Document and Entity Information

In Millions, unless otherwise specified

3 Months Ended

Mar. 29, 2015

Apr. 10, 2015

Document and Entity Information [Abstract]

Entity Registrant Name

Illumina Inc

Entity Central Index Key

0001110803

Current Fiscal Year End Date

--01-03

Entity Filer Category

Large Accelerated Filer

Document Type

10-Q

Document Period End Date

Mar. 29, 2015

Document Fiscal Year Focus

2015

Document Fiscal Period Focus

Q1

Amendment Flag

false

Entity Common Stock, Shares Outstanding

144.1

Condensed Consolidated Balance Sheets (Unaudited) (USD $)

In Thousands, unless otherwise specified

Mar. 29, 2015

Dec. 28, 2014

Current assets:

Cash and cash equivalents

$ 533,537

$ 636,154

Short-term investments

832,952

702,217

Accounts receivable, net

350,044

289,458

Inventory

205,184

191,144

Deferred tax assets, current portion

49,105

40,786

Prepaid expenses and other current assets

89,459

29,844

Total current assets

2,060,281

1,889,603

Property and equipment, net

280,628

265,264

Goodwill

724,904

Intangible assets, net

301,302

314,500

Deferred tax assets, long-term portion

63,122

49,848

Other assets

68,856

95,521

Total assets

3,499,093

3,339,640

Current liabilities:

Accounts payable

106,674

82,626

Accrued liabilities

296,150

335,276

Long-term debt, current portion

307,427

304,256

Total current liabilities

710,251

722,158

Long-term debt

993,777

986,780

Other long-term liabilities

171,739

167,904

Stockholders' equity:

Preferred stock

0

Common stock

1,823

1,805

Additional paid-in capital

2,311,970

2,172,940

Accumulated other comprehensive income (loss)

2,334

(1,080)

Retained earnings

697,864

561,206

Treasury stock, at cost

(1,390,665)

(1,272,073)

Total stockholders’ equity

1,623,326

1,462,798

Total liabilities and stockholders’ equity

$ 3,499,093

$ 3,339,640

Condensed Consolidated Statements of Income (Unaudited) (USD $)

In Thousands, except Per Share data, unless otherwise specified

3 Months Ended

Mar. 29, 2015

Mar. 30, 2014

Revenue:

Product revenue

$ 459,127

$ 362,211

Service and other revenue

79,438

58,570

Total revenue

538,565

420,781

Cost of revenue:

Cost of product revenue

119,624

111,441

Cost of service and other revenue

32,529

21,513

Amortization of acquired intangible assets

11,385

9,535

Total cost of revenue

163,538

142,489

Gross profit

375,027

278,292

Operating expense:

Research and development

91,772

77,041

Selling, general and administrative

116,317

109,573

Acquisition related gain, net

(9,887)

(1,013)

Headquarter relocation

699

595

Total operating expense

198,901

186,196

Income from operations

176,126

92,096

Other income (expense):

Interest income

1,693

956

Interest expense

(11,164)

(9,743)

Cost-method investment gain, net

12,582

Other (expense) income, net

(1,191)

479

Total other income (expense), net

1,920

(8,308)

Income before income taxes

178,046

83,788

Provision for income taxes

41,388

23,811

Net income

$ 136,658

$ 59,977

Net income per basic share

$ 0.95

$ 0.47

Net income per diluted share

$ 0.92

$ 0.40

Shares used in calculating basic net income per share

143,771

128,146

Shares used in calculating diluted net income per share

148,683

150,619

Condensed Consolidated Statements of Comprehensive Income (Unaudited) (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Mar. 29, 2015

Mar. 30, 2014

Statement of Comprehensive Income [Abstract]

Net income

$ 136,658

$ 59,977

Unrealized gain (loss) on available-for-sale securities, net of deferred tax

3,414

(26)

Total comprehensive income

$ 140,072

$ 59,951

Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Mar. 29, 2015

Mar. 30, 2014

Cash flows from operating activities:

Net income

$ 136,658

$ 59,977

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense

16,754

14,593

Amortization of intangible assets

13,348

13,814

Share-based compensation expense

31,918

33,424

Accretion of debt discount

10,169

8,992

Contingent compensation expense

2,417

Incremental tax benefit related to share-based compensation

(76,445)

(50,528)

Deferred income taxes

53,452

33,943

Change in fair value of contingent consideration

(9,887)

(1,760)

Change in estimated cease-use loss

699

Cost-method investment gain, net

(12,582)

