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Income (Loss)
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Equity
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Narrative - Accounting Pronouncements Adopted in
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Summary of Calculation of Weighted Average Shares
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Narrative (Details)
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Marketable Equity Securities (Details)
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Value Hierarchy of Assets and Liabilities
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Activity Under all Stock Option Plans (Details)
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Awards (Details)
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Classified Award (Details)
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Purchase Plan (Details)
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Repurchases (Details)
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Compensation Expense for all Stock Awards
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Accounts Receivable (Details)
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Inventory (Details)
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Assets and Goodwill Narrative (Details)
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Accrued Liabilities (Details)
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(Address of principal executive offices) (Zip code)
(i858)
i202-4500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value
iILMN
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
þ
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No iþ
See “Form 10-Q Cross-Reference Index” within Other Key Information for a cross-reference to the parts and items requirements of the Securities and Exchange Commission Quarterly Report on Form 10-Q.
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, or other operational results or metrics;
•our
expectations regarding the launch of new products or services;
•the benefits that we expect will result from our business activities and certain transactions we have completed, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures;
•our expectations of the effect on our financial condition of claims, litigation, contingent liabilities, and governmental investigations, proceedings, and regulations;
•our strategies or expectations for product development, market position, financial results, and reserves;
•our expectations regarding the outcome of the legal and regulatory proceedings related to our acquisition of GRAIL, Inc. (GRAIL) and other actions
that may be taken or pursued by the European Commission, the Federal Trade Commission and/or other governmental or regulatory authorities in connection with such acquisition;
•the interim measures order imposed by the European Commission, its duration and impact on Illumina and GRAIL, and the appointment of a monitoring trustee to monitor our compliance with such order;
•our expectations regarding the integration of any acquired technologies with our existing technology; and
•other expectations, beliefs, plans, strategies, anticipated developments, and other matters that are not historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on
our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•the impact to our business and operating results caused by the COVID-19 pandemic;
•our
expectations and beliefs regarding prospects and growth for our business and the markets in which we operate;
•the timing and mix of customer orders among our products and services;
•challenges inherent in developing, manufacturing, and launching new products and services, including expanding manufacturing operations and reliance on third-party suppliers for critical components;
•the impact of recently launched or pre-announced products and services on existing products and services;
•our
ability to develop and commercialize our instruments and consumables, to deploy new products, services, and applications, and to expand the markets for our technology platforms;
•our ability to manufacture robust instrumentation and consumables;
•our ability to identify and acquire technologies and integrate them into our products or businesses successfully;
•risks and uncertainties regarding the legal and regulatory proceedings relating to our acquisition of GRAIL and our ability to achieve the expected benefits of such acquisition and other actions that may be taken or pursued by the European Commission, the Federal Trade Commission and/or other governmental or regulatory authorities in connection with such acquisition;
•the
interim measures order imposed by the European Commission, and its duration and impact on Illumina and GRAIL, which impact may include material and adverse effects on synergies and other benefits we expect to achieve as a result of the acquisition of GRAIL, additional costs or liabilities, loss of revenue and other adverse effects on our business, financial condition and results of operations;
•our compliance with the terms of the interim measures order, which is monitored by an appointed monitoring trustee, and which is burdensome to implement and administer, and the risk that the European Commission could impose or seek to impose fines and other penalties for alleged noncompliance with such terms;
•the assumptions underlying our critical accounting policies and estimates;
•our
assessments and estimates that determine our effective tax rate;
•our assessments and beliefs regarding the outcome of pending legal proceedings and any liability that we may incur as a result of those proceedings;
•uncertainty, or adverse economic and business conditions, including as a result of slowing or uncertain economic growth in the United States or worldwide; and
•other factors detailed in our filings with the Securities and Exchange Commission (SEC), including the risks, uncertainties, and assumptions described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K
for the fiscal year ended January 2, 2022, the “Other Key Information” section of our Quarterly Report on Form 10-Q for the period ended April 3, 2022, the Risk Factors section below or in information disclosed in public conference calls, the date and time of which are released beforehand.
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation, and do not intend, to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, or to review
or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, in each case whether as a result of new information, future developments, or otherwise.
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.
i
1. ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview
We are a provider of sequencing- and array-based solutions, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.
On August 18, 2021, we acquired GRAIL, a healthcare company focused on early detection of multiple cancers. GRAIL’s Galleri blood test detects various types of cancers before they are symptomatic. The acquisition is subject to
ongoing legal proceedings and GRAIL is currently being held and operated as a separate company, with oversight provided by an appointed, independent monitoring trustee during the European Commission’s ongoing merger review. Refer to note “7. Legal Proceedings” for additional details. We have included the financial results of GRAIL in our condensed consolidated financial statements from the date of acquisition. There have been no adjustments to the purchase price allocation from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022. We are still finalizing the allocation
of the purchase price as additional information is received to complete our analysis and certain tax returns are finalized. In addition, GRAIL is a separate reportable segment. Refer to note “9. Segment Information” for additional details.
Basis of Presentation
iThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the fiscal year ended January 2, 2022, from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to form our critical accounting estimates. Actual results could differ from those estimates.
iThe unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, and majority-owned
or controlled companies. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
Fiscal Year
iOur fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending
the Sunday closest to March 31, June 30, September 30, and December 31. References to Q2 2022 and Q2 2021 refer to the three months ended July 3, 2022 and July 4, 2021, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2022 and 2021 refer to the six months ended July 3, 2022 and July 4, 2021, respectively, which were both 26 weeks.
During YTD 2022, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022, except as described in Recently Adopted Accounting Pronouncements below.
Recently Adopted Accounting Pronouncements
iIn
August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new standard reduces the number of accounting models for convertible debt instruments, amends the accounting for certain contracts in an entity’s own equity, and modifies how certain convertible instruments and contracts that may be settled in cash or shares impact the calculation of diluted earnings per share. Specifically, the guidance removes certain accounting models that separate the embedded conversion features from the host contract
for convertible instruments and requires the use of the if-converted method to calculate diluted earnings per share. We adopted the standard on its effective date in the first quarter of 2022 using a modified retrospective approach by recognizing a cumulative-effect adjustment to retained earnings on January 3, 2022. We did not restate prior periods. As a result of the adoption, we increased our convertible senior notes and retained earnings, on January 3, 2022, by $i43 million and $i61 million,
respectively, and decreased our deferred tax liabilities, included in other long-term liabilities on the condensed consolidated balance sheets, and additional paid-in capital by $i11 million and $i93 million,
respectively. Interest expense recognized in future periods will be reduced as a result of accounting for our convertible senior notes as a single liability measured at amortized cost. See note “4. Debt” for additional details on the adoption of ASU 2020-06./
Earnings (Loss) per Share
i
Basic
earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. On January 3, 2022, we adopted ASU 2020-06. As a result, beginning in Q1 2022, we utilize the if-converted method to calculate the impact of convertible senior notes on diluted earnings (loss) per share. Prior to the adoption of ASU 2020-06, we applied the treasury stock method when calculating the potential dilutive effect, if any, of convertible senior notes which we intended to settle or have settled in cash the principal outstanding. Under the treasury stock method,
convertible senior notes would have a dilutive impact when the average market price of our common stock exceeded 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. For the periods presented, we did not have any potentially dilutive common shares from equity awards. In loss periods, basic loss per share and diluted loss per share are identical since the effect of dilutive potential common shares is anti-dilutive and therefore excluded.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings (loss) per share:
In
millions
Q2 2022
Q2 2021
YTD 2022
YTD 2021
Weighted
average shares outstanding
i157
i146
i157
i146
Effect
of potentially dilutive common shares from:
Convertible senior notes
i—
i1
i—
i1
Weighted
average shares used in calculating diluted earnings (loss) per share
i157
i147
i157
i147
Anti-dilutive
shares:
Convertible senior notes
i2
i—
i2
i—
Equity
awards
i2
i—
i2
i—
Potentially
dilutive shares excluded from calculation due to anti-dilutive effect
i4
i—
i4
i—
/i
2.
