Illumina(US:ILMN)2024-11-05 23:11Condensed Consolidated Financial Statements This section provides the company's financial position, performance, and cash flows, supported by detailed notes on accounting policies, the GRAIL Spin-Off, and other key disclosures Condensed Consolidated Balance Sheets Total assets decreased from $10,111 million to $6,014 million, primarily due to reductions in goodwill and intangible assets, reflecting the impact of the GRAIL Spin-Off | Metric | September 29, 2024 (Unaudited) | December 31, 2023 | | :---------------------------------- | :----------------------------- | :------------------ | | Total Assets | $6,014 million | $10,111 million | | Goodwill | $1,113 million | $2,545 million | | Intangible Assets, net | $305 million | $2,993 million | | Total Liabilities and Stockholders' Equity | $6,014 million | $10,111 million | | Total Stockholders' Equity | $2,125 million | $5,745 million | Condensed Consolidated Statements of Operations The company reported a net loss for both periods, significantly impacted by goodwill and intangible impairment charges, with total revenue decreasing by 3.4% year-over-year for the nine months | Metric | Three Months Ended Sep 29, 2024 (Millions) | Three Months Ended Oct 1, 2023 (Millions) | Nine Months Ended Sep 29, 2024 (Millions) | Nine Months Ended Oct 1, 2023 (Millions) | | :---------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | | Total Revenue | $1,119 | $1,119 | $3,268 | $3,382 | | Net Income (Loss) | $(754) | $(754) | $(1,410) | $(986) | | Basic Earnings (Loss) Per Share | $(4.77) | $(4.77) | $(8.86) | $(6.23) | | Goodwill and Intangible Impairment | $821 | $821 | $1,889 | $821 | Condensed Consolidated Statements of Comprehensive Income (Loss) Total comprehensive loss for the nine months ended September 29, 2024, increased to $(1,414) million, primarily reflecting the net loss | Metric | Three Months Ended Sep 29, 2024 (Millions) | Three Months Ended Oct 1, 2023 (Millions) | Nine Months Ended Sep 29, 2024 (Millions) | Nine Months Ended Oct 1, 2023 (Millions) | | :---------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | | Net Income (Loss) | $705 | $(754) | $(1,410) | $(986) | | Unrealized (loss) gain on cash flow hedges, net of deferred tax | $(19) | $9 | $(4) | $18 | | Total Comprehensive Income (Loss) | $686 | $(745) | $(1,414) | $(968) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity significantly decreased from $5,745 million to $2,125 million, primarily due to net loss and the $2,399 million impact from the GRAIL Spin-Off | Metric | December 31, 2023 (Millions) | September 29, 2024 (Millions) | | :---------------------------------- | :------------------ | :----------------------------- | | Total Stockholders' Equity | $5,745 | $2,125 | | Additional Paid-In Capital (Impact of GRAIL Spin-Off) | $9,555 | $7,449 (decrease of $2,399 due to Spin-Off) | | Accumulated Deficit | $(19) | $(1,428) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $473 million, while net cash used in financing activities decreased to $(523) million, driven by GRAIL deconsolidation and debt repayments | Cash Flow Activity | Nine Months Ended Sep 29, 2024 (Millions) | Nine Months Ended Oct 1, 2023 (Millions) | | :---------------------------------- | :----------------------------- | :---------------------------- | | Net cash provided by operating activities | $473 | $254 | | Net cash used in investing activities | $(130) | $(146) | | Net cash used in financing activities | $(523) | $(1,183) | | GRAIL cash deconsolidated as a result of spin-off | $(968) | — | | Cash and cash equivalents at end of period | $869 | $927 | Notes to Condensed Consolidated Financial Statements Detailed disclosures cover organization, accounting policies, the GRAIL Spin-Off, revenue, investments, debt, equity, balance sheet items, legal proceedings, income taxes, and segment information, highlighting key events and impairment charges 1. Organization and Significant Accounting Policies Illumina provides genetic analysis solutions; the GRAIL Spin-Off completed on June 24, 2024, with 14.5% retained ownership, and no significant accounting policy changes occurred in YTD 2024 - Illumina provides sequencing- and array-based solutions for genetic and genomic analysis, serving research, clinical, and applied markets25 - The GRAIL Spin-Off was completed on June 24, 2024, distributing approximately 85.5% of GRAIL common stock to Illumina stockholders, with Illumina retaining approximately 14.5%2637 - No changes to significant accounting policies were made during YTD 202430 - ASU 2023-07 (Segment Reporting) is effective for the company in fiscal year 2024 and interim periods within fiscal year 2025. ASU 2023-09 (Income Taxes) is effective in fiscal year 20253132 2. GRAIL Spin-Off The GRAIL Spin-Off completed on June 24, 2024, distributing 85.5% of GRAIL common stock to Illumina stockholders, with Illumina retaining 14.5% and contributing $974 million for operations, incurring $53 million in separation costs - GRAIL Spin-Off completed on June 24, 2024, distributing approximately 85.5% of GRAIL common stock to Illumina stockholders (1 GRAIL share for every 6 Illumina shares)37 - Illumina retained approximately 14.5% of GRAIL common stock post-Spin-Off37 - Illumina contributed $974 million (less GRAIL's cash) to GRAIL for 2.5 years of operations38 - Incurred $53 million in separation-related transaction costs in YTD 2024, recognized in selling, general, and administrative expense39 GRAIL Net Assets Deconsolidated | GRAIL Net Assets Deconsolidated | Amount (in millions) | | :-------------------------------- | :------------------- | | Cash and cash equivalents | $968 | | Intangible assets, net | $2,201 | | GRAIL net assets | $2,738 | 3. Revenue Total revenue slightly decreased in Q3 and YTD 2024 due to lower instrument sales, offset by consumables and service growth, with regional declines in Americas and