UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| |
þ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended SeptemberJune 30, 2018
2019
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| |
¨☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-35406
Illumina, Inc.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 33-0804655 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
5200 Illumina Way,
San Diego, CA
| | 92122 |
(Address of principal executive offices) | | (Zip Code) |
(858)
5200 Illumina Way, San Diego, CA92122
(Address of principal executive offices) (Zip code)
(858) 202-4500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | ILMN | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ☑ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ☑ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | |
Large accelerated filer | þ☑ | | Accelerated filer | ¨☐ |
| | | | |
Non-accelerated filer | ¨☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨☐ |
| | | | |
| | | Emerging growth company | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ
As of October 19, 2018,July 26, 2019, there were 147 million shares of the registrant’s common stock outstanding.
ILLUMINA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ILLUMINA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
| | | September 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 30, 2018 |
| (Unaudited) | | | (Unaudited) | | |
ASSETS | Current assets: | | | | | | |
Cash and cash equivalents | $ | 1,346 |
| | $ | 1,225 |
| $ | 1,943 |
| | $ | 1,144 |
|
Short-term investments | 2,043 |
| | 920 |
| 1,230 |
| | 2,368 |
|
Accounts receivable, net | 433 |
| | 411 |
| 470 |
| | 514 |
|
Inventory | 374 |
| | 333 |
| 420 |
| | 386 |
|
Prepaid expenses and other current assets | 66 |
| | 91 |
| 93 |
| | 78 |
|
Total current assets | 4,262 |
| | 2,980 |
| 4,156 |
| | 4,490 |
|
Property and equipment, net | 1,060 |
| | 931 |
| 854 |
| | 1,075 |
|
Operating lease right-of-use assets | | 558 |
| | — |
|
Goodwill | 831 |
| | 771 |
| 824 |
| | 831 |
|
Intangible assets, net | 195 |
| | 175 |
| 162 |
| | 185 |
|
Deferred tax assets | 86 |
| | 88 |
| |
Deferred tax assets, net | | 69 |
| | 70 |
|
Other assets | 325 |
| | 312 |
| 350 |
| | 308 |
|
Total assets | $ | 6,759 |
| | $ | 5,257 |
| $ | 6,973 |
| | $ | 6,959 |
|
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | Current liabilities: | | | | | | |
Accounts payable | $ | 156 |
| | $ | 160 |
| $ | 139 |
| | $ | 184 |
|
Accrued liabilities | 450 |
| | 432 |
| 473 |
| | 513 |
|
Build-to-suit lease liability | 22 |
| | 144 |
| |
Long-term debt, current portion | 1,107 |
| | 10 |
| — |
| | 1,107 |
|
Total current liabilities | 1,735 |
| | 746 |
| 612 |
| | 1,804 |
|
Operating lease liabilities | | 698 |
| | — |
|
Long-term debt | 860 |
| | 1,182 |
| 1,120 |
| | 890 |
|
Other long-term liabilities | 352 |
| | 360 |
| 211 |
| | 359 |
|
Redeemable noncontrolling interests | 218 |
| | 220 |
| — |
| | 61 |
|
Stockholders’ equity: | | | | | | |
Preferred stock | — |
| | — |
| |
Common stock | 2 |
| | 2 |
| 2 |
| | 2 |
|
Additional paid-in capital | 3,093 |
| | 2,833 |
| 3,436 |
| | 3,290 |
|
Accumulated other comprehensive loss | (2 | ) | | (1 | ) | |
Accumulated other comprehensive income (loss) | | 5 |
| | (1 | ) |
Retained earnings | 2,872 |
| | 2,256 |
| 3,594 |
| | 3,083 |
|
Treasury stock, at cost | (2,462 | ) | | (2,341 | ) | (2,705 | ) | | (2,616 | ) |
Total Illumina stockholders’ equity | 3,503 |
| | 2,749 |
| 4,332 |
| | 3,758 |
|
Noncontrolling interests | 91 |
| | — |
| — |
| | 87 |
|
Total stockholders’ equity | 3,594 |
| | 2,749 |
| 4,332 |
| | 3,845 |
|
Total liabilities and stockholders’ equity | $ | 6,759 |
| | $ | 5,257 |
| $ | 6,973 |
| | $ | 6,959 |
|
See accompanying notes to condensed consolidated financial statements.
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Revenue: | | | | | | | | | | | | | | |
Product revenue | $ | 710 |
| | $ | 596 |
| | $ | 2,011 |
| | $ | 1,631 |
| $ | 704 |
| | $ | 673 |
| | $ | 1,372 |
| | $ | 1,301 |
|
Service and other revenue | 143 |
| | 118 |
| | 455 |
| | 344 |
| 134 |
| | 157 |
| | 312 |
| | 311 |
|
Total revenue | 853 |
| | 714 |
| | 2,466 |
| | 1,975 |
| 838 |
| | 830 |
| | 1,684 |
| | 1,612 |
|
Cost of revenue: | | | | | | | | | | | | | | |
Cost of product revenue | 184 |
| | 173 |
| | 540 |
| | 508 |
| 196 |
| | 181 |
| | 378 |
| | 355 |
|
Cost of service and other revenue | 62 |
| | 50 |
| | 190 |
| | 153 |
| 59 |
| | 65 |
| | 130 |
| | 127 |
|
Amortization of acquired intangible assets | 10 |
| | 9 |
| | 26 |
| | 30 |
| 10 |
| | 9 |
| | 19 |
| | 17 |
|
Total cost of revenue | 256 |
| | 232 |
| | 756 |
| | 691 |
| 265 |
| | 255 |
| | 527 |
| | 499 |
|
Gross profit | 597 |
| | 482 |
| | 1,710 |
| | 1,284 |
| 573 |
| | 575 |
| | 1,157 |
| | 1,113 |
|
Operating expense: | | | | | | | | | | | | | | |
Research and development | 159 |
| | 134 |
| | 447 |
| | 409 |
| 166 |
| | 151 |
| | 335 |
| | 288 |
|
Selling, general and administrative | 197 |
| | 167 |
| | 577 |
| | 499 |
| 202 |
| | 197 |
| | 412 |
| | 380 |
|
Total operating expense | 356 |
| | 301 |
| | 1,024 |
| | 908 |
| 368 |
| | 348 |
| | 747 |
| | 668 |
|
Income from operations | 241 |
| | 181 |
| | 686 |
| | 376 |
| 205 |
| | 227 |
| | 410 |
| | 445 |
|
Other income (expense): | | | | | | | | | | | | | | |
Interest income | 14 |
| | 4 |
| | 31 |
| | 13 |
| 20 |
| | 11 |
| | 43 |
| | 16 |
|
Interest expense | (15 | ) | | (10 | ) | | (37 | ) | | (26 | ) | (15 | ) | | (11 | ) | | (30 | ) | | (22 | ) |
Other (expense) income, net | (8 | ) | | — |
| | 5 |
| | 457 |
| |
Total other (expense) income, net | (9 | ) | | (6 | ) | | (1 | ) | | 444 |
| |
Other income, net | | 136 |
| | 5 |
| | 157 |
| | 14 |
|
Total other income, net | | 141 |
| | 5 |
| | 170 |
| | 8 |
|
Income before income taxes | 232 |
| | 175 |
| | 685 |
| | 820 |
| 346 |
| | 232 |
| | 580 |
| | 453 |
|
Provision for income taxes | 44 |
| | 23 |
| | 100 |
| | 199 |
| 53 |
| | 32 |
| | 63 |
| | 56 |
|
Consolidated net income | 188 |
| | 152 |
| | 585 |
| | 621 |
| 293 |
| | 200 |
| | 517 |
| | 397 |
|
Add: Net loss attributable to noncontrolling interests | 11 |
| | 11 |
| | 31 |
| | 37 |
| 3 |
| | 9 |
| | 12 |
| | 20 |
|
Net income attributable to Illumina stockholders | $ | 199 |
| | $ | 163 |
| | $ | 616 |
| | $ | 658 |
| $ | 296 |
| | $ | 209 |
| | $ | 529 |
| | $ | 417 |
|
Net income attributable to Illumina stockholders for earnings per share | $ | 199 |
| | $ | 163 |
| | $ | 616 |
| | $ | 657 |
| |
Earnings per share attributable to Illumina stockholders: | | | | | | | | | | | | | | |
Basic | $ | 1.35 |
| | $ | 1.12 |
| | $ | 4.20 |
| | $ | 4.49 |
| $ | 2.01 |
| | $ | 1.42 |
| | $ | 3.60 |
| | $ | 2.84 |
|
Diluted | $ | 1.33 |
| | $ | 1.11 |
| | $ | 4.15 |
| | $ | 4.45 |
| $ | 1.99 |
| | $ | 1.41 |
| | $ | 3.56 |
| | $ | 2.82 |
|
Shares used in computing earnings per share: | | | | | | | | | | | | | | |
Basic | 147 |
| | 146 |
| | 147 |
| | 146 |
| 147 |
| | 147 |
| | 147 |
| | 147 |
|
Diluted | 149 |
| | 148 |
| | 148 |
| | 148 |
| 149 |
| | 148 |
| | 149 |
| | 148 |
|
See accompanying notes to condensed consolidated financial statements.
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Consolidated net income | $ | 188 |
| | $ | 152 |
| | $ | 585 |
| | $ | 621 |
| $ | 293 |
| | $ | 200 |
| | $ | 517 |
| | $ | 397 |
|
Unrealized (loss) gain on available-for-sale debt securities, net of deferred tax | (1 | ) | | 1 |
| | (1 | ) | | 1 |
| |
Unrealized gain on available-for-sale debt securities, net of deferred tax | | 3 |
| | — |
| | 6 |
| | — |
|
Total consolidated comprehensive income | 187 |
| | 153 |
| | 584 |
| | 622 |
| 296 |
| | 200 |
| | 523 |
| | 397 |
|
Add: Comprehensive loss attributable to noncontrolling interests | 11 |
| | 11 |
| | 31 |
| | 37 |
| 3 |
| | 9 |
| | 12 |
| | 20 |
|
Comprehensive income attributable to Illumina stockholders | $ | 198 |
| | $ | 164 |
| | $ | 615 |
| | $ | 659 |
| $ | 299 |
| | $ | 209 |
| | $ | 535 |
| | $ | 417 |
|
See accompanying notes to condensed consolidated financial statements.
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions)
| | | Illumina Stockholders | | | | | Illumina Stockholders | | | | |
| | | Additional | | Accumulated Other | | | | | | | | Total | | | | | Additional | | Accumulated Other | | | | | | | | | | Total |
| Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Noncontrolling | | Stockholders’ | Common Stock | | Paid-In | | Comprehensive | | Retained | | Treasury Stock | | Noncontrolling | | Stockholders’ |
| Stock | | Capital | | Loss | | Earnings | | Stock | | Interests | | Equity | Shares | | Amount | | Capital | | (Loss) Income | | Earnings | | Shares | | Amount | | Interests | | Equity |
Balance as of December 31, 2017 | $ | 2 |
| | $ | 2,833 |
| | $ | (1 | ) | | $ | 2,256 |
| | $ | (2,341 | ) | | $ | — |
| | $ | 2,749 |
| 191 |
| | $ | 2 |
| | $ | 2,833 |
| | $ | (1 | ) | | $ | 2,256 |
| | (44 | ) | | $ | (2,341 | ) | | $ | — |
| | $ | 2,749 |
|
Net income (loss) | — |
| | — |
| | — |
| | 616 |
| | — |
| | (6 | ) | | 610 |
| — |
| | — |
| | — |
| | — |
| | 208 |
| | — |
| | — |
| | (1 | ) | | 207 |
|
Issuance of common stock, net of repurchases | | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | (13 | ) | | — |
| | 8 |
|
Share-based compensation | | — |
| | — |
| | 48 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 48 |
|
Adjustment to the carrying value of redeemable noncontrolling interests | | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) |
Contributions from noncontrolling interest owners | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 61 |
| | 61 |
|
Issuance of subsidiary shares in business combination | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
Balance as of April 1, 2018 | | 191 |
| | 2 |
| | 2,897 |
| | (1 | ) | | 2,464 |
| | (44 | ) | | (2,354 | ) | | 65 |
| | 3,073 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | 209 |
| | — |
| | — |
| | (2 | ) | | 207 |
|
Issuance of common stock, net of repurchases | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (1 | ) |
Share-based compensation | | — |
| | — |
| | 50 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50 |
|
Vesting of redeemable equity awards | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Adjustment to the carrying value of redeemable noncontrolling interests | | — |
| | — |
| | (8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) |
Contributions from noncontrolling interest owners | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | 31 |
|
Balance as of July 1, 2018 | | 191 |
| | 2 |
| | 2,939 |
| | (1 | ) | | 2,673 |
| | (44 | ) | | (2,356 | ) | | 94 |
| | 3,351 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | 199 |
| | — |
| | — |
| | (3 | ) | | 196 |
|
Unrealized loss on available-for-sale debt securities, net of deferred tax | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Issuance of common stock, net of repurchases | — |
| | 45 |
| | — |
| | — |
| | (121 | ) | | — |
| | (76 | ) | — |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | (106 | ) | | — |
| | (83 | ) |
Share-based compensation | — |
| | 145 |
| | — |
| | — |
| | — |
| | — |
| | 145 |
| — |
| | — |
| | 47 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 47 |
|
Vesting of redeemable equity awards | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Adjustment to the carrying value of redeemable noncontrolling interests | — |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| | (21 | ) | — |
| | — |
| | (8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) |
Issuance of convertible senior notes, net of tax impact | — |
| | 93 |
| | — |
| | — |
| | — |
| | — |
| | 93 |
| — |
| | — |
| | 93 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 93 |
|
Contributions from noncontrolling interest owners | — |
| | — |
| | — |
| | — |
| | — |
| | 92 |
| | 92 |
| |
Issuance of subsidiary shares | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
| |
Vesting of redeemable equity awards | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) | |
Balance as of September 30, 2018 | $ | 2 |
| | $ | 3,093 |
| | $ | (2 | ) | | $ | 2,872 |
| | $ | (2,462 | ) | | $ | 91 |
| | $ | 3,594 |
| 191 |
| | 2 |
| | 3,093 |
| | (2 | ) | | 2,872 |
| | (44 | ) | | (2,462 | ) | | 91 |
| | 3,594 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | 210 |
| | — |
| | — |
| | (4 | ) | | 206 |
|
Unrealized gain on available-for-sale debt securities, net of deferred tax | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Issuance of common stock, net of repurchases | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | (1 | ) | | (154 | ) | | — |
| | (153 | ) |
Share-based compensation | | — |
| | — |
| | 48 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 48 |
|
Adjustment to the carrying value of redeemable noncontrolling interests | | — |
| | — |
| | 148 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 148 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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) | — |
| | — |
| | — |
| | — |
| | 233 |
| | — |
| | — |
| | (2 | ) | | 231 |
|
Unrealized gain on available-for-sale debt securities, net of deferred tax | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Issuance of common stock, net of repurchases | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | (86 | ) | | — |
| | (59 | ) |
Share-based compensation | — |
| | — |
| | 51 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
|
Vesting of redeemable equity awards | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Adjustment to the carrying value of redeemable noncontrolling interests | — |
| | — |
| | 18 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18 |
|
Cumulative-effect adjustment from adoption of ASU 2016-02, net of deferred tax | — |
| | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | — |
| | (18 | ) |
Balance as of March 31, 2019 | 192 |
| | 2 |
| | 3,385 |
| | 2 |
| | 3,298 |
| | (45 | ) | | (2,702 | ) | | 85 |
| | 4,070 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | 296 |
| | — |
| | — |
| | (1 | ) | | 295 |
|
Unrealized gain on available-for-sale debt securities, net of deferred tax | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Issuance of common stock, net of repurchases | 1 |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
Share-based compensation | — |
| | — |
| | 48 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 48 |
|
Adjustment to the carrying value of redeemable noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) |
Deconsolidation of Helix | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | (84 | ) | | (82 | ) |
Balance as of June 30, 2019 | 193 |
| | $ | 2 |
| | $ | 3,436 |
| | $ | 5 |
| | $ | 3,594 |
| | (45 | ) | | $ | (2,705 | ) | | $ | — |
| | $ | 4,332 |
|
See accompanying notes to condensed consolidated financial statements.
