UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☑ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the Quarterly Period Ended July 2, 2023
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from to
Commission File Number 001-35406
Illumina, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0804655 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
5200 Illumina Way, San Diego, CA 92122
(Address of principal executive offices) (Zip code)
(858) 202-4500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | ILMN | The Nasdaq Stock Market LLC | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of August 4, 2023, there were 158.3 million shares of the registrant’s common stock outstanding.
ILLUMINA, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 2, 2023
TABLE OF CONTENTS
See “Form 10-Q Cross-Reference Index” within Other Key Information for a cross-reference to the parts and items requirements of the Securities and Exchange Commission Quarterly Report on Form 10-Q.
| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | PAGE | ||||
| MANAGEMENT’S DISCUSSION & ANALYSIS | |||||
| OTHER KEY INFORMATION | |||||
2
Consideration Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “continue,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “potential,” “predict,” “should,” “will,” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements we make regarding:
•our expectations as to our future financial performance, results of operations, or other operational results or metrics;
•the benefits that we expect will result from our business activities and certain transactions we have completed, or may complete, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures;
•our expectations of the effect on our financial condition of claims, litigation, contingent liabilities, and governmental investigations, proceedings, and regulations;
•our strategies or expectations for product development, market position, financial results, and reserves;
•our ability to successfully implement cost reduction plans in a timely manner and the possibility that costs associated with our cost reduction plans are greater than we anticipate;
•our expectations regarding the outcome of the legal and regulatory proceedings, including any related appeals, related to our acquisition of GRAIL, Inc. (GRAIL) and other actions that may be taken or pursued by the European Commission, the U.S. Federal Trade Commission (FTC) and/or other governmental or regulatory authorities in connection with such acquisition;
•the interim measures order imposed by the European Commission, the duration and impact of such order on Illumina and GRAIL, and the appointment of a monitoring trustee to monitor our compliance with such order;
•the prohibition decision adopted by the European Commission on September 6, 2022 (the Prohibition Decision), informing us of its decision to prohibit our acquisition of GRAIL, and a Statement of Objections issued by the European Commission on December 5, 2022, informing us of the order it intends to adopt requiring us (among other things) to divest GRAIL (the EC Divestment Decision);
•the opinion and order issued by the FTC on March 31, 2023 (the FTC Order), requiring us to divest GRAIL and to hold GRAIL separate through the completion of the divestiture;
•the Article 14(2)(b) fine imposed by the European Commission on July 12, 2023; and
•other expectations, beliefs, plans, strategies, anticipated developments, and other matters that are not historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•our expectations and beliefs regarding prospects and growth for our business and the markets in which we operate;
•the timing and mix of customer orders among our products and services;
3
•challenges inherent in developing, manufacturing, and launching new products and services, including expanding manufacturing operations and reliance on third-party suppliers for critical components;
•the impact of recently launched or pre-announced products and services on existing products and services;
•risks and uncertainties regarding the legal and regulatory proceedings, including the failure to obtain or delays in obtaining the required regulatory approvals or clearances including for any potential divestiture of GRAIL, any appeals relating to our acquisition of GRAIL and our ability to achieve the expected benefits of such acquisition and other actions that have been or may be taken or pursued by the European Commission, the FTC and/or other governmental or regulatory authorities in connection with such acquisition;
•the interim measures order and hold separate order imposed by the European Commission, the duration and impact of such orders on Illumina and GRAIL, which impact may include material and adverse effects on benefits we expect to achieve as a result of the acquisition of GRAIL, additional costs or liabilities, loss of revenue and other adverse effects on our business, financial condition and results of operations;
•our compliance with the terms of the interim measures order imposed by the European Commission, which is monitored by an appointed monitoring trustee, and which is burdensome to implement and administer, and the risk that the European Commission could impose or seek to impose additional fines and other penalties for alleged noncompliance with such terms;
•the anticipated EC Divestment Decision requiring us to divest GRAIL, the terms and conditions thereof (including with respect to a divestiture of GRAIL), and the timing of and the risks, costs and business disruptions (including the diversion of management’s attention) associated with any such divestiture, the announcement, pendency or implementation thereof or any associated legal or regulatory proceedings or obligations, and other uncertainties related to our compliance (or ability to comply) with the EC Divestment Decision;
•the FTC Order, which may adversely affect us and our business, including current plans and operations, financial condition and results of operations, requiring us to divest GRAIL and to hold GRAIL separate through the completion of the divestiture, the terms and conditions thereof (including with respect to a divestiture of GRAIL), and the timing of and the risks, costs and business disruptions (including the diversion of management’s attention) associated with such divestiture and/or any related appeals, the announcement, pendency or implementation thereof or any associated legal or regulatory proceedings or obligations, including any related appeals, and other uncertainties related to our compliance (or ability to comply) with the FTC Order, which may adversely affect us and our business, including current plans and operations, financial condition and results of operations;
•our potential inability to comply with any of the Prohibition Decision, the EC Divestment Decision and the FTC Order, and the risks, costs, potential negative effect on the market price of our common stock and business disruptions associated therewith;
•risks associated with third-party contracts or other agreements containing provisions that might be implicated by any divestiture of GRAIL, including our obligations with respect to contingent value rights (the CVRs) issued by us in connection with the GRAIL acquisition and the risk that we will be unable to fully discharge such obligations in connection with a divestiture of GRAIL, that a divestiture will result in a change in obligor on the CVRs and/or of other consequences related thereto, which may adversely affect us and our business and/or the market value of the CVRs;
•the risk of adverse effects resulting from additional potential litigation associated with the acquisition of GRAIL, such as additional legal, financial advisory, regulatory and other professional services fees;
•the risk of additional litigation arising against us in connection with the GRAIL acquisition;
•the assumptions underlying our critical accounting policies and estimates;
•our assessments and estimates that determine our effective tax rate;
4
•our assessments and beliefs regarding the outcome of pending legal proceedings and any liability that we may incur as a result of those proceedings;
•uncertainty, or adverse economic and business conditions, including as a result of slowing or uncertain economic growth, COVID-19 pandemic mitigation measures, or armed conflict; and
•other factors detailed in our filings with the Securities and Exchange Commission (SEC), including the risks, uncertainties, and assumptions described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, the “Other Key Information” section of our Quarterly Report on Form 10-Q for the period ended April 2, 2023, the “Risk Factors” section below, or in information disclosed in public conference calls, the date and time of which are released beforehand.
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation, and do not intend, to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, or to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, in each case whether as a result of new information, future developments, or otherwise.
5
| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | ||
ILLUMINA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
| July 2, 2023 | January 1, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,553 | $ | 2,011 | |||||||
| Short-term investments | 6 | 26 | |||||||||
| Accounts receivable, net | 741 | 671 | |||||||||
| Inventory, net | 617 | 568 | |||||||||
| Prepaid expenses and other current assets | 306 | 285 | |||||||||
| Total current assets | 3,223 | 3,561 | |||||||||
| Property and equipment, net | 1,069 | 1,091 | |||||||||
| Operating lease right-of-use assets | 638 | 653 | |||||||||
| Goodwill | 3,239 | 3,239 | |||||||||
| Intangible assets, net | 3,188 | 3,285 | |||||||||
| Other assets | 417 | 423 | |||||||||
| Total assets | $ | 11,774 | $ | 12,252 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 244 | $ | 293 | |||||||
| Accrued liabilities | 1,309 | 1,232 | |||||||||
| Term notes, current portion | — | 500 | |||||||||
| Convertible senior notes, current portion | 750 | 748 | |||||||||
| Total current liabilities | 2,303 | 2,773 | |||||||||
| Operating lease liabilities | 726 | 744 | |||||||||
| Term notes | 1,488 | 1,487 | |||||||||
| Other long-term liabilities | 702 | 649 | |||||||||
| Stockholders’ equity: | |||||||||||
| Common stock | 2 | 2 | |||||||||
| Additional paid-in capital | 9,397 | 9,207 | |||||||||
| Accumulated other comprehensive income | 12 | 3 | |||||||||
| Retained earnings | 911 | 1,142 | |||||||||
| Treasury stock, at cost | (3,767) | (3,755) | |||||||||
| Total stockholders’ equity | 6,555 | 6,599 | |||||||||
| Total liabilities and stockholders’ equity | $ | 11,774 | $ | 12,252 | |||||||
See accompanying notes to condensed consolidated financial statements.