Other

556

(636)

Changes in operating assets and liabilities:

Accounts receivable

(59,474)

(52,156)

Inventory

(14,044)

(9,991)

Prepaid expenses and other current assets

(1,157)

125

Other assets

(2,530)

(8,972)

Accounts payable

28,867

10,060

Accrued liabilities

(51,044)

(23,147)

Accrued legal contingencies

5,847

Other long-term liabilities

1,521

1,085

Net cash provided by operating activities

66,779

37,087

Cash flows from investing activities:

Purchases of available-for-sale securities

(325,383)

(253,255)

Sales of available-for-sale securities

152,156

89,030

Maturities of available-for-sale securities

42,564

44,075

Net sales proceeds from (purchases of) strategic investments

(13,067)

4,600

Purchases of property and equipment

(36,551)

(19,012)

Cash paid for intangible assets

(625)

Net cash used in investing activities

(154,147)

(144,387)

Cash flows from financing activities:

Payments on financing obligations

(114)

(29,654)

Incremental tax benefit related to share-based compensation

76,445

50,528

Common stock repurchases

(34,753)

(130,017)

Taxes paid related to net share settlement of equity awards

(83,839)

(8,826)

Proceeds from issuance of common stock

29,727

32,045

Net cash used in financing activities

(12,534)

(85,924)

Effect of exchange rate changes on cash and cash equivalents

(2,715)

100

Net decrease in cash and cash equivalents

(102,617)

(193,124)

Cash and cash equivalents at beginning of period

636,154

711,637

Cash and cash equivalents at end of period

$ 533,537

$ 518,513

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.

Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2014, from which the balance sheet information herein was derived.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Fiscal Year

The Company’s fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. The three months ended March 29, 2015 and March 30, 2014 were both 13 weeks.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new standard modifies current guidance on consolidation under the variable interest model and the voting model. ASU 2015-02 will be effective for the Company beginning in the first quarter of 2016. The Company is currently evaluating the impact of the ASU 2015-02 on its consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers. The new standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the Company beginning in the first quarter of 2017 and allows for a full retrospective or a modified retrospective adoption approach. The Company is currently evaluating the impact of ASU 2014-09 on its consolidated financial statements.

Derivatives

The Company is exposed to foreign exchange rate risks in the normal course of business. The Company enters into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other assets or other liabilities and are not designated as hedging instruments. Changes in the value of the derivative are recognized in other expense, net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.

As of March 29, 2015, the Company had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, and Australian dollar. As of March 29, 2015 and December 28, 2014, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $69.9 million and $61.0 million, respectively.

Reserve for Product Warranties

The Company generally provides a one-year warranty on instruments. Additionally, the Company provides a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses based on historical experience as well as anticipated product performance. The Company periodically reviews its warranty reserve for adequacy and adjusts the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.

Revenue Recognition

The Company’s 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 Company recognizes 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. The Company occasionally offers discounts on newly introduced products to recent customers of existing products. These promotions sometimes involve the trade-in of existing products in exchange for a discount on new products. Where applicable, the Company defers a portion of revenue on the sales of existing products in recognition of the promotional discounts until the delivery of new products. All revenue is recorded net of discounts and sales taxes collected on behalf of governmental authorities.

Revenue from product sales is recognized generally upon transfer of title to the customer, provided that no significant obligations remain and collection of the receivable is reasonably assured. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer or agreed upon milestones are reached.

In order to assess whether the price is fixed or determinable, the Company evaluates whether an arrangement is cancellable or subject to future changes in price, deliverables, or other terms. If it is determined that the price is not fixed or determinable, the Company defers revenue recognition until the price becomes fixed or determinable. The Company assesses collectibility based on a number of factors, including past transaction history with, and the creditworthiness of, the customer. If the Company determines that collection of a payment is not reasonably assured, revenue recognition is deferred until receipt of payment.

The Company regularly enters into contracts where revenue is derived from multiple deliverables including products or services. These products or services are generally delivered within a short time frame, approximately three to six months, after the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.

For transactions with multiple deliverables, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for the deliverable.

In order to establish VSOE of selling price, the Company must regularly sell the product 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 the Company considers whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, the Company determines its best estimate of selling price using average selling prices over a rolling 12-month period 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, the Company relies upon prices set by the Company’s pricing committee adjusted for applicable discounts. The Company recognizes revenue for delivered elements only when it determines 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.

