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Income
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Equity
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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 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
þ
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
(Do
not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. ☐
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
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 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 integrate acquired technologies, products, or businesses successfully;
•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 “Risk Factors” within the Business and Market Information
section of our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, 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.
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.
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 29, 2019, from which
the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results could differ from those estimates.
iThe unaudited condensed
consolidated financial statements include our accounts, our wholly-owned subsidiaries, majority-owned or controlled companies, and variable interest entities (VIEs) for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
Fiscal Year
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 2020 and Q2 2019 refer to the three months ended June 28, 2020 and June 30, 2019, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2020 and 2019 refer to the six months ended June 28, 2020 and June 30, 2019, respectively, which were both 26 weeks.
Significant Accounting Policies
During the first half of 2020, there were no changes to our significant accounting policies as described in our Annual Report on Form
10-K for the fiscal year ended December 29, 2019, except as described in Recently Adopted Accounting Pronouncements below.
Recently Adopted Accounting Pronouncements
iIn June 2016, the
FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including
trade receivables and available-for-sale
debt securities. We adopted the standard on its effective date in the first quarter of 2020 using a modified retrospective approach. The cumulative effect of applying the new credit loss standard was not material and, therefore, did not result in an adjustment to retained earnings. There was no material difference to the condensed consolidated financial statements in YTD 2020 due to the adoption of ASU 2016-13.
In accordance with ASU 2016-13, we no longer evaluate whether our available-for-sale debt securities in an unrealized loss position are other than temporarily impaired. Instead, we assess whether such unrealized loss positions are credit-related. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in interest income through an allowance account. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive income
(loss). We estimate our allowance for credit losses on our trade receivables as described in our Accounts Receivable policy, below.
Accounts Receivable
iTrade accounts receivable are considered past due based on the contractual payment terms. We reserve specific receivables when collectibility is no longer probable. We also reserve a percentage of our trade receivable balance based on collection history and current economic trends that we expect will impact the level of
credit losses over the life of our receivables. These reserves are re-evaluated on a regular basis and adjusted, as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.
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 Holdings I, LLC’s (Helix) deconsolidation, per-share losses of Helix were included in the consolidated basic and diluted earnings per share computations based on our share of Helix’s securities.
Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount
of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
i
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share:
In
millions
Q2 2020
Q2 2019
YTD 2020
YTD 2019
Weighted average shares outstanding
i147
i147
i147
i147
Effect
of potentially dilutive common shares from:
Equity awards
i1
i1
i1
i1
Convertible
senior notes
i—
i1
i—
i1
Weighted
average shares used in calculating diluted earnings per share
i148
i149
i148
i149
Potentially
dilutive shares excluded from calculation due to anti-dilutive effect
—
—
i1
—
/
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, and development and licensing agreements.
(1)
Region includes revenue from China, Taiwan, and Hong Kong.
/
Performance Obligations
We regularly enter into contracts with multiple performance obligations. Most performance obligations are generally satisfied within a short time frame, approximately three to six months, after the contract execution date. As of June 28, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $i784
million, of which approximately i85% is expected to be converted to revenue in the next itwelve months, and the remainder thereafter.
Contract liabilities, which consist of deferred revenue and customer deposits, as of June 28, 2020 and December 29, 2019 were $i196 million and $i209
million, respectively, of which the short-term portions of $i153 million and $i167 million, respectively, were recorded in accrued
liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q2 2020 and YTD 2020 included $i38 million and $i106
million, respectively, of previously deferred revenue that was included in contract liabilities as of December 29, 2019.
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 28, 2020, were as follows:
In
millions
Estimated Fair Value
Due within one year
$
i525
After one but within five years
i797
Total
$
i1,322
/
We
have the ability, if necessary, to liquidate any of our cash equivalents and short-term investments to meet our liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying condensed consolidated balance sheets.
Strategic Investments
Marketable Equity Securities
As of June 28, 2020 and December 29, 2019, the fair value of our marketable equity securities, included in short-term investments, totaled $i176
million and $i106 million, respectively. Total unrealized gains on our marketable equity securities, included in other income, net, were $i66 million
and $i69 million in Q2 2020 and YTD 2020, respectively, and $i102 million and $i104 million
in Q2 2019 and YTD 2019, respectively.
