Washington, D.C. 20549
ILLUMINA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2019JANUARY 2, 2022
TABLE OF CONTENTS
See “Form 10-K Cross-Reference Index” within Other Key Information for a cross-reference to the parts and items requirements of the Securities and Exchange Commission Annual Report on Form 10-K.
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BUSINESS & MARKET INFORMATION | PAGE |
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BUSINESS & MARKET INFORMATION | PAGE |
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MANAGEMENT’S DISCUSSION & ANALYSIS | |
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CONSOLIDATED FINANCIAL STATEMENTS | |
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OTHER KEY INFORMATION | |
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Special NoteConsideration Regarding Forward-Looking Statements
This annual report on Form 10-K 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. Forward-looking statements can be identified by 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 negativenegatives of these terms, and similar references to future periods.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;
•our expectations regarding the launch of new products or services;
•the benefits that we expect will result from our business activities and certain transactions we have completed, 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 expectations regarding the outcome of the legal and regulatory proceedings related to our recently completed acquisition of GRAIL, Inc. (GRAIL) and other actions that may be taken or pursued by the European Commission, the Federal Trade Commission and/or other governmental or regulatory authorities in connection with such acquisition;
•the interim measures order imposed by the European Commission, its duration and impact on Illumina and GRAIL, and the appointment of a monitoring trustee to monitor our compliance with such order;
•our expectations regarding the integration of any acquired technologies with our existing technology; 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:
•the impact to our business and operating results caused by the COVID-19 pandemic;
•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;
•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 timing and mix of customer orders among our products and services;
•the impact of recently launched or pre-announced products and services on existing products and services;
•our ability to develop and commercialize our instruments and consumables, to deploy new products, services, and applications, and to expand the markets for our technology platforms;
•our ability to manufacture robust instrumentation and consumables;
•our ability to identify and acquire technologies, and integrate them into our products or businesses successfully;
•risks and uncertainties regarding the legal and regulatory proceedings relating to our expectationsrecently completed acquisition of GRAIL and beliefs regarding prospectsour ability to achieve the expected benefits of such acquisition and growth forother actions that may be taken or pursued by the businessEuropean Commission, the Federal Trade Commission and/or other governmental or regulatory authorities in connection with such acquisition;
•the interim measures order imposed by the European Commission, and its markets;duration and impact on Illumina and GRAIL, which impact may include material and adverse effects on synergies and other 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, 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 fines and other penalties for alleged noncompliance with such terms;
•the assumptions underlying our critical accounting policies and estimates;
•our assessments and estimates that determine our effective tax rate;
•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 in the United States or worldwide; and
•other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A “Risk“Risk Factors” below, within the Business and Market Information section of this report, 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 annual report on Form 10-K 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.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website, www.illumina.com. The information on our website is not incorporated by reference into this report. Such reports are made available as soon as reasonably practicable after filing with, or furnishing to, the SEC. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that electronically file with the SEC. Copies of our annual report on Form 10-K will be made available, free of charge, upon written request.
Illumina, 24sure, Ampligase, Assign, BaseSpace, BlueBee, BlueFish, BlueFuse, BlueGnome, Clarity LIMS, CSPro, CytoSeq, COVIDSeq, DesignStudio, DRAGEN, Durascript, Enancio SAS, Genetic Energy, GenomeStudio, Globin-Zero, GoldenGate, HiSeq, iSeq, iHope, Illumina, Illumina Propel Certified, IllumiNotes, Infinium, iScan, iSelect, MiniSeq, MiSeq, MiSeqDx, NextBio, Nextera, NextSeq, NovaSeq, Powered by Illumina, Ribo-Zero, SeqMonitor, SureCell, TruGenome, TruSeq, TruSight, Understand Your Genome, UYG, Verifi, Verinata, Verinata Health, VeriSeq, the pumpkin orange color, and the Genetic Energy streaming bases design are trademarks or registered trademarks of Illumina, Inc.
“GRAIL,” the GRAIL logos, and other trade names, trademarks, or service marks of GRAIL are the property of GRAIL. The “Galleri” mark and logo are registered in the United States.Applications to register the “Galleri” mark and logo and some of GRAIL’s applications to register the “GRAIL” mark and the logos associated with GRAIL in other countries are pending.
Unless the context requires otherwise, references in this annual report on Form 10-K to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
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 2019, 2018,2021, 2020, and 20172019 refer to fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019, December 30, 2018,respectively. Fiscal years 2021 and December 31, 2017, respectively, all2019 were both 52 weeks, and fiscal year 2020 was 53 weeks.
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BUSINESS & MARKET INFORMATION |
BUSINESS OVERVIEW
We are thea global leader in sequencing- and array-based solutions for genetic and genomic analysis. Our products and services serve customers in a wide range of markets, enabling the adoption of genomic solutions in research and clinical settings. We were incorporated in California in April 1998 and reincorporated in Delaware in July 2000. Our principal executive offices are located at 5200 Illumina Way, San Diego, California 92122. Our telephone number is (858) 202-4500.
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 portfolio of integrated sequencing and microarray systems, consumables, and analysis tools is designed to accelerate and simplify genetic analysis. This portfolio addresses the range of genomic complexity, price points, and throughput, enabling customers to select the best solution for their research or clinical application.
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 (NGS) based early multi-cancer detection tests, enhance our position in Clinical Genomics, and increase our directly accessible total addressable market. The results of operations of GRAIL have been included in our consolidated financial statements from the date of acquisition. The acquisition is subject to ongoing legal proceedings and pending the European Commission’s ongoing merger review. GRAIL is currently being held and operated as a separate company, with oversight provided by an appointed, independent monitoring trustee during the European Commission’s ongoing merger review. See note “4. Acquisitions, Goodwill and Intangible Assets” and note “8. Legal Proceedings” for further details.
Genetics Primer
The instruction set for all living cells is encoded in deoxyribonucleic acid, or DNA. The complete set of DNA for any organism is referred to as its genome. DNA contains small regions called genes, which comprise a string of nucleotide bases labeled A, C, G, and T, representing adenine, cytosine, guanine, and thymine, respectively. These nucleotide bases occur in a precise order known as the DNA sequence. When a gene is “expressed,” a copy of a portion of its DNA sequence called messenger RNA (mRNA) is used as a template to direct the synthesis of a particular protein. Proteins, in turn, direct all cellular function. The illustration below is a simplified gene expression schematic.
![ilmn-20220102_g2.gif](https://files.docoh.com/10-K/0001110803-22-000013/ilmn-20220102_g2.gif)
Variations among organisms are due, in large part, to differences in their DNA sequences. Changes can result from insertions, deletions, inversions, translocations, or duplications of nucleotide bases. These changes may result in certain genes becoming overexpressed (excessive protein production), underexpressed (reduced protein production), or silenced altogether, sometimes triggering changes in cellular function. The most common form of variation in humans is called a single nucleotide polymorphism (SNP), which is a base change in a single position in a DNA
sequence. Another type of variation, copy number variations (CNVs), occur when there are fewer or more copies of certain genes, segments of a gene, or stretches of DNA.
In humans, genetic variation accounts for many of the physical differences we see (e.g., height, hair, eye color, etc.). Genetic variations also can have medical consequences affecting disease susceptibility, including predisposition to complex genetic diseases such as cancer, diabetes, cardiovascular disease, and Alzheimer’s disease. They can affect individuals’ response to certain drug treatments, causing them to respond well, experience adverse side effects, or not respond at all.
Scientists are studying these variations and their consequences in humans, as well as in a broad range of animals, plants, and microorganisms. Such research takes place in government, university, pharmaceutical, biotechnology, and agrigenomics laboratories around the world, where scientists expand our knowledge of the biological functions essential for life. Beginning at the genetic level, our tools are used to elucidate the relationship between gene sequence and biological processes. Researchers who investigate human and non-human genetic variation to understand the mechanisms of disease are enabling the development of more effective diagnostics and therapeutics. They also provide greater insight into genetic variation in plants (e.g., food and biofuel crops) and animals (e.g., livestock and domestic), enabling improvements in crop yields and animal breeding programs.
By empowering genetic analysis and facilitating a deeper understanding of genetic variation and function, our tools advance disease research, drug development, and the creation of molecular diagnostic tests. We believe that this will trigger a fundamental shift in the practice of medicine and health care, and that the increased emphasis on preventive and predictive molecular medicine will usher in the era of precision health care.
Our Principal Markets
We target the markets and customers outlined below.
Life Sciences
Historically, our core business has been in the life sciences research market. This includes laboratories associated with universities, research centers, and government institutions, along with biotechnology and pharmaceutical companies. Researchers at these institutions use our products and services for basic and translational research across a spectrum of scientific applications, including targeted, exome, and whole-genome sequencing; genetic variation; gene expression; epigenetics; and metagenomics. Next-generation sequencing (NGS)NGS technologies are being adopted due to their ability to cost-effectively sequence large sample sizes quickly and accurately, generating vast amounts of high-quality data. Both private and public funding drive this research, along with global initiatives to characterize genetic variation.
Our products also serve various applied markets including consumer genomics and agrigenomics. For example, in consumer genomics, our customers use our technologies to provide personalized genetic data and analysis to individual consumers. In agrigenomics, government and corporate researchers use our products and services to explore the genetic and biological basis for productivity and nutritional constitution in crops and livestock. Researchers can identify natural and novel genomic variation and deploy genome-wide marker-based applications to accelerate breeding and production of healthier and higher-yielding crops and livestock.
Clinical Genomics
We are focused on enabling translational and clinical markets through the introduction of best-in-class sequencing technology. Further, we are developing sample-to-answer solutions to catalyze adoption in the clinical setting, including in reproductive and genetic health and oncology. In reproductive health, our primary focus is driving noninvasive prenatal testing (NIPT) adoption globally through our technology, which identifies fetal chromosomal abnormalities by analyzing cell-free DNA in maternal blood. Our NGS technology is also accelerating rare and undiagnosed disease research to discover the genetic causes of inherited disorders by assessing many genes simultaneously. Using NGS can reduce costs compared to traditional methods of disease diagnosis, which are often expensive and inconclusive while requiring extensive testing.
Cancer is a disease of the genome, and the goal of cancer genomics is to identify genomic changes that transform a normal cell into a cancerous one. Understanding these genomic changes will improve diagnostic accuracy, increase understanding of the prognosis, and enable oncologists to target therapies to individuals. Customers in the translational and clinical oncology markets use our products to perform research that may help identify
individuals who are genetically predisposed to cancer and to identify molecular changes in a tumor. We believe that circulating tumor DNA (ctDNA) will become an important clinical tool for managing oncology patients during all stages of tumor progression. Our technology is being used to research the implications of ctDNA in treatment determination, treatment monitoring, minimal residual disease, and asymptomatic screening. For example, we have invested in, and partnered with GRAIL, which we formed to develop a blood-basedGRAIL’s Galleri blood test for early-stage cancer detection that is enabled by our sequencing technology.
Our Principal Products, Services, and Technologies
Our unique technology platforms support the scale of experimentation necessary for population-scale studies, genome-wide discovery, target selection, and validation studies (see Figure 1 below). Customers use our products to analyze the genome at all levels of complexity, from targeted panels to whole-genome sequencing. A large and dynamic Illumina user community has published tenshundreds of thousands of customer-authored scientific papers using our technologies. Through rapid innovation, we are changing the economics of genetic research, enabling projects that were previously considered impossible, and supporting clinical advances towards precision medicine.
Most of our product sales consist of instruments and consumables, which include reagents, flow cells, and microarrays, based on our proprietary technologies. We also perform various services for our customers. In 2019, 2018,2021, 2020, and 2017,2019, instrument sales represented 15%17%, 17%13%, and 19%15%, respectively, of total revenue; consumable sales represented 68%71%, 65%71%, and 64%68%, respectively, of total revenue; and services represented 17%12%, 18%16%, and 17%, respectively, of total revenue.
Figure 1: Illumina Platform Overview:
Sequencing
DNA sequencing is the process of determining the order of nucleotide bases (A, C, G, or T) in a DNA sample. Our portfolio of sequencing platforms represents a family of systems that we believe set the standard for productivity, cost-effectiveness, and accuracy among NGS technologies. Customers use our platforms to perform whole-genome, de novo, exome and RNA sequencing, and targeted resequencing of specific gene regions and genes.
Whole-genome sequencing determines the complete DNA sequence of an organism. In de novo sequencing, the goal is to sequence and assemble the genome of that sample without using information from prior sequencing of that species. In targeted resequencing, a portion of the sequence of an organism is compared to a standard or reference sequence from previously sequenced samples to identify genetic variation. Understanding the similarities and differences in DNA sequence between and within species helps us understand the function of the structures encoded in the DNA.
Our DNA sequencing technology is based on our proprietary reversible terminator-based sequencing chemistry, referred to as sequencing by synthesis (SBS) biochemistry. SBS tracks the addition of labeled nucleotides as the DNA chain is copied in a massively parallel fashion. Our SBS sequencing technology provides researchers with a
broad range of applications and the ability to sequence even large mammalian genomes in a few days rather than weeks or years.
Our sequencing platforms can generate between 500 megabases (Mb) and 6.0 terabases (Tb) (equivalent to approximately 48 human genomes) of genomic data in a single run, depending on the instrument and application.
There are different price points per gigabase (Gb) for each instrument, and for different applications, which range from small-genome, amplicon, and targeted gene-panel sequencing to population-scale whole human genome sequencing. Since we launched our first sequencing system in 2007, our systems have reduced the cost of sequencing by a factor of more than 10,000. In addition, the sequencing time per Gb has dropped by a factor of approximately 12,000.
Our BaseSpace Informatics Suite cloud platform playsIllumina informatics products play a critical role in supporting our sequencing applications.applications and customers’ needs across a range of activities, including sample preparation, instrument control & management, and post-run analysis.
Our BaseSpace Informatics Suite integrates directly with our sequencing instruments, allowing customers to manage their biological sample and sequencing runs, process and analyze the raw genomic data, and derive meaningful results. It facilitates data sharing, provides data-storage solutions and streamlines analysis through a growing number of applications developed by us and the bioinformatics community. Our DRAGEN Bio-IT Platform is used for secondary analysis and analyzes sequencing data from a variety of experiment types, including whole genomes, whole exomes, germline and somatic datasets, and RNA sequencing experiments with industry leading accuracy, speed and efficiency. Additionally, Illumina Connected Analytics is an integrated bioinformatics solution that provides a comprehensive, private, cloud-based data platform that empowers customers to manage, analyze, and explore large volumes of multi-omic data in a secure, scalable, and flexible environment.
In 2019, 2018,2021, 2020, and 2017,2019, total sequencing revenue comprised 87%91%, 83%89%, and83% 87%, respectively, of total revenue.
Arrays
Arrays are used for a broad range of DNA and RNA analysis applications, including SNP genotyping, CNV analysis, gene expression analysis, and methylation analysis, and enable the detection of millions of known genetic markers on a single array. Arrays are the primary technology used in consumer genomics applications.
Our BeadArray technology combines microscopic beads and a substrate in a proprietary manufacturing process to produce arrays that can perform many assays simultaneously. This facilitates large-scale analysis of genetic variation and biological function in a unique, high-throughput, cost-effective, and flexible manner. Using our BeadArray technology, we achieve high-throughput analysis via a high density of test sites per array and the ability to format arrays in various configurations. To serve the needs of multiple markets and market segments, we can vary the size, shape, and format of the substrate into which the beads self-assemble and create specific bead types for different applications. Our iScan System and our NextSeq 550 System can be used to image arrays.
In 2019, 2018,2021, 2020, and 2017,2019, total array revenue comprised 13%9%, 17%11%, and 17%13%, respectively, of total revenue.
Consumables
We have developed various library preparation and sequencing kits to simplify workflows and accelerate analysis. Our sequencing applications include whole-genome sequencing kits, which sequence entire genomes of any size and complexity, and targeted resequencing kits, which can sequence exomes, specific genes, RNA or other genomic regions of interest. Our sequencing kits maximize the ability of our customers to characterize the target genome accurately and are sold in various configurations, addressing a wide range of applications.
Customers use our array-based genotyping consumables for a wide range of analyses, including diverse species, disease-related mutations, and genetic characteristics associated with cancer. Customers can select from a range of human, animal, and agriculturally relevant genome panels or create their own custom arrays to investigate millions of genetic markers targeting any species.
Services
We provide whole-genome sequencing, genotyping, NIPT, and product support services. Human whole-genome sequencing services are provided through our CLIA-certified, CAP-accredited laboratory. Using our services, customers can perform whole-genome sequencing projects and microarray projects (including large-scale genotyping studies and whole-genome association studies). We also provide NIPT services through our partner laboratories that direct samples to us on a test send-out basis in our CLIA-certified, CAP-accredited laboratory. In addition, we also offer support services to customers who have purchased our products.
GRAIL
GRAIL’s multi-cancer early detection test, Galleri, is designed as a screening test for adults with an elevated risk for cancer, such as those aged 50 or older, and was commercially launched in 2021 as a laboratory developed test.
Intellectual Property
We have an extensive intellectual property portfolio. As of January 16, 2020,18, 2022, excluding GRAIL, we owned or had exclusive licenses to 7991,019 issued U.S. patents and 617789 pending U.S. patent applications, including 6143 allowed applications that have not yet issued as patents. Our issued and pending patents cover various aspects of our arrays, assays, oligo synthesis, sequencing technology, instruments, digital microfluidics, software, bioinformatics, and chemical-detection technologies, and have terms that expire between 20202022 and 2040.2042. We continue to file new patent applications to protect the full range of our technologies. We have filed or have been granted counterparts for many of these patents and applications in foreign countries.
GRAIL owns certain patent applications and intellectual property and exclusively licenses certain patents, patent applications, and other intellectual property from third parties. GRAIL’s patent portfolio broadly relates to methods, techniques and chemistry used to generate and analyze data using its proprietary bioinformatics and classifiers, including, for example, cfNA sequencing, marker panels, methylation signatures, bioinformatics techniques and biologically directed machine learning classifiers, which are incorporated into GRAIL’s products. As of January 3, 2022, GRAIL has exclusive licenses to more than 400 issued or granted patents and more than 190 pending patent applications globally, including 36 issued U.S. patents. GRAIL also owns or co-owns more than 390 pending patent applications globally, including more than 110 pending U.S. non-provisional and provisional patent applications. GRAIL’s patent portfolio includes patents and patent applications related to sequencing, library preparation and enrichment, marker panels, methylation profiling, and bioinformatic techniques and classifiers. GRAIL’s licensed patents and patent applications will begin to expire in 2028. The patent applications that GRAIL owns, if issued as patents, would be expected to expire at the earliest in 2037.
We protect our trade secrets, know-how, copyrights, and trademarks. Our success depends in part on obtaining patent protection for our products and processes, preserving trade secrets, patents, obtaining copyrights and trademarks, operating without infringing the proprietary rights of third parties, and acquiring licenses for technology or products. In addition, we invest in technological innovation, and we seek beneficial licensing opportunities to develop and maintain our competitive position.
We are party to various exclusive and nonexclusive license agreements and other arrangements with third parties that grant us rights to use key aspects of our sequencing and array technologies, assay methods, chemical detection methods, reagent kits, and scanning equipment. We have additional nonexclusive license agreements with various third parties for other components of our products. In most cases, the agreements remain in effect over the term of the underlying patents, may be terminated at our request without further obligation, and require that we pay customary royalties.
Research and Development
We have historically made substantial investments in research and development. Our research and development efforts prioritize continuous innovation coupled with product evolution.
Research and development expense in 2021, 2020, and 2019 2018, and 2017 was $647$1,185 million, $623$682 million, and $546$647 million, respectively. We expect research and development expense to increase during 20202022 to support business growth and continuing expansion in research and product-development efforts.
Marketing and Distribution
We market and distribute our products directly to customers in North America, Europe, Latin America, and the Asia-Pacific region. In addition, we sell through life-science distributors in certain markets within Europe, the Asia-Pacific region, Latin America, the Middle East, and Africa. We expect to continue increasing our sales and distribution resources during 20202022 and beyond as we launch new products and expand our potential customer base.
Manufacturing
We manufacture sequencing and array platforms and reagent kits. In 2019,2021, we continued to increase our manufacturing capacity, and we expect to increase our manufacturing capacity again in 2022 to meet customer demand. To address increasing product complexity and volume, we continue to automate manufacturing processes to accelerate throughput and improve quality and yield. We are committed to providing medical devices and related services that consistently meet customer and applicable regulatory requirements. We adhere to access and safety standards required by federal, state, and local health ordinances, such as standards for the use, handling, and disposal of hazardous substances. Our key manufacturing and distribution facilities operate under a quality management system certified to ISO 13485.
