NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 1—NATURE OF OPERATIONS
Affymetrix, Inc. ("Affymetrix" or the "Company") is a provider of life science tools and molecular diagnostic products that enable multiplex and parallel analysis of biological systems at the gene, protein and cell level. The Company sells products to genomic research centers, academic institutions, government and private laboratories, as well as pharmaceutical, diagnostic and biotechnology companies. The Company also sells some of its products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China.
In June 2012, the Company acquired eBioscience Holdings, Inc. ("eBioscience") for approximately $315 million (the "Acquisition"). eBioscience is based in San Diego, California, and engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for life science research and diagnostics. Refer to Note 3. "Acquisition" for further information.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affymetrix and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements include the results of companies acquired by us from the date of each acquisition for the applicable reporting periods.
Certain prior year amounts on the accompanying Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements is in conformity with U.S. generally accepted accounting principles ("US GAAP") which require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
BUSINESS COMBINATIONS
The Company's condensed consolidated financial statements include the operations of an acquired business after the completion of the acquisition. The Company accounts for acquired businesses using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, while transaction costs are expensed as incurred, except for any debt and equity issuance costs. The measurement of the fair value of assets acquired and liabilities assumed requires significant judgment. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill.
FOREIGN CURRENCY
Certain operations from foreign subsidiaries of the Company have a functional currency other than the U.S. dollar. All other subsidiaries have the U.S. dollar as their functional currency.
Assets and liabilities of non-U.S. subsidiaries that use the local currency as their functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income (loss) within stockholders' equity. Income and expense accounts are translated at average exchange rates during the year.
Foreign currency transaction gains and losses are recognized, net of hedging activity, in interest income and other, net and were comprised of net losses of $1.3 million, $2.5 million and less than $0.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.
The Company's subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Gains and losses from these remeasurements were insignificant and have been included in the Company's results of operations.
CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS
Restricted Cash
The Company's restricted cash balances consist primarily of outstanding letters of credits that are fully cash collateralized and reserves for value added tax in foreign locations.
Marketable Securities
The Company's investments consist of marketable equity and debt securities, including U.S. government notes and bonds; corporate notes, bonds and asset‑backed securities; mortgage‑backed securities, municipal notes and bonds; and publicly traded equity securities. The Company reports all securities with maturities at the date of purchase of 90 days or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. The Company's investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders' equity. The cost of its marketable securities is adjusted for the amortization of premiums and discounts to maturity. This amortization is included in interest income and other, net. Realized gains and losses, as well as interest income, on available-for-sale securities are also included in interest income and other, net. The cost of securities sold is based on the specific identification method. The fair values of securities are based on quoted market prices. The Company has classified its available-for-sale securities in current assets on the accompanying Consolidated Balance Sheets as it expects to liquidate the securities within the next twelve months.
Non-marketable Securities
As part of the Company's strategic efforts to gain access to potential new products and technologies, the Company owns an approximately 6% interest in a limited partnership investment fund that is accounted for under the equity method and included in other long-term assets in the accompanying Consolidated Balance Sheets.
Other-than-temporary Impairment
All of the Company's marketable and non-marketable securities are subject to quarterly reviews for impairment that is deemed to be other-than-temporary ("OTTI"). An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (1) the Company intends to sell the security; (2) it is "more likely than not" that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not expected to recover the entire amortized cost basis. Below is a summary of the Company's analysis:
·
|
Marketable securities
–As part of its review, the Company is required to take into consideration current market conditions, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts' evaluations, all available information relevant to the collectability of debt securities and other factors when evaluating for the existence of OTTI in its securities portfolio. OTTI is separated into credit-related losses, which exist when amortized cost basis is not expected to be fully recovered, and non-credit related losses, which are the result of all other factors, such as illiquidity. Any credit-related OTTI is recognized in earnings while noncredit-related OTTI is recorded in other comprehensive income (loss) ("OCI"). No impairment charges were recognized on its marketable securities during the year ended December 31, 2012. During the year ended December 31, 2011, the Company recorded an impairment charge of $0.8 million due to OTTI of its investment in a publicly-traded company. Refer to Note 6. "Financial Instruments – Investments in Debt and Equity Securities" for further information.
|
·
|
Non-marketable securities
– The Company periodically monitors the liquidity and financing activities of its non-marketable securities to determine if any impairment exists and accordingly writes down, to the extent necessary, the carrying value of the non-marketable equity securities to their estimated fair values. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook of the issuer, including key operational and cash flow metrics, current market conditions; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in estimated fair value. No impairment charges were recognized on its non-marketable securities during the year ended December 31, 2012. During the year ended December 31, 2011, the Company recorded impairment charges totaling $1.3 million, primarily related to its investment in a limited partnership investment fund. Refer to Note 6. "Financial Instruments – Non-Marketable Securities" for further information.
|
ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at net invoice value. The Company considers amounts past due based on the related terms of the invoice. The Company reviews its exposure to amounts receivable and provides an allowance for specific amounts if collectability is no longer reasonably assured. The Company also provides an allowance for a percentage of the gross trade receivable balance (excluding any specifically reserved amounts) based on its collection history. The allowance for doubtful accounts was not material at December 31, 2012 and 2011.
DERIVATIVE INSTRUMENTS
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings at each reporting date.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the Company measures the effectiveness of the derivative instruments by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. The effective portion of the gain or loss on the derivative instrument is reported as a component of OCI in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Refer to Note 6. "Financial Instruments – Derivative Financial Instruments" for further information.
INVENTORIES
Inventory cost is computed on an adjusted standard basis (which approximates actual cost on a first-in, first-out basis). Provisions for slow moving, potentially excess and obsolete inventories are provided based on estimated demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues.
Inventory that is not expected to be utilized until more than 12 months from the balance sheet date is classified as long-term. Estimating the level of inventory utilization for the upcoming 12 months requires management to exercise significant judgment. The Company maintains inventory levels in excess of 12 months for certain components of work-in-progress that have useful lives of up to 10 years. Carrying such levels of inventory impacts the Company's liquidity and cash flows since the inventory will not be converted to cash for more than one year.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Equipment and furniture is depreciated over useful lives generally ranging from 3 to 7 years and leasehold improvements are depreciated over the shorter of the expected life of the asset or lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred. The Company reassesses the useful life on its property and equipment on a periodic basis and may adjust the lives accordingly.
In the fourth quarter of 2012, the Company sold its facility located in West Sacramento, California to a third-party for $5.8 million, which included $0.3 million of commissions and closing costs paid by the Company, and received $5.5 million in cash.
GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of the fair value of the acquired entity over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in a business combination. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives which range from one to twelve years with the amortization recognized in either cost of revenue or operating expenses, as appropriate.
Goodwill is not subject to amortization, but is tested for impairment on an annual basis during the fourth quarter or whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Goodwill impairment testing is a two-step process and performed on a reporting unit level. In the first step, t
he Company conducts an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, it then conducts the second step, a two-part test for impairment of goodwill. The Company first compares the fair value of its reporting units to their carrying values. If the fair values of the reporting units exceed the carrying value of the net assets, goodwill is not considered impaired and no further analysis is required. If the carrying values of the net assets exceed the fair values of the reporting units, then the second part of the impairment test must be performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value, then an impairment loss equal to the difference would be recorded. For 2012, the Company performed its annual goodwill impairment analysis during the fourth quarter of 2012 and concluded that goodwill is not impaired.
Finite-lived intangible assets and other long-lived assets are reviewed for impairment when facts or circumstances suggest that the carrying value of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values.
Additionally, during each period, the Company evaluates the estimated remaining useful lives of purchased finite-lived intangible assets and other long-lived assets to determine whether events or changes in circumstances warrant a revision to the remaining period of amortization.
For the year ended December 31, 2012, no impairment charges were recognized. For the years ended December 31, 2011 and 2010, the Company recognized $1.7 million and $0.3 million, respectively, of impairment charges on its long-lived assets.
INCOME TAXES
Income tax expense is based on pre-tax financial accounting income. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. To the extent the Company believes that realization of the deferred tax assets is not more likely than not, the Company establishes a valuation allowance. Significant estimates are required in determining the Company's provision for income taxes, deferred tax assets and liabilities, any valuation allowance to be recorded against net deferred tax assets, and reserves for income tax related uncertainties. Some of these estimates are based on interpretations of existing tax laws or regulations. Various internal and external factors may have favorable or unfavorable effects on the Company's future effective tax rate. These factors include, but are not limited to, changes in overall levels of characterization and geographical mix of pretax earnings (losses), changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of deferred tax assets or liabilities, levels of research and development spending, nondeductible expenses, applicability of tax holidays, ultimate outcomes of income tax audits, and income tax impacts of any business combination transactions or changes in our equity structure. Relative to uncertain tax positions, the Company only recognizes the tax benefit if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Company's financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
CONTINGENCIES
The Company is subject to various legal proceedings principally related to intellectual property matters. Based on the information available at the most recent balance sheet date, the Company assesses the likelihood of any material adverse judgments or outcomes that may result from these matters, as well as the range of possible or probable loss, if any. If losses are probable and reasonably estimable, the Company will record a reserve. Any reserves recorded may change in the future due to new developments in each matter.
REVENUE RECOGNITION
Overview
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or system is required or performance obligations remain, revenue is deferred until all the acceptance criteria or performance obligations have been met.
The Company derives the majority of its revenue from product sales of probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the Company's products, services or other sources of revenue. When a sale combines multiple elements upon delivery or performance of multiple products, services and/or rights to use assets, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value or best estimate selling price, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value.
Effective January 1, 2010, the Company adopted Auditing Standards Update ("ASU") No. 2009-13,
Revenue Recognition (ASC Topic 605) – Multiple-Deliverable Revenue Arrangements
on a prospective basis, which establishes the relative selling price method whereby the Company is required to allocate consideration to all deliverables at the inception of the arrangement based on their relative selling prices. This change in accounting principle did not have a material impact on the Company's financial results.
Product Sales
Product sales include sales of probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenue is recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.
Services
Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees. Revenue from equipment service contracts are recognized ratably over the life of the contract.
Revenue from scientific and DNA analysis services are recognized upon shipment of the required data to the customer.
Revenue from custom probe array design fees associated with the Company's GeneChip
®
CustomExpress™ and CustomSeq™ products are recognized when the associated products are shipped.
Royalties and Other Revenue
Royalties and other revenue include license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip
®
array access programs; and research revenue, which mainly consists of amounts earned under government grants.
License revenue is generally recognized upon the execution of an agreement or is recognized ratably over the period of expected performance.
Revenue from royalties is recognized under the terms of the related agreement.
The Company enters into collaborative arrangements which generally include a research and product development phase and a manufacturing and product supply phase. These arrangements may include up-front nonrefundable license fees, milestones, the rights to royalties based on the sale of final product by the partner, product supply agreements and distribution arrangements.
Any up-front, nonrefundable payments from collaborative product development agreements are recognized ratably over the research and product development period, and at-risk substantive based milestones are recognized when earned. Any payments received which are not yet earned are included in deferred revenue.
