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ILLUMINA INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is provided in addition to the accompanying consolidated
financial statements and notes to assist readers in understanding our results of
operations, financial condition, and cash flows. This MD&A is organized as
follows:
• Business Overview and Outlook. High level discussion of our operating
results and significant known trends that affect our business.
• Results of Operations. Detailed discussion of our revenues and expenses.
• Liquidity and Capital Resources. Discussion of key aspects of our
statements of cash flows, changes in our financial position, and our
financial commitments.
• Off-Balance Sheet Arrangements. We have no significant off-balance
sheet arrangements.
• Contractual Obligations. Tabular disclosure of known contractual
obligations as of December 29, 2013.
• Critical Accounting Policies and Estimates. Discussion of significant
changes since our most recent Annual Report on Form 10-K that we
believe are important to understanding the assumptions and judgments
underlying our financial statements.
This MD&A discussion contains forward-looking statements that involve risks and
uncertainties. Please see "Special Note Regarding Forward-Looking Statements"
for additional factors relating to such statements, and see "Risk Factors" in
Item 1A of this report for a discussion of certain risk factors applicable to
our business, financial condition, and results of operations. Operating results
are not necessarily indicative of results that may occur in future periods.
Business Overview and Outlook
This overview and outlook provides a high level discussion of our operating
results and significant known trends that affect our business. We believe that
an understanding of these trends is important to understanding our financial
results for the periods being reported herein as well as our future financial
performance. This summary is not intended to be exhaustive, nor is it intended
to be a substitute for the detailed discussion and analysis provided elsewhere
in this Annual Report on Form 10-K.
About Illumina
We are a leading developer, manufacturer, and marketer of life science tools and
integrated systems for the analysis of genetic variation and function. Using our
proprietary technologies, we provide innovative sequencing- and array-based
solutions for genotyping, copy-number variation (CNV) analysis, methylation
studies, and gene expression profiling of DNA and RNA. Our customers include
leading genomic research centers, academic institutions, government
laboratories, hospitals, and reference laboratories, as well as pharmaceutical,
biotechnology, agrigenomics, commercial molecular diagnostic, and consumer
genomics companies.
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Our portfolio of instruments, consumables, and analysis tools are designed to
simplify and accelerate genetic analysis. This portfolio addresses a broad range
of genomic complexity, throughput, and price points, enabling customers to
select the best solution for their scientific challenge. These systems can be
used to efficiently perform a range of nucleic acid (DNA, RNA) analyses on large
numbers of samples. For more focused studies, our array-based solutions provide
ideal tools to perform genome-wide association studies (GWAS) involving
single-nucleotide polymorphism (SNP) genotyping and CNV analyses, as well as
gene expression profiling and other DNA and RNA studies.
To provide our customers with more comprehensive sample-to-answer workflow
solutions, we acquired: NextBio, a leader in clinical and genomic informatics,
in November 2013; Advanced Liquid Logic Inc., a leader in digital microfluidics
and liquid handling solutions, in July 2013; and Epicentre Technologies
Corporation, a leading provider of nucleic acid sample preparation reagents and
specialty enzymes for sequencing and microarray applications, in 2011.
During the last two years, we have taken significant steps to support our goal
of becoming a leader in the reproductive health market by acquiring Verinata
Health, Inc. (Verinata) in February 2013 and BlueGnome Ltd. (BlueGnome) in 2012.
Our acquisition of Verinata further strengthened our focus on reproductive
health by adding to our product portfolio Verinata's verifi® prenatal test, a
comprehensive non-invasive prenatal test (NIPT) for high-risk pregnancies, and
what we believe to be the most comprehensive intellectual property portfolio in
the NIPT industry. Our acquisition of BlueGnome, a leading provider of genetic
solutions for the screening of chromosomal abnormalities associated with
developmental delay, cancer, and infertility, expanded our ability to establish
integrated solutions in reproductive health and cancer.
Our financial results have been, and will continue to be, impacted by several
significant trends, which are described below. While these trends are important
to understanding and evaluating our financial results, this discussion should be
read in conjunction with our consolidated financial statements and the notes
thereto in Item 1, Part I of this report, and the other transactions, events,
and trends discussed in "Risk Factors" in Item 1A, Part I of this report.
Funding Environment
While many of our customers receive funding from government agencies to purchase
our products or services, we are diversifying our customer base to include more
customers that do not depend on government funding. In 2013, approximately 45%
of our total revenue came from customers who are not directly reliant on
government agencies for funding. We estimate that less than 30% of our total
revenue in 2013 came from academic or government customers in the United States
that, directly or indirectly, derive funding from the U.S. National Institute of
Health (NIH). NIH funding for the U.S. fiscal year 2014 is set to increase more
than 3% compared to the 2013 sequestration budget, and we believe that
allocations within the NIH budget will continue to favor genetic analysis tools
generally and, in particular, research programs that utilize next-generation
sequencing.
Next-Generation Sequencing
Next-generation sequencing has become a core technology for modern life science
research and is increasingly being used in the applied, molecular diagnostics,
and translational markets. Our sequencing instrument installed base continued to
expand in 2013, and we believe that expansion of the sequencing market,
including an increase in the number of samples available and enhancements in our
product portfolio, will continue to drive demand for our next-generation
sequencing technologies. As a result, we believe that our sequencing consumable
revenue will continue to grow in future periods.
Our portfolio of sequencing platforms represents a family of systems that are
designed to meet the workflow, output, and accuracy demands of a full range of
sequencing applications. Our MiSeq sequencing system is a low-cost desktop
sequencing system that provides individual researchers with rapid turnaround
time, high accuracy, and streamlined workflow. NextSeq 500, launched in January
2014, provides flexibility from whole genome sequencing to targeted panels in a
desktop platform. Our HiSeq 2500 sequencing system allows customers to sequence
an entire human genome in approximately a day. HiSeq X Ten, announced in January
2014, is a set of ten ultra-high-throughput sequencers built for large-scale
human whole-genome sequencing with the ability to generate 1.8 terabases of DNA
sequence per sequencer in less than three days.