Raw Materials
Our manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies. Multiple commercial sources provide many of our components and supplies, but there are some raw materials and components that we obtain from single-source suppliers. To manage potential risks arising from single-source suppliers, we believe that, if necessary, we could redesign our products using alternative components or for use with alternative reagents or develop an internal supply capability. In addition, while we attempt to keep our inventory at minimal levels, we purchase incremental inventory as circumstances warrant to protect our supply chain. If the capabilities of our suppliers and component
manufacturers are limited or stopped, due to the COVID-19 pandemic, disasters, quality, regulatory, or other reasons, it could negatively impact our ability to manufacture our products.
Competition
Although we believe that our products and services provide significant advantages over products and services currently available from other sources, we expect continued intense competition. Our competitors offer products and services for sequencing, SNP genotyping, gene expression, and molecular diagnostics markets. In some cases, we compete for the resources our customers allocate for purchasing a wide range of sequencing and non-sequencing products used to analyze genetic variation and biological function, some of which are complementary or adjacent to our own but not directly competitive; in other cases, our products face direct competition as customers choose among sequencing and non-sequencing products that are designed to address the same use case or answer the same biological question. Some of our competitors have, or will have, substantially greater financial, technical, research, and other resources than we do, along with larger, more established marketing, sales, distribution, and service organizations. In addition, they may have greater name recognition than we do in the markets we address, and in some cases a larger installed base of systems. We expect new competitors to emerge and the intensity of competition to increase. To compete effectively, we must scale our organization and infrastructure appropriately and demonstrate that our products have superior throughput, cost, and accuracy.
Segment and Geographic Information
We have onetwo reportable segment,segments, Core Illumina whichand GRAIL, as of January 2, 2022. On August 18, 2021, we acquired GRAIL and it operates as a separate reportable segment. We have included the results of operations of GRAIL in our consolidated statements of operations from the date of acquisition. Core Illumina relates to Illumina’sour core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix. Prior toSee note “11. Segments and Geographic Data” within the deconsolidationConsolidated Financial Statements section of GRAIL on February 28, 2017,this report for further information concerning our Consolidated VIEs reportable segment included the combined operations of Helix and GRAIL.
segments.
We currently sell our products to a number of customers outside the United States, including customers in other areas of North America, Latin America, Europe, China, and the Asia-Pacific region. Shipments to customers outside the United States totaled $1,684$2,331 million, or 48%52%, of total revenue, in 2019,2021, compared to $1,554$1,584 million, or 47%49%, and $1,241$1,684 million, or 45%48%, in 20182020 and 2017,2019, respectively. We consider the U.S. dollar to be the functional currency of our international operations due to the primary activities of our foreign subsidiaries. We expect that sales to
international customers will continue to be an important and growing source of revenue. See note “1. Organization and Significant Accounting Policies” and note “2. Revenue” within the Consolidated Financial Statements section of this report for further information concerning our foreign and domestic operations.
Backlog
Our backlog was approximately $980$1,035 million and $909$816 million as of December 29, 2019January 2, 2022 and December 30, 2018,January 3, 2021, respectively. Generally, our backlog consists of orders 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, and whether the product is catalog or custom. We expect approximately 66%89% of our backlog as of December 29, 2019,January 2, 2022, to be shipped in 2020,2022, approximately 14%9% in 2021,2023, and the remainder thereafter. Although we generally recognize revenue when control of our products and services is transferred to our customers, some customer contracts might require us to defer revenue recognition beyond the transfer of control.
Properties
The following table summarizes the facilities we leased by Core Illumina and GRAIL as of December 29, 2019,January 2, 2022, including the location and size of each principal facility, and their designated use. We believe our facilities are adequate for our current and near-term needs, and we will be able to locate additional facilities, as needed.
| | Location | | Approximate Square Feet | | Operation | | Lease Expiration Dates | Location | | Approximate Square Feet | | Operation | | Lease Expiration Dates |
San Diego, CA * | | 1,193,000 |
| | Office, Lab, Manufacturing, and Distribution | | 2020 – 2031 |
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San Francisco Bay Area, CA | | 464,000 |
| | Office, Lab, and Manufacturing | | 2025 – 2033 |
| |
Singapore * | | 395,000 |
| | Office, Lab, Manufacturing, and Distribution | | 2020 – 2025 |
| |
San Diego, CA | | San Diego, CA | | 1,176,000 | | | Office, Lab, Manufacturing, and Distribution | | 2025 – 2031 |
San Francisco Bay Area, CA * | | San Francisco Bay Area, CA * | | 540,000 | | | Office, Lab, and Manufacturing | | 2024 – 2033 |
Singapore ** | | Singapore ** | | 449,000 | | | Office, Lab, Manufacturing, and Distribution | | 2022 – 2033 |
Durham, North Carolina * | | Durham, North Carolina * | | 200,000 | | | Office and Lab | | 2033 |
Cambridge, United Kingdom | | 187,000 |
| | Office, Lab, and Manufacturing | | 2020 – 2039 |
| Cambridge, United Kingdom | | 186,000 | | | Office, Lab, and Manufacturing | | 2023 – 2039 |
Madison, WI | | 133,000 |
| | Office, Lab, and Manufacturing | | 2033 |
| Madison, WI | | 133,000 | | | Office, Lab, and Manufacturing | | 2033 | |
Eindhoven, the Netherlands | | Eindhoven, the Netherlands | | 90,000 | | | Office and Distribution | | 2036 | |
China | | 55,000 |
| | Office and Lab | | 2021 – 2025 |
| China | | 74,000 | | | Office and Lab | | 2023 – 2026 |
Eindhoven, the Netherlands | | 42,000 |
| | Office and Distribution | | 2020 |
| |
Other | | 62,000 |
| | Office | | 2020 – 2025 |
| |
Other * | | Other * | | 103,000 | | | Office | | 2022 – 2027 |
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* Includes properties leased by both Core Illumina and GRAIL, except for our location in Durham, North Carolina, which is leased entirely by GRAIL.
** Excludes approximately 278,000151,000 square feet for which the leases do not commence until 20202022 and beyond.
Employees
Human Capital
To continue as a leader in genomics, we need to harness the world’s best talent and give them the opportunity to thrive. We are committed to attracting, retaining, developing, and supporting our people to enable everyone to fully contribute to our mission and deliver on the transformative power of genomics. Diversity is a competitive advantage that drives innovation in all that we do.
Our key human capital objectives include: nurturing a culture of care; practicing diversity and inclusion in all we do to advance equity and belonging; foster an environment where people feel Illumina is a great place to work for everyone; offer employees the resources and support they need to bring their personal best every day; invest and develop our people to create a deep and diverse pipeline; and steward our employee safety and wellness.
Additional information is included in our annual Corporate Social Responsibility (CSR) Report located on our website at www.illumina.com/csr. Information on our website, including the CSR Report, shall not be deemed incorporated by reference into this Annual Report. Our annual CSR Report is guided by the reporting frameworks of the Global Reporting Initiative (GRI), Sustainable Accounting Standards Board (SASB), and the Task Force for Climate related Financial Disclosures (TCFD).
Core Illumina
As of December 29, 2019, January 2, 2022, Core Illumina’s global workforce was comprised of approximately 9,100 full time employees, 50 part time employees, and 1,600 temporary employees. The regional representation includes approximately 5,700 employees in the Americas, 1,200 employees in Europe, Middle East, and Africa, and 2,200 employees in Asia-Pacific. Core Illumina’s global voluntary turnover rate for 2021 was 12%. Women comprised 45% of Core Illumina’s global workforce. Based on self-identification data, Core Illumina’s U.S. workforce is comprised of 53% minorities. We plan to disclose additional details on U.S. diversity demographics in our annual CSR Report, which we had more than 7,700 employees. We consider our employee relationsexpect to be positive. Our success will dependpublish in large part upon our ability to attract and retain employees. We face competition in this regard from other companies, research and academic institutions, government entities, and other organizations. In addition, we contract with a number of temporary and contract employees.April 2022.
GRAIL
As of January 2, 2022, GRAIL’s global workforce was comprised of approximately 700 full time employees, the majority of which are based in the Americas, and 300 temporary employees. GRAIL’s global voluntary turnover rate for 2021 was 19%. Women comprised 51% of GRAIL’s global workforce.
Environmental Matters
As a global corporate citizen, we recognize the importance of the environment to a healthy, sustainable future for our business, our patients, and communities. We are committed to the protection of our employees and the environment. Our operations require the use of hazardous materials that subject usenvironment with an approach to various federal, state, and localcontinuously strengthen our environmental and safety laws and regulations.stewardship. We believe that we are in material compliance with current applicable laws and regulations. However, we could be held liable for damages and fines should contamination of the environment or individual exposures to hazardous substances occur. In addition, we cannot predict how changes in these laws and regulations, or the development of new laws and regulations, will affect our business operations or the cost of compliance. In addition, climate change may impact our business by increasing operating costs due to additional regulatory requirements, physical risks to our facilities, energy limitations, and disruptions to our supply chain. These potential risks are accounted for in our business planning, including investment in reducing energy and water consumption, greenhouse gas emissions, and waste production. As part of our climate action plan, we established emission reduction targets in line with a 1.5 degree pathway and had those targets verified by the Sciences Based Target Initiative. In addition, we established Net Zero emission commitments by 2050 in our direct operations and value chain. Additional information is included in our annual CSR Report located on our website at www.Illumina.com/csr.
Government Regulation
As we expand product lines to address the diagnosis of disease, regulation by governmental authorities in the United States and other countries will become an increasingly significant factor in development, testing, production, and marketing. Products that we develop in the molecular diagnostic markets, depending on their intended use, may be regulated as medical devices or in vitro diagnostic products (IVDs) by the FDA and comparable agencies in other countries. In the United States, certain of our products may require FDA clearance following a pre-market notification process, also known as a 510(k) clearance, or premarket approval (PMA) from the FDA. The usually shorter 510(k) clearance process, which we used for the FDA-cleared assays that are run on our FDA-regulated MiSeqDx instrument, generally takes from three to six months after submission, but it can take significantly longer. The longer PMA process, which we used for our FDA-cleared RAS panel that is also run on our MiSeqDx instrument, is typically much more costly and uncertain. It can take from 9 to 18 months after a complete filing, but it can take significantly longer and requires conducting clinical studies that are generally more extensive than those required for 510(k) clearance. All of the products that are currently regulated by the FDA as medical devices and IVDs are also subject to the FDA Quality System Regulation (QSR). Obtaining the requisite regulatory approvals, including the FDA quality system inspections that are required for PMA approval, can be expensive and may involve considerable delay.
In the U.S., the products we develop for oncology and non-invasive prenatal testing will be regulated by the PMA process. We cannot be certain which of our other planned molecular diagnostic products will be subject to the shorter 510(k) clearance process, or which of will need to go through the PMA process.
The regulatory approval process for such products may be significantly delayed, may be significantly more expensive than anticipated, and may conclude without such products being approved by the FDA. Without timely regulatory approval, we will not be able to launch or successfully commercialize such products.products, which would adversely affect our earnings and competitive position. Many of the products that we are developing are the first of their kind, such as the Galleri test that has been developed by GRAIL. The regulatory approval pathways for such products, like the Galleri
test, do not currently exist and therefore have a high degree of uncertainty. Core Illumina and GRAIL are separately collaborating with regulatory bodies to navigate this regulatory landscape.
Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products. This may negatively affect our ability to obtain or maintain FDA or comparable regulatory clearance or approval of our products. In addition, regulatory agencies may introduce new requirements that may change the regulatory requirements for us or our customers, or both.
If our products labeled as “For Research Use Only,” or RUO, are used, or could be used, for the diagnosis of disease, the regulatory requirements related to marketing, selling, and supporting such products could be uncertain. This is true even if such use by our customers occurs without our consent. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
Our products sold as medical devices or IVDs in Europe will be regulated under the In Vitro Diagnostics Directive (98/79/EC). A new regulation, the in vitro Diagnostic Medical Devices Regulation (EU) 2017/746, the IVDR, has been released and will become fully enforceable in May 2022. These regulations include requirements for both presentation and review of performance data and quality-system requirements.
Certain of our products are currently available through laboratories that are certified under the Clinical Laboratory Improvements Amendments (CLIA) of 1988. These products are commonly called “laboratory developed tests,” or LDTs. For a number of years, the FDA has exercised its regulatory enforcement discretion not to regulate LDTs as medical devices if created and used within a single laboratory. However, the FDA is continually reexamining this regulatory approach and changes to the agency’s handling of LDTs could impact our business in ways that cannot be predicted at this time. We cannot predict the nature or extent of the FDA's final guidance or regulation of LDTs, in general, or with respect to our or our customers’ LDTs, in particular.
Certification of CLIA laboratories includes standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, and quality control procedures. CLIA also mandates that, for high complexity labs such as ours, to operate as a lab, we must have an accreditation by an organization recognized by CLIA such as the College of Pathologists (CAP), which we have obtained and must maintain. If we were to lose our CLIA certification or CAP accreditation, our business, financial condition, or results of operations could be adversely affected. In addition, state laboratory licensing and inspection requirements may also apply to our products, which, in some cases, are more stringent than CLIA requirements.
RISK FACTORS
Our business is subject to various risks, including those described below. In addition to the other information included in this report, the following issues could adversely affect our operating results or our stock price.
Risks Relating to Research, Development, Marketing, and Sales of Products and Services
Our continued growth is dependent on continuously developing and commercializing new products.
Our target markets are characterized by rapid technological change, evolving industry standards, changes in customer needs, existing and emerging competition, strong price competition, and frequent new product introductions. Accordingly, our continued growth depends on developing and commercializing new products and services, including improving our existing products and services, in order to address evolving market requirements on a timely basis. If we fail to innovate or adequately invest in new technologies, our products and services will become dated, and we could lose our competitive position in the markets that we serve as customers purchase new products offered by our competitors. We believe that successfully introducing new products and technologies on a timely basis provides a significant competitive advantage because customers invest time in selecting and learning to use a new product and may be reluctant to switch once that selection is made.serve.
To the extent that we fail to introduce new and innovative products, or such products are not accepted in the market or suffer significant delays in development, weour financial results may lose market share to our competitors, which will be difficult or impossible to regain.suffer. An inability, for technological or other reasons, to successfully develop and introduce new products on a timely basis could reduce our growth rate or otherwise have an adverse effect on our business.
In the past, we have experienced, and are likely to experience in the future, delays in the development and introduction of new products. There can be no assurance that we will keep pace with the rapid rate of change in our markets or that our new products will adequately meet the requirements of the marketplace, achieve market acceptance, or compete successfully with third-party technologies. Some of the factors affecting our ability to develop and successfully commercialize new products and services include:
•the functionality and performance of new and existing products and services;
•the timing of introduction of new products or services relative to competing products and services;
•availability, quality, and price relative to competing products and services;
•scientists’ and customers’ opinions of the utility of new products or services;
•citation of new products or services in published research;
•regulatory trends and approvals; and
•our ability to acquire or otherwise gain access to third party technologies, products, or businesses; and
general trends in life sciences research and applied markets.
We may also have to write off excess or obsolete inventory if sales of our products are not consistent with our expectations or the market requirements for our products change due to technical innovations in the marketplace.
businesses.
Our success depends upon the continued emergence and growth of markets for analysis of genetic variation, and biological function, and continued substantial increases in the use of sequencing as the cost of sequencing declines.
Our products are designed for use in the life sciences, diagnostic, agricultural, pharmaceutical, and consumer genomics industries. The usefulness of our technologies depends in part upon the availability of genetic data and its usefulness in clinical, research, and consumer applications. We are focusing on markets for analysis of genetic variation or biological function, namely sequencing, genotyping, and gene expression profiling. These markets are relatively new and emerging, and they may not develop as quickly as we anticipate, or reach what we expect to be their full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not be able to successfully analyze raw genetic data or be able to convert raw genetic data into valuable information. In addition, factors affectinga reduction or delay in research and development spending generally could harmbudgets and government funding may adversely affect our business, such asbusiness. For example, changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changesbudgetary pressures resulting in reduced allocations to government programsagencies that provide funding to companiesfund research and research institutions. If useful genetic data is not availabledevelopment activities, such as the U.S. National Institute of Health, or ifNIH, could adversely affect our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect.business or results of operations.
The introduction of next-generation sequencing technologies, including ours, has reduced the cost of sequencing by a factor of more than 10,000 and reduced the sequencing time per Gb by a factor of approximately 12,000 over the last 20 years. Consequently, demand for sequencing-related products and services has increased substantially as new applications are enabled and more sequencing is done in connection with existing applications. If, as we expect, the cost of sequencing continues to fall, over time, we cannot be sure that the demand for related products and services will increase at least proportionately as new applications are enabled or more sequencing is done in connection with
existing applications. In the future, if demand for our products and services due to lower sequencing costs is less than we expect, our business, financial condition, and results of operations will be adversely affected.
Our products may be used to provide genetic information about humans, agricultural crops, other food sources, and other living organisms. The information obtained from our products could be used in a variety of applications, which may have underlying ethical, legal, and social concerns regarding privacy and the appropriate uses of the resulting information, including preimplantation genetic screening of embryos, prenatal genetic testing, genetic engineering or modification of agricultural products, or testing genetic predisposition for certain medical conditions, particularly for those that have no known cure. Our customers’ implementation of our products to provide their own products and services may raise such concerns and affect our own reputation. U.S. and international governmental authorities could, for social or other purposes, call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests, even if permissible. These and other ethical, legal, and social concerns about genetic testing may limit market acceptance of our technology for certain applications or reduce the potential markets for our technology, either of which could have an adverse effect on our business, financial condition, or results of operations.
If we do not successfully manage the development, manufacturing, and launch of new products or services, including product transitions, our financial results could be adversely affected.
We face risks associated with launching new products and pre-announcing products and services when the products or services have not been fully developed or tested. In addition, we may experience difficulty in managing or forecasting customer reactions, purchasing decisions, transition requirements, or programs with respect to newly-launched products (or products in development), which could adversely affect sales of our existing products.
If our products and services are not able to deliver the performance or results expected by our target markets or are not delivered on a timely basis, our reputation and credibility may suffer. If we encounter development challenges or discover errors in our products late in our development cycle, we may delay the product launch date. The expenses or losses associated with unsuccessful product development or launch activities, or a lack of market acceptance of our new products, could adversely affect our business, financial condition, or results of operations.
As we announce future products or integrate new products into our portfolio, such as new instruments or instrument platforms, we face numerous risks relating to product transitions and the evolution of our product portfolio. We may be unable to accurately forecast new product demand and the impact of new products on the demand for current or established products. We may experience challenges relating to managing excess and obsolete inventories, managing new or higher product cost structures, and managing different sales and support requirements. Announcements of currently planned or other new products may cause customers to defer or stop purchasing our current or established products until new products become available. In addition, customers may defer or stop purchasing our current or established products as they assess the features and technological characteristics of new products, as compared to our current or established products, before making a financial commitment. Our failure to effectively manage the evolution of our product portfolio, including product transitions or introductions, could adversely affect our business, financial condition, or results of operations.
We face intense competition, which could render our products obsolete, result in significant price reductions, or substantially limit the volume of products that we sell.
We compete with third parties that design, manufacture, and market products and services for analysis of genetic variation and biological function and other applications using a wide range of technologies. In some cases, we compete for the resources our customers allocate for purchasing a wide range of sequencing and non-sequencing products, used to analyze genetic variation and biological function, some of which are complementary or adjacent to our own but not directly competitive; in other cases, our products face direct competition as customers choose among sequencing and non-sequencing products that are designed to address the same use case or answer the same biological question. For example, complementary third-party sequencing technologies address use cases to which our products are not well suited. If we are unable to develop or acquire new technologies that address these complementary sequencing applications, our rate of growth and our ability to grow the overall market for sequencing could be adversely affected.
We anticipate that we will continue to face increased competition as existing companies develop new or improved products and as new companies enter the market with new technologies. One or more of our competitors may render one or more of our technologies obsolete or uneconomical. Some of our competitors have greater financial and personnel resources, broader product lines, more focused product lines, a more established customer base, more experience and broader reach in clinical markets, and more experience in research and development than we do. Furthermore, life sciences, clinical genomics, and pharmaceutical companies, which are our potential customers and strategic partners, could also develop competing products. We believe that customers in our markets display a
significant amount of loyalty to their initial supplier of a particular product; therefore, it may be difficult to generate sales to potential customers who have purchased products from competitors. To the extent we are unable to be the first to develop or supply new products, our competitive position may suffer.
The market for clinical and diagnostic products, in particular, is currently limited and highly competitive, with several large companies having significant market share, intellectual property portfolios, and regulatory expertise. For example, the market for noninvasive prenatal testing is rapidly developing, and if our competitors are able to develop and commercialize products superior to or less expensive than ours or are able to obtain regulatory clearances before we do, our business could be adversely impacted. Established clinical and diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which could deter acceptance of our products. In addition, some of these companies have formed alliances with genomics companies that provide them access to genetic information that may be incorporated into their diagnostic tests, potentially creating a competitive advantage for them.
As we develop, market, or sell diagnostic tests, we may encounter delays in receipt, or limits in the amount, of reimbursement approvals and public health funding, which will impact our ability to grow revenues in the healthcare market.
