NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
|
|
|
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Business Overview
We are a provider of sequencing- and array-based solutions, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.
On August 18, 2021, we acquired GRAIL, a healthcare company focused on early detection of multiple cancers. GRAIL’s Galleri blood test detects more than 50 different cancers before they are symptomatic. We will hold GRAIL as a separate company during the European Commission’s ongoing merger review. Refer to note “4. Business Combinations” for additional details.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the fiscal year ended January 3, 2021, from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to form our critical accounting estimates. Actual results could differ from those estimates.
The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, and majority-owned or controlled companies. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
We have included the results of operations for GRAIL in our condensed consolidated statements of operations from the date of acquisition. GRAIL operates as a separate reportable segment. See note “10. Segment Information” for additional details.
Fiscal Year
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. References to Q3 2021 and Q3 2020 refer to the three months ended October 3, 2021 and September 27, 2020, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2021 and 2020 refer to the nine months ended October 3, 2021 and September 27, 2020, respectively, which were both 39 weeks.
Significant Accounting Policies
During YTD 2021, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021. See below for our policy related to business combinations.
Business Combinations
Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill.
In connection with certain of our acquisitions, additional contingent consideration can be earned by the sellers upon completion of certain future performance milestones. In these cases, a liability is recorded on the acquisition date, as a component of accrued liabilities or other long-term liabilities for an estimate of the acquisition date fair value of the contingent consideration by applying the income approach utilizing variable inputs such as anticipated future cash flows, risk-free adjusted discount rates, and nonperformance risk. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains. Any change in the fair value of the contingent consideration subsequent to the acquisition date is recognized in selling, general and administrative expenses in our consolidated statements of income.
We typically use the discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or extended. We capitalize in-process research and development (IPR&D) and either amortize it over the life of the product upon commercialization or impair it if the project is abandoned.
If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements.
For our policy on goodwill and intangible assets, see the significant policies as described in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021.
Accounting Pronouncements Pending Adoption
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new standard reduces the number of accounting models for convertible debt instruments, amends the accounting for certain contracts in an entity’s own equity, and modifies how certain convertible instruments and contracts that may be settled in cash or shares impact the calculation of diluted EPS. We expect to adopt the standard on its effective date beginning in the first quarter of 2022. We are currently evaluating the impact of ASU 2020-06 on our consolidated financial statements, particularly as it relates to our outstanding Convertible Senior Notes.
Earnings per Share
Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2021
|
|
Q3 2020
|
|
YTD 2021
|
|
YTD 2020
|
Weighted average shares outstanding
|
152
|
|
|
146
|
|
|
148
|
|
|
147
|
|
Effect of potentially dilutive common shares from:
|
|
|
|
|
|
|
|
Equity awards
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Convertible senior notes
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating diluted earnings per share
|
153
|
|
|
148
|
|
|
149
|
|
|
148
|
|
|
|
|
|
|
|
|
|
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services, instrument service contracts, development and licensing agreements, and cancer detection testing services related to the GRAIL business.
Revenue by Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2021
|
|
Q3 2020
|
In millions
|
Sequencing
|
|
Microarray
|
|
Total
|
|
Sequencing
|
|
Microarray
|
|
Total
|
Consumables
|
$
|
723
|
|
|
$
|
71
|
|
|
$
|
794
|
|
|
$
|
500
|
|
|
$
|
62
|
|
|
$
|
562
|
|
Instruments
|
180
|
|
|
4
|
|
|
184
|
|
|
109
|
|
|
5
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
903
|
|
|
75
|
|
|
978
|
|
|
609
|
|
|
67
|
|
|
676
|
|
Service and other revenue
|
112
|
|
|
18
|
|
|
130
|
|
|
99
|
|
|
19
|
|
|
118
|
|
Total revenue
|
$
|
1,015
|
|
|
$
|
93
|
|
|
$
|
1,108
|
|
|
$
|
708
|
|
|
$
|
86
|
|
|
$
|
794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD 2021
|
|
YTD 2020
|
In millions
|
Sequencing
|
|
Microarray
|
|
Total
|
|
Sequencing
|
|
Microarray
|
|
Total
|
Consumables
|
$
|
2,123
|
|
|
$
|
224
|
|
|
$
|
2,347
|
|
|
$
|
1,440
|
|
|
$
|
178
|
|
|
$
|
1,618
|
|
Instruments
|
544
|
|
|
12
|
|
|
556
|
|
|
276
|
|
|
10
|
|
|
286
|
|
Total product revenue
|
2,667
|
|
|
236
|
|
|
2,903
|
|
|
1,716
|
|
|
188
|
|
|
1,904
|
|
Service and other revenue
|
348
|
|
|
76
|
|
|
424
|
|
|
317
|
|
|
65
|
|
|
382
|
|
Total revenue
|
$
|
3,015
|
|
|
$
|
312
|
|
|
$
|
3,327
|
|
|
$
|
2,033
|
|
|
$
|
253
|
|
|
$
|
2,286
|
|
Revenue by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on region of destination (in millions)
|
Q3 2021
|
|
Q3 2020
|
|
YTD 2021
|
|
YTD 2020
|
Americas
|
$
|
583
|
|
|
$
|
436
|
|
|
$
|
1,733
|
|
|
$
|
1,248
|
|
Europe, Middle East, and Africa
|
313
|
|
|
213
|
|
|
938
|
|
|
602
|
|
Greater China (1)
|
122
|
|
|
83
|
|
|
382
|
|
|
246
|
|
Asia-Pacific
|
90
|
|
|
62
|
|
|
274
|
|
|
190
|
|
Total revenue
|
$
|
1,108
|
|
|
$
|
794
|
|
|
$
|
3,327
|
|
|
$
|
2,286
|
|
_____________
(1)Region includes revenue from China, Taiwan, and Hong Kong.
Performance Obligations
We regularly enter into contracts with multiple performance obligations. Most performance obligations are generally satisfied within a short time frame, approximately three to six months, after the contract execution date. As of October 3, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,131 million, of which approximately 90% is expected to be converted to revenue in the next twelve months, approximately 8% in the following twelve months, and the remainder thereafter.