MicroArrays
As a complement to next-generation sequencing, we believe microarrays offer a
less expensive, faster, and highly accurate technology for use when genetic
content is already known. The information content of microarrays is fixed and
reproducible. As such, microarrays provide repeatable, standardized assays for
certain subsets of nucleotide bases within the overall genome. We believe that
life science researchers will migrate certain array studies to sequencing;
however, we expect this decline to be offset by demand from customers in
consumer, reproductive health, and applied markets. Additionally,
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demand in the array market has trended toward microarrays that have large-sample
numbers at a lower complexity, thus having a lower selling price per sample, and
we believe our innovation in microarray products supports the lower selling
price.
Financial Overview
Financial highlights for 2013 include the following:
• Net revenue increased by 24% in 2013 compared to 2012. Our sales
increased across our portfolio of sequencing products, including
consumables, instruments, and services.
• Gross profit as a percentage of revenue (gross margin) was 64.2% in
2013, a decrease from 67.4% in 2012. Gross margin decreased in 2013 due
in large part to an impairment charge associated with the
discontinuation of the Eco and NuPCR product lines, higher amortization
of acquired intangible assets, and legal contingencies associated with
the Syntrix litigation matter. See note "10. Legal Proceedings" in Part
II, Item 8 of this Form 10-K. We believe our gross margin in future periods will depend on several factors, including: market conditions
that may impact our pricing power; sales mix changes among consumable,
instrument, and services; product mix changes between established
products and new products in new markets; our cost structure for
manufacturing operations; royalties; and our ability to create
innovative and high premium products that meet or stimulate customer
demand.
• Income from operations decreased by $66.6 million in 2013 compared to
2012. This was a result of higher operating expenses offsetting the
increase in gross profit. During the current period, we recorded a
$115.4 million legal contingency expense in operating expenses
associated primarily with the Syntrix patent litigation matter.
Additionally, our research and development expenses and selling,
general and administrative expenses increased from the prior year by
$45.7 million and $95.0 million, respectively, and we expect such expenses to continue to grow as we continue to invest in the growth of
our business.
• Our effective tax rate was 21.3% in 2013, as compared to 32.1% in 2012.
The variance from the U.S. federal statutory tax rate of 35% in 2013
was primarily attributable to a higher mix of foreign earnings taxed at
rates lower than the U.S. federal statutory tax rate and the
retroactive reinstatement of the federal research and development
credit for 2012 which was enacted in January 2013. These items offset
the impact of recording a valuation allowance which was primarily
related to the estimated limitation on utilizing foreign tax credits in
the U.S. Our future effective tax rate may vary from the U.S. federal
statutory tax rate due to the mix of earnings in tax jurisdictions with
different statutory tax rates and the other factors discussed in the
risk factor "We are subject to risks related to taxation in multiple
jurisdictions" in Part I Item 1A of this Form 10-K for the fiscal year
ended December 29, 2013. We anticipate that our effective tax rate will
trend lower than the U.S. federal statutory tax rate in the future due
to the portion of our earnings that will be subject to lower statutory
tax rates.
In 2013, the Internal Revenue Service began an audit of the corporate income tax
return filed for fiscal year 2011. The Internal Revenue Service continues to
gather information and has not yet proposed any adjustments to the filed return.
• We ended 2013 with cash, cash equivalents, and short-term investments
totaling $1.17 billion.
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Results of Operations
To enhance comparability, the following table sets forth audited consolidated
statement of operations data for the years ended December 29, 2013, December 30,
2012, and January 1, 2012 stated as a percentage of total revenue.
2013 2012 2011
Revenue:
Product revenue 89.0 % 91.9 % 93.5 %
Service and other revenue 11.0 8.1 6.5
Total revenue 100.0 100.0 100.0
Cost of revenue:
Cost of product revenue 28.7 27.6 29.2
Cost of service and other revenue 4.8 3.8 2.5
Amortization of acquired intangible assets 2.3 1.2 1.1
Total cost of revenue
35.8 32.6 32.8
Gross profit 64.2 67.4 67.2
Operating expense:
Research and development 19.5 20.1 18.7
Selling, general and administrative 26.8 24.9 24.8
Legal contingencies
8.1 - -
Unsolicited tender offer related expense 1.0 2.0 -
Acquisition related (gain) expense, net (0.8 ) 0.2 0.1
Headquarter relocation 0.2 2.3 4.0
Restructuring - 0.4 0.8
Total operating expense 54.8 49.9 48.4
Income from operations 9.4 17.5 18.8
Other income (expense):
Interest income 0.3 1.4 0.7
Interest expense (2.7 ) (3.3 ) (3.3 )Cost-method investment related gain, net 4.3 4.0 -
Other expense, net
(0.1 ) (0.2 ) (3.7 )
Total other income (expense), net 1.8 1.9 (6.3 )
Income before income taxes 11.2 19.4 12.5
Provision for income taxes 2.4 6.2 4.4
Net income 8.8 % 13.2 % 8.1 %
Our fiscal year is the 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. Each of the years ended December 29, 2013,
December 30, 2012, and January 1, 2012 were 52 weeks.
Revenue
2013 - 2012 2012 - 2011
(Dollars in
thousands) 2013 2012 Change % Change 2011 Change % Change
Product revenue $ 1,264,656 $ 1,055,826 $ 208,830 20 % $ 987,280 $ 68,546 7 %
Service and other
revenue 156,522 92,690 63,832 69 68,255 24,435 36
Total revenue $ 1,421,178 $ 1,148,516 $ 272,662 24 % $ 1,055,535 $ 92,981 9 %
Product revenue consists primarily of revenue from sales of consumables and
instruments. Services and other revenue consists primarily of instrument service
contract revenue as well as sequencing and genotyping service revenue.
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2013 Compared to 2012
Consumables revenue increased $151.0 million, or 21%, to $880.3 million in 2013
compared to $729.3 million in the prior year. The increase was primarily
attributable to increased sales of sequencing consumables, driven by the growth
in the installed base for both HiSeq and MiSeq systems, as well as higher
consumable sales per HiSeq instrument in the installed base.