Non-Marketable Equity Securities
As of June 28, 2020 and December 29, 2019, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $i305
million and $i220 million, respectively.
One of our 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 $i250
million and $i190 million as of June 28, 2020 and December 29, 2019, respectively, recorded in other assets. During Q2 2020, we made an additional $i60
million investment in this VIE.
Revenue recognized from transactions with our strategic investees was $i10 million and $i23
million for Q2 2020 and YTD 2020, respectively, and $i18 million and $i34 million for Q2 2019 and YTD 2019, respectively.
We invest in itwo venture capital investment funds (the Funds) with capital commitments of $i100
million, callable through April 2026, and up to $i160 million, callable through July 2029, respectively, of which $i44 million and up to $i143
million, respectively, remained callable as of June 28, 2020. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $i79 million and $i53
million as of June 28, 2020 and December 29, 2019, respectively.
Previously Consolidated Variable Interest Entity
Helix Holdings I, LLC (Helix)
In July 2015, we obtained a i50% voting equity ownership interest in Helix. At that time, we determined
that we had unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and, as a result, we were deemed to be the primary beneficiary of Helix and were required to consolidate Helix. The operations of Helix are included in the accompanying condensed consolidated statements of income for Q2 2019 and the first half of 2019, up to the date of the deconsolidation, described below. During this period, we absorbed i50% of Helix’s losses.
On
April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, Helix. As part of the agreement, (i) Helix repurchased all of our outstanding equity interests in exchange for a contingent value right with a i7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events, (ii) we ceased having a controlling financial interest in Helix, including unilateral power over one of the activities that most significantly impacts the economic performance of Helix, (iii) we were relieved of any potential obligation
to redeem certain noncontrolling interests, and (iv) we no longer have representation on Helix’s board of directors. As a result, we deconsolidated Helix’s financial statements effective April 25, 2019 and recorded a gain on deconsolidation of $i39 million in other income, net. The gain on deconsolidation included (i) the contingent value right received from Helix recorded at a fair value of approximately $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.
During Q2 2020 and YTD 2020, changes in the fair value of the contingent value right resulted in unrealized gains of $i8 million and $i5
million, respectively, included in other income, net. During Q2 2019, such changes resulted in an unrealized loss of $i3 million.
Derivative Assets Related to Terminated Acquisition
On November 1, 2018, we entered into an Agreement and Plan of Merger (the Merger
Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $i1.2 billion (or $i8.00 per share). On
January 2, 2020, we entered into an agreement to terminate the Merger Agreement (the Termination Agreement). Pursuant to the Termination Agreement, we made a cash payment to PacBio of $i98 million on January 2, 2020, which represented the Reverse Termination Fee (as defined in the Merger
Agreement). The Reverse Termination Fee is repayable, without interest, to us if PacBio enters into a definitive agreement providing for, or consummates, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement), and such transaction is consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction. In addition, we made cash payments to PacBio of $i18 million in Q4 2019, pursuant to Amendment
No. 1 to the Merger Agreement, and $i34 million in Q1 2020, pursuant to the Termination Agreement, collectively referred to as the Continuation Advances. Up to the $i52
million of Continuation Advances is repayable without interest to us if, within two years of March 31, 2020, PacBio enters into a Change of Control Transaction or raises at least $i100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio).
The potential repayments of the Continuation Advances and Reverse Termination Fee meet the definition
of derivative assets and are recorded at fair value. The $i92 million difference between the $i132 million
in cash paid during Q1 2020 for the Continuation Advances and Reverse Termination Fee and the $i40 million fair value of these derivative assets on the payment dates was recorded as selling, general and administrative expenses. Changes in the fair value of the derivative assets are included in other income, net, and totaled $i11
million and $i15 million in unrealized losses in Q2 2020 and YTD 2020, respectively.