Contract Liabilities
Contract liabilities, which consist of deferred revenue and customer deposits, as of October 3, 2021 and January 3, 2021 were $256 million and $230 million, respectively, of which the short-term portions of $198 million and $186 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q3 2021 and YTD 2021 included $32 million and $159 million, respectively, of previously deferred revenue that was included in contract liabilities as of January 3, 2021.
|
|
|
3. INVESTMENTS AND FAIR VALUE MEASUREMENTS
|
Debt Securities
Our short-term investments include available-for-sale debt securities that consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2021
|
|
January 3, 2021
|
In millions
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in government-sponsored entities
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
|
|
$
|
10
|
|
Corporate debt securities
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
445
|
|
|
—
|
|
|
|
|
445
|
|
U.S. Treasury securities
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
830
|
|
|
1
|
|
|
|
|
831
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
1,285
|
|
|
$
|
1
|
|
|
|
|
$
|
1,286
|
|
During Q1 2021, we sold all of our available-for-sale debt securities in anticipation of funding the GRAIL acquisition. See note “4. Business Combinations” for further details. Realized gains and losses are determined based on the specific-identification method and are reported in interest income.
Strategic Investments
Marketable Equity Securities
As of October 3, 2021 and January 3, 2021, the fair value of our marketable equity securities, included in short-term investments, totaled $185 million and $376 million, respectively. Total net unrealized gains on our marketable equity securities, included in other income, net, were $45 million in Q3 2021 and total net unrealized losses were $16 million in YTD 2021. Total unrealized gains on our marketable equity securities were $59 million and $128 million in Q3 2020 and YTD 2020, respectively. Total net losses on marketable equity securities sold, included in other income, net, were $7 million in YTD 2021. There were no sales of our marketable equity securities in Q3 2021 or YTD 2020.
Non-Marketable Equity Securities
As of October 3, 2021 and January 3, 2021, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $61 million and $314 million, respectively. The decrease was due to our acquisition of GRAIL and the reclassification of several of our equity investments, that became marketable in Q3 2021, to short-term investments.
On August 18, 2021, we completed our acquisition of GRAIL. Prior to the acquisition, we held an investment in GRAIL for which we had concluded that GRAIL was a VIE for which we were not the primary beneficiary and, therefore, we did not consolidate GRAIL in our consolidated financial statements. The carrying value of our investment was $250 million as of January 3, 2021. See note “4. Business Combinations” for further details.
Revenue recognized from transactions with our strategic investees was $14 million and $47 million for Q3 2021 and YTD 2021, respectively, and $16 million and $39 million for Q3 2020 and YTD 2020, respectively.
Venture Funds
We invest in two venture capital investment funds (the Funds) with capital commitments of $100 million, callable through April 2026, and up to $150 million, callable through July 2029, respectively, of which $23 million and up to $122 million, respectively, remained callable as of October 3, 2021. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $172 million and $104 million as of October 3, 2021 and January 3, 2021, respectively.
Helix Contingent Value Right
In conjunction with the deconsolidation of Helix Holdings I, LLC (Helix) in April 2019, we received a contingent value right with a 7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events. Changes in the fair value of the contingent value right resulted in unrealized gains of $12 million and $30 million in Q3 2021 and YTD 2021, respectively, and an unrealized gain of $5 million in YTD 2020, included in other income, net. There was no change in fair value in Q3 2020.
Derivative Assets Related to Terminated Acquisition
On November 1, 2018, we entered into an Agreement and Plan of Merger (the PacBio Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share). On January 2, 2020, we entered into an agreement to terminate the PacBio Merger Agreement (the Termination Agreement). Pursuant to the Termination Agreement, we made a cash payment to PacBio of $98 million on January 2, 2020, which represented the Reverse Termination Fee (as defined in the PacBio Merger Agreement). The Reverse Termination Fee was repayable, without interest, if PacBio entered into a definitive agreement providing for, or consummating, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement), and such transaction was consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction. PacBio did not enter into a definitive agreement that provided for, or consummated, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement); therefore, the Reverse Termination Fee is no longer repayable.
In addition, we made cash payments to PacBio of $18 million in Q4 2019, pursuant to Amendment No. 1 to the PacBio Merger Agreement, and $34 million in Q1 2020, pursuant to the Termination Agreement, collectively referred to as the Continuation Advances. Up to the $52 million of Continuation Advances was repayable, without interest, if, within two years of March 31, 2020, PacBio entered into a Change of Control Transaction or raised at least $100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio). In February 2021, PacBio entered into an investment agreement with SB Northstar LP for the issuance and sale of $900 million in aggregate principal amount of PacBio’s convertible notes. Pursuant to the PacBio Merger Agreement, PacBio repaid to us the $52 million of Continuation Advances and we recorded a gain of $26 million in Q1 2021, which was included in other income, net.
The potential repayments of the Continuation Advances and Reverse Termination Fee met the definition of derivative assets and were recorded at fair value. The $92 million difference between the $132 million in cash paid during Q1 2020 for the Continuation Advances and Reverse Termination Fee and the $40 million fair value of these derivative assets on the payment dates was recorded as selling, general and administrative expense in Q1 2020. Changes in the fair value of the derivative assets were included in other income, net. Unrealized losses of $10 million and $25 million were recorded in Q3 2020 and YTD 2020, respectively.
Fair Value Measurements
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2021
|
|
January 3, 2021
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (cash equivalents)
|
$
|
623
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
623
|
|
|
$
|
1,512
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,512
|
|
Debt securities in government-sponsored entities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Corporate debt securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
445
|
|
|
—
|
|
|
445
|
|
U.S. Treasury securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
831
|
|
|
—
|
|
|
—
|
|
|
831
|
|
Marketable equity securities
|
185
|
|
|
—
|
|
|
—
|
|
|
185
|
|
|
376
|
|
|
—
|
|
|
—
|
|
|
376
|
|
Helix contingent value right
|
—
|
|
|
—
|
|
|
65
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
35
|
|
Derivative assets related to terminated acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
Deferred compensation plan assets
|
—
|
|
|
59
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
55
|
|
Total assets measured at fair value
|
$
|
808
|
|
|
$
|
59
|
|
|
$
|
65
|
|
|
$
|
932
|
|
|
$
|
2,719
|
|
|
$
|
510
|
|
|
$
|
61
|
|
|
$
|
3,290
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
769
|
|
|
$
|
769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred compensation plan liability
|
—
|
|
|
55
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
51
|
|
|
—
|
|
|
51
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
769
|
|
|
$
|
824
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
51
|
|
We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. We elected the fair value option to measure the contingent value right received from Helix. The fair value of our contingent value right, included in other assets, is derived using a Monte Carlo simulation. The derivative assets related to the terminated acquisition of PacBio were financial instruments measured at fair value, included in other assets. Significant estimates and assumptions required for these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.