6
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Product revenue | $ | 1,001 | $ | 1,006 | $ | 1,923 | $ | 2,076 | |||||||||||||||
| Service and other revenue | 175 | 156 | 340 | 310 | |||||||||||||||||||
| Total revenue | 1,176 | 1,162 | 2,263 | 2,386 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Cost of product revenue | 305 | 286 | 591 | 586 | |||||||||||||||||||
| Cost of service and other revenue | 91 | 69 | 190 | 138 | |||||||||||||||||||
| Amortization of acquired intangible assets | 48 | 40 | 96 | 79 | |||||||||||||||||||
| Total cost of revenue | 444 | 395 | 877 | 803 | |||||||||||||||||||
| Gross profit | 732 | 767 | 1,386 | 1,583 | |||||||||||||||||||
| Operating expense: | |||||||||||||||||||||||
| Research and development | 358 | 327 | 699 | 650 | |||||||||||||||||||
| Selling, general and administrative | 450 | 410 | 824 | 719 | |||||||||||||||||||
| Legal contingency and settlement | 12 | 609 | 15 | 609 | |||||||||||||||||||
| Total operating expense | 820 | 1,346 | 1,538 | 1,978 | |||||||||||||||||||
| Loss from operations | (88) | (579) | (152) | (395) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 17 | 1 | 34 | 1 | |||||||||||||||||||
| Interest expense | (19) | (6) | (39) | (12) | |||||||||||||||||||
| Other income (expense), net | 1 | (53) | (10) | (91) | |||||||||||||||||||
| Total other expense, net | (1) | (58) | (15) | (102) | |||||||||||||||||||
| Loss before income taxes | (89) | (637) | (167) | (497) | |||||||||||||||||||
| Provision (benefit) for income taxes | 145 | (102) | 64 | (48) | |||||||||||||||||||
| Net loss | $ | (234) | $ | (535) | $ | (231) | $ | (449) | |||||||||||||||
| Loss per share: | |||||||||||||||||||||||
| Basic | $ | (1.48) | $ | (3.40) | $ | (1.46) | $ | (2.85) | |||||||||||||||
| Diluted | $ | (1.48) | $ | (3.40) | $ | (1.46) | $ | (2.85) | |||||||||||||||
| Shares used in computing loss per share: | |||||||||||||||||||||||
| Basic | 158 | 157 | 158 | 157 | |||||||||||||||||||
| Diluted | 158 | 157 | 158 | 157 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
7
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In millions)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| Net loss | $ | (234) | $ | (535) | $ | (231) | $ | (449) | |||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | 13 | 12 | 9 | 13 | |||||||||||||||||||
| Total comprehensive loss | $ | (221) | $ | (523) | $ | (222) | $ | (436) | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
8
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions)
| Additional | Accumulated Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Retained | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of January 2, 2022 | 197 | $ | 2 | $ | 8,938 | $ | 17 | $ | 5,485 | (40) | $ | (3,702) | $ | 10,740 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 86 | — | — | 86 | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | 33 | — | — | — | (12) | 21 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 79 | — | — | — | — | 79 | |||||||||||||||||||||||||||||||||||||||
| — | — | (93) | — | 61 | — | — | (32) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of April 3, 2022 | 197 | 2 | 8,957 | 18 | 5,632 | (40) | (3,714) | 10,895 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (535) | — | — | (535) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 12 | — | — | — | 12 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | — | — | — | — | (4) | (4) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 76 | — | — | — | — | 76 | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 3, 2022 | 197 | 2 | 9,033 | 30 | 5,097 | (40) | (3,718) | 10,444 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (3,816) | — | — | (3,816) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 9 | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | 30 | — | — | — | (2) | 28 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 66 | — | — | — | — | 66 | |||||||||||||||||||||||||||||||||||||||
| Balance as of October 2, 2022 | 197 | 2 | 9,129 | 39 | 1,281 | (40) | (3,720) | 6,731 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (139) | — | — | (139) | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges, net of deferred tax | — | — | — | (36) | — | — | — | (36) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | 1 | — | — | — | — | — | (35) | (35) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 78 | — | — | — | — | 78 | |||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2023 | 198 | $ | 2 | $ | 9,207 | $ | 3 | $ | 1,142 | (40) | $ | (3,755) | $ | 6,599 | |||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
9
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions)
| Additional | Accumulated Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Retained | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2023 | 198 | $ | 2 | $ | 9,207 | $ | 3 | $ | 1,142 | (40) | $ | (3,755) | $ | 6,599 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 3 | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges, net of deferred tax | — | — | — | (4) | — | — | — | (4) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | 37 | — | — | — | (9) | 28 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 67 | — | — | — | — | 67 | |||||||||||||||||||||||||||||||||||||||
| Balance as of April 2, 2023 | 198 | 2 | 9,311 | (1) | 1,145 | (40) | (3,764) | 6,693 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (234) | — | — | (234) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 13 | — | — | — | 13 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | — | — | — | — | (3) | (3) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 77 | — | — | — | — | 77 | |||||||||||||||||||||||||||||||||||||||
| Reclassification of liability-classified awards | — | — | 9 | — | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 2, 2023 | 198 | $ | 2 | $ | 9,397 | $ | 12 | $ | 911 | (40) | $ | (3,767) | $ | 6,555 | |||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
10
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
| Six Months Ended | |||||||||||
| July 2, 2023 | July 3, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (231) | $ | (449) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation expense | 116 | 102 | |||||||||
| Amortization of intangible assets | 99 | 83 | |||||||||
| Share-based compensation expense | 199 | 183 | |||||||||
| Deferred income taxes | 36 | (34) | |||||||||
| Impairment of long-lived assets | 7 | — | |||||||||
| Net losses on strategic investments | 19 | 76 | |||||||||
| (Gain) loss on Helix contingent value right | (3) | 3 | |||||||||
| Change in fair value of contingent consideration liabilities | 28 | (11) | |||||||||
| Other | 14 | 4 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (78) | 1 | |||||||||
| Inventory | (49) | (86) | |||||||||
| Prepaid expenses and other current assets | (6) | 4 | |||||||||
| Operating lease right-of-use assets and liabilities, net | (10) | (7) | |||||||||
| Other assets | 4 | 13 | |||||||||
| Accounts payable | (44) | (52) | |||||||||
| Accrued liabilities | 29 | 470 | |||||||||
| Other long-term liabilities | (15) | (3) | |||||||||
| Net cash provided by operating activities | 115 | 297 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (99) | (132) | |||||||||
| Purchases of strategic investments | (11) | (22) | |||||||||
| Sales of strategic investments | 18 | — | |||||||||
| Net cash paid for acquisitions | — | (85) | |||||||||
| Cash paid for intangible asset | (1) | — | |||||||||
| Net cash used in investing activities | (93) | (239) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Debt issuance costs paid for credit facility | (1) | — | |||||||||
| Payments on term notes | (500) | — | |||||||||
| Taxes paid related to net share settlement of equity awards | (12) | (17) | |||||||||
| Proceeds from issuance of common stock | 37 | 33 | |||||||||
| Net cash (used in) provided by financing activities | (476) | 16 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (4) | (17) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (458) | 57 | |||||||||
| Cash and cash equivalents at beginning of period | 2,011 | 1,232 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,553 | $ | 1,289 | |||||||
See accompanying notes to condensed consolidated financial statements.
11
ILLUMINA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context requires otherwise, references in this report to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
| 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES | ||
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. The acquisition is subject to ongoing legal proceedings and, currently, GRAIL must be held and operated separately and independently from Illumina pursuant to interim measures ordered by the European Commission, which prohibited our acquisition of GRAIL on September 6, 2022. GRAIL is a separate reportable segment. Refer to note “7. Legal Proceedings” and note “9. Segment Information,” respectively, 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 1, 2023, 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 COVID-19 pandemic, the armed conflict between Russia and Ukraine, and macroeconomic factors such as inflation, exchange rates and concerns about an economic downturn present 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.
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 Q2 2023 and Q2 2022 refer to the three months ended July 2, 2023 and July 3, 2022, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2023 and 2022 refer to the six months ended July 2, 2023 and July 3, 2022, respectively, which were both 26 weeks.
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Significant Accounting Policies
During YTD 2023, 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 1, 2023, with the exception of the following for income taxes:
Historically we calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q2 2023 and YTD 2023 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q2 2023 and YTD 2023.
Loss per Share
Basic loss per share is computed based on the weighted average number of common shares outstanding during the period. Diluted loss 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. In loss periods, basic and diluted loss per share are identical since the effect of potentially dilutive common shares is antidilutive and therefore excluded.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. We utilize the if-converted method to calculate the impact of convertible senior notes on diluted loss per share. 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 weighted average shares used to calculate basic and diluted loss per share:
| In millions | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | |||||||||||||||||||
| Weighted average shares used in calculating basic loss per share | 158 | 157 | 158 | 157 | |||||||||||||||||||
| Weighted average shares used in calculating diluted loss per share | 158 | 157 | 158 | 157 | |||||||||||||||||||
| Antidilutive shares: | |||||||||||||||||||||||
| Convertible senior notes | 2 | 2 | 2 | 2 | |||||||||||||||||||
| Equity awards | 3 | 2 | 3 | 2 | |||||||||||||||||||
| Potentially dilutive shares excluded from calculation due to antidilutive effect | 5 | 4 | 5 | 4 | |||||||||||||||||||
| 2. REVENUE | ||
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Revenue by Source
| Q2 2023 | Q2 2022 | ||||||||||||||||||||||||||||||||||
| In millions | Sequencing | Microarray | Total | Sequencing | Microarray | Total | |||||||||||||||||||||||||||||
| Consumables | $ | 734 | $ | 70 | $ | 804 | $ | 739 | $ | 74 | $ | 813 | |||||||||||||||||||||||
| Instruments | 193 | 4 | 197 | 190 | 3 | 193 | |||||||||||||||||||||||||||||
| Total product revenue | 927 | 74 | 1,001 | 929 | 77 | 1,006 | |||||||||||||||||||||||||||||
| Service and other revenue | 156 | 19 | 175 | 136 | 20 | 156 | |||||||||||||||||||||||||||||
| Total revenue | $ | 1,083 | $ | 93 | $ | 1,176 | $ | 1,065 | $ | 97 | $ | 1,162 | |||||||||||||||||||||||
| YTD 2023 | YTD 2022 | ||||||||||||||||||||||||||||||||||
| In millions | Sequencing | Microarray | Total | Sequencing | Microarray | Total | |||||||||||||||||||||||||||||
| Consumables | $ | 1,419 | $ | 148 | $ | 1,567 | $ | 1,516 | $ | 149 | $ | 1,665 | |||||||||||||||||||||||
| Instruments | 346 | 10 | 356 | 401 | 10 | 411 | |||||||||||||||||||||||||||||
| Total product revenue | 1,765 | 158 | 1,923 | 1,917 | 159 | 2,076 | |||||||||||||||||||||||||||||
| Service and other revenue | 293 | 47 | 340 | 257 | 53 | 310 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,058 | $ | 205 | $ | 2,263 | $ | 2,174 | $ | 212 | $ | 2,386 | |||||||||||||||||||||||
Revenue by Geographic Area
| Based on region of destination (in millions) | Q2 2023 | Q2 2022(1) | YTD 2023 | YTD 2022(1) | |||||||||||||||||||
| Americas | $ | 640 | $ | 639 | $ | 1,256 | $ | 1,288 | |||||||||||||||
| Europe | 303 | 274 | 564 | 560 | |||||||||||||||||||
Greater China(2) | 115 | 118 | 206 | 245 | |||||||||||||||||||
Asia-Pacific, Middle East, and Africa(3) | 118 | 131 | 237 | 293 | |||||||||||||||||||
| Total revenue | $ | 1,176 | $ | 1,162 | $ | 2,263 | $ | 2,386 | |||||||||||||||
_____________
(1)We implemented a new global commercial structure in Q1 2023 to improve operating efficiencies and better align with local markets. We integrated Asia-Pacific and Japan with emerging markets across the Middle East, Africa, Turkey, and Commonwealth of Independent States (CIS). Beginning in Q1 2023, and going forward, we will report regional results for the following regions: Americas, Europe, Greater China, and Asia-Pacific, Middle East and Africa (AMEA). Prior period amounts have been reclassified to conform to this new presentation.
(2)Region includes revenue from China, Taiwan, and Hong Kong.
(3)Region includes revenue from Russia and Turkey.
Performance Obligations
We regularly enter into contracts with multiple performance obligations. These contracts are believed to be firm as of the balance sheet date. However, we may allow customers to make product substitutions as we launch new products. The timing of shipments depends on several factors, including agreed upon shipping schedules, which may span multiple quarters. Most performance obligations are generally satisfied within a short time frame, approximately to six months, after the contract execution date. As of July 2, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $881 million, of which approximately 86% is expected to be converted to revenue in the next twelve months, approximately 7% in the following twelve months, and the remainder thereafter.
Contract Assets and Liabilities
Contract assets, which consist of revenue recognized and performance obligations satisfied or partially satisfied in advance of customer billing, were $17 million as of July 2, 2023 and January 1, 2023 and were recorded in prepaid expenses and other current assets.
Contract liabilities, which consist of deferred revenue and customer deposits, as of July 2, 2023 and January 1, 2023 were $323 million and $308 million, respectively, of which the short-term portions of $250 million and $245 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in
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other long-term liabilities. Revenue recorded in Q2 2023 and YTD 2023 included $68 million and $163 million, respectively, of previously deferred revenue that was included in contract liabilities as of January 1, 2023.
| 3. INVESTMENTS AND FAIR VALUE MEASUREMENTS | ||
Strategic Investments
Marketable Equity Securities
Our short-term investments consist of marketable equity securities. As of July 2, 2023 and January 1, 2023, the fair value of our marketable equity securities totaled $6 million and $26 million, respectively.