Transactions with Distributors
The Company recognizes revenue from transactions with distributors when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed or determinable, and collectability is reasonably assured. The Company's agreements with distributors do not include rights of return.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for internal, collaborative and grant‑sponsored research and development. Research and development expenses include salaries, contractor fees, building costs, utilities and allocations of shared corporate services. In addition, the Company funds research and development at other companies and research institutions under agreements which are generally cancelable. All such costs are charged to research and development expense as incurred.
SOFTWARE DEVELOPMENT COSTS
Development Costs of Software to Be Sold, Leased or Marketed
Certain software development costs subsequent to the establishment of technological feasibility are capitalized. The Company's software is deemed to have achieved technological feasibility at the point a working model of the software product is developed. For the years ended December 31, 2012 and 2011, the Company did not capitalize any software development costs. Amortization of such costs was $0.5 million for the year ended December 31, 2012 and $0.7 million for each of the years ended December 31, 2011 and 2010. The costs of developing routine software enhancements are expensed as research and development when incurred because of the short time between the determination of technological feasibility and the date of general release of the related products.
Internal-Use Software
For the year ended December 31, 2012, the Company capitalized $0.4 million of costs associated with internal-use software. There was nothing capitalized for the year ended December 31, 2011. All costs associated with software developed for internal use will be amortized from the time at which the software is ready for its intended use. As of December 31, 2012, the Company had recognized total cumulative amortization costs related to internal-use software of $0.8 million.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs recorded for the years ended December 31, 2012, 2011 and 2010 were $2.0 million, $0.6 million and $1.2 million, respectively.
SHARE‑BASED COMPENSATION
The Company estimates the fair value of its option grants and shares sold under its Employee Stock Purchase Plan using the Black‑Scholes-Merton ("BSM") option pricing model.
This model requires the use of certain estimates and assumptions such as the expected term of options, estimated forfeitures, expected volatility of the Company's stock price, expected dividends and the risk-free interest rate at the grant date to determine the fair value of the stock options. The fair value of its restricted stock, restricted stock units and performance based restricted stock units, collectively referred to as restricted stock awards ("RSAs"), is based on the market price of the Company's common stock on the grant date.
The Company recognizes the fair value of its share-based compensation as expense on a straight-line basis over the requisite service period of each award, generally four years. Refer to Note 14. "Stockholders' Equity and Share-Based Compensation Expense" for further information.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes foreign currency translation adjustments, unrealized gains and losses on the Company's available-for-sale securities that are excluded from net loss and unrealized gains and losses on cash flow hedges. Total comprehensive income (loss) has been disclosed in the Company's Consolidated Statements of Comprehensive Loss.
At December 31, 2012 and 2011, the components of accumulated other comprehensive income, net of tax, are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Foreign currency translation adjustment
|
|
$
|
5,374
|
|
|
$
|
821
|
|
Unrealized gains on available-for-sale and non-marketable securities
|
|
|
896
|
|
|
|
845
|
|
Unrealized gains on cash flow hedges
|
|
|
32
|
|
|
|
826
|
|
Accumulated other comprehensive income
|
|
$
|
6,302
|
|
|
$
|
2,492
|
|
NET LOSS PER COMMON SHARE
Basic net loss per common share is calculated using the weighted‑average number of common shares outstanding during the period less the weighted‑average shares subject to repurchase. Diluted net loss per common share gives effect to dilutive common stock subject to repurchase, stock options (calculated based on the treasury stock method), shares purchased under the employee stock purchase plan and convertible debt (calculated using an as-if-converted method).
Diluted earnings per share, if any, include certain potential dilutive securities from common stock subject to repurchase, outstanding stock options (on the treasury stock method), shares purchased under the employee stock purchase plan and convertible notes (on the as-if-converted basis). The potentially dilutive securities excluded from diluted earnings per common share on an actual outstanding basis, were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Employee stock options
|
|
|
6,101
|
|
|
|
6,276
|
|
|
|
6,636
|
|
Employee stock purchase plan
|
|
|
210
|
|
|
|
64
|
|
|
|
-
|
|
Restricted stock and restricted stock units
|
|
|
3,734
|
|
|
|
2,597
|
|
|
|
1,953
|
|
Convertible notes
|
|
|
9,899
|
|
|
|
3,169
|
|
|
|
3,169
|
|
Total
|
|
|
19,944
|
|
|
|
12,106
|
|
|
|
11,758
|
|
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this guidance on January 1, 2012 on a retrospective basis and the adoption did not have a material effect on its consolidated financial statements.
In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this standard in the first quarter of 2012 and the adoption did not have a material impact on its financial statements and disclosures.
In September 2011, the FASB issued new guidance on testing goodwill for impairment. The new guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company adopted this accounting standard in the fourth quarter of 2012 and completed its 2012 goodwill impairment analysis based on this guidance. The adoption of this guidance did not have a material impact on the accompanying Consolidated Financial Statements.
NOTE 3—ACQUISITION
On June 25, 2012 (the "Acquisition Date"), pursuant to the terms of an Amended and Restated Agreement and Plan of Merger (the "Acquisition Agreement"), a wholly-owned subsidiary of the Company merged with and into eBioscience, with eBioscience surviving as a wholly-owned subsidiary of the Company (the "Acquisition"). eBioscience specializes in the development, manufacturing, marketing and distribution of research tools in the areas of flow cytometry, immunoassays, microscopic imaging and other protein-based analyses.
At the Acquisition Date, each share of eBioscience issued and outstanding common stock immediately prior to the Acquisition Date was cancelled and converted into the right to receive cash of $38.18 per each such previously issued and outstanding common share. Further, all options to purchase shares of eBioscience common stock that were outstanding immediately prior to the Acquisition Date became exercisable to the extent not fully vested and were cancelled and retired immediately prior to the Acquisition Date in exchange for cash of $38.18 per each such previously outstanding option, less the exercise price of such option.
The Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the tangible and identifiable intangible assets and liabilities of eBioscience were recorded at their respective fair values as of the Acquisition Date, including an amount for goodwill representing the difference between the Acquisition consideration and the fair value of the identifiable net assets.
At June 30, 2012, the Company had provisionally estimated fair values for the assets acquired and liabilities assumed at the Acquisition Date. The amounts reported were considered provisional as the Company was completing the valuation work to determine the fair value of assets acquired and liabilities assumed and finalize the working capital adjustments as required by the Acquisition Agreement. With the help of third-party specialists, the valuation was finished during the fourth quarter of 2012 and the determination of the fair value of acquired inventory, property and equipment, and intangible assets was completed. In addition, the Company's review of tax accounts was also completed during the fourth quarter of 2012. This resulted in adjustments to the determination of the fair value of assets acquired and liabilities assumed (also referred to as "measurement period adjustments") to the accompanying Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2012. Under US GAAP, changes to the fair value of the assets acquired and liabilities assumed during the measurement period are recognized as of the date of acquisition. The Company considers the fair value analysis to be final as of December 31, 2012.
The results of operations of the acquired eBioscience business and the fair values of the assets acquired and liabilities assumed have been included in the accompanying Consolidated Financial Statements since the Acquisition. For the year ended December 31, 2012, the Company recorded $37.0 million in revenue and recognized a net loss of $8.9 million from eBioscience.
Purchase price
The total purchase price for the Acquisition was $314.9 million, of which $8.3 million was accounted for as share-based compensation expense as a result of the accelerated vesting of certain eBioscience employee options immediately prior to the Acquisition and has been recognized in the accompanying Consolidated Statement of Operations under Selling, general and administrative expenses. The remaining $306.6 million was related to the fair value of the net assets acquired from eBioscience. The Acquisition was financed through a combination of cash on hand, the liquidation of available-for-sale securities, proceeds from third-party financing (the "Term Loan") and the issuance of 4.00% Convertible Senior Notes (the "4.00% Notes"). Refer to Note 13. "Long-Term Debt Obligations" for further information.
The following table summarizes the accounting treatment of the purchase price paid (in thousands):
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Adjustment
|
|
|
|
|
|
Adjustment
|
|
|
|
of Final
|
|
|
Measurement
|
|
|
of Final
|
|
|
|
Determination
|
|
|
Period
|
|
|
Determination
|
|
|
|
of Fair Value
|
|
|
Adjustments
|
|
|
of Fair Value
|
|
Purchase consideration
|
|
$
|
306,841
|
|
|
$
|
(215
|
)
|
|
$
|
306,626
|
|
Share-based compensation expense
|
|
|
8,265
|
|
|
|
-
|
|
|
|
8,265
|
|
Total purchase price
|
|
$
|
315,106
|
|
|
$
|
(215
|
)
|
|
$
|
314,891
|
|
Fair value of assets acquired and liabilities assumed
The following table summarizes the fair values of assets acquired, liabilities assumed and goodwill (in thousands), as well as retrospective measurement period adjustments made during the year ended December 31, 2012:
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Adjustment
|
|
|
|
|
|
Adjustment
|
|
|
|
of Final
|
|
|
Measurement
|
|
|
of Final
|
|
|
|
Determination
|
|
|
Period
|
|
|
Determination
|
|
|
|
of Fair Value(1)
|
|
|
Adjustments(2)
|
|
|
of Fair Value
|
|
Cash and cash equivalents
|
|
$
|
7,095
|
|
|
$
|
-
|
|
|
$
|
7,095
|
|
Accounts receivable, net
|
|
|
9,488
|
|
|
|
(8
|
)
|
|
|
9,480
|
|
Inventories
|
|
|
52,060
|
|
|
|
(1,380
|
)
|
|
|
50,680
|
|
Prepaid expenses and other assets
|
|
|
7,844
|
|
|
|
575
|
|
|
|
8,419
|
|
Property and equipment
|
|
|
5,969
|
|
|
|
551
|
|
|
|
6,520
|
|
Intangible assets
|
|
|
159,755
|
|
|
|
(22,155
|
)
|
|
|
137,600
|
|
Other non-current assets
|
|
|
1,769
|
|
|
|
(328
|
)
|
|
|
1,441
|
|
Identifiable assets acquired
|
|
|
243,980
|
|
|
|
(22,745
|
)
|
|
|
221,235
|
|
Accounts payable and accrued liabilities
|
|
|
(18,681
|
)
|
|
|
(2,691
|
)
|
|
|
(21,372
|
)
|
Deferred tax liability
|
|
|
(55,542
|
)
|
|
|
8,658
|
|
|
|
(46,884
|
)
|
Other non-current liabilities
|
|
|
(3,241
|
)
|
|
|
(225
|
)
|
|
|
(3,466
|
)
|
Identifiable liabilities acquired
|
|
|
(77,464
|
)
|
|
|
5,742
|
|
|
|
(71,722
|
)
|
Goodwill
|
|
|
140,325
|
|
|
|
16,788
|
|
|
|
157,113
|
|
Purchase consideration
|
|
$
|
306,841
|
|
|
$
|
(215
|
)
|
|
$
|
306,626
|
|
(1) As previously reported in the notes to the Condensed Consolidated Financial Statements included in the Company's Quarterly Report on Form 10-Q as of June 30, 2012 and for the three and six months then ended.
(2) During the second half of 2012, the Company finalized the valuations of the fair value of certain asset and liabilities included in the Acquisition resulting in the measurement period adjustments detailed above, including reducing the fair value of certain intangible assets by $22.2 million to better reflect market participant assumptions about the facts and circumstances existing as of the Acquisition Date.
