NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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Business Overview
We are a provider of sequencing- and array-based solutions, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.
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 December 29, 2019, from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results could differ from those estimates.
The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, majority-owned or controlled companies, and variable interest entities (VIEs) for which we are the primary beneficiary. 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 Q3 2020 and Q3 2019 refer to the three months ended September 27, 2020 and September 29, 2019, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2020 and 2019 refer to the nine months ended September 27, 2020 and September 29, 2019, respectively, which were both 39 weeks.
Significant Accounting Policies
During Q3 2020 and YTD 2020, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, except as described in Recently Adopted Accounting Pronouncements below.
Recently Adopted Accounting Pronouncements
In May 2020, the SEC issued Final Rule Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, which amends the disclosure requirements applicable to acquisitions and dispositions of businesses, including the required pro forma financial information. The amendments are effective for
us beginning January 1, 2021, with early compliance permitted. Among other changes, the final amendments revised the investment and income tests used to determine whether a business acquisition is significant, and reduced the filing requirements for financial statements and pro forma financial information of a significant acquired business to cover a maximum of two years. We have elected to adopt the amendments in Q3 2020 in connection with our pending acquisition of GRAIL, which is further described in note “3. Investments and Fair Value Measurements”.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. We adopted the standard on its effective date in the first quarter of 2020 using a modified retrospective approach. The cumulative effect of applying the new credit loss standard was not material and, therefore, did not result in an adjustment to retained earnings. There was no material difference to the condensed consolidated financial statements in YTD 2020 due to the adoption of ASU 2016-13.
In accordance with ASU 2016-13, we no longer evaluate whether our available-for-sale debt securities in an unrealized loss position are other than temporarily impaired. Instead, we assess whether such unrealized loss positions are credit-related. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in interest income through an allowance account. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive income (loss). We estimate our allowance for credit losses on our trade receivables as described in our Accounts Receivable policy, below.
Accounts Receivable
Trade accounts receivable are considered past due based on the contractual payment terms. We reserve specific receivables when collectibility is no longer probable. We also reserve a percentage of our trade receivable balance based on collection history and current economic trends that we expect will impact the level of credit losses over the life of our receivables. These reserves are re-evaluated on a regular basis and adjusted, as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.
Accounting Pronouncements Pending Adoption
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new standard reduces the number of accounting models for convertible debt instruments, amends the accounting for certain contracts in an entity’s own equity, and modifies how certain convertible instruments and contracts that may be settled in cash or shares impact the calculation of diluted EPS. The standard is effective for us beginning in the first quarter of 2022, with early adoption permitted in Q1 2021. We are currently evaluating the impact of ASU 2020-06 on the consolidated financial statements.
Earnings per Share
Basic earnings per share attributable to Illumina stockholders is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to Illumina stockholders is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Up to April 25, 2019, the date of Helix Holdings I, LLC’s (Helix) deconsolidation, per-share losses of Helix were included in the consolidated basic and diluted earnings per share computations based on our share of Helix’s securities.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share:
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In millions
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Q3 2020
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Q3 2019
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YTD 2020
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YTD 2019
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Weighted average shares outstanding
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146
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|
147
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|
147
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|
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147
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Effect of potentially dilutive common shares from:
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Equity awards
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1
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1
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1
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1
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Convertible senior notes
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1
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—
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—
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1
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Weighted average shares used in calculating diluted earnings per share
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148
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|
148
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|
148
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149
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Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services, instrument service contracts, and development and licensing agreements.