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
| | | Nine Months Ended | Six Months Ended |
| September 30, 2018 | | October 1, 2017 | June 30, 2019 | | July 1, 2018 |
Cash flows from operating activities: | | | | | | |
Consolidated net income | $ | 585 |
| | $ | 621 |
| $ | 517 |
| | $ | 397 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Gain on deconsolidation of GRAIL | — |
| | (453 | ) | |
Depreciation expense | 100 |
| | 81 |
| 76 |
| | 65 |
|
Amortization of intangible assets | 29 |
| | 36 |
| 20 |
| | 19 |
|
Share-based compensation expense | 146 |
| | 123 |
| 99 |
| | 98 |
|
Accretion of debt discount | 26 |
| | 23 |
| 27 |
| | 16 |
|
Deferred income taxes | (32 | ) | | 53 |
| 6 |
| | (22 | ) |
Impairment of intangible assets | — |
| | 23 |
| |
Unrealized gains on marketable equity securities | | (104 | ) | | — |
|
Payment of accreted debt discount | | (84 | ) | | — |
|
Gains on deconsolidation | | (54 | ) | | — |
|
Other | — |
| | (2 | ) | (5 | ) | | (6 | ) |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (24 | ) | | 1 |
| 46 |
| | 12 |
|
Inventory | (40 | ) | | (27 | ) | (36 | ) | | (28 | ) |
Prepaid expenses and other current assets | 7 |
| | 14 |
| (11 | ) | | 1 |
|
Operating lease right-of-use assets and liabilities, net | | (3 | ) | | — |
|
Other assets | (9 | ) | | (3 | ) | (11 | ) | | (5 | ) |
Accounts payable | 13 |
| | 12 |
| (43 | ) | | 1 |
|
Accrued liabilities | 45 |
| | 56 |
| (87 | ) | | 17 |
|
Other long-term liabilities | (4 | ) | | 23 |
| (12 | ) | | (15 | ) |
Net cash provided by operating activities | 842 |
| | 581 |
| 341 |
| | 550 |
|
Cash flows from investing activities: | | | | | | |
Maturities of available-for-sale securities | | 1,204 |
| | 556 |
|
Purchases of available-for-sale securities | (2,352 | ) | | (359 | ) | (393 | ) | | (1,137 | ) |
Sales of available-for-sale securities | 520 |
| | 314 |
| 386 |
| | 332 |
|
Maturities of available-for-sale securities | 710 |
| | 181 |
| |
Purchases of property and equipment | | (103 | ) | | (167 | ) |
Deconsolidation of Helix cash | | (29 | ) | | — |
|
Proceeds from deconsolidation of GRAIL | | 15 |
| | — |
|
Net purchases of strategic investments | | (13 | ) | | (9 | ) |
Net cash paid for acquisitions | (100 | ) | | — |
| — |
| | (100 | ) |
Proceeds from sale of GRAIL securities | — |
| | 278 |
| |
Deconsolidation of GRAIL cash | — |
| | (52 | ) | |
Net purchases of strategic investments | (12 | ) | | (25 | ) | |
Purchases of property and equipment | (231 | ) | | (234 | ) | |
Cash paid for intangible assets | — |
| | (2 | ) | |
Net cash (used in) provided by investing activities | (1,465 | ) | | 101 |
| |
Net cash provided by (used in) investing activities | | 1,067 |
| | (525 | ) |
Cash flows from financing activities: | | | | | | |
Payments on financing obligations | (3 | ) | | (7 | ) | (550 | ) | | (2 | ) |
Payments on acquisition related contingent consideration liability | — |
| | (3 | ) | |
Proceeds from issuance of debt, net | 735 |
| | 5 |
| |
Common stock repurchases | (103 | ) | | (176 | ) | (63 | ) | | — |
|
Taxes paid related to net share settlement of equity awards | (18 | ) | | (28 | ) | (26 | ) | | (15 | ) |
Proceeds from issuance of common stock | 45 |
| | 63 |
| 30 |
| | 22 |
|
Contributions from noncontrolling interest owners | 92 |
| | 79 |
| — |
| | 92 |
|
Net cash provided by (used in) financing activities | 748 |
| | (67 | ) | |
Net cash (used in) provided by financing activities | | (609 | ) | | 97 |
|
Effect of exchange rate changes on cash and cash equivalents | (4 | ) | | 4 |
| — |
| | (3 | ) |
Net increase in cash and cash equivalents | 121 |
| | 619 |
| 799 |
| | 119 |
|
Cash and cash equivalents at beginning of period | 1,225 |
| | 735 |
| 1,144 |
| | 1,225 |
|
Cash and cash equivalents at end of period | $ | 1,346 |
| | $ | 1,354 |
| $ | 1,943 |
| | $ | 1,344 |
|
Supplemental cash flow information: | | | | |
Cash paid for operating lease liabilities | | $ | 42 |
| | $ | — |
|
See accompanying notes to condensed consolidated financial statements.
Illumina, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017,30, 2018, from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, majority-owned or controlled companies, and variable interest entities (VIEs) for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are VIEs, and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach is applied that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously assess whether we are the primary beneficiary of a VIE,perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of sucha VIE. DuringEffective April 25, 2019, we deconsolidated the nine months ended September 30, 2018, our consolidated VIE,financial statements of Helix received additional cash contributions from us and third-party investors in exchangeHoldings I, LLC (Helix). See note “2. Balance Sheet Account Details” for votingfurther details.
We use the equity interests in Helix. Therefore, we reassessed and concluded that Helix continued to be a variable interest entity and that we remained the primary beneficiary. During the periods presented, we have not provided any other financial or other support to our VIEs that we were not contractually required to provide.
The equity method is used to account for investments inthrough which we have the ability to exercise significant influence, but not control, over the investee. Such investments are recorded withinin other assets, and theour share of net income or losses of equity investmentsloss is recognized on a one quarter lag in other (expense) income, net.
Redeemable Noncontrolling Interests
Noncontrolling interests represent the portion of equity (net assets) in Helix, our consolidated but not wholly-owned entity, that is neither directly nor indirectly attributable to us. Noncontrolling interests with embedded contingent redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of stockholders’ equity on the condensed consolidated balance sheets.
Fiscal Year
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. The three and ninesix months ended SeptemberJune 30, 20182019 and OctoberJuly 1, 20172018 were both 13 and 3926 weeks, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Significant Accounting Policies
During the three and ninesix months ended SeptemberJune 30, 2018,2019, there have beenwere no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,30, 2018, except as described below.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is based on the principle that revenue should be recognized in an amount that reflects the consideration to which we expect to be entitled in exchange for the transfer of promised goods or services. We adopted Topic 606 using the modified retrospective transition method. The cumulative effect of applying the new revenue standard to all incomplete contracts as of January 1, 2018 was not material and, therefore, did not result in an adjustment to retained earnings. There was no material difference to the condensed consolidated financial statements for the three and nine months ended September 30, 2018 due to the adoption of Topic 606.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), which requires equity investments (other than those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. This standard was effective for us beginning in the first quarter of 2018. Based on our elections, our strategic equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient for estimating fair value are measured at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identifiable or similar investments of the same issuer. The measurement alternative was applied prospectively and did not result in an adjustment to retained earnings.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (ASU)ASU 2016-02, Leases (Topic 842). The new standard, which requires lessees to recognize most leases on theirthe balance sheet as lease liabilities with corresponding right-of-use assets. ASU 2016-02 isassets and to disclose key information about leasing arrangements. We adopted Topic 842 on its effective for us beginningdate in the first quarter of 2019 and will be adopted onusing a modified retrospective basisapproach by recognizing a cumulative-effect adjustment to the opening balance of retained earnings inas of December 31, 2018. We elected the period of adoption; we will continue to report comparative periods under the current lease accounting standard. We are currently designing and implementing changes to our systems, processes, policies, and controls for lease accounting, including implementation of a third-party software application, to help us comply with the standard. We expect to elect the standard’savailable package of practical expedients onupon adoption, which allowsallowed us to carry forward our historical assessment of whether existing agreements containcontained a lease and the classification of our existing lease agreements.operating leases. We do not expect to elect the standard’s available hindsight practical expedient on adoption. While we continue to reviewreport our existingfinancial position as of December 30, 2018 under the former lease agreements and assessaccounting standard (Topic 840) in our condensed consolidated balance sheet.
The following table summarizes the effectsimpact of adoption, we believe the new standard will have a material effectTopic 842 on our condensed consolidated financial statements and disclosures. We expect substantially allbalance sheet upon adoption on December 31, 2018 (in millions):
|
| | | | | | | | | | | |
| December 31, 2018 (unaudited) |
| Pre-adoption | | Adoption Impact | | Post-adoption |
ASSETS | | | | | |
Prepaid expenses and other current assets | $ | 78 |
| | $ | (8 | ) | | $ | 70 |
|
Property and equipment, net | 1,075 |
| | (241 | ) | | 834 |
|
Operating lease right-of-use assets | — |
| | 579 |
| | 579 |
|
Deferred tax assets, net | 70 |
| | 6 |
| | 76 |
|
Total assets | $ | 1,223 |
| | $ | 336 |
| | $ | 1,559 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Accrued liabilities | $ | 513 |
| | $ | 36 |
| | $ | 549 |
|
Operating lease liabilities | — |
| | 722 |
| | 722 |
|
Long-term debt | 1,107 |
| | (269 | ) | | 838 |
|
Other long-term liabilities | 359 |
| | (135 | ) | | 224 |
|
Retained earnings | 3,083 |
| | (18 | ) | | 3,065 |
|
Total liabilities and stockholders’ equity | $ | 5,062 |
| | $ | 336 |
| | $ | 5,398 |
|
The adoption impact summarized above was primarily due to the recognition of our real-estate operating lease commitments will be recognized as lease liabilities with corresponding right-of-use assets resulting in a significant increase inbased on the present value of our remaining minimum lease payments, and the derecognition of existing fixed assets and liabilities on the consolidated balance sheet upon adoption. We are currently evaluating the impactfinancing obligations related to build-to-suit leasing arrangements that, under Topic 840, did not qualify for sale-leaseback accounting. The difference between these amounts, net of Topic 842 on the consolidated financial statementsdeferred tax, was recorded as it relatesa cumulative-effect adjustment to other aspects of our business.retained earnings.
Accounting Pronouncements Pending Adoption
In June 2016, the FASB issued Accounting Standards Update (ASU)ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. TheWe expect to adopt the standard ison its effective for us beginningdate in the first quarter of 2020 with earlyusing a modified retrospective approach. We currently do not expect the adoption permitted. We are currently evaluating the expectedto have a material impact of ASU 2016-13 on our consolidated financial statements.
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 and instrument service contracts.
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. 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. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control.
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; the term between invoicing and when payment is typically due is not significant.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 instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer or agreed-upon milestones are reached.customer.
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 expenses when incurred as the amortization period for such costs, if capitalized, would have been one year or less.
We regularly enter into contracts with multiple performance obligations. SuchRevenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract. Most performance obligations are generally satisfied within a short time frame, approximately three to six months after the contract execution date. Revenue recognition for contracts with multiple deliverables is based onAs of June 30, 2019, the separate, distinctaggregate amount of the transaction price allocated to remaining performance obligations withinwas $1,146 million, of which approximately 67% is expected to be converted to revenue in the contract. We do not disclosenext twelve months, approximately 13% in the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less,following twelve months, and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.remainder thereafter.
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 our pricing committee,management, adjusted for applicable discounts.
Contract liabilities, which consist of deferred revenue and customer deposits, as of SeptemberJune 30, 2019 and December 30, 2018 were $201 million and December 31, 2017 were $181$206 million, respectively, of which the short-term portions of $154$167 million and $150$175 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded induring the three and ninesix months ended SeptemberJune 30, 20182019 included $26$42 million and $128$106 million of previously deferred revenue that was included in contract liabilities as of December 31, 2017.30, 2018. Contract assets as of SeptemberJune 30, 20182019 and December 31, 201730, 2018 were not material.
In certain markets, products and services are sold to customers through distributors. In most sales through distributors, the product is delivered directly to customers.customers by us. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers.