The above change in domestic deferred tax liabilities resulted in a $7.6 million increase in the Company's domestic deferred tax asset valuation allowance. Adjustments to valuation allowances are further discussed in Note 16. "Income Taxes."
The above measurement period adjustments did not result from events that occurred after the Acquisition Date.
Inventories
The inventories acquired include an adjusted step-up in basis of approximately $29.0 million, which represents the fair value of the inventory less a reasonable profit margin on costs to complete and sell. The step-up in basis will be recognized as the inventory is sold, which is expected to be over a period of 12 to 23 months from the Acquisition Date.
Intangible Assets
The following table summarizes the fair value of definite-lived intangible assets acquired at the Acquisition Date and their estimated useful lives (in thousands, except for estimated useful lives):
|
|
|
Estimated
|
|
Fair Value
|
|
Useful Life
|
Purchased intangible assets:
|
|
|
|
Customer base
|
|
$
|
61,100
|
|
12 years
|
Developed technologies
|
|
|
58,000
|
|
12 years
|
Trademarks and tradenames
|
|
|
15,500
|
|
5 years
|
Other contractual agreements
|
|
|
3,000
|
|
2 years
|
Total
|
|
$
|
137,600
|
|
|
Purchased intangible assets were recorded at fair value determined using an income approach, which recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs. Indications of value are developed by discounting these benefits to their present worth at a discount rate that reflects the current return requirements of market participants.
Purchased intangible assets are finite-lived intangible assets and are being amortized over their estimated useful lives.
Deferred tax liabilities
Deferred tax liabilities assumed are primarily comprised of the tax impact of the temporary difference between the fair values of assets acquired and the historical tax basis of those assets. These temporary differences will reverse as the assets are amortized.
Goodwill
The excess of Acquisition consideration over the fair value of assets acquired and liabilities assumed represents goodwill. The Company believes the factors that contributed to goodwill include synergies that are specific to the Company's consolidated business, and not available to market participants, and the acquisition of a talented workforce that expands the Company's expertise in business development and the commercialization of cell and protein analysis products. The Company does not expect any portion of this goodwill to be deductible for tax purposes.
Liabilities
The above determination of fair value excludes amounts related to certain litigation in which eBioscience is currently involved. The Acquisition Agreement provides that eBioscience security holders shall, subject to certain limitations, indemnify Affymetrix against damages arising out of or resulting from intellectual property litigation brought against eBioscience by Life Technologies Corporation. The net assets acquired and results of operations do not reflect the outcome of this litigation, which was unable to be estimated at December 31, 2012. Under the terms of the Acquisition Agreement, $25.2 million of the purchase price was placed into escrow to secure eBioscience security holders' indemnification obligations to the Company. During January 2013, the litigation was settled and $2.3 million was reimbursed to the Company out of escrow.
Transaction costs
The Company cumulatively incurred approximately $9.1 million of Acquisition-related costs that are recognized as Selling, general and administrative expense in the accompanying Consolidated Statements of Operations, of which $6.2 million and $2.9 million was recognized during the years ended December 31, 2012 and 2011, respectively.
Total underwriting and financing fees of approximately $8.5 million associated with the Term Loan and 4.00% Notes were also incurred and are discussed in Note 13. "Long-Term Debt Obligations."
Share-based compensation costs
The share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience options immediately vested prior to the Acquisition was recognized in the accompanying Consolidated Statements of Operations as Selling, general and administrative expense in during the year ended December 31, 2012.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations for the years ended December 31, 2012 and 2011 as if the Acquisition had been completed on January 1, 2011, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of the Company and eBioscience. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands, except per share data):
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenue
|
|
$
|
331,370
|
|
|
$
|
338,416
|
|
Net loss
|
|
|
(35,500
|
)
|
|
|
(24,529
|
)
|
Basic and diluted net loss per share
|
|
|
(0.50
|
)
|
|
|
(0.35
|
)
|
The unaudited pro forma financial information exclude non-recurring share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience stock options immediately prior to the Acquisition, and an income tax benefit of $37.1 million for the years ended December 31, 2012 and 2011.
The unaudited pro forma financial information for the year ended December 31, 2012 exclude non-recurring Acquisition-related transaction costs incurred by the Company of $6.2 million and by eBioscience of $5.5 million. For the year ended December 31, 2011, excluded non-recurring Acquisition costs incurred by the Company was $2.9 million and by eBioscience was $0.6 million.
NOTE 4—CONCENTRATIONS OF RISK
Cash equivalents and investments are financial instruments that potentially subject Affymetrix to concentrations of risk to the extent of amounts recorded in the accompanying Consolidated Balance Sheets. Company policy restricts the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued by the United States Government.
The Company has not experienced significant credit losses from its accounts receivable. Affymetrix performs a regular review of its customer activity and associated credit risks and does not require collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable.
Certain raw materials or components used in the synthesis of probe arrays or the assembly of instrumentation are currently available only from a single source or limited sources. No assurance can be given that these raw materials or other components of the GeneChip
®
system will be available in commercial quantities at acceptable costs from other vendors should the need arise. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive.
In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors are delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations.
For the years ended December 31, 2012, 2011 and 2010, approximately 42%, 47% and 43%, respectively, of the Company's total revenue was generated from sales outside the United States. The Company's results of operations are affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of the Company's international operations are mitigated in part by the extent to which its sales are geographically distributed.
NOTE 5—FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:
Level 1:
quoted prices in active markets for identical assets or liabilities;
Level 2:
inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3:
unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company's or the counterparty's non-performance risk is considered in determining the fair values of liabilities and assets, respectively.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
|
|
|
In Active
|
|
|
Observable
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S. government obligations and agency securities
|
|
$
|
-
|
|
|
$
|
6,829
|
|
|
$
|
6,829
|
|
U.S. corporate debt
|
|
|
-
|
|
|
|
664
|
|
|
|
664
|
|
Foreign corporate debt and equity securities
|
|
|
-
|
|
|
|
1,873
|
|
|
|
1,873
|
|
Total
|
|
$
|
-
|
|
|
$
|
9,366
|
|
|
$
|
9,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
-
|
|
|
$
|
842
|
|
|
$
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
829
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations and agency securities
|
|
$
|
-
|
|
|
$
|
19,598
|
|
|
$
|
19,598
|
|
U.S. corporate debt
|
|
|
-
|
|
|
|
25,100
|
|
|
|
25,100
|
|
Foreign government obligations and agency securities
|
|
|
-
|
|
|
|
2,810
|
|
|
|
2,810
|
|
Foreign corporate debt and equity securities
|
|
|
105
|
|
|
|
14,825
|
|
|
|
14,930
|
|
Total
|
|
$
|
105
|
|
|
$
|
62,333
|
|
|
$
|
62,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
-
|
|
|
$
|
940
|
|
|
$
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
217
|
|
|
$
|
217
|
|
The Company's Level 2 input assumptions are determined based on review of third-party sources.
The fair values of the Company's available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term and available-for-sale securities—long-term on the accompanying Consolidated Balance Sheets based on each respective security's maturity.
The fair value of the Company's derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The derivative assets and liabilities are located in Other current assets and Accrued expenses, respectively, in the accompanying Consolidated Balance Sheets.
As of December 31, 2012 and 2011, the Company had no financial assets or liabilities requiring Level 3 classification, including those that have unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets and liabilities.
Debt Obligations
Debt obligations are not recorded at fair value on a recurring basis and are carried at amortized cost.
The fair values of the Company's 3.50% Senior Convertible Notes due 2039 (the "3.50% Notes") and 4.00% Notes are based on quoted market prices at the balance sheet date. At December 31, 2012, the fair value of the Company's remaining 3.50% Notes was $3.9 million and the fair value of the Company's 4.00% Notes was $87.3 million.
On June 25, 2012, the Company entered into a Credit Agreement and borrowed $85.0 million under the Term Loan. As of December 31, 2012, the fair value of the Term Loan approximated its carrying value of $73.3 million, as this was a recent transaction.
NOTE 6—FINANCIAL INSTRUMENTS
Investments in Debt and Equity Securities
As described in further detail in Note 3. "Acquisition", the Company liquidated the majority of its available-for-sale securities as part of the Acquisition in 2012.
The following is a summary of available-for-sale securities as of December 31, 2012 (in thousands):
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
U.S. government obligations and agency securities
|
|
$
|
6,775
|
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
6,829
|
|
U.S. corporate debt
|
|
|
651
|
|
|
|
13
|
|
|
|
-
|
|
|
|
664
|
|
Foreign corporate debt and equity securities
|
|
|
1,837
|
|
|
|
36
|
|
|
|
-
|
|
|
|
1,873
|
|
Total available-for-sale securities
|
|
$
|
9,263
|
|
|
$
|
103
|
|
|
$
|
-
|
|
|
$
|
9,366
|
|
The following is a summary of available-for-sale securities as of December 31, 2011 (in thousands):
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
U.S. government obligations and agency securities
|
|
$
|
19,421
|
|
|
$
|
177
|
|
|
$
|
-
|
|
|
$
|
19,598
|
|
U.S. corporate debt
|
|
|
24,942
|
|
|
|
259
|
|
|
|
(101
|
)
|
|
|
25,100
|
|
Foreign government obligations and agency securities
|
|
|
2,805
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
2,810
|
|
Foreign corporate debt and equity securities
|
|
|
15,157
|
|
|
|
41
|
|
|
|
(268
|
)
|
|
|
14,930
|
|
Total available-for-sale securities
|
|
$
|
62,325
|
|
|
$
|
483
|
|
|
$
|
(370
|
)
|
|
$
|
62,438
|
|
Contractual maturities of available-for-sale securities as of December 31, 2012 and 2011 are as follows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Less than one year
|
|
$
|
7,083
|
|
|
$
|
7,937
|
|
One to two years
|
|
|
664
|
|
|
|
25,785
|
|
More than two years
|
|
|
1,619
|
|
|
|
28,716
|
|
Total available-for-sale securities
|
|
$
|
9,366
|
|
|
$
|
62,438
|
|
Realized gains for the years ended December 31, 2012 and 2011 were $0.5 million and $0.6 million, respectively. Realized losses for the years ended December 31, 2012 and 2011 were $0.1 million and $1.6 million, respectively. Realized gains and losses are included in Interest income and other, net in the accompanying Consolidated Statements of Operations. During the year ended December 31, 2011, an equity security that experienced a decline in fair value was deemed other-than-temporarily impaired and impairment charges totaling $0.8 million were recorded. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company's other securities as of December 31, 2012.
Non-Marketable Securities
Non-marketable securities represents an investment in a limited partnership investment fund accounted for on the equity method. As of December 31, 2012 and 2011, the carrying amounts of the Company's non-marketable securities, totaling $4.4 million and $5.0 million, respectively, equaled their estimated fair values. The investments held by the limited partnership investment fund are in the life science industry and located in the United States. The investments are initially valued at the purchase price and subsequently on the basis of inputs that market participants would use in pricing such investments. The portfolio of investments includes Level 1 publicly traded equity securities and Level 3 equity securities and notes. During the year ended December 31, 2011, the Company recorded impairment charges on its non-marketable securities totaling $1.3 million. Net investment losses are included in Interest income and other, net in the accompanying Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment in the future.