Revenue by Source
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Q3 2020
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Q3 2019
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In millions
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Sequencing
|
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Microarray
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Total
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Sequencing
|
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Microarray
|
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Total
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Consumables
|
$
|
500
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|
|
$
|
62
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|
|
$
|
562
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|
|
$
|
525
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|
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$
|
75
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|
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$
|
600
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Instruments
|
109
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|
|
5
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|
|
114
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|
|
142
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4
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|
|
146
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|
|
|
|
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|
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|
|
|
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Total product revenue
|
609
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|
|
67
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|
|
676
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|
|
667
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|
|
79
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|
|
746
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|
Service and other revenue
|
99
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|
|
19
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|
|
118
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|
|
138
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|
|
23
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|
|
161
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Total revenue
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$
|
708
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|
|
$
|
86
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|
|
$
|
794
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|
|
$
|
805
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|
|
$
|
102
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|
|
$
|
907
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YTD 2020
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YTD 2019
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In millions
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Sequencing
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Microarray
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Total
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Sequencing
|
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Microarray
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Total
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Consumables
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$
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1,440
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|
|
$
|
178
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|
|
$
|
1,618
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|
|
$
|
1,503
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|
|
$
|
224
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|
|
$
|
1,727
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Instruments
|
276
|
|
|
10
|
|
|
286
|
|
|
376
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|
|
14
|
|
|
390
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|
Total product revenue
|
1,716
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|
|
188
|
|
|
1,904
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|
|
1,879
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|
|
238
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|
|
2,117
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|
Service and other revenue
|
317
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|
|
65
|
|
|
382
|
|
|
353
|
|
|
121
|
|
|
474
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|
Total revenue
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$
|
2,033
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|
|
$
|
253
|
|
|
$
|
2,286
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|
|
$
|
2,232
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|
|
$
|
359
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|
|
$
|
2,591
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Revenue by Geographic Area
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|
|
|
|
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|
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|
|
|
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|
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|
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Based on region of destination (in millions)
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Q3 2020
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Q3 2019
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YTD 2020
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YTD 2019
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Americas
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$
|
436
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|
|
$
|
514
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|
|
$
|
1,248
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|
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$
|
1,463
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Europe, Middle East, and Africa
|
213
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|
|
235
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|
|
602
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|
|
653
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Greater China (1)
|
83
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|
|
95
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|
|
246
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|
|
280
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|
Asia-Pacific
|
62
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|
|
63
|
|
|
190
|
|
|
195
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|
Total revenue
|
$
|
794
|
|
|
$
|
907
|
|
|
$
|
2,286
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|
|
$
|
2,591
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(1) Region includes revenue from China, Taiwan, and Hong Kong.
Performance Obligations
We regularly enter into contracts with multiple performance obligations. Most performance obligations are generally satisfied within a short time frame, approximately three to six months, after the contract execution date. As of September 27, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations
was $735 million, of which approximately 84% is expected to be converted to revenue in the next twelve months, and the remainder thereafter.
Contract Liabilities
Contract liabilities, which consist of deferred revenue and customer deposits, as of September 27, 2020 and December 29, 2019 were $196 million and $209 million, respectively, of which the short-term portions of $154 million and $167 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q3 2020 and YTD 2020 included $30 million and $136 million, respectively, of previously deferred revenue that was included in contract liabilities as of December 29, 2019.
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3. INVESTMENTS AND FAIR VALUE MEASUREMENTS
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Debt Securities
Our short-term investments are primarily available-for-sale debt securities that consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2020
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|
December 29, 2019
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In millions
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Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in government-sponsored entities
|
$
|
62
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|
|
$
|
—
|
|
|
|
|
$
|
62
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
|
|
$
|
18
|
|
Corporate debt securities
|
610
|
|
|
8
|
|
|
|
|
618
|
|
|
627
|
|
|
3
|
|
|
|
|
630
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|
U.S. Treasury securities
|
642
|
|
|
7
|
|
|
|
|
649
|
|
|
616
|
|
|
2
|
|
|
|
|
618
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|
Total
|
$
|
1,314
|
|
|
$
|
15
|
|
|
|
|
$
|
1,329
|
|
|
$
|
1,261
|
|
|
$
|
5
|
|
|
|
|
$
|
1,266
|
|
Realized gains and losses are determined based on the specific-identification method and are reported in interest income.
Contractual maturities of available-for-sale debt securities, as of September 27, 2020, were as follows:
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|
|
|
|
|
In millions
|
Estimated
Fair Value
|
Due within one year
|
$
|
627
|
|
After one but within five years
|
702
|
|
Total
|
$
|
1,329
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|
We have the ability, if necessary, to liquidate any of our cash equivalents and short-term investments to meet our liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying condensed consolidated balance sheets.