Gains and losses recognized in other income (expense), net on our marketable equity securities were as follows:
| In millions | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | |||||||||||||||||||
| Net losses recognized during the period on marketable equity securities | $ | — | $ | (27) | $ | (2) | $ | (69) | |||||||||||||||
| Less: Net gains (losses) recognized during the period on marketable equity securities sold during the period | 1 | — | (2) | — | |||||||||||||||||||
| Net unrealized losses recognized during the period on marketable equity securities still held at the reporting date | $ | (1) | $ | (27) | $ | — | $ | (69) | |||||||||||||||
Non-Marketable Equity Securities
As of July 2, 2023 and January 1, 2023, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $28 million.
Revenue recognized from transactions with our strategic investees was $28 million and $64 million for Q2 2023 and YTD 2023, respectively, and $25 million and $55 million for Q2 2022 and YTD 2022, 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 $6 million and up to $81 million, respectively, remained callable as of July 2, 2023. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $177 million and $183 million as of July 2, 2023 and January 1, 2023, respectively. We recorded unrealized losses of $2 million and $14 million in Q2 2023 and YTD 2023, respectively, and unrealized losses of $4 million and $6 million in Q2 2022 and YTD 2022, respectively, in other income (expense), net.
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 our contingent value right resulted in an unrealized gain of $3 million
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in YTD 2023 and unrealized losses of $8 million and $3 million in Q2 2022 and YTD 2022, respectively, which were included in other income (expense), net. There was no change in fair value of the contingent value right in Q2 2023.
Fair Value Measurements
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:
| July 2, 2023 | January 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds (cash equivalents) | $ | 1,250 | $ | — | $ | — | $ | 1,250 | $ | 1,642 | $ | — | $ | — | $ | 1,642 | |||||||||||||||||||||||||||||||
| Marketable equity securities | 6 | — | — | 6 | 26 | — | — | 26 | |||||||||||||||||||||||||||||||||||||||
| Helix contingent value right | — | — | 61 | 61 | — | — | 58 | 58 | |||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan assets | — | 57 | — | 57 | — | 52 | — | 52 | |||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 1,256 | $ | 57 | $ | 61 | $ | 1,374 | $ | 1,668 | $ | 52 | $ | 58 | $ | 1,778 | |||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Contingent consideration liabilities | $ | — | $ | — | $ | 440 | $ | 440 | $ | — | $ | — | $ | 412 | $ | 412 | |||||||||||||||||||||||||||||||
| Deferred compensation plan liability | — | 54 | — | 54 | — | 51 | — | 51 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 54 | $ | 440 | $ | 494 | $ | — | $ | 51 | $ | 412 | $ | 463 | |||||||||||||||||||||||||||||||
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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 such contingent value right, included in other assets, is derived using a Monte Carlo simulation. Estimates and assumptions used in the Monte Carlo simulation include probabilities related to the timing and outcome of future financing and/or liquidity events, assumptions regarding collectibility and volatility, and an estimated equity value of Helix. 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 related to acquisitions on a quarterly basis. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in selling, general and administrative expense. The contingent value rights issued as part of the GRAIL acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. As defined in the Contingent Value Rights Agreement, 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. Covered Revenues for Q4 2022 and Q1 2023 were $42 million in aggregate and Covered Revenues for Q4 2021 and Q1 2022 were $20 million in aggregate, driven primarily by sales of GRAIL’s Galleri test. Covered Revenue Payments relating to such periods were approximately $400,000 and $187,000 in YTD 2023 and YTD 2022, respectively. Pursuant to the Contingent Value Rights Agreement, a portion of the Covered Revenue Payments in YTD 2022 were applied to reimburse us for certain expenses. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL acquisition. Estimates and assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility estimate, an operational leverage ratio and a counterparty credit spread. 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. The fair value of our contingent consideration liability related to GRAIL was $440 million and $412 million as of July 2, 2023 and January 1, 2023, respectively, of which $439 million and $411 million, respectively, was included in other long-term liabilities, with the remaining balances included in accrued liabilities.
Changes in the estimated fair value of our contingent consideration liabilities during YTD 2023 were as follows:
| In millions | |||||
| Balance as of January 1, 2023 | $ | 412 | |||
| Change in estimated fair value | 28 | ||||
| Balance as of July 2, 2023 | $ | 440 | |||
| 4. DEBT | ||
| In millions | July 2, 2023 | January 1, 2023 | |||||||||
| Principal amount of 2031 Term Notes outstanding | $ | 500 | $ | 500 | |||||||
| Principal amount of 2027 Term Notes outstanding | 500 | 500 | |||||||||
| Principal amount of 2025 Term Notes outstanding | 500 | 500 | |||||||||
| Principal amount of 2023 Term Notes outstanding | — | 500 | |||||||||
| Unamortized discounts and debt issuance costs | (12) | (13) | |||||||||
| Net carrying amount of term notes | 1,488 | 1,987 | |||||||||
| Less: current portion | — | (500) | |||||||||
| Term notes, non-current | $ | 1,488 | $ | 1,487 | |||||||
| Fair value of term notes outstanding (Level 2) | $ | 1,418 | $ | 1,913 | |||||||
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Interest expense recognized on our term notes, which included amortization of debt discounts and issuance costs, was $18 million and $37 million in Q2 2023 and YTD 2023, respectively, and $4 million and $9 million in Q2 2022 and YTD 2022, respectively.
0.550% Term Notes due 2023 (2023 Term Notes) and 2.550% Term Notes due 2031 (2031 Term Notes)
In March 2021, we issued $500 million aggregate principal amount of 2023 Term Notes and $500 million aggregate principal amount of 2031 Term Notes. The 2023 Term Notes matured and were repaid in cash on March 23, 2023.
The 2031 Term Notes, which mature on March 23, 2031, accrue interest at a rate of 2.550% per annum, payable semi-annually on March 23 and September 23 of each year. We may redeem for cash all or any portion of the 2031 Term Notes, at our option, at any time prior to maturity. 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 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.
5.800% Term Notes due 2025 (2025 Term Notes) and 5.750% Term Notes due 2027 (2027 Term Notes)
In December 2022, we issued $500 million aggregate principal amount of 2025 Term Notes and $500 million aggregate principal amount of 2027 Term Notes. The 2025 Term Notes, which mature on December 12, 2025, and the 2027 Term Notes, which mature on December 13, 2027, accrue interest at a rate of 5.800% and 5.750% per annum, respectively, payable semi-annually. Interest for the 2025 Term Notes is payable on June 12 and December 12 of each year, beginning on June 12, 2023. Interest for the 2027 Term Notes is payable on June 13 and December 13 of each year, beginning on June 13, 2023.
We may redeem for cash all or any portion of the 2025 or 2027 Term Notes, at our option, at any time prior to maturity. Prior to November 12, 2025 for the 2025 Term Notes and prior to November 13, 2027 for the 2027 Term Notes, the notes are redeemable at make-whole premium redemption prices as defined in the applicable forms of note. After November 12, 2025 for the 2025 Term Notes and after November 13, 2027 for the 2027 Term Notes, the 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.
0% Convertible Senior Notes due 2023 (2023 Convertible Notes)
| In millions | July 2, 2023 | January 1, 2023 | |||||||||
| Principal amount outstanding | $ | 750 | $ | 750 | |||||||
| Unamortized debt issuance costs | — | (2) | |||||||||
| Net carrying amount of convertible senior notes, current portion | $ | 750 | $ | 748 | |||||||
| Fair value of convertible senior notes outstanding (Level 2) | $ | 745 | $ | 726 | |||||||
In August 2018, we issued $750 million aggregate principal amount of 2023 Convertible Notes, which carry no coupon interest and mature on August 15, 2023. The notes became convertible on May 15, 2023 and remain convertible until August 11, 2023. As of August 9, 2023, none of the notes had been converted.
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
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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.
Credit Agreement
On January 4, 2023, we entered into a new 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. The credit agreement dated as of March 8, 2021 and the commitments thereunder were terminated as of January 4, 2023.
The Credit Facility matures, and all amounts outstanding thereunder become due and payable in full, on January 4, 2028, 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 July 2, 2023, there were no borrowings or letters of credit outstanding under the Credit Facility and we were in compliance with all financial and operating covenants.
Any loans under the Credit Facility will have a variable interest rate based on either the term secured overnight financing rate or the alternate base rate, plus an applicable rate that varies with the Company’s debt rating and, in the case of loans bearing interest based on the term secured overnight financing rate, a credit spread adjustment equal to 0.10% per annum. 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.
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| 5. STOCKHOLDERS’ EQUITY | ||
Restricted Stock
Restricted stock activity was as follows:
| Restricted Stock Units (RSU) | Performance Stock Units (PSU)(1) | Weighted-Average Grant Date Fair Value per Share | |||||||||||||||||||||
| Units in thousands | RSU | PSU | |||||||||||||||||||||
| Outstanding at January 1, 2023 | 1,611 | 74 | $ | 311.23 | $ | 446.74 | |||||||||||||||||
| Awarded | 1,979 | 228 | $ | 197.36 | $ | 231.59 | |||||||||||||||||
| Vested | (85) | — | $ | 304.91 | $ | — | |||||||||||||||||
| Cancelled | (186) | (51) | $ | 268.37 | $ | 308.63 | |||||||||||||||||
| Outstanding at July 2, 2023 | 3,319 | 251 | $ | 246.12 | $ | 279.51 | |||||||||||||||||
_____________
(1)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.
Liability-Classified RSU
In Q1 2023, we granted RSU that were to be settled in cash if stockholder approval to increase our share reserve under the amended and restated 2015 Stock Plan was not obtained. In Q2 2023, the Company’s stockholders approved an amended and restated version of the 2015 Stock Plan and increased the maximum number of shares authorized for issuance. Upon such approval, all RSU previously accounted for as liability-classified awards, approximately 557,000 RSU, were reclassified to stockholders’ equity and accounted for prospectively as equity awards. There were no RSU liability-classified awards outstanding as of July 2, 2023.
Market-Based PSU
During YTD 2023, we granted PSU with a market condition that vest based on the Company’s relative total shareholder return (rTSR) as compared to a peer group of companies measured over a performance period. Depending on the actual performance over the measurement period, an award recipient could receive up to 175% of the granted award. The grant date fair value of such awards is estimated using a Monte Carlo simulation, which includes assumptions for expected volatility, risk-free interest rate and dividend yield. 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. The compensation expense for the awards is recognized over the requisite service period regardless of whether the market conditions are achieved. As of July 2, 2023, there were approximately 133,000 PSU with a rTSR market condition outstanding.