We reassess the fair value of contingent consideration to be settled in cash related to acquisitions on a quarterly basis. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL acquisition and an income approach to estimate the fair value of contingent consideration related to our other acquisition. See note “4. Business Combinations” for details regarding the contingent consideration arrangement related to the GRAIL acquisition. Significant assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility, an operational leverage ratio and a counterparty credit spread. Significant assumptions used in the income approach include the probability of achieving certain milestones and a discount rate. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Changes in the fair value of the contingent consideration liabilities are recognized in selling, general and administrative expense.
Changes in the estimated fair value of contingent consideration liabilities during YTD 2021 were as follows:
|
|
|
|
|
|
In millions
|
Contingent Consideration Liability (Level 3 Measurement)
|
Balance as of January 3, 2021
|
$
|
—
|
|
Acquisition of GRAIL
|
762
|
|
Other acquisition
|
14
|
|
Change in estimated fair value
|
(7)
|
|
|
|
Balance as of October 3, 2021
|
$
|
769
|
|
We recorded a contingent consideration liability of $14 million as a result of an acquisition completed in Q2 2021. The acquisition-date fair value of the contingent consideration liability was derived using the income approach. Assumptions used to estimate the liability included the probability of achieving certain milestones and a discount rate. As of October 3, 2021, the estimated fair value of the contingent consideration liability was $15 million, which is included in accrued liabilities. We recorded an expense of $1 million in selling, general and administrative expense in Q3 2021 and YTD 2021 due to the change in estimated fair value of the contingent consideration liability.
GRAIL, Inc.
On August 18, 2021, we completed our acquisition of GRAIL, a healthcare company focused on early detection of multiple cancers. The acquisition is expected to accelerate access and adoption of GRAIL’s blood test, Galleri, that detects more than 50 different cancers before they are symptomatic. The acquisition is subject to ongoing legal proceedings and pending the European Commission’s ongoing merger review. Refer to note “8. Legal Proceedings” for further details. As a result of the acquisition, GRAIL stockholders received as consideration (i) cash, (ii) shares of Illumina common stock and (iii) at their election, either a contingent value right or additional shares of Illumina common stock. We issued 9.8 million common shares as part of the consideration.
GRAIL is a separate reportable segment. See note “10. Segment Information” for more information. We have included the financial results of GRAIL in the condensed consolidated financial statements from the date of acquisition.
The total purchase price consisted of the following:
|
|
|
|
|
|
in millions
|
|
Cash
|
$
|
2,862
|
|
Fair value of common stock issued
|
4,975
|
|
Fair value of contingent consideration
|
762
|
|
|
|
|
|
Fair value of previously held investment
|
1,150
|
|
Settlement of preexisting relationships
|
2
|
|
Total purchase price
|
$
|
9,751
|
|
The contingent consideration relates to the GRAIL stockholders who elected to receive contingent value rights as part of the acquisition (the Contingent Value Rights Agreement). The contingent value rights entitle the holders to receive future cash payments representing a pro rata portion of certain GRAIL-related revenues each year for a 12-year period starting at the acquisition date. This will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during this same period. The acquisition-date fair value of the contingent consideration liability was measured using a Monte Carlo simulation. Key assumptions used in the fair value assessment included forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility, an operational leverage ratio and a counterparty credit spread. As of October 3, 2021, the estimated fair value of the contingent consideration liability was $754 million, of which $753 million was included in other long-term liabilities, with the remaining balance included in accrued liabilities. Accordingly, we recorded a gain of $8 million in selling, general and administrative expense in Q3 2021.
Prior to the acquisition, we owned a 12% interest in GRAIL. Authoritative guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity investment in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss in earnings. We remeasured our previously held equity investment to its fair value, as of the date of acquisition, based on the fair value of total consideration transferred and a discount for lack of control. Significant assumptions used in the remeasurement represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring the fair value. As a result of the remeasurement, we valued our previously held equity investment in GRAIL at $1.2 billion and recognized a gain of $900 million, included in other income, net, in Q3 2021.
In connection with the acquisition of GRAIL, we accelerated the vesting of certain outstanding and unvested equity awards of GRAIL employees. Approximately $69 million was included in the purchase price related to the fair value of accelerated equity awards attributable to the pre-combination period, with the fair value attributable to the post-combination period of $615 million included in share-based compensation expense in Q3 2021. In addition, we issued Illumina equity awards to GRAIL employees in exchange for any of their remaining outstanding and unvested GRAIL equity awards (the “replacement awards”) at acquisition. The replacement awards consist of restricted stock units and performance stock options. The terms of the replacement awards are substantially similar to the former GRAIL equity awards for which they were exchanged. The fair value of the replacement awards was $48 million, all of which is attributable to post-combination service, and will be recognized as share-based compensation expense over the remaining vesting period subsequent to the acquisition. The weighted-average acquisition-date fair value of the replacement performance stock options was determined using the Black-Scholes option pricing model with the following assumptions: (i) market price of $510.61 per share, which was the closing price of Illumina’s common stock on the acquisition date; (ii) weighted average expected term ranging from 1.6 years to 2.2 years; (iii) weighted-average risk-free interest rate ranging from 0.17% to 0.28%; (iv) weighted average annualized volatility ranging from 40% to 43%; and (v) no dividend yield. The weighted average acquisition-date fair value per share of the replaced performance stock options was $424.39. Refer to note “6. Stockholders’ Equity” for more information.
We are still finalizing the allocation of the purchase price, therefore, the fair value estimates assigned to intangible assets, goodwill and the related tax impacts of the acquisition, among other items, are subject to change as additional information is received to complete our analysis and certain tax returns are finalized. We expect to finalize the valuation as soon as practicable, but no later than one year after the acquisition date.