Net Income per Share

Basic net income per share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares consist of shares issuable under convertible senior notes, equity awards, and warrants. Convertible senior notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards and warrants are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of equity awards and warrants; the average amount of unrecognized compensation expense for equity awards; and estimated tax benefits that will be recorded in additional paid-in capital when expenses related to equity awards become deductible. In loss periods, basic net loss per share and diluted net loss per share are identical because the otherwise dilutive potential common shares become anti-dilutive and are therefore excluded.

The following table presents the calculation of weighted average shares used to calculate basic and diluted net income per share (in thousands):



	Three Months Ended
	March 29, 2015	March 30, 2014
Weighted average shares outstanding	143,771	128,146
Effect of potentially dilutive common shares from:
Convertible senior notes	2,177	5,518
Equity awards	2,735	4,816
Warrants	—	12,139
Weighted average shares used in calculation of diluted net income per share	148,683	150,619
Potentially dilutive shares excluded from calculation due to anti-dilutive effect	3	124

Balance Sheet Account Details

Short-Term Investments

The following is a summary of short-term investments (in thousands):



	March 29, 2015									December 28, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Debt securities in government sponsored entities	$	53,975	$	16	$	(13	)	$	53,978	$	51,308	$	10	$	(55	)	$	51,263
Corporate debt securities	587,346		340		(416		)	587,270		502,924		46		(2,882		)	500,088
U.S. Treasury securities	191,487		263		(46		)	191,704		151,255		5		(394		)	150,866
Total available-for-sale securities	$	832,808	$	619	$	(475	)	$	832,952	$	705,487	$	61	$	(3,331	)	$	702,217

As of March 29, 2015, the Company had 291 available-for-sale securities in a gross unrealized loss position, all of which had been in such position for less than twelve months. There were no material impairments considered other-than-temporary as it is more likely than not the Company will hold the securities until maturity or the recovery of the cost basis.

The following table shows the fair values and the gross unrealized losses of such available-for-sale securities that were in an unrealized loss position for less than twelve months as of March 29, 2015 and December 28, 2014, aggregated by investment category (in thousands):



	March 29, 2015					December 28, 2014
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Debt securities in government sponsored entities	$	31,068	$	(13	)	$	36,084	$	(55	)
Corporate debt securities	298,212		(416		)	428,078		(2,882		)
U.S. Treasury securities	84,323		(46		)	143,755		(394		)
Total	$	413,603	$	(475	)	$	607,917	$	(3,331	)

Realized gains and losses are determined based on the specific identification method and are reported in interest income.

Contractual maturities of available-for-sale debt securities as of March 29, 2015 were as follows (in thousands):



	Estimated Fair Value
Due within one year	$	375,825
After one but within five years	457,127
Total	$	832,952

Cost-Method Investments

As of March 29, 2015 and December 28, 2014, the aggregate carrying amounts of the Company’s cost-method investments in non-publicly traded companies were $38.8 million and $37.2 million, respectively, included in other assets. During the three months ended March 29, 2015, the Company sold a cost-method investment and recognized a $15.1 million gain. The Company’s cost-method investments are assessed for impairment quarterly. The Company determines that it is not practicable to estimate the fair value of its cost-method investments on a regular basis and does not reassess the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No material impairment loss was recorded during the three months ended March 29, 2015 or March 30, 2014.

Inventory

Inventory consists of the following (in thousands):



	March 29, 2015		December 28, 2014
Raw materials	$	72,083	$	70,316
Work in process	104,329		94,102
Finished goods	28,772		26,726
Total inventory	$	205,184	$	191,144

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



	March 29, 2015		December 28, 2014
Deferred revenue, current portion	$	83,758	$	75,294
Accrued compensation expenses	78,776		112,606
Accrued taxes payable	46,622		38,942
Acquisition related contingent liability, current portion	34,237		44,124
Reserve for product warranties	15,991		15,616
Customer deposits	11,945		20,274
Facility exit obligation, current portion	3,769		3,837
Other	21,052		24,583
Total accrued liabilities	$	296,150	$	335,276

Warranties

Changes in the Company’s reserve for product warranties during the three months ended March 29, 2015 and March 30, 2014 are as follows (in thousands):



	Three Months Ended
	March 29, 2015			March 30, 2014
Balance at beginning of period	$	15,616		$	10,407
Additions charged to cost of revenue	6,897			4,192
Repairs and replacements	(6,522		)	(3,107		)
Balance at end of period	$	15,991		$	11,492