Derivative
assets related to terminated acquisition
i—
i—
i36
i36
i—
i—
i10
i10
Deferred
compensation plan assets
i—
i48
i—
i48
i—
i48
i—
i48
Total
assets measured at fair value
$
i2,309
$
i705
$
i69
$
i3,083
$
i2,456
$
i696
$
i39
$
i3,191
Liabilities:
Deferred
compensation plan liability
$
i—
$
i46
$
i—
$
i46
$
i—
$
i46
$
i—
$
i46
/
Our
available-for-sale securities consist of highly-liquid, investment-grade debt securities and marketable equity securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our marketable equity securities are measured at fair value based on quoted trade prices in
active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. We elected the fair value option to measure the contingent value right received from Helix. The fair value of our contingent value right, included in other assets, is derived using a Monte Carlo simulation. The derivative assets related to the terminated acquisition of PacBio are financial instruments measured at fair value, included in other assets. Significant
estimates and assumptions required for these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.
Unamortized
discount of liability component of convertible senior notes
(i105)
(i126)
Net
carrying amount of liability component of convertible senior notes
i1,162
i1,141
Less:
current portion
(i503)
—
Long-term debt
$
i659
$
i1,141
Carrying
value of equity component of convertible senior notes, net of debt issuance costs
$
i213
$
i213
Fair
value of convertible senior notes outstanding (Level 2)
$
i1,563
$
i1,549
Weighted-average
remaining amortization period of discount on the liability component of convertible senior notes
i2.8 years
i3.2
years
/
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 i100% 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 28, 2020 and had no dilutive impact
during YTD 2020. If the 2023 Notes were converted as of June 28, 2020, 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 market price of our common stock met the stock trading price conversion requirement of $i330.64
and the 2021 Notes became convertible on July 1, 2020, and continue to be convertible through September 30, 2020. The potential dilutive impact of the 2021 Notes has been included in our calculation of diluted earnings per share for Q2 2020 and YTD 2020. If the 2021 Notes were converted as of June 28, 2020, the if-converted value would exceed the principal amount by $i211
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 was i2.9%. The 2019 Notes matured on June 15, 2019, and the excess of the conversion value over the principal amount was paid in i0.4
million shares of common stock.
i
5. STOCKHOLDERS’ EQUITY
As of June 28, 2020, approximately i4.1
million shares remained available for future grants under the 2015 Stock 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.
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 2020, approximately i0.1
million shares were issued under the ESPP. As of June 28, 2020, there were approximately i13.4 million shares available for issuance under the ESPP.
Share Repurchases
On February 5, 2020,
our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $i750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During YTD 2020, we repurchased i1.1 million shares
for approximately $i330 million. Authorizations to repurchase approximately $i420
million of our common stock remained available as of June 28, 2020.
Share-based
compensation expense reported in our condensed consolidated statements of income was as follows:
In millions
Q2
2020
Q2 2019
YTD 2020
YTD 2019
Cost of product revenue
$
i3
$
i5
$
i7
$
i10
Cost
of service and other revenue
i1
i1
i2
i2
Research
and development
i12
i16
i27
i34
Selling,
general and administrative
i1
i26
i19
i53
Share-based
compensation expense before taxes
i17
i48
i55
i99
Related
income tax benefits
(i6)
(i11)
(i15)
(i21)
Share-based
compensation expense, net of taxes
$
i11
$
i37
$
i40
$
i78
/
i
The
assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the ESPP during YTD 2020 were as follows:
Employee Stock Purchase Rights
Risk-free interest rate
i1.46%
- i2.56%
Expected volatility
i30%
- i37%
Expected term
i0.5
- i1.0 year
Expected dividends
i0
%
Weighted-average
grant-date fair value per share
$
i77.19
/
As
of June 28, 2020, approximately $i378 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 i2.4
years.
Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in Q2 2020, noting ino
impairment.