REVENUE
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services, instrument service contracts, development and licensing agreements, and cancer detection testing services related to the GRAIL business.
i
Revenue by Source
Q2
2022
Q2 2021
In millions
Sequencing
Microarray
Total
Sequencing
Microarray
Total
Consumables
$
i739
$
i74
$
i813
$
i704
$
i74
$
i778
Instruments
i190
i3
i193
i189
i5
i194
Total
product revenue
i929
i77
i1,006
i893
i79
i972
Service
and other revenue
i136
i20
i156
i128
i26
i154
Total
revenue
$
i1,065
$
i97
$
i1,162
$
i1,021
$
i105
$
i1,126
YTD
2022
YTD 2021
In millions
Sequencing
Microarray
Total
Sequencing
Microarray
Total
Consumables
$
i1,516
$
i149
$
i1,665
$
i1,399
$
i153
$
i1,552
Instruments
i401
i10
i411
i365
i8
i373
Total
product revenue
i1,917
i159
i2,076
i1,764
i161
i1,925
Service
and other revenue
i257
i53
i310
i236
i58
i294
Total
revenue
$
i2,174
$
i212
$
i2,386
$
i2,000
$
i219
$
i2,219
Revenue
by Geographic Area
Based on region of destination (in millions)
Q2 2022
Q2 2021
YTD 2022
YTD
2021
Americas
$
i639
$
i589
$
i1,288
$
i1,151
Europe,
Middle East, and Africa
i308
i320
i624
i625
Greater
China(1)
i118
i132
i245
i259
Asia-Pacific
i97
i85
i229
i184
Total
revenue
$
i1,162
$
i1,126
$
i2,386
$
i2,219
_____________
(1)Region
includes revenue from China, Taiwan, and Hong Kong.
We regularly enter into contracts with multiple performance obligations. Most performance obligations are generally
satisfied within a short time frame, approximately three to isix months, after the contract execution date. As of July 3, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $i1,132
million, of which approximately i90% is expected to be converted to revenue in the next itwelve months, approximately i7%
in the following itwelve months, and the remainder thereafter.
Contract assets, which consist of revenue recognized and performance obligations satisfied or partially satisfied in advance of customer billing, were $i18
million and $i16 million as of July 3, 2022 and January 2, 2022, respectively, and were recorded in prepaid expenses and other current assets.
Contract liabilities, which consist of deferred revenue and customer deposits, as of July 3, 2022 and January 2,
2022 were $i291 million and $i297 million, respectively, of which the short-term portions of $i226
million and $i234 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q2 2022 and YTD 2022 included $i59
million and $i164 million, respectively, of previously deferred revenue that was included in contract liabilities as of January 2, 2022.
i
3.
INVESTMENTS AND FAIR VALUE MEASUREMENTS
Strategic Investments
Marketable Equity Securities
Our short-term investments consist of marketable equity securities. As of July 3, 2022 and January 2, 2022, the fair value of our marketable equity securities totaled $i38 million and $i107
million, respectively.
i
Net (losses) gains recognized in other (expense) income, net on our marketable equity securities were as follows:
In
millions
Q2 2022
Q2 2021
YTD 2022
YTD 2021
Net (losses) gains recognized during the period on marketable equity securities
$
(i27)
$
i4
$
(i69)
$
(i68)
Less:
Net gains (losses) recognized during the period on marketable equity securities sold during the period
i—
i7
i—
(i7)
Net
unrealized losses recognized during the period on marketable equity securities still held at the reporting date
$
(i27)
$
(i3)
$
(i69)
$
(i61)
/
Non-Marketable
Equity Securities
As of July 3, 2022 and January 2, 2022, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $i42 million and $i40 million,
respectively.
Revenue recognized from transactions with our strategic investees was $i25 million and $i55 million for
Q2 2022 and YTD 2022, respectively, and $i22 million and $i35 million for Q2 2021 and YTD 2021, respectively.
Venture
Funds
We invest in itwo venture capital investment funds (the Funds) with capital commitments of $i100 million, callable through April 2026, and up to $i150
million, callable through July 2029, respectively, of which $i14 million and up to $i101 million, respectively, remained callable as of July 3, 2022.
Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $i187 million and $i173 million as of July 3,
2022 and January 2, 2022, respectively. We recorded unrealized losses of $i4 million and $i6
million in Q2 2022 and YTD 2022, respectively, an unrealized net loss of $i2 million in Q2 2021, and an unrealized net gain of $i31
million in YTD 2021, in other (expense) income, net.
In conjunction with the deconsolidation of Helix Holdings I, LLC (Helix) in April 2019, we received a contingent value right with a i7-year
term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events. Changes in the fair value of the contingent value right resulted in unrealized losses of $i8 million and $i3
million in Q2 2022 and YTD 2022, respectively, and unrealized gains of $i8 million and $i18 million in Q2 2021 and YTD
2021, respectively, which were included in other (expense) income, net.
Derivative Assets Related to Terminated Acquisition
Pursuant to the Agreement and Plan of Merger (the PacBio Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) entered into in November 2018 and amended in September 2019 (Amendment No. 1 to the PacBio Merger Agreement) and the subsequent agreement to terminate the PacBio Merger
Agreement (the Termination Agreement) entered into in January 2020, we made cash payments to PacBio of $i18 million in Q4 2019 and $i34
million in Q1 2020, respectively, collectively referred to as the Continuation Advances. Up to the $i52 million of Continuation Advances was repayable, without interest, if, within two years of March 31, 2020, PacBio entered into a Change of Control Transaction or raised at least $i100
million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio). In February 2021, PacBio entered into an investment agreement with SB Northstar LP for the issuance and sale of $i900 million in aggregate principal amount of PacBio’s convertible notes. Pursuant to the PacBio Merger Agreement, PacBio repaid to us the $i52 million
of Continuation Advances and we recorded a gain of $i26 million in Q1 2021, which was included in other (expense) income, net.
Fair Value Measurements
i
The
following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:
Our
marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary.
We
elected the fair value option to measure the contingent value right received from Helix. The fair value of such contingent value right, included in other assets, is derived using a Monte Carlo simulation. Estimates and assumptions used in the Monte Carlo simulation include probabilities related to the timing and outcome of future financing and/or liquidity events, assumptions regarding collectibility and volatility, and an estimated equity value of Helix. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.
We reassess the fair value of contingent consideration related to acquisitions on a quarterly basis. The contingent value rights issued as part of the GRAIL acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of
certain GRAIL-related revenues (Covered Revenues) each year for a i12-year period. As defined in the Contingent Value Rights Agreement, this will reflect a i2.5%
payment right to the first $i1 billion of revenue each year for i12 years. Revenue above $i1 billion
each year will be subject to a i9% contingent payment right during this same period. Covered Revenues for Q4 2021 and Q1 2022 were $ii20/ million
in aggregate, driven primarily by sales of GRAIL’s Galleri test. Corresponding Covered Revenue Payments in YTD 2022 were approximately $i187,000; however, pursuant to the Contingent Value Rights Agreement, a portion of the Covered Revenue Payments were applied to reimburse us for certain expenses. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL
acquisition. Estimates and assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility, an operational leverage ratio and a counterparty credit spread. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in selling, general and administrative expense in our condensed consolidated statements of operations. As of July 3, 2022, the fair value of our contingent consideration liability related to the GRAIL acquisition was $i605 million,
with $i604 million included in other long-term liabilities and the remaining balance included in accrued liabilities.
i
Changes
in the estimated fair value of our contingent consideration liabilities during YTD 2022 were as follows:
i0.550% Term Notes due 2023 (2023 Term Notes) and i2.550% Term Notes due
2031 (2031 Term Notes)
On March 23, 2021, we issued $i500 million aggregate principal amount of term notes due 2023 (2023 Term Notes) and $i500 million
aggregate principal amount of term notes due 2031 (2031 Term Notes, together the Term Notes). We received net proceeds from the issuance of $i992 million, after deducting discounts and debt issuance costs.
The 2023 and 2031 Term Notes accrue interest at a rate of i0.550%
and i2.550% per annum, respectively, payable semi-annually. Interest is payable on March 23 and September 23 of each year, beginning on September 23, 2021. The 2023 Term Notes mature on March 23, 2023, and the 2031 Term Notes mature on March 23, 2031.
We may redeem for cash all or any portion of the Term Notes, at our option, at any time prior to maturity. The 2023 Term Notes and,
prior to December 23, 2030, the 2031 Term Notes are redeemable at make-whole premium redemption prices as defined in the applicable forms of note. After December 23, 2030, the 2031 Term Notes are redeemable at a redemption price equal to i100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest up to, but excluding, the redemption date.
Interest expense recognized on the Term Notes, which included
amortization of debt discounts and issuance costs, was $i4 million and $i9 million in Q2 2022 and YTD 2022, respectively, and $i4
million and $i5 million in Q2 2021 and YTD 2021, respectively.
i0% Convertible Senior Notes due 2023 (2023 Convertible Notes)
Carrying
value of equity component, net of debt issuance costs
$
—
$
i126
Fair value of convertible senior notes outstanding (Level 2)
$
i717
$
i854
In
August 2018, we issued $i750 million aggregate principal amount of convertible senior notes due 2023 (2023 Convertible Notes). The 2023 Convertible Notes carry no coupon interest and mature on August 15, 2023.