Instrument revenue increased $57.2 million, or 18%, to $371.5 million in 2013
compared to $314.3 million in the prior year, driven primarily by an increase in
HiSeq shipments.
The increase in service and other revenue in 2013 compared to the prior year was
driven by an increase in sequencing service volume and instrument service
contract revenue as a result of our growing installed base.
2012 Compared to 2011
Consumables revenue increased $133.5 million, or 22%, to $729.3 million in 2012
compared to $595.8 million in 2011. The increase was primarily attributable to
increased sales of sequencing consumables, driven by higher consumable sales per
HiSeq instrument and the growth in both the HiSeq and MiSeq installed base.
Instrument revenue decreased $58.8 million, or 16%, to $314.3 million in 2012
compared to $373.1 million in 2011, driven by a decrease in HiSeq shipments,
partially offset by a full year of MiSeq shipments in 2012 as compared to less
than two quarters of shipments in 2011.
Revenue in 2011 reflects the impact of discounts provided to customers under our
Genome Analyzer trade-in program. The estimated incremental sales incentive
provided under this trade-in program was approximately $11.1 million, based on
the total discount provided from list price in excess of our average discount on
HiSeq 2000 sales during the period. The Genome Analyzer trade-in program was
completed in Q4 2011. See "Revenue Recognition" in note "1. Organization and
Summary of Significant Accounting Policies" in Part II, Item 8, of this Form
10-K for additional information on the Genome Analyzer trade-in program.
The increase in service and other revenue in 2012 compared to 2011 was driven by
an increase in our instrument service contract revenue as a result of our
growing installed base as well as an increase in our genotyping and sequencing
service revenue.
Gross Margin
2013 - 2012 2012 - 2011 (Dollars in thousands) 2013 2012 Change % Change
2011 Change % Change
Total gross profit $ 911,887 $ 773,528 $ 138,359 18 % $ 709,098 $ 64,430 9 %
Total gross margin 64.2 % 67.4 % 67.2 %
2013 Compared to 2012
Gross profit in 2013 increased in comparison to the prior year, primarily due to
the increase in revenue. Gross margin decreased in 2013 in comparison to the
prior year, primarily due to impairments associated with the discontinuation of
the Eco and NuPCR product lines, an increase in amortization of acquired
intangible assets due to recent acquisitions, and an increase in legal
contingencies, which had an aggregate impact to gross margins of 3.9%.
Acquisitions also contributed to the decrease in gross margin. These decreases
were partially offset by the favorable impacts from higher instrument margins,
higher mix of sequencing consumables, and operational efficiencies.
2012 Compared to 2011
Gross profit in 2012 increased in comparison to 2011 primarily due to higher
sales. Gross margin improved in 2012 due in large part to the shift in sales mix
from instruments to consumables, which have a higher margin than instruments.
This improvement was partially offset by a legal settlement charge recorded to
cost of sales in 2012. In addition, instrument sales in 2011 were affected by
promotional discounts provided to customers on HiSeq 2000 sales, including the
Genome Analyzer
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trade-in program. Based on the estimated amount of incremental sales incentive
provided, the Genome Analyzer trade-in program negatively impacted our gross
margin by approximately 1.1% in 2011. This trade-in program was completed in Q4
2011.
Operating Expense
2013 - 2012 2012 - 2011 (Dollars in thousands) 2013 2012 Change % Change
2011 Change % Change
Research and development $ 276,743 $ 231,025 $ 45,718 20 % $ 196,913 $ 34,112 17 %
Selling, general and
administrative 381,040 285,991 95,049 33 261,843 24,148 9
Legal contingencies 115,369 - 115,369 100 - - -
Unsolicited tender offer
related expense 13,621 23,136 (9,515 ) (41 ) - 23,136 100
Acquisition related
(gain) expense, net (11,617 ) 2,774 (14,391 ) (519 ) 919 1,855 202
Headquarter relocation 2,624 26,328 (23,704 ) (90 ) 41,826 (15,498 ) (37 )
Restructuring - 3,522 (3,522 ) (100 ) 8,136 (4,614 ) (57 )
Total operating expense $ 777,780 $ 572,776 $ 205,004 36 % $ 509,637 $ 63,139 12 %
2013 Compared to 2012
Research and development expense increased by $45.7 million, or 20%, in 2013
from 2012, primarily due to increased headcount and consulting services as we
continue to increase our investment in the development of new products as well
as enhancements to existing products. In 2012, we recorded a $21.4 million
impairment charge for an in-process research and development asset. The lack of
such charge in 2013 partially offset the increase in overall research and
development expense.
Selling, general and administrative expense increased by $95.0 million, or 33%
in 2013 from 2012. The increase is primarily driven by increased headcount and
consulting services to support the growth of our Company and our focus on global
business process improvements, as well as increased amortization of intangible
assets.
Recently completed acquisitions also contributed to the increases in research
and development expense and selling, general and administrative expense.
During 2013, we recorded $115.4 million in legal contingency charges within
operating expenses primarily related to the Syntrix litigation matter. The
amount recorded in operating expenses included the damages and prejudgment
interest awarded to Syntrix through March 14, 2013, the jury verdict date. See
additional discussions on this matter in note "10. Legal Proceedings" in Part
II, Item 8 of this form 10-K.
During 2013, we recorded $13.6 million of expenses incurred in relation to an
unsolicited tender offer in Q1 2012. The expenses consisted primarily of
advisory and legal fees. The advisory related expenses decreased from the prior
year as the advisory service arrangements were completed.
Acquisition related (gain) expense, net, in 2013 primarily consisted of gains
from changes in fair value of contingent consideration of $18.8 million. Such
gains were partially offset by transaction and other acquisition related costs
of $7.2 million. Acquisition related (gain) expense, net in the prior year
consisted of changes in fair value of contingent consideration of $2.0 million
and transaction costs of $0.8 million.