Derivative Financial Instruments
The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company's foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company's accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the accompanying Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. As of December 31, 2012, the Company's existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company's derivatives currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net gain of less than $0.1 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in other comprehensive income (loss) associated with such derivative instruments are reclassified immediately into operations through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in Interest income and other, net unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the years ended December 31, 2012 and 2011.
Under the Credit Agreement as defined in Note 13. "Long-Term Debt Obligations", the Company is required to maintain derivative contracts to protect against fluctuations in interest rates with respect to at least 35% of the aggregate principal amount of the Term Loan then outstanding, with such derivative contracts being required to have at least a three-year term. Accordingly, the Company has entered into an interest rate swap (the "Interest Rate Swap") for which the notional amount was originally set at $27.5 million, with quarterly reduction to the notional amount consistent with the mandatory amortization schedule of the Term Loan. The Interest Rate Swap calls for fixed rate quarterly payments of 1.70% of the notional amount in exchange for a variable rate quarterly receipt equal to a 3 month LIBOR rate with a floor of 1.50%. The Interest Rate Swap terminates on June 25, 2015.
The Company did not designate the Interest Rate Swap as a hedging instrument and will recognize adjustments to fair value through Interest income and other, net on the accompanying Consolidated Statements of Operations at each reporting date. As of December 31, 2012, the fair value of the Interest Rate Swap was $0.1 million.
As of December 31, 2012 and 2011, the total notional values of the Company's derivative assets and liabilities that mature within 12 months are as follows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Euro
|
|
$
|
16,933
|
|
|
$
|
11,851
|
|
Japanese yen
|
|
|
10,542
|
|
|
|
7,008
|
|
British pound
|
|
|
4,278
|
|
|
|
4,459
|
|
Interest rate swap
|
|
|
27,519
|
|
|
|
-
|
|
Total
|
|
$
|
59,272
|
|
|
$
|
23,318
|
|
Other than the Interest Rate Swap, the Company did not have any derivative assets or liabilities that were not designated or qualifying as hedges as of December 31, 2012. As of December 31, 2011, the Company did not have any derivative assets or liabilities that were not designated or qualifying as hedges.
As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred, however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.
The following table shows the Company's foreign currency derivatives measured at fair value as reflected on the accompanying Consolidated Balance Sheets as of December 31, 2012 and 2011 (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
Balance Sheet
|
|
|
2012
|
|
|
2011
|
|
Classification
|
Derivative assets:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
842
|
|
|
$
|
940
|
|
Other current assets
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
752
|
|
|
|
217
|
|
Accrued liabilities
|
Interest rate swap
|
|
|
77
|
|
|
|
-
|
|
Accrued liabilities
|
The following table shows the effect, net of tax, of the Company's derivative instruments on the accompanying Consolidated Statements of Operations and OCI for the years ended December 31, 2012, 2011 and 2010 (in thousands):
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Net (loss) gain recognized in OCI, net of tax (1)
|
|
$
|
(794
|
)
|
|
$
|
826
|
|
|
$
|
-
|
|
Net gain reclassified from accumulated OCI into income, net of tax (2)
|
|
|
1,226
|
|
|
|
-
|
|
|
|
-
|
|
Net gain (loss) recognized in other income and expense (3)
|
|
|
109
|
|
|
|
(103
|
)
|
|
|
-
|
|
Derivatives not designated as hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain recognized in income (4)
|
|
|
(539
|
)
|
|
|
(1,720
|
)
|
|
|
957
|
|
(1)
|
Net change in the fair value of the effective portion classified in OCI
|
(2)
|
Effective portion classified as revenue
|
(3)
|
Ineffective portion and amount excluded from effectiveness testing classified as Interest and other, net
|
(4)
|
Classified in Interest and other, net
|
NOTE 7—INVENTORIES
Inventories, net of reserves, consist of the following at December 31, 2012 and 2011 (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
11,167
|
|
|
$
|
8,635
|
|
Work-in-process
|
|
|
35,562
|
|
|
|
10,554
|
|
Finished goods
|
|
|
37,734
|
|
|
|
23,662
|
|
Total
|
|
$
|
84,463
|
|
|
$
|
42,851
|
|
|
|
|
|
|
|
|
|
|
Short-term portion
|
|
$
|
72,691
|
|
|
$
|
42,851
|
|
Long-term portion
|
|
$
|
11,772
|
|
|
$
|
-
|
|
Inventory at December 31, 2012 includes $41.4 million of inventory acquired from eBioscience that includes the unamortized balance of the fair value step-up in basis of $19.5 million discussed in Note 3. "Acquisition." Amortization expense on the fair value step-up during the year ended December 31, 2012 was $9.4 million.
NOTE 8—PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2012 and 2011 (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011 (1)
|
|
Property and equipment:
|
|
|
|
|
|
|
Construction-in-progress
|
|
$
|
1,790
|
|
|
$
|
838
|
|
Equipment and furniture
|
|
|
126,790
|
|
|
|
113,690
|
|
Building and leasehold improvements
|
|
|
54,579
|
|
|
|
96,390
|
|
Land
|
|
|
-
|
|
|
|
1,310
|
|
|
|
|
183,159
|
|
|
|
212,228
|
|
Less: accumulated depreciation and amortization
|
|
|
(154,496
|
)
|
|
|
(172,645
|
)
|
Net property and equipment
|
|
$
|
28,663
|
|
|
$
|
39,583
|
|
(1)
|
Included in the balance as of December 31, 2011 was the Company's West Sacramento facility that was reclassified to held-for-sale on the accompanying Consolidated Balance Sheets at an estimated fair value of $9.0 million at December 31, 2011. During the third quarter of 2012, the Company recognized an impairment of $4.0 million on the facility based on offers to purchase the property. During the fourth quarter of 2012, the Company sold the facility for gross proceeds of $5.8 million, which included $0.3 million in commissions and closing costs paid by the Company, and reduced the total impairment recognized in 2012 to $3.5 million.
|
For the years ended December 31, 2012, 2011 and 2010, the Company recorded depreciation expense of $15.8 million, $19.0 million and $22.2 million, respectively.
NOTE 9—GOODWILL AND INTANGIBLE ASSETS
The gross carrying amounts and net book values of the Company's definite-lived intangible assets are as follows (in thousands):
|
|
Carrying Value, Gross
|
|
|
Accumulated Amortization
|
|
|
Intangible Assets, Net
|
|
Weighted
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Average
|
|
|
2011
|
|
|
Additions
|
|
|
2012
|
|
|
2011
|
|
|
Additions
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
Useful Life
|
Customer relationships
|
|
$
|
14,600
|
|
|
$
|
62,274
|
|
|
$
|
76,874
|
|
|
$
|
(9,510
|
)
|
|
$
|
(4,836
|
)
|
|
$
|
(14,346
|
)
|
|
$
|
5,090
|
|
|
$
|
62,528
|
|
12 years
|
Developed technologies
|
|
|
17,653
|
|
|
|
59,161
|
|
|
|
76,814
|
|
|
|
(13,179
|
)
|
|
|
(5,310
|
)
|
|
|
(18,489
|
)
|
|
|
4,474
|
|
|
|
58,325
|
|
12 years
|
Trademarks and tradenames
|
|
|
2,300
|
|
|
|
15,518
|
|
|
|
17,818
|
|
|
|
(1,126
|
)
|
|
|
(1,883
|
)
|
|
|
(3,009
|
)
|
|
|
1,174
|
|
|
|
14,809
|
|
5 years
|
Other contractual agreements
|
|
|
-
|
|
|
|
3,055
|
|
|
|
3,055
|
|
|
|
-
|
|
|
|
(785
|
)
|
|
|
(785
|
)
|
|
|
-
|
|
|
|
2,270
|
|
2 years
|
Licenses
|
|
|
79,142
|
|
|
|
2,014
|
|
|
|
81,156
|
|
|
|
(60,355
|
)
|
|
|
(6,015
|
)
|
|
|
(66,370
|
)
|
|
|
18,787
|
|
|
|
14,786
|
|
Variable
|
Total definite-lived intangible assets
|
|
$
|
113,695
|
|
|
$
|
142,022
|
|
|
$
|
255,717
|
|
|
$
|
(84,170
|
)
|
|
$
|
(18,829
|
)
|
|
$
|
(102,999
|
)
|
|
$
|
29,525
|
|
|
$
|
152,718
|
|
|
The expected future annual amortization expense of the Company's intangible assets is as follows (in thousands):
|
|
Amortization
|
|
For the Year Ending December 31,
|
|
Expense
|
|
2013
|
|
$
|
23,600
|
|
2014
|
|
|
20,867
|
|
2015
|
|
|
14,715
|
|
2016
|
|
|
13,861
|
|
2017
|
|
|
12,186
|
|
Thereafter
|
|
|
67,489
|
|
Total
|
|
$
|
152,718
|
|
The Company recognized goodwill of $157.1 million in connection with the Acquisition. Refer to Note 2. "Acquisition" for further details. Information in regards to changes in the Company's goodwill at December 31, 2012 is as follows (in thousands):
Balance at December 31, 2011
|
|
$
|
-
|
|
Additions:
|
|
|
|
|
Acquisition of eBioscience
|
|
|
157,113
|
|
Effects of foreign currency change
|
|
|
2,623
|
|
Balance at December 31, 2012
|
|
$
|
159,736
|
|
During the year ended December 31, 2012, the Company concluded that there were no indicators of impairment during its annual impairment test of goodwill and the balance at December 31, 2012 is expected to be recoverable.
NOTE 10—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 2012 and 2011 consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accounts payable
|
|
$
|
13,716
|
|
|
$
|
15,629
|
|
Accrued compensation and related liabilities
|
|
|
15,760
|
|
|
|
12,169
|
|
Accrued interest
|
|
|
324
|
|
|
|
1,531
|
|
Accrued taxes
|
|
|
8,135
|
|
|
|
5,067
|
|
Accrued legal
|
|
|
594
|
|
|
|
1,808
|
|
Accrued audit and tax
|
|
|
1,106
|
|
|
|
963
|
|
Accrued warranties
|
|
|
802
|
|
|
|
1,500
|
|
Accrued royalties
|
|
|
1,608
|
|
|
|
1,206
|
|
Other
|
|
|
8,310
|
|
|
|
4,901
|
|
Total
|
|
$
|
50,355
|
|
|
$
|
44,774
|
|
NOTE 11—COMMITMENTS
Operating Leases
The Company leases laboratory, office and manufacturing facilities under non-cancelable operating leases that expire at various times through 2023. Some of these leases contain renewal options ranging from two to five years and escalation clauses. Rent expense related to operating leases for the years ended December 31, 2012, 2011 and 2010 was approximately $11.3 million, $11.0 million and $9.7 million, respectively. In connection with some of these facility leases, the Company has made security deposits totaling $3.6 million, which are included in other long-term assets in the accompanying Consolidated Balance Sheets.