Leases

Changes in the Company’s facility exit obligation related to its former headquarters lease during the three months ended March 29, 2015 and March 30, 2014 are as follows (in thousands):



	Three Months Ended
	March 29, 2015			March 30, 2014
Balance at beginning of period	$	37,700		$	38,218
Accretion of interest expense	607			595
Cash payments	(1,488		)	(1,633		)
Balance at end of period	$	36,819		$	37,180

On December 30, 2014, the Company entered into a lease agreement with BMR-Lincoln Centre LP (“BMR”) for certain office buildings in Foster City, California. Minimum lease payments during the initial term of 16 years are estimated to be $204.0 million. One of our Board members also serves on the Board of BMR. In addition, the Company entered into an amendment of its headquarter lease for additional rental square footage, which is expected to increase its minimum lease payments by $44.1 million over 15 years.

Fair Value Measurements

The following table presents the Company’s hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 29, 2015 and December 28, 2014 (in thousands):



	March 29, 2015								December 28, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds (cash equivalents)	$	317,288	$	—	$	—	$	317,288	$	431,172	$	—	$	—	$	431,172
Debt securities in government-sponsored entities	—		53,978		—		53,978		—		51,263		—		51,263
Corporate debt securities	—		587,270		—		587,270		—		500,088		—		500,088
U.S. Treasury securities	191,704		—		—		191,704		150,866		—		—		150,866
Deferred compensation plan assets	—		26,052		—		26,052		—		23,486		—		23,486
Total assets measured at fair value	$	508,992	$	667,300	$	—	$	1,176,292	$	582,038	$	574,837	$	—	$	1,156,875
Liabilities:
Acquisition related contingent consideration liabilities	$	—	$	—	$	34,237	$	34,237	$	—	$	—	$	44,124	$	44,124
Deferred compensation liability	—		24,760		—		24,760		—		20,310		—		20,310
Total liabilities measured at fair value	$	—	$	24,760	$	34,237	$	58,997	$	—	$	20,310	$	44,124	$	64,434

The Company holds available-for-sale securities that consist of highly liquid, investment grade debt securities. The Company considers information provided by the Company’s investment accounting and reporting service provider in the measurement of fair value of its debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. The Company’s deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. The Company performs control procedures to corroborate the fair value of its holdings, including comparing valuations obtained from its investment service provider to valuations reported by the Company’s asset custodians, validation of pricing sources and models, and review of key model inputs if necessary.

At March 29, 2015, the fair value of the contingent consideration liabilities consists primarily of amounts related to the 2013 Verinata Health, Inc. acquisition. The Company reassesses the fair value of contingent consideration to be settled in cash related to its acquisitions on a quarterly basis using the income approach. Assumptions used to estimate the acquisition date fair value of the contingent consideration include discount rates ranging from 6% to 20%, volatility of 50%, risk-free rate of 0.26%, revenue projections, and the probability of achieving regulatory milestones. This fair value measurement of the contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value. The changes in the fair value of the contingent considerations during the three months ended March 29, 2015 were due to changes in the estimated payments and a shorter discounting period.

Changes in estimated fair value of contingent consideration liabilities during the three months ended March 29, 2015 are as follows (in thousands):



	Contingent Consideration Liability (Level 3 Measurement)
Balance as of December 28, 2014	$	44,124
Change in estimated fair value, recorded in acquisition related gain, net	(9,887		)
Balance as of March 29, 2015	$	34,237

Convertible Senior Notes

As of March 29, 2015, the Company had outstanding $320.0 million in principal amount of 0.25% convertible senior notes due March 15, 2016, $632.5 million in principal amount of 0% convertible senior notes due June 15, 2019, and $517.5 million in principal amount of 0.5% convertible senior notes due June 15, 2021.

0% Convertible Senior Notes due 2019 and 0.5% Convertible Senior Notes due 2021

In June 2014, the Company issued $632.5 million aggregate principal amount of 0% convertible senior notes due 2019 (2019 Notes) and $517.5 million aggregate principal amount of 0.5% convertible senior notes due 2021 (2021 Notes). The Company used the net proceeds plus cash on hand to repurchase a portion of the outstanding 2016 Notes in privately negotiated transactions concurrently with the issuance of the 2019 and 2021 Notes. The 2019 Notes carry no coupon interest. The Company pays 0.5% interest per annum on the principal amount of the 2021 Notes, payable semiannually in arrears in cash on June 15 and December 15 of each year. The 2019 and 2021 Notes mature on June 15, 2019 and June 15, 2021, respectively, and the implied estimated effective rates of the liability components of the Notes were 2.9% and 3.5%, respectively, assuming no conversion. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rates were applied to the 2019 and 2021 Notes, which resulted in a fair value of the liability component in aggregate of $971.5 million upon issuance, calculated as the present value of implied future payments based on the $1,150.0 million aggregate principal amount. The $161.2 million difference between the cash proceeds of $1,132.7 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the 2019 and 2021 Notes are not considered redeemable.