The following tables representtable represents revenue by source (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| June 30, 2019 | | July 1, 2018 |
| Sequencing | | Microarray | | Total | | Sequencing | | Microarray | | Total |
Consumables | $ | 497 |
| | $ | 74 |
| | $ | 571 |
| | $ | 460 |
| | $ | 85 |
| | $ | 545 |
|
Instruments | 129 |
| | 4 |
| | 133 |
| | 124 |
| | 4 |
| | 128 |
|
Total product revenue | 626 |
| | 78 |
| | 704 |
| | 584 |
| | 89 |
| | 673 |
|
Service and other revenue | 102 |
| | 32 |
| | 134 |
| | 106 |
| | 51 |
| | 157 |
|
Total revenue | $ | 728 |
| | $ | 110 |
| | $ | 838 |
| | $ | 690 |
| | $ | 140 |
| | $ | 830 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2018 | | October 1, 2017 |
| Sequencing | | Microarray | | Total | | Sequencing | | Microarray | | Total |
Consumables | $ | 467 |
| | $ | 83 |
| | $ | 550 |
| | $ | 380 |
| | $ | 71 |
| | $ | 451 |
|
Instruments | 138 |
| | 16 |
| | 154 |
| | 128 |
| | 12 |
| | 140 |
|
Other product | 5 |
| | 1 |
| | 6 |
| | 5 |
| | — |
| | 5 |
|
Total product revenue | 610 |
| | 100 |
| | 710 |
| | 513 |
| | 83 |
| | 596 |
|
Service and other revenue | 109 |
| | 34 |
| | 143 |
| | 80 |
| | 38 |
| | 118 |
|
Total revenue | $ | 719 |
| | $ | 134 |
| | $ | 853 |
| | $ | 593 |
| | $ | 121 |
| | $ | 714 |
|
| | | Nine Months Ended | Six Months Ended |
| September 30, 2018 | | October 1, 2017 | June 30, 2019 | | July 1, 2018 |
| Sequencing | | Microarray | | Total | | Sequencing | | Microarray | | Total | Sequencing | | Microarray | | Total | | Sequencing | | Microarray | | Total |
Consumables | $ | 1,340 |
| | $ | 255 |
| | $ | 1,595 |
| | $ | 1,036 |
| | $ | 204 |
| | $ | 1,240 |
| $ | 978 |
| | $ | 149 |
| | $ | 1,127 |
| | $ | 882 |
| | $ | 173 |
| | $ | 1,055 |
|
Instruments | 372 |
| | 26 |
| | 398 |
| | 353 |
| | 23 |
| | 376 |
| 234 |
| | 11 |
| | 245 |
| | 237 |
| | 9 |
| | 246 |
|
Other product | 16 |
| | 2 |
| | 18 |
| | 14 |
| | 1 |
| | 15 |
| |
Total product revenue | 1,728 |
| | 283 |
| | 2,011 |
| | 1,403 |
| | 228 |
| | 1,631 |
| 1,212 |
| | 160 |
| | 1,372 |
| | 1,119 |
| | 182 |
| | 1,301 |
|
Service and other revenue | 312 |
| | 143 |
| | 455 |
| | 235 |
| | 109 |
| | 344 |
| 215 |
| | 97 |
| | 312 |
| | 202 |
| | 109 |
| | 311 |
|
Total revenue | $ | 2,040 |
| | $ | 426 |
| | $ | 2,466 |
| | $ | 1,638 |
| | $ | 337 |
| | $ | 1,975 |
| $ | 1,427 |
| | $ | 257 |
| | $ | 1,684 |
| | $ | 1,321 |
| | $ | 291 |
| | $ | 1,612 |
|
Revenue related to our Consolidated VIEspreviously consolidated VIE, Helix, is included in sequencing servicesservice and other revenue.revenue up to April 25, 2019, the date of Helix’s deconsolidation.
The following table represents revenue by geographic area, based on region of destination (in millions):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Americas (1) | $ | 474 |
| | $ | 417 |
| | $ | 1,380 |
| | $ | 1,153 |
| $ | 476 |
| | $ | 466 |
| | $ | 949 |
| | $ | 906 |
|
Europe, Middle East, and Africa | 219 |
| | 165 |
| | 615 |
| | 443 |
| 208 |
| | 202 |
| | 418 |
| | 396 |
|
Greater China (2)(1) | 102 |
| | 87 |
| | 288 |
| | 221 |
| 97 |
| | 107 |
| | 185 |
| | 185 |
|
Asia-Pacific | 58 |
| | 45 |
| | 183 |
| | 158 |
| 57 |
| | 55 |
| | 132 |
| | 125 |
|
Total revenue | $ | 853 |
| | $ | 714 |
| | $ | 2,466 |
| | $ | 1,975 |
| $ | 838 |
| | $ | 830 |
| | $ | 1,684 |
| | $ | 1,612 |
|
____________________________________(1) Revenue for the Americas region included United StatesRegion includes revenue of $455 million and $1,316 million, respectively, for the three and nine months ended September 30, 2018 and $397 million and $1,096 million, respectively, for the three and nine months ended October 1, 2017.
(2) Revenue for the Greater China region, which consists offrom China, Taiwan, and Hong Kong, is reported separately from the Asia-Pacific region.Kong.
Earnings per Share
Basic earnings per share attributable to Illumina stockholders is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to Illumina stockholders is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Per-shareUp to April 25, 2019, the date of Helix’s deconsolidation, per-share earnings of our VIEs areHelix were included in the consolidated basic and diluted earnings per share computations based on our share of the VIE’sHelix’s securities.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the
average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
The following istable presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in millions):
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Weighted average shares outstanding | 147 |
| | 147 |
| | 147 |
| | 147 |
|
Effect of potentially dilutive common shares from: | | | | | | | |
Convertible senior notes | 1 |
| | — |
| | 1 |
| | — |
|
Equity awards | 1 |
| | 1 |
| | 1 |
| | 1 |
|
Weighted average shares used in calculating diluted earnings per share | 149 |
| | 148 |
| | 149 |
| | 148 |
|
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Weighted average shares outstanding | 147 |
| | 146 |
| | 147 |
| | 146 |
|
Effect of potentially dilutive common shares from: | | | | | | | |
Convertible senior notes | 1 |
| | — |
| | — |
| | — |
|
Equity awards | 1 |
| | 2 |
| | 1 |
| | 2 |
|
Weighted average shares used in calculating diluted earnings per share | 149 |
| | 148 |
| | 148 |
| | 148 |
|
2. Balance Sheet Account Details
Short-Term InvestmentsShort-term investments
The following is a summary ofOur short-term investments are primarily available-for-sale debt securities that consisted of the following (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 30, 2018 |
| Amortized Cost | | Gross Unrealized Gains | | Estimated Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Debt securities in government sponsored entities | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | 21 |
|
Corporate debt securities | 553 |
| | 4 |
| | 557 |
| | 1,060 |
| | — |
| | (2 | ) | | 1,058 |
|
U.S. Treasury securities | 488 |
| | 2 |
| | 490 |
| | 1,250 |
| | 1 |
| | (1 | ) | | 1,250 |
|
Total | $ | 1,067 |
| | $ | 6 |
| | $ | 1,073 |
| | $ | 2,331 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 2,329 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Amortized Cost | | Gross Unrealized Losses | | Estimated Fair Value | | Amortized Cost | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale debt securities: | | | | | | | | | | | |
Debt securities in government sponsored entities | $ | 21 |
| | $ | — |
| | $ | 21 |
| | $ | 67 |
| | $ | — |
| | $ | 67 |
|
Corporate debt securities | 1,063 |
| | (3 | ) | | 1,060 |
| | 423 |
| | (2 | ) | | 421 |
|
U.S. Treasury securities | 964 |
| | (2 | ) | | 962 |
| | 433 |
| | (1 | ) | | 432 |
|
Total available-for-sale debt securities | $ | 2,048 |
| | $ | (5 | ) | | $ | 2,043 |
| | $ | 923 |
| | $ | (3 | ) | | $ | 920 |
|
Realized gains and losses are determined based on the specific identification method and are reported in interest income.
Contractual maturities of available-for-sale debt securities, as of SeptemberJune 30, 20182019, were as follows (in millions):
|
| | | |
| Estimated Fair Value |
Due within one year | $ | 516 |
|
After one but within five years | 557 |
|
Total | $ | 1,073 |
|
|
| | | |
| Estimated Fair Value |
Due within one year | $ | 1,253 |
|
After one but within five years | 790 |
|
Total | $ | 2,043 |
|
We have the ability, if necessary, to liquidate any of our cash equivalents and short-term investments to meet our liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying condensed consolidated balance sheets.
Strategic Investments
TheWe have strategic investments in privately held companies (non-marketable equity securities) and companies that have completed initial public offerings (marketable equity securities).
Our marketable equity securities are measured at fair value. As of June 30, 2019 and December 30, 2018, the fair value of our marketable equity securities, included in short-term investments, totaled $157 million and $39 million, respectively. Total unrealized gains on our marketable equity securities, included in other income, net, were $102 million and $104 million for the three and six months ended June 30, 2019, respectively.
Our non-marketable equity securities without readily determinable market values are initially measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. As of June 30, 2019 and December 30, 2018, the aggregate carrying amounts of our strategicnon-marketable equity investments without readily determinable fair values, are initially measured at cost and are remeasured for impairment and observable price changes in orderly transactions for identifiable or similar investments of the same issuer.
As of September 30, 2018 and December 31, 2017, the aggregate carrying amounts of our strategic equity investments without readily determinable fair values were $249 million and $250 million, respectively, included in other assets. Revenue recognized from transactionsassets, were $217 million and $231 million, respectively.
One of our non-marketable equity investments is a VIE for which we have concluded that we are not the primary beneficiary, and therefore, we do not consolidate this VIE in our consolidated financial statements. We have determined our maximum exposure to loss, as a result of our involvement with such companiesthe VIE, to be the carrying value of our investment, which was $32$189 million as of June 30, 2019 and $104 million, respectively, for the three and nine months ended SeptemberDecember 30, 2018 and $38 million and $96 million, respectively, for the three and nine months ended October 1, 2017.2018.
We invest in a venture capital investment fund (the Fund) with a capital commitment of $100 million that is callable over ten years,through April 2026, of which $73$57 million remained callable as of SeptemberJune 30, 2018.2019. Our investment in the Fund is accounted for as an equity-method investment. The carrying amounts of the Fund, included in other assets, were $25$47 million and $16$29 million as of SeptemberJune 30, 2019 and December 30, 2018, and December 31, 2017, respectively. In July 2019, we invested in a second venture capital investment fund with a maximum capital commitment of up to $160 million that is callable through July 2029.
Revenue recognized from transactions with our strategic investees was $18 million and $34 million, respectively, for the three and six months ended June 30, 2019 and $36 million and $72 million, respectively, for the three and six months ended July 1, 2018.
Inventory
Inventory consisted of the following (in millions):
|
| | | | | | | |
| June 30, 2019 | | December 30, 2018 |
Raw materials | $ | 124 |
| | $ | 117 |
|
Work in process | 271 |
| | 218 |
|
Finished goods | 25 |
| | 51 |
|
Total inventory | $ | 420 |
| | $ | 386 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 98 |
| | $ | 93 |
|
Work in process | 224 |
| | 188 |
|
Finished goods | 52 |
| | 52 |
|
Total inventory | $ | 374 |
| | $ | 333 |
|
Property and Equipment
Property and equipment, net consisted of the following (in millions):
|
| | | | | | | |
| June 30, 2019 | | December 30, 2018 |
Leasehold improvements | $ | 596 |
| | $ | 567 |
|
Machinery and equipment | 400 |
| | 382 |
|
Computer hardware and software | 263 |
| | 217 |
|
Furniture and fixtures | 47 |
| | 45 |
|
Buildings | 44 |
| | 285 |
|
Construction in progress | 59 |
| | 100 |
|
Total property and equipment, gross | 1,409 |
| | 1,596 |
|
Accumulated depreciation | (555 | ) | | (521 | ) |
Total property and equipment, net | $ | 854 |
| | $ | 1,075 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Leasehold improvements | $ | 505 |
| | $ | 331 |
|
Machinery and equipment | 352 |
| | 316 |
|
Computer hardware and software | 207 |
| | 185 |
|
Furniture and fixtures | 43 |
| | 34 |
|
Buildings | 279 |
| | 155 |
|
Construction in progress | 156 |
| | 326 |
|
Total property and equipment, gross | 1,542 |
| | 1,347 |
|
Accumulated depreciation | (482 | ) | | (416 | ) |
Total property and equipment, net | $ | 1,060 |
| | $ | 931 |
|
Property and equipment, net included non-cash expenditures of $38$18 million and $94$42 million for the ninesix months ended SeptemberJune 30, 20182019 and OctoberJuly 1, 2017,2018, respectively, which were excluded from the condensed consolidated statements of cash flows. Such non-cash expenditures included $18 million and $60$16 million recorded under build-to-suit lease accounting for the ninesix months ended SeptemberJuly 1, 2018.
As of December 30, 2018, property and Octoberequipment, net included $241 million of project construction costs paid or reimbursed by our landlord related to our build-to-suit leases that did not qualify for sale-leaseback accounting under Topic 840. Upon adoption of Topic 842 on December 31, 2018, we derecognized the Buildings related to our build-to-suit leasing arrangements and began to account for these leases as operating leases. See note “1. Basis of Presentation and Summary of Significant Accounting Policies” for further details on the adoption impact of Topic 842.
Leases
We lease approximately 2.5 million square feet of office, lab, and manufacturing facilities under various non-cancellable operating lease agreements (real estate leases). Our real estate leases have remaining lease terms of 1 2017, respectively.to 20 years, which represent the non-cancellable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms, ranging from 6 months to 20 years. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms as well as payments for common-area-maintenance and administrative services. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.
Intangible AssetsOperating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components; therefore, fixed payments for common-area-maintenance and administrative services are included in our operating lease right-of-use assets and liabilities. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our leases are not readily determinable.
As of June 30, 2019, the maturities of our operating lease liabilities were as follows (in millions):
|
| | | |
| Remaining Lease Payments |
2019 | $ | 35 |
|
2020 | 82 |
|
2021 | 81 |
|
2022 | 83 |
|
2023 | 85 |
|
Thereafter | 619 |
|
Total remaining lease payments (1) | 985 |
|
Less: imputed interest | (243 | ) |
Total operating lease liabilities | 742 |
|
Less: current portion | (44 | ) |
Long-term operating lease liabilities | $ | 698 |
|
Weighted-average remaining lease term | 11.5 years |
|
Weighted-average discount rate | 4.6 | % |
(1) Total remaining lease payments exclude $53 million of legally binding minimum lease payments for leases signed but not yet commenced.
The components of our lease costs included in our condensed consolidated statements of income were as follows (in millions):
|
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2019 | | June 30, 2019 |
Operating lease costs | $ | 21 |
| | $ | 43 |
|
Sublease income | (3 | ) | | (6 | ) |
Total lease costs | $ | 18 |
| | $ | 37 |
|
Operating lease costs consist of the fixed lease payments included in our operating lease liabilities and are recorded on a straight-line basis over the lease terms. We sublease certain real estate to third parties and this sublease income is also recorded on a straight-line basis.