The preliminary fair values of assets acquired and liabilities assumed as of the acquisition date were:
|
|
|
|
|
|
in millions
|
|
Cash and cash equivalents
|
$
|
571
|
|
|
|
|
|
|
|
Property and equipment
|
89
|
|
Operating lease right-of-use assets
|
121
|
|
|
|
Goodwill
|
6,082
|
|
Intangible assets
|
3,180
|
|
Other current and noncurrent assets
|
35
|
|
|
|
|
|
|
|
Deferred tax liability
|
(82)
|
|
Long-term lease liabilities
|
(97)
|
|
Other current and noncurrent liabilities
|
(148)
|
|
Total net assets acquired
|
$
|
9,751
|
|
Goodwill is primarily attributable to assembled workforce, expanded market opportunities, and expected synergies to be achieved. The goodwill recognized was assigned to the GRAIL segment and is not deductible for tax purposes.
The preliminary fair values assigned to identifiable intangible assets acquired were as follows:
|
|
|
|
|
|
|
|
|
in millions, except years
|
Fair Value
|
Estimated Useful Life
|
Developed technology
|
$
|
2,470
|
|
18
|
Trade name
|
40
|
|
9
|
In-process research and development (IPR&D)
|
670
|
|
Indefinite
|
Total intangible assets
|
$
|
3,180
|
|
|
The fair values of the developed technology, trade name and IPR&D were estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The estimated fair values were developed by discounting future net cash flows to their present value at market-based rates of return. The useful lives of the intangible assets for amortization purposes were determined by considering the period of expected cash flows used to measure the fair values of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic and other factors that may limit the useful life. The developed technology and trade name assets are amortized on a straight-line basis over their estimated useful lives. As of October 3, 2021, the IPR&D project had not been completed or abandoned and was therefore not subject to amortization.
The transaction costs associated with the acquisition of GRAIL, excluding any Continuation Payments paid to GRAIL prior to the close of the acquisition, consisted primarily of legal, regulatory and financial advisory fees of approximately $66 million and $156 million for Q3 2021 and YTD 2021, respectively. These transaction costs were expensed as incurred as selling, general and administrative expense in the respective periods.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information summarizes the combined results of operations of Illumina and GRAIL as if the companies had been combined as of the beginning of our fiscal year 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
Q3 2021
|
|
Q3 2020
|
|
YTD 2021
|
|
YTD 2020
|
Revenue
|
$
|
1,109
|
|
|
$
|
794
|
|
|
$
|
3,330
|
|
|
$
|
2,286
|
|
Net income
|
$
|
194
|
|
|
$
|
95
|
|
|
$
|
548
|
|
|
$
|
148
|
|
The unaudited pro forma financial information is presented for information purposes only and is not indicative of the results of operations that would have been achieved had the acquisition been completed at the beginning of our fiscal year 2020. In addition, the unaudited pro forma financial information is not a projection of future results of operations of the combined company nor does it reflect the expected realization of any synergies or cost savings associated with the acquisition. The unaudited pro forma financial information includes adjustments to reflect the elimination of intercompany transactions, incremental amortization and depreciation expense of the identifiable intangible assets and property and equipment acquired, respectively, the additional interest expense associated with the issuance of debt to finance the acquisition, and share-based compensation expense.
Prior to the acquisition, we were required to make monthly cash payments to GRAIL of $35 million (the Continuation Payments) through the earlier of the consummation of the acquisition or termination of the GRAIL Merger Agreement, subject to certain exceptions. We made Continuation Payments to GRAIL totaling $35 million and $245 million in Q3 2021 and YTD 2021, respectively, which were recorded as selling, general and administrative expenses. Subsequent to the acquisition, we did not make any additional monthly payments.
Intangible Assets
The following is a summary of our identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2021
|
|
January 3, 2021
|
In millions
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Intangible Assets,
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Intangible Assets,
Net
|
Core technologies
|
$
|
2,850
|
|
|
$
|
(251)
|
|
|
$
|
2,599
|
|
|
$
|
352
|
|
|
$
|
(221)
|
|
|
$
|
131
|
|
Licensed technologies
|
95
|
|
|
(92)
|
|
|
3
|
|
|
95
|
|
|
(91)
|
|
|
4
|
|
Customer relationships
|
31
|
|
|
(28)
|
|
|
3
|
|
|
31
|
|
|
(27)
|
|
|
4
|
|
License agreements
|
14
|
|
|
(12)
|
|
|
2
|
|
|
14
|
|
|
(11)
|
|
|
3
|
|
Trade name
|
44
|
|
|
(5)
|
|
|
39
|
|
|
4
|
|
|
(4)
|
|
|
—
|
|
Total finite-lived intangible assets, net
|
3,034
|
|
|
(388)
|
|
|
2,646
|
|
|
496
|
|
|
(354)
|
|
|
142
|
|
In-process research and development (IPR&D)
|
705
|
|
|
—
|
|
|
705
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total intangible assets, net
|
$
|
3,739
|
|
|
$
|
(388)
|
|
|
$
|
3,351
|
|
|
$
|
496
|
|
|
$
|
(354)
|
|
|
$
|
142
|
|
As a result of an acquisition completed in Q2 2021, we recorded an IPR&D intangible asset of $35 million, with an indefinite useful life. As of October 3, 2021, the IPR&D project had not been completed or abandoned and was therefore not subject to amortization. Additionally, as a result of another acquisition completed in Q3 2021, we recorded a developed technology intangible asset of $28 million, with a useful life of 10 years.
Total amortization expense recognized was $19 million and $34 million during Q3 2021 and YTD 2021, respectively.
The estimated annual amortization of finite-lived intangible assets for the next five years is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors.
|
|
|
|
|
|
In millions
|
Estimated Annual Amortization
|
2021 (balance of year)
|
$
|
42
|
|
2022
|
166
|
|
2023
|
165
|
|
2024
|
163
|
|
2025
|
163
|
|
Thereafter
|
1,947
|
|
Total
|
$
|
2,646
|
|
Goodwill
Changes to goodwill during YTD 2021 were as follows:
|
|
|
|
|
|
In millions
|
Goodwill
|
Balance as of January 3, 2021
|
$
|
897
|
|
Acquisitions
|
6,201
|
|
Balance as of October 3, 2021
|
$
|
7,098
|
|
Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in Q2 2021, noting no impairment.