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Stock Options
Stock option activity was as follows:
| Units in thousands | Options | Weighted-Average Exercise Price | Performance Options(1) | Weighted-Average Exercise Price | |||||||||||||||||||
| Outstanding at January 1, 2023 | 187 | $ | 319.72 | 17 | $ | 85.54 | |||||||||||||||||
| Exercised | (8) | $ | 71.09 | (1) | $ | 16.69 | |||||||||||||||||
| Cancelled | (82) | $ | 330.25 | — | $ | — | |||||||||||||||||
| Outstanding at July 2, 2023 | 97 | $ | 330.25 | 16 | $ | 87.74 | |||||||||||||||||
| Exercisable at July 2, 2023 | 45 | $ | 330.25 | — | $ | — | |||||||||||||||||
_____________
(1)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.
Other Liability-Classified Awards
We grant cash-based equity incentive awards to GRAIL employees. For purposes of valuation and performance measurement of the awards, GRAIL’s stand-alone valuation, as determined by GRAIL using a reasonable calculation and based on advice from independent valuation experts and analyses, is used. The awards generally have terms of four years with equal vesting annually, subject to continued employment through the vesting period.
Cash-based equity incentive award activity was as follows:
| In millions | |||||
| Outstanding at January 1, 2023 | $ | 293 | |||
| Granted | 116 | ||||
| Vested and paid in cash | (25) | ||||
| Cancelled | (17) | ||||
| Change in fair value | (13) | ||||
| Outstanding at July 2, 2023 | $ | 354 | |||
| Estimated liability as of July 2, 2023 (included in accrued liabilities) | $ | 57 | |||
We recognized share-based compensation expense of $25 million and $46 million in Q2 2023 and YTD 2023, respectively, and $16 million and $29 million in Q2 2022 and YTD 2022, respectively. As of July 2, 2023, approximately $297 million of total unrecognized compensation cost related to awards issued to date was expected to be recognized over a weighted-average period of approximately 3.0 years.
In connection with the acquisition of GRAIL, we assumed a performance-based award for which vesting is based on GRAIL’s future revenues. The award has an aggregate potential value of up to $78 million and expires, to the extent unvested, in August 2030. As of July 2, 2023, it was not probable that the performance conditions associated with the award will be achieved and, therefore, no share-based compensation expense, or corresponding liability, has been recognized in the condensed consolidated financial statements to-date.
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 2023, approximately 0.2 million shares were issued under the ESPP. As of July 2, 2023, there were approximately 12.6 million shares available for issuance under the ESPP.
The assumptions used and the resulting estimate of weighted-average fair value per share for stock purchased under the ESPP during YTD 2023 were as follows:
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| Risk-free interest rate | 0.78% - 4.79% | ||||
| Expected volatility | 41% - 51% | ||||
| Expected term | 0.5 - 1.0 year | ||||
| Expected dividends | 0 | % | |||
| Weighted-average grant-date fair value per share | $ | 57.96 | |||
Share Repurchases
We did not repurchase any shares during YTD 2023. As of July 2, 2023, authorizations to repurchase approximately $15 million of our common stock remained available under the $750 million share repurchase program authorized by our Board of Directors on February 5, 2020. The repurchases may be completed under a 10b5-1 plan or at management’s discretion.
Share-Based Compensation
Share-based compensation expense, which includes expense for both equity and liability-classified awards, reported in our condensed consolidated statements of operations was as follows:
| In millions | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | |||||||||||||||||||
| Cost of product revenue | $ | 8 | $ | 7 | $ | 15 | $ | 13 | |||||||||||||||
| Cost of service and other revenue | 6 | 1 | 12 | 2 | |||||||||||||||||||
| Research and development | 43 | 39 | 79 | 75 | |||||||||||||||||||
| Selling, general and administrative | 48 | 44 | 93 | 93 | |||||||||||||||||||
| Share-based compensation expense, before taxes | 105 | 91 | 199 | 183 | |||||||||||||||||||
| Related income tax benefits | (24) | (20) | (45) | (41) | |||||||||||||||||||
| Share-based compensation expense, net of taxes | $ | 81 | $ | 71 | $ | 154 | $ | 142 | |||||||||||||||
As of July 2, 2023, approximately $704 million of total unrecognized compensation cost related to restricted stock, including RSU and PSU, stock options, including performance stock options, and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately 2.7 years.
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| 6. SUPPLEMENTAL BALANCE SHEET DETAILS | ||
| In millions | July 2, 2023 | January 1, 2023 | |||||||||
| Trade accounts receivable, gross | $ | 748 | $ | 675 | |||||||
| Allowance for credit losses | (7) | (4) | |||||||||
| Total accounts receivable, net | $ | 741 | $ | 671 | |||||||
Inventory
| In millions | July 2, 2023 | January 1, 2023 | |||||||||
| Raw materials | $ | 281 | $ | 247 | |||||||
| Work in process | 415 | 386 | |||||||||
| Finished goods | 29 | 28 | |||||||||
| Inventory, gross | 725 | 661 | |||||||||
| Inventory reserve | (108) | (93) | |||||||||
| Total inventory, net | $ | 617 | $ | 568 | |||||||
Accrued Liabilities
| In millions | July 2, 2023 | January 1, 2023 | |||||||||
Legal contingencies(1) | $ | 471 | $ | 473 | |||||||
| Contract liabilities, current portion | 250 | 245 | |||||||||
Accrued compensation expenses(2) | 249 | 188 | |||||||||
| Accrued taxes payable | 84 | 97 | |||||||||
| Operating lease liabilities, current portion | 84 | 76 | |||||||||
| Liability-classified equity incentive awards | 57 | 36 | |||||||||
Other, including warranties(3) | 114 | 117 | |||||||||
| Total accrued liabilities | $ | 1,309 | $ | 1,232 | |||||||
(2)Included employee separation costs related to restructuring activities.
(3)See table below for changes in the reserve for product warranties.
Changes in the reserve for product warranties were as follows:
| In millions | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | |||||||||||||||||||
| Balance at beginning of period | $ | 19 | $ | 21 | $ | 18 | $ | 22 | |||||||||||||||
| Additions charged to cost of product revenue | 11 | 6 | 20 | 12 | |||||||||||||||||||
| Repairs and replacements | (10) | (6) | (18) | (13) | |||||||||||||||||||
| Balance at end of period | $ | 20 | $ | 21 | $ | 20 | $ | 21 | |||||||||||||||
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from 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.
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Restructuring
In Q2 2023, we implemented a cost reduction initiative that included workforce reductions, the consolidation of certain facilities and other actions to reduce expenses, all as part of a plan to realign operating expenses while maintaining focus on our innovation roadmap and sustainable long-term growth. In Q2 2023, we recorded a total pre-tax restructuring charge of $33 million, primarily related to severance pay and other employee separation costs.
A summary of the pre-tax restructuring charge is as follows:
| In millions | |||||
| Employee separation costs | $ | 25 | |||
Asset impairment charges (1) | 7 | ||||
| Other costs | 1 | ||||
Total restructuring charges (2) | $ | 33 | |||
_____________
(1)Primarily related to impairment of right-of-use assets and leasehold improvements.
(2)$18 million was recorded in SG&A expense, $12 million in R&D expense, with the remainder recorded in cost of revenue.
A summary of the restructuring liability is as follows:
| In millions | Employee Separation Costs | Other Costs | Total | ||||||||||||||
| Expense recorded in Q2 2023 | $ | 25 | $ | 1 | $ | 26 | |||||||||||
| Cash paid during Q2 2023 | (2) | — | (2) | ||||||||||||||
| Amount recorded in accrued liabilities as of July 2, 2023 | $ | 23 | $ | 1 | $ | 24 | |||||||||||
| Estimated total restructuring costs to still be incurred | $ | 7 | $ | — | $ | 7 | |||||||||||
It is expected that substantially all of the employee separation related restructuring charges will be incurred and paid by the end of 2023. We also plan to exit our i3 campus in San Diego, California by the end of 2023 and we are evaluating options with respect to our campus in Foster City, California. As of July 2, 2023, we had assets, consisting primarily of right-of-use assets and leasehold improvements, related to our i3 and Foster City campuses of approximately $52 million and $185 million, respectively.
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Goodwill
Goodwill is reviewed for impairment annually, during the second quarter of our fiscal year, or more frequently if an event occurs indicating the potential for impairment. In May 2023, we performed our annual goodwill impairment test for our two reporting units: Core Illumina and GRAIL. We performed a quantitative assessment for both reporting units. No impairment was recorded for either Core Illumina or GRAIL, in Q2 2023, as the fair value for each reporting unit exceeded its carrying value by approximately $34 billion and $555 million, respectively.
We performed our annual goodwill impairment test using a combination of both an income and a market approach to determine the fair value of each reporting unit. The income approach utilized the estimated discounted cash flows for each reporting unit, while the market approach utilized comparable company information. Estimates and assumptions used in the income approach included projected cash flows and a discount rate for each reporting unit. Discount rates were determined using a weighted average cost of capital for risk factors specific to each reporting unit and other market and industry data. For GRAIL, the selected discount rate was 21.5%. The estimates and assumptions used in our assessment represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. The assumptions used are inherently subject to uncertainty and we note that small changes in these assumptions could have a significant impact on the concluded value. An increase of 100 to 150 basis points to the discount rate used in our annual assessment for GRAIL would have resulted in an outcome ranging from no impairment to an impairment of approximately $250 million for GRAIL. In order to further validate the reasonableness of the fair values concluded for our reporting units, a reconciliation to market capitalization was performed by estimating a reasonable implied control premium and other market factors. As of July 2, 2023, remaining goodwill allocated to GRAIL was $2,178 million.
In conjunction with our annual goodwill impairment test, we also evaluated the in-process research and development (IPR&D) asset assigned to the GRAIL reporting unit for potential impairment. We performed our impairment test by comparing the carrying value of the IPR&D asset to its estimated fair value, which was determined by the income approach, using a discounted cash flow model. Estimates and assumptions used in the income approach, which represent a Level 3 measurement, included projected cash flows and a discount rate. Based on our impairment test, the carrying value of the IPR&D asset did not exceed its estimated fair value. We also performed a recoverability test for the definite-lived intangible assets assigned to the GRAIL reporting unit, which includes developed technology and trade name, noting no impairment.
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. Foreign exchange contracts are carried at fair value in other current assets, other assets, accrued liabilities, or other long-term liabilities, as appropriate, 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 (expense), net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of July 2, 2023, 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 July 2, 2023 and January 1, 2023, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $503 million and $485 million, respectively. On July 25, 2023, we entered into forward contracts for a total notional amount of €432 million to hedge the foreign currency exposure for the approximately €432 million fine imposed by the European Commission on July 12, 2023.
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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, are recognized in other income (expense), net. As of July 2, 2023, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, Canadian dollar, and Chinese Yuan Renminbi. As of July 2, 2023 and January 1, 2023, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $787 million and $425 million, respectively. We reclassified $2 million and $3 million to revenue in Q2 2023 and YTD 2023, respectively, and $10 million and $16 million in Q2 2022 and YTD 2022, respectively. As of July 2, 2023, the fair value of the foreign currency forward contracts recorded in total assets and total liabilities was $19 million and $6 million, respectively. As of January 1, 2023, the fair value of the foreign currency forward contracts recorded in total assets and total liabilities was $8 million and $6 million, respectively.
| 7. LEGAL PROCEEDINGS | ||
Acquisition of GRAIL
Our acquisition of GRAIL remains subject to ongoing legal and regulatory proceedings in the United States and in the European Union.