Both the 2019 and 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at the Company's election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $254.34 per share), only in the following circumstances and to the following extent: (1) during the five business-day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2019 and 2021 Note for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during that quarter) after the calendar quarter ending September 30, 2014, if the last reported sale price of the Company’s common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events described in the indenture for the 2019 and 2021 Notes; and (4) at any time on or after March 15, 2019 for the 2019 Notes, or March 15, 2021 for the 2021 Notes, through the second scheduled trading day immediately preceding the maturity date.

As noted in the indentures for the 2019 and 2021 Notes, it is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock. As a policy election under applicable guidance related to the calculation of diluted net income per share, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of the potential dilutive impact of the 2019 and 2021 Notes. Neither the 2019 nor the 2021 Notes were convertible as of March 29, 2015 and had no dilutive impact during the three months ended March 29, 2015. If the 2019 and 2021 Notes were converted as of March 29, 2015, the if-converted value would not exceed the principal amount.

0.25% Convertible Senior Notes due 2016

In 2011, the Company issued $920.0 million aggregate principal amount of 0.25% convertible senior notes due 2016 (2016 Notes). The Company pays 0.25% interest per annum on the principal amount of the 2016 Notes semiannually in arrears in cash on March 15 and September 15 of each year. The 2016 Notes mature on March 15, 2016. The effective rate of the liability component was estimated to be 4.5%.

The 2016 Notes are convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment, of 11.9687 shares per $1,000 principal amount of the 2016 Notes (which represents an initial conversion price of approximately $83.55 per share), only in the following circumstances and to the following extent: (1) during the five business-day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2016 Note for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during that quarter) after the calendar quarter ending March 31, 2011, if the last reported sale price of the Company’s common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events described in the indenture for the 2016 Notes; and (4) at any time on or after December 15, 2015 through the second scheduled trading day immediately preceding the maturity date. Based upon meeting the stock trading price conversion requirement during the three months ended March 30, 2015, the 2016 Notes will continue to be convertible through June 30, 2015.

In conjunction with the issuance of the 2019 and 2021 Notes, the Company used the net proceeds from the issuance plus cash on hand to repurchase $600.0 million in principal amount of the outstanding 2016 Notes in privately negotiated transactions. The aggregate cash used for the repurchase was $1,244.7 million. The repurchase is accounted for as an extinguishment of debt and resulted in a $31.4 million loss for the difference between the $588.8 million fair value of debt component and the carrying value of the repurchased 2016 Notes. The $655.9 million of the repurchase price allocated to the equity component was recorded as a reduction of additional paid-in capital.

As noted in the indenture for the 2016 Notes, it is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock. As a policy election under applicable guidance related to the calculation of diluted net income per share, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of the dilutive impact of the 2016 Notes. The calculation of dilutive potential common shares outstanding for the three months ended March 29, 2015 reflects the dilutive impact from the 2016 Notes. If the 2016 Notes were converted as of March 29, 2015, the if-converted value would exceed the principal amount by $417.5 million.

Summary of Convertible Senior Notes

The following table summarizes information about the equity and liability components of all convertible senior notes outstanding as of the period reported (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices.



	March 29, 2015			December 28, 2014
Principal amount of convertible notes outstanding	$	1,470,027		$	1,470,027
Unamortized discount of liability component	(168,823		)	(178,991		)
Net carrying amount of liability component	1,301,204			1,291,036
Less: current portion	(307,427		)	(304,256		)
Long-term debt	$	993,777		$	986,780
Carrying value of equity component, net of debt issuance cost	$	215,283		$	215,283
Fair value of outstanding notes	$	2,023,059		$	2,021,750
Weighted-average remaining amortization period of discount on the liability component	5.0 years			5.2 years

Share-based Compensation Expense

Share-based compensation expense for all stock awards consists of the following (in thousands):