Physicians and patients may not order diagnostic tests that we develop, market, sell, or enable such as our prenatal tests or GRAIL’s oncology screening tests, unless third-party payors, such as managed care organizations as well as government payors such as Medicare and Medicaid and governmental payors outside of the United States, pay a substantial portion of the test price. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical tests that involve new technologies or provide novel diagnostic information. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on diagnostic product suppliers to reduce their prices. Reimbursement by a payor may depend on a number of factors, including a payor's determination that tests using our technologies are: not experimental or investigational; medically necessary; appropriate for the specific patient; cost-effective; supported by peer-reviewed publications; and included in clinical practice guidelines.
Since each third-party payor often makes reimbursement decisions on an individual patient basis, obtaining such approvals is a time-consuming and costly process that requires us to provide scientific and clinical data supporting the clinical benefits of each of our products. As a result, there can be no assurance that reimbursement approvals will be obtained. This process can delay the broad market introduction of new products, and could have a negative effect on our results of operations. As a result, third-party reimbursement may not be consistent or financially adequate to cover the cost of diagnostic products that we develop, market, or sell. This could limit our ability to sell our products or cause us to reduce prices, which would adversely affect our results of operations.
Even if tests are reimbursed, third-party payors may withdraw their coverage policies, cancel their contracts with our customers at any time, review and adjust the rate of reimbursement, require co-payments from patients, or stop paying for tests, which would reduce our revenues. In addition, insurers, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts to control the cost, utilization, and delivery of healthcare services. These measures have resulted in reduced payment rates and decreased utilization for the clinical laboratory industry. Reductions in the reimbursement rate of payors may occur in the future. Reductions in the prices at which our tests are reimbursed could have a negative impact on our results of operations.
Risks Relating to Supply Chain, Manufacturing, and Quality
We depend on third-party manufacturers and suppliers for some of our products, or sub-assemblies, components, and materialsused in our products, and if shipments from these manufacturers or suppliers aredelayed or interrupted, or if the quality of the products, components, or materials supplied donot meet our requirements, we may not be able to launch, manufacture, or ship ourproducts in a timely manner, or at all.
The complex nature of our products requires customized, precision-manufactured sub-assemblies, components, and materials that currently are available from a limited number of sources, and, in the case of some sub-assemblies, components, and materials, from only a single source. If deliveries from these vendors are delayed or interrupted for any reason, or if we are otherwise unable to secure a sufficient supply, we may not be able to obtain these sub-assemblies, components, or materials on a timely basis or in sufficient quantities or at satisfactory qualities, or at all, in order to meet demand for our products.qualities. We may need to enter into contractual relationships with manufacturers for commercial-scale production of some of our products, in whole or in part, or develop these capabilities internally, and there can be no assurance that we will be able to do this on a timely basis, in sufficient quantities, or on commercially reasonable terms. In addition, the lead
time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort required to qualify a new supplier could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which would negatively impact our operating results. Accordingly, we may not be able to establish or maintain reliable, high-volume manufacturing at commercially reasonable costs or at all.costs. In addition, the manufacture or shipment of our products may be delayed or interrupted if the quality of the products, sub-assemblies, components, or materials supplied by our vendors does not meet our requirements. Current or future social and environmental regulations or critical issues, such as those relating to the sourcing of conflict minerals from conflict-affected areas such as the Democratic Republic of the Congo or the need to eliminate environmentally sensitive materials from our products, could restrict the supply of components and materials used in production or increase our costs. Any delay or interruption to our manufacturing process or in shipping our products could result in lost revenue, which would adversely affect our business, financial condition, or results of operations.
If defects are discovered in our products, we may incur additional unforeseen costs, our products may be subject to recalls, customers may not purchase our products, our reputation may suffer, and ultimately oursales and operating earnings could be negativelyimpacted.
Our products incorporate complex, precision-manufactured mechanical parts, electrical components, optical components, and fluidics, as well as computer software and complex surface chemistry and reagents, any of which may contain or result in errors or failures, especially when first introduced. In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design, and manufacturing processes, as well as defects in third-party components included in our products. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Defects or errors in our products may discourage customers from purchasing our products. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating margins. Identifying the root cause of quality issues, particularly those affecting reagents and third-party components, may be difficult, which increases the time needed to address quality issues as they arise, and increases the risk that similar problems could recur. Because our products are designed to be used to perform complex genomic analysis, we expect that our customers will have an increased sensitivity to such defects. If we do not meet applicable regulatory or quality standards, our products may be subject to recall, and, under certain circumstances, we may be required to notify applicable regulatory authorities about a recall. If our products are subject to recall or shipment holds, our reputation, business, financial condition, or results of operations could be adversely affected.
If we are unable to increase our manufacturing or service capacity and develop and maintain operation of our manufacturing or service capability, we may not be able to launch or support our products or services in a timely manner, or at all.
We expect to increase our manufacturing and service capacity to meet the anticipated demand for our products. Although we have consistently increased our manufacturing and service capacity, and we believe we have plans in place sufficient to ensure we have adequate capacity to meet our current business plans, there are uncertainties inherent in expanding our manufacturing and service capabilities, and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facilities and launch new products. Also, we may not manufacture the right product mix to meet customer demand, especially as we introduce new products. As a result, we may experience difficulties in meeting customer, collaborator, and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions and quality control issues that have temporarily reduced or suspended production of certain products. Due to the intricate nature of manufacturing complex instruments, consumables, and products that contain DNA and enzymes, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products (or to produce them economically), or prevent us from achieving expected performance levels, any of which could adversely affect our business, financial condition, or results of operations.
An interruption in our ability to manufacture our products or an inability to obtain key components or raw materials due to a catastrophic disaster, infectious disease, or infrastructure failure could adversely affect our business.
We currently manufacture in a limited number of locations. Our manufacturing facilities are located in San Diego and the San Francisco Bay Area in California; Madison, Wisconsin; Cambridge, United Kingdom; and Singapore. These areas are subject to natural disasters such as earthquakes, wildfires, or floods. If a natural disaster were to damage one of our facilities significantly or if other events, such as the outbreak of a serious infectious disease, were to cause our operations to fail or be significantly curtailed, we may be unable to manufacture our products, provide our services, or develop new products. In addition, if the capabilities of our suppliers and component manufacturers are limited or stopped, due to the outbreak of a serious infectious disease, natural or other disasters, quality, regulatory, or other reasons, it could negatively impact our ability to manufacture our products.
Many of our manufacturing processes are automated and are controlled by our custom-designed laboratory information management system, LIMS. Additionally, the decoding process in our array manufacturing requires significant network and storage infrastructure. If either our LIMS system or our networks or storage infrastructure were to fail for an extended period of time, our ability to manufacture our products on a timely basis could be adversely impacted and we could be prevented from achieving our expected shipments in any given period.
Risk Relating to COVID-19
We are unable to predict the extent to which the COVID-19 pandemic will adversely impact our business operations and financial performance.
The COVID-19 pandemic has significantly curtailed the movement of people, goods and services worldwide, including in the regions in which we sell our products and services and conduct our business operations. The magnitude and duration of the resulting decline in business activity cannot currently be estimated with any degree of certainty and is expected to continue to (1) negatively impact the demand for our products and services, (2) restrict our sales operations, marketing efforts, and customer field support, (3) impede the shipping and delivery of our products to customers (4) disrupt our supply chain, and (5) limit our ability to conduct research and product development and other important business activities. We continue to monitor our operations and applicable government recommendations, and we have made modifications to our normal operations because of the COVID-19 pandemic. In the U.S. and in most other key markets, most of our employees continue to work remotely, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our laboratories and manufacturing facilities, and many may continue to work remotely for an indefinite period of time. Remote working arrangements could impact employees’ productivity and morale. We may incur increased costs and experience delays in sales, purchases, deliveries and other business activities associated with the invocation by customers, suppliers, service providers, and other business partners of contractual provisions they may claim are triggered by the COVID-19 pandemic. Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets which may adversely impact the fair value of our marketable securities.
Risk Relating to the Protection of Our Intellectual Property
Any inability to effectively protect our proprietary technologies could harm our competitive position.
The proprietary positions of companies developing tools for the life sciences, genomics, forensics, agricultural, and pharmaceutical industries, including our proprietary position, generally are uncertain and involve complex legal and factual questions. Our success depends to a large extent on our ability to develop proprietary products and technologies and to obtain patents and maintain adequate protection of our intellectual property in the United States and other countries. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. Any finding that our patents or applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications
could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. Furthermore, as issued patents expire, including those related to our sequencing-by-synthesis technology. As this occurs, we may lose some competitive advantage as others develop, market, and sell competing products, which could negatively affect our revenue.
In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and may therefore fail to provide us with any competitive advantage. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive, and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel. There is also the risk that others may independently develop similar or alternative technologies or design around our patented technologies. In that regard, certain patent applications in the United States may be maintained in secrecy until the patents issue, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months.
We also rely upon trade secrets and proprietary know-how protection for our confidential and proprietary information, and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how, or other confidential information.
Risks Related to Acquisitions, Including the Acquisition of GRAIL
Our acquisitions expose us to risks that could adversely affect our business, and we may not achieve the anticipated benefits of acquisitions of businesses or technologies.
As part of our strategy to develop and identify new products, services, and technologies, we have made, and may continue to make, acquisitions of technologies, products, or businesses. Acquisitions involve numerous risks and operational, financial, and managerial challenges, including the following, any of which could materially and adversely affect our business, financial condition, or results of operations:
•difficulties in integrating new operations, technologies, products, and personnel;
•lack of synergies or the inability to realize expected synergies and cost-savings;
•lengthy, expensive, and time and resource-intensive regulatory review processes, the outcomes of which can be unpredictable;
•difficulties in managing geographically dispersed operations;
•underperformance of any acquired technology, product, or business relative to our expectations and the price we paid;
•negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges;
•the potential loss of key employees, customers, and strategic partners of acquired companies;
•claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;
•the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;
•diversion of management’s attention and company resources from existing operations of the business;
•inconsistencies in standards, controls, procedures, and policies;
•the impairment of intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and
•assumption of, or exposure to, known or unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify.
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. There can be no assurance that any of the acquisitions we make will be successful or will be, or will remain, profitable. Our failure to successfully address the above risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
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 General Court, the European Commission, the FTC and/or other governmental or regulatory authorities 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 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 U.S. Federal Trade Commission (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. We filed an answer to the FTC’s complaint in the administrative court on April 13, 2021, and the administrative trial commenced on August 24, 2021, and live testimony concluded on September 24, 2021. Post-trial briefing deadlines have not yet been scheduled. At the effective time of the mergers, no legal prohibition on the consummation of the Acquisition was in effect in the United States. We intend to vigorously defend against the FTC’s 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. The European Commission had previously notified us asserting that as a result of the Referral, pursuant to Article 22(4) of the EU Merger Regulation, we were prohibited from implementing the Acquisition (i) until the European Commission clears the Acquisition under the EU Merger Regulation or (ii) until the European Commission refuses the Referral, and therefore the European Commission’s acceptance of the Referral continued the purported standstill on the completion of the Acquisition until such time as the European Commission completes its review and approves the Acquisition. 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 decision asserting 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, and we await the court’s judgment. We intend to vigorously challenge the European Commission’s assertion of jurisdiction to review the Acquisition.
As previously disclosed, on July 22, 2021, the European Commission announced it had initiated a Phase II review of the Acquisition. The duration of the Phase II review cannot be foreseen with certainty. As of the completion of the Acquisition, the European Commission’s purported standstill on such completion, the validity and appropriateness of which we are challenging, had not been suspended or overturned. We continue to work with the European Commission on its review and had voluntarily offered to enter into a hold separate arrangement with the European Commission with respect to GRAIL and its operations pending the resolution of the action in the EU General Court and/or completion of the European Commission’s review. On October 29, 2021, the European Commission adopted an order imposing interim measures (the Interim Measures Order), which 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 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 costs, which may be burdensome to implement and administer, and which we expect to continue for the duration of the hold separate arrangement. 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. Further, our failure to comply with the terms of the Interim Measures Order may result in the European Commission seeking to impose fines or other penalties on us. On December 1, 2021, we filed an action with the EU General Court asking for annulment of the Interim Measures Order. The hearing of that application has been stayed pending the judgment of the EU General Court regarding the European Commission’s assertion of jurisdiction.
As a result of our decision to proceed with the completion of the Acquisition during the pendency of the European Commission’s review, the European Commission will likely seek to impose a fine on us pursuant to Article 14(2)(b) of the EU Merger Regulation of up to 10% of our consolidated annual revenues. 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 intend to vigorously defend against any such fines, penalties, remedies or restrictions, but we cannot predict the scope or severity thereof or the outcome of any related proceedings. 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 will hold the assets or equity interests of GRAIL separate for some period of time, and such delay in integration may materially and adversely affect 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.
We are subject to various uncertainties and restrictions while the Acquisition remains subject to ongoing regulatory and legal review and proceedings related thereto, including the Interim Measures Order, that could adversely affect our business, financial condition and results of operations.
During the period in which the Acquisition remains subject to ongoing regulatory and legal review and proceedings related thereto, it is possible that customers, suppliers, commercial partners and/or other persons with whom we have a business relationship may elect to delay or defer certain business decisions or decide to seek to terminate, change or renegotiate their relationships with us because of the Acquisition or the various uncertainties related to the ongoing review of the Acquisition, other legal and regulatory proceedings, and/or the hold separate arrangement required by the European Commission’s Interim Measures Order, which could significantly reduce the expected benefits of the Acquisition and/or negatively affect our revenues, earnings and cash flows, and the market price of our common stock, regardless of the ultimate outcome of such review and proceedings. Uncertainty about the effects of the Acquisition (and about the related regulatory and judicial review process) on employees may impair our ability to attract, retain and motivate key personnel while the Acquisition remains subject to ongoing regulatory and legal review and proceedings, and for a period of time thereafter. If key employees depart because of these or other issues, we and GRAIL may have to incur additional and significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent. Matters relating to the Acquisition (including the regulatory and legal review and proceedings related thereto and the hold separate arrangement required by the Interim Measures Order) require substantial commitments of time and resources by Illumina management and personnel and will continue in the future, which otherwise would have been devoted to day-to-day operations and other opportunities that may have been beneficial to us. We will also incur significant costs related to the ongoing review and proceedings related to the Acquisition (including to comply with the hold separate obligations required by the Interim Measures Order). These costs are substantial and include financial advisory, legal, monitoring trustee, and accounting costs.
We currently are prohibited from integrating GRAIL’s business, and if such integration is ultimately permitted, we may not be able to integrate GRAIL’s business successfully or manage the combined business effectively. Many of the anticipated synergies and other benefits of acquiring GRAIL may not be realized or may not be realized within the expected time frame.
We and GRAIL entered into the Merger Agreement with the expectation that the Acquisition would result in various benefits, including, among other things, operating efficiencies, synergies and cost savings. Achieving the anticipated benefits of the Acquisition is subject to a number of uncertainties, including whether our and GRAIL’s businesses can be integrated in an efficient and effective manner. While we are subject to the Interim Measures Order, we are not able to integrate or have any involvement in or influence over GRAIL’s business and our interactions with GRAIL are subject to the review of the appointed monitoring trustee, which requires us to incur additional costs and burdens us and GRAIL with administrative inefficiencies. Such delay in integration and managerial prohibitions may materially and adversely affect the synergies and other benefits we expect to achieve as a result of the Acquisition, and there is no guarantee that we will be permitted to integrate GRAIL in a timely manner or at all.
If we are ultimately able to integrate GRAIL, it is possible that the integration process could take longer than anticipated or that the management of the combined business could be more difficult than expected, and could result in the loss of valuable employees, the disruption of ongoing businesses, processes, systems and business relationships, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Acquisition. Our results of operations could also be adversely affected by any issues attributable to either company’s operations that arise or are based on events or actions that occur before the closing of the Acquisition or during the pendency of the hold separate arrangements. The integration process is subject to a number of risks and uncertainties, and no assurance can be given that the anticipated benefits of the Acquisition will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could adversely affect our and the surviving company’s future businesses, financial condition, results of operations and prospects.
The market price of our common stock may decline as a result of the Acquisition and the final outcomes of the regulatory and judicial reviews thereof.
The market price of our common stock may decline as a result of the Acquisition and the final outcomes of the regulatory and judicial reviews thereof, and holders of our common stock could see a decrease in the value of their investment in our common stock, if, among other things, we are unable to achieve the expected growth in earnings, or if the anticipated benefits, including synergies, cost savings, innovation and operational efficiencies, from the Acquisition are not realized, or if the Acquisition and integration-related costs related to the Acquisition are greater than expected, or if, as a result of unfavorable outcomes of regulatory and judicial proceedings, we are subject to fines, penalties, restrictions or remedies, including divestiture remedies. The market price of our common stock may also decline if we do not achieve the anticipated benefits of the Acquisition as rapidly or to the extent expected by financial or industry analysts or if the effects of the Acquisition on our financial position, results of operations or cash flows are not otherwise consistent with the expectations of financial or industry analysts. In addition, some former GRAIL stockholders may decide not to continue to hold the shares of our common stock they receive as a result of the Acquisition, and any such sales of our common stock could have the effect of depressing their market price. Moreover, general fluctuations in stock markets could have a material adverse effect on the market for, or liquidity of, our common stock, regardless of our actual operating performance.
Risks Relating to Our Strategic Collaborations
If we fail to maintain and successfully manage our strategic collaborations, our future results may be adversely impacted.
Strategic collaborations require significant management attention and operational resources. If we are unable to successfully manage or meet milestones related to our strategic collaborations, or if our partners do not perform as we expect, our future results may be adversely impacted. Furthermore, dependence on collaborative arrangements may also subject us to other risks, including:
•we may be required to relinquish important rights, including intellectual property, marketing and distribution rights;
•we may disagree with our partners as to rights to intellectual property, the direction of research programs, or commercialization activities;
Our•our revenues may be lower than if we were to develop and commercialize such products ourselves;
•a collaboration partner could develop and market a product that is competitive with either products developed under the collaboration or other of our products, either independently or in collaboration with others, including our competitors;
•our partners could become unable or less willing to expend their resources in support of our collaboration;
•collaborations could expose us to additional regulatory risks; and
•we may be unsuccessful at managing multiple simultaneous collaborations.
Moreover, disagreements with a partner or former partner could develop, and any conflict with a partner or former partner could reduce our ability to enter into future collaboration agreements and negatively impact our relationships with one or more existing partners.
As we develop, market, or sell diagnostic tests, we may encounter delays in receipt, or limits in the amount,
Physicians and patients may not order diagnostic tests that we develop, market, sell, or enable such as our prenatal tests, unless third-party payors, such as managed care organizations as well as government payors such as Medicare and Medicaid and governmental payors outside of the United States, pay a substantial portion of the test price. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical tests that involve new technologies or provide novel diagnostic information. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on diagnostic product suppliers to reduce their prices. Reimbursement by a payor may depend on a number of factors, including a payor's determination that tests using our technologies are:
not experimental or investigational;
medically necessary;
appropriate for the specific patient;
cost-effective;
supported by peer-reviewed publications; and
included in clinical practice guidelines.
Since each third-party payor often makes reimbursement decisions on an individual patient basis, obtaining such approvals is a time-consuming and costly process that requires us to provide scientific and clinical data supporting the clinical benefits of each of our products. As a result, there can be no assurance that reimbursement approvals will be obtained. This process can delay the broad market introduction of new products, and could have a negative effect on our results of operations. As a result, third-party reimbursement may not be consistent or financially adequate to cover the cost of diagnostic products that we develop, market, or sell. This could limit our ability to sell our products or cause us to reduce prices, which would adversely affect our results of operations.
Even if our tests are reimbursed, third-party payors may withdraw their coverage policies, cancel their contracts with our customers at any time, review and adjust the rate of reimbursement, require co-payments from patients, or stop paying for our tests, which would reduce our revenues. In addition, insurers, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts to control the cost, utilization, and delivery of healthcare services. These measures have resulted in reduced payment rates and decreased utilization for the clinical laboratory industry. Reductions in the reimbursement rate of payors may occur in the future. Reductions in the prices at which our tests are reimbursed could have a negative impact on our results of operations.
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Risks Relating to Litigation
Litigation, other proceedings, or third-party claims of intellectual propertyinfringement could require us to spend significant time and money and could preventus from selling our products or services.
Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we enter new markets or introduce new products, we expect that competitors will likely claim that our products infringe their intellectual property rights as part of a business strategy to impede our successful competition. In addition, third parties may have obtained and may in the future obtain patents allowing them to claim that the use of our technologies infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have an adverse impact on our stock price, which may be disproportionate to the actual impact of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to develop further, commercialize, or sell products or services, and could result in the award of substantial damages against us. In the event of a successful infringement claim against us, we may be required to pay damages and obtain one or more licenses from third parties or be prohibited from selling certain products or services. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins and earnings per share. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products or services could adversely affect our ability to grow or maintain profitability.