Strategic Investments
Marketable Equity Securities
As of September 27, 2020 and December 29, 2019, the fair value of our marketable equity securities, included in short-term investments, totaled $234 million and $106 million, respectively. Total unrealized gains on our marketable equity securities, included in other income (expense), net, were $59 million and $128 million in Q3 2020 and YTD 2020, respectively, and total unrealized losses and gains were $47 million and $57 million, respectively, in Q3 2019 and YTD 2019.
Non-Marketable Equity Securities
As of September 27, 2020 and December 29, 2019, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $305 million and $220 million, respectively.
One of our investments, GRAIL, Inc. (GRAIL), is a VIE for which we have concluded that we are not the primary beneficiary and, therefore, we do not consolidate GRAIL in our consolidated financial statements. On September 20, 2020, we entered into an agreement to acquire GRAIL, as described in Pending Acquisition below. We have determined our maximum exposure to loss, excluding any amounts associated with the pending acquisition of GRAIL, to be the carrying value of our investment, which was $250 million and $190 million as of September 27, 2020 and December 29, 2019, respectively, recorded in other assets. During YTD 2020, we made an additional $60 million investment in GRAIL.
Revenue recognized from transactions with our strategic investees was $16 million and $39 million for Q3 2020 and YTD 2020, respectively, and $15 million and $49 million for Q3 2019 and YTD 2019, 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 $160 million, callable through July 2029, respectively, of which $40 million and up to $143 million, respectively, remained callable as of September 27, 2020. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $90 million and $53 million as of September 27, 2020 and December 29, 2019, respectively.
Previously Consolidated Variable Interest Entity
Helix Holdings I, LLC (Helix)
In July 2015, we obtained a 50% voting equity ownership interest in Helix. At that time, we determined that we had unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and, as a result, we were deemed to be the primary beneficiary of Helix and were required to consolidate Helix. The operations of Helix are included in the accompanying condensed consolidated statements of income for YTD 2019, up to the date of the deconsolidation, described below. During this period, we absorbed 50% of Helix’s losses.
On April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, Helix. As part of the agreement, (i) Helix repurchased all of our outstanding equity interests in exchange for 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, (ii) we ceased having a controlling financial interest in Helix, including unilateral power over one of the activities that most significantly impacts the economic performance of Helix, (iii) we were relieved of any potential obligation to redeem certain noncontrolling interests, and (iv) we no longer have representation on Helix’s board of directors. As a result, we deconsolidated Helix’s financial statements effective April 25, 2019 and recorded a gain on deconsolidation of $39 million in other income (expense), net. The gain on deconsolidation included (i) the contingent value right received from Helix recorded at a fair value of approximately $30 million, (ii) the derecognition of the carrying amounts of Helix’s assets and liabilities, and (iii) the derecognition of the noncontrolling interests related to Helix.
During YTD 2020, changes in the fair value of the contingent value right resulted in unrealized gains of $5 million included in other income (expense), net. There was no change in fair value during Q3 2020. During Q3 2019 and YTD 2019, such changes resulted in an unrealized gain of $2 million and an unrealized loss of $1 million, respectively.
Pending Acquisition
On September 20, 2020, we entered into an Agreement and Plan of Merger (the “GRAIL Merger Agreement”) to acquire GRAIL for $8 billion, consisting of $3.5 billion in cash and $4.5 billion in shares of Illumina common stock, subject to a collar. The transaction, which is expected to close in the second half of 2021, is subject to certain customary closing conditions, including GRAIL shareholder approval and the receipt of required regulatory approvals.
The cash consideration for the transaction is expected to be funded using balance sheet cash of both Illumina and GRAIL, plus up to $1 billion in capital raised through either a debt or equity issuance. In advance of this anticipated issuance, we have obtained a bridge facility commitment letter from Goldman Sachs Bank USA for a 364-day senior unsecured bridge loan facility, in an aggregate principal amount of $1 billion. The bridge facility commitment letter is subject to certain conditions, including consummation of the acquisition pursuant to the GRAIL Merger Agreement. It is anticipated that we will replace or repay some or all of the bridge facility through one or a combination of the following: issuance of debt securities, preferred stock, common equity, or other securities or borrowings under a credit facility.