	Three Months Ended
	March 29, 2015			March 30, 2014
Cost of product revenue	$	2,332		$	2,095
Cost of service and other revenue	279			285
Research and development	11,307			11,669
Selling, general and administrative	18,000			19,375
Share-based compensation expense before taxes	31,918			33,424
Related income tax benefits	(9,113		)	(10,577		)
Share-based compensation expense, net of taxes	$	22,805		$	22,847

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the Employee Stock Purchase Plan (ESPP) during the three months ended March 29, 2015 are as follows:



	Employee Stock Purchase Rights
Risk-free interest rate	0.07% - 0.17%
Expected volatility	35% - 38%
Expected term	0.5 - 1.0 year
Expected dividends	—
Weighted-average fair value per share	$	53.35

As of March 29, 2015, approximately $243.5 million of unrecognized compensation cost related to stock options, restricted stock, and ESPP shares granted to date is expected to be recognized over a weighted-average period of approximately 2.0 years.

Stockholders' Equity

Stockholders’ Equity

As of March 29, 2015, approximately 5.5 million shares remained available for future grants under the 2005 Stock and Incentive Plan, the 2005 Solexa Equity Plan, and the 2008 Verinata Health Stock Plan.

Restricted Stock

A summary of the Company’s restricted stock activity and related information for the three months ended March 29, 2015 is as follows:



	Restricted Stock Awards (RSA)	Restricted Stock Units (RSU)		Performance Stock Units (PSU)		Weighted-Average Grant-Date Fair Value per Share
	Restricted Stock Awards (RSA)	Restricted Stock Units (RSU)		Performance Stock Units (PSU)		RSA		RSU		PSU
Outstanding at December 28, 2014	108	2,841		1,257		$	56.62	$	92.35	$	96.21
Awarded	—	22		3		—		$	194.61	$	194.34
Vested	—	(308	)	—		—		$	70.22	—
Cancelled	—	(132	)	(103	)	—		$	91.13	$	81.12
Outstanding at March 29, 2015	108	2,423		1,157		$	56.62	$	96.18	$	97.77

Stock Options

The Company’s stock option activity under all stock option plans during the three months ended March 29, 2015 is as follows:



	Options (in thousands)		Weighted-Average Exercise Price
Outstanding at December 28, 2014	3,211		$	34.74
Exercised	(593	)	$	28.10
Cancelled	(25	)	$	17.94
Outstanding at March 29, 2015	2,593		$	36.42

At March 29, 2015, outstanding options to purchase 2.4 million shares were exercisable with a weighted-average exercise price per share of $37.57.

Employee Stock Purchase Plan

The price at which common stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the three months ended March 29, 2015, approximately 0.1 million shares were issued under the ESPP. As of March 29, 2015, there were approximately 14.6 million shares available for issuance under the ESPP.

Share Repurchases

In April 2012 the Company’s Board of Directors authorized share repurchases for up to $250.0 million via a combination of Rule 10b5-1 and discretionary share repurchase programs. In addition, on January 30, 2014, the Company’s Board of Directors authorized up to $250.0 million to repurchase shares of the Company’s common stock on a discretionary basis. During the three months ended March 29, 2015 and March 30, 2014, the Company repurchased approximately 0.2 million and 0.8 million shares for $34.8 million and $130.0 million, respectively. Authorizations to repurchase up to an additional $95.6 million of the Company’s common stock remained available as of March 29, 2015.

Income Taxes

The Company’s effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three months ended March 29, 2015 was 23.2%. The variance from the U.S. federal statutory tax rate of 35% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom. The decrease from the U.S. federal statutory rate also resulted from the reversal of a valuation allowance related to research and development tax credits as well as tax deductions related to stock award activities, which were recorded as discrete items in the quarter.

The Company is currently under examination by the IRS for tax year 2011. The IRS has not yet proposed any adjustments to the filed return.

Legal Proceedings

The Company is 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, the Company assesses, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, the Company is currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event that opposing litigants in outstanding litigations or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

On November 14, 2014, the Company entered into a Settlement and License Agreement with Syntrix Biosystems, Inc. and its sole shareholders, John A. Zebala and Amy Zebala, that settled all claims in the litigation brought against the Company. On December 2, 2014, the Company and its subsidiary Verinata Health, Inc. entered into a series of agreements with Sequenom, Inc. and several other parties that, among other items, settled a patent litigation among the parties involved. For more detailed discussions on these matters, refer to note “10. Legal Proceedings” in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2014.

Summary of Significant Accounting Policies (Policies)