The 2023 Convertible Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate, subject to adjustment, of 2.1845 shares of common stock per $1,000 principal amount
of notes (which represents an initial conversion price of approximately $i457.77 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 i20
trading days (whether or not consecutive) during a period of i30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to i130%
of the conversion price in effect on each applicable trading day; (2) during the ifive business day period after any i10
consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2023 Convertible Notes for each trading day of the measurement period was less than i98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified
corporate events described in the indenture. Regardless of the foregoing circumstances, the holders may convert their notes on or after May 15, 2023 until August 11, 2023. As such, the 2023 Convertible Notes were reclassified to short-term as of July 3, 2022. The 2023 Convertible Notes were not convertible as of July 3, 2022.
We
may redeem for cash all or any portion of the 2023 Convertible Notes, at our option, on or after August 20, 2021 if the last reported sale price of our common stock has been at least i130% of the conversion price then in effect (currently $i595.10)
for at least i20 trading days (whether or not consecutive) during any i30 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 i100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date.
At the time of issuance, the embedded conversion feature of the 2023 Convertible Notes was required to be bifurcated from the notes and accounted for as an equity instrument classified within stockholders’ equity. As a result,
we recognized $i126 million in additional paid-in capital in 2018, which was recorded as a debt discount and subsequently amortized to interest expense at an estimated effective rate, assuming no conversion option, of i3.7%.
As of January 3, 2022, we adopted ASU 2020-06, which removed the requirement to separate the embedded conversion feature from the notes and requires the notes to be accounted for as a single liability measured at amortized cost. Accordingly, we reclassified the unamortized debt discount from additional paid-in capital to convertible senior notes in the condensed consolidated balance sheets on January 3, 2022. This resulted in an increase to our convertible senior notes and retained earnings of $i43 million
and $i61 million, respectively, and a decrease to our deferred tax liabilities, included in other long-term liabilities, and additional paid-in capital of $i11 million
and $i93 million, respectively.
Interest expense recognized on the 2023 Convertible Notes, which included amortization of debt issuance costs, was $i1 million
and $i2 million in Q2 2022 and YTD 2022, respectively. Interest expense recognized on the 2023 Convertible Notes in Q2 2021 and YTD 2021 was $i7 million and $i14 million,
respectively, which included amortization of the original debt discount and debt issuance costs.
i0.5% Convertible Senior Notes due 2021 (2021 Convertible Notes)
In June 2014, we issued $i517
million aggregate principal amount of convertible senior notes due 2021 (2021 Convertible Notes). The 2021 Convertible Notes matured on June 15, 2021, by which time the principal had been converted and was repaid in cash. The excess of the conversion value over the principal amount was paid in i0.7 million shares of common stock and we recorded a loss on extinguishment of debt of $i1 million
in Q2 2021. Interest expense recognized on the 2021 Convertible Notes, which included amortization of debt discount and issuance costs, was $i3 million and $i7 million in Q2 2021 and YTD 2021, respectively.
Our adoption of ASU 2020-06 on January 3, 2022 did not impact the accounting for the 2021 Convertible Notes since they were converted and repaid prior to the date of adoption.
Credit Agreement
On March 8, 2021, we entered into a credit agreement (the Credit Agreement), which provides us with a $i750 million senior unsecured ifive-year
revolving credit facility, including a $i40 million sublimit for swingline borrowings and a $i50 million
sublimit for letters of credit (the Credit Facility). The proceeds of the loans under the Credit Facility may be used to finance working capital needs and for general corporate purposes.
Any loans under the Credit Facility will have a variable interest rate based on either the eurocurrency rate or the alternate base rate, plus an applicable spread that varies with the Company’s debt rating. The Credit Agreement includes an option for us to elect to increase the commitments under the Credit Facility or to enter into one or more tranches of term loans in the aggregate principal amount of up to $i250 million,
subject to the consent of the lenders providing the additional commitments or term loans, as applicable, and certain other conditions.
The Credit Agreement contains financial and operating covenants. Pursuant to the Credit Agreement, we are required to maintain a ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA), calculated based on the four consecutive fiscal quarters ending with the most recent fiscal quarter, of not greater than i3.50
to 1.00 as of the end of each fiscal quarter. Upon the consummation of any Qualified Acquisition (as defined in the Credit Agreement) and us providing notice to the Administrative Agent, the ratio increases to i4.00 to 1.00 for the fiscal quarter in which the acquisition is consummated and the three consecutive fiscal quarters thereafter. The operating covenants include, among other things, limitations on (i) the incurrence of indebtedness by our subsidiaries,
(ii) liens on our and our subsidiaries assets, and (iii) certain fundamental changes and the disposition of assets by us and our subsidiaries. The Credit Agreement contains other customary covenants, representations and warranties, and events of default.
The Credit Facility matures, and all amounts outstanding thereunder become due and payable in full, on March 8, 2026, subject to itwoione-year extensions at our option, the consent of the extending lenders and certain other conditions. We may prepay amounts borrowed and terminate commitments under the Credit Facility at any time without premium or penalty.
As of July 3, 2022, there were ino
borrowings outstanding under the Credit Facility, and we were in compliance with all financial and operating covenants.
i
5. STOCKHOLDERS’ EQUITY
As of July 3, 2022, approximately i1.9
million shares remained available for future grants under the 2015 Stock and Incentive Compensation Plan.
(1)The
number of units reflect the estimated number of shares to be issued at the end of the performance period. Awarded units are presented net of performance adjustments.
(1)The
number of units reflect awards that have been granted and for which it is assumed to be probable that the underlying performance goals will be achieved.
We grant cash-based equity
incentive awards to GRAIL employees. The cash to be awarded may subsequently increase or decrease in direct correlation to changes in the enterprise fair value of GRAIL, as defined under the Cash-Based Equity Appreciation Award Plan.
i
Cash-based equity incentive award activity was as follows:
Estimated liability as of July 3, 2022 (included in accrued liabilities)
$
i40
/
We
recognized share-based compensation expense of $i16 million and $i29 million in Q2 2022 and YTD 2022, respectively.
As of July 3, 2022, approximately $i227 million of total unrecognized compensation cost related to awards issued to date was expected to be recognized over a weighted-average period of approximately i3.4
years.
In connection with the acquisition of GRAIL, we assumed a performance-based award for which vesting is based on GRAIL’s future revenues. The award has an aggregate potential value of up to $i78 million and expires, to the extent unvested, in August 2030. As of July 3, 2022, it was not probable
that the performance conditions associated with the award will be achieved and, therefore, no share-based compensation expense, or corresponding liability, has been recognized in the condensed consolidated financial statements to-date.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Employee Stock Purchase Plan (ESPP) is equal to i85%
of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During YTD 2022, approximately i0.1 million shares were issued under the ESPP. As of July 3, 2022, there were approximately i13.0
million shares available for issuance under the ESPP.
Share Repurchases
We did inot repurchase any shares during YTD 2022. As of July 3, 2022, authorizations to repurchase approximately $i15
million of our common stock remained available under the $i750 million share repurchase program authorized by our Board of Directors on February 5, 2020. The repurchases may be completed under a 10b5-1 plan or at management’s discretion.
Share-Based Compensation
i
Share-based
compensation expense, which includes expense for both equity and liability-classified awards, reported in our condensed consolidated statements of operations was as follows:
In February 2021, we modified the metrics and reduced the maximum potential payouts for our performance stock units granted in 2019 and 2020. The PSU granted in 2019 vested on January 2, 2022 and the PSU granted in 2020 vests at the end of the ithree-year period ending on January 1, 2023. The modifications affected
i52 employees with units granted in 2019, which resulted in total incremental share-based compensation expense of approximately $i41 million,
and i72 employees with units granted in 2020, which resulted in total incremental share-based compensation expense of approximately $i65 million.
i
The
assumptions used and the resulting estimate of weighted-average fair value per share for stock purchased under the ESPP during YTD 2022 were as follows:
Employee Stock Purchase Rights
Risk-free interest rate
i0.06%
- i0.78%
Expected volatility
i37%
- i47%
Expected term
i0.5
- i1.0 year
Expected dividends
i0
%
Weighted-average
grant-date fair value per share
$
i91.27
/
As
of July 3, 2022, approximately $i639 million of total unrecognized compensation cost related to restricted stock, stock options and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately i2.5
years.
We recorded a developed technology intangible asset of $i23 million, with a useful life of i7
years, and a database intangible asset of $i12 million, with a useful life of i7 years, as a result of an acquisition in Q2 2022. We
are still finalizing the allocation of the purchase price as additional information is received to complete our analysis. We expect to finalize the valuation as soon as practicable, but no later than one year after the acquisition date.
Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. In May 2022, we performed our annual goodwill impairment test for our itwo
reporting units: Core Illumina and GRAIL. We performed a qualitative assessment for the Core Illumina reporting unit, noting no impairment. For the GRAIL reporting unit, we performed a quantitative assessment and determined a fair value for the reporting unit using a discounted cash flow model, which included assumptions for projected cash flows and a discount rate of i16.0%. The selected discount rate was determined using a weighted average cost of capital for risk factors specific to the GRAIL reporting unit and other market and industry data. Estimates and
assumptions used in this assessment represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring the fair value. Based on the quantitative test performed, the fair value of the GRAIL reporting unit exceeded its carrying value by $i700 million and ino
goodwill impairment charge was recorded as of Q2 2022. The assumptions used in our impairment analysis are inherently subject to uncertainty. If actual results are not consistent with our estimates and assumptions, goodwill may be overstated, and an impairment charge would need to be recorded. Had we used a discount rate greater than i16.4% in our annual quantitative impairment test, this would have resulted in the carrying value of the GRAIL reporting unit exceeding its fair value and an impairment charge being recorded in Q2 2022.
On
July 13, 2022, the EU General Court reached a decision in favor of the European Commission, holding that the European Commission has jurisdiction to review our acquisition of GRAIL. Refer to note “7. Legal Proceedings” for additional details. This decision represents a triggering event in Q3 2022 for purposes of performing an interim goodwill impairment test. The results of performing an interim impairment test could result in us having to record material intangible asset and goodwill impairment charges related to the GRAIL reporting unit in Q3 2022.
iWe generally provide a ione-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six
to itwelve months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue./
Derivative
Financial Instruments
iWe are exposed to foreign exchange rate risks in the normal course of business and use derivative financial instruments to partially offset this exposure. We do not use derivative financial instruments for speculative or trading purposes. Foreign exchange contracts are carried at fair value in other current assets, other assets, accrued liabilities, or other long-term liabilities, as appropriate, on the condensed consolidated balance sheets.
We use
foreign exchange forward contracts to manage foreign currency risks related to monetary assets and liabilities denominated in currencies other than the U.S. dollar. These derivative financial instruments have terms of ione month or less and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other (expense) income, net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of July 3, 2022, we had foreign
exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, Chinese Yuan Renminbi, and British pound. As of July 3, 2022 and January 2, 2022, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $i559
million and $i462 million, respectively.
We also use foreign currency forward contracts to hedge portions of our foreign currency exposure associated with forecasted revenue transactions. These derivative financial instruments have terms up to i24
months and are designated as cash flow hedges. Changes in fair value of our cash flow hedges are recorded as a component of accumulated other comprehensive income and are reclassified to revenue in the same period the underlying hedged transactions are recorded. Accordingly, we reclassified $i10 million and $i16 million
to revenue in Q2 2022 and YTD 2022, respectively, and $ii1/ million
in both Q2 2021 and YTD 2021. The fair value of the foreign currency forward contracts recorded in total assets on the condensed consolidated balance sheets was $i36 million and $i19 million
as of July 3, 2022 and January 2, 2022, respectively, of which $i33 million and $i19 million, respectively, was recorded within prepaid
expenses and other current assets. The estimated net amount of gains reported in accumulated other comprehensive income that is expected to be reclassified into earnings within the next 12 months is $i33 million as of July 3, 2022. We regularly review the effectiveness of our cash flow hedges and consider them to be ineffective if it becomes probable that the forecasted transactions will not occur in the identified period.
Changes in fair value of the ineffective portions of our cash flow hedges, if any, will be recognized in other (expense) income, net. As of July 3, 2022, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, and Canadian dollar. As of July 3, 2022 and January 2, 2022, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $i456
million and $i450 million, respectively.
i
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 condensed 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.
On March 30, 2021, the Federal Trade Commission (the FTC) filed an administrative complaint and a motion for a preliminary injunction in the
United States District Court for the District of Columbia. In both actions, the FTC alleged that our acquisition of GRAIL would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. We filed an answer to the FTC’s complaint in federal district court on April 6, 2021, and in the administrative court on April 13, 2021. On April 20, 2021, the United States District Court for the District of Columbia granted our motion to transfer venue to the United States District Court for the Southern District of California. On May 28, 2021, the district court granted the FTC’s motion to dismiss the complaint without prejudice. The administrative trial commenced on August 24, 2021, and live testimony concluded on September
24, 2021. On April 15, 2022, the parties filed their opening post-trial briefs and proposed findings. Reply briefs were filed May 25, 2022, and closing arguments took place on June 8, 2022. A decision by the administrative judge is currently due no later than September 2, 2022. We intend to vigorously defend against the FTC action.
On April 19, 2021, the European Commission accepted a request for a referral of the GRAIL acquisition for European Union merger review, submitted by a Member State of the European Union (France), and joined by several other Member States (Belgium, Greece, Iceland, the Netherlands and Norway), under Article 22(1) of Council Regulation (EC) No 139/2004
(the EU Merger Regulation). On April 29, 2021, we filed an action in the General Court of the European Union (the EU General Court) asking for annulment of the European Commission’s assertion of jurisdiction to review the acquisition under Article 22 of the EU Merger Regulation, as the acquisition does not meet the jurisdictional criteria under the EU Merger Regulation or under the national merger control laws of any Member State of the European Union. On December 16, 2021, the EU General Court held a hearing regarding the European Commission’s assertion of jurisdiction. On July 13, 2022, the EU General Court reached a decision in favor of the European Commission, holding that the European Commission has jurisdiction to review the acquisition. We intend to appeal the decision. Additionally, as a result of our decision to
proceed with the completion of the acquisition of GRAIL during the pendency of the European Commission’s review, the European Commission will likely seek to impose a fine on us pursuant to Article 14(2)(b) of the EU Merger Regulation of up to i10% of our consolidated annual revenues. On July 19, 2022, the European Commission issued a Statement of Objections alleging that we breached the EU Merger Regulation by completing our acquisition of GRAIL. As a result, we accrued $i453 million,
included in accrued liabilities, in Q2 2022, representing i10% of our consolidated annual revenues for fiscal year 2021 in accordance with ASC 450, Contingencies.
BGI Genomics Co. Ltd. and its Affiliates
We are involved in lawsuits against BGI Genomics Co. Ltd (BGI) and its affiliates, including Complete Genomics, Inc. (CGI), in the United States and elsewhere.
On June
27, 2019, we filed suit against BGI in the United States District Court for the Northern District of California, alleging that certain BGI sequencing products infringe our U.S. Patent No. 7,566,537 (‘537 patent) and U.S. Patent No. 9,410,200 (‘200 patent). BGI has denied our claims and has counterclaimed that our technology infringes U.S. Patent No. 9,944,984 (‘984 patent). We deny their allegations. On February 27, 2020, we filed a second patent infringement suit against BGI in the United States District Court for the Northern District of California alleging that BGI sequencing products infringed U.S. Patent 7,771,973 (‘973 patent), U.S. Patent 7,541,444 (‘444 patent), and U.S. Patent 10,480,025 (‘025 patent). On June 15, 2020, the Court granted our motions requesting preliminary injunctions against BGI, finding that our patents were likely valid and infringed by
BGI’s chemistries. The injunction prohibits the sale of infringing BGI sequencers and sequencing reagents in the U.S. On December 9, 2020, BGI filed a motion to amend its answer to our second suit to include allegations that the ‘444 and ‘973 patents are unenforceable under the doctrine of inequitable conduct; we deny BGI’s allegations. We deny that we owe any damages or ongoing royalty. On August 27, 2021, and September 9, 2021, the Court issued its decisions on the summary judgment motions: (i) the Court granted our motion for summary judgment that we do not infringe BGI’s ‘984 patent; (ii) the Court granted our motion for summary judgment that our ‘444 and ‘973 patents are not unenforceable; (iii) the Court granted our motion for summary judgment that BGI’s standard MPS products infringe all of our patents-in-suit: (iv)
the Court granted our motion for summary judgment that BGI’s “Cool MPS” sequencing products infringe the ‘973 and ‘444 patents, and granted BGI’s motion for summary judgment that BGI’s “Cool MPS” sequencing products do not infringe the ‘025 patent; and (v) the Court denied BGI’s motion for summary judgment that our ‘973 patent is invalid for lack of written description and enablement. Trial began on November 12, 2021, and the jury rendered a verdict on November 30, 2021. The jury found that the ‘537, ‘200, ‘973 patents and claims 9, 27, 31, 33, 34, 42, 47 of the ‘025 patent are valid and were willfully infringed by BGI. The jury also ruled that the claim 4
of the ‘444 patent and claim 1 of the ‘025 patent were invalid as obvious. The jury awarded the Company $i8 million in damages. On March 27, 2022, the Court issued a decision on post-trial motions. The Court denied BGI’s motions. The Court (i) upheld the jury’s award of $i8 million
and granted pre-judgment interest, (ii) upheld the jury’s finding that BGI’s infringement was willful, (iii) granted the Company’s request for a permanent injunction until the relevant patents expire; (iv) granted the Company’s request that claim 1 of the ‘025 patent is not invalid, but denied the request with respect to claim 4 of the ‘444 patent; and (v) denied the Company’s request for enhanced damages. On April 27, 2022, BGI appealed the judgment to the United States Court of Appeals for the Federal Circuit. The Company cross-appealed, including with respect to the denial
of the Company’s request for enhanced damages.
On January 11, 2021, Complete Genomics, Inc., BGI Americas Corp., and MGI Americas, Inc. also filed a complaint in the United States District Court for the Northern District of California alleging the Company and its subsidiary Illumina Cambridge Ltd. violated federal antitrust and state unfair competition laws. CGI and these affiliates allege that the Company fraudulently withheld a prior art reference that was material to patentability for the ‘444 and ‘973 patents. They also allege that our infringement claims of the ‘025 against BGI’s “Cool MPS” chemistry were
objectively baseless. The Company denies the allegations in the complaint. On March 30, 2021, the Court stayed the antitrust case pending resolution of the underlying patent infringement suit taking place in the same court.
On May 28, 2019, CGI filed suit against us in the United States District Court for the District of Delaware alleging that our two-channel sequencing systems, including the NovaSeq, NextSeq, and MiniSeq systems, infringe certain claims of U.S. Patent No. 9,222,132. We have denied CGI’s allegations and have counterclaimed for infringement by CGI, BGI Americas Corp., and MGI Americas, Inc. of U.S. Patent No. 9,303,290, U.S. Patent No. 9,217,178, and U.S. Patent No. 9,970,055. On August
15, 2019, CGI filed a motion to dismiss our counterclaims. On August 29, 2019, we filed our Opposition to the Motion to Dismiss. The Court denied and granted the motion in part, denying the motion as to our claims for inducing infringement and granting it for contributory infringement. The Court gave us leave to file an amended complaint to attempt to cure the alleged deficiencies as to contributory infringement. On July 1, 2020, CGI amended its complaint to add claims of infringement of U.S. Patent No. 10,662,473 by our two-channel sequencing systems. We deny these allegations. As of April 8, 2022, CGI is seeking $i334 million
in alleged past damages and an average ongoing royalty of at least i5.5% on sales of the accused two-channel sequencing instruments and chemistry in the U.S. until the patents-in-suit expire on January 28, 2029. We deny that we owe any damages or ongoing royalty. On October 22, 2021, pursuant to the Court’s local rules, the Company sought leave to file a motion for summary
judgment of non-infringement of the CGI patents-in-suit. CGI sought leave to file a motion for summary judgment against the Company’s invalidity defense based on prior invention. On January 14, 2022, the Court denied the Company and CGI’s motions for leave to file for summary judgment. Trial began on April 25, 2022.
On May 6, 2022, the jury in the U.S. District Court for the District of Delaware rendered a verdict that we willfully infringed U.S. Patent Nos. 9,222,132 and 10,662,473 owned by CGI, and awarded approximately $i334 million
to CGI in past damages. The jury also invalidated ithree patents owned by us, namely, U.S. Patent Nos. 9,217,178; 9,303,290; and 9,970,055. On July 14, 2022, we entered into a Settlement and License Agreement with BGI and CGI (the “Agreement”). The Agreement resolves all claims in Complete Genomics, Inc. v. Illumina, Inc., Case No. C.A. No. 19-970-MN (D. Del.). The Agreement also resolves all claims in Illumina, Inc. and Illumina Cambridge Ltd. v. BGI Genomics Co., Ltd., BGI Americas
Corp., MGI Tech Co., Ltd., MGI Americas Inc., and Complete Genomics, Inc., Case No. 3:19-cv-03770-WHO (N.D. Cal.) and Illumina, Inc. and Illumina Cambridge Ltd. v. BGI Genomics Co., Ltd., BGI Americas Corp., MGI Tech Co., Ltd., MGI Americas Inc., and Complete Genomics, Inc., Case No. 3:20-cv-01465-WHO (N.D. Cal.), as well as related Appeal Nos. 2022-1733, 2022-1735 and 2022-1742, 2022-1743 pending in the United States Court of Appeals for the Federal Circuit, with the exception that the permanent injunction entered on April 11, 2022 against BGI remains in effect with a revised expiration date of January 1, 2023, with respect to BGI’s StandardMPS chemistry. The Agreement further resolves all antitrust claims against us in Complete Genomics, Inc., BGI Americas Corp. and MGI Americas, Inc. v. Illumina, Inc. and Illumina Cambridge Ltd., Case No. 21-cv-00217 (N.D. Cal.) and
that complaint will be dismissed with prejudice. Pursuant to the terms of the Agreement, the Company agrees to pay Complete Genomics a one-time payment of $i325 million, with the parties agreeing that the judgment against BGI and the judgment against the Company in the above-referenced litigations are satisfied in total. In addition, the
Company received from BGI a fully paid-up license to U.S. Patent Nos. 8,617,811, 9,222,132, 9,523,125, 10,662,473, 11,098,356 and 11,214,832, U.S. Patent Application Nos. 61/024,396, 61/024,110, 16/882,461, 17/407,935 and 17/523,706, and U.S. patents and patent applications related to each of the foregoing U.S. patents and patent applications until their expiration (“the 2-channel technology patents”). Our license allows the Company to use the 2-channel technology in all its current and future platforms with no additional royalties owed. BGI received from us a fully paid-up license to U.S. Patent Nos. 9,217,178, 9,303,290 and
9,970,055 (“the image mix patents”) and U.S. patents and applications related to each of the foregoing U.S. patents until their expiration. The parties agree to a litigation standstill for patent and antitrust actions in the United States and its territories until October 1, 2025, as set forth in the Agreement. The standstill does not apply to the parties’ patents or patent applications related to non-invasive prenatal testing, nor to any intellectual property of Grail, Inc., related to multi-cancer early detection. None of the parties make any admission of liability in entering into the Agreement.
Per our preliminary assessment performed in Q2 2022, we allocated the $i325 million
payment with an estimated $i156 million allocated to the release of past damages claimed. We accrued this estimate in Q2 2022, included in accrued liabilities. We also expect to record an estimated $i177 million
as an intangible asset in Q3 2022 representing the fair value of the license granted to us, which is expected to be amortized over a period of approximately i6.5 years. The value of the license was estimated using a discounted cash flow model. In addition, we expect to record the damages awarded to us, estimated to be $i8 million,
as a gain contingency in Q3 2022.
i
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.
Our effective tax rates for Q2 2022 and YTD 2022 were i16.0% and i9.7%, respectively,
compared to i10.8% and i11.8% in Q2 2021 and YTD 2021, respectively. The tax benefits in Q2 2022 and YTD 2022 had effective tax rates that were lower than the
U.S. federal statutory tax rate of 21% primarily because of the $ii95/ million
impact from the potential European Commission fine related to the GRAIL acquisition which is nondeductible for tax purposes, the $i6 million and $i31 million
impacts of GRAIL pre-acquisition net operating losses on global intangible low-taxed income (GILTI) and the utilization of U.S. foreign tax credits, respectively, and the $i23 million and $i27 million
impacts of research and development expense capitalization for tax purposes, respectively. This was partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.
As of July 3, 2022 and January 2, 2022, prepaid income taxes included within prepaid expenses and other current assets on the condensed consolidated balance sheets were $i199 million
and $i101 million, respectively. The increase primarily relates to the tax benefit recorded in Q2 2022.
/i
9.
SEGMENT INFORMATION
We have itwo reportable segments, Core Illumina and GRAIL. We report segment information based on the management approach, which designates the internal reporting used by the Chief Operating Decision Maker (CODM) for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment using information about its revenue and income (loss) from operations. We do not allocate expenses between segments. Core
Illumina sells products and provides services to GRAIL, and vice versa, in accordance with contractual agreements between the entities.
Core Illumina:
Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of GRAIL.
GRAIL:
GRAIL is a healthcare company focused on early detection of multiple cancers. We acquired GRAIL on August 18, 2021. We have included the financial results of GRAIL in our condensed consolidated financial statements from the date of acquisition.
Our Management’s Discussion and Analysis (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying condensed consolidated financial statements and notes. This MD&A is organized as follows:
•Management’s Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.
•Results of Operations. Detailed discussion of our revenues and expenses.
•Liquidity
and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.
•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.
•Quantitative
and Qualitative Disclosure About Market Risk. Discussion of our financial instruments’ exposure to market risk.
Our discussion of our results of operations, financial condition, and cash flow for Q2 2021 and YTD 2021can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our filing of Form 10-Q for the fiscal quarter ended July 4, 2021.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. See “Consideration
Regarding Forward-Looking Statements” preceding the Condensed Consolidated Financial Statements section of this report for additional factors relating to such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended January 2, 2022. Operating results are not necessarily indicative of results that may occur in future periods.
MANAGEMENT’S OVERVIEW AND OUTLOOK
This
overview and outlook provide a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report.
About Illumina
Our focus on innovation has established us as the global leader in DNA sequencing and array-based technologies, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments.
Our customers include leading genomic research
centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.
Our comprehensive line of products addresses the scale of experimentation and breadth of functional analysis to advance disease research, drug development, and the development of molecular tests. This portfolio of leading-edge sequencing and array-based solutions addresses a range of genomic complexity and throughput, enabling researchers and clinical practitioners to select the best solution for their scientific challenge.
On
August 18, 2021, we acquired GRAIL, a healthcare company focused on early detection of multiple cancers. GRAIL’s Galleri blood test detects various types of cancers before they are symptomatic. We believe our acquisition of GRAIL will accelerate the adoption of next-generation sequencing based early multi-cancer detection tests, enhance our position in Clinical Genomics, and increase our directly accessible total addressable market. The acquisition is subject to ongoing legal proceedings and GRAIL is currently being held and operated as a separate company, with oversight provided by an appointed, independent monitoring trustee during the European Commission’s ongoing merger review. See note “7. Legal Proceedings” for further details. We have included the financial results of GRAIL
in our condensed consolidated financial statements from the date of acquisition. GRAIL is a separate reportable segment.
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto within the Condensed Consolidated Financial Statements section of this report, and the other transactions, events, and trends discussed in “Risk Factors” within the Other Key Information section of this report.
Financial Overview
Beginning in 2020,
the COVID-19 pandemic and international efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions in which we sell our products and services and conduct our business operations. In addition, beginning in 2022, the armed conflict between Russia and Ukraine and the imposed sanctions by the U.S. and other countries may impact our ability to ship products into the regions. Both the COVID-19 pandemic and the armed conflict between Russia and Ukraine could potentially impact our sales and results of operations in 2022, the size and duration of which are significantly uncertain.
Financial highlights for YTD 2022 included the following:
•Revenue increased 8% in YTD 2022 to $2,386 million compared to $2,219 million in YTD 2021 primarily due to growth in sequencing consumables and instruments,
as well as in service and other revenue. We expect our revenue to continue to increase in 2022.
•Gross profit as a percentage of revenue (gross margin) was 66.3% in YTD 2022 compared to 70.6% in YTD 2021. The decrease in gross margin was driven primarily by the gross loss incurred by GRAIL in YTD 2022. Our gross margin depends on many factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, services, and development and licensing revenue; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; freight costs; and product support obligations.
•(Loss) income from operations as a percentage of revenue was (16.6)% in YTD 2022 compared to 17.2% in YTD 2021.
The decrease was primarily due to legal contingencies recorded as they relate to the potential European Commission fine and our settlement with BGI, and a decrease in gross margin. We expect our operating expenses to continue to grow on an absolute basis in 2022.
•Our effective tax rate was 9.7% in YTD 2022 compared to 11.8% in YTD 2021. The tax benefit in YTD 2022 had an effective tax rate that was lower than the U.S. federal statutory tax rate of 21% primarily because of the impact of the potential European Commission fine related to the GRAIL acquisition which is nondeductible for tax purposes, the impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits, and the impact of research and development expense capitalization for tax purposes. This was partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S.
federal statutory tax rate, such as in Singapore and the United Kingdom.
•We ended Q2 2022 with cash, cash equivalents, and short-term investments totaling $1.3 billion as of July 3, 2022, of which approximately $611 million was held by our foreign subsidiaries.
To
enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified reporting periods, stated as a percentage of total revenue(1).
Q2 2022
Q2 2021
YTD
2022
YTD 2021
Revenue:
Product revenue
86.6
%
86.3
%
87.0
%
86.8
%
Service
and other revenue
13.4
13.7
13.0
13.2
Total revenue
100.0
100.0
100.0
100.0
Cost
of revenue:
Cost of product revenue
24.7
22.6
24.6
23.4
Cost of service and other revenue
5.9
5.6
5.8
5.4
Amortization
of acquired intangible assets
3.4
0.6
3.3
0.6
Total cost of revenue
34.0
28.8
33.7
29.4
Gross
profit
66.0
71.2
66.3
70.6
Operating expense:
Research and development
28.1
18.0
27.3
18.0
Selling,
general and administrative
35.4
36.6
30.1
35.4
Legal contingencies
52.3
—
25.5
—
Total
operating expense
115.8
54.6
82.9
53.4
(Loss) income from operations
(49.8)
16.6
(16.6)
17.2
Other
income (expense):
Interest income
0.1
—
—
—
Interest expense
(0.5)
(1.4)
(0.5)
(1.6)
Other
(expense) income, net
(4.6)
3.2
(3.8)
1.4
Total other (expense) income, net
(5.0)
1.8
(4.3)
(0.2)
(Loss)
income before income taxes
(54.8)
18.4
(20.9)
17.0
(Benefit) provision for income taxes
(8.8)
2.0
(2.1)
2.0
Net
(loss) income
(46.0)
%
16.4
%
(18.8)
%
15.0
%
_____________
(1)Percentages
may not recalculate due to rounding.
The
increases in Core Illumina consumables revenue in Q2 2022 and YTD 2022 were primarily due to increases in sequencing consumables revenue of $40 million and $128 million, respectively, driven primarily by growth in the instrument installed base. Core Illumina instruments revenue slightly decreased in Q2 2022 due to fewer shipments. Core Illumina instruments revenue increased in YTD 2022, primarily due to an increase in sequencing instruments revenue of $37 million, driven primarily by increased shipments of our NovaSeq instrument, partially offset by fewer shipments of our NextSeq instrument. Core Illumina service and other revenue decreased in Q2 2022 and YTD 2022, primarily due to revenue from a patent litigation settlement in Q2 2021, partially offset by increased revenue from extended maintenance service contracts in Q2 2022 and YTD 2022. Additionally, Core Illumina revenue
was impacted by $19 million in Q2 2022 and $33 million in YTD 2022 due to unfavorable foreign exchange rate fluctuations, which is net of amounts reclassified to revenue of $10 million and $16 million in Q2 2022 and YTD 2022, respectively, related to our cash flow hedges.
GRAIL service and other revenue for Q2 2022 and YTD 2022 related primarily to sales of Galleri.
The decreases in Core Illumina gross margin in Q2 2022 and YTD 2022 were driven primarily by less fixed cost leverage and higher freight costs, increased revenue from a patent litigation settlement in Q2 2021, partially offset by favorable product mix.
GRAIL gross loss for Q2 2022 and YTD 2022 was primarily due to amortization of intangible assets of $33 million and $67 million, respectively.
Operating Expense
Dollars
in millions
Q2 2022
Q2 2021
Change
% Change
YTD 2022
YTD 2021
Change
% Change
Research and development:
Core
Illumina
$
249
$
202
$
47
23
%
$
486
$
398
$
88
22
%
GRAIL
86
—
86
100
171
—
171
100
Eliminations
(8)
—
(8)
100
(7)
—
(7)
100
Consolidated
research and development
327
202
125
62
650
398
252
63
Selling,
general and administrative:
Core Illumina
339
413
(74)
(18)
590
787
(197)
(25)
GRAIL
72
—
72
100
130
—
130
100
Eliminations
(1)
—
(1)
100
(1)
—
(1)
100
Consolidated
selling, general and administrative
410
413
(3)
(1)
719
787
(68)
(9)
Legal
contingencies:
Core Illumina
609
—
609
100
609
—
609
100
Total
consolidated operating expense
$
1,346
$
615
$
731
119
%
$
1,978
$
1,185
$
793
67
%
Core
Illumina research and development expense increased by $47 million, or 23%, in Q2 2022 and by $88 million, or 22%, in YTD 2022 primarily due to increases in headcount, as we continue to invest in the research and development of new products and enhancements to existing products and professional services, partially offset by a decrease in performance-based compensation.
GRAIL research and development expense for Q2 2022 and YTD 2022 consisted primarily of expenses related to headcount, including performance-based compensation, and clinical trials.
Core Illumina selling, general and administrative expense decreased by $74 million, or 18%, in Q2 2022 and by $197 million, or 25%, in YTD 2022 primarily due to a decrease in acquisition-related expenses as a result of $105 million and $210 million in Continuation Payments made to GRAIL in Q2 2021 and YTD 2021, respectively, and a decrease
in performance-based compensation, partially offset in Q2 2022 by the fair value change of $38 million related to our contingent consideration liability. The decreases in Q2 2022 and YTD 2022 were partially offset by increases in headcount and travel expenses.
GRAIL selling, general and administrative expense for Q2 2022 and YTD 2022 consisted primarily of expenses related to headcount, including performance-based compensation, and professional services.
Core Illumina legal contingencies for Q2 2022 and YTD 2022 consisted of an accrual of $453 million, recorded in Q2 2022, for the potential fine that the European Commission may impose of up to 10% of our consolidated annual revenues and an estimated accrual of $156 million, also recorded in Q2 2022, related to the settlement of our litigation with BGI in July 2022. See note “7.
Legal Proceedings” for additional details.
Total
other (expense) income, net relates primarily to the Core Illumina segment.
Interest expense in Q2 2022 and YTD 2022 consisted primarily of accrued interest on our Term Notes. The decreases in Q2 2022 and YTD 2022 were primarily due to the accretion of the original debt discount on our convertible senior notes, prior to the adoption of ASU 2020-06. The decrease in YTD 2022 was also due to the recognition of interest expense in Q2 2021 and YTD 2021 associated with the amortization of debt issuance costs related to the termination of our Bridge Facility in Q1 2021. The fluctuations in other (expense) income, net were primarily due to unrealized losses on our marketable equity securities in Q2 2022 and YTD 2022, and unrealized gains on our non-marketable equity securities and Helix contingent value right in Q2 2021 and YTD 2021.For
YTD 2022 the fluctuation was also due to a $26 million gain recorded on our derivative assets related to the terminated PacBio acquisition in Q1 2021.
(Benefit) Provision for Income Taxes
Dollars
in millions
Q2 2022
Q2 2021
Change
% Change
YTD 2022
YTD 2021
Change
% Change
(Loss) income before income taxes
$
(637)
$
207
$
(844)
(408)
%
$
(497)
$
378
$
(875)
(231)
%
(Benefit)
provision for income taxes
(102)
22
(124)
(564)
(48)
45
(93)
(207)
Net (loss) income
$
(535)
$
185
$
(720)
(389)
%
$
(449)
$
333
$
(782)
(235)
%
Effective
tax rate
16.0
%
10.8
%
9.7
%
11.8
%
Our effective tax rate was 16.0% in Q2 2022 compared to 10.8% in Q2 2021. The tax benefit in Q2 2022 had an effective
tax rate that was lower than the U.S. federal statutory tax rate of 21% primarily because of the $95 million impact from the potential European Commission fine related to the GRAIL acquisition which is nondeductible for tax purposes, the $6 million impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits, and the $23 million impact of capitalizing research and development expenses for tax purposes beginning in 2022, in accordance with the 2017 Tax Cuts and Jobs Act. If the capitalization requirement is not repealed, modified, or deferred, potentially retroactively to the beginning of 2022, our provision for income taxes will continue to be negatively impacted and our cash tax payments will increase by approximately $142 million in 2022. The tax benefit in Q2 2022 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore
and the United Kingdom.
In Q2 2021, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax benefits related to GRAIL Continuation Payments and 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.
Our effective tax rate was 9.7% in YTD 2022 compared to 11.8% in YTD 2021. The tax benefit in YTD 2022 had an effective tax rate that was lower than the U.S. federal statutory tax rate of 21% primarily because of the $95 million impact from the potential European Commission fine related to the GRAIL acquisition which is nondeductible for tax purposes, the $31 million impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of the U.S. foreign tax credits, and the $27 million impact of capitalizing research and development
expenses for tax purposes beginning in 2022, in accordance with the 2017 Tax Cuts and Jobs Act. The tax benefit in YTD 2022 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.
In YTD 2021, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax benefits related to GRAIL Continuation Payments and the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United
Kingdom. This was partially offset by tax expense on certain foreign subsidiary earnings that are no longer indefinitely reinvested.
Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
LIQUIDITY
AND CAPITAL RESOURCES
At July 3, 2022, we had approximately $1.3 billion in cash and cash equivalents, of which approximately $611 million was held by our foreign subsidiaries. Cash and cash equivalents increased by $57 million from January 2, 2022, 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.
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 July 3, 2022, we had $38 million in short-term investments comprised of marketable equity securities.
As of July 3, 2022, the fair value of our contingent consideration liability related to our acquisition of GRAIL was $605 million. The contingent value rights issued as part of the acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. This will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during
this same period. Covered Revenues for Q4 2021 and Q1 2022 were $20 million in aggregate, driven primarily by sales of GRAIL’s Galleri test. Covered Revenue Payments in YTD 2022 were approximately $187,000; however, pursuant to the Contingent Value Rights Agreement, a portion of the Covered Revenue Payments were applied to reimburse us for certain expenses. We expect Covered Revenue Payments to total approximately $110,000 in Q3 2022 due to Covered Revenues for Q2 2022 of approximately $12 million.
We continued to grant GRAIL employees cash incentive equity awards in YTD 2022. As of July 3, 2022, the aggregate cash value of awards outstanding and unvested was $267 million, and we accrued an estimated liability of $40 million, included in accrued liabilities. In addition, we have an outstanding
performance-based award for which vesting is based on GRAIL’s future revenues. The award has an aggregate potential value of up to $78 million, which is expected to be settled in cash, and expires, to the extent unvested, in August 2030. As of July 3, 2022, it was not probable that the performance conditions associated with the award will be achieved.
As a result of our decision to proceed with the completion of acquisition of GRAIL during the pendency of the European Commission’s review, the European Commission will likely seek to impose a fine on us. In Q2 2022, we accrued $453 million, included in accrued liabilities, representing 10% of our consolidated annual revenues for fiscal year 2021, as further disclosed in note “7. Legal Proceedings.”
On
July 14, 2022, we entered into a Settlement and License Agreement with BGI, in which we agreed to pay an affiliate of BGI a one-time payment of $325 million, resolve claims in certain cases between the two parties and license certain technology to and from CGI and its affiliates, as further disclosed in note “7. Legal Proceedings.” We paid the one-time payment amount of $325 million on July 25, 2022.
On
March 23, 2021, we issued term notes due 2023 with an aggregate principal amount of $500 million and term notes due 2031 with an aggregate principal amount of $500 million. The 2023 Term Notes and the 2031 Term Notes accrue interest at a rate of 0.550% and 2.550% per annum, respectively, payable semi-annually on March 23 and September 23 of each year. The 2023 Term Notes, which are classified as short-term, mature on March 23, 2023 and the 2031 Term Notes mature on March 23, 2031. We may redeem for cash all or any portion of the Term Notes, at our option, at any time prior to maturity. Our convertible senior notes, with an aggregate principal amount of $750 million, due on August 15, 2023, were not convertible as of July 3, 2022.
As of July 3, 2022, our convertible notes were reclassified to short-term given the holders may convert their notes on or after May 15, 2023 until August 11, 2023.
On March 8, 2021, we obtained a Credit Facility, which provides us with a $750 million senior unsecured five-year revolving credit facility, including a $40 million sublimit for swingline borrowings and a $50 million sublimit for letters of credit. The Credit Facility matures, and all amounts outstanding thereunder become due and payable in full, on March 8, 2026, subject to two one-year extensions at our option and the consent of the extending lenders and certain other conditions. As of July 3,
2022, there were no borrowings outstanding under the Credit Facility.
We had $14 million and up to $101 million, respectively, remaining in our capital commitments to two venture capital investment funds as of July 3, 2022 that are callable through April 2026 and July 2029, respectively.
Authorizations to repurchase $15 million of our common stock remained available as of July 3, 2022 under the $750 million share repurchase program authorized by our Board of Directors on February 5, 2020. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. We do not intend to make any share repurchases during fiscal year 2022.
We anticipate that our current cash, cash
equivalents, and short-term investments, together with cash provided by operating activities and available borrowing capacity under the Credit Facility, are sufficient to fund our near-term capital and operating needs for at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:
•support of commercialization efforts related to our current and future products;
•acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
•the continued advancement of
research and development efforts;
•potential strategic acquisitions and investments;
•repayment of debt obligations; and
•the expansion needs of our facilities, including costs of leasing and building out additional facilities.
We expect that our revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
•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.
Net cash (used in) provided by investing activities
(239)
1,379
Net cash provided by financing activities
16
472
Effect
of exchange rate changes on cash and cash equivalents
(17)
—
Net increase in cash and cash equivalents
$
57
$
2,386
Operating Activities
Net cash provided by operating activities in YTD 2022 primarily consisted of net loss of $449 million plus net adjustments of $406 million and net changes in operating assets and liabilities of $340 million. The primary adjustments
to net loss included depreciation and amortization expense of $185 million, share-based compensation expense of $183 million, and net losses on strategic investments of $76 million, partially offset by deferred income taxes of $34 million and a gain recorded on our contingent consideration liability of $11 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by an increase in accrued liabilities due to legal contingencies, partially offset by an increase in inventory and a decrease in accounts payable.
Investing Activities
Net cash used in investing activities totaled $239 million in YTD 2022. We invested $132 million in capital expenditures, primarily associated with our investment in facilities, paid $85 million for an acquisition, and used $22 million for purchases of strategic investments.
Financing
Activities
Net cash provided by financing activities totaled $16 million in YTD 2022. We received $33 million in proceeds from the sale of shares under our employee stock purchase plan, partially offset by $17 million used to pay taxes related to net share settlement of equity awards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income (loss) and net income (loss), as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Critical
Accounting Policies and Estimates” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. There were no material changes to our critical accounting policies and estimates during YTD 2022.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no substantial changes to our market risks in YTD 2022, when compared to the disclosures in “Quantitative and Qualitative Disclosures about
Market Risk” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
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 Q2 2022, we continued to monitor and evaluate the design and operating effectiveness of key controls, including the impact of the COVID-19 pandemic on our internal control environment. 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.
Our business is subject to various risks, including those described in “Risk Factors” within the Business & Market Information Section of our Annual Report on Form 10-K
for the fiscal year ended January 2, 2022, and the “Other Key Information” section of our Quarterly Report on Form 10-Q for the period ended April 3, 2022, which we strongly encourage you to review. In addition to the risk factors disclosed in our Form 10-K, the issues raised in the following risk factors could adversely affect our operating results and stock price:
Our acquisition (the Acquisition) of GRAIL remains subject to ongoing legal and regulatory proceedings
in the United States and in the European Union. Adverse decisions by the EU General Court, the European Commission, the FTC and/or other governmental or regulatory authorities and/or other adverse consequences resulting from our decision to proceed with the completion of the acquisition, could result in significant financial penalties, operational restrictions, increased costs or loss of revenues or require us to divest all or a portion of the assets or equity interests of GRAIL on terms that are materially worse than the terms on which we acquired GRAIL, any or all of which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operation.
As previously disclosed, on March 30, 2021, the U.S. Federal Trade Commission (the FTC) filed an administrative complaint alleging that our acquisition of GRAIL (the Acquisition)
would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. We filed an answer to the FTC’s complaint in the administrative court on April 13, 2021, and the administrative trial commenced on August 24, 2021, and live testimony concluded on September 24, 2021. On April 15, 2022, the parties filed their opening post-trial briefs and proposed findings. Reply briefs were filed on May 25, 2022, and closing arguments took place on June 8, 2022. A decision by the administrative judge is currently due no later than September 2, 2022. We intend to continue to vigorously defend against the FTC’s action.
As
previously disclosed, on April 19, 2021, the European Commission accepted a request for referral of the Acquisition (the Referral) for European Union merger review under Article 22(1) of Council Regulation (EC) No 139/2004 (the EU Merger Regulation), which had been submitted by a Member State of the European Union. The European Commission had previously notified us asserting that as a result of the Referral, pursuant to Article 22(4) of the EU Merger Regulation, we were prohibited from implementing the Acquisition (i) until the European
Commission clears the Acquisition
under the EU Merger Regulation or (ii) until the European Commission refuses the Referral, and therefore the European Commission’s acceptance of the Referral continued the purported standstill on the completion of the Acquisition until such time as the European Commission completes its review and approves the Acquisition. On April 29, 2021, we filed an action in the General Court of the European Union (the EU General Court) asking for annulment of the European Commission’s decision asserting jurisdiction to review the Acquisition under Article 22 of the EU Merger Regulation, as the Acquisition does not meet the jurisdictional criteria under the EU Merger Regulation or under the national merger control laws of any Member State of the European Union. On December 16, 2021, the EU General Court held a hearing regarding the European Commission’s assertion of jurisdiction. On
July 13, 2022, the EU General Court ruled that the European Commission has jurisdiction to review the Acquisition under the EU Merger Regulation. We intend to appeal the decision to the Court of Justice of the European Union.
As previously disclosed, on July 22, 2021, the European Commission announced it had initiated a Phase II review of the Acquisition. The duration of the Phase II review cannot be foreseen with certainty. As of the completion of the Acquisition, the European Commission’s purported standstill on such completion, the validity and appropriateness of which we are challenging, had not been suspended or overturned. We continue to work with the European Commission on its review and had voluntarily offered to enter into a hold separate arrangement with the European Commission with respect to GRAIL and its operations
pending the resolution of the action in the EU General Court and/or completion of the European Commission’s review. On October 29, 2021, the European Commission adopted an order imposing interim measures (the Interim Measures Order), which provided that (i) we ensure that Illumina and GRAIL will continue to operate as independent legal entities that transact at arms’ length, no integration activity will take place, the day-to-day operation of GRAIL will remain the sole responsibility of GRAIL’s management and our management will have no involvement in or influence over GRAIL, (ii) we take certain supportive measures to preserve GRAIL’s viability, marketability and competitiveness, including with respect to the provision of resources to GRAIL and the retention and/or replacement of key personnel of GRAIL, (iii) subject to limited exceptions, we implement all necessary measures to ensure that Illumina does not obtain any
confidential information relating to GRAIL during the hold separate period and vice versa and (iv) we appoint an independent firm as monitoring trustee to monitor our compliance with the Interim Measures Order. An independent monitoring trustee has been appointed. Such hold separate arrangement, and our obligations pursuant thereto, have imposed implementation and administrative processes and additional costs, which have been burdensome to implement and administer, and which we expect to continue for the duration of the hold separate arrangement. Such burdens and additional costs, independently or together with additional burdens, costs and/or liabilities arising from such arrangement, may result in loss of revenue and other adverse effects on our business, financial condition and results of operations and have an adverse impact on our ability to achieve the anticipated benefits of the Acquisition. Further, our failure to comply with the terms of the Interim Measures
Order may result in the European Commission seeking to impose fines or other penalties on us. On December 1, 2021, we filed an action with the EU General Court asking for annulment of the Interim Measures Order. The hearing of that application has been stayed pending our appeal of the judgment of the EU General Court regarding the European Commission’s assertion of jurisdiction.
If we are required to divest all or a portion of the assets or equity interests of GRAIL, the terms of such divestment could be materially worse than the terms on which we acquired GRAIL. Furthermore, we may not be able to direct the timing, structure or financial terms of such divestment, which could result in negative financial or tax consequences. In addition, such divestment would impose significant costs and additional liabilities on us, including significant advisory fees and additional expenses.
Such divestment could also divert our management’s attention and our resources away from existing operations and other opportunities that may have been beneficial to us. For these reasons, a partial or complete divestment of GRAIL could have a material adverse effect on our business, financial condition and results of operations.
On July 19, 2022, the European Commission issued a Statement of Objections alleging that we breached the EU Merger Regulation by completing the Acquisition. We believe that the European Commission will likely seek to impose a fine on us pursuant to Article 14(2)(b) of the EU Merger Regulation of up to 10% of our consolidated annual revenues (the Article 14(2)(b) Fine). In addition, the European Commission, the FTC and/or other governmental or regulatory authorities may seek to impose other fines, penalties, remedies or restrictions. We intend to vigorously
defend against any such fines, penalties, remedies or restrictions, but we cannot predict the scope or severity thereof or the outcome of any related proceedings. We also cannot predict what other adverse consequences to, among other things, our reputation, our relationships with governmental or regulatory authorities or our ability to successfully complete future acquisitions and/or divestitures may result from our decision to proceed with the completion of the Acquisition. We expect to continue to hold the assets or equity interests of GRAIL
separate for some period of time, and such delay in integration may materially
and adversely affect the synergies and other benefits we expect to achieve as a result of the Acquisition and could result in additional costs or liabilities, loss of revenue and other adverse effects on our business, financial condition and results of operations. In the second fiscal quarter of 2022, we accrued $453 million in anticipation of a potential Article 14(2)(b) Fine, included in accrued liabilities, representing 10% of our consolidated annual revenues for fiscal year 2021 in accordance with ASC 450, Contingencies. In addition, under applicable accounting rules, we may be required from time to time to perform interim analyses of the value of GRAIL. To the extent that the value of GRAIL on a standalone basis is less than its book value, we would be required to record an impairment on our consolidated financial statements.
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REPURCHASES AND SALES
Purchases of Equity Securities by the Issuer
None during the quarterly period ended July 3, 2022.
Unregistered Sales of Equity Securities
None during the quarterly period ended July 3, 2022.
OTHER INFORMATION
As announced on June 9, 2022, following the departure of Sam Samad, Joydeep Goswami, Chief Strategy and Corporate Development Officer,
was appointed to serve as interim Chief Financial Officer while the company conducts a search for a permanent CFO.
Prior to joining Illumina in 2019, Mr. Goswami had more than a decade of senior management and P&L responsibilities at Thermo Fisher Scientific, and previously served pharma, technology, and private equity clients at McKinsey & Company. He holds an M.S., Ph.D. in chemical engineering, and an MBA from the Massachusetts Institute of Technology as well as a bachelor's degree in chemical engineering from the Indian Institute of Technology, Mumbai.
On August 9, 2022, in light of Mr. Goswami’s increased responsibilities as interim CFO, the Compensation Committee of the Board of Directors of Illumina approved additional compensation
for Mr. Goswami in the form of a stipend of $25,000 per month, retroactive to July 2022 and, due to the expected requirement of Mr. Goswami to provide transition services, running through two months following the appointment of a permanent CFO.
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+ Management contract or corporate plan or arrangement
* Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K.A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.
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.