Goodwill
On May 14, 2018, we acquired Edico Genome, a provider of data analysis acceleration solutions for next-generation sequencing (NGS) for total cash consideration of $100 million, net of cash acquired. As a result of this transaction, we recorded $56 million as goodwill. In addition, we recorded developed technology of $45 million and a trade name of $1 million, with useful lives of 10 and 3 years, respectively.
We test the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require us to estimate the fair value of each reporting unit annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment is required. We performed the annual assessment for goodwill impairment in the second quarter of 2018,2019, noting no impairment.
Changes to goodwill during the ninesix months ended SeptemberJune 30, 20182019 were as follows (in millions): |
| | | |
| Goodwill |
Balance as of December 30, 2018 | $ | 831 |
|
Helix deconsolidation | (7 | ) |
Balance as of June 30, 2019 | $ | 824 |
|
|
| | | |
| Goodwill |
Balance as of December 31, 2017 | $ | 771 |
|
Current period acquisitions | 60 |
|
Balance as of September 30, 2018 | $ | 831 |
|
We perform regular reviews to determine if any event has occurred that may indicate our identifiable intangible assets are potentially impaired. During the nine months ended October 1, 2017, we performed a recoverability test when the planned use of a finite-lived acquired intangible asset changed, resulting in an impairment charge of $18 million recorded in cost of product revenue. Also during the nine months ended October 1, 2017, we recorded a $5 million impairment charge in research and development related to an in-process research and development project that was determined to have no future alternative use.
Derivatives
We are exposed to foreign exchange rate risks in the normal course of business. We enter into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other current assets or accrued liabilities and are not designated as hedging instruments. Changes in the value of the derivatives are recognized in other (expense) income, net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.
As of SeptemberJune 30, 2018,2019, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, and Canadian dollar.British pound. As of SeptemberJune 30, 20182019 and December 31, 2017,30, 2018, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $99$256 million and $88$122 million, respectively.
Accrued Liabilities
Accrued liabilities consisted of the following (in millions):
|
| | | | | | | |
| June 30, 2019 | | December 30, 2018 |
Contract liabilities, current portion | $ | 167 |
| | $ | 175 |
|
Accrued compensation expenses | 132 |
| | 193 |
|
Accrued taxes payable | 66 |
| | 82 |
|
Operating lease liabilities, current portion | 44 |
| | — |
|
Other, including warranties | 64 |
| | 63 |
|
Total accrued liabilities | $ | 473 |
| | $ | 513 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Contract liabilities, current portion | $ | 154 |
| | $ | 150 |
|
Accrued compensation expenses | 154 |
| | 177 |
|
Accrued taxes payable | 94 |
| | 50 |
|
Other | 48 |
| | 55 |
|
Total accrued liabilities | $ | 450 |
| | $ | 432 |
|
Warranties
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.
Changes in the reserve for product warranties during the three and ninesix months ended SeptemberJune 30, 20182019 and OctoberJuly 1, 20172018 were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Balance at beginning of period | $ | 16 |
| | $ | 16 |
| | $ | 19 |
| | $ | 17 |
|
Additions charged to cost of product revenue | 6 |
| | 6 |
| | 9 |
| | 12 |
|
Repairs and replacements | (6 | ) | | (7 | ) | | (12 | ) | | (14 | ) |
Balance at end of period | $ | 16 |
| | $ | 15 |
| | $ | 16 |
| | $ | 15 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Balance at beginning of period | $ | 15 |
| | $ | 14 |
| | $ | 17 |
| | $ | 13 |
|
Additions charged to cost of product revenue | 8 |
| | 7 |
| | 20 |
| | 18 |
|
Repairs and replacements | (6 | ) | | (5 | ) | | (20 | ) | | (15 | ) |
Balance at end of period | $ | 17 |
| | $ | 16 |
| | $ | 17 |
| | $ | 16 |
|
Deconsolidation of Helix
Investments in Consolidated VIEs
Helix Holdings I, LLC
In July 2015, we obtained a 50% voting equity ownership interest in Helix Holdings I, LLC (Helix), a limited liability company formed with unrelated third-party investors to pursue the development and commercialization of a marketplace for consumer genomics.Helix. We determined that Helix is a VIE as the holders of the at-risk equity investments as a group lack the power to direct the activities of Helix that most significantly impact Helix’s economic performance. Additionally, we determined that we have (a)had unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and, no one individual party has unilateral power over the remaining significant activities of Helix and (b) the obligation to absorb losses of and the right to receive benefits from Helix that are potentially significant to Helix. Asas a result, we arewere deemed to be the primary beneficiary of Helix and arewere required to consolidate Helix.
On April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, Helix. As contractually committed, in July 2015, we contributed certain perpetual licenses, instruments, intangibles, initial laboratory setup, and discounted supply termspart of the agreement, (i) Helix repurchased all outstanding equity interests previously issued to us in exchange for voting equity interests in Helix. Such contributions were recorded at their historical basis as they remained within our control. Helix is financed through cash contributions made by us and the third-party investors in exchange for voting equity interests in Helix. During the nine months ended September 30, 2018, we made additional investments of $100 million in exchange for voting equity interests in Helix. As of September 30, 2018, the noncontrolling shareholders and Illumina each held 50% of Helix’s outstanding voting equity interests.
Certain noncontrolling Helix investors may require us to redeem certain noncontrolling interests in cash at the then approximate fair market value. Such redemptiona contingent value right, is exercisable at the option of certain noncontrolling interest holders after January 1, 2021, provided that a bona fide pursuit of the sale of Helix has occurred and an initial public offering of Helix has not been completed. As the contingent redemption is outside of our control, the redeemable noncontrolling interests in Helix are classified outside of stockholders’ equity on the accompanying condensed consolidated balance sheets. The balance of the redeemable noncontrolling interests is reported at the greater of its carrying value after receiving its allocation of Helix’s profits and losses or its estimated redemption fair value at each reporting date. The fair value of the redeemable noncontrolling interests is considered a Level 3 instrument.
As of September 30, 2018, the accompanying condensed consolidated balance sheet included $149 million of cash, cash equivalents, and short-term investments attributable to Helix that will be used to settle its respective obligations and will not be available to settle obligations of Illumina. The remaining assets and liabilities of Helix were not significant to our financial position as of September 30, 2018. Helix had an immaterial impact on our condensed consolidated statements of income and cash flows for the three and nine months ended September 30, 2018.
GRAIL, Inc.
In 2016, we obtained a majority equity ownership interest in GRAIL, a company formed with unrelated third-party investors to develop a blood test for early-stage cancer detection. At that time, we determined that GRAIL was a VIE as the entity lacked sufficient equity to finance its activities without additional support. Additionally, we determined that we were the primary beneficiary of GRAIL and were required to consolidate GRAIL. On February 28, 2017, GRAIL completed the initial close of its Series B preferred stock financing,(ii) we ceased to havehaving a controlling financial interest in GRAIL,Helix, including unilateral power over one of the activities that most significantly impacts the economic performance of Helix, (iii) we were relieved of any potential obligation to redeem
certain noncontrolling interests, and our equity ownership was reduced from 52% to 19%. Additionally, our voting interest was reduced to 13% and(iv) we no longer hadhave representation on GRAIL’sHelix’s board of directors. As a result, we deconsolidated GRAIL’sHelix’s financial statements effective February 28, 2017April 25, 2019 and recorded a pretax gain on deconsolidation of $453$39 million in other (expense) income, net. The gain on deconsolidation includes (i) the contingent value right received from Helix for its repurchase of our ownership interest, recorded at its fair value of $30 million, (ii) the derecognition of the carrying amounts of Helix’s assets and liabilities, and (iii) the derecognition of the noncontrolling interests related to Helix. The operations of GRAIL from January 2, 2017Helix, up to February 28, 2017, the date of deconsolidation, wereare included in the accompanying condensed consolidated statements of income for the ninethree and six months ended OctoberJune 30, 2019 and July 1, 2017.2018. During this period,these periods, we absorbed approximately 50% of GRAIL’s losses based upon our proportional ownership of GRAIL’s common stock.Helix’s losses.
The carryingcontingent value right entitles us to receive consideration in an amount dependent upon the outcome of future financing and/or liquidity events related to Helix and has a term of seven years. We elected the fair value option to measure the contingent value right, which is included in other assets. During the three months ended June 30, 2019, the fair value measurement resulted in a $3 million unrealized loss, included in other income, net. The fair value of the investment recordedcontingent value right is derived using a Monte Carlo simulation. Significant estimates and assumptions required for this valuation include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs, which represent a Level 3 measurement, are supported by little or no market activity and reflect our own assumptions in other assetsmeasuring fair value.
Concurrent with the agreement to sell all of our outstanding equity interests, we also amended our long-term supply and license agreements with Helix, including the discounted supply terms. Because these agreements were entered into concurrently, we consider them to be one arrangement with multiple elements, as defined under the respective authoritative accounting guidance. We determined that each of the elements, which include the contingent value right and services to be provided in accordance with the long-term supply and license agreements, were at, or approximated, fair value on a stand-alone basis. Therefore, none of the deconsolidation gain was $189 million and $185 million as of September 30, 2018 and December 31, 2017, respectively.allocated to these elements.
Redeemable Noncontrolling Interests
The activity of the redeemable noncontrolling interests during the ninesix months ended SeptemberJune 30, 20182019 was as follows (in millions):
|
| | | |
| Redeemable Noncontrolling Interests |
Balance as of December 30, 2018 | $ | 61 |
|
Vesting of redeemable equity awards | 1 |
|
Net loss attributable to noncontrolling interests | (9 | ) |
Adjustment down to the redemption value | (16 | ) |
Release of potential obligation to noncontrolling interests | (37 | ) |
Balance as of June 30, 2019 | $ | — |
|
|
| | | |
| Redeemable Noncontrolling Interests |
Balance as of December 31, 2017 | $ | 220 |
|
Vesting of redeemable equity awards | 2 |
|
Net loss attributable to noncontrolling interests | (25 | ) |
Adjustment up to the redemption value | 21 |
|
Balance as of September 30, 2018 | $ | 218 |
|
3. Pending Acquisition
On November 1, 2018, we entered into an Agreement and Plan of Merger (the Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share). The transaction, which is now expected to close in Q4 2019, is subject to certain customary closing conditions, including the receipt of certain required antitrust approvals. The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including but not limited to, a termination of the Merger Agreement in connection with PacBio accepting a superior offer or due to the withdrawal by PacBio’s board of directors of its recommendation of the merger, PacBio will pay us a cash termination fee of $43 million. In certain other circumstances related to antitrust approvals, we may be required to pay PacBio a termination fee of $98 million assuming the other closing conditions not related to antitrust or competition laws have been satisfied.
4. Fair Value Measurements
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20182019 and December 31, 201730, 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 30, 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
Money market funds (cash equivalents) | $ | 1,631 |
| | $ | — |
| | $ | — |
| | $ | 1,631 |
| | $ | 832 |
| | $ | — |
| | $ | — |
| | $ | 832 |
|
Debt securities in government-sponsored entities | — |
| | 26 |
| | — |
| | 26 |
| | — |
| | 21 |
| | — |
| | 21 |
|
Corporate debt securities | — |
| | 557 |
| | — |
| | 557 |
| | — |
| | 1,058 |
| | — |
| | 1,058 |
|
U.S. Treasury securities | 490 |
| | — |
| | — |
| | 490 |
| | 1,250 |
| | — |
| | — |
| | 1,250 |
|
Marketable equity securities | 157 |
| | — |
| | — |
| | 157 |
| | 39 |
| | — |
| | — |
| | 39 |
|
Contingent value right | — |
| | — |
| | 27 |
| | 27 |
| | — |
| | — |
| | — |
| | — |
|
Deferred compensation plan assets | — |
| | 44 |
| | — |
| | 44 |
| | — |
| | 34 |
| | — |
| | 34 |
|
Total assets measured at fair value | $ | 2,278 |
| | $ | 627 |
| | $ | 27 |
| | $ | 2,932 |
| | $ | 2,121 |
| | $ | 1,113 |
| | $ | — |
| | $ | 3,234 |
|
Liabilities: | | | | | | | | | | | | | | | |
Deferred compensation plan liability | $ | — |
| | $ | 42 |
| | $ | — |
| | $ | 42 |
| | $ | — |
| | $ | 33 |
| | $ | — |
| | $ | 33 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
Money market funds (cash equivalents) | $ | 1,053 |
| | $ | — |
| | $ | — |
| | $ | 1,053 |
| | $ | 957 |
| | $ | — |
| | $ | — |
| | $ | 957 |
|
Debt securities in government-sponsored entities | — |
| | 21 |
| | — |
| | 21 |
| | — |
| | 67 |
| | — |
| | 67 |
|
Corporate debt securities | — |
| | 1,060 |
| | — |
| | 1,060 |
| | — |
| | 421 |
| | — |
| | 421 |
|
U.S. Treasury securities | 962 |
| | — |
| | — |
| | 962 |
| | 432 |
| | — |
| | — |
| | 432 |
|
Deferred compensation plan assets | — |
| | 39 |
| | — |
| | 39 |
| | — |
| | 35 |
| | — |
| | 35 |
|
Total assets measured at fair value | $ | 2,015 |
| | $ | 1,120 |
| | $ | — |
| | $ | 3,135 |
| | $ | 1,389 |
| | $ | 523 |
| | $ | — |
| | $ | 1,912 |
|
Liabilities: | | | | | | | | | | | | | | | |
Deferred compensation liability | $ | — |
| | $ | 37 |
| | $ | — |
| | $ | 37 |
| | $ | — |
| | $ | 33 |
| | $ | — |
| | $ | 33 |
|
We hold available-for-sale securities that consist of highly-liquid, investment-grade debt securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service.
Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validation ofvalidating pricing sources and models, and review ofreviewing key model inputs, if necessary. Our marketable equity securities are measured at fair value based on quoted trade prices in active markets.