Summary of Term Debt Obligations
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
|
|
|
|
|
|
|
|
|
Principal amount of 2031 Term Notes outstanding
|
$
|
500
|
|
|
|
Principal amount of 2023 Term Notes outstanding
|
500
|
|
|
|
|
|
|
|
Unamortized discounts and debt issuance costs
|
(7)
|
|
|
|
|
|
|
|
Net carrying amount of term notes
|
993
|
|
|
|
Less: current portion
|
—
|
|
|
|
Term notes, non-current
|
$
|
993
|
|
|
|
Fair value of term notes outstanding (Level 2)
|
$
|
1,008
|
|
|
|
0.550% Term Notes due 2023 (2023 Term Notes) and 2.550% Term Notes due 2031 (2031 Term Notes)
On March 23, 2021, we issued $500 million aggregate principal amount of term notes due 2023 (2023 Term Notes) and $500 million aggregate principal amount of term notes due 2031 (2031 Term Notes, together the Term Notes). We received net proceeds from the issuance of $992 million, after deducting discounts and debt issuance costs.
The 2023 and 2031 Term Notes accrue interest at a rate of 0.550% and 2.550% per annum, respectively, payable semi-annually. Interest is payable on March 23 and September 23 of each year, beginning on September 23, 2021. The 2023 Term Notes mature on March 23, 2023 and the 2031 Term Notes mature on March 23, 2031.
We may redeem for cash all or any portion of the Term Notes, at our option, at any time prior to maturity. The 2023 Term Notes and, prior to December 23, 2030, the 2031 Term Notes are redeemable at make-whole premium redemption prices as defined in the applicable forms of note. After December 23, 2030, the 2031 Term Notes are redeemable at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest up to, but excluding, the redemption date.
Interest expense recognized on the Term Notes was $4 million and $9 million during Q3 2021 and YTD 2021, respectively, which included amortization of debt discounts and issuance costs.
Summary of Convertible Debt Obligations
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
January 3,
2021
|
|
|
|
|
|
|
|
|
Principal amount of 2023 Convertible Senior Notes outstanding
|
$
|
750
|
|
|
$
|
750
|
|
Principal amount of 2021 Convertible Senior Notes outstanding
|
—
|
|
|
517
|
|
|
|
|
|
Unamortized discount of liability component of convertible senior notes
|
(56)
|
|
|
(83)
|
|
|
|
|
|
Net carrying amount of liability component of convertible senior notes
|
694
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
—
|
|
|
(511)
|
|
Convertible senior notes, non-current
|
$
|
694
|
|
|
$
|
673
|
|
Carrying value of equity component of convertible senior notes, net of debt issuance costs
|
$
|
126
|
|
|
$
|
213
|
|
Fair value of convertible senior notes outstanding (Level 2)
|
$
|
869
|
|
|
$
|
1,595
|
|
Weighted-average remaining amortization period of discount on the liability component of convertible senior notes
|
1.9 years
|
|
2.4 years
|
Interest expense recognized on the Convertible Senior Notes, which included amortization of debt discounts and issuance costs, was $7 million and $28 million during Q3 2021 and YTD 2021, respectively, and $11 million and $33 million during Q3 2020 and YTD 2020, respectively.
0% Convertible Senior Notes due 2023 (2023 Convertible Notes)
In August 2018, we issued $750 million aggregate principal amount of convertible senior notes due 2023 (2023 Convertible Notes). The 2023 Convertible Notes mature on August 15, 2023, and the implied estimated effective rate of the liability component of the notes was 3.7%, assuming no conversion option.
The 2023 Convertible Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate, subject to adjustment, of 2.1845 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $457.77 per share of common stock), only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price in effect on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2023 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events described in the indenture. Regardless of the foregoing circumstances, the holders may convert their notes on or after May 15, 2023 until August 11, 2023.
We may redeem for cash all or any portion of the 2023 Convertible Notes, at our option, on or after August 20, 2021 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect (currently $595.10) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date.
The 2023 Convertible Notes were not convertible as of October 3, 2021 and had no dilutive impact during YTD 2021. If the notes were converted as of October 3, 2021, the if-converted value would not exceed the principal amount.
0.5% Convertible Senior Notes due 2021 (2021 Convertible Notes)
In June 2014, we issued $517 million aggregate principal amount of convertible senior notes due 2021 (2021 Convertible Notes). The implied estimated effective rate of the liability component of the notes was 3.5%, assuming no conversion option. The 2021 Convertible Notes were convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on conversion rates as defined in the indenture. The 2021 Convertible Notes matured on June 15, 2021, by which time the principal had been converted and was repaid in cash. The excess of the conversion value over the principal amount was paid in shares of common stock.
The following table summarizes information about the conversions during YTD 2021:
|
|
|
|
|
|
In millions
|
2021 Notes
|
Cash paid for principal of notes converted
|
$
|
517
|
|
Conversion value over principal amount, paid in shares of common stock
|
$
|
313
|
|
Number of shares of common stock issued upon conversion
|
0.7
|
|
Loss on extinguishment of debt
|
$
|
1
|
|
Credit Agreement
On March 8, 2021, we entered into a credit agreement (the Credit Agreement), which provides us with a $750 million senior unsecured five-year revolving credit facility, including a $40 million sublimit for swingline borrowings and a $50 million sublimit for letters of credit (the Credit Facility). The proceeds of the loans under the Credit Facility may be used to finance working capital needs and for general corporate purposes.
Any loans under the Credit Facility will have a variable interest rate based on either the eurocurrency rate or the alternate base rate, plus an applicable spread that varies with the Company’s debt rating. The Credit Agreement includes an option for us to elect to increase the commitments under the Credit Facility or to enter into one or more tranches of term loans in the aggregate principal amount of up to $250 million, subject to the consent of the lenders providing the additional commitments or term loans, as applicable, and certain other conditions.
The Credit Agreement contains financial and operating covenants. Pursuant to the Credit Agreement, we are required to maintain a ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA), calculated based on the four consecutive fiscal quarters ending with the most recent fiscal quarter, of not greater than 3.50 to 1.00 as of the end of each fiscal quarter. Upon the consummation of any Qualified Acquisition (as defined in the Credit Agreement) and us providing notice to the Administrative Agent, the ratio increases to 4.00 to 1.00 for the fiscal quarter in which the acquisition is consummated and the three consecutive fiscal quarters thereafter. The operating covenants include, among other things, limitations on (i) the incurrence of indebtedness by our subsidiaries, (ii) liens on our and our subsidiaries assets, and (iii) certain fundamental changes and the disposition of assets by us and our subsidiaries. The Credit Agreement contains other customary covenants, representations and warranties, and events of default.