ReductionIf product or delayservice liability lawsuits are successfully brought against us, we may face reduced demand for our products and incur significant liabilities.
Our products and services are used for sensitive applications, and we face an inherent risk of exposure to product or service liability claims if our products or services are alleged to have caused harm, resulted in research and development budgets and government fundingfalse negatives or false positives, or do not perform in accordance with specifications. Product liability claims filed against us or against third parties to whom we may adversely affect our revenue.
The timing and amount of revenues from customers that rely on government and academic research funding may vary significantly due to factors that can be difficult to forecast, and there is significant uncertainty concerning government and academic research funding worldwide. Funding for life science research can be volatile during periods of economic uncertainty. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Other programs, such as defense, entitlement programs, or general efforts to reduce budget deficitshave an obligation could be viewed by governments as a higher priority. These budgetary pressurescostly and time-consuming to defend and result in substantial damages or reputational risk. We cannot be certain that we would be able to successfully defend any product or service liability lawsuit brought against us. Regardless of merit or eventual outcome, product or service liability claims may result in reduced allocationsin: decreased demand for our products; injury to government agencies that fund researchour reputation; increased product liability insurance costs; costs of related litigation; and development activities, such assubstantial monetary awards to plaintiffs.
Although we carry product and service liability insurance, if we become the U.S. National Institutesubject of Health,a successful product or NIH. Past proposals to reduce budget deficits have included reduced NIH and other research and development allocations. Any shift away from the funding of life sciences research and development or delays surrounding the approval of government budget proposalsservice liability lawsuit, our insurance may cause our customers to delay or forego purchases of our products,not cover all substantial liabilities, which could adversely affecthave an adverse effect on our business, financial condition, or results of operations.
Risks Relating to Government Regulation
Our acquisitions expose us to risks that could adversely affect our business, and wemay not achieve the anticipated benefits of acquisitions of businesses ortechnologies.
As part of our strategy to develop and identify new products, services, and technologies, we have made, and may continue to make, acquisitions of technologies, products, or businesses. Acquisitions involve numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:
difficulties in integrating new operations, technologies, products, and personnel;
lack of synergies or the inability to realize expected synergies and cost-savings;
lengthy, expensive, and time and resource-intensive regulatory review processes, the outcomes of which can be unpredictable;
difficulties in managing geographically dispersed operations;
underperformance of any acquired technology, product, or business relative to our expectations and the price we paid;
negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges;
the potential loss of key employees, customers, and strategic partners of acquired companies;
claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;
the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;
diversion of management’s attention and company resources from existing operations of the business;
inconsistencies in standards, controls, procedures, and policies;
the impairment of intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and
assumption of, or exposure to, known or unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify.
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. There can be no assurance that any of the acquisitions we make will be successful or will be, or will remain, profitable. Our failure to successfully address the above risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
If we are unable to increase our manufacturing or service capacity and develop and maintainoperation of our manufacturing or service capability, we may not be able to launch or supportour products or services in a timely manner, or at all.
We continue to increase our manufacturing and service capacity to meet the anticipated demand for our products. Although we have significantly increased our manufacturing and service capacity and we believe we have plans in place sufficient to ensure we have adequate capacity to meet our current business plans, there are uncertainties inherent in expanding our manufacturing and service capabilities, and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facilities and launch new products. Also, we may not manufacture the right product mix to meet customer demand, especially as we introduce new products. As a result, we may experience difficulties in meeting customer, collaborator, and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions and quality control issues that have temporarily reduced or suspended production of certain products. Due to the intricate nature of manufacturing complex instruments, consumables, and products that contain DNA and enzymes, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products (or to produce them economically), or prevent us from achieving expected performance levels, any of which could adversely affect our business, financial condition, or results of operations.
An interruption in our ability to manufacture our products or an inability to obtain key components or raw materials due to a catastrophic disaster or infrastructure could adversely affect our business.
We currently manufacture in a limited number of locations. Our manufacturing facilities are located in San Diego and the San Francisco Bay Area in California; Madison, Wisconsin; Cambridge, United Kingdom; and Singapore. These areas are subject to natural disasters such as earthquakes, wildfires, or floods. If a natural disaster were to damage one of our facilities significantly or if other events, such as the outbreak of a serious infectious disease, were to cause our operations to fail or be significantly curtailed, we may be unable to manufacture our products, provide our services, or develop new products. In addition, if the capabilities of our suppliers and component manufacturers are limited or stopped, due to disasters, quality, regulatory, or other reasons, it could negatively impact our ability to manufacture our products.
Many of our manufacturing processes are automated and are controlled by our custom-designed laboratory information management system (LIMS). Additionally, the decoding process in our array manufacturing requires significant network and storage infrastructure. If either our LIMS system or our networks or storage infrastructure were to fail for an extended period of time, our ability to manufacture our products on a timely basis could be adversely impacted and we could be prevented from achieving our expected shipments in any given period.
If we lose our key personnel or are unable to attract and retain additionalpersonnel, we may be unable to achieve our goals.
Our future success depends upon the continuing services of members of our senior management team and scientific and engineering personnel. The loss of their services could adversely impact our ability to achieve our business objectives. In addition, the continued growth of our business depends on our ability to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, software, engineering, sales, marketing, and technical support. We compete for qualified management and scientific personnel with other life science and technology companies, universities, and research institutions. Competition for these individuals, particularly in the San Diego and San Francisco areas, is intense, and the turnover rate can be high. Moreover, changes in immigration policies, laws and regulations in the United States or other jurisdictions may make it more difficult for us to hire and retain members of management and scientific and engineering personnel. Failure to attract and retain management and scientific and engineering personnel could prevent us from pursuing collaborations or developing our products or technologies. Additionally, integration of acquired companies and businesses can be disruptive, causing key employees of the acquired business to leave. Further, we use share-based compensation, including restricted stock units and performance stock units, to attract key personnel, incentivize them to remain with us, and align their interests with ours by building long-term stockholder value. If our stock price decreases, the value of these equity awards decreases and, therefore, reduces a key employee’s incentive to stay.
Any inability to effectively protect our proprietary technologies could harm ourcompetitive position.
The proprietary positions of companies developing tools for the life sciences, genomics, forensics, agricultural, and pharmaceutical industries, including our proprietary position, generally are uncertain and involve complex legal and factual questions. Our success depends to a large extent on our ability to develop proprietary products and technologies and to obtain patents and maintain adequate protection of our intellectual property in the United States and other countries. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. Any finding that our patents or applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. Furthermore, as issued patents expire, we may lose some competitive advantage as others develop competing products, and, as a result, we may lose revenue.
In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and may therefore fail to provide us with any competitive advantage. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive, and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel. There is also the risk that others may independently develop similar or alternative technologies or design around our patented technologies. In that regard, certain patent applications in the United States may be maintained in secrecy until the patents issue, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months.
We also rely upon trade secrets and proprietary know-how protection for our confidential and proprietary information, and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how, or other confidential information.
Our strategic investments may result in losses.
We periodically make strategic investments in various public and private companies with businesses or technologies that may complement our business. In addition, we periodically form companies that remain consolidated within our financial statements but receive substantial funding from third-party investors who are granted certain control and governance rights.
The market values of these strategic investments may fluctuate due to market conditions and other conditions over which we have no control. Declines in the market price and valuations of the securities that we hold in other companies would require us to record losses related to our investment. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.
Security breaches, including with respect to cyber-security, and other disruptions could compromise our information, products, and services, disrupt our operations, and expose us to liability, which could cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information (and that of our customers), and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure maintenance of this information is important to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to cyber-attacks by hackers or breached due to employee error, malfeasance, or other disruptions.
As a leader in the field of genetic analysis, we may face cyber-attacks that attempt to penetrate our network security, including our data centers; sabotage or otherwise disable our research, products, and services, including instruments at our customers’ sites; misappropriate our or our customers' and partners' proprietary information, which may include personally identifiable information; or cause interruptions of our internal operations, systems and services. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disruption, disclosure, or other loss of information could result in an adverse impact on our business, legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation.
Our products, if used for the diagnosis of disease, could be subject to governmentregulation, and the regulatory approval and maintenance process for such products maybe expensive, time-consuming, and uncertain both in timing and in outcome.
Our products are not subject to FDA clearance or approval if they are not intended to be used for the diagnosis, treatment or prevention of disease. However, as we expand our product line to encompass products that are intended to be used for the diagnosis of disease, such as our FDA-regulated MiSeqDx, certain of our products will become subject to regulation by the FDA, or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. Such regulatory approval processes or clearances may be expensive, time-consuming, and uncertain, and our failure to obtain or comply with such approvals and clearances could have an adverse effect on our business, financial condition, or operating results. In addition, changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required.
Diagnostic products are regulated as medical devices by the FDA and comparable international agencies and may require either clearance from the FDA following the 510(k) pre-market notification process or pre-market approval from the FDA, in each case prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for diagnostic products that we develop, we may not be able to launch or successfully commercialize such products in a timely manner, or at all.
In addition, if our products labeled as “For Research Use Only. Not for use in diagnostic procedures,” or RUO, are used, or could be used, for the diagnosis of disease, the regulatory requirements related to marketing, selling, and supporting such products could change or be uncertain, even if such use by our customers is without our consent. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
If the FDA requires in the future that any of our LDT products be subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
Certain of our diagnostic products are currently available through laboratories that are certified under the Clinical Laboratory Improvements Amendments (CLIA) of 1988. These products are commonly called “laboratory
developed tests,” or LDTs. For a number of years, the FDA has exercised its regulatory enforcement discretion not to regulate LDTs as medical devices if created and used within a single laboratory. However, the FDA has been reconsidering its enforcement discretion policy and has commented that regulation of LDTs may be warranted because of the growth in the volume and complexity of testing services utilizing LDTs. We cannot predict the nature or extent of the FDA's final guidance or regulation of LDTs, in general, or with respect to our LDTs, in particular. If the FDA requires in the future that LDT products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
If product or service liability lawsuits are successfully brought against us, we may face reduced demand forRisks Relating to Information Technology Security and Continuity
Despite using commercially reasonably measures to secure our systems, networks, and products, security breaches, including with respect to cyber-security, and incur significant liabilities.
Ourother disruptions could compromise our information, products, and services, are used fordisrupt our or our customers’ operations, and expose us to liability, which could cause our business and reputation to suffer.
In the ordinary course of our business, we collect sensitive applications,data, including intellectual property, our proprietary business information (and that of our customers), and we face anpersonally identifiable information of our customers and employees and store it in our data centers and on our networks. Our customers also collect sensitive data and information using our products. The secure maintenance of information is important to our operations and business strategy. Despite our security measures, due to the inherent riskfeatures of exposure to product or service liability claims ifInternet and technical limitations our information technology and infrastructure and our products may be impacted by cyber-attacks, employee error, malfeasance, or other disruptions.
We and users of our products may face cyber-attacks, including from nation state actors or advanced persistent threats who attempt to penetrate our or our customers’ network security, including our data centers; sabotage or otherwise disable our research, products, and services, are alleged to have caused harm, resulted in false negativesincluding instruments at our customers’ sites; misappropriate our or false positives,our customers' and partners' proprietary information, which may include personally identifiable information; or do not perform in accordance with specifications. Product liability claims filed against uscause interruptions of our or against third parties to whom we may have an obligationour customers’ internal operations, systems and services. Any such breach could compromise our or our customers’ networks and the information stored there could be costly and time-consuming to defend andaccessed, publicly disclosed, lost, or stolen. Any such access, disruption, disclosure, or other loss of information could result in substantial damagesan adverse impact on our or reputational risk. We cannot be certainour customers’ business, legal claims or proceedings, liability under laws that we would be able to successfully defend any product or service liability lawsuit brought against us. Regardlessprotect the privacy of merit or eventual outcome, product or service liability claims may result in:
decreased demand for our products;
injurypersonal information, and damage to our reputation;reputation.
increased product liability insurance costs;
costsDisruption of related litigation; and
substantial monetary awards to plaintiffs.
Although we carry product and service liability insurance, if we become the subject of a successful product or service liability lawsuit, our insurance may not cover all substantial liabilities, whichcritical information technology systems could have an adverse effect on our operations, business, customer relations, and financial condition,condition.
Our success depends, in part, on the continued and uninterrupted performance of our IT systems, which are used extensively in virtually all aspects of our business. IT systems may be vulnerable to damage from a variety of sources, including telecommunications or resultsnetwork failures, power loss, natural disasters, human acts, terrorist attacks, computer viruses, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems. Certain of operations.our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Despite any precautions we may take, such problems could
result in, among other consequences, disruption of our operations, which could harm our reputation and financial results.
As we continuously adjust our workflow and business practices and add additional functionality to our enterprise software, problems could arise that we have not foreseen, including interruptions in service, loss of data, inaccurate data, or reduced functionality. Such problems could adversely impact our ability to run our business in a timely manner.
General Risk Factors
Doing business internationally, especially in emerging markets, creates operational risk for our business.
Conducting and launching operations on an international scale requires close coordination of activities across multiple jurisdictions and consumes significant management resources. If we fail to coordinate and manage these activities effectively, including the risks noted below, our business, financial condition, or results of operations could be adversely affected. We have sales offices located internationally throughout Europe, the Asia-Pacific region, and Brazil, as well as manufacturing and research facilities in Singapore and the United Kingdom. Shipments to customers outside the United States comprised 48%52%, 47%49%, and 45%48% of our total revenue in 2019, 2018,2021, 2020, and 2017,2019, respectively.
We are subject to the following risks and challenges associated with conducting business globally, particularly in emerging international markets, where we expect a growing proportion of our business to be located:
•longer payment cycles and difficulties in collecting accounts receivable outside of the United States;
•longer sales cycles due to the volume of transactions taking place through public tenders;
•challenges in staffing and managing foreign operations;
•tariffs and other trade barriers;
•lack of consistency, and unexpected changes, in legislative or regulatory requirements of foreign countries into which we sell our products;
•increased risk of governmental and regulatory scrutiny and investigations;
•the burden of complying with a wide variety of foreign laws, regulations, and legal standards;
•operating in locations with a higher incidence of corruption and fraudulent business practices;
•import and export requirements, tariffs, taxes, and other trade barriers;
•weak or no protection of intellectual property rights;
•possible enactment of laws regarding the management of and access to data and public networks and websites;
•potential negative impact of a global health crisis, such as the outbreak of a serious infectious disease, to our commercial or manufacturing operations, including the loss of productivity from our own workforce and consequences of any restrictions on the movement of people or materials;
•possible future limitations on foreign-owned businesses;
•significant taxes; and
•other factors beyond our control, including political, social and economic instability, and security concerns in general.
Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other local laws prohibiting corrupt payments to governmental officials, anti-competition regulations and sanctions imposed by the U.S. Office of Foreign Assets Control and other similar laws and regulations. Violations of these laws and regulations could result in fines and penalties, criminal sanctions,
restrictions on our business conduct and on our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to attract and retain employees, our international operations, our business and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
As we continue to expand our business into multiple international markets, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these risks could harm our international operations and negatively impact our sales, adversely affecting our business, results of operations, financial condition and growth prospects.
We are exposed to risks associated with transactions denominated in foreign currency.
During 2019, nearly2021, more than half of our international sales were denominated in foreign currencies while the majority of our purchases of raw materials were denominated in U.S. dollars. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Changes in currency exchange rates may also affect the relative prices at which we are able to sell products in the same market. Our revenues from international customers may be negatively impacted as increases in the U.S. dollar relative to our international customers local currency could make our products more expensive, impacting our ability to compete. Our costs of materials from international suppliers may increase if, in order to continue doing business with us, they raise their prices as the value of the U.S. dollar decreases relative to their local currency. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recent global financial conditions have led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue, which could adversely affect our business, financial condition, or results of operations.
Significant developments stemming from the U.S. administration or the U.K.’s referendum on membership in the EU could have an adverse effect on us.
The U.S. administration has called for substantial changes to trade agreements and is imposing significant increases on tariffs on goods imported into the United States. Changes in U.S. or foreign political, regulatory and economic conditions or laws and policies governing foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate could adversely affect our operating results and our business. The prospect of such changes has already affected, and may continue to affect, the timing of customer purchases.
Additionally, on June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, or EU. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the EU. Our business could be affected as the United Kingdom and the EU negotiate the United Kingdom’s exit from the EU and adopt and implement new trade agreements. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results and our customers’ businesses.
We are subject to risks related to taxation in multiple jurisdictions.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining the provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax policies, laws, regulations, or rates, changes in the level of non-deductible expenses (including share-based compensation), location of operations, changes in our future levels of research and development spending, mergers and acquisitions, or the result of examinations by various tax authorities. Although we believe our tax estimates are reasonable, if the U.S. Internal Revenue Service or other taxing authority disagrees with the positions taken on our tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.
Our operating results may vary significantly from period to period, and we may not be able to sustain operating profitability.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and services, the effects of new product launches and related promotions, the timing and availability of our customers’ funding, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, and other unpredictable factors that may affect customer ordering patterns. In particular, collaboration agreements and large-scale government funded projects such as population genomic projects are the result of lengthy and complex negotiations, and the timing of revenue recognition in connection with these agreements and projects may be subject to significant uncertainty because of the long-term nature of development and collaboration projects, as well as sample availability for population genomics projects.
Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. While we anticipate future growth, there is some uncertainty as to the timing of revenue on a quarterly basis. This is because a substantial portion of our quarterly revenue is typically recognized in the last month of a quarter and because the pattern for revenue generation during that month is normally not linear, with a concentration of orders in the final weeks of the quarter. In light of that, our manufacturing and shipping operations may experience increased pressure and demand during the time period shortly before the end of a fiscal quarter; delays related to our manufacturing and shipping operations during this time period could delay the recognition of revenue.
A large portion of our expenses are relatively fixed, including expenses for facilities, equipment, and personnel. To meet the anticipated growth in our business, we may incur fixed expenses, such as costs related to facility expansions, before we generate revenue sufficient to fully support such expenses. In addition, we expect operating expenses to continue to increase in absolute dollars to support our anticipated growth. Accordingly, our ability to sustain profitability will depend in part on the rate of growth, if any, of our revenue and on the level of our expenses, and if revenue does not grow as anticipated, we may not be able to maintain annual or quarterly profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our future revenue growth or cause a sequential decline in quarterly revenue. In addition, non-cash share-based compensation expense and expenses related to prior and future acquisitions are also likely to continue to adversely affect our future profitability. Due to the possibility of significant fluctuations in our revenue and expenses, particularly from quarter to quarter, we believe that quarterly comparisons of our operating results are not a good indication of our future performance.
If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price could decline.
From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period-to-period changes in net sales. As a result, our operating results could vary materially from quarter-to-quarter based on the receipt of such orders and their ultimate recognition as revenue.
We may not be able to convert our order backlog into revenue.
Our backlog consists of orders believed to be firm as of the balance sheet date. However, we may allow customers to make product substitutions as we launch new products. We may not receive revenue from some of these orders, and the order backlog we report may not be indicative of our future revenue. Many events can cause an order to be delayed or not completed at all, some of which may be out of our control. If we delay fulfilling customer orders, or if customers reconsider their orders, those customers may seek to cancel or modify their orders with us. Customers may otherwise seek to cancel or delay their orders even if we are prepared to fulfill them. If our orders in backlog do not result in sales, our operating results may suffer.
Disruption of critical information technology systems or material breaches in the security of our systems could have an adverse effect on our operations, business, customer relations, and financial condition.
Information technology (IT) systems help us operate efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produce our consolidated financial statements. IT systems are used extensively in virtually all aspects of our business, including product manufacturing and supply chain, sales forecast, order fulfillment and billing, customer service, logistics, and management of financial reports and data. Our success depends, in part, on the continued and uninterrupted performance of our IT systems. IT systems may be vulnerable to damage from a variety of sources, including telecommunications or network failures, power loss, natural disasters, human acts, terrorist attacks, computer viruses, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems. Certain of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Despite any precautions we may take, such problems could result in, among other consequences, disruption of our operations, which could harm our reputation and financial results.
If we do not allocate and effectively manage the resources necessary to build and sustain the proper IT infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. If our data management systems do not effectively collect, store, process, and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, or human error, our ability to effectively plan, forecast, and execute our business plan and comply with applicable laws and regulations will be impaired. Any such impairment could adversely affect our reputation, financial condition, results of operations, cash flows, and the timeliness with which we report our internal and external operating results.
As we continuously adjust our workflow and business practices and add additional functionality to our enterprise resource planning software and other software applications, problems could arise that we have not foreseen, including interruptions in service, loss of data, or reduced functionality. Such problems could adversely impact our ability to provide quotes, take customer orders, and otherwise run our business in a timely manner. In addition, if our new systems fail to provide accurate and increased visibility into pricing and cost structures, it may be difficult to improve or maximize our profit margins. As a result, our results of operations and cash flows could be adversely affected.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, and litigation, are highly complex and involve many subjective assumptions, estimates, and
judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.