We completed the relocation of our headquarters in 2012. During 2013, we
recorded additional cease-use loss due to a delay in the sublease of portions of
our prior headquarters and accretion of interest expense related to the facility
exit obligation recorded upon vacating our former headquarters. Headquarter
relocation expense recorded in 2012 consisted of cease-use loss recorded upon
vacating our prior headquarters, accretion expense related to the facility exit
obligation, double rent expense during the transition to our new facility, and
moving expenses.
In late 2011, we announced restructuring plans to reduce our global workforce
and to consolidate certain facilities. As a result of the restructuring effort,
we recorded additional restructuring charges of $3.5 million during 2012,
comprised primarily of severance pay and other employee separation costs.
Restructuring activities were completed during 2012.
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2012 Compared to 2011
Research and development expense increased by $34.1 million, or 17%, in 2012
from 2011 primarily due to a $21.4 million impairment loss recognized for IPR&D
recorded as a result of a prior acquisition and increased personnel expenses as
we continue to increase our investment in projects to develop and commercialize
new products. In addition, we incurred increased facilities expenses in 2012 as
the rental fees for our current headquarters are higher than our prior facility.
Selling, general and administrative expense increased by $24.1 million in 2012
from 2011. The increase is primarily driven by a $15.8 million increase in
personnel expenses associated with increased headcount, and a $9.5 million
increase in legal and other consulting fees. Personnel expenses included
salaries, share-based compensation, and benefits. These increases in expense
were partially offset by a $2.3 million decrease in bad debt expense, as certain
customer bankruptcies impacted us in 2011. In addition, we had the benefit of a
$2.3 million legal settlement gain recorded in selling, general and
administrative expenses in 2011.
During Q1 2012, CKH Acquisition Corporation and Roche Holding Ltd. (together,
"Roche") made an unsolicited tender offer to purchase all outstanding shares of
our common stock for up to $51.00 per share. During 2012, we recorded $23.1
million of expenses incurred in relation to Roche's unsolicited tender offer,
consisting primarily of legal, advisory, and other professional fees.
Acquisition related (gain) expense, net, in 2012 consisted of acquisition
transaction costs of $0.8 million and changes in fair value of contingent
consideration of $2.0 million. Acquisition related (gain) expense, net in 2011
consisted of gains related to changes in fair value of contingent consideration
offset by acquired in-process research and development of $5.4 million related
to a milestone payment for a prior acquisition.
In Q3 2012, we completed the relocation of our headquarters that started in
2011. During 2012, we incurred $26.3 million in additional headquarter
relocation expense, primarily consisting of cease-use loss associated with
vacating our prior headquarters, double rent expense during the transition to
our new facility, and accretion of interest expense on the lease exit liability.
Headquarter relocation expense recorded in 2011 consisted of accelerated
depreciation and rent expense on the new facility during the transition period
of occupying both the current and new facility.
In late 2011, we announced restructuring plans to reduce our global workforce
and to consolidate certain facilities. As a result of the restructuring effort,
we recorded additional restructuring charges of $3.5 million during 2012,
comprised primarily of separation and other employee costs.
Other Income (Expense), Net
2013 - 2012 2012 - 2011
(Dollars in
thousands) 2013 2012 Change % Change 2011 Change % Change
Interest income $ 4,887 $ 16,208 $ (11,321 ) (70 )% 7,052 9,156 130 %
Interest expense (39,690 ) (37,779 ) (1,911 ) 5 (34,790 ) (2,989 ) 9
Cost-method investment
related gain, net 61,357 45,911 15,446 34 - 45,911 100
Other expense, net (1,347 ) (2,484 ) 1,137 (46 ) (38,678 ) 36,194 (94 )
Total other income
(expense), net $ 25,207 $ 21,856 $ 3,351 15 % $ (66,416 ) $ 88,272 (133 )%
2013 Compared to 2012
Interest income primarily consisted of returns from our investment portfolio.
Interest income decreased in 2013 from 2012 as a result of a decrease in our
investment portfolio balance as well as a decline in average market rates during
the period. Furthermore, interest income in 2012 included a $6.0 million
recovery of a note receivable. Interest expense in 2013 remained relatively
consistent as compared to 2012 and consisted primarily of accretion of discount
on our convertible senior notes.
In 2013, we recognized $61.4 million in gains from sales of cost-method
investments, of which $55.2 million related to the sale of our minority
ownership interest in Oxford Nanopore Technologies Ltd. Cost-method investment
related gain in 2012 consisted of a gain of $48.6 million on the sale of our
minority ownership interest in deCODE Genetics, partially offset
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by an impairment loss of $2.7 million on another cost-method investment that was
determined to be other-than-temporarily impaired.
Other expense, net, in 2013 and 2012 primarily consisted of net foreign exchange
losses and losses on the extinguishment of debt recorded on conversions of our
0.625% convertible senior notes due 2014.
2012 Compared to 2011
Interest income increased in 2012 primarily due to a $6.0 million recovery of a
previously impaired note receivable and an increase in realized gains from our
investment portfolio. Interest expenses in both 2012 and 2011 are primarily
comprised of accretion of the discount on our convertible senior notes.
Cost-method investment related gain in 2012 consisted of a gain of $48.6 million
on the sale of our minority ownership interest in deCODE Genetics, partially
offset by an impairment loss of $2.7 million on another cost-method investment
that was determined to be other-than-temporarily impaired.
Other expense, net in 2012 primarily consisted of foreign exchange losses. Other
expense, net, in 2011 primarily consisted of a $37.6 million loss on the
extinguishment of debt recorded on conversions of our 0.625% convertible senior
notes due 2014.
Provision for Income Taxes
2013 - 2012 2012 - 2011
(Dollars in
thousands) 2013 2012 Change % Change 2011 Change % Change
Income before income
taxes $ 159,314 $ 222,608 $ (63,294 ) (28 )% $ 133,045 $ 89,563 67 %
Provision for income
taxes 34,006 71,354 (37,348 ) (52 ) 46,417 24,937 54
Net income $ 125,308 $ 151,254 $ (25,946 ) (17 )% $ 86,628 $ 64,626 75 %
Effective tax rate 21.3 % 32.1 % 34.9 %
2013 Compared to 2012
Our effective tax rate was 21.3% in 2013, as compared to 32.1% in 2012. The
variance from the U.S. federal statutory tax rate of 35% in 2013 was primarily
attributable to a higher mix of foreign earnings taxed at rates lower than the
U.S. federal statutory tax rate and the retroactive reinstatement of the federal
research and development credit for 2012 which was enacted in January 2013.