Future minimum lease obligations, net of sublease income, at December 31, 2012 under all non-cancelable operating leases are as follows (in thousands):
For the Year Ending December 31,
|
|
Amount
|
|
2013
|
|
$
|
10,465
|
|
2014
|
|
|
8,429
|
|
2015
|
|
|
7,825
|
|
2016
|
|
|
5,128
|
|
2017
|
|
|
5,120
|
|
Thereafter
|
|
|
27,471
|
|
Total
|
|
$
|
64,438
|
|
Sublease income is expected to be approximately $0.5 million for the year ended December 31, 2013 and none thereafter.
Non-Cancelable Supply Agreements
As of December 31, 2012, the Company had approximately $0.9 million of non-cancelable inventory supply agreements that are in effect through 2013.
Indemnifications
From time to time the Company has entered into indemnification provisions under certain of its agreements with other companies in the ordinary course of business, typically with business partners, customers, and suppliers. Pursuant to these agreements, the Company generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties on a case by case basis for losses suffered or incurred by the indemnified parties in connection with any U.S. patent or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification provisions is generally perpetual from the time of the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. In addition, the Company has entered into indemnification agreements with its officers and directors. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As of December 31, 2012, the Company had not accrued a liability for this guarantee, because the likelihood of incurring a payment obligation in connection with this guarantee is remote.
NOTE 12—WARRANTIES
The Company provides for anticipated warranty costs at the time the associated revenue is recognized. Product warranty costs are estimated based upon the Company's historical experience and the warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. Information regarding the changes in the Company's product warranty liability for the years ended December 31, 2012 and 2011 is as follows (in thousands):
|
|
Amount
|
|
Balance at December 31, 2010
|
|
$
|
1,493
|
|
Additions charged to cost of product sales
|
|
|
879
|
|
Repairs and replacements
|
|
|
(872
|
)
|
Balance at December 31, 2011
|
|
$
|
1,500
|
|
Additions charged to cost of product sales
|
|
|
611
|
|
Repairs and replacements
|
|
|
(1,309
|
)
|
Balance at December 31, 2012
|
|
$
|
802
|
|
NOTE 13—LONG-TERM DEBT OBLIGATIONS
Term Loan
On June 25, 2012, the Company entered into a credit agreement (the "Credit Agreement") by, and among, Affymetrix and its domestic subsidiaries, and General Electric Capital Corporation ("GE Capital"), Silicon Valley Bank and other financial institutions party thereto from time to time (collectively, the "Lenders"), as well as certain securities affiliates of the Lenders. The Credit Agreement provides for the Term Loan in an aggregate principal amount of $85.0 million and a revolving credit facility in an aggregate principal amount of $15.0 million (the "Revolving Credit Facility" and, together with the Term Loan, the "Senior Secured Credit Facility"), each with a term of five years. As of December 31, 2012, the Company borrowed a total of $85.0 million under the Term Loan which was used to finance a portion of the Acquisition.
At the option of the Company (subject to certain limitations), borrowings under the Credit Agreement bear interest at either a base rate or at the London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin. Under the Base Rate Option, interest will be at the base rate plus 4.00% per annum, calculated on the basis of the actual number of days elapsed in a year of 365 or 366 days (as applicable) and payable quarterly in arrears. The base rate will be equal to the greatest of (a) the rate last quoted by The Wall Street Journal (or another national publication selected by GE Capital) as the U.S. "Prime Rate," (b) the federal funds rate, plus 0.50% per annum and (c) LIBOR for an interest period of one month, plus 1.00% per annum. However, the base rate will not be less than a floor of 2.50% per annum. Under the LIBOR Option, interest will be determined based on interest periods to be selected by Affymetrix of one, two, three or six months (and, to the extent available to all relevant lenders, nine or 12 months) and will be equal to LIBOR, plus 5.00%, calculated based on the actual number of days elapsed in a 360-day year. However, LIBOR will be deemed not to be less than a floor of 1.50% per annum. Interest will be paid at the end of each interest period or, in the case of interest periods longer than three months, quarterly. During the year ended December 31, 2012, the Company entered into its Interest Rate Swap as required by the terms of the Credit Agreement with a third-party lending institution. Refer to Note 6. "Financial Instruments–Derivative Financial Instruments" for further information. At December 31, 2012, the applicable interest rate was approximately 6.50%.
The loans and other obligations under the Senior Secured Credit Facility are (i) guaranteed by substantially all of the Company's domestic subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of Affymetrix and each guarantor (subject to certain exceptions and limitations).
The Credit Agreement requires the Company to maintain a fixed charge coverage ratio of at least 1.5 to 1.0, a senior leverage multiple not exceeding initially 2.00 to 1.00 and stepping down to 1.50 to 1.00 and a total leverage multiple not exceeding initially 4.75 to 1.00 and stepping down to 3.50 to 1.00. The Credit Agreement also includes other covenants, including negative covenants that, subject to certain exceptions, limit Affymetrix', and that of certain of its subsidiaries', ability to, among other things: (i) incur additional debt, including guarantees by the Company or its subsidiaries, (ii) make investments, pay dividends on capital stock, redeem or repurchase capital stock, redeem or repurchase the Company's senior convertible notes or any subordinated obligations, (iii) create liens and negative pledges, (iv) make capital expenditures, (v) dispose of assets, (vi) make acquisitions, (vii) create or permit restrictions on the ability of Affymetrix' subsidiaries to pay dividends or make distributions to Affymetrix, (viii) engage in transactions with affiliates, (ix) engage in sale and leaseback transactions, (x) consolidate or merge with or into other companies or sell all or substantially all the Company's assets and (xi) change their nature of business, their organizational documents or their accounting policies. As of December 31, 2012, the Company was in compliance with these covenants.
The Company is required to make the following mandatory prepayments: (a) annual prepayments in an amount equal to 50% of excess cash flow (as defined in the Credit Agreement), subject to a leverage-based stepdown, (b) prepayments in an amount equal to 100% of the net cash proceeds of issuances or incurrences of debt obligations of Affymetrix and its subsidiaries (other than debt incurrences expressly permitted by the Credit Agreement), (c) prepayments in an amount equal to 100% of the net proceeds of asset sales in excess of $2.5 million annually (subject to certain reinvestment rights) and (d) prepayments in an amount equal to any indemnification payments or similar payments received under the Acquisition Agreement, subject to certain exclusions. During the year ended December 31, 2012, the Company was not obligated to make aforementioned mandatory prepayments.
The Credit Agreement also contains events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-default and cross-acceleration to other indebtedness in excess of specified amounts, monetary judgment defaults in excess of specified amounts, bankruptcy or insolvency, actual or asserted invalidity or impairment of any part of the credit documentation (including the failure of any lien on a material portion of the collateral to remain perfected) and change of ownership or control defaults. In addition, the occurrence of a "fundamental change" under the indenture governing the 4.00% Notes would be an event of default under the Credit Agreement. As of December 31, 2012, there have been no events of default under the Credit Agreement.
Additionally, the proceeds from the Term Loan are net of debt issuance costs of approximately $4.5 million that are being amortized over the 5-year term of the Senior Secured Credit Facility beginning on June 25, 2012.
As of December 31, 2012, the Company had an outstanding principal balance of $73.3 million and incurred $3.6 million in interest under the Senior Secured Credit Facility for the year ended December 31, 2012.
The Term Loan will amortize in quarterly installments in amounts resulting in an annual amortization of 10% during the first year, 15% during the second year, 15% during the third year, 20% during the fourth year and 40% during the fifth year after June 25, 2012. The principal amount of unpaid maturities per the Credit Agreement is as follows (in thousands):
For the Year Ending December 31,
|
|
|
|
2013
|
|
$
|
-
|
|
2014
|
|
|
12,713
|
|
2015
|
|
|
13,813
|
|
2016
|
|
|
17,000
|
|
2017
|
|
|
29,750
|
|
Total
|
|
$
|
73,276
|
|
The Company paid $11.7 million of quarterly installments representing both fiscal 2012 and 2013 installments under the Credit Agreement. The Company intends to continue to make quarterly payments during fiscal 2013 and has classified $12.7 million as current on the accompanying Consolidated Balance Sheet for the year ended December 31, 2012.
4.00% Convertible Senior Notes
On June 25, 2012, the Company issued $105.0 million principal amount of 4.00% Convertible Senior Notes due July 1, 2019. The net proceeds, after debt issuance costs totaling $3.9 million from the 4.00% Notes offering, were $101.1 million. The 4.00% Notes bear interest of 4.00% per year payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2013 until the maturity date of July 1, 2019, unless converted, redeemed or repurchased earlier. The debt issuance costs are being amortized over the effective life of the 4.00% Notes, which is 7 years.
Holders of the 4.00% Notes may convert their 4.00% Notes into shares of the Company's stock at their option any time prior to the close of business on the business day immediately preceding the maturity date. The 4.00% Notes are initially convertible into approximately 170.0319 shares of the Company's common stock per $1,000 principal amount of notes, which equates to 17,857,143 shares of common stock, or an initial conversion price of $5.88 per share of common stock. The conversion rate is subject to certain customary anti-dilution adjustments. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances. Holders may also require the Company to repurchase for cash their notes upon certain fundamental changes.
On or after July 1, 2017, the Company can redeem for cash all or part of the 4.00% Notes if the last reported sale price per share of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending within 5 trading days prior to the date on which the Company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the 4.00% Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
As of December 31, 2012, the outstanding balance on the 4.00% Notes was $105.0 million and interest incurred for the year ended December 31, 2012 was $2.5 million.
3.50% Senior Convertible Notes
During the first quarter of 2012, the Company repurchased approximately $91.6 million of aggregate principal amount of its 3.50% Notes in private transactions for total cash consideration of $92.1 million, including accrued interest of $0.5 million. Such notes were purchased at par and accelerated amortization of deferred financing costs of $0.3 million was recognized. The remaining $3.9 million aggregate principal amount of the 3.50% Notes was redeemed during the first quarter of 2013 as further discussed in Note 22. "Subsequent Events."
NOTE 14—STOCKHOLDERS' EQUITY AND SHARE-BASED COMPENSATION EXPENSE
Convertible Preferred Stock
The Company's Board of Directors has authorized 5.0 million shares of convertible preferred stock, $0.01 par value. At December 31, 2012 and 2011, there were no such shares issued or outstanding.
Share-based Compensation Plans
The Company has a share-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and RSAs, granted under various stock plans. Stock options are issued at a price of at least 100% of the fair value of the Company's common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options generally expire 7 to 10 years from the grant date and may be granted with different vesting terms from time to time as determined by the Board of Directors, usually over a period of four years on each anniversary of the grant date. In general, RSAs vest on an annual basis over a period of four years on each anniversary of the grant date, are subject to the employees' continued employment and are paid upon vesting in shares of the Company's common stock on a one-for-one basis. As of December 31, 2012, the Company had approximately 5.3 million shares of common stock reserved for future issuance under its share-based compensation plans. A more detailed description of the Company's current share-based compensation plans follows below:
In 1998, the Board of Directors adopted the Affymetrix 1998 Stock Incentive Plan (the "1998 Stock Plan") under which nonqualified stock options and restricted stock may be granted to employees and outside consultants, except that members of the Board of Directors and individuals who are considered officers of the Company under the rules of the National Association of Securities Dealers shall not be eligible. Options granted under the 1998 Stock Plan expire no later than ten years from the date of grant. A total of 3.6 million shares of common stock are authorized for issuance under the 1998 Stock Plan.