On March 30, 2021, the U.S. 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. On September 1, 2022, the administrative law judge (the ALJ) ruled in favor of Illumina and found that the acquisition of GRAIL did not violate Section 7 of the Clayton Act. In the decision, the ALJ found that the FTC’s complaint counsel had failed to prove its prima facie case that Illumina’s acquisition of GRAIL would result in harm to competition in a putative market for multi-cancer early detection (MCED) tests. The FTC’s complaint counsel appealed the ALJ’s decision to the full FTC on September 2, 2022. The appeal was fully briefed as of November 10, 2022 and oral argument occurred on December 13, 2022. On March 31, 2023, the FTC issued an opinion and order (the FTC Order) requiring Illumina to divest GRAIL, reversing the ALJ’s ruling. On April 5, 2023, Illumina filed a petition for review of the FTC Order in the U.S. Court of Appeals for the Fifth Circuit. On April 24, 2023, the FTC granted a motion staying in its entirety the FTC Order pending resolution of Illumina’s Fifth Circuit appeal. Illumina submitted its opening appeal brief on June 5, 2023. The FTC submitted its opposition brief on July 26, 2023, and Illumina’s reply brief is due on August 16, 2023. Oral argument is scheduled for September 12, 2023. We intend to continue to vigorously defend against 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). The European Commission had never solicited
26
referrals to take jurisdiction over an acquisition of a U.S. company that had no revenue in Europe. 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. On December 16, 2021, the EU General Court held a hearing regarding the European Commission’s assertion of jurisdiction. On July 13, 2022, the EU General Court reached a decision in favor of the European Commission, holding that the European Commission has jurisdiction under the EU Merger Regulation to review the acquisition. On September 22, 2022, we filed an appeal in the Court of Justice of the European Union asking for annulment of the EU General Court’s decision.
On October 29, 2021, the European Commission adopted an order imposing interim measures (the Initial Interim Measures Order). As the Initial Interim Measures Order was set to expire on November 3, 2022, the European Commission adopted a new order imposing interim measures (the New Interim Measures Order) on October 28, 2022. On December 1, 2021, we filed an action with the EU General Court asking for annulment of the Initial Interim Measures Order. The hearing of that application has been stayed pending our appeal of the judgment of the EU General Court regarding the European Commission’s assertion of jurisdiction. On January 10, 2023, we filed an action with the EU General Court asking for annulment of the New Interim Measures Order. On January 20, 2023, the European Commission requested that these proceedings be stayed pending our appeal on jurisdiction. We submitted a filing indicating that we had no objections to the European Commission’s request, and the EU General Court stayed the proceedings on February 21, 2023.
On September 6, 2022, the European Commission announced that it had completed its Phase II review of the acquisition of GRAIL and adopted a final decision (the Prohibition Decision), which found that, in its view, our acquisition of GRAIL was incompatible with the internal market in Europe because it results in a significant impediment to effective competition. On November 17, 2022, we filed an action with the EU General Court asking for annulment of the Prohibition Decision.
On December 5, 2022, the European Commission issued a Statement of Objections informing Illumina of the order it intends to adopt requiring us (among other things) to divest GRAIL (the EC Divestment Decision). We filed our response to the Statement of Objections on January 16, 2023. Neither the Prohibition Decision nor such public statements indicate when any such EC Divestment Decision may be adopted. We may pursue other appeals to the EC Divestment Decision.
On July 12, 2023, the European Commission adopted a final decision finding that we breached the EU Merger Regulation by, in its view, acquiring the possibility to exert decisive influence over GRAIL and exerting such influence during the pendency of the European Commission’s review (the Article 14(2)(b) Decision). The European Commission therefore imposed a fine on us pursuant to Article 14(2)(b) of the EU Merger Regulation of approximately €432 million, representing the maximum fine of 10% of our consolidated annual revenues for fiscal year 2022. As of July 2, 2023, we accrued $471 million included in accrued liabilities. We intend to appeal this decision.
SEC Inquiry Letter
In July 2023, we were informed that the staff of the SEC was conducting an investigation relating to Illumina and was requesting documents and communications primarily related to Illumina’s acquisition of GRAIL and certain statements and disclosures concerning GRAIL, its products and its acquisition, and related to the conduct and compensation of certain members of Illumina and GRAIL management, among other things. Illumina is cooperating with the SEC in this investigation.
| 8. INCOME TAXES | ||
Our effective tax rates for Q2 2023 and YTD 2023 were (163.8)% and (38.5)%, respectively, compared to 16.0% and 9.7% in Q2 2022 and YTD 2022, respectively. The variance from the U.S. federal statutory tax rate of 21% in Q2 2023 and YTD 2023 was primarily attributable to the $112 million and net $64 million income tax expense impact of research and development expense capitalization for tax purposes, respectively, and the $69 million and net $25 million income tax expense impact of GRAIL pre-acquisition net operating losses on global intangible low-taxed
27
income (GILTI) and the utilization of U.S. foreign tax credits, respectively. This was partially offset by 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.
Historically we calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q2 2023 and YTD 2023 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q2 2023 and YTD 2023.
As of July 2, 2023 and January 1, 2023, prepaid income taxes included within prepaid expenses and other current assets on the condensed consolidated balance sheets were $123 million and $116 million, respectively.
| 9. SEGMENT INFORMATION | ||
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.
| In millions | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Core Illumina | $ | 1,159 | $ | 1,156 | $ | 2,235 | $ | 2,377 | ||||||||||||
| GRAIL | 22 | 12 | 42 | 22 | ||||||||||||||||
| Eliminations | (5) | (6) | (14) | (13) | ||||||||||||||||
| Consolidated revenue | $ | 1,176 | $ | 1,162 | $ | 2,263 | $ | 2,386 | ||||||||||||
| Income (loss) from operations: | ||||||||||||||||||||
| Core Illumina | $ | 115 | $ | (396) | $ | 257 | $ | (34) | ||||||||||||
| GRAIL | (204) | (187) | (408) | (359) | ||||||||||||||||
| Eliminations | 1 | 4 | (1) | (2) | ||||||||||||||||
| Consolidated loss from operations | $ | (88) | $ | (579) | $ | (152) | $ | (395) | ||||||||||||
Total other expense, net primarily relates to Core Illumina and we do not allocate income taxes to our segments.
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| MANAGEMENT’S DISCUSSION & ANALYSIS | ||
•Management’s Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.
•Results of Operations. Detailed discussion of our revenues and expenses.
•Liquidity and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.
•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.
•Quantitative and Qualitative Disclosure About Market Risk. Discussion of our financial instruments’ exposure to market risk.
Our discussion of our results of operations, financial condition, and cash flow for Q2 2022 and YTD 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our filing of Form 10-Q for the fiscal quarter ended July 3, 2022.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. See “Consideration Regarding Forward-Looking Statements” preceding the Condensed Consolidated Financial Statements section of this report for additional factors relating to such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended January 1, 2023. Operating results are not necessarily indicative of results that may occur in future periods.
MANAGEMENT’S OVERVIEW AND OUTLOOK
This overview and outlook provide a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report.
About Illumina
Our focus on innovation has established us as a global leader in DNA sequencing and array-based technologies, 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. Our comprehensive line of products addresses the scale of experimentation and breadth of functional analysis to advance disease research, drug development, and the development of molecular tests. This portfolio of leading-edge sequencing and array-based solutions addresses a range of genomic complexity and throughput, enabling researchers and clinical practitioners to select the best solution for their scientific challenge.
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On August 18, 2021, we acquired GRAIL, a healthcare company focused on early detection of multiple cancers. GRAIL’s Galleri blood test detects various types of cancers before they are symptomatic. We believe our acquisition of GRAIL will accelerate the adoption of next-generation sequencing based early multi-cancer detection tests, enhance our position in Clinical Genomics, and increase our directly accessible total addressable market. The acquisition is subject to ongoing legal proceedings and, currently, GRAIL must be held and operated separately and independently from Illumina pursuant to interim measures ordered by the European Commission, which prohibited our acquisition of GRAIL on September 6, 2022. See note “7. Legal Proceedings” for further details.
We have two reportable segments, Core Illumina and GRAIL. Core Illumina relates to our core operations, excluding the results of GRAIL. See note “9. Segment Information” for additional details.
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto within the Condensed Consolidated Financial Statements section of this report, and the other transactions, events, and trends discussed in “Risk Factors” within the Other Key Information section of this report.
Financial Overview
Since 2020, the COVID-19 pandemic and international efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions where we sell our products and services and conduct our business operations. In addition, armed conflict between Russia and Ukraine, which began in 2022, and the sanctions imposed by the U.S. and other countries, has impacted our ability to ship products into affected regions and to designated customers. Furthermore, macroeconomic factors such as inflation, exchange rates and concerns about an economic downturn, and competitive challenges in our China region, have impacted both Illumina directly and our customers’ behavior. For example, some customers experienced supply chain pressures that delayed their lab expansions and others are managing inventory and capital more conservatively. We expect these factors to continue to impact our sales and results of operations in 2023, the size and duration of which is significantly uncertain.
Financial highlights for YTD 2023 included the following:
•Revenue decreased 5.2% in YTD 2023 to $2,263 million compared to $2,386 million in YTD 2022 primarily due to decreases in sequencing consumables revenue and sequencing instruments revenue, partially offset by an increase in GRAIL service and other revenue. We now expect revenue to grow 1% in 2023 compared to 2022.
•Gross profit as a percentage of revenue (gross margin) was 61.3% in YTD 2023 compared to 66.3% in YTD 2022. The decrease in gross margin was driven primarily by less fixed cost leverage on lower manufacturing volumes and lower instrument margins due to the NovaSeq X launch in Q1 2023. Our gross margin depends on many factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, services, and development and licensing revenue; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; freight costs; and product support obligations.
•Loss from operations was $152 million in YTD 2023 compared to $395 million in YTD 2022. The decrease was primarily due to a decrease in operating expense of $440 million, which included a significant decrease in legal contingency and settlement, partially offset by a $197 million decrease in gross profit. We continue to focus on our cost reduction initiatives to accelerate progress toward higher margins and create flexibility for further investment in high-growth areas.
•Our effective tax rate was (38.5)% in YTD 2023 compared to 9.7% in YTD 2022. The variance from the U.S. federal statutory tax rate of 21% was primarily because of the income tax expense impact of research and development expense capitalization for tax purposes, and the income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits. This was partially offset by 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.
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•We ended Q2 2023 with cash, cash equivalents, and short-term investments totaling $1.6 billion, of which approximately $413 million was held by our foreign subsidiaries.