4.5. Debt and Other Commitments
Summary of debt obligations
Debt obligations consisted of the following (dollars in millions):
|
| | | | | | | |
| June 30, 2019 | | December 30, 2018 |
Principal amount of 2023 Notes outstanding | $ | 750 |
| | $ | 750 |
|
Principal amount of 2021 Notes outstanding | 517 |
| | 517 |
|
Principal amount of 2019 Notes outstanding | — |
| | 633 |
|
Unamortized discount of liability component of convertible senior notes | (147 | ) | | (175 | ) |
Net carrying amount of liability component of convertible senior notes | 1,120 |
| | 1,725 |
|
Obligations under financing leases | — |
| | 269 |
|
Other | — |
| | 3 |
|
Less: current portion | — |
| | (1,107 | ) |
Long-term debt | $ | 1,120 |
| | $ | 890 |
|
Carrying value of equity component of convertible senior notes, net of debt issuance costs | $ | 213 |
| | $ | 287 |
|
Fair value of convertible senior notes outstanding (Level 2) | $ | 1,658 |
| | $ | 2,222 |
|
Weighted-average remaining amortization period of discount on the liability component of convertible senior notes | 3.7 years |
| | 3.9 years |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Principal amount of 2023 Notes outstanding | $ | 750 |
| | $ | — |
|
Principal amount of 2021 Notes outstanding | 517 |
| | 517 |
|
Principal amount of 2019 Notes outstanding | 633 |
| | 633 |
|
Unamortized discount of liability component of convertible senior notes | (190 | ) | | (75 | ) |
Net carrying amount of liability component of convertible senior notes | 1,710 |
| | 1,075 |
|
Obligations under financing leases | 254 |
| | 113 |
|
Other | 3 |
| | 4 |
|
Less: current portion | (1,107 | ) | | (10 | ) |
Long-term debt | $ | 860 |
| | $ | 1,182 |
|
Carrying value of equity component of convertible senior notes, net of debt issuance cost | $ | 287 |
| | $ | 161 |
|
Fair value of convertible senior notes outstanding (Level 2) | $ | 2,533 |
| | $ | 1,305 |
|
Weighted-average remaining amortization period of discount on the liability component of convertible senior notes | 4.1 years |
| | 2.8 years |
|
Convertible Senior Notes
0% Convertible Senior Notes due 2023 (2023 Notes)
On August 21, 2018, we issued $750 million aggregate principal amount of convertible senior notes due 2023 (2023 Notes). The net proceeds from the issuance, after deducting the offering expenses payable by us, were $735 million. The 2023 Notes carry no coupon interest and mature on August 15, 2023.2023, and the implied estimated effective rate of the liability component of the Notes was 3.7%, assuming no conversion option.
The 2023 Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate, subject to adjustment, of 2.1845 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $457.77 per share of common stock), only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price in effect on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2023 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events described in the indenture. Regardless of the foregoing circumstances, the holders may convert their notes on or after May 15, 2023 until August 13,11, 2023.
It is our intent and policy to settle conversions, if any, through combination settlement; this involves repayment of an amount of cash equal to the principal amount and delivery of the excess of conversion value over the principal amount in shares
of common stock. In general, the “principal amount” paid in cash upon settlement is the lesser of $1,000 and the sum of the daily conversion values during a 20-day observation period. The daily conversion value is the product of the effective conversion rate (2.1845) and the daily volume weighted average price (VWAP) of our common stock divided by 20. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.
We may redeem for cash all or any portion of the 2023 Notes, at our option, on or after August 20, 2021 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect (currently $595.10) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date.
The 2023 Notes are accounted for in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by estimating the fair value of a similar liability that does not have an associated conversion feature. Because we have no outstanding non-convertible public debt, we determined that market-traded senior, unsecured corporate bonds represent a similar liability without a conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in our industry, and with similar maturities to the 2023 Notes, we estimated an implied interest rate of 3.7%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the 2023 Notes, which resulted in a fair value of the liability component in aggregate of $624 million upon issuance, calculated as the present value of implied future payments based on the $750 million aggregate principal amount. The $126 million difference ($93 million, net of tax) between the aggregate principal amount of $750 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the 2023 Notes are not considered redeemable.
As a policy election under applicable guidance related to the calculation of diluted net income per share, we have elected the combination settlement method as our stated settlement policy and apply the treasury stock method in the calculation of the potential dilutive impact of the 2023 Notes on net income per share each period. The 2023 Notes were not convertible as of SeptemberJune 30, 20182019 and had no dilutive impact during the three and ninesix months ended SeptemberJune 30, 2018.2019. If the 2023 Notes were converted as of SeptemberJune 30, 2018,2019, the if-converted value would not exceed the principal amount.
0% Convertible Senior Notes due 2019 (2019 Notes) and 0.5% Convertible Senior Notes due 2021 (2021 Notes)
In June 2014, we issued $633 million aggregate principal amount of 2019 Notes and $517 million aggregate principal amount of 2021 Notes. We used the net proceeds plus cash on hand to repurchase outstanding debt. The 2019 and 2021 Notes mature on June 15, 2019 and June 15, 2021, respectively, and the implied estimated effective rates of the liability componentscomponent of the Notes were 2.9% andwas 3.5%, respectively, assuming no conversion.conversion option.
Both the 2019 andThe 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $254.34 per share), only in the following circumstances and to the following extent:circumstances: (1) during the five business-day period after any 10 consecutive trading day period (the measurement period) in which the trading price per 2019 and 2021 Notes for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during that quarter)commencing after the calendar quarter ending September 30, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2021 Notes for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified events described in the indenture for the 2019 and 2021 Notes; and (4) at any timeNotes. Regardless of the foregoing circumstances, the holders of the 2021 Notes may convert their notes on or after March 15, 2019 for the 2019 Notes, or March 15, 2021 for the 2021 Notes, through the second scheduled trading day immediately preceding the maturity date.until June 11, 2021.
During the three months ended September 30, 2018, the market price of our common stock met the stock trading price conversion requirement of $330.64 and the 2019 and 2021 Notes became convertible on October 1, 2018 and continue to be convertible through December 31, 2018. The potential dilutive impact of the 2019 and 2021 notesNotes has been included in our calculation of diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 2018.2019. If the 2019 and 2021 Notes were converted as of SeptemberJune 30, 2018,2019, the if-converted value would exceed the principal amount by $452$182 million. During
0% Convertible Senior Notes due 2019 (2019 Notes)
In June 2014, we issued $633 million aggregate principal amount of 2019 Notes, and the nine months ended September 30, 2018,implied estimated effective rate of the carrying valuesliability component of the Notes was 2.9%, assuming no conversion option. The 2019 Notes were convertible into cash, shares of common stock, or a combination of common stock, at our election, based on conversion rates as defined in the indenture. The 2019 Notes matured on June 15, 2019, by which time the principal had been converted and was repaid in cash. The excess of the conversion value over the principal amount was paid in shares of common stock.
The following table summarizes information about the conversion of the 2019 and 2021 Notes were reclassified to short-term as they are convertible within twelveduring the six months of the balance sheet date.ended June 30, 2019 (in millions):
Build-to-suit |
| | | |
| 2019 Notes |
Cash paid for principal of notes converted | $ | 633 |
|
Conversion value over principal amount, paid in shares of common stock | $ | 153 |
|
Number of shares of common stock issued upon conversion | 0.4 |
|
Obligations under financing leases
We evaluate whether we are the accounting owner of leased assets during the construction period when we are involved in the construction of leased assets. As of SeptemberDecember 30, 2018, we were considered the ownerobligations under financing leases of a construction project for accounting purposes only under build-to-suit lease accounting due to certain indemnification obligations related to the construction. As of September 30, 2018, and December 31, 2017, we recorded $22$269 million and $144 million, respectively, inrepresented project construction costs paid or reimbursed by theour landlord as construction in progress and a correspondingrelated to our build-to-suit lease liability.
During the nine months ended September 30, 2018, construction of a build-to-suit property was completed. We concluded weleases that did not qualify for sale-leaseback treatmentaccounting under Topic 840. Upon adoption of Topic 842 on December 31, 2018, we derecognized the remaining financing obligations for our build-to-suit leasing arrangements and began to account for these leases as operating leases. See note “1. Basis of Presentation and Summary of Significant Accounting Policies” for further details on the leaseadoption of Topic 842.
6. Stockholders’ Equity
As of June 30, 2019, approximately 4.9 million shares remained available for future grants under the 2015 Stock Plan.
Restricted Stock
Restricted stock activity for the six months ended June 30, 2019 was as follows (units in thousands):
|
| | | | | | | | | | | | | |
| Restricted Stock Units (RSU) | | Performance Stock Units (PSU)(1) | | |
| | | RSU | | PSU |
Outstanding at December 30, 2018 | 1,840 |
| | 660 |
| | $ | 227.00 |
| | $ | 196.99 |
|
Awarded | 52 |
| | (42 | ) | | $ | 305.68 |
| | $ | 258.92 |
|
Vested | (65 | ) | | — |
| | $ | 195.44 |
| | — |
|
Cancelled | (83 | ) | | (49 | ) | | $ | 215.41 |
| | $ | 167.43 |
|
Outstanding at June 30, 2019 | 1,744 |
| | 569 |
| | $ | 231.06 |
| | $ | 194.97 |
|
| |
(1) | The number of units reflect the estimated number of shares to be issued at the end of the performance period. |
Stock Options
Stock option activity during the six months ended June 30, 2019 was as follows:
|
| | | | | | |
| Options (in thousands) | | Weighted-Average Exercise Price |
Outstanding at December 30, 2018 | 192 |
| | $ | 54.52 |
|
Exercised | (85 | ) | | $ | 49.82 |
|
Outstanding and exercisable at June 30, 2019 | 107 |
| | $ | 58.26 |
|
ESPP
The price at which common stock is accountedpurchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the six months ended June 30, 2019, approximately 0.1 million shares were issued under the ESPP. As of June 30, 2019, there were approximately 13.6 million shares available for asissuance under the ESPP.
Share Repurchases
On February 6, 2019, our Board of Directors authorized a financing obligation. Accordingly, $142new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $550 million of construction in progress and build-to-suit lease liability were reclassifiedoutstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During the six months ended June 30, 2019, we repurchased 0.2 million shares for approximately $63 million. Authorizations to building asset and obligations under financing leases, respectively.repurchase approximately $488 million of our common stock remained available as of June 30, 2019.
5. Share-based Compensation Expense
Share-based compensation expense reported in our condensed consolidated statements of income was as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Cost of product revenue | $ | 5 |
| | $ | 4 |
| | $ | 10 |
| | $ | 8 |
|
Cost of service and other revenue | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Research and development | 16 |
| | 15 |
| | 34 |
| | 30 |
|
Selling, general and administrative | 26 |
| | 30 |
| | 53 |
| | 58 |
|
Share-based compensation expense before taxes | 48 |
| | 50 |
| | 99 |
| | 98 |
|
Related income tax benefits | (11 | ) | | (11 | ) | | (21 | ) | | (21 | ) |
Share-based compensation expense, net of taxes | $ | 37 |
| | $ | 39 |
| | $ | 78 |
| | $ | 77 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Cost of product revenue | $ | 4 |
| | $ | 3 |
| | $ | 12 |
| | $ | 9 |
|
Cost of service and other revenue | 1 |
| | 1 |
| | 3 |
| | 2 |
|
Research and development | 15 |
| | 12 |
| | 45 |
| | 38 |
|
Selling, general and administrative | 28 |
| | 18 |
| | 86 |
| | 74 |
|
Share-based compensation expense before taxes | 48 |
| | 34 |
| | 146 |
| | 123 |
|
Related income tax benefits | (8 | ) | | (11 | ) | | (29 | ) | | (34 | ) |
Share-based compensation expense, net of taxes | $ | 40 |
| | $ | 23 |
| | $ | 117 |
| | $ | 89 |
|
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the Employee Stock Purchase Plan (ESPP) during the ninesix months ended SeptemberJune 30, 20182019 were as follows:
|
| | | |
| Employee Stock Purchase Rights |
Risk-free interest rate | 1.89% - 2.56% |
|
Expected volatility | 30% - 38% |
|
Expected term | 0.5 - 1.0 year |
|
Expected dividends | 0 | % |
Weighted-average grant-date fair value per share | $ | 71.48 |
|
|
| | | |
| Employee Stock Purchase Rights |
Risk-free interest rate | 1.22% - 2.45% |
|
Expected volatility | 29% - 39% |
|
Expected term | 0.5 - 1.0 year |
|
Expected dividends | 0 | % |
Weighted-average fair value per share | $ | 61.59 |
|
As of SeptemberJune 30, 2018,2019, approximately $293$372 million of total unrecognized compensation cost related to restricted stock and ESPP shares grantedissued to date was expected to be recognized over a weighted-average period of approximately 2.1 years.
6. Stockholders’ Equity
As of September 30, 2018, approximately 5.5 million shares remained available for future grants under the 2015 Stock Plan.
Restricted Stock
Restricted stock activity and related information for the nine months ended September 30, 2018 was as follows (units in thousands):
|
| | | | | | | | | | | | | |
| Restricted Stock Units (RSU) | | Performance Stock Units (PSU)(1) | | Weighted-Average Grant-Date Fair Value per Share |
| | | RSU | | PSU |
Outstanding at December 31, 2017 | 2,085 |
| | 542 |
| | $ | 172.92 |
| | $ | 166.15 |
|
Awarded | 80 |
| | 211 |
| | $ | 272.83 |
| | $ | 177.93 |
|
Vested | (139 | ) | | — |
| | $ | 162.89 |
| | — |
|
Cancelled | (155 | ) | | (30 | ) | | $ | 171.35 |
| | $ | 162.54 |
|
Outstanding at September 30, 2018 | 1,871 |
| | 723 |
| | $ | 178.07 |
| | $ | 169.73 |
|
| |
(1) | The number of units reflect the estimated number of shares to be issued at the end of the performance period. |
Stock Options
Stock option activity during the nine months ended September 30, 2018 was as follows:
|
| | | | | | |
| Options (in thousands) | | Weighted-Average Exercise Price |
Outstanding at December 31, 2017 | 322 |
| | $ | 46.93 |
|
Exercised | (101 | ) | | $ | 35.32 |
|
Outstanding and exercisable at September 30, 2018 | 221 |
| | $ | 52.22 |
|
ESPP
The price at which common stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the nine months ended September 30, 2018, approximately 0.3 million shares were issued under the ESPP. As of September 30, 2018, there were approximately 13.7 million shares available for issuance under the ESPP.
Share Repurchases
On July 28, 2016, our Board of Directors authorized a share repurchase program, which superseded all prior and available repurchase authorizations, to repurchase $250 million of outstanding common stock. During the year ended December 31, 2017, we repurchased 0.6 million shares for $101 million, completing the share repurchase program.
On May 4, 2017, our Board of Directors authorized a share repurchase program to repurchase $250 million of outstanding common stock. During the year ended December 31, 2017, we repurchased 0.8 million shares for $150 million from this program.
On May 1, 2018, our Board of Directors authorized an additional share repurchase program to repurchase $150 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During the three months ended September 30, 2018, we repurchased 0.3 million shares for $103 million concurrently with the offering of our 2023 Notes. Authorizations to repurchase $147 million of our common stock remained available as of September 30, 2018.