Ethical, legal, and social concerns related to the use of genetic information could reduce demand for our products or services.
Our products may be used to provide genetic information about humans, agricultural crops, other food sources, and other living organisms. The information obtained from our products could be used in a variety of applications, which may have underlying ethical, legal, and social concerns regarding privacy and the appropriate uses of the resulting information, including preimplantation genetic screening of embryos, prenatal genetic testing, genetic engineering or modification of agricultural products, or testing genetic predisposition for certain medical conditions, particularly for those that have no known cure. Our customers’ implementation of our products to provide their own products and services may raise such concerns and affect our own reputation. U.S. and international governmental authorities could, for social or other purposes, call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests, even if permissible. These and other ethical, legal, and social concerns about genetic testing may limit market acceptance of our technology for certain applications or reduce the potential markets for our technology, either of which could have an adverse effect on our business, financial condition, or results of operations.
Conversion of our outstanding convertible senior notes may result in losses.
As of December 29, 2019,January 2, 2022, we had $517$750 million aggregate principal amount of convertible senior notes due 2021 and $750 million aggregate principle amount of convertible notes duein 2023 outstanding. The notes are convertible into cash, and if applicable, shares of our common stock under certain circumstances, including trading price conditions related to our common stock. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the notes to be extinguished and their corresponding net carrying value. The fair value of the notes to be extinguished depends on our current incremental borrowing rate. The net carrying value of our notes has an implicit interest rate of 3.5% with respect to convertible notes due 2021 and 3.7% with respect to the convertible senior notes due in 2023. If our incremental borrowing rate at the time of conversion is lower than the implied interest rate of the notes, we will record a loss in our consolidated statement of income during the period in which the notes are converted.
Our Certificate of Incorporation and Bylaws include anti-takeover provisions that may make it difficult for another company to acquire control of us or limit the price investors might be willing to pay for our stock.
Certain provisions of our Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make it more difficult to successfully complete a merger, tender offer, or proxy contest involving us. Our Certificate of Incorporation has provisions that give our Board the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without stockholder approval. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock. In addition, the staggered terms of our board of directors could have the effect of delaying or deferring a change in control.
In addition, certain provisions of the Delaware General Corporation Law (DGCL), including Section 203 of the DGCL, may have the effect of delaying or preventing changes in the control or management of Illumina. Section 203 of the DGCL provides, with certain exceptions, for waiting periods applicable to business combinations with stockholders owning at least 15% and less than 85% of the voting stock (exclusive of stock held by directors, officers, and employee plans) of a company.
The above factors may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of Illumina, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock.
LEGAL PROCEEDINGS
See discussion of legal proceedings in note “8. Legal Proceedings” within the Consolidated Financial Statements section of this report, which is incorporated by reference herein.
SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data for each of our last five fiscal years. This information should be read in conjunction with the consolidated financial statements and notes thereto included in the Consolidated Financial Statements section of this report.
Statement of Income Data
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended |
(In millions, except per share data) | December 29, 2019 (52 weeks) | | December 30, 2018 (52 weeks) | | December 31, 2017 (52 weeks) | | January 1, 2017 (52 weeks) | | January 3, 2016 (53 weeks) |
Total revenue | $ | 3,543 |
| | $ | 3,333 |
| | $ | 2,752 |
| | $ | 2,398 |
| | $ | 2,220 |
|
Income from operations | $ | 985 |
| | $ | 883 |
| | $ | 606 |
| | $ | 587 |
| | $ | 613 |
|
Consolidated net income | $ | 990 |
| | $ | 782 |
| | $ | 678 |
| | $ | 428 |
| | $ | 458 |
|
Net income attributable to Illumina stockholders | $ | 1,002 |
| | $ | 826 |
| | $ | 726 |
| | $ | 463 |
| | $ | 462 |
|
Net income attributable to Illumina stockholders for earnings per share | $ | 1,002 |
| | $ | 826 |
| | $ | 725 |
| | $ | 454 |
| | $ | 462 |
|
Earnings per share attributable to Illumina stockholders: |
Basic | $ | 6.81 |
| | $ | 5.63 |
| | $ | 4.96 |
| | $ | 3.09 |
| | $ | 3.19 |
|
Diluted | $ | 6.74 |
| | $ | 5.56 |
| | $ | 4.92 |
| | $ | 3.07 |
| | $ | 3.10 |
|
Shares used in computing earnings per share: | | |
| | |
| | |
| | |
|
Basic | 147 |
| | 147 |
| | 146 |
| | 147 |
| | 145 |
|
Diluted | 149 |
| | 149 |
| | 148 |
| | 148 |
| | 149 |
|
Certain amounts may not recalculate using the rounded amounts provided.
Balance Sheet Data
|
| | | | | | | | | | | | | | | | | | | |
| December 29, 2019 | | December 30, 2018 | | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
In millions | |
Cash, cash equivalents and short-term investments | $ | 3,414 |
| | $ | 3,512 |
| | $ | 2,145 |
| | $ | 1,559 |
| | $ | 1,386 |
|
Total assets | $ | 7,316 |
| | $ | 6,959 |
| | $ | 5,257 |
| | $ | 4,281 |
| | $ | 3,688 |
|
Short-term debt | — |
| | $ | 1,107 |
| | $ | 10 |
| | $ | 2 |
| | $ | 75 |
|
Long-term debt | $ | 1,141 |
| | $ | 890 |
| | $ | 1,182 |
| | $ | 1,056 |
| | $ | 1,016 |
|
Redeemable noncontrolling interests | — |
| | $ | 61 |
| | $ | 220 |
| | $ | 44 |
| | $ | 33 |
|
Total stockholders’ equity | $ | 4,613 |
| | $ | 3,845 |
| | $ | 2,749 |
| | $ | 2,270 |
| | $ | 1,849 |
|
MARKET INFORMATION
Our common stock has been quoted on The NASDAQ Global Select Market under the symbol “ILMN” since July 28, 2000. Prior to that time, there was no public market for our common stock. The following table sets forth, for the fiscal periods indicated, the quarterly high and low sales prices per share of our common stock as reported on The NASDAQ Global Select Market.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| High | | Low | | High | | Low |
First Quarter | $ | 555.77 | | | $ | 356.00 | | | $ | 339.63 | | | $ | 196.78 | |
Second Quarter | $ | 487.00 | | | $ | 368.07 | | | $ | 377.80 | | | $ | 251.14 | |
Third Quarter | $ | 526.00 | | | $ | 391.33 | | | $ | 404.20 | | | $ | 260.42 | |
Fourth Quarter | $ | 425.00 | | | $ | 341.03 | | | $ | 378.33 | | | $ | 288.01 | |
|
| | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| High | | Low | | High | | Low |
First Quarter | $ | 322.32 |
| | $ | 268.62 |
| | $ | 256.64 |
| | $ | 207.51 |
|
Second Quarter | $ | 369.00 |
| | $ | 300.35 |
| | $ | 293.15 |
| | $ | 225.82 |
|
Third Quarter | $ | 380.76 |
| | $ | 263.30 |
| | $ | 372.61 |
| | $ | 274.66 |
|
Fourth Quarter | $ | 336.63 |
| | $ | 279.76 |
| | $ | 371.91 |
| | $ | 271.00 |
|
Stock Performance Graph
The graph below compares the cumulative total stockholder returns on our common stock for the last five fiscal years with the cumulative total stockholder returns on the NASDAQ Composite Index, the NASDAQ Biotechnology Index, and the S&P 500 Index for the same period. The graph assumes that $100 was invested on December 28, 201430, 2016 in our common stock and in each index and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
Compare 5-Year Cumulative Total Return among Illumina, NASDAQ Composite Index,
NASDAQ Biotechnology Index, and S&P 500 Index
Holders
As of February 7, 2020,11, 2022, we had 128703 record holders of our common stock.
Dividends
We have never paid cash dividends and have no present intention to pay cash dividends in the foreseeable future. The indenturesindenture for our convertible senior notes due in 2021 and 2023, which are convertible into cash and, in certain circumstances, shares of our common stock, requirerequires us to increase the conversion rate applicable to the notes if we pay any cash dividends.
SHARE REPURCHASES AND SALES
Purchases of Equity Securities by the Issuer
On February 6, 2019, our BoardThere were no purchases of Directors authorized a share repurchase program, which superseded all prior and available repurchase authorizations, to repurchase $550 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. Shares repurchasedequity securities in open-market transactions pursuant to this program during 2019 were as follows:
|
| | | | | | | | | | | | | |
In thousands, except price per share |
Total Number of Shares Purchased | |
Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
First Quarter | 210 |
| | $ | 297.38 |
| | 210 |
| | $ | 487,500 |
|
Second Quarter | — |
| | — |
| | — |
| | $ | 487,500 |
|
Third Quarter | 687 |
| | $ | 289.47 |
| | 687 |
| | $ | 288,756 |
|
Fourth Quarter (1) | 208 |
| | $ | 300.03 |
| | 208 |
| | $ | 226,200 |
|
Total | 1,105 |
| | $ | 292.97 |
| | 1,105 |
| | $ | 226,200 |
|
2021.
(1)
Repurchases during the fourth quarter of 2019 were as follows:
|
| | | | | | | | | | | | | |
In thousands, except price per share |
Total Number of Shares Purchased | |
Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
September 30, 2019 - October 27, 2019 | — |
| | — |
| | — |
| | $ | 288,756 |
|
October 28, 2019 - November 24, 2019 | 208 |
| | $ | 300.03 |
| | 208 |
| | $ | 226,200 |
|
November 25, 2019 - December 29, 2019 | — |
| | — |
| | — |
| | $ | 226,200 |
|
Total | 208 |
| | $ | 300.03 |
| | 208 |
| | $ | 226,200 |
|
Sales of Unregistered Securities
There were no sales of unregistered securities in 2019.2021.
|
| |
MANAGEMENT’S DISCUSSION & ANALYSIS |
Our Management’s Discussion and Analysis (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying consolidated financial statements and notes. This MD&A is organized as follows:
| |
• | Management’s Overview and Outlook•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 consolidated statements of cash flows, changes in our financial position, and our financial commitments.
|
| |
• | Contractual Obligations. Tabular disclosure of known contractual obligations as of December 29, 2019.
|
| |
• | Critical Accounting Policies and Estimates. Discussion of significant changes we believe are important to understanding the assumptions and judgments underlying our consolidated financial statements.
|
| |
• | Quantitative and Qualitative Disclosure about Market Risk. Discussion of our financial instruments’ exposure to market risk.
|
| |
• | Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our consolidated financial statements.
|
| |
• | Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
|
Our discussion of our operating results and significant known trends that affect our business.
•Results of operations,Operations. Detailed discussion of our revenues and expenses.
•Liquidity and Capital Resources. Discussion of key aspects of our consolidated statements of cash flows, changes in our financial condition,position, and cash flow for 2017our financial commitments.
•Critical Accounting Policies and Estimates. Discussion of critical accounting policies and the significant assumptions, estimates, and judgments we make in applying such policies.
•Quantitative and Qualitative Disclosure about Market Risk. Discussion of our financial instruments’ exposure to market risk.
•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our consolidated financial statements.
This MD&A generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations” withinOperations" in our filing ofAnnual Report on Form 10-K for the fiscal year ended 2017.2020.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. See “Special NoteConsideration Regarding Forward-Looking Statements” preceding the Business & Market Overview section of this report for additional factors relating to such statements. See “Risk Factors” within the Business & Market Information section of this report for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods.
MANAGEMENT’S OVERVIEW AND OUTLOOK
This overview and outlook providesprovide 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
We have one reportable segment, Core Illumina, 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. Prior to the deconsolidation of GRAIL on February 28, 2017, our Consolidated VIEs reportable segment included the combined operations of Helix and GRAIL. For information on Helix and GRAIL, refer to note “3. Investments and Fair Value Measurements” and note “11. Segments and Geographic Data” within the Consolidated Financial Statements section of this report.
Our focus on innovation has established us as the 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.
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 pending the European Commission’s ongoing merger review. GRAIL is currently being held and operated as a separate company, with oversight provided by an appointed, independent monitoring trustee during the European Commission’s ongoing merger review. See note “4. Acquisitions, Goodwill and Intangible Assets” and note “8. Legal Proceedings” for further details.
We have two reportable segments, Core Illumina and GRAIL, as of January 2, 2022. The results of operations of GRAIL have been included in our consolidated financial statements from the date of acquisition. Core Illumina relates to our core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included Core Illumina and Helix. For information on Helix, refer to note “3. Investments and Fair Value Measurements” within the Consolidated Financial Statements section of this report. Also see note “11. Segments and Geographic Data.”
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 consolidated financial statements and the notes thereto within the Consolidated Financial Statements section of this report, and the other transactions, events, and trends discussed in “Risk Factors” within the Business & Market Information section of this report.
Financial Overview
Beginning in 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 in which we sell our products and services and conduct our business operations. We expect the COVID-19 pandemic to continue to impact our sales and results of operations in 2022, the size and duration of which is significantly uncertain.
Consolidated financial highlights includefor 2021 included the following:
•Revenue increased 6%40% in 20192021 to $3.5$4.5 billion compared to $3.3$3.2 billion in 20182020 primarily due to increasedgrowth in sequencing consumables revenue and revenueinstruments, as our customers experience a broader recovery from developmentthe COVID-19 pandemic, as well as an increase in service and licensing agreements, partially offset by a decline in microarray revenue due to weakness in the direct-to-consumer (DTC) market.other revenue. We expect our revenue to continue to increase in 2020, although we anticipate ongoing weakness in the DTC market. We are continuing to monitor and assess the effects of the coronavirus outbreak on our commercial and manufacturing operations, including any impact on our revenue in 2020.2022.
•Gross profit as a percentage of revenue (gross margin) was 69.6%69.7% in 20192021 compared to 69.0%68.0% in 2018.2020. The increase in gross margin increase was driven primarily by an increase in revenue from development and licensing agreements as well as an increase in sequencing consumables as a percentage of totalhigher revenue, which generate higher gross margins,generated increased fixed cost leverage, partially offset by lower average selling prices on instruments and consumables and lower volumes in our service business.less favorable product mix. Our gross margin in future periods will dependdepends on severalmany 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.
| |
• | Income from operations as a percentage of revenue increased to 27.8% in 2019 compared to 26.5% in 2018•(Loss) income from operations as a percentage of revenue decreased to (2.7)% in 2021 compared to 17.9% in 2020. The decrease was primarily due to share-based compensation expense recorded in 2021 related to the acceleration of outstanding equity awards as part of the GRAIL acquisition, other GRAIL acquisition-related expenses and an increase in performance-based compensation. When excluding the additional share-based compensation expense recorded in 2021 related to the GRAIL acquisition, we expect our operating expenses to continue to grow on an absolute basis in 2022.
•increased revenue, improved gross margins, and a decrease in operating expenses as a percentage of revenue. We expect our operating expenses to continue to grow on an absolute basis in 2020. |
Our effective tax rate was 11.4%13.8% and 12.5%23.3% in 20192021 and 2018,2020, respectively. In 2019,2021, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, discrete tax benefits related to uncertain tax positions, and tax benefits related to share-based compensation.Kingdom.
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” in “Risk Factors” within the Business & Market Information section of this report. As a result of the U.S. Court of Appeals for the Ninth Circuit decision on June 7, 2019 to overturn a U.S. Tax Court opinion provided in Q3 2015 that stock compensation should be excluded from cost sharing charges, we anticipate our effective tax rate may be adversely impacted. The final resolution of this case is uncertain, but if it is determined that the outcome of this decision is more likely than not, a discrete tax expense of up to $30 million could be recorded. Excluding this item, weWe anticipate that our future effective tax rate will remainbe lower than the
U.S. federal statutory tax rate of 21% due to the portion of our earnings that will be subject to lower statutory tax rates.
•We ended 20192021 with cash, cash equivalents, and short-term investments totaling $3.4$1.3 billion, of which approximately $547$446 million was held by our foreign subsidiaries.
RESULTS OF OPERATIONS
To enhance comparability, the following table sets forth audited consolidated statement of operations data for 2019, 2018,2021, 2020, and 2017,2019, stated as a percentage of total revenue.revenue(1).
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Revenue: | | | | | |
Product revenue | 87.7 | % | | 84.4 | % | | 82.7 | % |
Service and other revenue | 12.3 | | | 15.6 | | | 17.3 | |
Total revenue | 100.0 | | | 100.0 | | | 100.0 | |
Cost of revenue: | | | | | |
Cost of product revenue | 23.4 | | | 24.3 | | | 22.6 | |
Cost of service and other revenue | 5.3 | | | 6.8 | | | 6.8 | |
Amortization of acquired intangible assets | 1.6 | | | 0.9 | | | 1.0 | |
Total cost of revenue | 30.3 | | | 32.0 | | | 30.4 | |
Gross profit | 69.7 | | | 68.0 | | | 69.6 | |
Operating expense: | | | | | |
Research and development | 26.2 | | | 21.1 | | | 18.3 | |
Selling, general and administrative | 46.2 | | | 29.0 | | | 23.5 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total operating expense | 72.4 | | | 50.1 | | | 41.8 | |
(Loss) income from operations | (2.7) | | | 17.9 | | | 27.8 | |
Other income (expense): | | | | | |
Interest income | — | | | 1.3 | | | 2.1 | |
Interest expense | (1.3) | | | (1.5) | | | (1.5) | |
| | | | | |
Other income, net | 23.5 | | | 8.7 | | | 3.2 | |
Total other income, net | 22.2 | | | 8.5 | | | 3.8 | |
Income before income taxes | 19.5 | | | 26.4 | | | 31.6 | |
Provision for income taxes | 2.7 | | | 6.1 | | | 3.6 | |
Consolidated net income | 16.8 | | | 20.3 | | | 28.0 | |
Add: Net loss attributable to noncontrolling interests | — | | | — | | | 0.3 | |
Net income attributable to Illumina stockholders | 16.8 | % | | 20.3 | % | | 28.3 | % |
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Revenue: | |
| | |
| | |
|
Product revenue | 82.7 | % | | 82.5 | % | | 83.2 | % |
Service and other revenue | 17.3 |
| | 17.5 |
| | 16.8 |
|
Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of revenue: | | | |
| | |
|
Cost of product revenue | 22.6 |
| | 22.1 |
| | 24.7 |
|
Cost of service and other revenue | 6.8 |
| | 7.8 |
| | 7.6 |
|
Amortization of acquired intangible assets | 1.0 |
| | 1.1 |
| | 1.3 |
|
Total cost of revenue | 30.4 |
| | 31.0 |
| | 33.6 |
|
Gross profit | 69.6 |
| | 69.0 |
| | 66.4 |
|
Operating expense: | |
| | |
| | |
|
Research and development | 18.3 |
| | 18.7 |
| | 19.8 |
|
Selling, general and administrative | 23.5 |
| | 23.8 |
| | 24.6 |
|
Total operating expense | 41.8 |
| | 42.5 |
| | 44.4 |
|
Income from operations | 27.8 |
| | 26.5 |
| | 22.0 |
|
Other income (expense): | |
| | |
| | |
|
Interest income | 2.1 |
| | 1.3 |
| | 0.7 |
|
Interest expense | (1.5 | ) | | (1.7 | ) | | (1.3 | ) |
Other income, net | 3.2 |
| | 0.7 |
| | 16.5 |
|
Total other income, net | 3.8 |
| | 0.3 |
| | 15.9 |
|
Income before income taxes | 31.6 |
| | 26.8 |
| | 37.9 |
|
Provision for income taxes | 3.6 |
| | 3.3 |
| | 13.3 |
|
Consolidated net income | 28.0 |
| | 23.5 |
| | 24.6 |
|
Add: Net loss attributable to noncontrolling interests | 0.3 |
| | 1.3 |
| | 1.8 |
|
Net income attributable to Illumina stockholders | 28.3 | % | | 24.8 | % | | 26.4 | % |
_____________(1)Percentages may not recalculate due to rounding.
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021-2020 | | |
Dollars in millions | 2021 | | 2020 | | Change | | % Change | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Core Illumina: | | | | | | | | | | | | | |
Consumables | $ | 3,220 | | | $ | 2,304 | | | $ | 916 | | | 40 | % | | | | | | |
Instruments | 753 | | | 431 | | | 322 | | | 75 | | | | | | | |
Total product revenue | 3,973 | | | 2,735 | | | 1,238 | | | 45 | | | | | | | |
Service and other revenue | 546 | | | 504 | | | 42 | | | 8 | | | | | | | |
Total Core Illumina revenue | 4,519 | | | 3,239 | | | 1,280 | | | 40 | | | | | | | |
GRAIL: | | | | | | | | | | | | | |
Service and other revenue | 12 | | | — | | | 12 | | | 100 | | | | | | | |
Eliminations | (5) | | | — | | | (5) | | | 100 | | | | | | | |
Total consolidated revenue | $ | 4,526 | | | $ | 3,239 | | | $ | 1,287 | | | 40 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 - 2018 | | 2018 - 2017 |
(Dollars in millions) | 2019 | | 2018 | | Change | | % Change | | 2017 | | Change | | % Change |
Consumables | $ | 2,392 |
| | $ | 2,177 |
| | $ | 215 |
| | 10 | % | | $ | 1,771 |
| | $ | 406 |
| | 23 | % |
Instruments | 537 |
| | 572 |
| | (35 | ) | | (6 | ) | | 518 |
| | 54 |
| | 10 |
|
Total product revenue | 2,929 |
| | 2,749 |
| | 180 |
| | 7 |
| | 2,289 |
| | 460 |
| | 20 |
|
Service and other revenue | 614 |
| | 584 |
| | 30 |
| | 5 |
| | 463 |
| | 121 |
| | 26 |
|
Total revenue | $ | 3,543 |
| | $ | 3,333 |
| | $ | 210 |
| | 6 | % | | $ | 2,752 |
| | $ | 581 |
| | 21 | % |
Service and other revenue consists primarily of revenue generated from genotyping and sequencing services, instrument service contracts, and development and licensing agreements. Total revenue primarily relates to Core Illumina for all periods presented.