RESULTS OF OPERATIONS
To enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified reporting periods, stated as a percentage of total revenue.(1)
| Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Product revenue | 85.1 | % | 86.6 | % | 85.0 | % | 87.0 | % | |||||||||||||||
| Service and other revenue | 14.9 | 13.4 | 15.0 | 13.0 | |||||||||||||||||||
| Total revenue | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Cost of product revenue | 25.9 | 24.7 | 26.1 | 24.6 | |||||||||||||||||||
| Cost of service and other revenue | 7.7 | 5.9 | 8.4 | 5.8 | |||||||||||||||||||
| Amortization of acquired intangible assets | 4.2 | 3.4 | 4.2 | 3.3 | |||||||||||||||||||
| Total cost of revenue | 37.8 | 34.0 | 38.7 | 33.7 | |||||||||||||||||||
| Gross profit | 62.2 | 66.0 | 61.3 | 66.3 | |||||||||||||||||||
| Operating expense: | |||||||||||||||||||||||
| Research and development | 30.4 | 28.1 | 30.9 | 27.3 | |||||||||||||||||||
| Selling, general and administrative | 38.3 | 35.4 | 36.4 | 30.1 | |||||||||||||||||||
| Legal contingency and settlement | 1.0 | 52.3 | 0.7 | 25.5 | |||||||||||||||||||
| Total operating expense | 69.7 | 115.8 | 68.0 | 82.9 | |||||||||||||||||||
| Loss from operations | (7.5) | (49.8) | (6.7) | (16.6) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 1.4 | 0.1 | 1.5 | — | |||||||||||||||||||
| Interest expense | (1.6) | (0.5) | (1.7) | (0.5) | |||||||||||||||||||
| Other income (expense), net | 0.1 | (4.6) | (0.5) | (3.8) | |||||||||||||||||||
| Total other expense, net | (0.1) | (5.0) | (0.7) | (4.3) | |||||||||||||||||||
| Loss before income taxes | (7.6) | (54.8) | (7.4) | (20.9) | |||||||||||||||||||
| Provision (benefit) for income taxes | 12.3 | (8.8) | 2.8 | (2.1) | |||||||||||||||||||
| Net loss | (19.9) | % | (46.0) | % | (10.2) | % | (18.8) | % | |||||||||||||||
_____________
(1)Percentages may not recalculate due to rounding.
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Revenue
| Dollars in millions | Q2 2023 | Q2 2022 | Change | % Change | YTD 2023 | YTD 2022 | Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Core Illumina: | |||||||||||||||||||||||||||||||||||||||||||||||
| Consumables | $ | 809 | $ | 818 | $ | (9) | (1) | % | $ | 1,579 | $ | 1,676 | $ | (97) | (6) | % | |||||||||||||||||||||||||||||||
| Instruments | 197 | 193 | 4 | 2 | 357 | 412 | (55) | (13) | |||||||||||||||||||||||||||||||||||||||
| Total product revenue | 1,006 | 1,011 | (5) | — | 1,936 | 2,088 | (152) | (7) | |||||||||||||||||||||||||||||||||||||||
| Service and other revenue | 153 | 145 | 8 | 6 | 299 | 289 | 10 | 3 | |||||||||||||||||||||||||||||||||||||||
| Total Core Illumina revenue | 1,159 | 1,156 | 3 | — | 2,235 | 2,377 | (142) | (6) | |||||||||||||||||||||||||||||||||||||||
| GRAIL: | |||||||||||||||||||||||||||||||||||||||||||||||
| Service and other revenue | 22 | 12 | 10 | 83 | 42 | 22 | 20 | 91 | |||||||||||||||||||||||||||||||||||||||
| Eliminations | (5) | (6) | 1 | (17) | (14) | (13) | (1) | 8 | |||||||||||||||||||||||||||||||||||||||
| Total consolidated revenue | $ | 1,176 | $ | 1,162 | $ | 14 | 1 | % | $ | 2,263 | $ | 2,386 | $ | (123) | (5) | % | |||||||||||||||||||||||||||||||
The decrease in Core Illumina consumables revenue in Q2 2023 and YTD 2023 was primarily due to a decrease in sequencing consumables revenue of $5 million and $96 million, respectively, driven primarily by lower NovaSeq 6000 consumables pull-through as some of our high throughput customers continue to transition to NovaSeq X, as well as customers managing tighter inventory given the continued impact of challenging macroeconomic factors. Core Illumina instruments revenue slightly increased in Q2 2023 due to shipments of our NovaSeq X instrument, offset by fewer shipments of our NovaSeq 6000 instrument. Core Illumina instruments revenue decreased in YTD 2023 due to a decrease in sequencing instruments revenue of $55 million, driven primarily by fewer shipments of our NovaSeq 6000, NextSeq 550, and MiSeq instruments, partially offset by shipments of NovaSeq X that launched in Q1 2023. Core Illumina service and other revenue increased in Q2 2023 and YTD 2023 primarily due to increased revenue from extended maintenance service contracts on a growing installed base, partially offset by decreases in revenues from development and licensing agreements. The increase in YTD 2023 was also partially offset by decreases in genotyping services revenue. Additionally, Core Illumina revenue was adversely impacted by $11 million and $35 million in Q2 2023 and YTD 2023, respectively, due to unfavorable foreign exchange rate fluctuations, which is net of the amounts reclassified to revenue of $2 million and $3 million in Q2 2023 and YTD 2023, respectively, related to our cash flow hedges.
GRAIL service and other revenue increased $10 million, or 83%, and $20 million, or 91%, in Q2 2023 and YTD 2023, respectively, primarily due to sales of Galleri.
Gross Margin
| Dollars in millions | Q2 2023 | Q2 2022 | Change | % Change | YTD 2023 | YTD 2022 | Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Gross profit (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Core Illumina | $ | 760 | $ | 801 | $ | (41) | (5) | % | $ | 1,446 | $ | 1,651 | $ | (205) | (12) | % | |||||||||||||||||||||||||||||||
| GRAIL | (24) | (29) | 5 | (17) | (50) | (58) | 8 | (14) | |||||||||||||||||||||||||||||||||||||||
| Eliminations | (4) | (5) | 1 | (20) | (10) | (10) | — | — | |||||||||||||||||||||||||||||||||||||||
| Consolidated gross profit | $ | 732 | $ | 767 | $ | (35) | (5) | % | $ | 1,386 | $ | 1,583 | $ | (197) | (12) | % | |||||||||||||||||||||||||||||||
| Gross margin: | |||||||||||||||||||||||||||||||||||||||||||||||
| Core Illumina | 65.5 | % | 69.3 | % | 64.7 | % | 69.5 | % | |||||||||||||||||||||||||||||||||||||||
| GRAIL | * | * | * | * | |||||||||||||||||||||||||||||||||||||||||||
| Consolidated gross margin | 62.2 | % | 66.0 | % | 61.3 | % | 66.3 | % | |||||||||||||||||||||||||||||||||||||||
________________
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*Not meaningful.
The decrease in Core Illumina gross margin in Q2 2023 and YTD 2023 was driven primarily by less fixed cost leverage on lower manufacturing volumes, lower instrument margins due to the NovaSeq X launch, which is typical with a new platform introduction until we scale manufacturing and gain operating efficiencies, and increased field services and installation costs.
GRAIL gross loss in Q2 2023 and Q2 2022 and YTD 2023 and YTD 2022 was primarily due to amortization of intangible assets of $33 million and $67 million, respectively.
Operating Expense
| Dollars in millions | Q2 2023 | Q2 2022 | Change | % Change | YTD 2023 | YTD 2022 | Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Research and development: | |||||||||||||||||||||||||||||||||||||||||||||||
| Core Illumina | $ | 274 | $ | 249 | $ | 25 | 10 | % | $ | 532 | $ | 486 | $ | 46 | 9 | % | |||||||||||||||||||||||||||||||
| GRAIL | 89 | 86 | 3 | 3 | 175 | 171 | 4 | 2 | |||||||||||||||||||||||||||||||||||||||
| Eliminations | (5) | (8) | 3 | (38) | (8) | (7) | (1) | 14 | |||||||||||||||||||||||||||||||||||||||
| Consolidated research and development | 358 | 327 | 31 | 9 | 699 | 650 | 49 | 8 | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative: | |||||||||||||||||||||||||||||||||||||||||||||||
| Core Illumina | 359 | 339 | 20 | 6 | 641 | 590 | 51 | 9 | |||||||||||||||||||||||||||||||||||||||
| GRAIL | 91 | 72 | 19 | 26 | 184 | 130 | 54 | 42 | |||||||||||||||||||||||||||||||||||||||
| Eliminations | — | (1) | 1 | (100) | (1) | (1) | — | — | |||||||||||||||||||||||||||||||||||||||
| Consolidated selling, general and administrative | 450 | 410 | 40 | 10 | 824 | 719 | 105 | 15 | |||||||||||||||||||||||||||||||||||||||
| Legal contingency and settlement: | |||||||||||||||||||||||||||||||||||||||||||||||
| Core Illumina | 12 | 609 | (597) | (98) | 15 | 609 | (594) | (98) | |||||||||||||||||||||||||||||||||||||||
| Total consolidated operating expense | $ | 820 | $ | 1,346 | $ | (526) | (39) | % | $ | 1,538 | $ | 1,978 | $ | (440) | (22) | % | |||||||||||||||||||||||||||||||
Core Illumina R&D expense increased by $25 million, or 10%, in Q2 2023 and by $46 million, or 9%, in YTD 2023 primarily due to an increase in compensation related expenses, including performance-based compensation, as we continue to invest in the research and development of new products and enhancements to existing products, and $12 million for restructuring activities that commenced in Q2 2023, primarily related to employee separation costs.
GRAIL R&D expense increased by $3 million, or 3%, in Q2 2023 and by $4 million, or 2%, in YTD 2023 primarily due to an increase in headcount, including an increase in performance-based compensation, partially offset by lower spend on clinical trials.
Core Illumina SG&A expense increased by $20 million, or 6%, in Q2 2023 and by $51 million, or 9%, in YTD 2023 primarily due to an increase in compensation related expenses, including performance-based compensation, $17 million for restructuring activities that commenced in Q2 2023, consisting primarily of employee separation costs and lease and other asset impairments of $7 million, and costs related to the proxy contest of $25 million and $31 million, respectively, partially offset by decreases in travel and professional services costs. The increase in Q2 2023 was also partially offset by a $10 million favorable impact related to our contingent consideration liability for GRAIL. The increase in YTD 2023 was also due to a $39 million unfavorable loss related to our contingent consideration liability for GRAIL.
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GRAIL SG&A expense increased by $19 million, or 26%, in Q2 2023 and by $54 million, or 42%, in YTD 2023 primarily due to an increase in headcount, including an increase in performance-based compensation, and professional services.
Core Illumina legal contingency and settlement in Q2 2023 consisted of an adjustment to our previously recorded accrual for the fine imposed by the European Commission in July 2023. Refer to note “7. Legal Proceedings” for additional details. Core Illumina legal contingency and settlement in YTD 2023 also consisted of a loss related to a patent litigation settlement in Q1 2023. Core Illumina legal contingency and settlement for Q2 2022 and YTD 2022 consisted of an estimated accrual of $453 million related to the fine imposed by the European Commission in July 2023 and an accrual of $156 million related to the settlement of our litigation with BGI.