The Credit Facility matures, and all amounts outstanding thereunder become due and payable in full, on March 8, 2026, subject to two one-year extensions at our option, the consent of the extending lenders and certain other conditions. We may prepay amounts borrowed and terminate commitments under the Credit Facility at any time without premium or penalty.
As of October 3, 2021, there were no borrowings outstanding under the Credit Facility, and we were in compliance with all financial and operating covenants.
Bridge Facility
In advance of the acquisition of GRAIL, we obtained a bridge facility commitment letter from Goldman Sachs Bank USA for a 364-day senior unsecured bridge loan facility, in an aggregate principal amount of $1 billion. The bridge facility commitment letter was subject to certain conditions, including consummation of the acquisition pursuant to the GRAIL Merger Agreement. On March 23, 2021, we terminated the bridge facility commitment letter in conjunction with the issuance of the 2023 and 2031 Term Notes.
As of October 3, 2021, approximately 3.4 million shares remained available for future grants under the 2015 Stock Plan.
Restricted Stock
Restricted stock activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
(RSU)(1)
|
|
Performance
Stock Units
(PSU)(2)
|
|
Weighted-Average Grant Date Fair Value per Share
|
Units in thousands
|
|
|
RSU
|
|
PSU
|
Outstanding at January 3, 2021
|
1,721
|
|
|
—
|
|
|
$
|
313.35
|
|
|
—
|
|
Awarded
|
183
|
|
|
424
|
|
|
$
|
464.17
|
|
|
$
|
475.77
|
|
Vested
|
(92)
|
|
|
—
|
|
|
$
|
274.12
|
|
|
—
|
|
Cancelled
|
(206)
|
|
|
(34)
|
|
|
$
|
316.92
|
|
|
$
|
475.77
|
|
Outstanding at October 3, 2021
|
1,606
|
|
|
390
|
|
|
$
|
332.36
|
|
|
$
|
475.77
|
|
_____________
(1)In connection with the GRAIL acquisition, replacement awards of 59,000 RSUs were awarded to GRAIL employees.
(2)The number of units reflect the estimated number of shares to be issued at the end of the performance period. Awarded units are presented net of performance adjustments.
Stock Options
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units in thousands
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Performance Stock Options(1)
|
|
Weighted-Average
Exercise Price
|
Outstanding at January 3, 2021
|
10
|
|
|
$
|
59.11
|
|
|
—
|
|
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
48
|
|
|
$
|
86.73
|
|
Exercised
|
(2)
|
|
|
$
|
20.06
|
|
|
(1)
|
|
|
$
|
83.02
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2021
|
8
|
|
|
$
|
65.58
|
|
|
47
|
|
|
$
|
86.89
|
|
_____________
(1)In connection with the GRAIL acquisition, we issued performance stock options. The number of units reflect awards that have been granted and for which it is assumed to be probable that the underlying performance goals will be achieved.
As of October 3, 2021, all outstanding options were exercisable and no outstanding performance stock options were exercisable.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Employee Stock Purchase Plan (ESPP) is equal to 85% of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During YTD 2021, approximately 0.2 million shares were issued under the ESPP. As of October 3, 2021, there were approximately 13.1 million shares available for issuance under the ESPP.
Share Repurchases
On February 5, 2020, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. We did not repurchase any shares during YTD 2021. Authorizations to repurchase approximately $15 million of our common stock remained available as of October 3, 2021.
Share-based Compensation
Share-based compensation expense reported in our condensed consolidated statements of income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2021
|
|
Q3 2020
|
|
YTD 2021
|
|
YTD 2020
|
Cost of product revenue
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
22
|
|
|
$
|
13
|
|
Cost of service and other revenue
|
1
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Research and development
|
193
|
|
|
21
|
|
|
243
|
|
|
48
|
|
Selling, general and administrative
|
496
|
|
|
33
|
|
|
576
|
|
|
52
|
|
Share-based compensation expense before taxes
|
697
|
|
|
61
|
|
|
844
|
|
|
116
|
|
Related income tax benefits
|
(29)
|
|
|
(12)
|
|
|
(57)
|
|
|
(27)
|
|
Share-based compensation expense, net of taxes
|
$
|
668
|
|
|
$
|
49
|
|
|
$
|
787
|
|
|
$
|
89
|
|
In connection with the acquisition of GRAIL, we recognized share-based compensation expense of $615 million in Q3 2021 related to the fair value of accelerated equity awards attributable to the post-combination period, of which $167 million was recorded in research and development expense and $448 million in selling, general and administrative expense. We also recognized $6 million of expense in Q3 2021 related to the replacement awards.
In February 2021, we modified the metrics and reduced the maximum potential payouts for our performance stock units granted in 2019 and 2020, which vest at the end of the three-year periods ended January 2, 2022 and January 1, 2023, respectively. The modifications affected 52 employees with units granted in 2019, which resulted in total incremental share-based compensation cost of approximately $41 million, and 72 employees with units granted in 2020, which resulted in total incremental share-based compensation cost of approximately $65 million.
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the ESPP during YTD 2021 were as follows:
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Rights
|
|
|
Risk-free interest rate
|
0.06% - 0.12%
|
|
|
Expected volatility
|
37% - 47%
|
|
|
Expected term
|
0.5 - 1.0 year
|
|
|
Expected dividends
|
0
|
%
|
|
|
Weighted-average grant-date fair value per share
|
$
|
134.47
|
|
|
|
As of October 3, 2021, approximately $511 million of total unrecognized compensation cost related to restricted stock, performance stock options and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately 2.0 years.
|
|
|
7. SUPPLEMENTAL BALANCE SHEET DETAILS
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
January 3,
2021
|
Trade accounts receivable, gross
|
$
|
607
|
|
|
$
|
491
|
|
Allowance for credit losses
|
(3)
|
|
|
(4)
|
|
Total accounts receivable, net
|
$
|
604
|
|
|
$
|
487
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
January 3,
2021
|
Raw materials
|
$
|
89
|
|
|
$
|
106
|
|
Work in process
|
286
|
|
|
244
|
|
Finished goods
|
26
|
|
|
22
|
|
Total inventory
|
$
|
401
|
|
|
$
|
372
|
|
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
January 3,
2021
|
Contract liabilities, current portion
|
$
|
198
|
|
|
$
|
186
|
|
Accrued compensation expenses
|
184
|
|
|
153
|
|
Accrued taxes payable
|
77
|
|
|
68
|
|
|
|
|
|
Operating lease liabilities, current portion
|
66
|
|
|
51
|
|
Contingent consideration liabilities
|
16
|
|
|
—
|
|
Other, including warranties (a)
|
125
|
|
|
83
|
|
Total accrued liabilities
|
$
|
666
|
|
|
$
|
541
|
|
(a) Changes in the reserve for product warranties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2021
|
|
Q3 2020
|
|
YTD 2021
|
|
YTD 2020
|
Balance at beginning of period
|
$
|
16
|
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
14
|
|
Additions charged to cost of product revenue
|
5
|
|
|
6
|
|
|
20
|
|
|
11
|
|
Repairs and replacements
|
(6)
|
|
|
(6)
|
|
|
(18)
|
|
|
(15)
|
|
Balance at end of period
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
15
|
|
|
$
|
10
|
|
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.
