Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.07M
2: EX-3.3 Articles of Incorporation/Organization or Bylaws HTML 43K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 34K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 32K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 26K
13: R1 Cover Page HTML 76K
14: R2 Condensed Consolidated Balance Sheets HTML 116K
15: R3 Condensed Consolidated Statements of Income HTML 110K
16: R4 Condensed Consolidated Statements of Comprehensive HTML 43K
Income
17: R5 Condensed Consolidated Statements of Stockholders' HTML 94K
Equity
18: R6 Condensed Consolidated Statements of Cash Flows HTML 131K
19: R7 Basis of Presentation and Summary of Significant HTML 174K
Accounting Policies
20: R8 Balance Sheet Account Details HTML 166K
21: R9 Pending Acquisition HTML 27K
22: R10 Fair Value Measurements HTML 92K
23: R11 Debt and Other Commitments HTML 65K
24: R12 Stockholders' Equity HTML 89K
25: R13 Legal Proceedings HTML 26K
26: R14 Income Taxes HTML 27K
27: R15 Segment Information HTML 71K
28: R16 Basis of Presentation and Summary of Significant HTML 117K
Accounting Policies (Policies)
29: R17 Basis of Presentation and Summary of Significant HTML 154K
Accounting Policies (Tables)
30: R18 Balance Sheet Account Details (Tables) HTML 159K
31: R19 Fair Value Measurements (Tables) HTML 89K
32: R20 Debt and Other Commitments (Tables) HTML 51K
33: R21 Stockholders' Equity (Tables) HTML 113K
34: R22 Segment Information (Tables) HTML 69K
35: R23 Basis of Presentation and Summary of Significant HTML 64K
Accounting Policies - Summary of Impact of Topic
842 (Details)
36: R24 Basis of Presentation and Summary of Significant HTML 38K
Accounting Policies - Narrative (Details)
37: R25 Basis of Presentation and Summary of Significant HTML 34K
Accounting Policies - Narrative - Revenue,
Remaining Performance Obligation (Details)
38: R26 Basis of Presentation and Summary of Significant HTML 60K
Accounting Policies - Recently Adopted Accounting
Principles (Details)
39: R27 Basis of Presentation and Summary of Significant HTML 37K
Accounting Policies - Summary of Calculation of
Weighted Average Shares used to Calculate Basic
and Diluted Earnings Per Share (Details)
40: R28 Balance Sheet Account Details - Summary of HTML 42K
Short-term Investments (Details)
41: R29 Balance Sheet Account Details - Summary of HTML 30K
Contractual Maturities of Available-for-sale Debt
Securities (Details)
42: R30 Balance Sheet Account Details - Narrative - HTML 54K
Strategic Investments (Details)
43: R31 Balance Sheet Account Details - Summary of HTML 35K
Inventory (Details)
44: R32 Balance Sheet Account Details - Summary of HTML 47K
Property and Equipment (Details)
45: R33 Balance Sheet Account Details - Narrative - HTML 36K
Property and Equipment (Details)
46: R34 Balance Sheet Account Details - Narrative - Leases HTML 32K
(Details)
47: R35 Balance Sheet Account Details - Summary of Leases HTML 54K
(Details)
48: R36 Balance Sheet Account Details - Summary of Lease HTML 30K
Costs (Details)
49: R37 Balance Sheet Account Details - Summary of Changes HTML 27K
in Goodwill (Details)
50: R38 Balance Sheet Account Details - Narrative - HTML 27K
Derivatives (Details)
51: R39 Balance Sheet Account Details - Summary of Accrued HTML 40K
Liabilities (Details)
52: R40 Balance Sheet Account Details - Narrative - HTML 30K
Warranties (Details)
53: R41 Balance Sheet Account Details - Summary of Changes HTML 32K
in Reserve for Product Warranties (Details)
54: R42 Balance Sheet Account Details - Narrative - HTML 40K
Deconsolidation of Helix (Details)
55: R43 Balance Sheet Account Details - Summary of HTML 33K
Activity of Redeemable Noncontrolling Interests
(Details)
56: R44 Pending Acquisition (Details) HTML 31K
57: R45 Fair Value Measurements - Summary of Hierarchy for HTML 66K
Assets and Liabilities Measured at Fair Value on a
Recurring Basis (Details)
58: R46 Debt and Other Commitments - Summary of Debt HTML 60K
Obligations (Details)
59: R47 Debt and Other Commitments - Narrative (Details) HTML 68K
60: R48 Debt and Other Commitments - Summary of Debt HTML 32K
Conversions (Details)
61: R49 Debt and Other Commitments - Narrative - HTML 25K
Obligations Under Financing Leases (Details)
62: R50 Stockholders' Equity - Narrative (Details) HTML 27K
63: R51 Stockholders' Equity - Summary of Restricted Stock HTML 55K
Activity and Related Information (Details)
64: R52 Stockholders' Equity - Summary of Stock Option HTML 42K
Activity Under all Stock Option Plans (Details)
65: R53 Stockholders' Equity - Narrative - Employee Stock HTML 32K
Purchase Plan (Details)
66: R54 Stockholders' Equity - Narrative - Share HTML 34K
Repurchases (Details)
67: R55 Stockholders' Equity - Summary of Share-based HTML 42K
Compensation Expense for all Stock Awards
(Details)
68: R56 Stockholders' Equity - Summary of Assumptions Used HTML 50K
to Estimate the Weighted Average Fair Value Per
Share (Details)
69: R57 Income Taxes - Narrative (Details) HTML 26K
70: R58 Segment Information (Details) HTML 45K
72: XML IDEA XML File -- Filing Summary XML 132K
12: XML XBRL Instance -- form10-qfy19q2_htm XML 2.17M
71: EXCEL IDEA Workbook of Financial Reports XLSX 74K
8: EX-101.CAL XBRL Calculations -- ilmn-20190630_cal XML 242K
9: EX-101.DEF XBRL Definitions -- ilmn-20190630_def XML 566K
10: EX-101.LAB XBRL Labels -- ilmn-20190630_lab XML 1.51M
11: EX-101.PRE XBRL Presentations -- ilmn-20190630_pre XML 891K
7: EX-101.SCH XBRL Schema -- ilmn-20190630 XSD 139K
73: JSON XBRL Instance as JSON Data -- MetaLinks 343± 530K
74: ZIP XBRL Zipped Folder -- 0001110803-19-000042-xbrl Zip 247K
(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 Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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
☑
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 i☐ No þ
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to“Illumina,” “we,”“us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
1.
iBasis of Presentation and Summary of Significant Accounting Policies
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 December 30, 2018,
from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
i
The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, majority-owned or controlled companies,
and variable interest entities (VIEs) for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
iWe evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are VIEs, and,
if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE. Effective April 25, 2019, we deconsolidated the financial statements of Helix Holdings I, LLC (Helix). See note “2. Balance Sheet Account Details” for further details.
i
We
use the equity method to account for investments through which we have the ability to exercise significant influence, but not control, over the investee. Such investments are recorded in other assets, and our share of net income or loss is recognized on a one quarter lag in other income, net.
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. The three
and six months ended June 30, 2019 and July 1, 2018 were both 13 and 26 weeks, respectively.
Reclassifications
i
Certain prior period amounts have been reclassified to conform
to the current period presentation.
Significant Accounting Policies
During the three and six months ended June 30, 2019, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, except as described below.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets and to disclose key information about leasing arrangements. We
adopted Topic 842 on its effective date in the first quarter of 2019 using a modified retrospective approach by recognizing a cumulative-effect adjustment to retained earnings as of December 31, 2018. We elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We continue to report our financial position as of December 30, 2018 under the former lease accounting standard (Topic 840) in our condensed consolidated balance sheet.
i
The
following table summarizes the impact of Topic 842 on our condensed consolidated balance sheet upon adoption on December 31, 2018 (in millions):
The
adoption impact summarized above was primarily due to the recognition of operating lease liabilities with corresponding right-of-use assets based on the present value of our remaining minimum lease payments, and the derecognition of existing fixed assets and financing obligations related to build-to-suit leasing arrangements that, under Topic 840, did not qualify for sale-leaseback accounting. The difference between these amounts, net of deferred tax, was recorded as a cumulative-effect adjustment to retained earnings.
Accounting Pronouncements Pending Adoption
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring
entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. We expect to adopt the standard on its effective date in the first quarter of 2020 using a modified retrospective approach. We currently do not expect the adoption to have a material impact on our consolidated financial statements.
/
Revenue Recognition
i
Our
revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services and instrument service contracts.
We recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract,
determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the
performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract
when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service.
Revenue from product sales is recognized generally upon delivery to the end customer, which is when control of the product is deemed to be transferred. Invoicing typically occurs upon shipment; and payment is typically due within 60 days from invoice. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all
acceptance criteria have been met. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer.
Revenue is recorded net of discounts, distributor commissions, and sales taxes collected on behalf of governmental authorities. Employee sales commissions are recorded as selling, general and administrative expenses when incurred as the amortization period for such costs, if capitalized, would have been one year or less.
We
regularly enter into contracts with multiple performance obligations. Revenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract. Most performance obligations are generally satisfied within a short time frame, approximately three to isix
months after the contract execution date. As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $i1,146
million, of which approximately i67% is expected to be converted to revenue in the next twelve months, approximately i13%
in the following twelve months, and the remainder thereafter.
The contract price is allocated to each performance obligation in proportion to its standalone selling price. We determine our best estimate of standalone selling price using average selling prices over a rolling 12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts.
Contract liabilities, which consist of deferred
revenue and customer deposits, as of June 30, 2019 and December 30, 2018 were $i201 million and $i206
million, respectively, of which the short-term portions of $i167 million and $i175
million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded during the three and six months ended June 30, 2019 included $i42 million and $i106
million of previously deferred revenue that was included in contract liabilities as of December 30, 2018. Contract assets as of June 30, 2019 and December 30, 2018 were not material.
In certain markets, products and services are sold to customers through distributors. In most sales through distributors, the product is delivered directly to customers by us. The terms of sales transactions
through distributors are consistent with the terms of direct sales to customers.
i
The following table represents revenue by source (in millions):
Revenue
related to our previously consolidated VIE, Helix, is included in sequencing service and other revenue up to April 25, 2019, the date of Helix’s deconsolidation.
The following table represents revenue by geographic area, based on region of destination (in millions):
(1)
Region includes revenue from China, Taiwan, and Hong Kong.
Earnings per Share
i
Basic earnings per share attributable to Illumina stockholders is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to Illumina stockholders is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Up to April
25, 2019, the date of Helix’s deconsolidation, per-share earnings of Helix were included in the consolidated basic and diluted earnings per share computations based on our share of Helix’s securities.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
i
The
following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in millions):
Realized
gains and losses are determined based on the specific identification method and are reported in interest income.
i
Contractual maturities of available-for-sale debt securities, as of June 30, 2019, were as follows (in millions):
Estimated
Fair
Value
Due within one year
$
i516
After one but within five years
i557
Total
$
i1,073
/
We
have the ability, if necessary, to liquidate any of our cash equivalents and short-term investments to meet our liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying condensed consolidated balance sheets.
Strategic Investments
i
We
have strategic investments in privately held companies (non-marketable equity securities) and companies that have completed initial public offerings (marketable equity securities).
Our marketable equity securities are measured at fair value. As of June 30, 2019 and December 30, 2018, the fair value of our marketable equity securities, included in short-term investments, totaled $i157
million and $i39 million, respectively. Total unrealized gains on our marketable equity securities, included in other income, net, were $i102
million and $i104 million for the three and six months ended June 30, 2019, respectively.
Our non-marketable equity securities without readily determinable market values are initially measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. As of June 30,
2019 and December 30, 2018, the aggregate carrying amounts of our non-marketable equity investments without readily determinable fair values, included in other assets, were $i217 million and $i231
million, respectively.
One of our non-marketable equity investments is a VIE for which we have concluded that we are not the primary beneficiary, and therefore, we do not consolidate this VIE in our consolidated financial statements. We have determined our maximum exposure to loss, as a result of our involvement with the VIE, to be the carrying value of our investment, which was $i189
million as of June 30, 2019 and December 30, 2018.
/
We invest in a venture capital investment fund (the Fund) with a capital commitment of $i100
million that is callable through April 2026, of which $i57 million remained callable as of June 30, 2019. Our investment in the Fund is accounted for as an equity-method investment. The carrying amounts of the Fund, included in other assets, were $i47
million and $i29 million as of June 30, 2019 and December 30, 2018, respectively. In July 2019, we invested in a second venture capital investment fund with a maximum capital commitment of up to $i160
million that is callable through July 2029.
Revenue recognized from transactions with our strategic investees was $i18
million and $i34 million, respectively, for the three and six months ended June 30, 2019 and $i36
million and $i72 million, respectively, for the three and six months ended July 1, 2018.
Inventory
i
Inventory
consisted of the following (in millions):
Property
and equipment, net included non-cash expenditures of $i18 million and $i42 million
for the six months ended June 30, 2019 and July 1, 2018, respectively, which were excluded from the condensed consolidated statements of cash flows. Such non-cash expenditures included $i16 million
recorded under build-to-suit lease accounting for the six months ended July 1, 2018.
As of December 30, 2018, property and equipment, net included $i241 million
of project construction costs paid or reimbursed by our landlord related to our build-to-suit leases that did not qualify for sale-leaseback accounting under Topic 840. Upon adoption of Topic 842 on December 31, 2018, we derecognized the Buildings related to our build-to-suit leasing arrangements and began to account for these leases as operating leases. See note “1. Basis of Presentation and Summary of Significant Accounting Policies” for further details on the adoption impact of Topic 842.
Leases
We lease approximately i2.5
million square feet of office, lab, and manufacturing facilities under various non-cancellable operating lease agreements (real estate leases). Our real estate leases have remaining lease terms of i1 to i20
years, which represent the non-cancellable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms, ranging from i6 months to i20
years. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms as well as payments for common-area-maintenance and administrative services. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.
Operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining
lease terms. We do not allocate lease payments to non-lease components; therefore, fixed payments for common-area-maintenance and administrative services are included in our operating lease right-of-use assets and liabilities. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our leases are not readily determinable.
i
As of June 30, 2019, the maturities of our operating lease liabilities
were as follows (in millions):
Remaining Lease Payments
2019
$
i35
2020
i82
2021
i81
2022
i83
2023
i85
Thereafter
i619
Total
remaining lease payments (1)
i985
Less: imputed interest
(i243
)
Total
operating lease liabilities
i742
Less: current portion
(i44
)
Long-term
operating lease liabilities
$
i698
Weighted-average remaining lease term
i11.5
years
Weighted-average discount rate
i4.6
%
____________________________________
(1) Total remaining lease payments
exclude $i53 million of legally binding minimum lease payments for leases signed but not yet commenced.
/
i
The
components of our lease costs included in our condensed consolidated statements of income were as follows (in millions):
Operating
lease costs consist of the fixed lease payments included in our operating lease liabilities and are recorded on a straight-line basis over the lease terms. We sublease certain real estate to third parties and this sublease income is also recorded on a straight-line basis.
Goodwill
We test the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require us to estimate the fair value of each reporting unit annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment is required. We performed the annual assessment for goodwill impairment in the second quarter of 2019, noting no impairment.
i
Changes
to goodwill during the six months ended June 30, 2019 were as follows (in millions):
We are exposed to foreign exchange rate risks in the normal course of business. We enter into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities
that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other current assets or accrued liabilities and are not designated as hedging instruments. Changes in the value of the derivatives are recognized in other income, net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.
As of June 30, 2019, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, and British pound. As of June 30,
2019 and December 30, 2018, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $i256 million and $i122
million, respectively.
Accrued Liabilities
i
Accrued liabilities consisted of the following (in millions):
We
generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to 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.
/
i
Changes in the reserve for product warranties during the three and six months ended June 30, 2019
and July 1, 2018 were as follows (in millions):
In July 2015, we obtained a i50% voting equity ownership interest in Helix. We determined that we had unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements
and, as a result, we were deemed to be the primary beneficiary of Helix and were required to consolidate Helix.
On April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, Helix. As part of the agreement, (i) Helix repurchased all outstanding equity interests previously issued to us in exchange for a contingent value right, (ii) we ceased having a controlling financial interest in Helix, including unilateral power over one of the activities that most significantly impacts the economic performance of Helix, (iii) we were relieved of any potential obligation to redeem
certain noncontrolling interests, and (iv) we no longer have representation on Helix’s board of directors. As a result, we deconsolidated Helix’s financial statements effective April 25, 2019 and recorded a gain on deconsolidation of $i39 million in other income, net. The gain on deconsolidation includes (i) the contingent value right received from Helix
for its repurchase of our ownership interest, recorded at its fair value of $i30 million, (ii) the derecognition of the carrying amounts of Helix’s assets and liabilities, and (iii) the derecognition of the noncontrolling interests related to Helix. The operations of Helix, up to the date of deconsolidation, are included in the accompanying condensed consolidated statements of income for the three and six months ended June 30,
2019 and July 1, 2018. During these periods, we absorbed i50% of Helix’s losses.
The contingent value right entitles us to receive consideration in an amount dependent upon the
outcome of future financing and/or liquidity events related to Helix and has a term of iseven years. We elected the fair value option to measure the contingent value right, which is included in other assets. During the three months ended June 30, 2019, the fair value measurement resulted in a $i3
million unrealized loss, included in other income, net. The fair value of the contingent value right is derived using a Monte Carlo simulation. Significant estimates and assumptions required for this valuation include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs, which represent a Level 3 measurement, are supported by little or no market activity and reflect our own assumptions in measuring fair value.
Concurrent with the agreement to sell all of our outstanding equity interests, we also amended our long-term supply and license agreements with Helix, including the discounted supply terms. Because these agreements were entered into concurrently, we consider them to be one arrangement with multiple elements,
as defined under the respective authoritative accounting guidance. We determined that each of the elements, which include the contingent value right and services to be provided in accordance with the long-term supply and license agreements, were at, or approximated, fair value on a stand-alone basis. Therefore, none of the deconsolidation gain was allocated to these elements.
Redeemable Noncontrolling Interests
i
The activity of the redeemable noncontrolling interests
during the six months ended June 30, 2019 was as follows (in millions):
On November 1, 2018, we entered into an Agreement and Plan of Merger (the Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $i1.2
billion (or $i8.00 per share). The transaction, which is now expected to close in Q4 2019, is subject to certain customary closing conditions, including the receipt of certain required antitrust approvals. The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including but not limited to, a termination of the Merger
Agreement in connection with PacBio accepting a superior offer or due to the withdrawal by PacBio’s board of directors of its recommendation of the merger, PacBio will pay us a cash termination fee of $i43 million. In certain other circumstances related to antitrust approvals, we may be required to pay PacBio a termination fee of $i98
million assuming the other closing conditions not related to antitrust or competition laws have been satisfied.
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 30, 2018 (in millions):
We
hold available-for-sale securities that consist of highly-liquid, investment-grade debt securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our deferred compensation plan assets consist primarily of investments in life insurance contracts
carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. Our marketable equity securities are measured at fair value based on quoted trade prices in active markets.
Unamortized
discount of liability component of convertible senior notes
(i147
)
(i175
)
Net
carrying amount of liability component of convertible senior notes
i1,120
i1,725
Obligations
under financing leases
—
i269
Other
—
i3
Less:
current portion
—
(i1,107
)
Long-term debt
$
i1,120
$
i890
Carrying
value of equity component of convertible senior notes, net of debt issuance costs
$
i213
$
i287
Fair
value of convertible senior notes outstanding (Level 2)
$
i1,658
$
i2,222
Weighted-average
remaining amortization period of discount on the liability component of convertible senior notes
i3.7 years
i3.9
years
/
Convertible Senior Notes
i0%
Convertible Senior Notes due 2023 (2023 Notes)
On August 21, 2018, we issued $i750 million aggregate principal amount of convertible senior notes due 2023 (2023 Notes). The 2023 Notes mature on August 15, 2023, and the implied estimated
effective rate of the liability component of the Notes was i3.7%, assuming no conversion option.
The 2023 Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate, subject
to adjustment, of 2.1845 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $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 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.
We may redeem for cash all or any portion of the 2023 Notes, at our option, on or after August 20, 2021 if the last reported sale price of our common
stock has been at least 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 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date.
The 2023 Notes were not convertible as of June 30, 2019 and had no dilutive impact during the six months endedJune 30, 2019. If the 2023 Notes were converted as of June 30, 2019, the if-converted
value would not exceed the principal amount.
i0.5%
Convertible Senior Notes due 2021 (2021 Notes)
In June 2014, we issued $i517 million aggregate principal amount of 2021 Notes. The 2021 Notes mature on June 15, 2021, and the implied estimated effective rates of the liability component of the Notes was i3.5%,
assuming no conversion option.
The 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $i254.34
per share), only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending September 30, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for i20 or more trading days in the period of i30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds i130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the i5
business day period after any i10 consecutive trading day period (the “measurement period”) in which the trading price per 2021 Notes for each day of such measurement period was less than i98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified events described in the indenture for the 2021 Notes. Regardless of the foregoing circumstances, the holders of the 2021 Notes may convert their notes on or after March 15, 2021 until June 11, 2021.
The potential dilutive impact of the 2021 Notes has been included in our calculation of diluted earnings per share for the three and six months ended June 30, 2019. If the 2021 Notes were converted
as of June 30, 2019, the if-converted value would exceed the principal amount by $i182 million.
i0%
Convertible Senior Notes due 2019 (2019 Notes)
In June 2014, we issued $i633 million aggregate principal amount of 2019 Notes, and the implied estimated effective rate of the liability component of the Notes was i2.9%,
assuming no conversion option. The 2019 Notes were convertible into cash, shares of common stock, or a combination of common stock, at our election, based on conversion rates as defined in the indenture. The 2019 Notes matured on June 15, 2019, by which time the principal had been converted and was repaid in cash. The excess of the conversion value over the principal amount was paid in shares of common stock.
i
The following table summarizes
information about the conversion of the 2019 Notes during the six months ended June 30, 2019 (in millions):
2019 Notes
Cash paid for principal of notes converted
$
i633
Conversion
value over principal amount, paid in shares of common stock
$
i153
Number of shares of common stock issued upon conversion
i0.4
/
Obligations
under financing leases
As of December 30, 2018, obligations under financing leases of $i269 million represented project construction costs paid or reimbursed by our landlord related to our build-to-suit leases that did not qualify for sale-leaseback accounting under Topic 840. Upon adoption of Topic 842 on December 31, 2018, we derecognized the remaining financing obligations
for our build-to-suit leasing arrangements and began to account for these leases as operating leases. See note “1. Basis of Presentation and Summary of Significant Accounting Policies” for further details on the adoption of Topic 842.
6. iStockholders’ Equity
As
of June 30, 2019, approximately i4.9 million shares remained available for future grants under the 2015 Stock Plan.
The
price at which common stock is purchased under the 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 the six months ended June 30,
2019, approximately i0.1 million shares were issued under the ESPP. As of June 30, 2019, there were approximately i13.6
million shares available for issuance under the ESPP.
Share Repurchases
On February 6, 2019, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $i550
million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During the six months endedJune 30, 2019, we repurchased i0.2 million shares for approximately $i63
million. Authorizations to repurchase approximately $i488 million of our common stock remained available as of June 30, 2019.
The
assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the Employee Stock Purchase Plan (ESPP) during the six months ended June 30, 2019 were as follows:
Employee Stock Purchase Rights
Risk-free interest rate
1.89% - 2.56%
Expected
volatility
30% - 38%
Expected term
0.5 - 1.0 year
Expected dividends
i0
%
Weighted-average
grant-date fair value per share
$
i71.48
/
As
of June 30, 2019, approximately $i372 million of total unrecognized compensation cost related to restricted stock and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately i2.1
years.
7. iLegal Proceedings
We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assess,
on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations,
and/or cash flows.
8. iIncome Taxes
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences
between income before income taxes and taxable income. The effective tax rates for the three and six months ended June 30, 2019 were i15.4% and i10.8%,
respectively. For the three and six months ended June 30, 2019, the decrease from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom. For the six months ended June 30, 2019, the decrease from the U.S. federal statutory tax rate was also attributable to a discrete tax benefit related to uncertain tax positions recorded in Q1 2019 and excess tax benefits related to share-based compensation.
We report segment information based on the management approach. This approach designates the internal reporting used by the Chief Operating Decision Maker (CODM) for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment using information about its revenue and income (loss) from operations. Based
on the information used by the CODM, we have determined we have ione reportable segment, Core Illumina, which relates to Illumina’s core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix.
Core Illumina:
Core
Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of our previously consolidated VIE Helix.
Helix:
Helix was established to enable individuals to explore their genetic information by providing affordable sequencing and database services for consumers through third-party partners, driving the creation of an ecosystem of consumer applications. Helix was deconsolidated on April 25, 2019. See note “2. Balance Sheet Account Details” for further details.
Management evaluates
the performance of our reportable segments based upon income (loss) from operations. We do not allocate expenses between segments. Core Illumina sells products and provides services to Helix in accordance with contractual agreements between the entities.
i
The following table presents the operating performance of each reportable segment (in millions):
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying condensed consolidated financial statements and notes. This MD&A is organized as follows:
•
Business
Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.
•
Results of Operations. Detailed discussion of our revenues and expenses.
•
Liquidity and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our
financial commitments.
•
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
•
Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K
that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.
•
Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see “Consideration Regarding Forward-Looking Statements” preceding Item 3 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 December 30, 2018. Operating results are not necessarily indicative of results that may occur in future periods.
Business Overview and Outlook
This overview and outlook provides a high-level discussion of our operating results
and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report.
About Illumina
We have one reportable segment, Core Illumina, which relates to Illumina’s core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix.
Our focus on innovation
has established us as the global leader in DNA sequencing and array-based technologies, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments.
Our customers include a broad range of academic, government, pharmaceutical, biotechnology, and other leading institutions around the globe.
Our comprehensive line of products addresses the scale of experimentation and breadth of functional analysis to advance disease research, drug development, and the development of molecular tests. This portfolio of leading-edge sequencing and array-based solutions addresses a range of genomic complexity and throughput, enabling researchers and clinical practitioners
to select the best solution for their scientific challenge.
On November 1, 2018, we entered into an Agreement and Plan of Merger to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share), subject to applicable regulatory approvals. We believe PacBio’s highly accurate long reads combined with our highly accurate and scalable short reads will provide researchers and clinicians with a more perfect view of the genome, enhancing their ability to make novel discoveries and broaden clinical utility across a range of applications. The transaction is now expected to close
in Q4 2019. See note “3. Pending Acquisition” in Part I, Item 1 of this report for further details.
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto in Item 1, Part I of this report, and the other transactions, events, and trends discussed in “Risk Factors” in Item 1A, Part II of this report and Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30,
2018.
Financial Overview
Consolidated financial highlights for the first half of 2019 included the following:
•
Revenue increased4% during the first half of 2019 to $1,684 million compared to $1,612 million in the
first half of 2018 primarily due to growth in sequencing consumables. We expect our revenue, as compared to the prior year, to continue to increase in 2019, although we are anticipating ongoing weakness in the direct-to-consumer (DTC) market and delayed timing of certain population genomics projects.
•
Gross profit as a percentage of revenue (gross margin) was 68.7% in the first half of 2019 compared to 69.0% in the first half of 2018. The gross
margin decrease was driven by lower volumes in our service business, partially offset by an increase in revenue from a non-recurring licensing agreement in Q1 2019.Our gross margin in future periods will depend on several factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, and services; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product support obligations.
•
Income from operations as a percentage of revenue decreased
to 24.3% in the first half of 2019 compared to 27.6% in the first half of 2018 primarily due to increased operating expenses as a percentage of revenue. We expect our operating expenses, as compared to the prior year, to continue to grow on an absolute basis in 2019. However, we are focused on reducing operating expenses in the second half of 2019 in response to lower revenue growth expectations.
•
Our effective tax rate was 10.8% in the first
half of 2019 compared to 12.3% in the first half of 2018. In the first half of 2019, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, a discrete tax benefit related to uncertain tax positions recorded in Q1 2019, and excess tax benefits related to share-based compensation.
•
We ended the first half of 2019
with cash, cash equivalents, and short-term investments totaling $3.2 billion as of June 30, 2019, of which approximately $476 million was held by our foreign subsidiaries.
Results of Operations
To enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified
reporting periods, stated as a percentage of total revenue.
Q2 2019
Q2 2018
YTD 2019
YTD
2018
Revenue:
Product revenue
84.0
%
81.1
%
81.5
%
80.7
%
Service
and other revenue
16.0
18.9
18.5
19.3
Total revenue
100.0
100.0
100.0
100.0
Cost
of revenue:
Cost of product revenue
23.4
21.8
22.4
22.0
Cost
of service and other revenue
7.0
7.8
7.8
7.9
Amortization of acquired intangible assets
1.2
1.1
1.1
1.1
Total
cost of revenue
31.6
30.7
31.3
31.0
Gross profit
68.4
69.3
68.7
69.0
Operating
expense:
Research and development
19.8
18.2
19.9
17.9
Selling,
general and administrative
24.1
23.7
24.5
23.5
Total operating expense
43.9
41.9
44.4
41.4
Income
from operations
24.5
27.4
24.3
27.6
Other income (expense):
Interest
income
2.4
1.3
2.6
1.0
Interest expense
(1.8
)
(1.3
)
(1.8
)
(1.4
)
Other
income, net
16.2
0.6
9.3
0.9
Total other income, net
16.8
0.6
10.1
0.5
Income
before income taxes
41.3
28.0
34.4
28.1
Provision for income taxes
6.3
3.9
3.7
3.5
Consolidated
net income
35.0
24.1
30.7
24.6
Add: Net loss attributable to noncontrolling interests
0.3
1.1
0.7
1.3
Net
income attributable to Illumina stockholders
35.3
%
25.2
%
31.4
%
25.9
%
Percentages may not recalculate due to rounding
Our
fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. The three and six month periods ended June 30, 2019 and July 1, 2018 were both 13 and 26 weeks, respectively.
Service
and other revenue consists primarily of sequencing and genotyping service revenue as well as instrument service contract revenue. Total revenue relates primarily to Core Illumina for all periods presented.
The increases in consumables revenue in Q2 2019 and the first half of 2019 were primarily due to increases in sequencing consumables revenue of $37 million and $96 million, respectively, driven primarily by growth in theinstrument installed base. The increases in sequencing consumables revenue were partially offset by decreases in microarray consumables
revenue primarily due to ongoing weakness in the direct-to-consumer (DTC) market. Instruments revenueincreasedin Q2 2019, primarily due to increased shipments of NextSeq. Instruments revenue remained relatively flat in the first half of 2019, primarily due to the timing of NovaSeq shipments offsetting the increased shipments of our NextSeq instruments. Service and other revenue decreased in Q2 2019, primarily due to decreased revenue from genotyping services, which reflects ongoing weakness in the DTC market, and decreased sequencing services revenue. Service and other revenue was relatively flat in the first half of 2019,
primarily due to increased licensing and co-development revenue offsetting the decreased revenue from genotyping and sequencing services.
Gross Margin
(Dollars
in millions)
Q2 2019
Q2 2018
Change
% Change
YTD 2019
YTD 2018
Change
%
Change
Gross profit
$
573
$
575
$
(2
)
—%
$
1,157
$
1,113
$
44
4%
Gross
margin
68.4
%
69.3
%
68.7
%
69.0
%
The gross margin decreases in Q2 2019 and the first half of 2019 were driven primarily due to lower volumes in our service business. The decreases were partially offset by a more favorable mix of sequencing consumables and services in Q2 2019 and, in the first half of 2019, an increase in revenue from a non-recurring licensing agreement in Q1 2019.
Operating Expense
(Dollars
in millions)
Q2 2019
Q2 2018
Change
% Change
YTD 2019
YTD 2018
Change
%
Change
Research and development
$
166
$
151
$
15
10
%
$
335
$
288
$
47
16
%
Selling,
general and administrative
202
197
5
3
412
380
32
8
Total
operating expense
$
368
$
348
$
20
6
%
$
747
$
668
$
79
12
%
Core
Illumina R&D expense increased by $20 million, or 14%, in Q2 2019 and by $52 million, or 19%, in the first half of 2019, primarily due to increased headcountas we continue to invest in the research and development of new products and enhancements to existing products, partially offset by a decrease in performance-based compensation. Helix R&D expense decreased by $5 million in Q2 2019 and the first half of 2019, primarily due to its deconsolidation on April 25,
2019.
Core Illumina SG&A expense increased by $11 million, or 6%, in Q2 2019, and by $40 million, or 11%, in the first half of 2019, primarily due to expenses related to the pending Pacific Biosciences acquisition, increased headcount, and investment in facilities to support the continued growth and scale of our operations,
partially offset by a decrease in performance-based compensation. Helix SG&A expense decreased by $6 million in Q2 2019 and by $8 million in the first half of 2019, primarily due to its deconsolidation on April 25, 2019.
Other Income, Net
(Dollars
in millions)
Q2 2019
Q2 2018
Change
% Change
YTD 2019
YTD 2018
Change
%
Change
Interest income
$
20
$
11
$
9
82
%
$
43
$
16
$
27
169
%
Interest
expense
(15
)
(11
)
(4
)
36
(30
)
(22
)
(8
)
36
Other
income, net
136
5
131
2,620
157
14
143
1,021
Total
other income, net
$
141
$
5
$
136
2,720
%
$
170
$
8
$
162
2,025
%
Other
income, net relates primarily to Core Illumina for all periods presented.
Interest income increased in Q2 2019 and in the first half of 2019 as a result of higher yields on our short-term debt securities and higher cash and cash-equivalent balances. Interest expense consisted primarily of accretion of discount on our convertible senior notes and increased in Q2 2019 and the first half of 2019 primarily due to the 2023 Notes issued in August 2018. Other income, net, increased in Q2 2019 and in the first half of 2019 primarily due to mark-to-market
adjustments from our strategic investments, which included a $92 million unrealized gain from a strategic investment that completed an initial public offering in Q2 2019. The increase in other income, net was also due to a $39 million gain recorded on the deconsolidation of Helix in Q2 2019 and a $15 million gain recorded in Q1 2019 from the settlement of a contingency related to the deconsolidation of GRAIL in 2017.
Provision for Income Taxes
(Dollars
in millions)
Q2 2019
Q2 2018
Change
% Change
YTD 2019
YTD 2018
Change
%
Change
Income before income taxes
$
346
$
232
$
114
49
%
$
580
$
453
$
127
28
%
Provision
for income taxes
53
32
21
66
63
56
7
13
Consolidated
net income
$
293
$
200
$
93
47
%
$
517
$
397
$
120
30
%
Effective
tax rate
15.4
%
13.9
%
10.8
%
12.3
%
Our
effective tax rate was 15.4% for Q2 2019 compared to 13.9% in Q2 2018. The variances from the U.S. federal statutory tax rate of 21% in Q2 2019 and Q2 2018 were primarily attributable to the mix of earnings in jurisdictions with 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 10.8% for the first half of 2019 compared to 12.3% for
the first half of 2018. For the first half of 2019, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the UnitedKingdom, a discrete tax benefit related to uncertain tax positionsrecorded in Q1 2019, and excess tax benefits related to share-based compensation. For the first half of 2018, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory rates than the U.S. federal statutory rate, such as in Singapore and the United Kingdom, and the discrete benefit associated with the
recognition of prior year losses from our investment in Helix.
Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” in Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018. As a result of the Ninth Circuit decision on June 7, 2019 to overturn a U.S. Tax Court opinion provided in
Q3 2015 that stock compensation should be excluded from cost sharing charges, we anticipate our effective tax rate may be adversely impacted. The final resolution of this case is uncertain, and we are still evaluating, but if it is determined that the outcome of this decision is more likely than not, we anticipate a discrete tax expense of less than $30 million could be recorded.
Liquidity and Capital Resources
At June 30, 2019, we had approximately $1.9 billion in cash and cash equivalents, of which
approximately $476 million was held by our foreign subsidiaries. Cash and cash equivalents increased by $0.8 billion from December 30, 2018, due to the factors described in the “Cash Flow Summary” below. Our primary source of liquidity, other than our holdings of cash, cash equivalents and investments, has been cash flows from operations and, from time to time, issuances of debt. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.
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 June 30, 2019, we had $1.2 billion in short-term investments. Our short-term investments are predominantly comprised of marketable securities consisting of U.S. government-sponsored entities, corporate debt securities, and U.S. Treasury securities.
Our 2019 Notes matured on June 15, 2019, by which time the $633 million in principal had been converted and was paid in cash. The excess of the conversion value over the principal amount was paid in shares of common stock. Our convertible senior notes due in 2021 and 2023 were not convertible as of June 30,
2019.
We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities are sufficient to fund our near-term capital and operating needs for at least the next 12 months including the pending acquisition of PacBio for a cash price of approximately $1.2 billion. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:
•
support of commercialization efforts related to our current and future products, including
expansion of our direct sales force and field support resources both in the United States and abroad;
•
acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
•
the continued advancement of research and development efforts;
•
potential
strategic acquisitions and investments;
•
repayment of debt obligations;
•
the expansion needs of our facilities, including costs of leasing and building out additional facilities; and
•
repurchases of our outstanding common stock.
On
February 6, 2019, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $550 million of outstanding common stock. The repurchases may be
completed under a 10b5-1 plan or at management’s discretion. Authorizations to repurchase $488 million of our common stock remained available as of June 30, 2019.
We
had $57 million remaining in our capital commitment to a venture capital investment fund as of June 30, 2019 that is callable through April 2026. In July 2019, we invested in a second venture capital investment fund with a maximum capital commitment of up to $160 million that is callable through July 2029.
We expect that our revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
•
our
ability to successfully commercialize and further develop our technologies and create innovative products in our markets;
•
scientific progress in our research and development programs and the magnitude of those programs;
•
competing technological and market developments; and
•
the need to enter
into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.
Cash Flow Summary
(In millions)
YTD 2019
YTD 2018
Net cash provided by operating activities
$
341
$
550
Net
cash provided by (used in) investing activities
1,067
(525
)
Net cash (used in) provided by financing activities
(609
)
97
Effect of exchange rate
changes on cash and cash equivalents
—
(3
)
Net increase in cash and cash equivalents
$
799
$
119
Operating
Activities
Net cash provided by operating activities in the first half of 2019 primarily consisted of net income of $517 million less net adjustments of $19 million and net changes in operating assets and liabilities of $157 million. The primary adjustments to net income included unrealized gains on marketable equity securities of $104 million, payment of the accreted debt discount related to our 2019 Notes of $84 million, and gains on deconsolidation of $54 million, partially offset by share-based compensation of $99 million,depreciation and amortization expenses of $96 million,
accretion of debt discount of $27 million, and deferred income taxes of $6 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increases in inventory, prepaid expenses and other current assets, and other assets and decreases in accrued liabilities, accounts payable, and other long-term liabilities, partially offset by decreases in accounts receivable.
