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Balance Sheet Account Details
9 Months Ended
Oct. 02, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Account Details
Balance Sheet Account Details

Short-Term Investments

The following is a summary of short-term investments (in thousands):
 
 
October 2, 2016
 
January 3, 2016
 
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
$
29,687

 
$

 
$
(30
)
 
$
29,657

 
$
14,634

 
$

 
$
(8
)
 
$
14,626

Corporate debt securities
463,484

 
282

 
(474
)
 
463,292

 
422,177

 
44

 
(1,127
)
 
421,094

U.S. Treasury securities
248,542

 
182

 
(104
)
 
248,620

 
182,144

 
3

 
(417
)
 
181,730

Total available-for-sale securities
$
741,713

 
$
464

 
$
(608
)
 
$
741,569

 
$
618,955

 
$
47

 
$
(1,552
)
 
$
617,450



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 October 2, 2016 were as follows (in thousands):
 
 
Estimated
Fair Value
Due within one year
$
279,548

After one but within five years
462,021

Total
$
741,569


The Company has the ability, if necessary, to liquidate any of its cash equivalents and short-term investments in order to meet its liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase nonetheless are classified as short-term on the accompanying condensed consolidated balance sheets.

Strategic Investments

As of October 2, 2016 and January 3, 2016, the aggregate carrying amounts of the Company’s cost-method investments in non-publicly traded companies included in other assets were $56.9 million and $56.6 million, respectively. Revenue recognized from transactions with such companies was $12.5 million and $42.1 million, respectively, for the three and nine months ended October 2, 2016 and $16.1 million and $47.3 million, respectively, for the three and nine months ended September 27, 2015.

During the nine months ended September 27, 2015, the Company recognized a gain on a disposition of a cost-method investment of $18.0 million. 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 and nine months ended October 2, 2016 or September 27, 2015.

On April 14, 2016, the Company announced that it has committed to invest $100.0 million in a new venture capital investment fund (the Fund). The capital commitment is callable over ten years, and up to $40.0 million can be drawn down during the first year. The Company’s investment in the Fund is accounted for as an equity method investment. During the nine months ended October 2, 2016, the Company transferred $3.2 million of its cost-method investments to the Fund and contributed $4.4 million in cash.

Inventory

Inventory consists of the following (in thousands):
 
October 2,
2016
 
January 3,
2016
Raw materials
$
101,646

 
$
97,740

Work in process
166,050

 
138,322

Finished goods
44,546

 
34,715

Total inventory
$
312,242

 
$
270,777



Property and Equipment

Property and equipment, net consists of the following (in thousands):
 
October 2,
2016
 
January 3,
2016
Leasehold improvements
$
197,534

 
$
178,019

Machinery and equipment
264,556

 
224,158

Computer hardware and software
153,851

 
136,550

Furniture and fixtures
20,448

 
18,539

Building
7,670

 
7,670

Construction in progress
308,825

 
44,501

Total property and equipment, gross
952,884

 
609,437

Accumulated depreciation
(319,028
)
 
(266,743
)
Total property and equipment, net
$
633,856

 
$
342,694


Property and equipment, net included accrued expenditures of $194.4 million for the nine months ended October 2, 2016, which includes $168.8 million in construction in progress recorded under build-to-suit lease accounting. Accrued capital expenditures were excluded from the condensed consolidated statements of cash flows. Accrued capital expenditures were immaterial for the nine months ended September 27, 2015.

Goodwill

The Company tests the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require the Company to estimate the fair value of the reporting units annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment is required. The Company performed its annual assessment for goodwill impairment in the second quarter of 2016, noting no impairment.

Changes in the Company’s goodwill balance during the nine months ended October 2, 2016 are as follows (in thousands):
 
Goodwill
Balance as of January 3, 2016
$
752,629

Current period acquisitions
23,366

Balance as of October 2, 2016
$
775,995


In January 2016, the Company closed two acquisitions consisting of $17.8 million in upfront cash payments, equity instruments, and certain contingent consideration provisions.