These items offset the impact of recording a valuation allowance which was
primarily related to the estimated limitation on utilizing foreign tax credits
in the U.S. In 2012 the variance from the U.S. federal statutory tax rate of 35%
was primarily attributable to the change in the mix of earnings in tax
jurisdictions with different statutory rates.
The American Taxpayer Relief Act of 2012, which was signed into law on January
2, 2013, included the retroactive reinstatement of the federal research and
development credit from January 1, 2012 through December 31, 2013. Our provision
for income taxes for the year ended December 30, 2012 did not include the impact
of the federal research credit generated in 2012 since the law was enacted
subsequent to our 2012 reporting period. Instead, the retroactive reinstatement
of the federal research credit generated in 2012 reduced our provision for
income taxes for 2013 by approximately $2.9 million.
2012 Compared to 2011
Our effective tax rate was 32.1% for 2012. The variance from the U.S. federal
statutory tax rate of 35% was primarily attributable to the change in the mix of
earnings in tax jurisdictions with different statutory rates. The effective tax
rate in 2011 was 34.9%, which closely approximated the U.S. federal statutory
tax rate because a significant portion of our earnings were subject to U.S.
taxation.
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Liquidity and Capital Resources
At December 29, 2013, we had approximately $711.6 million in cash and cash
equivalents, a $277.7 million increase from last year, due to the factors
described in the "Cash Flow Summary" below. Our primary source of liquidity,
other than our holdings of cash, cash equivalents, and investments, has been
cash flows from operations. Our ability to generate cash from operations
provides us with the financial flexibility we need to meet operating, investing,
and financing needs. Cash and cash equivalents held by our foreign subsidiaries
at December 29, 2013 were approximately $412.6 million. It is our intention to
indefinitely reinvest all current and future foreign earnings in foreign
subsidiaries.
Historically, we have liquidated our short-term investments and/or issued debt
and equity securities to finance our business needs as a supplement to cash
provided by operating activities. At December 29, 2013, we have $454.0 million
in short-term investments. Our short-term investments include marketable
securities consisting of debt securities in government-sponsored entities,
corporate debt securities, and U.S. Treasury notes.
We anticipate that our current cash, cash equivalents and short-term
investments, together with cash provided by operating activities will be
sufficient to fund our near term capital and operating needs for at least the
next 12 months. Operating needs include the planned costs to operate our
business, including amounts required to fund working capital and capital
expenditures. Our primary short-term needs for capital, which are subject to
change, include expenditures related to:
• support of commercialization efforts related to our current and future
products, including expansion of our direct sales force and field
support resources both in the United States and abroad;
• acquisitions of equipment and other fixed assets for use in our current
and future manufacturing and research and development facilities;
• repurchases of our outstanding common stock;
• the continued advancement of research and development efforts;
• potential strategic acquisitions and investments;
• repayments of debt obligations; and
• the expansion needs of our facilities, including costs of leasing
additional facilities.
As of December 29, 2013, $29.6 million principal amount of our 0.625%
convertible senior notes due 2014 remained outstanding, with a maturity date of
February 15, 2014. $920.0 million in principal amount of our convertible senior
notes due 2016 ("2016 Notes") remained outstanding as of December 29, 2013. The
2016 Notes are convertible into cash, shares of our common stock, or a
combination of cash and shares of our common stock prior to maturity if the
trading price of our common stock remains at least 130% above $83.55 for a
sustained period. It is our intent and policy to settle conversions of the 2016
Notes through combination settlement, which essentially involves repayment of an
amount of cash equal to the principal amount and delivery of the excess of
conversion value over the principal amount in shares of common stock.
As of December 29, 2013, we have $49.5 million in fair value of contingent
considerations associated with prior acquisitions to be settled in future
periods.
Our Board of Directors authorized several common stock repurchase programs. In
2013, we used $50.0 million to repurchase our outstanding shares under these
programs. As of December 29, 2013, we had authorization from our Board of
Directors to repurchase up to an additional $117.5 million of our common stock.
On January 30, 2014, our Board of Directors authorized an additional $250.0
million to repurchase shares of our common stock on a discretionary basis. In
July 2013, the Company settled with a hedging counterparty outstanding warrants
to purchase approximately 3.0 million shares of the Company's common stock for
$125.0 million in cash.
We expect that our revenue and the resulting operating income, as well as the
status of each of our new product development programs, will significantly
impact our cash management decisions.
Our future capital requirements and the adequacy of our available funds will
depend on many factors, including:
• our ability to successfully commercialize and further develop our
technologies and create innovative products in our markets;
• scientific progress in our research and development programs and the
magnitude of those programs;
• competing technological and market developments; and
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• the need to enter into collaborations with other companies or acquire
other companies or technologies to enhance or complement our product
and service offerings.
Cash flow Summary
(In thousands) 2013 2012 2011Net cash provided by operating activities $ 386,421 $ 291,873
$ 358,140
Net cash used in investing activities (69,649 ) (150,012 ) (400,999 )
Net cash (used in) provided by financing
activities (38,719 ) (10,755 ) 97,016
Effect of exchange rate changes on cash and
cash equivalents (397 ) (103 ) (126 )
Net increase in cash and cash equivalents $ 277,656 $ 131,003 $ 54,031
Operating Activities
Cash provided by operating activities in 2013 consisted of net income of $125.3
million, net adjustments of $107.7 million, and a change in net operating assets
and liabilities of $153.4 million. The primary non-cash expenses added back to
net income included share-based compensation of $105.8 million, depreciation and
amortization expenses related to property and equipment and intangible assets of
$97.9 million, accretion of debt discount of $36.2 million, and impairments of
$25.2 million. The adjustments to net income also included $61.4 million in
cost-method investment related gain, $36.7 million in deferred income taxes, and
$56.7 million in incremental tax benefit related to share-based compensation.