In connection with the transaction, GRAIL stockholders will receive contingent value rights, which will entitle holders to receive future payments representing a pro rata portion of certain 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 will offer GRAIL stockholders the option to receive additional cash and/or stock consideration, in an amount to be determined prior to closing, in lieu of the contingent value rights.
If the GRAIL Merger Agreement is not consummated prior to December 20, 2020, we will make monthly cash payments to GRAIL of $35 million (the “Continuation Payments”) until the earlier of the consummation or termination of the GRAIL Merger Agreement, subject to certain exceptions. If the GRAIL Merger Agreement is terminated, we will receive shares of non-voting GRAIL preferred stock in respect of all Continuation Payments in excess of $315 million, subject to certain terms and conditions.
The GRAIL Merger Agreement contains certain termination rights if the consummation of the acquisition does not occur on or before September 20, 2021, subject to a three-month extension related to obtaining certain required regulatory clearances. Upon termination of the GRAIL Merger Agreement under specified circumstances, we would be required to pay a termination fee of $300 million and make an additional $300 million investment in GRAIL in exchange for shares of non-voting GRAIL preferred stock, subject to certain terms and conditions.
Derivative Assets Related to Terminated Acquisition
On November 1, 2018, we entered into an Agreement and Plan of Merger (the “PacBio Merger Agreement”) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share). On January 2, 2020, we entered into an agreement to terminate the PacBio Merger Agreement (the Termination Agreement). Pursuant to the Termination Agreement, we made a cash payment to PacBio of $98 million on January 2, 2020, which represented the Reverse Termination Fee (as defined in the PacBio Merger Agreement). The Reverse Termination Fee is repayable, without interest, to us if PacBio enters into a definitive agreement providing for, or consummates, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement), and such transaction is consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction. PacBio did not enter into a definitive agreement that provided for, or consummated, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement); therefore, the Reverse Termination Fee is no longer repayable. In addition, we made cash payments to PacBio of $18 million in Q4 2019, pursuant to Amendment No. 1 to the PacBio Merger Agreement, and $34 million in Q1 2020, pursuant to the Termination Agreement, collectively referred to as the Continuation Advances. Up to the $52 million of Continuation Advances is repayable without interest to us if, within two years of March 31, 2020, PacBio enters into a Change of Control Transaction or raises at least $100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio).
The potential repayments of the Continuation Advances and Reverse Termination Fee meet the definition of derivative assets and are recorded at fair value. The $92 million difference between the $132 million in cash paid during Q1 2020 for the Continuation Advances and Reverse Termination Fee and the $40 million fair value of these
derivative assets on the payment dates was recorded as selling, general and administrative expenses. Changes in the fair value of the derivative assets are included in other income (expense), net, and totaled $10 million and $25 million in unrealized losses in Q3 2020 and YTD 2020, respectively.
Fair Value Measurements
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2020
|
|
December 29, 2019
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (cash equivalents)
|
$
|
1,449
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,449
|
|
|
$
|
1,732
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,732
|
|
Debt securities in government-sponsored entities
|
—
|
|
|
62
|
|
|
—
|
|
|
62
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
18
|
|
Corporate debt securities
|
—
|
|
|
618
|
|
|
—
|
|
|
618
|
|
|
—
|
|
|
630
|
|
|
—
|
|
|
630
|
|
U.S. Treasury securities
|
649
|
|
|
—
|
|
|
—
|
|
|
649
|
|
|
618
|
|
|
—
|
|
|
—
|
|
|
618
|
|
Marketable equity securities
|
234
|
|
|
—
|
|
|
—
|
|
|
234
|
|
|
106
|
|
|
—
|
|
|
—
|
|
|
106
|
|
Contingent value right
|
—
|
|
|
—
|
|
|
33
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
29
|
|
Derivative assets related to terminated acquisition
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
10
|
|
Deferred compensation plan assets
|
—
|
|
|
51
|
|
|
—
|
|
|
51
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
48
|
|
Total assets measured at fair value
|
$
|
2,332
|
|
|
$
|
731
|
|
|
$
|
59
|
|
|
$
|
3,122
|
|
|
$
|
2,456
|
|
|
$
|
696
|
|
|
$
|
39
|
|
|
$
|
3,191
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability
|
$
|
—
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our available-for-sale securities consist of highly-liquid, investment-grade debt securities and marketable equity securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. We elected the fair value option to measure the contingent value right received from Helix. The fair value of our contingent value right, included in other assets, is derived using a Monte Carlo simulation. The derivative assets related to the terminated acquisition of PacBio are financial instruments measured at fair value, included in other assets. Significant estimates and assumptions required for these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.