7. Legal Proceedings
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.
8. Income Taxes
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income. The effective tax rates for the three and ninesix months ended SeptemberJune 30, 20182019 were 19.0%15.4% and 14.6%10.8%, respectively. For the three and ninesix months ended SeptemberJune 30, 2018,2019, the variancedecrease 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, offset partially by the discrete tax expense associated with updating prior year estimates of the impact of U.S. Tax Reform.Kingdom. For the ninesix months ended SeptemberJune 30, 2018,2019, the decrease from the U.S. federal statutory tax rate was also attributable to thea discrete tax benefit associated with the recognition of prior year losses from our investment in Helix.
We continue to evaluate the impacts of U.S. Tax Reform as we interpret the legislation, including the newly-enacted global intangible low-taxed income (GILTI) provisions which subject our foreign earnings to a minimum level of tax. Because of the complexities of the new legislation, we have not yet elected an accounting policy for GILTI and, therefore, have only included GILTI related to current year operations in our estimated provision for income taxes. Recent FASB guidance indicates that accounting for GILTI either as part of deferred taxes or as a period cost is acceptable. Once further information is gathered and interpretation and analysis of theuncertain tax legislation evolves, we will make an appropriate accounting method election.
8. Legal Proceedings
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 ispositions recorded in the financial statements if it is believed to be probable that a loss has been incurredQ1 2019 and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable results 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. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertaintiesexcess tax benefits related to the occurrence, amount, and range of loss on any pending litigation or claim, we are currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event opposing litigants in outstanding litigations or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.share-based compensation.
9. Segment Information
We have two reportable segments: Core Illumina and one segment related to the combined activities of our Consolidated VIEs. Our Consolidated VIEs currently include only the operations of Helix, whereas prior to the deconsolidation of GRAIL on February 28, 2017, our Consolidated VIEs included the combined operations of GRAIL and Helix.
We report segment information based on the management approach. This approach designates the internal reporting used by the Chief Operating Decision Maker (“CODM”)(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. Based on the information used by the CODM, we have determined 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 as follows:
included both Core Illumina: and Helix.
Core Illumina:
Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of theour previously consolidated VIEs.VIE Helix.
Consolidated VIEs:Helix:
Helix: Helix was established to enable individuals to explore their genetic information by providing affordable sequencing and database services for consumers through third-party partners, driving the creation of an ecosystem of consumer applications. Helix was deconsolidated on April 25, 2019. See note “2. Balance Sheet Account Details” for further details.
GRAIL:GRAIL was created to develop a blood test for early-stage cancer detection. GRAIL was in the early stages of developing this test and as such, had no revenues through the date of deconsolidation.
Management evaluates the performance of our operatingreportable segments based upon income (loss) from operations. We do not allocate expenses between segments. Core Illumina sells products and provides services to GRAIL and Helix in accordance with contractual agreements between the entities.
The following table presents the operating performance of each reportable segment (in millions):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | June 30, 2019 | | July 1, 2018 | | June 30, 2019 | | July 1, 2018 |
Revenue: | | | | | | | | | | | | | | |
Core Illumina | $ | 855 |
| | $ | 715 |
| | $ | 2,467 |
| | $ | 1,978 |
| $ | 838 |
| | $ | 829 |
| | $ | 1,684 |
| | $ | 1,612 |
|
Consolidated VIEs | 2 |
| | 1 |
| | 8 |
| | 4 |
| |
Helix | | — |
| | 3 |
| | 1 |
| | 6 |
|
Elimination of intersegment revenue | (4 | ) | | (2 | ) | | (9 | ) | | (7 | ) | — |
| | (2 | ) | | (1 | ) | | (6 | ) |
Consolidated revenue | $ | 853 |
| | $ | 714 |
| | $ | 2,466 |
| | $ | 1,975 |
| $ | 838 |
| | $ | 830 |
| | $ | 1,684 |
| | $ | 1,612 |
|
| | | | | | | | | | | | | | |
Income (loss) from operations: | | | | | | | | | | | | | | |
Core Illumina | $ | 264 |
| | $ | 203 |
| | $ | 748 |
| | $ | 447 |
| $ | 211 |
| | $ | 246 |
| | $ | 433 |
| | $ | 484 |
|
Consolidated VIEs | (23 | ) | | (22 | ) | | (64 | ) | | (72 | ) | |
Helix | | (6 | ) | | (20 | ) | | (24 | ) | | (41 | ) |
Elimination of intersegment earnings | — |
| | — |
| | 2 |
| | 1 |
| — |
| | 1 |
| | 1 |
| | 2 |
|
Consolidated income from operations | $ | 241 |
| | $ | 181 |
| | $ | 686 |
| | $ | 376 |
| $ | 205 |
| | $ | 227 |
| | $ | 410 |
| | $ | 445 |
|
The following table presents the total assets of each reportable segment (in millions):
|
| | | | | | | |
| June 30, 2019 | | December 30, 2018 |
Core Illumina | $ | 6,973 |
| | $ | 6,912 |
|
Helix | — |
| | 154 |
|
Elimination of intersegment assets | — |
| | (107 | ) |
Consolidated total assets | $ | 6,973 |
| | $ | 6,959 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Core Illumina | $ | 6,691 |
| | $ | 5,223 |
|
Consolidated VIEs | 177 |
| | 45 |
|
Elimination of intersegment assets | (109 | ) | | (11 | ) |
Consolidated total assets | $ | 6,759 |
| | $ | 5,257 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying condensed consolidated financial statements and notes. This MD&A is organized as follows:
| |
• | Business Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business. |
| |
• | Results of Operations. Detailed discussion of our revenues and expenses. |
| |
• | Liquidity and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our financial commitments. |
| |
• | Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements. |
| |
• | Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements. |
| |
• | Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements. |
Business 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 statements of cash flows, changes in our financial position, and our financial commitments.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K we believe are important to understanding the assumptions and judgments underlying our financial statements.
Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see “Consideration Regarding Forward-Looking Statements” at the endpreceding Item 3 of this MD&A sectionreport for additional factors relating to
such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018. Operating results are not necessarily indicative of results that may occur in future periods.
Business Overview and Outlook
This overview and outlook provides 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 twoone reportable segments:segment, Core Illumina, which relates to Illumina’s core operations (Core Illumina) and one segment relatedoperations. Prior to the activities of our Consolidated VIEs. Our Consolidated VIEs currently include only the operations of Helix whereas prior to the GRAIL deconsolidation on February 28, 2017,April 25, 2019, our Consolidated VIEsreportable segments included the combined operations of GRAILboth Core Illumina and Helix. For information on GRAIL and Helix, refer to notes 2 and 9 of the Notes to the Condensed Consolidated Financial Statements provided in 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 a broad range of academic, government, pharmaceutical, biotechnology, and other leading institutions around the globe.
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 addressaddresses a range of genomic complexity and throughput, enabling researchers and clinical practitioners to select the best solution for their scientific challenge.
On November 1, 2018, we entered into an Agreement and Plan of Merger to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share), subject to applicable regulatory approvals. We believe PacBio’s highly accurate long reads combined with our highly accurate and scalable short reads will provide researchers and clinicians with a more perfect view of the genome, enhancing their ability to make novel discoveries and broaden clinical utility across a range of applications. The transaction is now expected to close in Q4 2019. See note “3. Pending Acquisition” in Part I, Item 1 of this report for further details.
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto in Item 1, Part I of this report, and the other transactions, events, and trends discussed in “Risk Factors” in Item 1A, Part II of this report and Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018.
Financial Overview
Consolidated financial highlights for the first three quartershalf of 20182019 included the following:
Net revenueRevenue increased 25%4% during the first three quartershalf of 20182019 to $2.5 billion$1,684 million compared to $2.0 billion$1,612 million in the first three quartershalf of 20172018 primarily due to the growth in sales of our consumables, services and instruments, primarily driven by increases in sequencing.sequencing consumables. We expect our revenue, as compared to the prior year, to continue to increase in 2018.
Gross profit as a percentage of revenue (gross margin) was 69.4%2019, although we are anticipating ongoing weakness in the first three quartersdirect-to-consumer (DTC) market and delayed timing of 2018 compared to 65.0% in the first three quarters of 2017. The gross margin increase was primarily driven by an increase in consumables as a percentage of revenue, which generate higher gross margins, and the impairment of an acquired intangible asset and inventory reserves related to product transitions that were recorded in the first three quarters of 2017. Our gross margin in future periods will depend on several factors, including: market conditions that may impact our pricing power; sales mix changes among consumables, instruments, and services; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product support obligations.certain population genomics projects.
| |
• | Gross profit as a percentage of revenue (gross margin) was 68.7% in the first half of 2019 compared to 69.0% in the first half of 2018. The gross margin decrease was driven by lower volumes in our service business, partially offset by an increase in revenue from a non-recurring licensing agreement in Q1 2019.Our gross margin in future periods will depend on several factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, and services; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product support obligations. |
Income from operations as a percentage of revenue increaseddecreased to 27.8%24.3% in the first three quartershalf of 20182019 compared to 19.0%27.6% in the first three quartershalf of 20172018 primarily due to increased revenue, improved gross margins, and a decrease in operating expenses as a percentage of revenue. We expect our operating expenses, as compared to the prior year, to continue to grow on an absolute basis.basis in 2019. However, we are focused on reducing operating expenses in the second half of 2019 in response to lower revenue growth expectations.
Our effective tax rate was 14.6%10.8% in the first three quartershalf of 20182019 compared to 24.3%12.3% in the first three quartershalf of 2017. The variance from the U.S. federal statutory tax rate of 21% in2018. In the first three quartershalf of 2018 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 the discrete tax benefit associated with the recognition of prior year losses from our investment in Helix, offset partially by the discrete tax expense associated with updating prior year estimates of the impact of U.S. Tax Reform.
Cash, cash equivalents, and short-term investments were $3.4 billion as of September 30, 2018, of which approximately $817 million was held by our foreign subsidiaries.
Results of Operations
To enhance comparability, the following table sets forth our unaudited condensed consolidated statements of income for the specified reporting periods stated as a percentage of total revenue.
|
| | | | | | | | | | | |
| Q3 2018 | | Q3 2017 | | YTD 2018 | | YTD 2017 |
Revenue: | | | | | | | |
Product revenue | 83.2 | % | | 83.5 | % | | 81.5 | % | | 82.6 | % |
Service and other revenue | 16.8 |
| | 16.5 |
| | 18.5 |
| | 17.4 |
|
Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of revenue: | | | | | | | |
Cost of product revenue | 21.6 |
| | 24.2 |
| | 21.9 |
| | 25.7 |
|
Cost of service and other revenue | 7.2 |
| | 7.0 |
| | 7.7 |
| | 7.7 |
|
Amortization of acquired intangible assets | 1.2 |
| | 1.3 |
| | 1.0 |
| | 1.6 |
|
Total cost of revenue | 30.0 |
| | 32.5 |
| | 30.6 |
| | 35.0 |
|
Gross profit | 70.0 |
| | 67.5 |
| | 69.4 |
| | 65.0 |
|
Operating expense: | | | | | | | |
Research and development | 18.6 |
| | 18.7 |
| | 18.1 |
| | 20.7 |
|
Selling, general and administrative | 23.2 |
| | 23.5 |
| | 23.5 |
| | 25.3 |
|
Total operating expense | 41.8 |
| | 42.2 |
| | 41.6 |
| | 46.0 |
|
Income from operations | 28.2 |
| | 25.3 |
| | 27.8 |
| | 19.0 |
|
Other income (expense): | | | | | | | |
Interest income | 1.6 |
| | 0.6 |
| | 1.3 |
| | 0.7 |
|
Interest expense | (1.8 | ) | | (1.4 | ) | | (1.5 | ) | | (1.3 | ) |
Other (expense) income, net | (0.9 | ) | | — |
| | 0.2 |
| | 23.1 |
|
Total other (expense) income, net | (1.1 | ) | | (0.8 | ) | | — |
| | 22.5 |
|
Income before income taxes | 27.1 |
| | 24.5 |
| | 27.8 |
| | 41.5 |
|
Provision for income taxes | 5.1 |
| | 3.2 |
| | 4.1 |
| | 10.1 |
|
Consolidated net income | 22.0 |
| | 21.3 |
| | 23.7 |
| | 31.4 |
|
Add: Net loss attributable to noncontrolling interests | 1.3 |
| | 1.5 |
| | 1.3 |
| | 1.9 |
|
Net income attributable to Illumina stockholders | 23.3 | % | | 22.8 | % | | 25.0 | % | | 33.3 | % |
Percentages may not recalculate due to rounding
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. The three and nine month periods ended September 30, 2018 and October 1, 2017 were both 13 and 39 weeks, respectively.
Revenue
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q3 2018 | | Q3 2017 | | Change | | % Change | | YTD 2018 | | YTD 2017 | | Change | | % Change |
Consumables | $ | 550 |
| | $ | 451 |
| | $ | 99 |
| | 22 | % | | $ | 1,595 |
| | $ | 1,240 |
| | $ | 355 |
| | 29 | % |
Instruments | 154 |
| | 140 |
| | 14 |
| | 10 |
| | 398 |
| | 376 |
| | 22 |
| | 6 |
|
Other product | 6 |
| | 5 |
| | 1 |
| | 20 |
| | 18 |
| | 15 |
| | 3 |
| | 20 |
|
Total product revenue | 710 |
| | 596 |
| | 114 |
| | 19 |
| | 2,011 |
| | 1,631 |
| | 380 |
| | 23 |
|
Service and other revenue | 143 |
| | 118 |
| | 25 |
| | 21 |
| | 455 |
| | 344 |
| | 111 |
| | 32 |
|
Total revenue | $ | 853 |
| | $ | 714 |
| | $ | 139 |
| | 20 | % | | $ | 2,466 |
| | $ | 1,975 |
| | $ | 491 |
| | 25 | % |
Other product revenue consists primarily of freight. Service and other revenue consists primarily of sequencing and genotyping service revenue as well as instrument service contract revenue. Total revenue primarily relates to Core Illumina for all periods presented.