In 2000, the Board of Directors adopted the Amended and Restated 2000 Equity Incentive Plan (the "2000 Stock Plan"), which was amended and restated in 2001, under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees, outside directors and consultants. In the second quarter of 2010, 4.5 million shares of common stock were added under the 2000 Stock Plan bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 16.2 million.
In June 2012, the Board of Directors adopted the 2012 Inducement Plan (the "2012 Inducement Plan"), under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees. A total of 2.0 million shares of common stock is authorized for issuance under the 2012 Inducement Plan.
The following table sets forth the total share-based compensation expense resulting from stock options and RSAs included in the accompanying Consolidated Statements of Operations (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Costs of product sales
|
|
$
|
1,554
|
|
|
$
|
1,143
|
|
|
$
|
994
|
|
Research and development
|
|
|
1,337
|
|
|
|
1,850
|
|
|
|
2,136
|
|
Selling, general and administrative (1)
|
|
|
14,316
|
|
|
|
5,778
|
|
|
|
6,780
|
|
Total share-based compensation expense
|
|
$
|
17,207
|
|
|
$
|
8,771
|
|
|
$
|
9,910
|
|
(1) Includes $8.3 million of share-based compensation expense related to the acceleration of unvested stock options in connection with the Acquisition during the year ended December 31, 2012
As of December 31, 2012, $14.4 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2016. The weighted‑average term of the unrecognized share-based compensation expense is 2.6 years.
Stock Options
The fair value of options was estimated at the date of grant using the BSM option pricing model with the following weighted‑average assumptions:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Risk free interest rate
|
|
|
0.6
|
%
|
|
|
1.5
|
%
|
|
|
1.1
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
76
|
%
|
Expected option term (in years)
|
|
|
4.6
|
|
|
|
4.5
|
|
|
|
4.1
|
|
The risk free interest rate for periods within the contractual life of the Company's stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company's historical exercise trends over ten years. The expected volatility for the years ended December 31, 2012 and 2011 is based on a blend of historical and market‑based implied volatility. Using the assumptions above, the weighted‑average grant date fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was $2.14, $2.86 and $2.66, respectively.
Activity under the Company's stock plans for the year ended December 31, 2012 is as follows (in thousands, except per share amounts):
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Contractual Terms
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
6,276
|
|
|
$
|
9.41
|
|
|
|
|
|
|
|
Grants
|
|
|
1,159
|
|
|
|
4.03
|
|
|
|
|
|
|
|
Exercises
|
|
|
(109
|
)
|
|
|
3.51
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
(1,225
|
)
|
|
|
13.08
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
6,101
|
|
|
$
|
7.75
|
|
|
|
4.42
|
|
|
$
|
85,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
3,175
|
|
|
$
|
10.52
|
|
|
|
3.30
|
|
|
$
|
70,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2012
|
|
|
5,616
|
|
|
$
|
8.03
|
|
|
|
4.27
|
|
|
$
|
85,444
|
|
The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2012:
Range of Exercise Prices
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise Price
|
|
|
|
|
|
Exercise Price
|
|
Lower
|
|
|
Upper
|
|
|
Number
|
|
|
Contractual Life
|
|
|
Per Share
|
|
|
Number
|
|
|
Per Share
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
$
|
2.63
|
|
|
$
|
3.22
|
|
|
|
393
|
|
|
|
3.57
|
|
|
$
|
2.95
|
|
|
|
253
|
|
|
$
|
2.89
|
|
$
|
3.32
|
|
|
$
|
4.16
|
|
|
|
954
|
|
|
|
6.44
|
|
|
$
|
3.92
|
|
|
|
54
|
|
|
$
|
3.85
|
|
$
|
4.21
|
|
|
$
|
4.22
|
|
|
|
848
|
|
|
|
4.64
|
|
|
$
|
4.22
|
|
|
|
409
|
|
|
$
|
4.22
|
|
$
|
4.26
|
|
|
$
|
4.85
|
|
|
|
797
|
|
|
|
5.66
|
|
|
$
|
4.73
|
|
|
|
202
|
|
|
$
|
4.75
|
|
$
|
4.88
|
|
|
$
|
5.74
|
|
|
|
803
|
|
|
|
4.73
|
|
|
$
|
5.37
|
|
|
|
362
|
|
|
$
|
5.41
|
|
$
|
5.78
|
|
|
$
|
8.29
|
|
|
|
1,027
|
|
|
|
4.47
|
|
|
$
|
7.33
|
|
|
|
616
|
|
|
$
|
7.45
|
|
$
|
8.71
|
|
|
$
|
19.92
|
|
|
|
822
|
|
|
|
2.37
|
|
|
$
|
12.52
|
|
|
|
822
|
|
|
$
|
12.52
|
|
$
|
20.90
|
|
|
$
|
57.08
|
|
|
|
457
|
|
|
|
1.32
|
|
|
$
|
28.29
|
|
|
|
457
|
|
|
$
|
28.29
|
|
Total
|
|
|
|
|
|
|
|
6,101
|
|
|
|
4.42
|
|
|
$
|
7.75
|
|
|
|
3,175
|
|
|
$
|
10.52
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock price on the last trading day of its fourth quarter of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2012. The amount changes based on the fair market value of the Company's common stock. For the years ended December 31, 2012, 2011 and 2010, total intrinsic value of options exercised was $0.1 million, $0.4 million and $0.2 million, respectively.
Reserved Shares
At December 31, 2012, the Company has shares reserved for future issuance as follows (in thousands):
Options outstanding
|
|
|
6,101
|
|
Options available for future grants
|
|
|
5,262
|
|
Convertible notes
|
|
|
17,985
|
|
Total at December 31, 2012
|
|
|
29,348
|
|
Restricted Stock
The following table summarizes the Company's RSAs activity for the year ended December 31, 2012 (in thousands, except per share amounts):
|
|
Number
|
|
|
Weighted-Average
|
|
|
|
of Shares
|
|
|
Grant Date Fair Value
|
|
Restricted stock awards
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
540
|
|
|
$
|
7.32
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(310
|
)
|
|
|
8.22
|
|
Forfeited
|
|
|
(63
|
)
|
|
|
6.64
|
|
Outstanding at December 31, 2012
|
|
|
167
|
|
|
$
|
5.89
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
2,057
|
|
|
$
|
4.74
|
|
Granted
|
|
|
1,451
|
|
|
|
4.09
|
|
Vested
|
|
|
(515
|
)
|
|
|
5.20
|
|
Forfeited
|
|
|
(302
|
)
|
|
|
4.69
|
|
Outstanding at December 31, 2012
|
|
|
2,691
|
|
|
$
|
4.31
|
|
For the years ended December 31, 2012 and 2011, total fair value of RSAs vested was $16.2 million and $14.6 million, respectively.
Performance-Based Awards
In 2011, the Compensation Committee of the Company's Board of Directors approved a grant of performance-based restricted stock units ("PRSUs") under the Plan to the Company's Chief Executive Officer ("CEO") that is
earned annually in four equal tranches
based on his performance in the applicable fiscal year (the "Performance Period"). The PRSUs entitle the CEO to receive a certain number of shares of the Company's common stock based on the Company's satisfaction of certain financial and strategic performance goals as set and approved by the Board of Directors annually during the first quarter of the Company's fiscal year. Based on the achievement of the performance conditions during each Performance Period, the final settlement of the PRSU award will vest twelve months following the end of each Performance Period. The PRSU award will be forfeited if the performance goals are not met or if the executive officer is no longer employed at the vest date.
The number of shares underlying the PRSUs that were granted to the CEO during 2011 totaled 240,000 shares. As of December 31, 2012, performance conditions pertaining to 60,000 shares of the PRSUs with a grant date fair value of $6.71 per PRSU, and relating to a Performance Period ending December 31, 2011 were achieved.
The Company expects that an additional 15,000 shares of the PRSUs, with a grant date fair value of $4.63 per PRSU, will vest with respect to the Performance Period ending December 31, 2012 and the fair value of such PRSU's is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was less than $0.1 million as of December 31, 2012.
During July 2012, the Compensation Committee granted certain PRSUs following the acquisition of eBioscience referred to as an Acquisition Performance Share Program (the "Program"). The purpose of the Program is to align key management and senior leadership with stockholders' interests and to retain key employees. The measurement periods for the Program are the twelve month periods ended June 30, 2013 and June 30, 2014, respectively. Members of eBioscience management and other key employees are participating in the Program. Awards granted under the Program are granted in the form of performance shares pursuant to the terms of our 2012 Inducement Plan. If pre-determined eBioscience specific performance goals are met, shares of stock will be granted to the recipient, vesting one month following the performance period representing the date of certification of achievement, contingent upon the recipient's continued service to the Company.
For the year ended December 31, 2012, the Company awarded
916,500 PRSUs under the Program at a grant date fair value of $4.16 per PRSU and expects 78% of the PRSUs will vest. The fair value of the PRSUs is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $1.6 million as of December 31, 2012.
Employee Stock Purchase Plan
In August 2011, the Company's Board of Directors adopted the 2011 Employee Stock Purchase Plan ("ESPP") that was approved by the Company's stockholders on May 11, 2012. The ESPP reserved a total of 7.0 million shares of the Company's common stock for issuance under the plan and permits eligible employees to purchase common stock at a discount through payroll deductions.
The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods are twelve months and include two six month purchase periods that result in a look-back for determining the purchase price of up to 12 months.
Employees can invest up to 15% of their gross compensation through payroll deductions. In no event would an employee be permitted to purchase more than 750 shares of common stock during any six-month purchase period.
The initial offering period commenced in November 2011. As of December 31, 2012, there were 347 participants in the plan and approximately 0.3 million shares were issued under the ESPP during the period at an average subscription date fair value of $3.37 per share. Included in total share-based compensation cost for the year ended December 31, 2012 was $0.6 million, related to the ESPP.
During the years ended December 31, 2012 and 2011, the fair value of shares under the ESPP was estimated using the following assumptions:
|
|
2012
|
|
|
2011
|
|
Risk free interest rate
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
64
|
%
|
|
|
67
|
%
|
Expected term (in years)
|
|
|
0.7
|
|
|
|
0.7
|
|
NOTE 15—LEGAL PROCEEDINGS
The Company has been in the past, and continues to be, a party to litigation which has consumed, and may continue to consume, substantial financial and managerial resources. The Company could incur substantial costs and divert attention of management and technical personnel in defending against litigation, and any adverse ruling or perception of an adverse ruling could have a material adverse impact on the Company's stock price. In addition, any adverse ruling could have a material adverse impact on the Company's cash flow and financial condition. The results of any litigation or any other legal proceedings are uncertain and as of the date of this report, the Company has not accrued any liability with respect to any of the litigation matters listed below:
E8 Pharmaceuticals LLC
On July 1, 2008, the Company was named as a defendant in a complaint filed by plaintiffs E8 Pharmaceuticals LLC and Massachusetts Institute of Technology ("MIT") in the United States District Court of Massachusetts. In the complaint, the plaintiffs allege that the Company is infringing one patent owned by MIT and licensed to E8 Pharmaceuticals by making and selling the Company's GeneChip® products to customers and teaching its customers how to use the products. The plaintiffs seek a permanent injunction enjoining the Company from further infringement, unspecified monetary damages, enhanced damages pursuant to 35 U.S.C. §284, costs, attorneys' fees and other relief as the court deems just and proper. On September 4, 2012, the District Court issued its ruling construing key claims of the patent at issue. The parties thereafter stipulated to the dismissal of plaintiff's claims and in September, the District Court dismissed the lawsuit in its entirety. On September 26, 2012, the plaintiffs filed an appeal with the United States Court of Appeals for the Federal Circuit appealing the District Court's dismissal of the lawsuit. The Company will continue to vigorously defend against the plaintiffs' claims.