Summary of debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
September 27,
2020
|
|
December 29,
2019
|
Principal amount of 2023 Notes outstanding
|
$
|
750
|
|
|
$
|
750
|
|
Principal amount of 2021 Notes outstanding
|
517
|
|
|
517
|
|
|
|
|
|
Unamortized discount of liability component of convertible senior notes
|
(94)
|
|
|
(126)
|
|
Net carrying amount of liability component of convertible senior notes
|
1,173
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
(507)
|
|
|
—
|
|
Long-term debt
|
$
|
666
|
|
|
$
|
1,141
|
|
Carrying value of equity component of convertible senior notes, net of debt issuance costs
|
$
|
213
|
|
|
$
|
213
|
|
Fair value of convertible senior notes outstanding (Level 2)
|
$
|
1,447
|
|
|
$
|
1,549
|
|
Weighted-average remaining amortization period of discount on the liability component of convertible senior notes
|
2.6 years
|
|
3.2 years
|
Bridge Facility
In advance of the acquisition of GRAIL, we have obtained a bridge facility commitment letter from Goldman Sachs Bank USA for a 364-day senior unsecured bridge loan facility, in an aggregate principal amount of $1 billion. The bridge facility commitment letter is subject to certain conditions, including consummation of the acquisition pursuant to the GRAIL Merger Agreement. It is anticipated that we will replace or repay some or all of the bridge facility through one or a combination of the following: issuance of debt securities, preferred stock, common equity, or other securities or borrowings under a credit facility. See note “3. Investments and Fair Value Measurements” for further details.
0% Convertible Senior Notes due 2023 (2023 Notes)
On August 21, 2018, we issued $750 million aggregate principal amount of convertible senior notes due 2023 (2023 Notes). The 2023 Notes mature on August 15, 2023, and the implied estimated effective rate of the liability component of the Notes was 3.7%, assuming no conversion option.
The 2023 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 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events described in the indenture. Regardless of the foregoing circumstances, the holders may convert their notes on or after May 15, 2023 until August 11, 2023.
We may redeem for cash all or any portion of the 2023 Notes, at our option, on or after August 20, 2021 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect (currently $595.10) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date.
The 2023 Notes were not convertible as of September 27, 2020 and had no dilutive impact during YTD 2020. If the 2023 Notes were converted as of September 27, 2020, the if-converted value would not exceed the principal amount.
0.5% Convertible Senior Notes due 2021 (2021 Notes)
In June 2014, we issued $517 million aggregate principal amount of 2021 Notes. The 2021 Notes mature on June 15, 2021, and the implied estimated effective rates of the liability component of the Notes was 3.5%, assuming no conversion option.
The 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $254.34 per share), only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending September 30, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2021 Notes for each day of such 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; or (3) upon the occurrence of specified events described in the indenture for the 2021 Notes. Regardless of the foregoing circumstances, the holders of the 2021 Notes may convert their notes on or after March 15, 2021 until June 11, 2021.
The market price of our common stock met the stock trading price conversion requirement of $330.64 and the 2021 Notes became convertible on July 1, 2020, and continued to be convertible through September 30, 2020. The potential dilutive impact of the 2021 Notes has been included in our calculation of diluted earnings per share for Q3 2020 and YTD 2020. If the 2021 Notes were converted as of September 27, 2020, the if-converted value would exceed the principal amount by $97 million.