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 October 2, 2016, the Company had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, and Australian dollar. As of October 2, 2016 and January 3, 2016, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $62.2 million and $61.3 million, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):
 
October 2,
2016
 
January 3,
2016
Deferred revenue, current portion
$
116,118

 
$
96,654

Accrued compensation expenses
89,527

 
120,662

Accrued taxes payable
30,855

 
44,159

Customer deposits
17,831

 
20,901

Acquisition related contingent liability, current portion
7,220

 
35,000

Other
53,653

 
69,468

Total accrued liabilities
$
315,204

 
$
386,844


Build-to-Suit Lease Liability

The Company evaluates whether it is the accounting owner during the construction period when the Company is involved in the construction of leased assets. As a result, the Company is considered the owner of three construction projects for accounting purposes only under build-to-suit lease accounting due to certain indemnification obligations related to the construction. As of October 3, 2016 and January 3, 2016, the Company has recorded $178.3 million and $9.5 million, respectively, in project construction costs incurred by the landlord as construction in progress and a corresponding build-to-suit lease liability. Once the landlord completes the construction projects, the Company will evaluate the lease in order to determine whether or not it meets the criteria for “sale-leaseback” treatment.

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.

Changes in the Company’s reserve for product warranties during the three and nine months ended October 2, 2016 and September 27, 2015 are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
September 27,
2015
 
October 2,
2016
 
September 27,
2015
Balance at beginning of period
$
15,679

 
$
16,365

 
$
16,717

 
$
15,616

Additions charged to cost of product revenue
3,878

 
6,916

 
17,200

 
20,737

Repairs and replacements
(5,180
)
 
(5,348
)
 
(19,540
)
 
(18,420
)
Balance at end of period
$
14,377

 
$
17,933

 
$
14,377

 
$
17,933


Leases

Changes in the Company’s facility exit obligation related to its former headquarters lease during the three and nine months ended October 2, 2016 and September 27, 2015 are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
September 27,
2015
 
October 2,
2016
 
September 27,
2015
Balance at beginning of period
$
20,557

 
$
36,677

 
$
22,160

 
$
37,700

Adjustment to facility exit obligation
66

 
(5,935
)
 
87

 
(5,278
)
Accretion of interest expense
320

 
590

 
983

 
1,926

Cash payments
(1,198
)
 
(1,539
)
 
(3,485
)
 
(4,555
)
Balance at end of period
$
19,745

 
$
29,793

 
$
19,745

 
$
29,793

On March 18, 2016, the Company entered into an agreement to sublease its office building in San Francisco, California. The Company will receive $51.2 million in minimum lease payments during the initial term of approximately eight years.

On April 5, 2016, the Company entered into a lease agreement for certain office buildings being constructed in San Diego, California. Minimum lease payments during the initial term of ten years are estimated to be $127.4 million.

Investments in Consolidated Variable Interest Entities

GRAIL, Inc.

In January 2016, the Company obtained a majority equity ownership interest in GRAIL, Inc. (GRAIL), a company formed with unrelated third party investors to pursue the development and commercialization of a blood test for asymptomatic cancer screening. The Company determined that GRAIL is a variable interest entity as the entity lacks sufficient equity to finance its activities without additional support. Additionally, the Company determined that it has (a) control of the entity’s Board of Directors, which has unilateral power over the activities that most significantly impact the economic performance of GRAIL and (b) the obligation to absorb losses of and the right to receive benefits from GRAIL that are potentially significant to GRAIL. As a result, the Company is deemed to be the primary beneficiary of GRAIL and is required to consolidate GRAIL. On a fully diluted basis, the Company holds a 52% equity ownership interest in GRAIL as of October 2, 2016.

During the three months ended April 3, 2016, GRAIL completed its Series A convertible preferred stock financing, raising $120.0 million, of which the Company invested $40.0 million. Additionally, the Company and GRAIL executed a long-term supply agreement in which the Company contributed certain perpetual licenses, employees, and discounted supply terms in exchange for 112.5 million shares of GRAIL’s Class B Common Stock. Such contributions are recorded at their historical basis as they remain within the control of the Company. The $80.0 million received by GRAIL from unrelated third party investors upon issuance of its Series A convertible preferred stock is classified as noncontrolling interests in stockholders’ equity on the Company’s consolidated balance sheet.

During the three months ended July 3, 2016, GRAIL authorized for issuance 97.5 million shares of Series A-1 convertible preferred stock, all of which were issued to Illumina in exchange for 97.5 million shares of Illumina’s Class B Common Stock on June 23, 2016. As a result of the exchange, Illumina recorded a $9.5 million deemed dividend net of tax of $9.6 million through equity, which was eliminated in consolidation.

For the three months ended October 2, 2016, the Company absorbed approximately 50% of GRAIL’s losses based upon its proportional ownership of GRAIL’s common stock. Prior to the exchange, for the six months ended July 3, 2016, the Company absorbed 90% of GRAIL’s losses based upon its proportional ownership of GRAIL’s common stock.

In accordance with GRAIL’s Equity Incentive Plan, the Company may be required to redeem certain vested stock awards in cash at the then approximate fair market value.  The fair value of the redeemable noncontrolling interests is considered a Level 3 instrument.  Such redemption right is exercisable at the option of the holder of the awards after February 28, 2021, provided that an initial public offering of GRAIL has not been completed. As the redemption provision is outside of the control of the Company, the redeemable noncontrolling interests in GRAIL are classified outside of stockholders’ equity on the accompanying condensed consolidated balance sheets.  The balance of the redeemable noncontrolling interests is reported at the greater of its carrying value after receiving its allocation of GRAIL’s profits and losses or its estimated redemption value at each reporting date. 

The assets and liabilities of GRAIL, other than cash and cash equivalents, are not significant to the Company’s financial position as of October 2, 2016. Additionally, GRAIL has an immaterial impact on the Company’s condensed consolidated statements of income and cash flows for the three and nine months ended October 2, 2016.

Helix Holdings I, LLC

In July 2015, the Company obtained a 50% voting equity ownership interest in Helix Holdings I, LLC (Helix), a limited liability company formed with unrelated third party investors to pursue the development and commercialization of a marketplace for consumer genomics. The Company determined that Helix is a variable interest entity as the holder of the at-risk equity investments as a group lack the power to direct the activities of Helix that most significantly impact Helix’s economic performance. Additionally, the Company determined that it has (a) unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and no one individual party has unilateral power over the remaining significant activities of Helix and (b) the obligation to absorb losses of and the right to receive benefits from Helix that are potentially significant to Helix. As a result, the Company is deemed to be the primary beneficiary of Helix and is required to consolidate Helix.

As contractually committed, the Company contributed certain perpetual licenses, instruments, intangibles, initial laboratory setup, and discounted supply terms in exchange for voting equity interests in Helix. Such contributions are recorded at their historical basis as they remain within the control of the Company. Helix is financed through cash contributions made by the third party investors in exchange for voting equity interests in Helix.

Certain noncontrolling Helix investors may require the Company to redeem all noncontrolling interests in cash at the then approximate fair market value. The fair value of the redeemable noncontrolling interests is considered a Level 3 instrument. Such redemption right is exercisable at the option of certain noncontrolling interest holders after January 1, 2021, provided that a bona fide pursuit of the sale of Helix has occurred and an initial public offering of Helix has not been completed.

As the contingent redemption is outside of the control of Illumina, the redeemable noncontrolling interests in Helix are classified outside of stockholders’ equity on the accompanying condensed consolidated balance sheets. The balance of the redeemable noncontrolling interests is reported at the greater of its carrying value after receiving its allocation of Helix’s profits and losses or its estimated redemption value at each reporting date. As of October 2, 2016, the noncontrolling shareholders and Illumina each held 50% of Helix’s outstanding voting equity interests.

The assets and liabilities of Helix are not significant to the Company’s financial position as of October 2, 2016. Helix has an immaterial impact on the Company’s condensed consolidated statements of income and cash flows for the three and nine months ended October 2, 2016.

As of October 2, 2016, the accompanying condensed consolidated balance sheet includes $103.6 million of cash and cash equivalents attributable to GRAIL and Helix that will be used to settle their respective obligations and will not be available to settle obligations of the Company.

Redeemable Noncontrolling Interests

The activity of the redeemable noncontrolling interests during the nine months ended October 2, 2016 is as follows (in thousands):
 
Redeemable Noncontrolling Interests
Balance as of January 3, 2016
$
32,546

Vesting of redeemable equity awards
1,481

Net loss attributable to noncontrolling interests
(11,793
)
Adjustment up to the redemption value
12,023

Balance as of October 2, 2016
$
34,257