Other Income (Expense)
| Dollars in millions | Q2 2023 | Q2 2022 | Change | % Change | YTD 2023 | YTD 2022 | Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Interest income | $ | 17 | $ | 1 | $ | 16 | 1,600 | % | $ | 34 | $ | 1 | $ | 33 | 3,300 | % | |||||||||||||||||||||||||||||||
| Interest expense | (19) | (6) | (13) | 217 | (39) | (12) | (27) | 225 | |||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 1 | (53) | 54 | (102) | (10) | (91) | 81 | (89) | |||||||||||||||||||||||||||||||||||||||
| Total other expense, net | $ | (1) | $ | (58) | $ | 57 | (98) | % | $ | (15) | $ | (102) | $ | 87 | (85) | % | |||||||||||||||||||||||||||||||
Total other expense, net primarily relates to the Core Illumina segment.
Interest income consisted primarily of interest on our money market funds, which benefited from higher yields in Q2 2023 and YTD 2023 due to rising interest rates. Interest expense consisted primarily of interest on our Term Notes and increased in Q2 2023 and YTD 2023 due to the issuance of our 2025 and 2027 Term Notes in December 2022. The fluctuation in other income (expense), net in Q2 2023 and YTD 2023 was primarily due to lower net losses recognized on our strategic investments, as well as favorable impacts related to our deferred compensation plan assets and Helix contingent value right. We recognized net losses on our strategic investments of $3 million and $19 million in Q2 2023 and YTD 2023, respectively, and $32 million and $76 million in Q2 2022 and YTD 2022, respectively.
Provision (Benefit) for Income Taxes
| Dollars in millions | Q2 2023 | Q2 2022 | Change | % Change | YTD 2023 | YTD 2022 | Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Loss before income taxes | $ | (89) | $ | (637) | $ | 548 | (86) | % | $ | (167) | $ | (497) | $ | 330 | (66) | % | |||||||||||||||||||||||||||||||
| Provision (benefit) for income taxes | 145 | (102) | 247 | (242) | 64 | (48) | 112 | (233) | |||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (234) | $ | (535) | $ | 301 | (56) | % | $ | (231) | $ | (449) | $ | 218 | (49) | % | |||||||||||||||||||||||||||||||
| Effective tax rate | (163.8) | % | 16.0 | % | (38.5) | % | 9.7 | % | |||||||||||||||||||||||||||||||||||||||
Our effective tax rate was (163.8)% and (38.5)% in Q2 2023 and YTD 2023, respectively, compared to 16.0% and 9.7% in Q2 2022 and YTD 2022, respectively. The variance from the U.S. federal statutory tax rate of 21% for Q2 2023 and YTD 2023 was primarily because of the $112 million and net $64 million income tax expense impact of capitalizing research and development expenses for tax purposes, respectively, and the $69 million and net $25 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits, respectively. The income tax expense in Q2 2023 and YTD 2023 were also favorably impacted by 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.
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The income tax benefits in Q2 2022 and YTD 2022 had an effective tax rate that was lower than the U.S. federal statutory tax rate of 21% primarily because of the $95 million income tax expense impact from the potential European Commission fine related to the GRAIL transaction which is nondeductible for tax purposes, the $23 million and $27 million income tax expense impact of capitalizing research and development expenses, respectively, and the $6 million and $31 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of the U.S. foreign tax credits, respectively. Our effective tax rate in Q2 2022 and YTD 2022 were also favorably impacted by 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.
Historically we calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q2 2023 and YTD 2023 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q2 2023 and YTD 2023.
Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 2023, we had approximately $1.6 billion in cash and cash equivalents, of which approximately $413 million was held by our foreign subsidiaries. Cash and cash equivalents decreased by $458 million from January 1, 2023 due primarily to the repayment of our 2023 Term Notes in Q1 2023 of $500 million and other factors described in the “Cash Flow Summary” below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, has been cash flows from operations and, from time to time, issuances of debt. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs. Historically, we have liquidated our short-term investments and/or issued debt to finance our business needs as a supplement to cash provided by operating activities. As of July 2, 2023, we had $6 million in short-term investments comprised of marketable equity securities.
On July 12, 2023, as a result of our decision to proceed with the completion of our acquisition of GRAIL during the pendency of the European Commission’s review, the European Commission imposed a €432 million fine on us, representing the maximum fine of 10% of our consolidated annual revenues for fiscal year 2022. As of July 2, 2023, we accrued $471 million included in accrued liabilities. Refer to note “7. Legal Proceedings” for additional details.
In March 2021, we issued term notes due 2023 with an aggregate principal amount of $500 million and term notes due 2031 with an aggregate principal amount of $500 million. The 2023 Term Notes matured and were repaid in cash on March 23, 2023. The 2031 Term Notes, which mature on March 23, 2031, accrue interest at a rate of 2.550% per annum, payable semi-annually in March and September of each year. We may redeem for cash all or any portion of the 2031 Term Notes, at our option, at any time prior to maturity.
Our convertible senior notes, with an aggregate principal amount of $750 million, which are due on August 15, 2023 and are classified as short-term, became convertible on May 15, 2023 and remain convertible until August 11, 2023. As of August 9, 2023, none of the notes had been converted.
In December 2022, we issued term notes due 2025 with an aggregate principal amount of $500 million and term notes due 2027 with an aggregate principal amount of $500 million. The 2025 Term Notes, which mature on December 12, 2025, and the 2027 Term Notes, which mature on December 13, 2027, accrue interest at a rate of 5.800% and 5.750% per annum, respectively, payable semi-annually in June and December of each year. We may redeem for cash all or any portion of the 2025 or 2027 Term Notes, at our option, at any time prior to maturity.
On January 4, 2023, we obtained a new Credit Facility, 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 matures, and all amounts outstanding thereunder become due and payable in
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full, on January 4, 2028, subject to two one-year extensions at our option and the consent of the extending lenders and certain other conditions. As of July 2, 2023, there were no borrowings outstanding under the Credit Facility; however, we may draw upon the facility in the future to manage cash flow or for other corporate purposes, including in connection with the payment of the €432 million European Commission fine. We are planning to issue a guarantee and defer the payment of the European Commission fine pending the outcome of our appeal of the EU General Court’s ruling that the European Commission has jurisdiction to review our acquisition of GRAIL under the EU Merger Regulation.
As of July 2, 2023, the fair value of our contingent consideration liability related to our acquisition of GRAIL was $440 million, of which $439 million was included in other long-term liabilities. The contingent value rights issued as part of the acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. 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. We expect Covered Revenues for Q2 2023 to be approximately $22 million and for related Covered Revenue Payments to total approximately $209,000 in Q3 2023. In YTD 2023, we paid $400,000 in aggregate Covered Revenue Payments related to Covered Revenues for Q4 2022 and Q1 2023 of $42 million in aggregate.
We grant cash incentive equity awards to GRAIL employees that generally have terms of four years and vest in equal annual installments. As of July 2, 2023, the aggregate cash value of awards outstanding and unvested was $354 million, and we accrued an estimated liability of $57 million, included in accrued liabilities. In addition, we have an outstanding performance-based award for which vesting is based on GRAIL’s future revenues. The award has an aggregate potential value of up to $78 million, which is expected to be settled in cash, and expires, to the extent unvested, in August 2030. As of July 2, 2023, it was not probable that the performance conditions associated with the award will be achieved.
We had $6 million and up to $81 million, respectively, remaining in our capital commitments to two venture capital investment funds as of July 2, 2023 that are callable through April 2026 and July 2029, respectively.
Authorizations to repurchase $15 million of our common stock remained available as of July 2, 2023 under the $750 million share repurchase program authorized by our Board of Directors on February 5, 2020. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. We do not intend to make any share repurchases during fiscal year 2023.
We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities and available borrowing capacity under the Credit Facility, are sufficient to fund our near-term capital and operating needs for at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:
•support of commercialization efforts related to our current and future products;
•acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
•the continued advancement of research and development efforts;
•the payment of the European Commission fine related to our acquisition of GRAIL;
•potential strategic acquisitions and investments;
•repayment of debt obligations; and
•the expansion needs of our facilities, including costs of leasing and building out additional facilities.
We expect that our revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
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•our ability to successfully commercialize and further develop our technologies and create innovative products in our markets;
•scientific progress in our research and development programs and the magnitude of those programs;
•competing technological and market developments; and
•the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.
Cash Flow Summary
| In millions | YTD 2023 | YTD 2022 | |||||||||
| Net cash provided by operating activities | $ | 115 | $ | 297 | |||||||
| Net cash used in investing activities | (93) | (239) | |||||||||
| Net cash (used in) provided by financing activities | (476) | 16 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (4) | (17) | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (458) | $ | 57 | |||||||
Operating Activities
Net cash provided by operating activities in YTD 2023 primarily consisted of a net loss of $231 million, plus net adjustments of $515 million, less net changes in operating assets and liabilities of $169 million. The primary adjustments to net loss included depreciation and amortization expense of $215 million, share-based compensation expense of $199 million, deferred income taxes of $36 million, and change in fair value of contingent consideration liabilities of $28 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increases in accounts receivable and inventory and a decrease in accounts payable, partially offset by an increase in accrued liabilities.
Investing Activities
Net cash used in investing activities totaled $93 million in YTD 2023. We invested $99 million in capital expenditures, primarily associated with our investment in facilities, which was partially offset by sales of our strategic investments of $18 million.
Financing Activities
Net cash used in financing activities totaled $476 million in YTD 2023. We used $500 million to repay our 2023 Term Notes in Q1 2023 and used $12 million to pay taxes related to net share settlement of equity awards, partially offset by $37 million received in proceeds from the sale of shares under our employee stock purchase plan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income (loss) and net income (loss), as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Critical Accounting Policies and Estimates” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Though the COVID-19 pandemic, the armed conflict between Russia and Ukraine, and macroeconomic factors such as inflation, exchange rates and concerns about an economic downturn present additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. There were no material changes to our critical accounting policies and estimates during YTD 2023, with the exception of income taxes as disclosed in note “1. Organization and Significant Accounting Policies.”
RECENT ACCOUNTING PRONOUNCEMENTS
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For a summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, see note “1. Organization and Significant Accounting Policies” within the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no substantial changes to our market risks in YTD 2023, when compared to the disclosures in “Quantitative and Qualitative Disclosures about Market Risk” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
| OTHER KEY INFORMATION | ||
We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.
During the second quarter of 2023, we continued to monitor and evaluate the design and operating effectiveness of key controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.
Based on management’s evaluation (under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO)), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
LEGAL PROCEEDINGS
See discussion of legal proceedings in note “7. Legal Proceedings” in the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.