0% Convertible Senior Notes due 2019 (2019 Notes)
In June 2014, we issued $633 million aggregate principal amount of 2019 Notes, and the implied estimated effective rate of the liability component was 2.9%. The 2019 Notes matured on June 15, 2019, and the excess of the conversion value over the principal amount was paid in 0.4 million shares of common stock.
As of September 27, 2020, approximately 4.1 million shares remained available for future grants under the 2015 Stock Plan.
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 December 29, 2019
|
1,700
|
|
|
271
|
|
|
$
|
271.49
|
|
|
$
|
258.66
|
|
Awarded
|
234
|
|
|
(82)
|
|
|
$
|
301.83
|
|
|
$
|
343.38
|
|
Vested
|
(83)
|
|
|
—
|
|
|
$
|
219.18
|
|
|
—
|
|
Cancelled
|
(167)
|
|
|
(71)
|
|
|
$
|
267.36
|
|
|
$
|
261.19
|
|
Outstanding at September 27, 2020
|
1,684
|
|
|
118
|
|
|
$
|
278.68
|
|
|
400.74
|
|
______________________________________
(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.
Stock Options
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
(in thousands)
|
|
Weighted-Average
Exercise Price
|
Outstanding at December 29, 2019
|
58
|
|
|
$
|
56.65
|
|
|
|
|
|
Exercised
|
(48)
|
|
|
$
|
56.16
|
|
|
|
|
|
Outstanding and exercisable at September 27, 2020
|
10
|
|
|
$
|
59.11
|
|
ESPP
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 2020, approximately 0.2 million shares were issued under the ESPP. As of September 27, 2020, there were approximately 13.3 million shares available for issuance under the ESPP.
Share Repurchases
On February 5, 2020, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During YTD 2020, we repurchased 1.4 million shares for approximately $455 million. Authorizations to repurchase approximately $295 million of our common stock remained available as of September 27, 2020.
Share-based Compensation
Share-based compensation expense reported in our condensed consolidated statements of income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2020
|
|
Q3 2019
|
|
YTD 2020
|
|
YTD 2019
|
Cost of product revenue
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
$
|
15
|
|
Cost of service and other revenue
|
1
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Research and development
|
21
|
|
|
15
|
|
|
48
|
|
|
50
|
|
Selling, general and administrative
|
33
|
|
|
24
|
|
|
52
|
|
|
77
|
|
Share-based compensation expense before taxes
|
61
|
|
|
45
|
|
|
116
|
|
|
145
|
|
Related income tax benefits
|
(12)
|
|
|
(10)
|
|
|
(27)
|
|
|
(31)
|
|
Share-based compensation expense, net of taxes
|
$
|
49
|
|
|
$
|
35
|
|
|
$
|
89
|
|
|
$
|
114
|
|
On August 5, 2020, we modified the performance period for our performance stock units granted in 2018, which vest at the end of the three-year period in Q4 2020. This modification affected 49 employees and is expected to result in total incremental share-based compensation cost of approximately $47 million in FY 2020, of which $17 million was expensed in Q3 2020.
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the ESPP during YTD 2020 were as follows:
|
|
|
|
|
|
|
Employee Stock Purchase Rights
|
Risk-free interest rate
|
0.11% - 2.04%
|
Expected volatility
|
30% - 45%
|
Expected term
|
0.5 - 1.0 year
|
Expected dividends
|
0
|
%
|
Weighted-average grant-date fair value per share
|
$
|
75.57
|
|
As of September 27, 2020, approximately $367 million of total unrecognized compensation cost related to restricted stock and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately 2.0 years.
|
|
|
6. SUPPLEMENTAL BALANCE SHEET DETAILS
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
September 27,
2020
|
|
December 29,
2019
|
|
|
|
|
Trade accounts receivable, gross
|
$
|
468
|
|
|
$
|
575
|
|
|
|
|
|
Allowance for credit losses
|
(4)
|
|
|
(2)
|
|
|
|
|
|
Total accounts receivable, net
|
$
|
464
|
|
|
$
|
573
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
September 27,
2020
|
|
December 29,
2019
|
Raw materials
|
$
|
142
|
|
|
$
|
108
|
|
Work in process
|
246
|
|
|
225
|
|
Finished goods
|
27
|
|
|
26
|
|
Total inventory
|
$
|
415
|
|
|
$
|
359
|
|
Intangible Assets and Goodwill
We recorded a developed technology intangible asset of $26 million, with a useful life of 10 years, as a result of an acquisition in Q2 2020.