The main driver in the change in net operating assets was an increase in legal
contingencies due to a patent litigation.
Cash provided by operating activities in 2012 consisted of net income of $151.3
million plus net adjustments of $158.6 million, offset by a change in net
operating assets of $18.0 million. The primary non-cash expenses added back to
net income included share-based compensation of $94.3 million, depreciation and
amortization expenses related to property and equipment and intangible assets of
$65.3 million, impairment of IPR&D of $21.4 million, and the accretion of debt
discount of $35.0 million. The adjustments to net income also included $20.8
million in incremental tax benefit related to share-based compensation, $45.9
million in net cost-method investment related gain, and $6.0 million in recovery
of a previously impaired note receivable. The main drivers in the change in net
operating assets included increases in accounts receivable, inventory, accounts
payable, and accrued liabilities.
Cash provided by operating activities in 2011 consisted of net income of $86.6
million plus net adjustments of $236.5 million and changes in net operating
assets of $35.0 million. The primary non-cash expenses added back to net income
included share-based compensation of $92.1 million, depreciation and
amortization expenses related to property and equipment and intangible assets of
$69.2 million, debt extinguishment loss of $37.6 million, and the accretion of
debt discount of $32.2 million. The adjustments to net income also included
$46.4 million in incremental tax benefit related to share-based compensation.
The main drivers in the change in net operating assets included increases in
accrued liabilities, and decreases in inventory and accounts payable.
Investing Activities
Cash used in investing activities totaled $69.6 million in 2013. We purchased
$364.0 million of available-for-sale securities and $812.8 million of our
available-for-sale securities matured or were sold during the period. We also
paid net cash of $523.5 million for acquisitions, and invested $79.2 million in
capital expenditures primarily associated with the purchase of manufacturing,
research, and development equipment, leasehold improvements, and information
technology equipment and systems.
Cash used in investing activities totaled $150.0 million in 2012. We purchased
$925.5 million of available-for-sale securities and $898.8 million of our
available-for-sale securities matured or were sold during the period. We
received $50.8 million in proceeds from a sale of a cost-method investment and
used $15.9 million for purchases of strategic investments. We also paid net cash
of $83.2 million for acquisitions, used $12.2 million for purchases of
intangible assets, and invested $68.8 million in capital expenditures primarily
associated with the purchase of manufacturing and servicing equipment, leasehold
improvements, and information technology equipment and systems. In addition, we
received $6.0 million from recovery of a note previously impaired.
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Cash used in investing activities totaled $401.0 million in 2011. During the
year we purchased $1.3 billion of available-for-sale securities, and $1.1
billion of our available-for-sale securities matured or were sold during 2011.
We used $58.3 million, net of cash acquired, in an acquisition and $13.8 million
in the purchases of strategic investments. We also incurred $77.8 million in
capital expenditures primarily associated with the purchase of manufacturing,
R&D, and servicing equipment, leasehold improvements, and information technology
equipment and systems.
Financing Activities
Cash used in financing activities totaled $38.7 million in 2013. We received
$94.5 million in proceeds from the issuance of common stock through the exercise
of stock options and the sale of shares under our employee stock purchase plan,
used $50.0 million to repurchase our common stock, and used $125.0 million for
retirement of warrants. In addition, we received $56.7 million in incremental
tax benefit related to share-based compensation.
Cash used in financing activities totaled $10.8 million in 2012. We received
$54.4 million in proceeds from the issuance of common stock through the exercise
of stock options and warrants and under our employee stock purchase plan. We
used $82.5 million to repurchase our common stock in 2012. In addition, we
received $20.8 million in incremental tax benefit related to share-based
compensation.
Cash provided by financing activities totaled $97.0 million in 2011. We received
$903.5 million in proceeds from the issuance of $920.0 million of our 0.25%
convertible senior notes due 2016, net of issuance discounts, of which $349.9
million was used to repay the principal amount of our 0.625% convertible senior
notes due 2014 upon conversions in 2011. We used $570.4 million in repurchases
of our common stock. We also received $67.5 million in proceeds from the
issuance of our common stock through the exercise of stock options and warrants
and under our employee stock purchase plan. In addition, we received $46.4
million in incremental tax benefit related to share-based compensation.
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. During the fiscal year ended
December 29, 2013, we were not involved in any "off-balance sheet arrangements"
within the meaning of the rules of the Securities and Exchange Commission.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under
agreements with third parties, and exclude orders for goods and services entered
into in the normal course of business that are not enforceable or legally
binding. The following table represents our contractual obligations as of
December 29, 2013, aggregated by type (amounts in thousands):
Payments Due by Period(1)
Less Than More Than
Contractual Obligation Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Debt obligations(2) $ 955,412 $ 31,962 $ 923,450 $ - $ -
Leases 553,619 30,400 60,615 67,262 395,342
Purchase obligations 15,132 9,063 5,007 1,062 -
Amounts due under executive deferred
compensation plan 14,957 14,957 - - -
Total $ 1,539,120 $ 86,382 $ 989,072 $ 68,324 $ 395,342
_______________________________________
(1) The table excludes $132.9 million of contingent legal liability, $128.0
million of contingent consideration payments related to acquisitions, and
$49.0 million of uncertain tax positions. These items were excluded because
we cannot make reasonably reliable estimates regarding the timing and
amounts of the settlement of such contingent payments or uncertain
positions, if any. See notes "10. Legal Proceedings", "3. Acquisitions", and
"11. Income Taxes", respectively, in Part II, Item 8 of this Form 10-K for
further discussions of these items.