Derivative Financial Instruments
We are exposed to foreign exchange rate risks in the normal course of business and use derivative financial instruments to partially offset this exposure. We do not use derivative financial instruments for speculative or trading purposes. All foreign exchange contracts are carried at fair value in other current assets or accrued liabilities on the condensed consolidated balance sheets.
We use foreign exchange forward contracts to manage foreign currency risks related to monetary assets and liabilities denominated in currencies other than the U.S. dollar. These derivative financial instruments have terms of one month or less and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income, net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of October 3, 2021, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, Chinese Yuan Renminbi, and British pound. As of October 3, 2021 and January 3, 2021, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $429 million and $405 million, respectively.
We also use foreign currency forward contracts to hedge portions of our foreign currency exposure associated with forecasted revenue transactions. These derivative financial instruments have terms up to 24 months and are designated as cash flow hedges. Changes in fair value of our cash flow hedges are recorded as a component of accumulated other comprehensive income and are reclassified to revenue in the same period the underlying hedged transactions are recorded. We regularly review the effectiveness of our cash flow hedges and consider them to be ineffective if it becomes probable that the forecasted transactions will not occur in the identified period. Changes in fair value of the ineffective portions of our cash flow hedges, if any, will be recognized in other income, net. As of October 3, 2021, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, and Canadian dollar. As of October 3, 2021 and January 3, 2021, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $421 million and $305 million, respectively.
We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assess, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations, and/or cash flows.
Acquisition of GRAIL
On March 30, 2021, the Federal Trade Commission (the FTC) filed an administrative complaint and a motion for a preliminary injunction in the United States District Court for the District of Columbia. In both actions, the FTC alleged that our acquisition of GRAIL would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. We filed an answer to the FTC’s complaint in federal district court on April 6, 2021, and in the administrative court on April 13, 2021. On April 20, 2021, the United States District Court for the District of Columbia granted our motion to transfer venue to the United States District Court for the Southern District of California. On May 28, 2021, the district court granted the FTC’s motion to dismiss the complaint without prejudice. The administrative trial commenced on August 24, 2021, and live testimony concluded on September 24, 2021. Post-trial briefing deadlines have not yet been scheduled. We intend to vigorously defend the FTC action.
On April 19, 2021, the European Commission accepted a request for a referral of the GRAIL acquisition for European Union merger review, submitted by a Member State of the European Union (France), and joined by several other Member States (Belgium, Greece, Iceland, the Netherlands and Norway), under Article 22(1) of Council Regulation (EC) No 139/2004 (the EU Merger Regulation). On April 29, 2021, we filed an action in the General Court of the European Union (the EU General Court) asking for annulment of the European Commission’s assertion of jurisdiction to review the acquisition under Article 22 of the EU Merger Regulation, as the acquisition does not meet the jurisdictional criteria under the EU Merger Regulation or under the national merger control laws of any Member State of the European Union. The date of our hearing before the General Court has not yet been set. We intend to vigorously challenge the European Commission’s assertion of jurisdiction. See the risk factor “Our acquisition of GRAIL remains subject to ongoing legal and regulatory proceedings in the United States and in the European Union” described in “Risk Factors” for discussion of the risks associated with these proceedings.
BGI Genomics Co. Ltd. and its Affiliates
We are involved in lawsuits against BGI Genomics Co. Ltd (BGI) and its affiliates, including Complete Genomics, Inc. (CGI), in the United States and elsewhere.
On June 27, 2019, we filed suit against BGI in the United States District Court for the Northern District of California, alleging that certain BGI sequencing products infringe our U.S. Patent No. 7,566,537 (‘537 patent) and U.S. Patent No. 9,410,200 (‘200 patent). BGI has denied our claims and has counterclaimed that our technology infringes U.S. Patent No. 9,944,984 (‘984 patent). We deny their allegations. On February 27, 2020, we filed a second patent infringement suit against BGI in the United States District Court for the Northern District of California alleging that BGI sequencing products infringed U.S. Patent 7,771,973 (‘973 patent), U.S. Patent 7,541,444 (‘444 patent), and U.S. Patent 10,480,025 (‘025 patent). On June 15, 2020, the Court granted our motions requesting preliminary injunctions against BGI, finding that our patents were likely valid and infringed by BGI’s chemistries. The injunction prohibits the sale of BGI’s sequencers and sequencing reagents in the US. On December 9, 2020, BGI filed a motion to amend its answer to our second suit to include allegations that the ‘444 and ‘937 patents are unenforceable under the doctrine of unequitable conduct; we deny BGI’s allegations. As of April 12, 2021, BGI is seeking approximately $54 million in alleged damages and an ongoing royalty of 3.6% on sales of the accused products by us in the United States until the ‘984 patent expires on June 13, 2026. We deny that we owe any damages or ongoing royalty. On August 27, 2021, and September 9, 2021, the Court issued its decisions on the summary judgment motions: (i) the Court granted our motion for summary judgment that we do not infringe BGI’s ‘984 patent; (ii) the Court granted our motion for summary judgment that our ‘444 and ‘973 patents are not unenforceable; (iii) the Court granted our motion for summary judgment that BGI’s standard MPS products infringe all of our patents-in-suit: (iv) the Court granted our motion for summary judgment that BGI’s “Cool MPS” sequencing products infringe the ‘973 and ‘444 patents, and granted BGI’s motion for summary judgment that BGI’s “Cool MPS” sequencing products do not infringe the ‘025 patent; and (v) the Court denied BGI’s motion for summary judgment that our ‘973 patent is invalid for lack of written description and enablement. Trial is scheduled to begin November 15, 2021, on the remaining issues, including BGI’s allegation that our patents are invalid for obviousness, and our claims against BGI for damages and willful infringement.