(a)
iChanges in the reserve for product warranties were as follows:
In
millions
Q2 2020
Q2 2019
YTD 2020
YTD 2019
Balance at beginning of period
$
i12
$
i16
$
i14
$
i19
Additions
charged to cost of product revenue
i2
i6
i5
i9
Repairs
and replacements
(i4)
(i6)
(i9)
(i12)
Balance
at end of period
$
i10
$
i16
$
i10
$
i16
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./
Derivatives
iWe
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 28, 2020, we had foreign exchange forward contracts
in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, Chinese Yuan Renminbi, and British pound. As of June 28, 2020 and December 29, 2019, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $i321 million and $i252
million, respectively.
We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assess, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history,
scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations, and/or cash flows.
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. The effective tax rates for Q2 2020 and YTD 2020 were i71.6% and i35.7%,
respectively. In Q2 2020, the increase from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax expense of $i62 million related to the valuation allowance recorded against the deferred tax asset for California research and development credits, and discrete tax expense of $i28 million
related to the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments, partially offset by 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 2020, the increase from the U.S. federal statutory tax rate was primarily attributable to the items noted above for Q2 2020, partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition and tax benefits related to share-based compensation.
/
i
9.
SEGMENT INFORMATION
We have ione reportable segment, Core Illumina, as of June 28, 2020, which relates to Illumina’s core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix. See note “3. Investments and Fair Value Measurements”
for further details.
Core Illumina:
Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of our previously consolidated VIE, Helix.
Helix:
Helix was established to enable individuals to explore their genetic information by providing affordable sequencing and database services for consumers through third-party partners, driving the creation of an ecosystem of consumer applications.
iCore
Illumina sells products and provides services to Helix in accordance with contractual agreements between the entities.
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.
•Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
•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 2019 and YTD 2019 can 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 June 30, 2019.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please 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 December 29, 2019. Operating results are not necessarily indicative of results that may occur in future periods.
MANAGEMENT’S 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.
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
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. As a result, we experienced a decline in our sales and results of operations during Q2 2020 and YTD 2020. We expect the COVID-19 pandemic to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable
to predict. As such, we will provide an update on our Q2 2020 and YTD 2020 results only, without discussion about our expectations for the rest of the year.
Consolidated financial highlights for YTD 2020 included the following:
•Revenue decreased 11% in YTD 2020 to $1,492 million compared to $1,684 million in YTD 2019 primarily due to decreased shipments of sequencing consumables and instruments to our customers impacted by the effects of the COVID-19 pandemic.
•Gross profit as a percentage of revenue (gross margin) was 70.2% in YTD 2020 compared to 68.7% in YTD 2019. The gross margin increase was driven primarily by an increase in sequencing consumables as a percentage of total revenue,
which generate higher gross margins, and an increase in revenue from development and licensing agreements. Our gross margin depends on many 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 was 19.1% in YTD 2020 compared to 24.3% in YTD 2019. The decrease was due to an increase in operating expenses as a percentage of revenue, primarily due to the decrease in revenue in YTD 2020 compared to YTD 2019, offset partially by an increase in gross margin.
•Our
effective tax rate was 35.7% in YTD 2020 compared to 10.8% in YTD 2019. In YTD 2020, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments. This was partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition, the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, and tax benefits related to share-based compensation.
•We ended Q2 2020 with cash, cash equivalents, and short-term
investments totaling $3.3 billion as of June 28, 2020, of which approximately $464 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.