2019 Compared to 2018
The increase in Core Illumina consumables revenue in 20192021 was driven by a $251 millionprimarily due to an increase in sequencing consumables revenue primarily due to growth in the instrument installed base. The increase in sequencing consumables revenue was partially offset by a decrease in microarray consumables revenue, primarily due to ongoing weakness in the direct-to-consumer (DTC) market. Instruments revenue decreased in 2019 primarily due to a lower average selling price for our NovaSeq instrument compared to its historic range as well as fewer shipments of our microarray instruments. These decreases were partially offset by increased shipments of our NextSeq instruments in 2019. Service and other revenue increased in 2019 primarily due to increased revenue from development and licensing agreements, partially offset by decreased revenue from sequencing and genotyping services.
2018 Compared to 2017
The increase in consumables revenue in 2018 was primarily due to a $340$875 million, increase in sequencing consumables revenue driven primarily by growth in the instrument installed base. Instrumentsbase, as our customers experience a broader recovery from the COVID-19 pandemic. Core Illumina instruments revenue increased in 20182021, primarily due to a $48 millionan increase in sequencing instruments revenue of $319 million, which was driven by increased shipments of our NovaSeq and NextSeq instruments, partially offset by fewer shipments of our HiSeq instrument. Serviceinstruments. Core Illumina service and other revenue increased in 2018 as a result of2021, primarily due to increased revenue from extended maintenance service contracts and sequencing services, and a patent litigation settlement, partially offset by a decrease in development agreements, and genotypinglicensing agreements. GRAIL service and other revenue, for the period subsequent to the acquisition, relates to cancer detection services.
Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021-2020 | | |
Dollars in millions | 2021 | | 2020 | | Change | | % Change | | | | | | |
Gross profit (loss): | | | | | | | | | | | | | |
Core Illumina | $ | 3,195 | | | $ | 2,203 | | | $ | 992 | | | 45 | % | | | | | | |
GRAIL | (41) | | | — | | | (41) | | | 100 | | | | | | | |
Consolidated gross profit | $ | 3,154 | | | $ | 2,203 | | | $ | 951 | | | 43 | % | | | | | | |
| | | | | | | | | | | | | |
Gross margin: | | | | | | | | | | | | | |
Core Illumina | 70.7 | % | | 68.0 | % | | | | | | | | | | |
GRAIL | * | | — | | | | | | | | | | | |
Consolidated gross margin | 69.7 | % | | 68.0 | % | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 - 2018 | | 2018 - 2017 |
(Dollars in millions) | 2019 | | 2018 | | Change | | % Change | | 2017 | | Change | | % Change |
Gross profit | $ | 2,467 |
| | $ | 2,300 |
| | $ | 167 |
| | 7 | % | | $ | 1,826 |
| | $ | 474 |
| | 26 | % |
Gross margin | 69.6 | % | | 69.0 | % | | | | | | 66.4 | % | | | | |
_____________
*Not meaningful.
2019 Compared to 2018
The increase in Core Illumina gross margin increase in 20192021 was driven primarily by an increase inhigher revenue, which generated increased fixed cost leverage, and increased revenue from development and licensing agreements as well as an increase in sequencing consumables as a percentage of total revenue, which generate higher gross margins,patent litigation settlement, partially offset by lower average selling prices on instruments and consumables and lower volumes in our service business.less favorable product mix. GRAIL gross loss, for the period subsequent to the acquisition, was primarily due to amortization of intangible assets of $45 million.
2018 Compared to 2017
The gross margin increase in 2018 was driven primarily by an increase in consumables as a percentage of total revenue, which generate higher gross margins, and an $18 million impairment of an acquired intangible asset and inventory reserves related to product transitions that were recorded in 2017.
Operating Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021-2020 | | |
Dollars in millions | 2021 | | 2020 | | Change | | % Change | | | | | | |
Research and development: | | | | | | | | | | | | | |
Core Illumina | $ | 885 | | | $ | 682 | | | $ | 203 | | | 30 | % | | | | | | |
GRAIL | 300 | | | — | | | 300 | | | 100 | | | | | | | |
| | | | | | | | | | | | | |
Consolidated research and development | $ | 1,185 | | | $ | 682 | | | $ | 503 | | | 74 | % | | | | | | |
| | | | | | | | | | | | | |
Selling, general and administrative: | | | | | | | | | | | | | |
Core Illumina | $ | 1,502 | | | $ | 941 | | | $ | 561 | | | 60 | % | | | | | | |
GRAIL | 590 | | | — | | | 590 | | | 100 | | | | | | | |
| | | | | | | | | | | | | |
Consolidated selling, general and administrative | 2,092 | | | 941 | | | 1,151 | | | 122 | | | | | | | |
Total consolidated operating expense | $ | 3,277 | | | $ | 1,623 | | | $ | 1,654 | | | 102 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 - 2018 | | 2018 - 2017 |
(Dollars in millions) | 2019 | | 2018 | | Change | | % Change | | 2017 | | Change | | % Change |
Research and development | $ | 647 |
| | $ | 623 |
| | $ | 24 |
| | 4 | % | | $ | 546 |
| | $ | 77 |
| | 14 | % |
Selling, general and administrative | 835 |
| | 794 |
| | 41 |
| | 5 |
| | 674 |
| | 120 |
| | 18 |
|
Total operating expense | $ | 1,482 |
| | $ | 1,417 |
| | $ | 65 |
| | 5 | % | | $ | 1,220 |
| | $ | 197 |
| | 16 | % |
2019 Compared to 2018
Core Illumina R&D expense increased by $43$203 million, or 7%30%, primarily due to increased headcount, as we continue to investincreases in the research and development of new products and enhancements to existing products, partially offset by a decrease in performance-based compensation. Helix R&D expense decreased by $19 million, primarily due to its deconsolidation on April 25, 2019.
Core Illumina SG&A expense increased by $73 million, or 10%, primarily due to increased headcount and investments in facilities to support the continued growth and scale of our operations, and $43 millionin expenseslicensing fees related to the Pacific Biosciences acquisition, which was terminated on January 2, 2020, partially offset by a decrease in performance-based compensation. Helix SG&A expense decreased by $32 million, primarily due to its deconsolidation on April 25, 2019.
2018 Compared to 2017
Core Illumina R&D expense increased by $78 million, or 15%, primarily due to increased headcount,co-development agreements, as we continue to invest in the research and development of new products and enhancements to existing products, and an increase in performance-based compensation.
GRAIL R&D expense, of our Consolidated VIEs decreased by $1 million, primarily duefor the period subsequent to the deconsolidationacquisition, consisted primarily of GRAIL in Q1 2017, partially offset by$167 million of share-based compensation expense related to the growth in Helix’s operations.acceleration of outstanding equity awards as part of the acquisition, as well as other compensation costs related to the acquisition, and expenses related to headcount and clinical trials.
Core Illumina SG&A expense increased by $125$561 million, or 20%60%, primarily due to increasedexpenses related to our acquisition of GRAIL, including $245 million in Continuation Payments paid to GRAIL prior to the close of the acquisition, and increases in headcount, performance-based compensation, and investmentsoutside services, partially offset by expenses for fees and other payments to PacBio of $92 million in facilities to support the continued growth and scale of our operations, and an increase in performance-based compensation.2020.
GRAIL SG&A expense, of our Consolidated VIEs decreased by $5 million primarily duefor the period subsequent to the deconsolidationacquisition, consisted primarily of GRAIL in Q1 2017, partially offset by$448 million of share-based compensation expense related to the growthacceleration of Helix's operations.outstanding equity awards as part of the acquisition, as well as other compensation and transaction costs related to the acquisition, and expenses related to headcount.
Total Other Income, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021-2020 | | |
Dollars in millions | 2021 | | 2020 | | Change | | % Change | | | | | | |
Interest income | $ | — | | | $ | 41 | | | $ | (41) | | | (100) | % | | | | | | |
Interest expense | (61) | | | (49) | | | (12) | | | 24 | | | | | | | |
Other income, net | 1,068 | | | 284 | | | 784 | | | 276 | | | | | | | |
Total other income, net | $ | 1,007 | | | $ | 276 | | | $ | 731 | | | 265 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 - 2018 | | 2018 - 2017 |
(Dollars in millions) | 2019 | | 2018 | | Change | | % Change | | 2017 | | Change | | % Change |
Interest income | $ | 75 |
| | $ | 44 |
| | $ | 31 |
| | 70 | % | | $ | 19 |
| | $ | 25 |
| | 132 | % |
Interest expense | (52 | ) | | (57 | ) | | 5 |
| | (9 | ) | | (37 | ) | | (20 | ) | | 54 |
|
Other income, net | 110 |
| | 24 |
| | 86 |
| | 358 |
| | 455 |
| | (431 | ) | | (95 | ) |
Total other income, net | $ | 133 |
| | $ | 11 |
| | $ | 122 |
| | 1,109 | % | | $ | 437 |
| | $ | (426 | ) | | (97 | )% |
OtherTotal other income, net primarily relates to Core Illumina for all periods presented.
2019 Compared to 2018
Interest income increaseddecreased in 2019 compared to 20182021 as a result of higher cash and cash-equivalent balances and yields onselling all of our short-termavailable-for-sale debt securities.securities in Q1 2021. Interest expense consistedconsists primarily of accretion of discount on our convertible senior notes. The increase in 2021 primarily relates to accrued interest on our Term Notes and amortization of debt issuance costs on our bridge facility, which we terminated in 2021. The increase in other income, net in 2019, was primarily due to mark-to-marketthe gain of $899 million from our previously held investment in GRAIL as part of the acquisition, a gain of $86 million related to the exchange of certain GRAIL contingent value rights, fair value adjustments to our Helix contingent value right and to our contingent considerations liabilities, and a $26 million gain on our derivative assets related to the terminated PacBio acquisition, partially offset by a decrease in net gains recognized on strategic investments in marketable equity securities. Additionally, in 2019, we recorded a $39 million gain related to the deconsolidation of Helix and a $15 million gain from the settlement of a contingency related to the deconsolidation of GRAIL in 2017.
2018 Compared to 2017
Interest income increased in 20182021 compared to 2017 as a result of higher yields on our short-term debt securities and higher cash and cash-equivalent balances. Interest expense consisted primarily of accretion of discount on our convertible senior notes and interest recorded on our financing obligations related to our build-to-suit properties. Other income, net, in 2018, consisted primarily of mark-to-market adjustments and impairments from our strategic investments. Other income, net decreased in 2018 primarily due to a $453 million gain recorded on the deconsolidation of GRAIL in 2017.2020.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021-2020 | | |
Dollars in millions | 2021 | | 2020 | | Change | | % Change | | | | | | |
Income before income taxes | $ | 884 | | | $ | 856 | | | $ | 28 | | | 3 | % | | | | | | |
Provision for income taxes | 122 | | | 200 | | | (78) | | | (39) | | | | | | | |
Consolidated net income | $ | 762 | | | $ | 656 | | | $ | 106 | | | 16 | % | | | | | | |
Effective tax rate | 13.8 | % | | 23.3 | % | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 - 2018 | | 2018 - 2017 |
(Dollars in millions) | 2019 | | 2018 | | Change | | % Change | | 2017 | | Change | | % Change |
Income before income taxes | $ | 1,118 |
| | $ | 894 |
| | $ | 224 |
| | 25 | % | | $ | 1,043 |
| | $ | (149 | ) | | (14 | )% |
Provision for income taxes | 128 |
| | 112 |
| | 16 |
| | 14 |
| | 365 |
| | (253 | ) | | (69 | ) |
Consolidated net income | $ | 990 |
| | $ | 782 |
| | $ | 208 |
| | 27 | % | | $ | 678 |
| | $ | 104 |
| | 15 | % |
Effective tax rate | 11.4 | % | | 12.5 | % | | | | | | 35.0 | % | | | | |
2019 Compared to 2018
In 2019,2021, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, discrete tax benefits related to uncertain tax positions, and tax benefits related to share-based compensation.Kingdom. In 2018,2020, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments. 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, and tax benefits related to share-based compensation, offset partially by the $11 million tax expense associated with updating prior year estimatesderivative assets recorded as a result of the impact of U.S. Tax Reform.
2018 Compared to 2017
In 2018, the U.S. federal statutory rate was reduced from 35% to 21%. In 2018, the variance from the U.S. federal statutory 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 tax benefits related to share-based compensation, offset partially by the $11 million tax expense associated with updating prior year estimates of the impact of U.S. Tax Reform. In 2017, the effective tax rate was primarily attributable to the mix of earnings in jurisdictions with lower statutory rates from the U.S. federal statutory rate, such as in Singapore and the United Kingdom,terminated PacBio acquisition, and tax benefits related to share-based compensation. Such impacts were offset primarily by the provisional estimated impact of U.S. Tax Reform of $150 million. The impact of U.S. Tax Reform primarily represented our provisional estimate of the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and the impact of revaluing our U.S. deferred tax assets and liabilities based on the statutory rates at which they are expected to be recognized in the future, which for federal purposes was reduced from 35% to 21%.
LIQUIDITY AND CAPITAL RESOURCES
At December 29, 2019,January 2, 2022, we had approximately $2.0$1.2 billion in cash and cash equivalents, of which approximately $547$446 million was held by our foreign subsidiaries. Cash and cash equivalents increaseddecreased by $898$578 million from lastprior year due to the 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. It is our intention to indefinitely reinvest the historical earnings
Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. During 2021, we sold all of our available-for-sale debt securities and a portion of our marketable equity securities primarily to fund the GRAIL acquisition. As of December 29, 2019,January 2, 2022, we had $1.4 billion$107 million remaining in short-term investments. Our short-term investments are predominantly comprised of marketable securities consistingequity securities.
On August 18, 2021, we acquired GRAIL for total cash and other consideration of U.S government-sponsored entities, corporate debt securities,$9.7 billion, which included cash of $2.9 billion and U.S. Treasury securities.$757 million in fair value of contingent consideration in the form of a contingent value right. As of January 2, 2022, the estimated fair value of the contingent consideration was $615 million. The cash consideration was funded using existing cash of both Illumina and GRAIL, including the $1 billion in capital raised in Q1 2021 through the issuance of term debt. The contingent value rights entitle the holders to receive future cash payments representing a pro rata portion of certain GRAIL-related revenues each year for a 12-year period. 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. Prior to the acquisition, we were required to make monthly Continuation Payments to GRAIL of $35 million through the earlier of the consummation of the acquisition or termination of the GRAIL Merger Agreement, subject to certain exceptions. We made Continuation Payments to GRAIL totaling $245 million in 2021. Subsequent to the acquisition, we did not make any additional monthly payments.
During 2021, we granted certain GRAIL employees cash incentive awards that generally have terms of four years and vest in equal annual installments. As of January 2, 2022, the aggregate cash value of awards outstanding and unvested was $184 million. 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 January 2, 2022, it was not probable that the performance conditions associated with the award will be achieved.
On March 23, 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 net proceeds from the issuance were $992 million. The 2023 Term Notes and the 2031 Term Notes accrue interest at a rate of 0.550% and 2.550% per annum, respectively, payable semi-annually on March 23 and September 23 of each year. The 2023 Term Notes mature on March 23, 2023 and the 2031 Term Notes mature on March 23, 2031. We may redeem for cash all or any portion of the Term Notes, at our option, at any time prior to maturity.
On March 8, 2021, we obtained a 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 full, on March 8, 2026, subject to two one-year extensions at our option and the consent of the extending lenders and certain other conditions. As of January 2, 2022, there were no borrowings outstanding under the Credit Facility.
Our 20192021 Convertible Senior Notes matured on June 15, 2019,2021, by which time the $633$517 million in principal had been converted and was paidrepaid in cash. The excess of the conversion value over the principal amount was paid in shares of common stock. Our convertible senior notes due in 2021 and 2023, with an aggregate principal amount of $750 million, were not convertible as of December 29, 2019.
We made cash payments to Pacific Biosciences of California, Inc. (PacBio) totaling $18 million in 2019. Pursuant to the Termination Agreement, we made a cash payment to PacBio of $98 million on January 2, 2022.
On February 5, 2020, our Board of Directors authorized a new share repurchase program, which represented the Reverse Termination Fee (as defined in the Merger Agreement). Additionally, we made cash paymentssupersedes all prior and available repurchase authorizations, to repurchase $750 million of $6outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. Authorizations to repurchase $15 million of our common stock remained available as of January 2, 2022. We do not intend to make any share repurchases during fiscal year 2022.
We had $20 million and $22up to $118 million, onrespectively, remaining in our capital commitments to two venture capital investment funds as of January 2, 20202022, that are callable through April 2026 and February 3, 2020, respectively,July 2029, respectively.
The impact of the Tax Cuts and will makeJobs Act, enacted on December 22, 2017, resulted in a one-time transition tax on earnings of certain foreign subsidiaries of $105 million, which we elected to pay in installments, and expect to pay over the next four years.
Our other short-term and long-term material cash
paymentrequirements, from known contractual obligations as of
$6 million on or before MarchJanuary 2,
2020. These payments totaling $34 million, along with the $18 million of payments made in the fourth quarter of 2019, are collectively referred to2022, include operating lease liabilities, uncertain tax positions, and amounts due under our executive deferred compensation plan, as
the Continuation Advances. See note “4. Intangible Assets, Goodwill, and Acquisitions”discussed in the Consolidated Financial Statements section of this report for additional details.report.
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;
•potential strategic acquisitions and investments;
potential •repayment of debt obligations; and
•the expansion needs of our facilities, including costs of leasing and building out additional facilities; and
repurchases of our outstanding common stock.
Authorizations to repurchase $226 million of our common stock remained available as of December 29, 2019. On February 5, 2020, our Board of Directors authorized a new share repurchase program, which superseded all prior and available repurchase authorizations, to repurchase $750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion.
We had $51 million and up to $160 million, respectively, remaining in our capital commitments to two venture capital investment funds as of December 29, 2019, that are callable through April 2026 and July 2029, respectively.
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:
•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 | 2021 | | 2020 | | 2019 |
Net cash provided by operating activities | $ | 545 | | | $ | 1,080 | | | $ | 1,051 | |
Net cash (used in) provided by investing activities | (1,069) | | | (554) | | | 745 | |
Net cash used in financing activities | (51) | | | (766) | | | (897) | |
Effect of exchange rate changes on cash and cash equivalents | (3) | | | 8 | | | (1) | |
Net (decrease) increase in cash and cash equivalents | $ | (578) | | | $ | (232) | | | $ | 898 | |
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Net cash provided by operating activities | $ | 1,051 |
| | $ | 1,142 |
| | $ | 875 |
|
Net cash provided by (used in) investing activities | 745 |
| | (1,813 | ) | | (214 | ) |
Net cash (used in) provided by financing activities | (897 | ) | | 594 |
| | (176 | ) |
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | | (4 | ) | | 5 |
|
Net increase (decrease) in cash and cash equivalents | $ | 898 |
| | $ | (81 | ) | | $ | 490 |
|
Operating Activities
Net cash provided by operating activities in 20192021 primarily consisted of net income of $990$762 million plusless net adjustments of $255$65 million partially offset byand net changes in operating assets and liabilities of $194$152 million. The primary non-cash adjustments to net income included a gain on our previously held investment in GRAIL of $899 million, a gain on the exchange of GRAIL contingent value rights of $86 million, deferred income taxes of $76 million, a gain on our Helix contingent value right of $30 million, a gain on derivative assets related to a terminated acquisition of $26 million, and net gains on strategic investments of $18 million, partially offset by share-based compensation of $194$754 million, depreciation and amortization expenses of $188$251 million, and accretion of debt discount on our convertible senior notes of $46 million, deferred income taxes of $11 million, and loss on Continuation Advances of $8 million, partially offset by payment of the accreted debt discount related to our 2019 Notes of $84 million, gains on deconsolidation of $54 million, and unrealized gains on marketable equity securities of $53$32 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increases in accounts receivable, other assets, and prepaid expenses and decreasesother current assets, inventory, and other assets, partially offset by increases in accrued liabilities and accounts payable, and other long-term liabilities, partially offset by a decrease in inventory.payable.