On January 11, 2021, Complete Genomics, Inc., BGI Americas Corp., and MGI Americas, Inc. also filed a complaint in the United States District Court for the Northern District of California alleging the Company and its subsidiary Illumina Cambridge Ltd. violated federal antitrust and state unfair competition laws. CGI and these affiliates allege that the Company fraudulently withheld a prior art reference that was material to patentability for the ‘444 and ‘973 patents. They also allege that our infringement claims of the ‘025 against BGI’s “CoolMPS” chemistry were objectively baseless. The Company denies the allegations in the complaint. On March 30, 2021, the Court stayed the antitrust case pending resolution of the underlying patent infringement suit taking place in the same court.
On May 28, 2019, CGI filed suit against us in the United States District Court for the District of Delaware alleging that our two-channel sequencing systems, including the NovaSeq, NextSeq, and MiniSeq systems, infringe certain claims of U.S. Patent No. 9,222,132. We have denied CGI’s allegations and have counterclaimed for infringement by CGI, BGI Americas Corp., and MGI Americas, Inc. of U.S. Patent No. 9,303,290, U.S. Patent No. 9,217,178, and U.S. Patent No. 9,970,055. On August 15, 2019, CGI filed a motion to dismiss our counterclaims. On August 29, 2019, we filed our Opposition to the Motion to Dismiss. The Court denied and granted the motion in part, denying the motion as to our claims for inducing infringement and granting it for contributory infringement. The Court gave us leave to file an amended complaint to attempt to cure the alleged deficiencies as to contributory infringement. On July 1, 2020, CGI amended its complaint to add claims of infringement of U.S. Patent No. 10,662,473 by our two-channel sequencing systems. We deny these allegations. As of May 12, 2021, CGI is seeking $225 million in alleged past damages and an average ongoing royalty of 5.5% on sales of the accused two-channel sequencing instruments and chemistry in the U.S. until the patents-in-suit expire on January 28, 2029. We deny that we owe any damages or ongoing royalty. On October 22, 2021, pursuant to the Court’s local rules, the Company sought leave to file a motion for summary judgment of non-infringement of the CGI patents-in-suit. CGI sought leave to file a motion for summary judgment against the Company’s invalidity defense based on prior invention. We are awaiting decisions by the Court. Trial is scheduled to begin April 18, 2022.
We will continue to pursue our claims against BGI and CGI, and vigorously defend against BGI’s and CGI’s claims. We currently cannot estimate any possible loss or range of loss that may result from BGI’s and CGI’s claims against us.
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income.
The effective tax rates for Q3 2021 and YTD 2021 were 24.7% and 18.6%, respectively. The variance from the U.S. federal statutory tax rate of 21% in Q3 2021 was primarily attributable to discrete tax expense related to GRAIL Continuation Payments and prior year tax adjustments. Due to the acquisition of GRAIL, the tax treatment of the GRAIL Continuation Payments changed from what was recorded in prior quarters, which resulted in a discrete tax expense being recorded for Q3 2021. The variance from the U.S. federal statutory tax rate of 21% in Q3 2021 was also attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.
In YTD 2021, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom. This was partially offset by the discrete tax expense on certain foreign subsidiary earnings that are no longer indefinitely reinvested, and discrete tax expense due to prior year tax adjustments.
We have two reportable segments, Core Illumina and GRAIL, as described below. We report segment information based on the management approach, which designates the internal reporting used by the Chief Operating Decision Maker (“CODM”) for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment using information about its revenue and income (loss) from operations. We do not allocate expenses between segments.
On August 18, 2021, we acquired GRAIL in a business combination and it operates as a separate reportable segment. We have included the results of operations of GRAIL in our condensed consolidated statements of operations from the date of acquisition. See note “4. Business Combinations” for further details. Core Illumina sells products and provides services to GRAIL, and vice versa, in accordance with contractual agreements between the entities.
Core Illumina:
Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of GRAIL.
GRAIL:
GRAIL is a healthcare company focused on early detection of multiple cancers.
The following table presents the operating performance of each reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2021
|
|
Q3 2020
|
|
YTD 2021
|
|
YTD 2020
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Core Illumina
|
$
|
1,106
|
|
|
$
|
794
|
|
|
$
|
3,325
|
|
|
$
|
2,286
|
|
|
|
|
|
GRAIL
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
$
|
1,108
|
|
|
$
|
794
|
|
|
$
|
3,327
|
|
|
$
|
2,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Core Illumina
|
$
|
51
|
|
|
$
|
46
|
|
|
$
|
148
|
|
|
$
|
137
|
|
|
|
|
|
GRAIL
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization
|
$
|
65
|
|
|
$
|
46
|
|
|
$
|
162
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
Core Illumina
|
$
|
205
|
|
|
$
|
162
|
|
|
$
|
586
|
|
|
$
|
447
|
|
|
|
|
|
GRAIL
|
(750)
|
|
|
—
|
|
|
(750)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (loss) income from operations
|
$
|
(545)
|
|
|
$
|
162
|
|
|
$
|
(164)
|
|
|
$
|
447
|
|
|
|
|
|
Other income, net relates to Core Illumina and we do not allocate income taxes to our segments.
The following table presents the total assets of each reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
January 3,
2021
|
|
|
|
|
Core Illumina
|
$
|
5,794
|
|
|
$
|
7,585
|
|
|
|
|
|
GRAIL
|
9,270
|
|
|
—
|
|
|
|
|
|
Elimination of intersegment assets
|
(1)
|
|
|
—
|
|
|
|
|
|
Consolidated total assets
|
$
|
15,063
|
|
|
$
|
7,585
|
|
|
|
|
|
The following table presents net long-lived assets, consisting of property and equipment and operating lease right-of-use assets, by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
October 3,
2021
|
|
January 3,
2021
|
|
|
|
|
United States
|
$
|
1,300
|
|
|
$
|
1,134
|
|
|
|
|
|
Singapore
|
204
|
|
|
150
|
|
|
|
|
|
United Kingdom
|
138
|
|
|
141
|
|
|
|
|
|
Other countries
|
43
|
|
|
29
|
|
|
|
|
|
Total net long-lived assets
|
$
|
1,685
|
|
|
$
|
1,454
|
|
|
|
|
|