Q2 2020
Q2 2019
YTD 2020
YTD 2019
Revenue:
Product
revenue
83.3
%
84.0
%
82.3
%
81.5
%
Service and other revenue
16.7
16.0
17.7
18.5
Total
revenue
100.0
100.0
100.0
100.0
Cost of revenue:
Cost of product revenue
24.0
23.4
21.8
22.4
Cost
of service and other revenue
7.2
7.0
7.1
7.8
Amortization of acquired intangible assets
1.1
1.2
0.9
1.1
Total
cost of revenue
32.3
31.6
29.8
31.3
Gross profit
67.7
68.4
70.2
68.7
Operating
expense:
Research and development
24.5
19.8
20.8
19.9
Selling, general and administrative
28.0
24.1
30.3
24.5
Total
operating expense
52.5
43.9
51.1
44.4
Income from operations
15.2
24.5
19.1
24.3
Other
income (expense):
Interest income
1.1
2.4
1.4
2.6
Interest expense
(1.8)
(1.8)
(1.5)
(1.8)
Other
income, net
11.5
16.2
3.9
9.3
Total other income, net
10.8
16.8
3.8
10.1
Income
before income taxes
26.0
41.3
22.9
34.4
Provision for income taxes
18.6
6.3
8.2
3.7
Consolidated
net income
7.4
35.0
14.7
30.7
Add: Net loss attributable to noncontrolling interests
—
0.3
—
0.7
Net
income attributable to Illumina stockholders
7.4
%
35.3
%
14.7
%
31.4
%
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. References to Q2 2020 and Q2 2019 refer to the three months ended
June 28, 2020 and June 30, 2019, respectively, which were both 13 weeks, and references to year-to-date (YTD) of 2020 and 2019 refer to the six months ended June 28, 2020 and June 30, 2019, respectively, which were both 26 weeks.
Service and other revenue primarily consists of revenue generated from genotyping and sequencing services, instrument service contracts, and development and licensing agreements. Total revenue relates primarily to Core Illumina for all periods presented.
The decreases in consumables revenue in Q2 2020 and YTD 2020 were primarily due to decreases in sequencing consumables revenue of $110 million and $38 million, respectively, driven primarily by decreased shipments to our customers impacted by the effects of the COVID-19 pandemic, which more than offset the positive impacts from the growth in instrument installed base. Microarray consumables revenue also decreased in Q2 2020 and YTD 2020 due to the COVID-19
pandemic and ongoing weakness in the direct-to-consumer (DTC) market. Instruments revenue decreased in Q2 2020 and YTD 2020 primarily due to decreases in sequencing instruments revenue of $41 million and $68 million, respectively, which were driven by decreased shipments to our customers impacted by the effects of the COVID-19 pandemic. We experienced fewer shipments across our portfolio in Q2 2020 and YTD 2020, with the exception of our NextSeq 2000 platform, which launched in Q1 2020. Service and other revenue decreased in Q2 2020 and YTD 2020, primarily due to decreased revenue from genotyping and sequencing services. The YTD 2020 decrease in service and other revenue was partially offset by increased revenue from development and licensing agreements.
Gross Margin
Dollars
in millions
Q2 2020
Q2 2019
Change
% Change
YTD 2020
YTD 2019
Change
% Change
Gross profit
$
428
$
573
$
(145)
(25)%
$
1,047
$
1,157
$
(110)
(10)%
Gross
margin
67.7
%
68.4
%
70.2
%
68.7
%
The gross margin decrease in Q2 2020 was driven primarily by lower revenue, which generated less fixed cost leverage, and increased freight costs attributable to the COVID-19 pandemic. The
gross margin increase in YTD 2020 was primarily driven by an increase in sequencing consumables as a percentage of total revenue, which generate higher gross margins, and an increase in revenue from development and licensing agreements.
Operating Expense
Dollars
in millions
Q2 2020
Q2 2019
Change
% Change
YTD 2020
YTD 2019
Change
% Change
Research and development
$
155
$
166
$
(11)
(7)
%
$
311
$
335
$
(24)
(7)
%
Selling,
general and administrative
177
202
(25)
(12)
451
412
39
9
Total
operating expense
$
332
$
368
$
(36)
(10)
%
$
762
$
747
$
15
2
%
Core
Illumina R&D expense decreased by $9 million, or 5%, in Q2 2020 and by $15 million, or 5%, in YTD 2020 primarily due to decreases in outside services, performance-based compensation, and travel expenses. Helix R&D expense decreased by $2 million in Q2 2020 and by $9 million in YTD 2020 due to its deconsolidation on April 25, 2019.