The increases in consumables revenue in Q3 2018 and the first three quarters of 2018 were primarily due to an $87 million and $304 million increase in sequencing consumables revenue, respectively, driven primarily by growth in the instrument installed base. Instruments revenue increased in Q3 2018 primarily due to a $10 million increase in sequencing instruments revenue. The increase in instruments revenue in the first three quarters of 2018 was primarily due to a $19 million increase in sequencing instruments revenue driven by increased shipments of our NovaSeq instruments, partially offset by fewer shipments of our HiSeq instruments. Service and other revenue increased in Q3 2018 and the first three quarters of 2018 as a result of increased revenue fromsequencing services and co-development agreements. Service and other revenue also increased in the first three quarters of 2018 due to increased revenue from genotyping services.
Gross Margin
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q3 2018 | | Q3 2017 | | Change | | % Change | | YTD 2018 | | YTD 2017 | | Change | | % Change |
Gross profit | $ | 597 |
| | $ | 482 |
| | $ | 115 |
| | 24% | | $ | 1,710 |
| | $ | 1,284 |
| | $ | 426 |
| | 33% |
Gross margin | 70.0 | % | | 67.5 | % | | | | | | 69.4 | % | | 65.0 | % | | | | |
The gross margin increase in Q3 2018 and the first three quarters of 2018 was primarily driven by increases in consumables as a percentage of revenue, which generate higher gross margins. Gross margin also increased in the first three quarters of 2018 due to an $18 million impairment of an acquired intangible asset and inventory reserves related to product transitions that were recorded in Q1 2017.
Operating Expense
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q3 2018 | | Q3 2017 | | Change | | % Change | | YTD 2018 | | YTD 2017 | | Change | | % Change |
Research and development | $ | 159 |
| | $ | 134 |
| | $ | 25 |
| | 19 | % | | $ | 447 |
| | $ | 409 |
| | $ | 38 |
| | 9 | % |
Selling, general and administrative | 197 |
| | 167 |
| | 30 |
| | 18 |
| | 577 |
| | 499 |
| | 78 |
| | 16 |
|
Total operating expense | $ | 356 |
| | $ | 301 |
| | $ | 55 |
| | 18 | % | | $ | 1,024 |
| | $ | 908 |
| | $ | 116 |
| | 13 | % |
Core Illumina R&D expense increased by $23 million, or 18%, in Q3 2018 and by $40 million, or 10%, in the first three quarters of 2018, primarily due to increased headcount, 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. R&D expense of our Consolidated VIEs increased by $2 million in Q3 2018 due to growth in Helix’s operations. R&D expense of our Consolidated VIEs decreased by $2 million in the first three quarters of 2018 primarily due to the deconsolidation of GRAIL in Q1 2017.
Core Illumina SG&A expense increased by $31 million, or 20%, in Q3 2018 and by $87 million, or 19%, in the first three quarters of 2018, primarily due to increased headcount and investment in facilities to support the continued growth and scale of our operations, and an increase in performance-based compensation. SG&A expense of our Consolidated VIEs decreased by $1 million in Q3 2018 due to elevated marketing expenses in Q3 2017 related to Helix’s platform launch. SG&A expense of our Consolidated VIEs decreased by $9 million in the first three quarters of 2018 primarily due to the deconsolidation of GRAIL in Q1 2017, partially offset by the growth of Helix's operations.
Other Income (Expense)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q3 2018 | | Q3 2017 | | Change | | % Change | | YTD 2018 | | YTD 2017 | | Change | | % Change |
Interest income | $ | 14 |
| | $ | 4 |
| | $ | 10 |
| | 250 | % | | $ | 31 |
| | $ | 13 |
| | $ | 18 |
| | 138 | % |
Interest expense | (15 | ) | | (10 | ) | | (5 | ) | | 50 |
| | (37 | ) | | (26 | ) | | (11 | ) | | 42 |
|
Other (expense) income, net | (8 | ) | | — |
| | (8 | ) | | 100 |
| | 5 |
| | 457 |
| | (452 | ) | | (99 | ) |
Total other (expense) income, net | $ | (9 | ) | | $ | (6 | ) | | $ | (3 | ) | | 50 | % | | $ | (1 | ) | | $ | 444 |
| | $ | (445 | ) | | (100 | )% |
Other income (expense) primarily relates to Core Illumina for all periods presented.
Interest income increased in Q3 2018 and in the first three quarters of 2018 as a result of higher yields on our investments 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 (expense) income, net, in Q3 2018 consisted primarily of mark-to-market adjustments and impairments from our strategic investments. Other (expense) income, net decreased in the first three quarters of 2018 primarily due to a $453 million gain recorded on the deconsolidation of GRAIL in Q1 2017.
Provision for Income Taxes |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q3 2018 | | Q3 2017 | | Change | | % Change | | YTD 2018 | | YTD 2017 | | Change | | % Change |
Income before income taxes | $ | 232 |
| | $ | 175 |
| | $ | 57 |
| | 33 | % | | $ | 685 |
| | $ | 820 |
| | $ | (135 | ) | | (16 | )% |
Provision for income taxes | 44 |
| | 23 |
| | 21 |
| | 91 |
| | 100 |
| | 199 |
| | (99 | ) | | (50 | ) |
Consolidated net income | $ | 188 |
| | $ | 152 |
| | $ | 36 |
| | 24 | % | | $ | 585 |
| | $ | 621 |
| | $ | (36 | ) | | (6 | )% |
Effective tax rate | 19.0 | % | | 12.9 | % | | | | | | 14.6 | % | | 24.3 | % | | | | |
For U.S. federal purposes, the corporate statutory income tax rate was reduced from 35% to 21%, effective for our 2018 tax year. The provisional impact of the Tax Cuts and Jobs Act (U.S. Tax Reform), enacted on December 22, 2017, was our best estimate based on a review of the new law and is subject to revision based on our existing accounting for income taxes policy as further information is gathered, and interpretation and analysis of the tax legislation evolves. The Securities and Exchange Commission has issued rules allowing for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts. In Q3 2018, we recorded $11.0 million as a discrete tax expense as a result of updating our prior year estimates of the impact of U.S. Tax Reform. Any future changes to our estimated impact of U.S. Tax Reform will be included as an adjustment to the provision for income taxes.
Our effective tax rate was 19.0% for Q3 2018 compared to 12.9% in Q3 2017. The variance from the U.S. federal statutory tax rate of 21% in Q3 2018 was primarily impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, offset partially by the discrete tax expense associated with updating our prior year estimates of the impact of U.S. Tax Reform. The variance from the U.S. federal statutory tax rate of 35% in Q3 2017 was primarily impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, and excess tax benefits related to share-based compensation.
Our effective tax rate was 14.6% for the first three quarters of 2018 compared to 24.3% for the first three quarters of 2017. For the first three quarters of 2018,2019, 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, a discrete tax benefit related to uncertain tax positions recorded in Q1 2019, and excess tax benefits related to share-based compensation.
We ended the first half of 2019 with cash, cash equivalents, and short-term investments totaling $3.2 billion as of June 30, 2019, of which approximately $476 million was held by our foreign subsidiaries.
Results of Operations
To enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified reporting periods, stated as a percentage of total revenue.
|
| | | | | | | | | | | |
| Q2 2019 | | Q2 2018 | | YTD 2019 | | YTD 2018 |
Revenue: | | | | | | | |
Product revenue | 84.0 | % | | 81.1 | % | | 81.5 | % | | 80.7 | % |
Service and other revenue | 16.0 |
| | 18.9 |
| | 18.5 |
| | 19.3 |
|
Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of revenue: | | | | | | | |
Cost of product revenue | 23.4 |
| | 21.8 |
| | 22.4 |
| | 22.0 |
|
Cost of service and other revenue | 7.0 |
| | 7.8 |
| | 7.8 |
| | 7.9 |
|
Amortization of acquired intangible assets | 1.2 |
| | 1.1 |
| | 1.1 |
| | 1.1 |
|
Total cost of revenue | 31.6 |
| | 30.7 |
| | 31.3 |
| | 31.0 |
|
Gross profit | 68.4 |
| | 69.3 |
| | 68.7 |
| | 69.0 |
|
Operating expense: | | | | | | | |
Research and development | 19.8 |
| | 18.2 |
| | 19.9 |
| | 17.9 |
|
Selling, general and administrative | 24.1 |
| | 23.7 |
| | 24.5 |
| | 23.5 |
|
Total operating expense | 43.9 |
| | 41.9 |
| | 44.4 |
| | 41.4 |
|
Income from operations | 24.5 |
| | 27.4 |
| | 24.3 |
| | 27.6 |
|
Other income (expense): | | | | | | | |
Interest income | 2.4 |
| | 1.3 |
| | 2.6 |
| | 1.0 |
|
Interest expense | (1.8 | ) | | (1.3 | ) | | (1.8 | ) | | (1.4 | ) |
Other income, net | 16.2 |
| | 0.6 |
| | 9.3 |
| | 0.9 |
|
Total other income, net | 16.8 |
| | 0.6 |
| | 10.1 |
| | 0.5 |
|
Income before income taxes | 41.3 |
| | 28.0 |
| | 34.4 |
| | 28.1 |
|
Provision for income taxes | 6.3 |
| | 3.9 |
| | 3.7 |
| | 3.5 |
|
Consolidated net income | 35.0 |
| | 24.1 |
| | 30.7 |
| | 24.6 |
|
Add: Net loss attributable to noncontrolling interests | 0.3 |
| | 1.1 |
| | 0.7 |
| | 1.3 |
|
Net income attributable to Illumina stockholders | 35.3 | % | | 25.2 | % | | 31.4 | % | | 25.9 | % |
Percentages may not recalculate due to rounding
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. The three and six month periods ended June 30, 2019 and July 1, 2018 were both 13 and 26 weeks, respectively.
Revenue
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q2 2019 | | Q2 2018 | | Change | | % Change | | YTD 2019 | | YTD 2018 | | Change | | % Change |
Consumables | $ | 571 |
| | $ | 545 |
| | $ | 26 |
| | 5 | % | | $ | 1,127 |
| | $ | 1,055 |
| | $ | 72 |
| | 7 | % |
Instruments | 133 |
| | 128 |
| | 5 |
| | 4 |
| | 245 |
| | 246 |
| | (1 | ) | | — |
|
Total product revenue | 704 |
| | 673 |
| | 31 |
| | 5 |
| | 1,372 |
| | 1,301 |
| | 71 |
| | 5 |
|
Service and other revenue | 134 |
| | 157 |
| | (23 | ) | | (15 | ) | | 312 |
| | 311 |
| | 1 |
| | — |
|
Total revenue | $ | 838 |
| | $ | 830 |
| | $ | 8 |
| | 1 | % | | $ | 1,684 |
| | $ | 1,612 |
| | $ | 72 |
| | 4 | % |
Service and other revenue consists primarily of sequencing and genotyping service revenue as well as instrument service contract revenue. Total revenue relates primarily to Core Illumina for all periods presented.
The increases in consumables revenue in Q2 2019 and the discrete benefit associated withfirst half of 2019 were primarily due to increases in sequencing consumables revenue of $37 million and $96 million, respectively, driven primarily by growth in the recognitioninstrument installed base. The increases in sequencing consumables revenue were partially offset by decreases in microarray consumables revenue primarily due to ongoing weakness in the direct-to-consumer (DTC) market. Instruments revenueincreasedin Q2 2019, primarily due to increased shipments of prior year lossesNextSeq. Instruments revenue remained relatively flat in the first half of 2019, primarily due to the timing of NovaSeq shipments offsetting the increased shipments of our NextSeq instruments. Service and other revenue decreased in Q2 2019, primarily due to decreased revenue from genotyping services, which reflects ongoing weakness in the DTC market, and decreased sequencing services revenue. Service and other revenue was relatively flat in the first half of 2019, primarily due to increased licensing and co-development revenue offsetting the decreased revenue from genotyping and sequencing services.
Gross Margin
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q2 2019 | | Q2 2018 | | Change | | % Change | | YTD 2019 | | YTD 2018 | | Change | | % Change |
Gross profit | $ | 573 |
| | $ | 575 |
| | $ | (2 | ) | | —% | | $ | 1,157 |
| | $ | 1,113 |
| | $ | 44 |
| | 4% |
Gross margin | 68.4 | % | | 69.3 | % | | | | | | 68.7 | % | | 69.0 | % | | | | |
The gross margin decreases in Q2 2019 and the first half of 2019 were driven primarily due to lower volumes in our service business. The decreases were partially offset by a more favorable mix of sequencing consumables and services in Q2 2019 and, in the first half of 2019, an increase in revenue from a non-recurring licensing agreement in Q1 2019.
Operating Expense
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q2 2019 | | Q2 2018 | | Change | | % Change | | YTD 2019 | | YTD 2018 | | Change | | % Change |
Research and development | $ | 166 |
| | $ | 151 |
| | $ | 15 |
| | 10 | % | | $ | 335 |
| | $ | 288 |
| | $ | 47 |
| | 16 | % |
Selling, general and administrative | 202 |
| | 197 |
| | 5 |
| | 3 |
| | 412 |
| | 380 |
| | 32 |
| | 8 |
|
Total operating expense | $ | 368 |
| | $ | 348 |
| | $ | 20 |
| | 6 | % | | $ | 747 |
| | $ | 668 |
| | $ | 79 |
| | 12 | % |
Core Illumina R&D expense increased by $20 million, or 14%, in Q2 2019 and by $52 million, or 19%, in the first half of 2019, primarily due to increased headcountas we continue to invest 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 $5 million in Q2 2019 and the first half of 2019, primarily due to its deconsolidation on April 25, 2019.
Core Illumina SG&A expense increased by $11 million, or 6%, in Q2 2019, and by $40 million, or 11%, in the first half of 2019, primarily due to expenses related to the pending Pacific Biosciences acquisition, increased headcount, and investment in facilities to support the continued growth and scale of our operations, partially offset by a decrease in performance-based compensation. Helix SG&A expense decreased by $6 million in Q2 2019 and by $8 million in the first half of 2019, primarily due to its deconsolidation on April 25, 2019.
Other Income, Net
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q2 2019 | | Q2 2018 | | Change | | % Change | | YTD 2019 | | YTD 2018 | | Change | | % Change |
Interest income | $ | 20 |
| | $ | 11 |
| | $ | 9 |
| | 82 | % | | $ | 43 |
| | $ | 16 |
| | $ | 27 |
| | 169 | % |
Interest expense | (15 | ) | | (11 | ) | | (4 | ) | | 36 |
| | (30 | ) | | (22 | ) | | (8 | ) | | 36 |
|
Other income, net | 136 |
| | 5 |
| | 131 |
| | 2,620 |
| | 157 |
| | 14 |
| | 143 |
| | 1,021 |
|
Total other income, net | $ | 141 |
| | $ | 5 |
| | $ | 136 |
| | 2,720 | % | | $ | 170 |
| | $ | 8 |
| | $ | 162 |
| | 2,025 | % |
Other income, net relates primarily to Core Illumina for all periods presented.