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(2) Debt obligations include the principal amount of our convertible senior
notes due 2016 and 2014, as well as interest payments to be made under the
notes. Although these notes mature in 2016 and 2014 respectively, they can be converted into cash and shares of our common stock prior to maturity if
certain conditions are met. Any conversion prior to maturity can result in
repayments of the principal amounts sooner than the scheduled repayments as
indicated in the table. See note "6. Convertible Senior Notes" in Part II,
Item 8 of this Form 10-K for further discussion of the terms of the
convertible senior notes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Management bases its estimates on historical
experience, market and other conditions, and various other assumptions it
believes to be reasonable. Although these estimates are based on management's
best knowledge of current events and actions that may impact us in the future,
the estimation process is, by its nature, uncertain given that estimates depend
on events over which we may not have control. If market and other conditions
change from those that we anticipate, our consolidated financial statements may
be materially affected. In addition, if our assumptions change, we may need to
revise our estimates, or take other corrective actions, either of which may also
have a material effect on our consolidated financial statements.
We believe that the following critical accounting policies and estimates have a
higher degree of inherent uncertainty and require our most significant
judgments. In addition, had we used estimates different from any of these, our
consolidated financial statements could have been materially different from
those presented. Members of our senior management have discussed the development
and selection of our critical accounting policies and estimates, and our
disclosure regarding them, with the audit committee of our board of directors.
Our accounting policies are more fully described in note "1. Organization and
Significant Accounting Policies" in Part II, Item 8 of this Form 10-K.
Revenue Recognition
Our 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. The timing of revenue recognition and the amount of revenue
recognized in each case depends upon a variety of factors, including the
specific terms of each arrangement and the nature of our deliverables and
obligations. Determination of the appropriate amount of revenue recognized
involves significant judgment and estimates.
We recognize revenue 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. All revenue is recorded net of
discounts.
Revenue for 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 refund rights exist. If there are refund rights or payment terms based
on future performance, we defer revenue recognition until the price becomes
fixed or determinable. We assess collectibility based on a number of factors,
including past transaction history and the creditworthiness of the customer. If
we determine that collection of a payment is not 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, of the contract execution date. Revenue recognition for contracts with
multiple deliverables is based on the individual units of accounting determined
to exist in the contract. A delivered item is considered a separate unit of
accounting when the delivered item has value to the customer on a stand-alone
basis. Items are considered to have stand-alone value when they are sold
separately by any vendor or when the customer could resell the item on a
stand-alone basis.
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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, we use best estimate of the selling price for the
deliverable.
In order to establish VSOE of selling price, we must regularly sell the product
or service on a standalone basis with a substantial majority priced within a
relatively narrow range. VSOE of selling price is usually the midpoint of that
range. If there are not a sufficient number of standalone sales and VSOE of
selling price cannot be determined, then 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.
We recognize revenue for delivered elements only when we determine there are no
uncertainties regarding customer acceptance.
In certain markets, the Company sells products and provides services 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 the Company's revenue
recognition policy described herein.
Investments
We invest in various types of securities, including debt securities in
government-sponsored entities, corporate debt securities, and U.S. Treasury
securities. As of December 29, 2013, we have $454.0 million in short-term
investments. In accordance with the accounting standard for fair value
measurements, we classify our investments as Level 1, 2, or 3 within the fair
value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets that we have the ability to
access. Fair values determined by Level 2 inputs utilize data points that are
observable such as quoted prices, interest rates and yield curves. Fair values
determined by Level 3 inputs utilize unobservable data points for the asset.
As discussed in note "5. Fair Value Measurements" in Part II, Item 8 of this
Form 10-K, a majority of our security holdings have been classified as Level 2.
These securities have been initially valued at the transaction price and
subsequently valued utilizing a third party service provider who assesses the
fair value using inputs other than quoted prices that are observable either
directly or indirectly, such as 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. We perform certain procedures to corroborate the
fair value of these holdings, and in the process, we apply judgment and
estimates that if changed, could significantly affect our statement of financial
positions.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We evaluate the
collectibility of our accounts receivable based on a combination of factors. We
regularly analyze customer accounts, review the length of time receivables are
outstanding, review historical loss rates and assess current economic trends
that may impact the level of credit losses in the future. Our gross trade
accounts receivables totaled $242.6 million and the allowance for doubtful
accounts was $3.7 million at December 29, 2013. Our allowance for doubtful
accounts has generally been adequate to cover our actual credit losses. However,
since we cannot reliably predict future changes in the financial stability of
our customers, we may need to increase our reserves if the financial conditions
of our customers deteriorate.
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Inventory Valuation
Inventories are stated at lower of cost or market. We record adjustments to
inventory for potentially excess, obsolete, or impaired goods in order to state
inventory at net realizable value. We must make assumptions about future demand,
market conditions, and the release of new products that will supersede old ones.
We regularly review inventory for excess and obsolete products and components,
taking into account product life cycles, quality issues, historical experience,
and usage forecasts. Our gross inventory totaled $172.0 million and the
cumulative adjustment for potentially excess and obsolete inventory was $17.9
million at December 29, 2013. Historically, our inventory adjustment has been
adequate to cover our losses. However, if actual market conditions are less
favorable than anticipated, additional inventory adjustments could be required.
Contingencies
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 resolutions 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 in consideration of many factors,
which include, but are not limited to, past history, scientific and other
evidence, and the specifics and status of each matter. We may change our
estimates if our assessment of the various factors changes and the amount of
ultimate loss may differ from our estimates, resulting in a material effect on
our business, financial condition, results of operations, and/or cash flows.
Business Combinations
Under the acquisition method of accounting, we allocate the fair value of the
total consideration transferred to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their estimated fair values on
the date of acquisition. The fair values assigned, defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between willing market participants, are based on estimates and
assumptions determined by management. We record the excess consideration over
the aggregate fair value of tangible and intangible assets, net of liabilities
assumed, as goodwill. These valuations require us to make significant estimates
and assumptions, especially with respect to intangible assets.
In connection with certain of our acquisitions, additional contingent
consideration is earned by the sellers upon completion of certain future
performance milestones. In these cases, a liability is recorded on the
acquisition date for an estimate of the acquisition date fair value of the
contingent consideration by applying the income approach utilizing variable
inputs such as anticipated future cash flows, risk-free adjusted discount rates,
and nonperformance risk. Any change in the fair value of the contingent
consideration subsequent to the acquisition date is recognized in acquisition
related (gain) expense, net, a component of operating expenses, in our
consolidated statements of income. This method requires significant management
judgment, including the probability of achieving certain future milestones and
discount rates. Future changes in our estimates could result in expenses or
gains.