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RISK FACTORS
Our business is subject to various risks, including those described in “Risk Factors” within the Business & Market Information Section of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, and the “Other Key Information” section of our Quarterly Report on Form 10-Q for the period ended April 2, 2023, which we strongly encourage you to review. In addition to the risk factors disclosed in our Form 10-K, the issues raised in the following risk factor could adversely affect our operating results and stock price:
Our acquisition (the Acquisition) of GRAIL remains subject to ongoing legal and regulatory proceedings in the United States and in the European Union. Adverse decisions by the EU and/or U.S. courts, the European Commission, the FTC and/or other governmental or regulatory authorities, that have been issued in the past or may be issued in the future, and/or other adverse consequences resulting from our decision to proceed with the completion of the acquisition, could result in significant financial penalties, operational restrictions, increased costs or loss of revenues, implicate our existing contractual arrangements or require us to divest all or a portion of the assets or equity interests of GRAIL on terms that are materially worse than the terms on which we acquired GRAIL, any or all of which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operation.
As previously disclosed, on March 30, 2021, the FTC filed an administrative complaint alleging that our acquisition of GRAIL (the Acquisition) would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. On September 1, 2022, the administrative law judge (the ALJ) ruled in favor of Illumina and found that the acquisition of GRAIL did not violate Section 7 of the Clayton Act. The FTC’s complaint counsel appealed the ALJ’s decision to the full FTC on September 2, 2022. On March 31, 2023, the FTC issued an opinion and order (the FTC Order) requiring Illumina to divest GRAIL, reversing the ALJ’s ruling. On April 5, 2023, Illumina filed a petition for review of the FTC Order in the U.S. Court of Appeals for the Fifth Circuit. On April 24, 2023, the FTC granted a motion staying in its entirety the FTC Order pending resolution of Illumina’s Fifth Circuit appeal. Illumina submitted its opening appeal brief on June 5, 2023. The FTC submitted its opposition brief on July 26, 2023, and Illumina’s reply brief is due on August 16, 2023. Oral argument is scheduled for September 12, 2023. We intend to continue to vigorously defend against the FTC action.
As previously disclosed, on April 19, 2021, the European Commission accepted a request for referral of the Acquisition (the Referral) for European Union merger review under Article 22(1) of Council Regulation (EC) No 139/2004 (the EU Merger Regulation), which had been submitted by a Member State of the European Union. On July 13, 2022, the EU General Court ruled that the European Commission has jurisdiction to review the Acquisition under the EU Merger Regulation. On September 22, 2022, we filed an appeal in the Court of Justice of the European Union asking for annulment of the EU General Court’s decision.
As previously disclosed, on October 29, 2021, the European Commission adopted an order imposing interim measures (the Initial Interim Measures Order), which was renewed on October 28, 2022 (subject to certain operational modifications and also expressly prohibits Illumina from selling, transferring, encumbering or otherwise disposing of GRAIL or any of GRAIL’s assets), provided that (i) we ensure that Illumina and GRAIL will continue to operate as independent legal entities that transact at arms’ length, no integration activity will take place, the day-to-day operation of GRAIL will remain the sole responsibility of GRAIL’s management and our management will have no involvement in or influence over GRAIL, (ii) we take certain supportive measures to preserve GRAIL’s viability, marketability and competitiveness, including with respect to the provision of resources to GRAIL and the retention and/or replacement of key personnel of GRAIL, (iii) subject to limited exceptions, we implement all necessary measures to ensure that Illumina does not obtain any confidential information relating to GRAIL during the hold separate period and vice versa and (iv) we appoint an independent firm as monitoring trustee to monitor our compliance with the Initial Interim Measures Order. An independent monitoring trustee has been appointed. Such hold separate arrangement, and our obligations pursuant thereto, have imposed implementation and administrative processes and additional legal, financial advisory, regulatory and other professional services costs, which have been burdensome to implement and administer, and which we expect to continue for the duration of the hold separate arrangement (pursuant to the New Interim Measures Order or any replacement thereof). Such burdens and additional costs, independently or together with additional burdens, costs and/or liabilities arising from such arrangement, may result in loss of revenue and other adverse effects on our business, financial condition and results of operations and have an adverse impact on our ability to achieve the anticipated benefits of the Acquisition, as further explained below. Moreover, our failure to comply with the terms of the New Interim Measures Order may result in the European Commission seeking to impose fines or other penalties on us. On January 10, 2023, we filed an action with the EU General Court asking for annulment of the New Interim Measures Order. On January 20, 2023, the European Commission requested that these proceedings be stayed pending our appeal on jurisdiction.
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We submitted a filing indicating that we had no objections to the European Commission’s request, and the EU General Court stayed the proceedings on February 21, 2023.
On September 6, 2022, the European Commission announced that it had completed its Phase II review of the Acquisition and adopted a final decision (the Prohibition Decision), which found that, in its view, our acquisition of GRAIL was incompatible with the internal market in Europe because it results in a significant impediment to effective competition. On November 17, 2022, we filed an action with the EU General Court asking for annulment of the Prohibition Decision. On December 5, 2022, the European Commission issued a Statement of Objections informing Illumina of the order it intends to adopt requiring us (among other things) to divest GRAIL (the EC Divestment Decision). We filed a response to the Statement of Objections on January 16, 2023. There can be no assurance that our Statement of Objections nor any appeal we may file in the future will be successful. We also cannot predict when the EC’s Divestment Decision may be adopted.
The Prohibition Decision, and the EC Divestment Decision, and any order or decision by the FTC or any other governmental or regulatory authority pursuant to which Illumina is required to divest GRAIL (an FTC Divestment Decision), if implemented once final and non-appealable or during the pendency of the applicable appeals proceedings, and our obligations pursuant thereto, have imposed in the past and may will impose in the future significant costs and additional liabilities on us, including significant legal, financial advisory, regulatory and other professional services fees and additional expenses, and may result in loss of revenue and other adverse effects on our business, financial condition and results of operations. Such adverse effects could include being required to divest GRAIL on terms that are materially worse than the terms on which we acquired GRAIL. Furthermore, we may not be able to direct the timing, structure or financial terms of such divestment, which could result in negative financial or tax consequences. For example, we are unlikely to be able to, in a sale of GRAIL, effect such sale in a non-taxable transaction and so would incur significant tax liabilities attributable to the recognition of taxable gain equal to the difference between (i) the fair market value of any consideration received and (ii) our tax basis in GRAIL (which tax basis is currently estimated to be between $500 million and $1 billion). In addition, any such divestment will likely implicate certain provisions in our third-party contracts and other agreements, including our obligations with respect to contingent value rights (the CVRs) issued by us as part of the Acquisition, which may adversely affect us and our business and/or the market value of the CVRs or have other consequences. For example, we may be unable to fully discharge our obligations with respect to the CVRs in connection with any such divestiture, and/or such divestiture may result in a change in obligor on the CVRs. Moreover, the business of GRAIL may be adversely affected by any such divestment, which could adversely affect the market value of the CVRs.
Furthermore, even if an order or decision by the European Commission, General Court of EU, FTC or any other governmental or regulatory authority, approves the Acquisition, the delay in the approval or/and the imposition of conditions not part of the Acquisition agreement, could adversely affect the synergies and benefits we anticipate from the integration of GRAIL in our operations and may result in loss of revenue and other adverse effects on our business, financial condition and results of operations.
The Initial Interim Measures Order, the New Interim Measures Order, the Prohibition Decision, and the implementation of the EC Divestment Decision, or an FTC Divestment Decision or any other order or decision by any other governmental or regulatory authority, if implemented once final and non-appealable or during the pendency of the applicable appeals proceedings, have in the past and could may also in the future divert management’s attention and company resources away from existing operations and other opportunities that may have been beneficial to us, any or all of which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operation. We have experienced and might continue to experience negative impacts on our stock price. We cannot predict what other adverse consequences to, among other things, our reputation, our relationships with governmental or regulatory authorities, or our ability to successfully complete future transactions, our ability to attract, retain and motivate customers, key personnel and those with whom we conduct business may result.
On July 12, 2023, the European Commission adopted a final decision finding that we breached the EU Merger Regulation by, in its view, acquiring the possibility to exert decisive influence over GRAIL and exerting such influence during the pendency of the European Commission’s review (the Article 14(2)(b) Decision). The European Commission therefore imposed a fine on us pursuant to Article 14(2)(b) of the EU Merger Regulation of approximately €432 million, representing the maximum fine of 10% of our consolidated annual revenues for fiscal year 2022. As of July 2, 2023, we accrued $471 million included in accrued liabilities. In addition, the European Commission, the FTC and/or other governmental or regulatory authorities may seek to impose other fines, penalties, remedies or restrictions. We also cannot predict what other adverse consequences to, among other things, our reputation, our relationships with governmental or regulatory authorities or our ability to successfully complete future acquisitions and/or divestitures may result from our decision to proceed with the completion of the Acquisition. We expect to continue to hold the assets or equity interests of GRAIL separate until the applicable legal and regulatory proceedings are completed or, if required, a divestment of GRAIL is effected, and such inability to
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integrate may materially and adversely affect or prevent the synergies and other benefits we expect to achieve as a result of the Acquisition and could result in additional costs or liabilities, loss of revenue and other adverse effects on our business, financial condition and results of operations. In addition, under applicable accounting rules, we may be required from time to time to perform interim analyses of the value of GRAIL. To the extent that the value of GRAIL on a standalone basis is less than its book value, we would be required to record an impairment on our consolidated financial statements.
SHARE REPURCHASES AND SALES
Purchases of Equity Securities by the Issuer
None during the quarterly period ended July 2, 2023.
Unregistered Sales of Equity Securities
None during the quarterly period ended July 2, 2023.
ADOPTIONS, MODIFICATIONS OR TERMINATIONS OF TRADING PLANS
During the quarterly period ended July 2, 2023, the following directors and officers adopted, modified or terminated 10b5-1 plans:
•On May 30, 2023, Phil Febbo, Chief Medical Officer, entered in a new arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). The arrangement terminates on December 31, 2024 and provides for the sale of up to 9,294 shares.
•On May 9, 2023, Alex Aravanis, Chief Technology Officer, Head of Research and Product Development, entered in a new arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). The arrangement terminates on May 9, 2024 and provides for the sale of up to 15,486 shares.
On August 7, 2023, Phil Febbo departed the Company, and on August 9, 2023, the Company announced that Alex Aravanis will also depart the Company.
Other than as disclosed above, during the quarterly period ended July 2, 2023, none of the Company’s directors or officers adopted or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
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EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | ||||||||||||||||||||||||||||||||
| +10.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and included as Exhibit 101 | X | ||||||||||||||||||||||||||||||||||||
__________________________________
+ Management contract or corporate plan or arrangement
* Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.
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FORM 10-Q CROSS-REFERENCE INDEX
| Page | |||||
| PART I. FINANCIAL INFORMATION | |||||
| PART II. OTHER INFORMATION | |||||
| Item 3. Defaults Upon Senior Securities | None | ||||
| Item 4. Mine Safety Disclosures | Not Applicable | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ILLUMINA, INC. (registrant) | |||||||||||
| Date: | August 10, 2023 | ||||||||||
| By: | /s/ Joydeep Goswami | ||||||||||
| Name: | Joydeep Goswami | ||||||||||
| Title: | Chief Financial Officer, Chief Strategy and Corporate Development Officer | ||||||||||
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