Net cash provided by operating activities in 20182020 primarily consisted of net income of $782$656 million plus net adjustments of $378$351 million partially offset byand net changes in operating assets and liabilities of $18$73 million. The primary non-cash adjustments to net income included share-based compensation of $193$194 million, depreciation and amortization expenses of $179$187 million, deferred income taxes of $117 million, a loss on derivative assets related to a terminated acquisition of $116 million, and accretion of debt discount of $41$40 million, partially offset by deferred income taxesnet gains on strategic
investments of $291 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increasesa decrease in accounts receivable and inventory,increases in accounts payable and other long-term liabilities, partially offset by increases in accrued liabilitiesother assets and accounts payable.prepaid expenses and other current assets.
Investing Activities
Net cash provided byused in investing activities totaled $745$1,069 million in 2019.2021. We purchased $1,010paid $2,444 million, net of available-for-sale securities and $2,016 million of our available-for-sale securities matured or were sold during the period. We received $15 million in proceeds from the settlement of a contingency related to the deconsolidation of GRAIL in 2017. Wecash acquired, for acquisitions, invested $209$208 million in capital expenditures, primarily associated with our investment in facilities, and paid $20purchased $77 million forof available-for-sale debt securities and $52 million of strategic investments. We received $1,362 million related to maturities and sales of our available-for-sale debt securities, $298 million related to sales of our strategic investments and $18$52 million tofrom PacBio for repayment of Continuation Advances. We removed $29 million in cash from our balance sheet as a result of the deconsolidation of Helix.
Net cash used in investing activities totaled $1,813$554 million in 2018.2020. We purchased $2,859$1,802 million of available-for-sale securities and $1,457$1,791 million of our available-for-sale securities matured or were sold during the period. We paid net cash of $100$132 million for derivative assets, consisting of a $98 million Reverse Termination Fee and $34 million in Continuation Advances, associated with the terminated acquisition of PacBio. We purchased strategic investments of $124 million and completed acquisitions and $15for total cash consideration of $98 million, for strategic investments.net of cash acquired. We also invested $296$189 million in capital expenditures, primarily associated with our investment in facilities.facilities and equipment.
Financing Activities
Net cash used in financing activities totaled $897$51 million in 2019.2021. We made payments on our convertible senior notes due in 2021 of $517 million and used $550$511 million to repay financing obligations primarilypay taxes related to net share settlement of equity awards, of which $419 million was for taxes paid for the common stock issued related to the GRAIL acquisition. In addition, we paid $71 million related to our 2019 Notes, $324contingent consideration liabilities, of which $57 million related to the exchange of GRAIL contingent value rights. We received $988 million in net proceeds from the issuance of debt and $60 million in proceeds from the sale of shares under our employee stock purchase plan and the issuance of common stock through the exercise of stock options.
Net cash used in financing activities totaled $766 million in 2020. We used $736 million to repurchase our common stock, and $82$91 million to pay taxes related to net share settlement of equity awards. We received $59$61 million in proceeds from the issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan.
Net cash provided by financing activities totaled $594 million in 2018. We received $735 million in proceeds from the issuance of $750 million in principal amount of our convertible senior notes due 2023, net of issuance costs. We also received $46 million in proceeds from the issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan. We used $201 million to repurchase our common stock and $74 million to pay taxes related to net share settlement of equity awards. Contributions from noncontrolling interest owners were $92 million. Additionally, $4 million was used by Helix to repay financing obligations.
CONTRACTUAL OBLIGATIONS
Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of December 29, 2019, aggregated by type:
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period(1) |
| | | | Less Than | | | | | | More Than |
In millions | | Total | | 1 Year | | 1 – 3 Years | | 3 – 5 Years | | 5 Years |
Debt obligations(2) | | $ | 1,271 |
| | $ | 2 |
| | $ | 519 |
| | $ | 750 |
| | $ | — |
|
Operating lease liabilities(3) | | 970 |
| | 77 |
| | 168 |
| | 171 |
| | 554 |
|
U.S. Tax Reform transition tax(4) | | 87 |
| | — |
| | 17 |
| | 70 |
| | — |
|
Amounts due under executive deferred compensation plan | | 46 |
| | 46 |
| | — |
| | — |
| | — |
|
Total | | $ | 2,374 |
| | $ | 125 |
| | $ | 704 |
| | $ | 991 |
| | $ | 554 |
|
| |
(1) | The table excludes $79 million of uncertain tax positions and $211 million of capital commitments for our venture capital investment funds, as the timing and amounts of settlement remained uncertain as of December 29, 2019. This table also excludes payments totaling $132 million due to PacBio associated with the termination of the merger agreement on January 2, 2020. See note “9. Income Taxes,” note “7. Supplemental Balance Sheet Details,” and note “3. Intangible Assets, Goodwill, and Acquisitions” in the Consolidated Financial Statements section of this report for additional information. |
| |
(2) | Debt obligations include the principal amount of our convertible senior notes due 2021 and 2023, as well as interest payments to be made under the notes. Although these notes mature in 2021 and 2023, respectively, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayments of the principal amounts sooner than the scheduled repayments as indicated in the table. See note “5. Debt and Other Commitments” in the Consolidated Financial Statements section of this report for further discussion. |
| |
(3) | Operating lease liabilities exclude $44 million of legally binding minimum lease payments for leases signed but not yet commenced. |
| |
(4) | U.S. Tax Reform transition tax includes the remaining portion of the one-time tax on earnings of certain foreign subsidiaries which we elected to pay in installments in accordance with the Tax Cuts and Jobs Act enacted on December 22, 2017. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions, and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, the estimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. 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. If market and other conditions change from those that we anticipate, our consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect on our consolidated financial statements.
We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our consolidated financial statements could have been materially different from those presented. Members of our senior management have discussed the development and selection of our critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors. Our accounting
Revenue Recognition
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.agreements, and cancer detection testing services related to the GRAIL business.
We recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. Revenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Most performance obligations are generally satisfied within a short time frame, approximately three to six months, after the contract execution date. The contract price is allocated to each performance obligation in proportion to its standalone selling price. We determine our best estimate of standalone selling price using average selling prices over a rolling 12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts.
Revenue from product sales is recognized generally upon delivery to the end customer, which is when control of the product is deemed to be transferred. Invoicing typically occurs upon shipment and payment is typically due within 60 days from invoice. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. Revenue from genotyping and sequencing services, including cancer detection testing services related to the GRAIL business, is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from development and licensing agreements generally includes upfront and periodic licensing fees, contract research and development services, or payments for development and regulatory milestones. Revenue for these agreements is recognized when each distinct performance obligation is satisfied.
Revenue is recorded net of discounts, distributor commissions, and sales taxes collected on behalf of governmental authorities. Employee sales commissions are recorded as selling, general and administrative expensesexpense when incurred as the amortization period for such costs, if capitalized, would have been one year or less.
In certain markets, products and services are sold to customers through distributors. In most sales through distributors, the product is delivered directly to customers by us. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers.
Investments
We invest in various types ofmarketable and non-marketable equity securities includingand have historically invested in debt securities in government-sponsored entities, corporate debt securities and U.S. Treasury securities and equity securities. As of December 29, 2019,January 2, 2022, we had $1.4 billion$107 million in short-term investments.investments, consisting of marketable equity securities. We classify our investments as Level 1, 2, or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset.
AsIn 2020, approximately 27% of our security holdings were classified as Level 2, as discussed in note “3. Investments and Fair Value Measurements” in the Consolidated Financial Statements section of this report, almost half of our security holdings have been classified as Level 2. Thesereport. Such securities have beenare initially valued at the transaction price and subsequently valued utilizing a third-party service provider who
assesses the fair value using inputs other than quoted prices that are observable either directly or indirectly, such as 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. We perform certain
procedures to corroborate the fair value of these holdings, and in the process, we apply judgment and estimates that if changed, could significantly affect our statement of financial positions.
Inventory Valuation
Inventory is stated at lower of cost or net realizable value. We regularly review inventory for excess and obsolete products and components, taking into account product life cycles, quality issues, historical experience, and usage forecasts. We record write-downs of inventory for potentially excess, obsolete, or impaired goods in order to state inventory at net realizable value. We make assumptions about future demand, market conditions, and the release of new products that may supersede old ones. However, if actual market conditions are less favorable than anticipated, additional inventory write-downs could be required.
Contingencies
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.
Business Combinations
Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. Costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.
In connection with certain acquisitions, contingent consideration can be earned by the sellers upon completion of certain future performance milestones. In these cases, a liability is recorded on the acquisition date, as a component of accrued liabilities and/or other long-term liabilities, for an estimate of the acquisition date fair value of the contingent consideration. We use a Monte Carlo simulation or an income approach to estimate the fair value of contingent consideration. Estimates and assumptions used in a Monte Carlo simulation include forecasted revenues, a revenue risk premium, a revenue volatility, an operational leverage ratio and a counterparty credit spread. An income approach utilizes variable inputs such as anticipated future cash flows, risk-free adjusted discount rates, and nonperformance risk. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in selling, general and administrative expense in our consolidated statements of income.
We typically use the discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended. We capitalize in-process research and development (IPR&D), which is considered indefinite lived until the completion or abandonment of the associated research and development efforts. Upon reaching the end of the relevant research and development project (i.e., upon
commercialization), the IPR&D asset is amortized over its estimated useful life. If the relevant research and development project is abandoned, the IPR&D asset is expensed in the period of abandonment.
If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. We record these adjustments to the provisional amounts with a corresponding offset to goodwill. Any adjustments identified after the measurement period are recorded in the consolidated statements of income.
Goodwill and Intangible Assets with Indefinite Lives — Impairment Assessment
Goodwill and other intangible assets with indefinite useful lives (i.e., IPR&D) are not amortized, however they are tested annually for impairment, in the second quarter of our fiscal year, and whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than the carrying value. Events that would indicate impairment and trigger an interim impairment test include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator.
We perform our goodwill impairment analysis at the reporting unit level, which aligns with our reporting structure and availability of discrete financial information. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair values of our reporting units are less than the carrying amounts, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and our overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair values of our reporting units are less than the carrying amounts, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair values of the reporting units with the carrying values, including goodwill. If the carrying amounts of the reporting units exceed the fair values, we record an impairment loss based on the difference. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions include, but are not limited to, future revenue growth, operating margins, capital expenditures, terminal growth rates and discount rates. We also consider our market capitalization as a part of our analysis. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative goodwill impairment test.
Intangible Assets and Other Long-Lived Assets — Impairment AssessmentsAssessment
We perform regular reviews to determine if any event has occurred that may indicate that the carrying values of our long-livedintangible assets are impaired. A review of identifiable intangible assetswith finite lives and other long-lived assets is performed when an event occurs indicating the potential for impairment.are impaired. If indicators of impairment exist, we assess the recoverability of the affected long-livedassets by determining whether their carrying amounts exceed their undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and compare theirrecord an impairment loss if the carrying value exceeds the fair valuesvalue. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to net book value, significant changes in the respective carrying amounts.ability of an asset to generate positive cash flows and the pattern of utilization of a particular asset.
In order to estimate the fair valuevalues of identifiable intangible assets with finite lives and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting units, we may be required to record future impairment charges for purchased intangible assets.assets with finite lives. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Share-Based Compensation
We measure and recognize compensation expense for all share-based payments based on estimated fair value. Share-based compensation expense is recognized based on the fair value on a straight-line basis over the requisite service periods of the awards. The fair value of our restricted stock and performance stock units is based on the market price of our common stock on the date of grant. The determination of fair valuethe amount of share-based compensation expense for our performance stock units awards requires the use of certain estimates and assumptions that affect the amount of share-based compensation expense recognized in our consolidated statements of income. At each reported period, we reassess the probability of the achievement of corporate performance goals to estimate the amount of shares to be released. Any increase or decrease in share-based compensation expense resulting from an adjustment in the estimated shares to be released is treated as a cumulative catch-up in the period of adjustment. If any of the assumptions or estimates used change significantly, share-based compensation expense may differ materially from what we have recorded in the current period.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Sensitivity
Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed-rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in investment-grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest-sensitive financial instruments.
Changes in interest rates may impact gains or losses from the conversion of our outstanding convertible senior notes. In June 2014, we issued $517 million aggregate principal amount of 0.5% convertible senior notes due 2021 (2021 Notes). In August 2018, we issued $750 million aggregate principal amount of 0% convertible senior notes due 2023 (2023 Convertible Notes). At our election, the notes are convertible into cash, shares of our common stock, or a
combination of cash and shares of our common stock under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock reaches a price at 130% above the conversion price, the notes become convertible. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the
debt to be extinguished depends on our then-current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the notes, we will record a gain or loss in our consolidated statement of income during the period in which the notes are converted. The implicit interest ratesrate for the 2021 and 2023 Notes were 3.5% andwas 3.7%, respectively.. An incremental borrowing rate that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of $100 million aggregate principal amount of each of the 2021 and 2023 Convertible Notes would result in lossesa loss of approximately $2 million and $3 million, respectively.million.
Foreign Currency Exchange Risk
We conduct a portion of our business in currencies other than our U.S. dollar functional currency. These transactions give rise to cash flows and monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. Thedollar; the value of these monetary assets and liabilitiesamounts are subjectexposed to changes in currency exchange rates from the time the transactions are forecasted or originated, until the time the cash settlement in cash.is converted into U.S. dollars. Our foreign currency exposures are primarily concentrated in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, Chinese Yuan Renminbi, and British pound. Both realized and unrealized gains or losses on the value of these monetary assets and liabilities are included in the determination of net income.
We use forward exchange contracts to manage these foreign currency risks relatedand to monetary assets and liabilities denominated in currencies other than the U.S. dollar.hedge portions of our foreign currency exposure associated with forecasted revenue transactions. We only use derivative financial instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial instruments for trading or speculative purposes. We primarily useThe counterparties to these forward exchange contracts expose us to hedgecredit-related risks in the event of their non-performance. We mitigate this risk by actively monitoring credit ratings and only selecting major financial institutions as counterparties. Additionally, our risk of credit-related loss is limited to the fair value of these financial contracts, which were not material to our financial position.
Our forward exchange contracts used to manage foreign currency exposures,risks related to monetary assets and they generallyliabilities have terms of one month or less. Realized and unrealized gains or losses on the fair value of these financial contracts entered into to hedge the exchange rate exposure of these monetary assets and liabilities are also included in the determination of net income, as they have not been designated for hedge accounting. These contracts, which settle monthly, effectively fix the exchange rate at which these specific monetary assets and liabilities will be settled, so that gains or losses on the forward contracts offset the gains or losses from changes in the value of the underlying monetary assets and liabilities. As of December 29, 2019,January 2, 2022, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases was $252$462 million. Our forward exchange contracts used to hedge portions of our foreign currency exposure associated with forecasted revenue transactions have terms of up to 24 months. These derivative financial instruments are designated as cash flow hedges. Gains and losses on these financial contracts, which settle monthly, are generally recorded to revenue in the same period the underlying hedged transactions are recorded. As of January 2, 2022, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases was $450 million.
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our consolidated financial statements see note “1. Organization and Significant Accounting Policies” within the Consolidated Financial Statements section of this report, which is incorporated herein by reference.
OFF-BALANCE SHEET ARRANGEMENTS
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended December 29, 2019, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
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CONSOLIDATED FINANCIAL STATEMENTS |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | Page |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and the Board of Directors and Stockholders of Illumina, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Illumina, Inc. (the Company) as of December 29, 2019January 2, 2022 and December 30, 2018,January 3, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 29, 2019,January 2, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2019January 2, 2022 and December 30, 2018,January 3, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2019,January 2, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 29, 2019,January 2, 2022, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 10, 202018, 2022 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12, effective January 1, 2018.
Adoption of ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accountaccounts or disclosuredisclosures to which it relates.
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Valuation of Inventoryintangible assets acquired and contingent consideration liabilities assumed in connection with the GRAIL acquisition |
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Description of the Matter | The Company's inventories totaled $359 million as of December 29, 2019. As explaineddisclosed in Note 1 to4 of the consolidated financial statements, the Company assessescompleted the valuationacquisition of inventoryGRAIL, Inc. (“GRAIL”) on August 18, 2021 for net consideration of approximately $9.7 billion. The transaction was accounted for as a business combination. The Company recorded intangible assets, including developed technology of $2.4 billion and in-process research and development (“IPR&D”) of $670 million. In connection with the acquisition, the Company recognized a liability of $757 million for acquisition consideration that is related to outstanding contingent value rights. The contingent value rights entitle the holders to receive future payments representing a pro rata portion of certain GRAIL-related revenues each year for a 12-year period. The Company determines the fair value of the contingent consideration arrangements, both as part of the initial purchase price allocation and on an ongoing basis each reporting period. Obsolete inventory or inventory in excess of management's estimated usage requirement is written down to its estimated net realizable value if those balancesperiod, until the arrangements are determined to be less than cost.settled.
Auditing management's estimatesthe Company’s accounting for excessits acquisition of GRAIL was complex due to the significant estimation uncertainty in determining the fair value of the developed technology and obsolete inventory involved subjective auditor judgment becauseIPR&D (the “intangible assets”) and contingent consideration liability. A significant emphasis is placed on the estimates relyappropriateness of the estimate considerations used by management to determine the fair value of the acquired intangible assets and contingent consideration liability due to sensitivity of the respective fair values to the underlying assumptions. The Company used an income approach to measure the intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates, revenue growth rates and technology obsolescence. The Company used a Monte Carlo simulation model to measure the contingent consideration liability. The significant assumptions include forecasted revenues for GRAIL and the discount rate based on a numberthe estimated timing of factors thatpayments. These significant assumptions related to the intangible assets and contingent consideration liability are forward looking and could be affected by future economic and market and economic conditions outside the Company's control. In particular, the excess and obsolete inventory calculations are sensitive to significant assumptions, including product life cycles, quality issues, historical experience, and usage forecasts.
conditions.
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How We Addressed the Matter in Our Audit
| We obtained an understanding, evaluated the design and tested the design and operating effectiveness of internal controls over the Company's excessprocess for determining the fair value of intangible assets acquired and obsolete inventory valuation process, including management's assessmentcontingent consideration liability assumed in connection with the GRAIL acquisition. This included controls over management’s development of the above-described assumptions stated above and data underlyingused in the excess and obsolete inventory valuation.valuation models applied. Our
To test the estimated fair value of the intangible assets, we performed audit procedures that included, among others, evaluating the significant assumptions stated above and the accuracy and completenessCompany’s use of the underlying data management used to value excessincome approach and obsolete inventory. We compared the balance of on-hand inventories to usage forecasts and historical usage and evaluated adjustments to forecasted usage for specific product considerations, such as new product introductions, technological changes or alternative uses. We also assessed the historical accuracy of management's estimates and performed sensitivity analyses overtesting the significant assumptions to evaluate the changesused in the excessvaluation model, as described above. In testing the valuation of the contingent consideration liability, we performed audit procedures that included, among others, evaluating the Company’s use of the Monte Carlo simulation model and obsolete inventory estimates that would result from changestesting the significant assumptions used in the model, as described above. We evaluated the completeness and accuracy of underlying assumptions.data used in supporting the assumptions and estimates. We evaluated the reasonableness of projected revenue growth used within the valuations against analyst expectations, industry trends, market trends, and other market information. In addition, we involved valuation specialists to assist in assessing the significant assumptions and methodologies used by the Company. |
/s/ ERNSTErnst & YOUNGYoung LLP
We have served as the Company’s auditor since 1998.2000.