Management typically uses the discounted cash flow method to value our acquired
intangible assets. This method requires significant management judgment to
forecast future operating results and establish residual growth rates and
discount factors. The estimates we use to value and amortize intangible assets
are consistent with the plans and estimates that we use to manage our business
and are based on available historical information and industry estimates and
averages. If the subsequent actual results and updated projections of the
underlying business activity change compared with the assumptions and
projections used to develop these values, we could experience impairment
charges. In addition, we have estimated the economic lives of certain acquired
assets and these lives are used to calculate depreciation and amortization
expense. If our estimates of the economic lives change, depreciation or
amortization expenses could be accelerated or slowed.
Intangible Assets and Other Long-Lived Assets - Impairment Assessments
We regularly perform reviews to determine if the carrying values of our
long-lived assets are impaired. A review of identifiable intangible assets and
other long-lived assets is performed when an event occurs indicating the
potential for impairment. If indicators of impairment exist, we assess the
recoverability of the affected long-lived assets and compare their fair values
to the respective carrying amounts.
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In order to estimate the fair value of identifiable intangible assets and other
long-lived assets, we estimate the present value of future cash flows from those
assets. The key assumptions that we use in our discounted cash flow model are
the amount and timing of estimated future cash flows to be generated by the
asset over an extended period of time and a rate of return that considers the
relative risk of achieving the cash flows, the time value of money, and other
factors that a willing market participant would consider. Significant judgment
is required to estimate the amount and timing of future cash flows and the
relative risk of achieving those cash flows.
Assumptions and estimates about future values and remaining useful lives are
complex and often subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends, and internal
factors such as changes in our business strategy and our internal forecasts. For
example, if our future operating results do not meet current forecasts or if we
experience a sustained decline in our market capitalization that is determined
to be indicative of a reduction in fair value of our reporting unit, we may be
required to record future impairment charges for purchased intangible assets.
Impairment charges could materially decrease our future net income and result in
lower asset values on our balance sheet.
Share-Based Compensation
We are required to measure and recognize compensation expense for all
share-based payments based on estimated fair value. We estimate the fair value
of stock options granted and stock purchases under our employee stock purchase
plan using the Black-Scholes-Merton (BSM) option-pricing model. The fair value
of our restricted stock units is based on the market price of our common stock
on the date of grant.
The determination of fair value of share-based awards using the BSM model
requires the use of certain estimates and highly judgmental assumptions that
affect the amount of share-based compensation expense recognized in our
consolidated statements of income. These include estimates of the expected
volatility of our stock price, expected life of an award, expected dividends,
and the risk-free interest rate. We determine the volatility of our stock price
by equally weighing the historical and implied volatility of our common stock.
The historical volatility of our common stock over the most recent period is
generally commensurate with the estimated expected life of our stock awards,
adjusted for the impact of unusual fluctuations not reasonably expected to
recur, and other relevant factors. Implied volatility is calculated from the
implied market volatility of exchange-traded call options on our common stock.
The expected life of an award is based on historical forfeiture experience,
exercise activity, and on the terms and conditions of the stock awards. We
determined expected dividend yield to be 0% given we have never declared or paid
any cash dividends on our common stock and we currently 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. We amortize the fair value of share-based compensation on a
straight-line basis over the requisite service periods of the awards. If any of
the assumptions used in the BSM model change significantly, share-based
compensation expense may differ materially from what we have recorded in the
current period.
Warranties
We generally provide a one-year warranty on instruments. Additionally, we
provide a warranty on consumables through the expiration date, which generally
ranges from six to twelve months after the manufacture date. We establish an
accrual for estimated warranty expenses based on historical experience as well
as anticipated product performance. We periodically review the adequacy of our
warranty reserve, and adjust, if necessary, the warranty percentage and accrual
based on actual experience and estimated costs to be incurred. If our estimates
of warranty obligation change or if actual product performance is below our
expectations we may incur additional warranty expense.
Cease-Use Loss upon Exit of Facility
We may, from time to time, relocate or consolidate our office locations and
cease to use a facility for which the lease continues beyond the cease-use date.
We estimate cease-use loss as the present value of the remaining lease
obligation offset by estimated sublease rental receipts during the remaining
lease period, adjusted for deferred items and leasehold improvements. In this
process, management is required to make significant judgments to estimate the
present value of future cash flows from the assumed sublease, including the
amount and timing of estimated sublease rental receipts, and the risk-adjusted
discount rate. These assumptions are subjective in nature and the actual future
cash flows could differ from our estimates, resulting in significant adjustments
to the cease-use loss recorded.
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Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and
reserves for unrecognized tax benefits reflect our best assessment of estimated
future taxes to be paid. Significant judgments and estimates based on
interpretations of existing tax laws or regulations in the United States and the
numerous foreign jurisdictions where we are subject to income tax are required
in determining our provision for income taxes. Changes in tax laws, statutory
tax rates, and estimates of the company's future taxable income could impact the
deferred tax assets and liabilities provided for in the consolidated financial
statements and would require an adjustment to the provision for income taxes.
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 our 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, our history of earnings and reliability of our
forecasts, projections of pre-tax book income over the foreseeable future, and
the impact of any feasible and prudent tax planning strategies. Based on the
available evidence as of December 29, 2013, we were not able to conclude it is
more likely than not certain U.S. deferred tax assets will be realized.
Therefore, we recorded a valuation allowance of $19.1 million against certain
U.S. deferred tax assets.
We recognize the impact of a tax position in our financial statements only if
that position is more likely than not of being sustained upon examination by
taxing authorities, based on the technical merits of the position. Tax
authorities regularly examine our returns in the jurisdictions in which we do
business and we regularly assess the tax risk of the company's return filing
positions. Due to the complexity of some of the uncertainties, the ultimate
resolution may result in payments that are materially different from our current
estimate of the tax liability. These differences, as well as any interest and
penalties, will be reflected in the provision for income taxes in the period in
which they are determined.
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