Illumina Reports Financial Results for Second Quarter of Fiscal Year 2012

Illumina Reports Financial Results for Second Quarter of Fiscal Year 2012

Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the second quarter of 2012.

Gross margin in the second quarter of 2012 was 68.8% compared to 67.3% in the prior year period. Excluding the effect of non-cash charges associated with stock compensation, amortization of acquired intangibles, and legal contingencies, non-GAAP gross margin was 70.9% for the second quarter of 2012 compared to 69.0% in the prior year period.

Research and development (R&D) expenses for the second quarter of 2012 were $71.2 million compared to $50.8 million in the second quarter of 2011. R&D expenses in the second quarter of 2012 included a one-time charge of $21.4 million related to in-process research and development associated with the impairment of an early-stage technology acquired in 2010 as well as $7.7 million and $8.5 million of non-cash stock compensation expense in the second quarters of 2012 and 2011, respectively. Excluding these charges and contingent compensation, R&D expenses as a percentage of revenue were 14.7% compared to 14.1% in the prior year period.

Selling, general and administrative (SG&A) expenses for the second quarter of 2012 were $68.5 million compared to $69.2 million for the second quarter of 2011. SG&A expenses included $14.3 million and $13.3 million of non-cash stock compensation expense in the second quarters of 2012 and 2011, respectively. Excluding these charges, contingent compensation, and acquired intangible asset amortization, SG&A expenses as a percentage of revenue were 19.4% compared to 19.1% in the prior year period.

Depreciation and amortization expenses were $14.7 million and capital expenditures were $20.9 million during the second quarter of 2012. The company ended the second quarter of 2012 with $1.3 billion in cash, cash equivalents and short-term investments compared to $1.2 billion as of January 1, 2012.

"We are very pleased with our operational execution for the first half of 2012 and the resulting financial performance," said Jay Flatley, Illumina's President and Chief Executive Officer. "While some uncertainty exists with respect to academic and research funding in the second half of the year, our outlook is generally as we anticipated. Accordingly, we are re-affirming our 2012 revenue guidance and increasing our non-GAAP earnings per fully diluted share guidance to between $1.50 - $1.60 (previously $1.40 - $1.50)."

The conference call will begin at 2:00 pm Pacific Time (5:00 pm Eastern Time) on Tuesday, July 24, 2012. Interested parties may listen to the call by dialing 888-680-0890 (passcode: 97408950), or if outside North America by dialing +1-617-213-4857 (passcode: 97408950). Individuals may access the live teleconference in the Investor Relations section of Illumina's web site under the "Company" tab at .

A replay of the conference call will be available from 4:00 pm Pacific Time (7:00 pm Eastern Time) on July 24, 2012 through July 31, 2012 by dialing 888-286-8010 (passcode: 51099189), or if outside North America by dialing +1-617-801-6888 (passcode: 51099189).

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

The company's financial measures under GAAP include substantial charges related to stock compensation expense, non-cash interest expense associated with the company's convertible debt instruments that may be settled in cash, costs related to unsolicited tender offer for the company's stock, amortization expense related to acquired intangible assets, contingent compensation expense, restructuring charges, legal contingencies, headquarter relocation expense, loss on the extinguishment of convertible debt, impairment of in-process research and development, and acquisition related expense. Per share amounts also include the double dilution associated with the accounting treatment of the company's 0.625% convertible senior notes outstanding and the corresponding call option overlay. Management believes that presentation of operating results that excludes these items and per share double dilution provides useful supplemental information to investors and facilitates the analysis of the company's core operating results and comparison of operating results across reporting periods. Management also believes that this supplemental non-GAAP information is therefore useful to investors in analyzing and assessing the company's past and future operating performance.

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

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

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

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

Pro forma impact of weighted average shares represents the impact of double dilution associated with the accounting treatment of the company's outstanding convertible debt and the corresponding call option overlay.

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

Headquarter relocation expense in Q2 2012 and first half of 2012 consists primarily of double rent expense during the transition to our new headquarter facility, accretion of interest expense on lease exit liability recorded upon vacating certain buildings of our prior headquarters, and moving costs. Headquarter relocation expense recorded in Q2 2011 and first half of 2011 consisted of accelerated depreciation.

Acquisition related expense, net in Q2 and first half of 2012 year represents changes in fair value of contingent consideration. Acquisition related expense, net in Q2 and first half of 2011 includes an acquired in-process research and development charge of $5.4 million in Q2 2011 related to a milestone payment for a prior acquisition, offset by a loss of $0.3 million in Q1 2011 and a gain of $0.7 million in Q2 2011 recorded for changes in fair value of contingent consideration.

Contingent compensation expense represents contingent consideration for post-combination services associated with acquisitions.

Incremental non-GAAP tax expense reflects the increase to GAAP tax expense related to the non-GAAP adjustments listed above.

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

Contingent compensation expense represents contingent consideration for post-combination services associated with acquisitions.

Headquarter relocation expense in Q2 2012 and first half of 2012 consists primarily of double rent expense during the transition to our new headquarter facility, accretion of interest expense on lease exit liability recorded upon vacating certain buildings of our prior headquarters, and moving costs. Headquarter relocation expense recorded in Q2 2011 and first half of 2011 consisted of accelerated depreciation.

Acquisition related expense, net in Q2 and first half of 2012 year represents changes in fair value of contingent consideration. Acquisition related expense, net in Q2 and first half of 2011 includes an acquired in-process research and development charge of $5.4 million in Q2 2011 related to a milestone payment for a prior acquisition, offset by a loss of $0.3 million in Q1 2011 and a gain of $0.7 million in Q2 2011 recorded for changes in fair value of contingent consideration.

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

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

The company's future performance and financial results are subject to risks and uncertainties, and actual results could differ materially from the guidance set forth below. More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the SEC, including the company's Form 10-K for the fiscal year ended January 1, 2012. The company assumes no obligation to update any forward-looking statements or information.

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

We expect to incur additional headquarter relocation expenses, the majority of which are non-cash in nature. These expenses include items such as additional cease-use loss upon vacating our former headquarter facilities, accretion of interest expense on such cease-use liabilities, and double rent expense during the transition to the new facility.

Contingent compensation expense represents contingent consideration for post-combination services associated with acquisitions.

Acquisition related expense represents changes in fair value of contingent consideration.

Pro forma impact of weighted average shares represents the estimated impact of double dilution associated with the accounting treatment of the company's outstanding convertible debt and the corresponding call option overlay.

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