San Diego, California
February 10, 202018, 2022
ILLUMINA, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
|
| | | | | | | |
| December 29, 2019 | | December 30, 2018 |
ASSETS |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 2,042 |
| | $ | 1,144 |
|
Short-term investments | 1,372 |
| | 2,368 |
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Accounts receivable, net | 573 |
| | 514 |
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Inventory | 359 |
| | 386 |
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Prepaid expenses and other current assets | 105 |
| | 78 |
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Total current assets | 4,451 |
| | 4,490 |
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Property and equipment, net | 889 |
| | 1,075 |
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Operating lease right-of-use assets | 555 |
| | — |
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Goodwill | 824 |
| | 831 |
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Intangible assets, net | 145 |
| | 185 |
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Deferred tax assets, net | 64 |
| | 70 |
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Other assets | 388 |
| | 308 |
|
Total assets | $ | 7,316 |
| | $ | 6,959 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | |
| | |
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Accounts payable | $ | 149 |
| | $ | 184 |
|
Accrued liabilities | 516 |
| | 513 |
|
Long-term debt, current portion | — |
| | 1,107 |
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Total current liabilities | 665 |
| | 1,804 |
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Operating lease liabilities | 695 |
| | — |
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Long-term debt | 1,141 |
| | 890 |
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Other long-term liabilities | 202 |
| | 359 |
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Commitments and contingencies |
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| |
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Redeemable noncontrolling interests | — |
| | 61 |
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Stockholders’ equity: | |
| | |
Preferred stock, $0.01 par value, 10 million shares authorized; no shares issued and outstanding at December 29, 2019 and December 30, 2018 | — |
| | — |
|
Common stock, $0.01 par value, 320 million shares authorized; 194 million shares issued and 147 million outstanding at December 29, 2019; 192 million shares issued and 147 million outstanding at December 30, 2018 | 2 |
| | 2 |
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Additional paid-in capital | 3,560 |
| | 3,290 |
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Accumulated other comprehensive income (loss) | 5 |
| | (1 | ) |
Retained earnings | 4,067 |
| | 3,083 |
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Treasury stock, 47 million shares and 45 million shares at cost at December 29, 2019 and December 30, 2018, respectively | (3,021 | ) | | (2,616 | ) |
Total Illumina stockholders’ equity | 4,613 |
| | 3,758 |
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Noncontrolling interests | — |
| | 87 |
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Total stockholders’ equity | 4,613 |
| | 3,845 |
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Total liabilities and stockholders’ equity | $ | 7,316 |
| | $ | 6,959 |
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| January 2, 2022 | | January 3, 2021 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 1,232 | | | $ | 1,810 | |
Short-term investments | 107 | | | 1,662 | |
Accounts receivable, net | 648 | | | 487 | |
Inventory | 431 | | | 372 | |
Prepaid expenses and other current assets | 295 | | | 152 | |
Total current assets | 2,713 | | | 4,483 | |
Property and equipment, net | 1,024 | | | 922 | |
Operating lease right-of-use assets | 672 | | | 532 | |
Goodwill | 7,113 | | | 897 | |
Intangible assets, net | 3,250 | | | 142 | |
| | | |
Other assets | 445 | | | 609 | |
Total assets | $ | 15,217 | | | $ | 7,585 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 332 | | | $ | 192 | |
Accrued liabilities | 761 | | | 541 | |
| | | |
Convertible senior notes, current portion | — | | | 511 | |
Total current liabilities | 1,093 | | | 1,244 | |
Operating lease liabilities | 774 | | | 671 | |
Term notes | 993 | | | — | |
Convertible senior notes | 702 | | | 673 | |
| | | |
Other long-term liabilities | 915 | | | 303 | |
Commitments and contingencies | 0 | | 0 |
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Stockholders’ equity: | | | |
Preferred stock, $0.01 par value, 10 million shares authorized; no shares issued and outstanding at January 2, 2022 and January 3, 2021 | — | | | — | |
Common stock, $0.01 par value, 320 million shares authorized; 197 million shares issued and 157 million outstanding at January 2, 2022; 195 million shares issued and 146 million outstanding at January 3, 2021 | 2 | | | 2 | |
Additional paid-in capital | 8,938 | | | 3,815 | |
Accumulated other comprehensive income | 17 | | | 2 | |
Retained earnings | 5,485 | | | 4,723 | |
Treasury stock, 40 million shares and 49 million shares at cost at January 2, 2022 and January 3, 2021, respectively | (3,702) | | | (3,848) | |
| | | |
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Total stockholders’ equity | 10,740 | | | 4,694 | |
Total liabilities and stockholders’ equity | $ | 15,217 | | | $ | 7,585 | |
See accompanying notes to consolidated financial statements.
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
|
| | | | | | | | | | | |
| Years Ended |
| December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
Revenue: | |
| | |
| | |
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Product revenue | $ | 2,929 |
| | $ | 2,749 |
| | $ | 2,289 |
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Service and other revenue | 614 |
| | 584 |
| | 463 |
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Total revenue | 3,543 |
| | 3,333 |
| | 2,752 |
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Cost of revenue: | |
| | |
| | |
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Cost of product revenue | 802 |
| | 738 |
| | 679 |
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Cost of service and other revenue | 240 |
| | 260 |
| | 208 |
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Amortization of acquired intangible assets | 34 |
| | 35 |
| | 39 |
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Total cost of revenue | 1,076 |
| | 1,033 |
| | 926 |
|
Gross profit | 2,467 |
| | 2,300 |
| | 1,826 |
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Operating expense: | |
| | |
| | |
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Research and development | 647 |
| | 623 |
| | 546 |
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Selling, general and administrative | 835 |
| | 794 |
| | 674 |
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Total operating expense | 1,482 |
| | 1,417 |
| | 1,220 |
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Income from operations | 985 |
| | 883 |
| | 606 |
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Other income (expense): | |
| | |
| | |
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Interest income | 75 |
| | 44 |
| | 19 |
|
Interest expense | (52 | ) | | (57 | ) | | (37 | ) |
Other income, net | 110 |
| | 24 |
| | 455 |
|
Total other income, net | 133 |
| | 11 |
| | 437 |
|
Income before income taxes | 1,118 |
| | 894 |
| | 1,043 |
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Provision for income taxes | 128 |
| | 112 |
| | 365 |
|
Consolidated net income | 990 |
| | 782 |
| | 678 |
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Add: Net loss attributable to noncontrolling interests | 12 |
| | 44 |
| | 48 |
|
Net income attributable to Illumina stockholders | $ | 1,002 |
| | $ | 826 |
| | $ | 726 |
|
Net income attributable to Illumina stockholders for earnings per share | $ | 1,002 |
| | $ | 826 |
| | $ | 725 |
|
Earnings per share attributable to Illumina stockholders: | | | | | |
Basic | $ | 6.81 |
| | $ | 5.63 |
| | $ | 4.96 |
|
Diluted | $ | 6.74 |
| | $ | 5.56 |
| | $ | 4.92 |
|
Shares used in computing earnings per share: | | | | | |
Basic | 147 |
| | 147 |
| | 146 |
|
Diluted | 149 |
| | 149 |
| | 148 |
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| | | | | | | | | | | | | | | | | |
| Years Ended |
| January 2, 2022 | | January 3, 2021 | | December 29, 2019 |
Revenue: | | | | | |
Product revenue | $ | 3,968 | | | $ | 2,735 | | | $ | 2,929 | |
Service and other revenue | 558 | | | 504 | | | 614 | |
Total revenue | 4,526 | | | 3,239 | | | 3,543 | |
Cost of revenue: | | | | | |
Cost of product revenue | 1,060 | | | 788 | | | 802 | |
Cost of service and other revenue | 241 | | | 220 | | | 240 | |
Amortization of acquired intangible assets | 71 | | | 28 | | | 34 | |
Total cost of revenue | 1,372 | | | 1,036 | | | 1,076 | |
Gross profit | 3,154 | | | 2,203 | | | 2,467 | |
Operating expense: | | | | | |
Research and development | 1,185 | | | 682 | | | 647 | |
Selling, general and administrative | 2,092 | | | 941 | | | 835 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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Total operating expense | 3,277 | | | 1,623 | | | 1,482 | |
(Loss) income from operations | (123) | | | 580 | | | 985 | |
Other income (expense): | | | | | |
Interest income | — | | | 41 | | | 75 | |
Interest expense | (61) | | | (49) | | | (52) | |
Other income, net | 1,068 | | | 284 | | | 110 | |
Total other income, net | 1,007 | | | 276 | | | 133 | |
Income before income taxes | 884 | | | 856 | | | 1,118 | |
Provision for income taxes | 122 | | | 200 | | | 128 | |
Consolidated net income | 762 | | | 656 | | | 990 | |
Add: Net loss attributable to noncontrolling interests | — | | | — | | | 12 | |
Net income attributable to Illumina stockholders | $ | 762 | | | $ | 656 | | | $ | 1,002 | |
| | | | | |
Earnings per share attributable to Illumina stockholders: | | | | | |
Basic | $ | 5.07 | | | $ | 4.48 | | | $ | 6.81 | |
Diluted | $ | 5.04 | | | $ | 4.45 | | | $ | 6.74 | |
Shares used in computing earnings per share: | | | | | |
Basic | 150 | | | 147 | | | 147 | |
Diluted | 151 | | | 148 | | | 149 | |
See accompanying notes to consolidated financial statements.
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| | | | Years Ended | | | Years Ended |
| | December 29, 2019 | | December 30, 2018 | | December 31, 2017 | | | January 2, 2022 | | January 3, 2021 | | December 29, 2019 |
Consolidated net income | | $ | 990 |
| | $ | 782 |
| | $ | 678 |
| Consolidated net income | | $ | 762 | | | $ | 656 | | | $ | 990 | |
Unrealized gain on available-for-sale debt securities, net of deferred tax | | 6 |
| | — |
| | — |
| |
Unrealized (loss) gain on available-for-sale debt securities, net of deferred tax | | Unrealized (loss) gain on available-for-sale debt securities, net of deferred tax | | (1) | | | (3) | | | 6 | |
Unrealized gain on cash flow hedges, net of deferred tax | | Unrealized gain on cash flow hedges, net of deferred tax | | 16 | | | — | | | — | |
Total consolidated comprehensive income | | 996 |
| | 782 |
| | 678 |
| Total consolidated comprehensive income | | 777 | | | 653 | | | 996 | |
Add: Comprehensive loss attributable to noncontrolling interests | | 12 |
| | 44 |
| | 48 |
| Add: Comprehensive loss attributable to noncontrolling interests | | — | | | — | | | 12 | |
Comprehensive income attributable to Illumina stockholders | | $ | 1,008 |
| | $ | 826 |
| | $ | 726 |
| Comprehensive income attributable to Illumina stockholders | | $ | 777 | | | $ | 653 | | | $ | 1,008 | |
See accompanying notes to consolidated financial statements.
ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Illumina Stockholders | | | | |
| | | | | Additional | | Accumulated Other | | | | | | | | | | Total |
| Common Stock | | Paid-In | | Comprehensive | | Retained | | Treasury Stock | | Noncontrolling | | Stockholders’ |
| Shares | | Amount | | Capital | | (Loss) Income | | Earnings | | Shares | | Amount | | Interests | | Equity |
Balance as of January 1, 2017 | 189 |
| | $ | 2 |
| | $ | 2,733 |
| | $ | (1 | ) | | $ | 1,485 |
| | (43 | ) | | $ | (2,022 | ) | | $ | 73 |
| | $ | 2,270 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | 726 |
| | — |
| | — |
| | (7 | ) | | 719 |
|
Issuance of common stock, net of repurchases | 2 |
| | — |
| | 71 |
| | — |
| | — |
| | (1 | ) | | (319 | ) | | — |
| | (248 | ) |
Share-based compensation | — |
| | — |
| | 164 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 164 |
|
Adjustment to the carrying value of redeemable noncontrolling interests | — |
| | — |
| | (136 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (136 | ) |
Vesting of redeemable equity awards | — |
| | — |
| | (13 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) |
Cumulative-effect adjustment from adoption of ASU 2016-09 | — |
| | — |
| | 3 |
| | — |
| | 45 |
| | — |
| | — |
| | — |
| | 48 |
|
Deconsolidation of GRAIL | — |
| | — |
| | 11 |
| | — |
| | — |
| | — |
| | — |
| | (66 | ) | | (55 | ) |
Balance as of December 31, 2017 | 191 |
| | 2 |
| | 2,833 |
| | (1 | ) | | 2,256 |
| | (44 | ) | | (2,341 | ) | | — |
| | 2,749 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | 826 |
| | — |
| | — |
| | (10 | ) | | 816 |
|
Issuance of common stock, net of repurchases | 1 |
| | — |
| | 46 |
| | — |
| | — |
| | (1 | ) | | (275 | ) | | — |
| | (229 | ) |
Share-based compensation | — |
| | — |
| | 193 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 193 |
|
Adjustment to the carrying value of redeemable noncontrolling interests | — |
| | — |
| | 127 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 127 |
|
Vesting of redeemable equity awards | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) |
Issuance of subsidiary shares | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
Contributions from noncontrolling interest owners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 92 |
| | 92 |
|
Issuance of convertible senior notes, net of tax impact | — |
| | — |
| | 93 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 93 |
|
Cumulative-effect adjustment from adoption of ASU 2016-01 | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Balance as of December 30, 2018 | 192 |
| | 2 |
| | 3,290 |
| | (1 | ) | | 3,083 |
| | (45 | ) | | (2,616 | ) | | 87 |
| | 3,845 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | 1,002 |
| | — |
| | — |
| | (3 | ) | | 999 |
|
Unrealized gain on available-for-sale debt securities, net of deferred tax | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
|
Issuance of common stock, net of repurchases | 2 |
| | — |
| | 59 |
| | — |
| | — |
| | (2 | ) | | (405 | ) | | — |
| | (346 | ) |
Share-based compensation | — |
| | — |
| | 194 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 194 |
|
Adjustment to the carrying value of redeemable noncontrolling interests | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Deconsolidation of Helix | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | (84 | ) | | (82 | ) |
Vesting of redeemable equity awards | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Cumulative-effect adjustment from adoption of ASU 2016-02, net of deferred tax | — |
| | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | — |
| | (18 | ) |
Balance as of December 29, 2019 | 194 |
| | $ | 2 |
| | $ | 3,560 |
| | $ | 5 |
| | $ | 4,067 |
| | (47 | ) | | $ | (3,021 | ) | | $ | — |
| | $ | 4,613 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Illumina Stockholders | | | | |
| | | | | Additional | | Accumulated Other | | | | | | | | | | Total |
| Common Stock | | Paid-In | | Comprehensive | | Retained | | Treasury Stock | | Noncontrolling | | Stockholders’ |
| Shares | | Amount | | Capital | | (Loss) Income | | Earnings | | Shares | | Amount | | Interests | | Equity |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance as of December 30, 2018 | 192 | | | $ | 2 | | | $ | 3,290 | | | $ | (1) | | | $ | 3,083 | | | (45) | | | $ | (2,616) | | | $ | 87 | | | $ | 3,845 | |
Net income (loss) | — | | | — | | | — | | | — | | | 1,002 | | | — | | | — | | | (3) | | | 999 | |
Unrealized gain on available-for-sale debt securities, net of deferred tax | — | | | — | | | — | | | 6 | | | — | | | — | | | — | | | — | | | 6 | |
Issuance of common stock, net of repurchases | 2 | | | — | | | 59 | | | — | | | — | | | (2) | | | (405) | | | — | | | (346) | |
Share-based compensation | — | | | — | | | 194 | | | — | | | — | | | — | | | — | | | — | | | 194 | |
Adjustment to the carrying value of redeemable noncontrolling interests | — | | | — | | | 16 | | | — | | | — | | | — | | | — | | | — | | | 16 | |
Deconsolidation of Helix | — | | | — | | | 2 | | | — | | | — | | | — | | | — | | | (84) | | | (82) | |
Vesting of redeemable equity awards | — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Cumulative-effect adjustment from adoption of ASU 2016-02, net of deferred tax | — | | | — | | | — | | | — | | | (18) | | | — | | | — | | | — | | | (18) | |
Balance as of December 29, 2019 | 194 | | | 2 | | | 3,560 | | | 5 | | | 4,067 | | | (47) | | | (3,021) | | | — | | | 4,613 | |
Net income | — | | | — | | | — | | | — | | | 656 | | | — | | | — | | | — | | | 656 | |
Unrealized loss on available-for-sale debt securities, net of deferred tax | — | | | — | | | — | | | (3) | | | — | | | — | | | — | | | — | | | (3) | |
Issuance of common stock, net of repurchases | 1 | | | — | | | 61 | | | — | | | — | | | (2) | | | (827) | | | — | | | (766) | |
Share-based compensation | — | | | — | | | 194 | | | — | | | — | | | — | | | — | | | — | | | 194 | |
Balance as of January 3, 2021 | 195 | | | 2 | | | 3,815 | | | 2 | | | 4,723 | | | (49) | | | (3,848) | | | — | | | 4,694 | |
Net income | — | | | — | | | — | | | — | | | 762 | | | — | | | — | | | — | | | 762 | |
Unrealized loss on available-for-sale debt securities, net of deferred tax | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | (1) | |
Unrealized gain on cash flow hedges, net of deferred tax | — | | | — | | | — | | | 16 | | | — | | | — | | | — | | | — | | | 16 | |
Issuance of common stock, net of repurchases | 2 | | | — | | | 60 | | | — | | | — | | | (1) | | | (91) | | | — | | | (31) | |
GRAIL acquisition | — | | | — | | | 4,749 | | | — | | | — | | | 10 | | | 237 | | | — | | | 4,986 | |
Exchange of GRAIL contingent value rights | — | | | — | | | 2 | | | — | | | — | | | — | | | — | | | — | | | 2 | |
Share-based compensation | — | | | — | | | 312 | | | — | | | — | | | — | | | — | | | — | | | 312 | |
Balance as of January 2, 2022 | 197 | | | $ | 2 | | | $ | 8,938 | | | $ | 17 | | | $ | 5,485 | | | (40) | | | $ | (3,702) | | | $ | — | | | $ | 10,740 | |
| | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
ILLUMINA, INC.
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.
The preparation of the consolidated financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures 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.
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 2019, 2018,2021, 2020, and 20172019 refer to fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019, December 30, 2018,respectively. Fiscal years 2021 and December 31, 2017, respectively, all2019 were both 52 weeks, and fiscal year 2020 was 53 weeks.
The U.S. dollar is the functional currency of our international operations. We re-measure foreign subsidiaries’ monetary assets and liabilities to the U.S. dollar and record the net gains or losses resulting from re-measurement in other income, net in the consolidated statements of income.
We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact our operating results. A portion of our customers consist of university and research institutions that management believes are, to some degree, directly or indirectly supported by the United States Government. A significant change in current research funding, particularly with respect to the U.S. National Institutes of Health, could have an adverse impact on future revenues and results of operations.
International sales entail a variety of risks, including currency exchange fluctuations, longer payment cycles, and greater difficulty in accounts receivable collection. We are also subject to general geopolitical risks, such as political, social and economic instability, and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed. Shipments to customers outside the United States comprised 48%52%, 47%49%, and 45%48% of total revenue in 2019, 2018,2021, 2020, and 2017,2019, respectively. Customers outside the United States represented 53%57% and 44%56% of our gross trade accounts receivable balance as of December 29, 2019January 2, 2022 and December 30, 2018,January 3, 2021, respectively.
We are also subject to risks related to our financial instruments, including cash and cash equivalents, investments, and accounts receivable. Most of our cash and cash equivalents as of December 29, 2019January 2, 2022 were deposited with U.S. financial institutions, either domestically or with their foreign branches. Our investment policy restricts the amount of credit exposure to any one issuer to 5% of the portfolio or 5% of the total issue size outstanding at the time of purchase and to any one industry sector, as defined by Clearwater Analytics (Industry Sector Report), to 30% of the portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in debt securities, U.S. government-sponsored entities, U.S. Treasury securities, and money market funds. Historically, we have not experienced significant credit losses from financial instruments.
We require customized products and components that currently are available from a limited number of sources. We source certain key products and components included in our products from single vendors.
We report segment information based on the management approach. This approach designates the internal reporting used by the Chief Operating Decision Maker (CODM) for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment using information about its revenue and income (loss) from operations. Management evaluates the performance of our reportable segments based upon income (loss) from operations. We do not allocate expenses between segments.
We elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We continue to report our financial position as of December 30, 2018 under the former lease accounting standard (Topic 840)The impact from adoption primarily resulted in our consolidated balance sheet.
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.agreements, and cancer detection testing services related to the GRAIL business.
We recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. Revenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The contract price is allocated to each performance obligation in proportion to its standalone selling price. We determine our best estimate of standalone selling price using average selling prices over a rolling 12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts.
Revenue from product sales is recognized generally upon delivery to the end customer, which is when control of the product is deemed to be transferred. Invoicing typically occurs upon shipment and payment is typically due within 60 days from invoice. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. Revenue from genotyping and sequencing services, including cancer detection testing services related to the GRAIL business, is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from development and licensing agreements generally includes upfront and periodic licensing fees, contract research and development services, or payments for development and regulatory milestones. Revenue for these agreements is recognized when each distinct performance obligation is satisfied.
Revenue is recorded net of discounts, distributor commissions, and sales taxes collected on behalf of governmental authorities. Employee sales commissions are recorded as selling, general and administrative expensesexpense when incurred as the amortization period for such costs, if capitalized, would have been one year or less.
In certain markets, products and services are sold to customers through distributors. In most sales through distributors, the product is delivered directly to customers by us. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers.
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, and February 28, 2017, the date of the Helix and GRAIL deconsolidations, respectively,deconsolidation, per-share losses of Helix and GRAIL were included in the consolidated basic and diluted earnings per share computations based on our share of the entities’ 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: