Illumina(ILMN) - 2025 Q2 - Quarterly Report

Condensed Consolidated Financial Statements This section presents the company's financial position, performance, and cash flows for the reported periods, along with detailed explanatory notes - The financial statements are prepared in accordance with U.S. GAAP for interim information and do not include all footnotes required for complete financial statements[33] - Management's estimates and assumptions affect reported amounts, and actual results could differ[33] Condensed Consolidated Balance Sheets Illumina's balance sheet as of June 30, 2024, shows a significant decrease in total assets and stockholders' equity compared to December 31, 2023, primarily driven by the GRAIL Spin-Off and related impairments. Current liabilities increased due to the current portion of term debt Balance Sheet Highlights (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $920 | $1,048 | | Total current assets | $2,459 | $2,609 | | Goodwill | $1,079 | $2,545 | | Intangible assets, net | $278 | $2,993 | | Total assets | $6,081 | $10,111 | | Term debt, current portion | $744 | $— | | Total current liabilities | $2,208 | $1,570 | | Total stockholders' equity | $1,436 | $5,745 | Condensed Consolidated Statements of Operations For Q2 and YTD 2024, Illumina reported a substantial net loss, primarily due to significant goodwill and intangible impairment charges, despite a slight decrease in total revenue Consolidated Statements of Operations (in millions, except per share) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :-------------------------------- | :------ | :------ | :------- | :------- | | Total revenue | $1,112 | $1,176 | $2,188 | $2,263 | | Gross profit | $721 | $732 | $1,388 | $1,386 | | Goodwill and intangible impairment | $1,886 | $— | $1,889 | $— | | Loss from operations | $(1,637) | $(88) | $(1,749) | $(152) | | Net loss | $(1,988) | $(234) | $(2,114) | $(231) | | Basic loss per share | $(12.48) | $(1.48) | $(13.28) | $(1.46) | Condensed Consolidated Statements of Comprehensive Loss Illumina's comprehensive loss for Q2 and YTD 2024 significantly increased compared to the prior year, primarily reflecting the substantial net loss Consolidated Statements of Comprehensive Loss (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :---------------------- | :------ | :------ | :------- | :------- | | Net loss | $(1,988) | $(234) | $(2,114) | $(231) | | Total comprehensive loss | $(1,986) | $(221) | $(2,099) | $(222) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased significantly from December 31, 2023, to June 30, 2024, primarily due to the net loss incurred and the impact of the GRAIL Spin-Off, which resulted in a substantial reduction in additional paid-in capital Changes in Stockholders' Equity (in millions) | Metric | December 31, 2023 | June 30, 2024 | | :-------------------------- | :---------------- | :------------ | | Additional paid-in capital | $9,555 | $7,347 | | Accumulated deficit | $(19) | $(2,133) | | Total stockholders' equity | $5,745 | $1,436 | - The Spin-Off of GRAIL resulted in a derecognition of $2,399 million from additional paid-in capital[25] Condensed Consolidated Statements of Cash Flows For YTD 2024, operating activities provided cash, while investing and financing activities used cash, leading to a net decrease in cash and cash equivalents, significantly impacted by the GRAIL Spin-Off and related debt Consolidated Statements of Cash Flows (in millions) | Metric | YTD 2024 | YTD 2023 | | :------------------------------------ | :------- | :------- | | Net cash provided by operating activities | $157 | $115 | | Net cash used in investing activities | $(89) | $(93) | | Net cash used in financing activities | $(191) | $(476) | | Net decrease in cash and cash equivalents | $(128) | $(458) | - GRAIL cash deconsolidated as a result of spin-off: $(968) million in YTD 2024[28] - Borrowings on delayed draw term loan, net of issuance costs: $744 million in YTD 2024[28] Notes to Condensed Consolidated Financial Statements These notes provide essential details and explanations for the unaudited condensed consolidated financial statements, covering significant accounting policies, the GRAIL Spin-Off, revenue recognition, investments, debt, equity, balance sheet specifics, legal proceedings, income taxes, segment information, and a subsequent event Organization and Significant Accounting Policies This note outlines Illumina's business, the impact of the GRAIL Spin-Off, and key accounting policy changes, including the interim income tax calculation method and weighted average shares for loss per share - Illumina provides sequencing- and array-based solutions for research, clinical, and applied markets[31] - Completed GRAIL Spin-Off on June 24, 2024, distributing 85.5% of GRAIL common stock to Illumina stockholders; retained approximately 14.5%[32] - Changed interim income tax calculation method to estimated annual effective tax rate for Q2 and YTD 2024[36] Weighted Average Shares Used in Calculating Loss Per Share (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------------------------------ | :------ | :------ | :------- | :------- | | Weighted average shares used in calculating basic loss per share | 159 | 158 | 159 | 158 | | Weighted average shares used in calculating diluted loss per share | 159 | 158 | 159 | 158 | GRAIL Spin-Off This note details the completion of the GRAIL Spin-Off, the distribution of shares to Illumina stockholders, the cash contribution to GRAIL, and the financial impact of deconsolidated assets and separation costs - Spin-Off completed on June 24, 2024; Illumina stockholders received one share of GRAIL common stock for every six Illumina shares[41] - Illumina retained approximately 14.5% of GRAIL common stock post-Spin-Off[41] - Illumina contributed $974 million in cash to GRAIL for 2.5 years of operations (Disposal Funding)[42] GRAIL Net Assets Deconsolidated (in millions) | Asset/Liability | Amount | | :------------------------------------ | :----- | | Cash and cash equivalents | $968 | | Intangible assets, net | $2,201 | | GRAIL net assets | $2,738 | - Incurred $52 million in separation-related transaction costs during YTD 2024[44] Revenue This note provides a breakdown of revenue by source, highlighting decreases in Core Illumina instrument sales and increases in GRAIL service revenue, along with remaining performance obligations Revenue by Source (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :-------------------- | :------ | :------ | :------- | :------- | | Product revenue | $927 | $1,001 | $1,803 | $1,923 | | Service and other revenue | $185 | $175 | $385 | $340 | | Total revenue | $1,112 | $1,176 | $2,188 | $2,263 | - Core Illumina instruments revenue decreased by 39% in Q2 2024 and 34% in YTD 2024, driven by fewer shipments of high-throughput and mid-throughput instruments[145] - GRAIL service and other revenue increased by 32% in Q2 2024 and 31% in YTD 2024, primarily due to sales of Galleri[146] - Remaining performance obligations totaled $717 million as of June 30, 2024, with 82% expected to convert to revenue in the next 12 months[49] Investments and Fair Value Measurements This note details changes in marketable equity securities, including the retained GRAIL investment and associated unrealized losses, as well as the fair value adjustments for the Helix contingent value right and GRAIL contingent consideration liability - Marketable equity securities increased to $74 million as of June 30, 2024, from $6 million at December 31, 2023, primarily due to the retained 14.5% investment in GRAIL, initially recorded at $397 million[52] - Recorded an unrealized loss of $328 million on the GRAIL investment in Q2 and YTD 2024[52] Net Losses Recognized on Marketable Equity Securities (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------------------------------------------------------------------------------ | :------ | :------ | :------- | :------- | | Net losses recognized during the period on marketable equity securities | $(330) | $— | $(329) | $(2) | | Net unrealized losses recognized during the period on marketable equity securities still held at the reporting date | $(330) | $(1) | $(329) | $— | - Helix contingent value right fair value increased to $79 million as of June 30, 2024, and was settled for $82.5 million cash on July 31, 2024[58] - Contingent consideration liability related to GRAIL decreased significantly to $131 million as of June 30, 2024, from $387 million at December 31, 2023, due to an increase in the revenue risk premium assumption[59] Debt This note summarizes the company's term debt obligations, including the new Delayed Draw Credit Facility used for GRAIL Spin-Off funding, and details the revolving credit facility Summary of Term Debt Obligations (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :-------------- | :---------------- | | Principal amount of 2025 Term Notes | $500 | $500 | | Principal amount of 2027 Term Notes | $500 | $500 | | Principal amount of 2031 Term Notes | $500 | $500 | | Principal amount of 2025 Delayed Draw Term Loan | $750 | $— | | Net carrying amount of term debt | $2,234 | $1,489 | - Borrowed $750 million on the Delayed Draw Credit Facility on June 20, 2024, to provide a portion of the GRAIL Spin-Off Disposal Funding, maturing June 19, 2025, with a current borrowing rate of 6.7%[66] - Maintains a $750 million senior unsecured five-year revolving credit facility, undrawn as of June 30, 2024[68] Stockholders' Equity This note details adjustments to equity awards due to the GRAIL Spin-Off, restricted stock activity, derecognition of liability-classified awards, ESPP share issuance, remaining share repurchase authorization, and share-based compensation expense - All unvested RSU and PSU were equitably adjusted for the GRAIL Spin-Off, increasing shares reserved under the 2015 Stock Plan by 160,000[71] Restricted Stock Activity (Units in thousands) | Metric | RSU | PSU | | :-------------------------------- | :---- | :---- | | Outstanding at December 31, 2023 | 2,198 | — | | Awarded | 2,666 | 457 | | Unvested adjustment for GRAIL Spin-Off | 107 | 12 | | Outstanding at June 30, 2024 | 4,685 | 450 | - Liability-classified awards for GRAIL employees were assumed by GRAIL in connection with the Spin-Off, resulting in a derecognition of $283 million[75] - Approximately 0.3 million shares were issued under the ESPP during YTD 2024, with 12.6 million shares remaining available[77] - Approximately $15 million remained available for share repurchases under the $750 million program as of June 30, 2024[79] Share-Based Compensation Expense (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------------------ | :------ | :------ | :------- | :------- | | Share-based compensation expense, before taxes | $110 | $105 | $208 | $199 | Supplemental Balance Sheet Details This note provides detailed breakdowns of accounts receivable, inventory, and accrued liabilities, and explains significant restructuring charges, goodwill impairment, and intangible asset impairment related to GRAIL, along with foreign currency hedging activities Accounts Receivable, net (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :-------------- | :---------------- | | Trade accounts receivable, gross | $651 | $741 | | Total accounts receivable, net | $641 | $734 | Inventory, net (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :---------------- | :-------------- | :---------------- | | Raw materials | $232 | $276 | | Work in process | $416 | $402 | | Total inventory, net | $561 | $587 | Accrued Liabilities (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :-------------- | :---------------- | | Legal contingencies | $481 | $484 | | Contract liabilities, current portion | $238 | $252 | | Accrued taxes payable | $177 | $79 | | Total accrued liabilities | $1,265 | $1,325 | - Recorded $40 million in total restructuring charges in YTD 2024, primarily from asset impairment charges related to leased facilities[85] - Recorded goodwill impairment of $1,466 million for GRAIL in Q2 2024, as its carrying value exceeded its fair value[87] - Recorded IPR&D intangible asset impairment of $420 million for GRAIL in Q2 2024[90] Total Intangible Assets, Net (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :-------------- | :---------------- | | Total finite-lived intangible assets, net | $278 | $2,403 | | In-process research and development (IPR&D) | $— | $590 | | Total intangible assets, net | $278 | $2,993 | - Entered into new forward contracts for €432 million in June 2024 to hedge foreign currency exposure for the European Commission fine[96] Legal Proceedings This note details ongoing legal and regulatory actions, including the FTC complaint, the European Commission fine for the GRAIL acquisition, an SEC investigation, and multiple shareholder lawsuits alleging fiduciary duty breaches and misleading statements - FTC administrative complaint regarding GRAIL acquisition was subject to a Joint Motion To Dismiss on July 30, 2024, following the Spin-Off[100] - European Commission imposed a fine of approximately €432 million on July 12, 2023, for breaching EU Merger Regulation, representing 10% of 2022 consolidated annual revenues[105] - Accrued $481 million as of June 30, 2024, for the EC fine, including interest and foreign currency fluctuations[106] - SEC is conducting an investigation related to the GRAIL acquisition and certain statements/disclosures[108] - Multiple shareholder derivative complaints and federal/state securities class actions have been filed, alleging breaches of fiduciary duties and false/misleading statements related to the GRAIL acquisition[109][111][115][116][118][120] Income Taxes This note presents the effective tax rates for the reported periods and explains the primary variances from the U.S. federal statutory tax rate, including the impact of non-deductible goodwill impairment, GRAIL pre-acquisition net operating losses, and R&D expense capitalization Effective Tax Rates | Period | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------- | :------ | :------ | :------- | :------- | | Effective tax rate | (0.6)% | (163.8)% | (1.4)% | (38.5)% | - Variance from U.S. federal statutory tax rate (21%) in Q2 and YTD 2024 primarily due to: $308 million income tax expense impact from non-deductible goodwill impairment; $99 million (Q2 2024) and $116 million (YTD 2024) income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, U.S. foreign tax credits, and Pillar Two global minimum top-up tax; and $41 million (Q2 2024) and $63 million (YTD 2024) income tax expense impact of R&D expense capitalization for tax purposes[125] Segment Information This note outlines Illumina's two reportable segments, Core Illumina and GRAIL, and provides a breakdown of revenue and income (loss) from operations for each segment, noting GRAIL's spin-off - Illumina has two reportable segments: Core Illumina and GRAIL, with GRAIL spun off on June 24, 2024[129] Segment Revenue (in millions) | Segment | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------ | :------ | :------ | :------- | :------- | | Core Illumina | $1,092 | $1,159 | $2,148 | $2,235 | | GRAIL | $29 | $22 | $55 | $42 | Segment Income (Loss) from Operations (in millions) | Segment | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------ | :------- | :------- | :------- | :------- | | Core Illumina | $442 | $115 | $558 | $257 | | GRAIL | $(2,078) | $(204) | $(2,305) | $(408) | Subsequent Event This note discloses the acquisition of Fluent BioSciences on July 9, 2024, including the upfront cash payment and contingent consideration structure - Acquired Fluent BioSciences on July 9, 2024[132] - Upfront cash payment of $85 million, plus contingent consideration based on milestones[132] Management's Discussion & Analysis This section provides management's perspective on the company's financial condition, results of operations, liquidity, and capital resources Management's Overview and Outlook Illumina, a global leader in DNA sequencing, completed the GRAIL Spin-Off on June 24, 2024. The company's financial results are impacted by macroeconomic factors and competitive challenges. YTD 2024 highlights include a revenue decrease, gross margin increase, significant operating loss due to impairment, and a negative effective tax rate - Illumina is a global leader in DNA sequencing and array-based technologies[136] - Completed the Spin-Off of GRAIL on June 24, 2024, retaining approximately 14.5% ownership[137] - Macroeconomic factors (inflation, exchange rates, economic downturn, China competition, Russia sanctions) continue to impact sales and operations[140] - Revenue decreased 3% in YTD 2024 to $2,188 million compared to YTD 2023[141] - Gross profit margin was 63.5%, up from 61.3% in YTD 2023, driven by favorable sequencing consumables mix and cost savings[141] - Loss from operations increased to $1,749 million from $152 million in YTD 2023, primarily due to $1,889 million in goodwill and intangible impairment charges[141] - Effective tax rate was (1.4)% in YTD 2024[141] - Ended Q2 2024 with $994 million in cash, cash equivalents, and short-term investments[142] Results of Operations This section provides a detailed breakdown of Illumina's financial performance, showing a decline in total revenue driven by instrument sales, an improved gross margin for Core Illumina, and a substantial increase in operating loss due to significant goodwill and intangible asset impairments, particularly from GRAIL Consolidated Statement of Operations Data as Percentage of Total Revenue | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :-------------------------------- | :------ | :------ | :------- | :------- | | Total revenue | 100.0% | 100.0% | 100.0% | 100.0% | | Gross profit | 64.8% | 62.2% | 63.5% | 61.3% | | Total operating expense | 212.0% | 69.7% | 143.4% | 68.0% | | Loss from operations | (147.2)% | (7.5)% | (79.9)% | (6.7)% | | Net loss | (178.8)% | (19.9)% | (96.6)% | (10.2)% | - Core Illumina instruments revenue decreased by $77 million (39%) in Q2 2024 and $123 million (34%) in YTD 2024 due to fewer high-throughput and mid-throughput instrument shipments[145] - Core Illumina gross margin increased in Q2 and YTD 2024 due to a more favorable mix of sequencing consumables and operational excellence initiatives[148] - GRAIL goodwill and intangible impairment for Q2 and YTD 2024 totaled $1,886 million, comprising $1,466 million goodwill impairment and $420 million IPR&D intangible asset impairment[154] - Core Illumina SG&A expense decreased by $311 million (84%) in Q2 2024, primarily due to a $271 million gain recognized on GRAIL CVR contingent consideration liability[152] - Unrealized loss of $328 million on retained investment in GRAIL drove the fluctuation in other (expense) income, net in Q2 and YTD 2024[156] Liquidity and Capital Resources Illumina's cash and cash equivalents decreased by $128 million in YTD 2024, primarily due to the GRAIL Spin-Off and related funding, partially offset by new debt. The company maintains sufficient liquidity through operating cash flows and credit facilities, but faces significant obligations including the EC fine and contingent consideration for GRAIL CVRs - Cash and cash equivalents at June 30, 2024: $920 million, a decrease of $128 million from December 31, 2023[161] - GRAIL Spin-Off resulted in deconsolidation of $968 million in cash and cash equivalents[161] - Accrued $481 million as of June 30, 2024, for the European Commission fine, which is accruing interest at 5.5% per annum[162] - Borrowed $750 million on the Delayed Draw Credit Facility in June 2024 for GRAIL Disposal Funding[163] - Contingent consideration liability for GRAIL acquisition was $131 million as of June 30, 2024[167] - Anticipates current cash, cash equivalents, short-term investments, operating cash flows, and Revolving Credit Facility are sufficient to fund near-term capital and operating needs for at least the next 12 months[170] Key Cash Flow Activities (in millions, YTD 2024) | Activity | Amount | | :------------------------------------ | :----- | | Net cash provided by operating activities | $157 | | Net cash used in investing activities | $(89) | | Net cash used in financing activities | $(191) | Critical Accounting Policies and Estimates The company's critical accounting policies and estimates remain consistent with those disclosed in the Annual Report on Form 10-K for fiscal year 2023, with the exception of changes to income tax accounting as detailed in Note 1 - No material changes to critical accounting policies and estimates during YTD 2024, except for income taxes as disclosed in Note 1[178] Recent Accounting Pronouncements For information regarding recent accounting pronouncements applicable to the condensed consolidated financial statements, refer to Note 1, "Organization and Significant Accounting Policies" - Refer to Note 1. Organization and Significant Accounting Policies for a summary of recent accounting pronouncements[179] Quantitative and Qualitative Disclosures About Market Risk There were no substantial changes to the company's market risks in YTD 2024 compared to the disclosures in the Annual Report on Form 10-K for fiscal year 2023 - No substantial changes to market risks in YTD 2024 compared to the Annual Report on Form 10-K for fiscal year ended December 31, 2023[180] Other Key Information This section covers additional important disclosures including controls, legal proceedings, risk factors, and corporate governance updates Controls and Procedures Management confirmed the effectiveness of the company's disclosure controls and procedures and reported no material changes to internal control over financial reporting during Q2 2024 - No changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting during Q2 2024[182] - CEO and CFO concluded that disclosure controls and procedures are effective as of June 30, 2024[183] Legal Proceedings For a comprehensive discussion of the company's legal proceedings, including those related to the GRAIL acquisition, refer to Note 8, "Legal Proceedings," within the Condensed Consolidated Financial Statements section - Refer to Note 8. Legal Proceedings for a discussion of legal proceedings[184] Risk Factors The company faces significant risks, primarily from ongoing legal and regulatory challenges related to the GRAIL acquisition and Spin-Off, including potential substantial tax liabilities, continued obligations for GRAIL CVRs, and the impact of new FDA regulations on Laboratory Developed Tests (LDTs) - The GRAIL acquisition remains subject to ongoing legal and regulatory proceedings in the U.S. and EU, potentially leading to significant financial penalties and increased costs[185] - The Spin-Off could result in substantial tax liability if it does not qualify for tax-free treatment[192] - Illumina remains the obligor on the contingent value rights (CVRs) issued in connection with the GRAIL acquisition, which may be difficult to estimate or comply with[194] - The FDA's Final Rule on Laboratory Developed Tests (LDTs) may subject newly developed LDT products to regulatory clearance or approval, potentially impacting the business[196][200] Share Repurchases and Sales The company did not repurchase any equity securities or engage in unregistered sales of equity securities during the quarterly period ended June 30, 2024 - No purchases of equity securities by the issuer during Q2 2024[201] - No unregistered sales of equity securities during Q2 2024[202] Adoptions, Modifications or Terminations of Trading Plans During Q2 2024, Charles Dadswell, the General Counsel, modified an existing 10b5-1 trading plan for the sale of up to 8,904 shares, effective until April 18, 2025 - Charles Dadswell, General Counsel, modified an existing 10b5-1 plan on May 14, 2024, for the sale of up to 8,904 shares, terminating on April 18, 2025[203] Other Information The Board of Directors approved amendments to the company's Amended and Restated Bylaws on August 5, 2024, which include updates to stockholder meeting requirements, director nominations, indemnification, and a new federal forum provision - Amended and Restated Bylaws became effective on August 5, 2024[204] - Amendments include adding a federal forum provision, updating stockholder meeting requirements, clarifying director nomination and business notice procedures, and aligning indemnification provisions[205] Exhibits This section lists all documents filed as exhibits to the Form 10-Q, including various agreements related to the GRAIL Spin-Off, credit facilities, and certifications - Exhibits include the Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Stockholder and Registration Rights Agreement, Fourth Amendment to the Amended and Restated Supply and Commercialization Agreement, and the 364-Day Delayed Draw Credit Agreement[206][207] - Includes certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[207] Form 10-Q Cross-Reference Index This index provides a cross-reference to the specific pages within the Form 10-Q where each required item of the SEC's quarterly report is addressed - Provides a cross-reference to the parts and items requirements of the Securities and Exchange Commission Quarterly Report on Form 10-Q[210]