Core Illumina SG&A expense decreased by $22 million, or 11%, in Q2 2020, primarily due to decreases in travel expenses, acquisition-related expenses, and performance-based compensation, partially
offset by an increase in other compensation related expenses. Core Illumina SG&A expense increased by $48 million, or 12%, in YTD 2020, primarily due to expenses related to the Reverse Termination Fee and Continuation Advances paid to PacBio in Q1 2020, partially offset by decreases in travel expenses and performance-based compensation. Helix SG&A expense decreased by $3 million in Q2 2020 and by $9 million in YTD 2020 due to its deconsolidation on April 25, 2019.
Other Income, Net
Dollars
in millions
Q2 2020
Q2 2019
Change
% Change
YTD 2020
YTD 2019
Change
% Change
Interest income
$
7
$
20
$
(13)
(65)
%
$
21
$
43
$
(22)
(51)
%
Interest
expense
(11)
(15)
4
(27)
(22)
(30)
8
(27)
Other
income, net
73
136
(63)
(46)
58
157
(99)
(63)
Total
other income, net
$
69
$
141
$
(72)
(51)
%
$
57
$
170
$
(113)
(66)
%
Other
income, net, relates primarily to Core Illumina for all periods presented.
Interest income decreased in Q2 2020 and YTD 2020 as a result of lower yields on our short-term debt securities and lower cash and cash-equivalent balances. Interest expense consisted primarily of accretion of discount on our convertible senior notes. The decreases in other income, net, in Q2 2020 and YTD 2020 were primarily due todecreased unrealized gains on our marketable equity securities, which included a $92 million unrealized gain recorded in Q2 2019 from a strategic investment that completed an initial public offering, a $39 million gain recorded on the deconsolidation of Helix in Q2 2019, and decreases in the fair value of our derivative assets related to the terminated PacBio acquisition.The YTD 2020 decrease in
other income, net, is also due to a $15 million gain recorded in Q1 2019 from the settlement of a contingency related to the deconsolidation of GRAIL in 2017.
Our effective tax rate was 71.6% in Q2 2020 compared to 15.4% in Q2 2019. The variance from the U.S. federal statutory tax rate of 21% in Q2 2020 was primarily attributable
to discrete tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments, 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. In Q2 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.
In evaluating our ability to realize the deferred tax asset for California research and development credits we considered all available positive and negative evidence, including operating results
and forecasted ranges of future taxable income, and determined it is more likely than not that our California research and development credits will not be realized.As a result, a discrete tax expense of $62 million was recorded in Q2 2020 related to establishing a valuation allowance against the deferred tax asset for California research and development credits. We will continue to monitor all available positive and negative evidence in assessing the realization of the deferred tax asset for California research and development credits in the future. In the event there is a need to release the valuation allowance a tax benefit will be recorded.
On June 22, 2020, the Supreme Court denied petition for certiorari for Altera Corporation v. Commissioner. This effectively means the Ninth Circuit decision that
stock-based compensation must be included in cost sharing is final. As a result, a discrete tax expense of $28 million was recorded in Q2 2020.
Our effective tax rate was 35.7% in YTD 2020 compared to 10.8% in YTD 2019. In YTD 2020, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments. This was partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition, the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, and
tax benefits related to share-based compensation. In YTD 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.
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 and Market Information section of our Annual Report on Form 10-K
for the fiscal year ended December 29, 2019.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 2020, we had approximately $1.8 billion in cash and cash equivalents, of which approximately $464 million was held by our foreign subsidiaries. Cash and cash equivalents decreased by $0.3 billion from December 29, 2019, 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 28, 2020, we had $1.5 billion in short-term investments. Our short-term investments are predominantly comprised of marketable
securities consisting of debt securities in U.S. government-sponsored entities, corporate debt securities, and U.S. Treasury securities.
Our convertible senior notes due in 2021, with an aggregate principal amount of $517 million, became convertible on July 1, 2020, and continue to be convertible through September 30, 2020. Our convertible senior notes due in 2023 were not convertible.
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. 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;
•the expansion needs of our facilities, including costs of leasing and building out additional facilities;
and
•repurchases of our outstanding common stock.
On February 5, 2020, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. Authorizations to repurchase $420 million of our common stock remained available as of June 28, 2020.
We had $44 million and up to $143 million, respectively, remaining in our capital commitments to two venture capital investment funds as of June 28, 2020 that are callable through
April 2026 and July 2029, respectively.
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 2020
YTD 2019
Net cash provided by operating activities
$
521
$
341
Net
cash (used in) provided by investing activities
(455)
1,067
Net cash used in financing activities
(334)
(609)
Effect of exchange rate changes on cash and cash equivalents
(4)
—
Net
(decrease) increase in cash and cash equivalents
Net cash provided by operating activities in YTD 2020 primarily consisted of net income of $220 million plus net adjustments of $237 million, and net changes in operating
assets and liabilities of $64 million. The primary adjustments to net income included depreciation and amortization expenses of $90 million, a loss on derivative assets related to a terminated acquisition of $107 million, share-based compensation of $55 million, deferred income taxes of $47 million, and accretion of debt discount of $19 million, partially offset by and unrealized gains on marketable equity securities of $69 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by a decrease in accounts receivable and an increase in other long-term liabilities, partially offset by increases in inventory and other assets and decreases in accrued liabilities and accounts payable.
Investing Activities
Net cash used in investing activities totaled $455 million in YTD 2020. We purchased $547
million of available-for-sale securities and $505 million of our available-for-sale securities matured or were sold during the period. We paid $132 million for derivative assets, consisting of a $98 million Reverse Termination Fee and $34 million in Continuation Advances, associated with the terminated acquisition of PacBio. We purchased strategic investments of $107 million and completed an acquisition for total cash consideration of $95 million, net of cash acquired. We invested $79 million in capital expenditures, primarily associated with our investment in facilities.
Financing Activities
Net cash used in financing activities in YTD 2020 totaled $334 million. We used $330 million to repurchase our common stock, including commissions, and $38 million to pay taxes related to net share settlement of equity awards. We
received $34 million in proceeds from the sale of shares under our employee stock purchase plan and the issuance of common stock through the exercise of stock options.
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 “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 December 29, 2019 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 the first half of 2020.
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 2020, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no substantial changes to our market
risks in the first half of 2020, 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 December 29, 2019.
OTHER KEY INFORMATION
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 2020, 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 and Market Information Section
of our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, 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 factor could adversely affect our operating results and stock price:
We are unable to predict the extent to which the COVID-19 pandemic will adversely impact our business operations and financial performance.
The
COVID-19 pandemic caused by the SARS-CoV-2 virus 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. As a result, we experienced a decline in our sales and results of operations during Q2 2020 and YTD 2020. The magnitude and duration of the resulting decline in business activity cannot currently be estimated with any degree of certainty and will (1) negatively impact the demand for our products and services, (2) restrict our sales operations, marketing efforts, and customer field support, (3) impede the shipping and delivery of our products to customers (4) disrupt our supply chain, and (5) limit our ability to conduct research and product development and other important business activities. We continue to monitor our operations and applicable government recommendations, and we have
made modifications to our normal operations because of the COVID-19 pandemic. In the U.S. and in most other key markets, we are requiring most of our employees to work remotely, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our laboratories and manufacturing facilities, and many may continue to work remotely for an indefinite period of time. Remote working arrangements could impact employees’ productivity and morale. In addition, in response to the COVID-19 pandemic, certain industry and customer events have been canceled, postponed or moved to virtual-only experiences, and we may further alter, postpone or cancel additional customer, employee or industry events in the future. We may incur increased costs and experience delays in sales, purchases, deliveries and other business activities associated with the invocation by customers, suppliers, service providers, and other business partners of contractual
provisions they may claim are triggered by the COVID-19 pandemic. We expect the COVID-19 pandemic to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets which may adversely impact the fair value of our marketable securities.
SHARE REPURCHASES AND SALES
Purchases of Equity Securities by the Issuer
On February 5, 2020, our Board of Directors authorized a share repurchase
program, which superseded all prior and available repurchase authorizations, to repurchase $750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. Shares repurchased in open-market transactions pursuant to this program during YTD 2020 were as follows:
In thousands, except price per share
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
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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.