Net cash provided by operating activities in the first half of 2018 consisted of net income of $397 million plus net adjustments of $170 million, partially offset by net changes in operating assets and liabilities of $17 million.
The primary adjustments to net income included depreciation and amortization expenses of $84 million, share-based compensation of $98 million, and accretion of debt discount of $16 million, partially offset by deferred income taxes of $22 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by an increase in inventory and a decrease in other long-term liabilities, partially offset by an increase in accrued liabilities and a decrease in accounts receivable.
Investing Activities
Net cash provided by investing activities totaled $1,067
million in the first half of 2019. We purchased $393 million of available-for-sale securities and $1,590 million of our available-for-sale securities matured or were sold during the period. We received $15 million in proceeds from the settlement of a contingency related to the deconsolidation of GRAIL in 2017. We invested $103 million in capital expenditures, primarily associated with our investment in facilities and paid $13 million for strategic investments. We removed $29 million in cash from our balance sheet as a result of the deconsolidation of Helix.
Net cash used in investing activities in the
first half of 2018 totaled $525 million. We purchased $1,137 million of available-for-sale securities and $888 million of our available-for-sale securities matured or were sold during the period. Our
net cash paid for acquisitions was $100 million, and we invested $167 million in capital expenditures, primarily associated with our investment in facilities.
Financing
Activities
Net cash used in financing activities in the first half of 2019 totaled $609 million. We used $550 million to repay financing obligations primarily related to our 2019 Notes. We used $63 million to repurchase our common stock and $26 million to pay taxes related to net share settlement of equity awards. We received $30 million in proceeds from the issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan.
Net cash provided by financing activities in the first
half of 2018 totaled $97 million. We received $22 million in proceeds from issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan, and contributions from noncontrolling interest owners were $92 million. We used $15 million to pay taxes related to net share settlement of equity awards.
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the first half of 2019, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income and net income, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described
in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the first half of 2019.
Recent Accounting Pronouncements
For summary
of recent accounting pronouncements applicable to our condensed consolidated financial statements, see note “1. Summary of Significant Accounting Policies” in Part I, Item 1, Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “anticipate,”“intend,”“plan,”“goal,”“seek,”“believe,”“continue,”“project,”“estimate,”“expect,”“strategy,”“future,”“likely,”“may,”“potential,”“predict,” should,” “will,” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements we make regarding:
•
our expectations as to our future financial performance, results of operations, cash flows or other operational results or metrics;
•
our
expectations regarding the launch of new products or services;
•
the benefits that we expect will result from our business activities and certain transactions we have completed, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures;
•
our expectations of the effect on our financial condition of claims, litigation, contingent liabilities, and governmental investigations, proceedings, and regulations;
•
our
strategies or expectations for product development, market position, financial results, and reserves;
our expectations regarding the integration of any acquired technologies with our existing technology; and
•
other expectations, beliefs,
plans, strategies, anticipated developments, and other matters that are not historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause
our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•
our expectations and beliefs regarding prospects and growth for our business and the markets in which we operate;
•
the timing and mix of customer orders among our products and services;
•
challenges
inherent in developing, manufacturing, and launching new products and services, including expanding manufacturing operations and reliance on third-party suppliers for critical components;
•
the impact of recently launched or pre-announced products and services on existing products and services;
•
our ability to develop and commercialize our instruments and consumables, to deploy new products, services, and applications, and to expand the markets for our technology platforms;
•
our
ability to manufacture robust instrumentation and consumables;
•
our ability to identify and integrate acquired technologies, products, or businesses successfully;
•
our expectations regarding the pending acquisition of Pacific Biosciences of California, Inc.;
•
the assumptions underlying our
critical accounting policies and estimates;
•
our assessments and estimates that determine our effective tax rate;
•
our assessments and beliefs regarding the outcome of pending legal proceedings and any liability, that we may incur as a result of those proceedings;
•
uncertainty, or adverse economic
and business conditions, including as a result of slowing or uncertain economic growth in the United States or worldwide; and
•
other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, or in information disclosed in public conference calls, the date and time of which are released beforehand.
The
foregoing factors should be considered together with other factors detailed in our filings with the Securities and Exchange Commission, including our most recent filings on Forms 10-K and 10-Q, or in information disclosed in public conference calls, the date and time of which are released beforehand. We undertake no obligation, and do not intend, to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, or to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, in each case whether
as a result of new information, future developments, or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There were no substantial changes to our market risks in the six months ended June 30, 2019, when compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 30,
2018.
Item 4. Controls and Procedures.
We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.
Based on management’s evaluation (under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO)), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
During
Q2 2019, we continued to monitor and evaluate the design and operating effectiveness of key controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.
See discussion of legal proceedings in note “7. Legal Proceedings” in Part I, Item 1, Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Item 1A. Risk Factors.
Our business is subject to various risks, including those described in Item 1A of our Annual Report on Form 10-K for
the fiscal year ended December 30, 2018, which we strongly encourage you to review. There have been no material changes from the risk factors disclosed in Item 1A of our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
None during
the quarterly period ended June 30, 2019.
Purchases of Equity Securities by the Issuer
None during the quarterly period ended June 30, 2019.
Certification of Sam A. Samad pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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.