Changes to goodwill during YTD 2020 were as follows:
|
|
|
|
|
|
In millions
|
Goodwill
|
Balance as of December 29, 2019
|
$
|
824
|
|
Acquisitions
|
73
|
|
Balance as of September 27, 2020
|
$
|
897
|
|
Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in Q2 2020, noting no impairment.
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
September 27,
2020
|
|
December 29,
2019
|
Contract liabilities, current portion
|
$
|
154
|
|
|
$
|
167
|
|
Accrued compensation expenses
|
123
|
|
|
154
|
|
Accrued taxes payable
|
46
|
|
|
86
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities, current portion
|
54
|
|
|
45
|
|
Other, including warranties (a)
|
75
|
|
|
64
|
|
Total accrued liabilities
|
$
|
452
|
|
|
$
|
516
|
|
(a) Changes in the reserve for product warranties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2020
|
|
Q3 2019
|
|
YTD 2020
|
|
YTD 2019
|
Balance at beginning of period
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
14
|
|
|
$
|
19
|
|
Additions charged to cost of product revenue
|
6
|
|
|
3
|
|
|
11
|
|
|
12
|
|
Repairs and replacements
|
(6)
|
|
|
(5)
|
|
|
(15)
|
|
|
(17)
|
|
Balance at end of period
|
$
|
10
|
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
14
|
|
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.
Derivatives
We are exposed to foreign exchange rate risks in the normal course of business. We enter into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other current assets or accrued liabilities and are not designated as hedging instruments. Changes in the value of the derivatives are recognized in other income (expense), net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.
As of September 27, 2020, 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 September 27, 2020 and December 29, 2019, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $315 million and $252 million, respectively.
We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assess, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations, and/or cash flows.
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income. The effective tax rates for Q3 2020 and YTD 2020 were 16.8% and 28.4%, respectively. In Q3 2020, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, and discrete tax benefits due to prior year tax adjustments and uncertain tax positions. In addition to the items noted above, the variance from the U.S. federal statutory tax rate for YTD 2020 was primarily attributable to discrete tax expense of $62 million related to the valuation allowance recorded against the deferred tax asset for California research and development credits, and discrete tax expense of $28 million related to the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments, partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition and tax benefits related to share-based compensation.
We have one reportable segment, Core Illumina, as of September 27, 2020, which relates to Illumina’s core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix. See note “3. Investments and Fair Value Measurements” for further details.
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 our previously consolidated VIE, Helix.
Helix:
Helix was established to enable individuals to explore their genetic information by providing affordable sequencing and database services for consumers through third-party partners, driving the creation of an ecosystem of consumer applications.
Core Illumina sells products and provides services to Helix in accordance with contractual agreements between the entities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Q3 2020
|
|
Q3 2019
|
|
YTD 2020
|
|
YTD 2019
|
Revenue:
|
|
|
|
|
|
|
|
Core Illumina
|
$
|
794
|
|
|
$
|
907
|
|
|
$
|
2,286
|
|
|
$
|
2,591
|
|
Helix
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Elimination of intersegment revenue
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
Consolidated revenue
|
$
|
794
|
|
|
$
|
907
|
|
|
$
|
2,286
|
|
|
$
|
2,591
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
Core Illumina
|
$
|
162
|
|
|
$
|
308
|
|
|
$
|
447
|
|
|
$
|
740
|
|
Helix
|
—
|
|
|
—
|
|
|
—
|
|
|
(24)
|
|
Elimination of intersegment earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Consolidated income from operations
|
$
|
162
|
|
|
$
|
308
|
|
|
$
|
447
|
|
|
$
|
717
|
|