Interest income increased in Q2 2019 and in the first half of 2019 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 increased in Q2 2019 and the first half of 2019 primarily due to the 2023 Notes issued in August 2018. Other income, net, increased in Q2 2019 and in the first half of 2019 primarily due to mark-to-market adjustments from our strategic investments, which included a $92 million unrealized gain from a strategic investment that completed an initial public offering in Q2 2019. The increase in other income, net was also due to a $39 million gain recorded on the deconsolidation of Helix offset partially byin Q2 2019 and a $15 million gain recorded in Q1 2019 from the discretesettlement of a contingency related to the deconsolidation of GRAIL in 2017.
Provision for Income Taxes |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Q2 2019 | | Q2 2018 | | Change | | % Change | | YTD 2019 | | YTD 2018 | | Change | | % Change |
Income before income taxes | $ | 346 |
| | $ | 232 |
| | $ | 114 |
| | 49 | % | | $ | 580 |
| | $ | 453 |
| | $ | 127 |
| | 28 | % |
Provision for income taxes | 53 |
| | 32 |
| | 21 |
| | 66 |
| | 63 |
| | 56 |
| | 7 |
| | 13 |
|
Consolidated net income | $ | 293 |
| | $ | 200 |
| | $ | 93 |
| | 47 | % | | $ | 517 |
| | $ | 397 |
| | $ | 120 |
| | 30 | % |
Effective tax rate | 15.4 | % | | 13.9 | % | | | | | | 10.8 | % | | 12.3 | % | | | | |
Our effective tax expense associatedrate was 15.4% for Q2 2019 compared to 13.9% in Q2 2018. The variances from the U.S. federal statutory tax rate of 21% in Q2 2019 and Q2 2018 were primarily attributable to the mix of earnings in jurisdictions with updating prior year estimateslower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.
Our effective tax rate was 10.8% for the first half of 2019 compared to 12.3% for the impactfirst half of U.S. Tax Reform.2018. For the first three quartershalf of 2017,2019, the variance from the U.S. federal statutory tax rate of 35%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 UnitedKingdom, a discrete tax benefit related to uncertain tax positionsrecorded in Q1 2019, and excess tax benefits related to share-based compensation. For the first half of 2018, 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 rates than the U.S. federal statutory rate, such as in Singapore and the United Kingdom, and excess tax benefits related to share-based compensation, partially offset by the discrete tax impactbenefit associated with the recognition of $150 millionprior year losses from the gain on deconsolidation of GRAIL.our investment in Helix.
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 Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Based on our initial interpretation and analysis30, 2018. As a result of U.S. Tax Reform and projected future financial results, we anticipate that our effective tax rate will trend lower than the U.S. federal statutory tax rate in the future due to the portion of our earnings that will be subject to lower statutory tax rates. As further information is gathered, and interpretation and analysis of the tax legislation evolves, we will update our estimate of the future effective tax rate. The Ninth Circuit decision on July 24, 2018June 7, 2019 to overturn a U.S. Tax Court opinion provided in Q3 2015 that stock compensation should be excluded from cost sharing charges, was withdrawn on August 7, 2018.we anticipate our effective tax rate may be adversely impacted. The final resolution of this case is uncertain, and we are still evaluating, but if ait is determined that the outcome of this decision similar to the one provided on July 24, 2018 becomesis more likely than not, we anticipate a discrete tax detrimentexpense of less than $30 million could be recorded and then a modest ongoing impact thereafter.recorded.
Liquidity and Capital Resources
At SeptemberJune 30, 20182019, we had approximately $1.351.9 billion in cash and cash equivalents, of which approximately $817$476 million was held by our foreign subsidiaries. Cash and cash equivalents held by Helix as of September 30, 2018 were $52 million. Cash and cash equivalents increased by $121 million$0.8 billion from December 31, 2017,30, 2018, 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. We currently do not expect our foreign earnings generated in 2018 to be indefinitely invested in the foreign jurisdictions.
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. As of SeptemberJune 30, 20182019, we had $2.041.2 billion in short-term investments,including $97 million held by Helix.investments. Our short-term investments includeare predominantly comprised of marketable securities consisting of U.S. government-sponsored entities, corporate debt securities, and U.S. Treasury securities.
In August 2018, we issued convertible senior notes due 2023 (2023 Notes) with an aggregateOur 2019 Notes matured on June 15, 2019, by which time the $633 million in principal had been converted and was paid in cash. The excess of the conversion value over the principal amount was paid in shares of $750 million. The net proceeds from the issuance, after deducting the offering expenses payable by us, were $735 million. We used a portion of the net proceeds to repurchase $103 million dollars of our common stock concurrently with the offering. The 2023 Notes mature on August 15, 2023 and were not convertible as of September 30, 2018.
stock. Our convertible senior notes due in 20192021 and 2021 became2023 were not convertible at the optionas of the holders, on October 1, 2018 and continue to be convertible at least through December 31, 2018. It is our intent and policy to settle conversions of the notes through combination settlement; this involves repayment of an amount of cash equal to the principal amount and delivery of the excess of conversion value over the principal amount in shares of common stock.June 30, 2019.
We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities are sufficient to fund our near-term capital and operating needs for at least the next 12 months.months including the pending acquisition of PacBio for a cash price of approximately $1.2 billion. 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, including expansion of our direct sales force and field support resources both in the United States and abroad;
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 early repayment of debt obligations;
the expansion needs of our facilities, including costs of leasing and building out additional facilities; and
repurchases of our outstanding common stock; andstock.
the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred in accordance with the U.S. Tax Reform.
On May 4, 2017,February 6, 2019, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $250$550 million of outstanding common stock. On May 1, 2018, our Board of Directors increased the share repurchase authorization by $150 million. The repurchases may be
completed under a 10b5-1 plan or at management’s discretion. Authorizations to repurchase $147$488 million of our common stock remained available as of SeptemberJune 30, 2018.2019.
Certain noncontrolling Helix investors may require Illumina to redeem certain noncontrolling interests in cash at the then approximate fair market value. Such redemption right is exercisable at the option of certain noncontrolling interest holders after January 1, 2021, provided that a bona fide pursuit of the sale of Helix has occurred and an initial public offering of Helix has not been completed. The fair value of the redeemable noncontrolling interests related to Helix as of September 30, 2018 was $218 million.
We had $73$57 million remaining in our capital commitment to thea venture capital investment fund as of SeptemberJune 30, 2018.2019 that is callable through April 2026. In July 2019, we invested in a second venture capital investment fund with a maximum capital commitment of up to $160 million that is callable through July 2029.
We expect that our revenue and the resulting operating income, from operations, 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) | YTD 2018 | | YTD 2017 | YTD 2019 | | YTD 2018 |
Net cash provided by operating activities | $ | 842 |
| | $ | 581 |
| $ | 341 |
| | $ | 550 |
|
Net cash (used in) provided by investing activities | (1,465 | ) | | 101 |
| |
Net cash provided by (used in) financing activities | 748 |
| | (67 | ) | |
Net cash provided by (used in) investing activities | | 1,067 |
| | (525 | ) |
Net cash (used in) provided by financing activities | | (609 | ) | | 97 |
|
Effect of exchange rate changes on cash and cash equivalents | (4 | ) | | 4 |
| — |
| | (3 | ) |
Net increase in cash and cash equivalents | $ | 121 |
| | $ | 619 |
| $ | 799 |
| | $ | 119 |
|
Operating Activities
Net cash provided by operating activities in the first three quartershalf of 20182019 primarily consisted of net income of $585$517 million plusless net adjustments of $269$19 million partially offset byand net changes in operating assets and liabilities of $12$157 million. The primary non-cash adjustments to net income included unrealized gains on marketable equity securities of $104 million, payment of the accreted debt discount related to our 2019 Notes of $84 million, and gains on deconsolidation of $54 million, partially offset by share-based compensation of $99 million,depreciation and amortization expenses of $129$96 million, share-based compensation of $146 million, and accretion of debt discount of $26$27 million, partially offset byand deferred income taxes of $32$6 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increases in inventory, accounts receivable,prepaid expenses and other current assets, and other assets and decreases in accrued liabilities, accounts payable, and other long-term liabilities, partially offset by increasesdecreases in accounts payable and accrued liabilities.receivable.
Net cash provided by operating activities in the first three quartershalf of 20172018 consisted of net income of $621$397 million lessplus net adjustments of $116$170 million, partially offset by net changes in operating assets and liabilities of $76$17 million. The primary non-cash adjustments to net income included the gain on deconsolidation of GRAIL of $453 million, depreciation and amortization expenses of $117$84 million, share-based compensation of $123 million, deferred income tax of $53 million, impairment of intangible assets of $23$98 million, and accretion of debt discount of $23$16 million, partially offset by deferred income taxes of $22 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increasesan increase in inventory and a decrease in other long-term liabilities, partially offset by an increase in accrued liabilities other long-term liabilities and inventory.a decrease in accounts receivable.
Investing Activities
Net cash used in investing activities in the first three quarters of 2018 totaled $1,465 million. We purchased $2,352 million of available-for-sale securities and $1,230 million of our available-for-sale securities matured or were sold during the period. Our net cash paid for acquisitions was $100 million, and we invested $231 million in capital expenditures, primarily associated with our investment in facilities.
Net cash provided by investing activities totaled $101$1,067 million forin the first three quartershalf of 2017.2019. We purchased $359$393 million of available-for-sale securities and $495$1,590 million of our available-for-sale securities matured or were sold during the period. We received $278$15 million in proceeds from the salesettlement of a portioncontingency related to the deconsolidation of GRAIL in 2017. We invested $103 million in capital expenditures, primarily associated with our ownership interestinvestment in GRAIL. In connection with the sale, wefacilities and paid $13 million for strategic investments. We removed $52$29 million in cash from our condensed consolidated balance sheet as a result of the deconsolidation.deconsolidation of Helix.
Net cash used in investing activities in the first half of 2018 totaled $525 million. We purchased $1,137 million of available-for-sale securities and $888 million of our available-for-sale securities matured or were sold during the period. Our
net cash paid $25for acquisitions was $100 million, for strategic investments and we invested $234$167 million in capital expenditures, primarily associated with our investment in facilities.
Financing Activities
Net cash used in financing activities in the first half of 2019 totaled $609 million. We used $550 million to repay financing obligations primarily related to our 2019 Notes. We used $63 million to repurchase our common stock and $26 million to pay taxes related to net share settlement of equity awards. We received $30 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 in the first three quartershalf of 2018 totaled $748$97 million. We received $735 million in net proceeds from the issuance of $750 million in principal amount of our 2023 Notes, and we used $103 million to repurchase our common stock concurrently with this debt offering. We received $45$22 million in proceeds from issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan, and contributions from noncontrolling interest owners were $92 million. We used $18$15 million to pay taxes related to net share settlement of equity awards.
Net cash used in financing activities in the first three quarters of 2017 totaled $67 million. We used $176 million to repurchase shares of our common stock and $28 million to pay taxes related to net share settlement of equity awards. We received $63 million in proceeds from issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan, and contributions from noncontrolling interest owners were $79 million.
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 first three quartershalf of 2018,2019, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income and net income, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Other than the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as described in note “1. Summary of Significant Accounting Policies” in Part I, Item 1, Notes to Condensed Consolidated Financial Statements provided in this report, thereThere were no material changes to our critical accounting policies and estimates during the first three quartershalf of 2018.2019.
Recent Accounting Pronouncements
For summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, see note “1. Summary of Significant Accounting Policies” in Part I, Item 1, Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Consideration Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. 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 negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements we make regarding:
our expectations as to our future financial performance, results of operations, cash flows 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 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:
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 integrate acquired technologies, products, or businesses successfully;
our expectations and beliefs regarding prospects and growth for the business and its markets;pending acquisition of Pacific Biosciences of California, Inc.;
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 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, | |
• | other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, or in information disclosed in public conference calls, the date and time of which are released beforehand. |
The foregoing factors should be considered together with other factors detailed in our filings with the Securities and Exchange Commission, including our most recent filings on Forms 10-K and 10-Q, or in information disclosed in public conference calls, the date and time of which are released beforehand. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There were no substantial changes to our market risks in the ninesix months ended SeptemberJune 30, 20182019, when compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018.
Item 4. Controls and Procedures.
We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.
Based on management’s evaluation (under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO)), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
During Q3 2018,Q2 2019, we continued to monitor and evaluate the design and operating effectiveness of key controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are involvedSee discussion of legal proceedings in various lawsuits and claims arisingnote “7. Legal Proceedings” in the ordinary course of business, including actions with respectPart I, Item 1, Notes 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 liabilityCondensed Consolidated Financial Statements, which is recorded in the 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 results 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. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, we are currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event opposing litigants or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.incorporated herein by reference.
Item 1A. Risk Factors.
Our business is subject to various risks, including those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018, which we strongly encourage you to review. There have been no material changes from the risk factors disclosed in Item 1A of our Form 10-K.10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
None during the quarterly period ended SeptemberJune 30, 2018, other than as reported in the Company’s Current Report on Form 8-K filed on August 21, 2018.2019.
Purchases of Equity Securities by the Issuer
The following table summarizes shares repurchased pursuant to our share repurchase programNone during the three monthsquarterly period ended SeptemberJune 30, 2018 (in thousands except for price per share):2019. |
| | | | | | | | | | | | | |
Period |
Total Number of Shares Purchased (1) | |
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 |
July 2, 2018 - July 29, 2018 | — |
| | — |
| | — |
| | $ | 250,000 |
|
July 30, 2018 - August 26, 2018 | 314 |
| | $ | 326.98 |
| | 314 |
| | $ | 147,270 |
|
August 27, 2018 - September 30, 2018 | — |
| | — |
| | — |
| | $ | 147,270 |
|
Total | 314 |
| | $ | 326.98 |
| | 314 |
| | $ | 147,270 |
|
_________
(1) All shares purchased were made concurrently with the offering of our 2023 Notes in privately negotiated transactions.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibit Number | | Description of Document |
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| | Amended and Restated Certificate of Incorporation (June 2019) |
| | |
| | Certification of Francis A. deSouza pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Sam A. Samad pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| | Certification of Francis A. deSouza pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| | Certification of Sam A. Samad pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| ILLUMINA, INC. (registrant) |
| | |
Date: | October 23, 2018July 30, 2019 | | /s/ SAM A. SAMAD |
| | | Sam A. Samad Senior Vice President and Chief Financial Officer |