Enzo Litigation
Southern District of New York Case
: On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively "Enzo"), filed a complaint against the Company that is pending in the United States District Court for the Southern District of New York for breach of contract, injunctive relief and declaratory judgment. The Enzo complaint relates to a 1998 distributorship agreement with Enzo under which the Company served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. In its complaint, Enzo seeks monetary damages and an injunction against the Company from using, manufacturing or selling Enzo products and from inducing collaborators and customers to use Enzo products in violation of the 1998 agreement. Enzo also seeks the transfer of certain Affymetrix patents to Enzo.
On November 10, 2003, the Company filed a complaint against Enzo in the United States District Court for the Southern District of New York for declaratory judgment, breach of contract and injunctive relief relating to the 1998 agreement. In its complaint, the Company alleges that Enzo has engaged in a pattern of wrongful conduct against it and other Enzo labeling reagent customers by, among other things, asserting improperly broad rights in its patent portfolio, improperly using the 1998 agreement and distributorship agreements with others in order to corner the market for non-radioactive labeling reagents, and improperly using the 1998 agreement to claim ownership rights to the Company's proprietary technology. The court has not set a trial date for these actions, but has advised the parties to clear time for trials at the end of 2013 or the beginning of 2014, to potentially try these actions as well as other related actions between Enzo and other third parties
Delaware Case
: On April 6, 2012, Enzo filed a complaint against the Company in the United States District Court for the District of Delaware. In the complaint, plaintiff alleges that Affymetrix is infringing U.S. Patent No. 7,064,197 by making and selling certain GeneChip® products. The plaintiff seeks a preliminary and permanent injunction enjoining the Company from further infringement and unspecified monetary damages. The Company will vigorously defend against the plaintiff's case. No trial date is set for this action.
Life Technologies Litigation
On October 12, 2010, Life Technologies Corporation filed a complaint against eBioscience in the United States District Court for the Southern District of California, alleging that eBioscience is infringing U.S. Patent Nos. 6,423,551, 6,699,723, and 6,927,069 related to certain eBioscience products. The parties reached a settlement of this lawsuit in January 2013. See Note 3. "Acquisition" for further details.
Administrative Proceedings
The Company's intellectual property is subject to a number of significant administrative actions. These proceedings could result in the Company's patent protection being significantly modified or reduced, and the incurrence of significant costs and the consumption of substantial managerial resources. For the year ended December 31, 2012, the Company did not incur significant costs in connection with administrative proceedings.
NOTE 16—INCOME TAXES
The following table presents the U.S. and foreign components of consolidated loss before income taxes (in thousands):
|
Year Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
(LOSS) INCOME BEFORE INCOME TAXES:
|
|
|
|
|
|
|
U.S.
|
|
$
|
(36,248
|
)
|
|
$
|
(26,778
|
)
|
|
$
|
(15,722
|
)
|
Foreign
|
|
|
(10,301
|
)
|
|
|
22
|
|
|
|
7,659
|
|
Loss before income taxes
|
|
$
|
(46,549
|
)
|
|
$
|
(26,756
|
)
|
|
$
|
(8,063
|
)
|
The following table presents the (benefit) provision for income taxes (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(BENEFIT) PROVISION FOR INCOME TAXES:
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(28
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
568
|
|
|
|
106
|
|
|
|
37
|
|
Foreign
|
|
|
1,104
|
|
|
|
1,038
|
|
|
|
2,222
|
|
Subtotal
|
|
|
1,644
|
|
|
|
1,144
|
|
|
|
2,259
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(35,329
|
)
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(1,811
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(357
|
)
|
|
|
261
|
|
|
|
(89
|
)
|
Subtotal
|
|
|
(37,497
|
)
|
|
|
261
|
|
|
|
(89
|
)
|
Income tax (benefit) provision
|
|
$
|
(35,853
|
)
|
|
$
|
1,405
|
|
|
$
|
2,170
|
|
The difference between the (benefit) provision for income taxes and the amount computed by applying the federal statutory income tax rate (35%) to loss before taxes is explained as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Tax at federal statutory rate
|
|
$
|
(16,292
|
)
|
|
$
|
(9,364
|
)
|
|
$
|
(2,822
|
)
|
State taxes, net
|
|
|
(1,136
|
)
|
|
|
(1,740
|
)
|
|
|
(1,646
|
)
|
Non-deductible stock compensation
|
|
|
3,470
|
|
|
|
453
|
|
|
|
626
|
|
Non-deductible acquisition costs
|
|
|
410
|
|
|
|
878
|
|
|
|
-
|
|
Foreign rate differential
|
|
|
4,353
|
|
|
|
1,274
|
|
|
|
(547
|
)
|
Research credits
|
|
|
-
|
|
|
|
(692
|
)
|
|
|
(991
|
)
|
Change in valuation allowance
|
|
|
(26,795
|
)
|
|
|
10,461
|
|
|
|
7,026
|
|
Other
|
|
|
137
|
|
|
|
135
|
|
|
|
524
|
|
Income tax (benefit) provision
|
|
$
|
(35,853
|
)
|
|
$
|
1,405
|
|
|
$
|
2,170
|
|
During the year ended December 31, 2012, the Company recognized a reduction in the valuation allowance recorded against the Company's net deferred tax assets of $37.1 million. The reduction was related to net deferred tax liabilities recognized for the difference between the fair value and carrying basis of certain tangible and intangible assets obtained as part of the Acquisition, which can be used as a source of income to support realization of certain domestic deferred tax assets. Under US GAAP, changes in an acquirer's valuation allowances that stem from a business combination should be recognized as an element of the acquirer's deferred income tax expense (benefit) in the reporting period that includes the business combination. There were no changes to the valuation allowance recorded as deferred income tax expense (benefit) during the years ended December 31, 2011 and 2010.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's assets and liabilities are as follows (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
75,622
|
|
|
$
|
57,677
|
|
Tax credit carryforwards
|
|
|
50,704
|
|
|
|
47,513
|
|
Deferred revenue
|
|
|
1,537
|
|
|
|
1,632
|
|
Capitalized research and development costs
|
|
|
394
|
|
|
|
487
|
|
Intangibles
|
|
|
21,175
|
|
|
|
20,462
|
|
Share-based compensation
|
|
|
5,808
|
|
|
|
4,284
|
|
Accrued compensation
|
|
|
1,775
|
|
|
|
2,025
|
|
Accrued warranty
|
|
|
446
|
|
|
|
570
|
|
Inventory reserves
|
|
|
5,664
|
|
|
|
4,860
|
|
Reserves and other
|
|
|
13,216
|
|
|
|
10,928
|
|
Depreciation and amortization
|
|
|
6,731
|
|
|
|
21,323
|
|
Other, net
|
|
|
6,069
|
|
|
|
1,742
|
|
Total deferred tax assets
|
|
|
189,141
|
|
|
|
173,503
|
|
Valuation allowance for deferred tax assets
|
|
|
(130,979
|
)
|
|
|
(154,107
|
)
|
Net deferred tax assets
|
|
|
58,162
|
|
|
|
19,396
|
|
Net deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(45,397
|
)
|
|
|
(2,459
|
)
|
Acquired tangible assets
|
|
|
(7,701
|
)
|
|
|
-
|
|
Cancellation of debt
|
|
|
(9,669
|
)
|
|
|
(9,669
|
)
|
Foreign earnings
|
|
|
(3,282
|
)
|
|
|
(5,139
|
)
|
Other, net
|
|
|
(1,296
|
)
|
|
|
(1,315
|
)
|
Total deferred tax liabilities
|
|
|
(67,345
|
)
|
|
|
(18,582
|
)
|
Net deferred tax (liabilities) assets
|
|
$
|
(9,183
|
)
|
|
$
|
814
|
|
The deferred tax liabilities for 2012 include amounts related to the Acquisition and therefore the change in total deferred tax liabilities in 2012 includes changes that are recorded to goodwill.
As of December 31, 2012, the Company had total U.S. net operating loss carryforwards of $356.1 million, comprised of $210.4 million for U.S. federal purposes, which expire in the years 2021 through 2032 if not utilized, and $145.7 million for state purposes, the majority of which expire in the years 2013 through 2032 if not utilized. Additionally, the Company has federal research and development tax credit carryforwards of approximately $23.7 million, which expire in the years 2017 through 2032 if not utilized. The Company also has state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $41.3 million. Substantially all of the state tax credits can be carried forward indefinitely. Certain of the net operating loss and tax credit carryforwards are subject to annual limitations due to the ownership change provisions under Internal Revenue Code Section 382 and similar state provisions. The limitations will not result in significant expirations of the net operating loss carryforwards before utilization.
As of December 31, 2012, the Company has recorded a full valuation allowance against all U.S. and certain foreign deferred tax assets. The valuation allowance decrease of $23.1 million from $154.1 million in 2011 to $131.0 in 2012 is primarily attributable to the
reduction in the valuation allowance recorded against the Company's net deferred tax assets of $37.1 million as part of the Acquisition, partially offset by U.S losses which was recorded as a tax benefit through the income statement.
Approximately $26.5 million of the valuation allowance as of December 31, 2012 is attributable to the income tax benefits of share-based compensation, the benefit of which will be credited to stockholders' equity when, and if, realized.
The valuation allowance increase of $11.5 million from $142.6 million in 2010 to $154.1 million in 2011 was primarily
attributable to U.S. losses and a release in reserves related to uncertain tax positions.
Not included in the deferred tax assets as of December 31, 2012 is approximately $4.8 million of tax benefits related to share-based compensation. When, and if, realized the tax benefit of these assets will be accounted for as a credit to stockholders' equity, rather than a reduction of the income tax provision.
Of the total tax benefits realized from the share-based compensation nominal amounts were recorded to stockholders' equity for the years ended December 31, 2012 and 2011, respectively.
The Company provides for U.S. income tax on the earnings of foreign subsidiaries unless the earnings are considered indefinitely reinvested outside the U.S. As of December 31, 2012, the Company has a nominal amount of previously untaxed earnings from its foreign subsidiaries which were not indefinitely reinvested outside the U.S. The potential federal and state taxes on these repatriations is nominal.
A portion of the Company's operations in Singapore operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2017. There was a minimal net impact of these tax holidays and tax incentive programs for the year ended December 31, 2012.
The following table presents the Company's total amount of gross unrecognized tax benefits (in thousands):
|
|
2012
|
|
|
2011
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
16,480
|
|
|
$
|
20,758
|
|
Gross increases - tax positions in prior period
|
|
|
3,027
|
|
|
|
517
|
|
Gross decreases - tax positions in prior period
|
|
|
(376
|
)
|
|
|
(201
|
)
|
Gross increases - current period tax positions
|
|
|
1,282
|
|
|
|
1,203
|
|
Settlements
|
|
|
-
|
|
|
|
(5,797
|
)
|
Unrecognized tax benefits, end of year
|
|
$
|
20,413
|
|
|
$
|
16,480
|
|
If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $5.3 million. As of December 31, 2012, the Company does not anticipate any material changes to the amount of unrecognized tax benefits during the next 12 months. The Company classifies interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2012, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount included in non-current income taxes payable of $1.1 million as of December 31, 2012. A number of major tax jurisdictions are currently subject to examination. The amount of unrecognized tax benefits that could change in the next 12 months as a result is $1.9 million.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company's major tax jurisdictions are the U.S. federal, California, Singapore, the United Kingdom and Austria. The federal and California statute of limitations on assessments remain open for substantially all tax years. The major foreign jurisdictions remain open for primarily tax years 2007 through 2012.
NOTE 17—SEGMENT AND GEOGRAPHIC INFORMATION
The Company reports segment information on the "management" approach which designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments. The Company has determined that its Chief Executive Officer is the Company's chief operating decision maker ("CODM") as he is responsible for reviewing and approving investments in the Company's technology platforms and manufacturing infrastructure. Prior to 2012, the Company was organized as one reportable operating segment. Subsequent to the Acquisition, the Company's business was reorganized into two reportable operating segments for financial reporting purposes, Affymetrix Core and eBioscience.
Beginning in 2012, prior to the Acquisition, the Company reorganized its business in the following four business units: Expression, Genetic Analysis and Clinical Applications, Life Science Reagents, which the Company categorized into its reportable operating segment, Affymetrix Core, and Corporate. The reorganization into business units represented a fundamental change for the Company. The necessary information for the year ended December 31, 2010 is not disclosed as the cost to develop it would be excessive. The Expression business unit develops and markets the Company's gene expression products and services, including in vitro transcription and other whole transcript arrays and QuantiGene line targeted at low-to-mid-plex products. The Genetic Analysis and Clinical Applications business unit develops and markets the Company's genotyping and cytogenetics products. The Life Science Reagents business unit targets the life science reagent markets, developing and marketing reagents, enzymes, purification kits and biochemicals used by life science researchers. The Corporate business unit is comprised primarily of revenue from royalty arrangements, and field revenue from services provided to customers by the Company. The Company has concluded that its manufacturing operations are based on platforms that are used to produce various products that serve multiple applications and markets. Its manufacturing and the majority of its supporting operations have not been reorganized into business units but is centralized and Affymetrix Core business units are aggregated into one reportable operating segment, except for the Corporate business unit which was not deemed to be an operating segment.
The Company's other reportable operating segment, eBioscience, was acquired in the second quarter of 2012 and will be operated as a separate business unit in order to minimize or avoid any disruption of services, while taking advantage of immediate opportunities to create efficiencies. Refer to Note 3. "Acquisition" for further information. eBioscience specializes in the development, manufacturing, marketing and distribution of research tools in the areas of flow cytometry, immunoassays, microscopic imaging and other protein-based analyses. The Acquisition allows the Company to expand addressable markets and continue to diversify the business beyond genomics discovery into cell and protein analysis.
The Company evaluates the performance of its reportable operating segments based on revenue and income (loss) from operations. Revenue are allocated to each business unit based on product codes. Excluding eBioscience whose business is primarily operated on a stand-alone basis except for certain cross-functional areas, operating expenses are allocated to Affymetrix Core in the following manner: Research and development costs are allocated to the business units based on respective products in which the research and development costs are incurred, with the remaining costs allocated to the Corporate business unit. Sales and marketing costs are allocated based on surveys with company personnel on the business unit in which employees incur their time. General and administrative costs are primarily allocated to the Corporate business unit.
The following table shows revenue and income (loss) from operations by reportable operating segment for the years ended December 31, 2012 and 2011 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenue (a):
|
|
|
|
|
|
|
Affymetrix Core
|
|
$
|
235,105
|
|
|
$
|
242,307
|
|
eBioscience
|
|
|
37,011
|
|
|
|
-
|
|
Totals
|
|
$
|
272,116
|
|
|
$
|
242,307
|
|
Income (loss) from operations (a):
|
|
|
|
|
|
|
|
|
Affymetrix Core
|
|
$
|
35,230
|
|
|
$
|
55,659
|
|
eBioscience
|
|
|
(8,792
|
)
|
|
|
-
|
|
Totals
|
|
$
|
26,438
|
|
|
$
|
55,659
|
|
The following table reconciles total operating segment revenue and loss from operations to the accompanying Consolidated Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Total revenue from reportable operating segments
|
|
$
|
272,116
|
|
|
$
|
242,307
|
|
Other revenue (a)
|
|
|
23,507
|
|
|
|
25,167
|
|
Total revenue
|
|
$
|
295,623
|
|
|
$
|
267,474
|
|
|
|
|
|
|
|
|
|
|
Total income from operations from reportable operating segments
|
|
$
|
26,438
|
|
|
$
|
55,659
|
|
Other corporate expenses, net (b)
|
|
|
(65,529
|
)
|
|
|
(72,300
|
)
|
Total loss from operations
|
|
$
|
(39,091
|
)
|
|
$
|
(16,641
|
)
|
(a) Other revenue include field service revenue and royalty revenue
(b) Other corporate expenses, net include cost of goods sold directly associated with other revenue, research and development, corporate marketing, facilities and other separately-managed general and administrative expenses.
The Company reported total revenue by region as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Customer location:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
171,176
|
|
|
$
|
142,508
|
|
|
$
|
178,029
|
|
Europe
|
|
|
71,526
|
|
|
|
76,286
|
|
|
|
80,914
|
|
Japan
|
|
|
21,039
|
|
|
|
19,989
|
|
|
|
22,248
|
|
Other
|
|
|
31,882
|
|
|
|
28,691
|
|
|
|
29,555
|
|
Total
|
|
$
|
295,623
|
|
|
$
|
267,474
|
|
|
$
|
310,746
|
|
There were no customers representing 10% or more of total revenue in 2012, 2011 and 2010.
The Company's long-lived assets other than purchased intangible assets, which the Company does not allocate to specific geographic locations as it is impracticable to do so, are composed principally of net property and equipment.
Net property and equipment, classified by major geographic areas in which the Company operates was as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net property and equipment:
|
|
|
|
|
|
|
United States (1)
|
|
$
|
22,204
|
|
|
$
|
32,168
|
|
Singapore
|
|
|
4,260
|
|
|
|
6,022
|
|
Europe
|
|
|
1,770
|
|
|
|
1,059
|
|
Other countries
|
|
|
430
|
|
|
|
335
|
|
Total
|
|
$
|
28,663
|
|
|
$
|
39,583
|
|
(1) Included in the balance as of December 31, 2011 was the Company's West Sacramento facility that was reclassified to held-for-sale on the accompanying Consolidated Balance Sheets at an estimated fair value of $9.0 million at December 31, 2011.
NOTE 18—DEFINED‑CONTRIBUTION SAVINGS PLANS
The Company maintains a defined‑contribution savings plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time U.S. employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company's expense associated with matching employee contributions, including eBioscience, for the years ended December 31, 2012, 2011 and 2010 totaled $3.0 million, $3.0 million and $2.8 million, respectively. Company contributions to employees vest ratably over four years.
NOTE 19—RELATED PARTY TRANSACTIONS
In December 2011, the Company entered into an agreement under which it assigned one patent application and related know-how to Cellular Research, Inc. ("Cellular Research"), a company founded by the Company's Chairman, Dr. Stephen P.A. Fodor. Dr. Fodor also owns a majority of the shares of Cellular Research. Pursuant to the agreement, Cellular Research shall pay single digit royalties to Affymetrix on sales of products covered by the assigned technology, and starting in December 2015, an annual minimum fee of $100,000. Affymetrix shall also have a right of first refusal to collaborate with Cellular Research for the development of certain new products and to supply arrays to Cellular Research under certain terms and conditions. As of December 31, 2012, no royalties were earned pertaining to this agreement.
NOTE 20—UNAUDITED QUARTERLY FINANCIAL INFORMATION
|
|
2012
|
|
|
2011
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter (1)
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(in thousands, except per share amounts)
|
|
Total revenue
|
|
$
|
84,349
|
|
|
$
|
79,624
|
|
|
$
|
66,403
|
|
|
$
|
65,247
|
|
|
$
|
65,104
|
|
|
$
|
63,987
|
|
|
$
|
64,659
|
|
|
$
|
73,724
|
|
Total cost of goods sold
|
|
|
39,171
|
|
|
|
37,938
|
|
|
|
27,682
|
|
|
|
27,344
|
|
|
|
30,412
|
|
|
|
27,648
|
|
|
|
25,793
|
|
|
|
27,099
|
|
Net (loss) income
|
|
|
(12,269
|
)
|
|
|
(17,859
|
)
|
|
|
23,649
|
|
|
|
(4,217
|
)
|
|
|
(14,739
|
)
|
|
|
(9,789
|
)
|
|
|
(3,672
|
)
|
|
|
39
|
|
Basic net (loss) income per common share
|
|
|
(0.17
|
)
|
|
|
(0.25
|
)
|
|
|
0.34
|
|
|
|
(0.06
|
)
|
|
|
(0.21
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
0.00
|
|
Diluted net (loss) income per common share
|
|
|
(0.17
|
)
|
|
|
(0.25
|
)
|
|
|
0.33
|
|
|
|
(0.06
|
)
|
|
|
(0.21
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
0.00
|
|
(1) During the third quarter of 2012, the Company recast its income tax benefit for the second quarter of 2012, lowering it by $7.2 million from net $44.3 million to net $37.1 million with a corresponding increase in valuation allowance as a result of the retrospective adjustments related to the determination of the fair value of assets acquired and liabilities assumed and related income tax valuation adjustments.
NOTE 21—RESTRUCTURING
In late 2012, the Company initiated a cost reduction action that included workforce. In January 2013, approximately 100 employees were notified of their involuntary termination. The Company estimates that the total restructuring charge associated with the plan will be approximately $6.8 million, substantially all of which is compensation and benefits afforded to terminated employees. The restructuring charges is expected to be recognized during the first quarter of 2013 in Restructuring expenses except for $1.8 million related to employees who were notified prior to December 31, 2012 and accrued and recognized in the accompanying Consolidated Financial Statements for the year ended December 31, 2012. The Company anticipates substantially all of the cash expenditures will be released during the first quarter of 2013. As of December 31, 2012, the Company had $1.8 million outstanding in Accounts payable and accrued liabilities on the accompanying Consolidated Balance Sheets.
NOTE 22—SUBSEQUENT EVENTS
During the first quarter of 2013, the Company redeemed its remaining outstanding 3.50% Notes due on January 15, 2015 for $3.9 million in total cash consideration, including accrued interest of $0.1 million. The notes were redeemed at par and the related deferred financing costs written off.