Greater China Revenue by Source | Revenue by Source (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :-------------------------------- | :------ | :------ | :------- | :------- | | Consumables | $807 | $760 | $2,376 | $2,327 | | Instruments | $107 | $181 | $342 | $537 | | Service and other revenue | $166 | $178 | $550 | $518 | | Total Revenue | $1,080 | $1,119 | $3,268 | $3,382 | Revenue by Geographic Area | Revenue by Geographic Area (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--------------------------------------- | :------ | :------ | :------- | :------- | | Americas | $609 | $663 | $1,852 | $1,920 | | Europe | $291 | $260 | $859 | $825 | | Greater China | $75 | $98 | $228 | $302 | | Asia-Pacific, Middle East, and Africa | $105 | $98 | $329 | $335 | | Total Revenue | $1,080 | $1,119 | $3,268 | $3,382 | - Remaining performance obligations totaled $688 million as of September 29, 2024, with approximately 82% expected to convert to revenue in the next twelve months45 4. Investments and Fair Value Measurements Marketable equity securities increased to $70 million due to retained GRAIL investment, incurring a $332 million unrealized loss, while the GRAIL contingent consideration liability decreased to $82 million due to revised projections and restructuring Investments | Metric (in millions) | September 29, 2024 | December 31, 2023 | | :---------------------------------- | :----------------- | :------------------ | | Marketable Equity Securities | $70 | $6 | | Non-Marketable Equity Securities | $27 | $28 | | Venture Funds (carrying amount) | $191 | $168 | - An unrealized loss of $332 million was recognized in YTD 2024 on the retained investment in GRAIL subsequent to the Spin-Off4849 - The Helix contingent value right was settled for $83 million cash on July 31, 20245455 GRAIL Contingent Consideration Liability | GRAIL Contingent Consideration Liability (in millions) | September 29, 2024 | December 31, 2023 | | :----------------------------------------------------- | :----------------- | :------------------ | | Fair Value | $82 | $387 | - The significant decrease in the GRAIL contingent consideration liability was due to revised revenue projections announced by GRAIL in May 2024 and a restructuring announcement in August 2024, along with an increased revenue risk premium58 5. Debt Net term debt increased to $1,988 million with the issuance of $500 million in 2026 Term Notes and repayment of the $750 million Delayed Draw Credit Facility, while the $750 million revolving credit facility remains undrawn Term Debt Obligations | Term Debt Obligations (in millions) | September 29, 2024 | December 31, 2023 | | :---------------------------------- | :----------------- | :------------------ | | Principal amount of 2025 Term Notes outstanding | $500 | $500 | | Principal amount of 2026 Term Notes outstanding | $500 | — | | Principal amount of 2027 Term Notes outstanding | $500 | $500 | | Principal amount of 2031 Term Notes outstanding | $500 | $500 | | Net carrying amount of term debt, non-current | $1,988 | $1,489 | - Issued $500 million aggregate principal amount of 4.650% Term Notes due 2026 on September 9, 2024, with net proceeds of $497 million used to repay debt63182 - The $750 million Delayed Draw Credit Facility, borrowed on June 20, 2024, was fully repaid on September 9, 2024, resulting in a $5 million loss on debt extinguishment68181 - A $750 million senior unsecured five-year revolving credit facility is available, with no outstanding borrowings as of September 29, 20246970184 6. Stockholders' Equity Stockholders' equity was impacted by the GRAIL Spin-Off and equity award adjustments; a new $1.5 billion share repurchase program was authorized, with $99 million in repurchases in Q3 2024 - Approximately 5.4 million shares remained available for future grants under the 2015 Stock and Incentive Compensation Plan as of September 29, 202473 Restricted Stock Units | Restricted Stock Units (in thousands) | Outstanding at Dec 31, 2023 | Outstanding at Sep 29, 2024 | | :------------------------------------ | :-------------------------- | :-------------------------- | | RSU | 2,198 | 4,623 | | PSU | — | 620 | - All stock options were cancelled, resulting in no outstanding options as of September 29, 202476 - Liability-classified equity incentive awards for GRAIL employees were assumed by GRAIL in connection with the Spin-Off, with a derecognition of $283 million77 - A new share repurchase program for up to $1.5 billion of common stock was authorized in August 2024, with $1.4 billion remaining available as of September 29, 202481186 Share Repurchase Activity (Q3 2024) | Share Repurchase Activity (Q3 2024) | Value | | :---------------------------------- | :---- | | Number of shares repurchased (thousands) | 770 | | Total cost of shares repurchased (millions) | $99 | | Average price paid per share | $127.71 | Share-Based Compensation Expense | Share-Based Compensation Expense (in millions, before taxes) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :----------------------------------------------------------- | :------ | :------ | :------- | :------- | | Total Share-based compensation expense | $84 | $86 | $291 | $286 | 7. Supplemental Balance Sheet Details Accrued liabilities significantly decreased to $784 million, with $46 million in restructuring charges and $1,886 million in goodwill and $420 million in IPR&D impairments for GRAIL, while derivative instruments manage foreign exchange risks Balance Sheet Metrics | Metric (in millions) | September 29, 2024 | December 31, 2023 | | :---------------------------------- | :----------------- | :------------------ | | Accounts Receivable, net | $699 | $734 | | Inventory, net | $574 | $587 | | Accrued Liabilities | $784 | $1,325 | Restructuring Charges | Restructuring Charges (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :---------------------------------- | :------ | :------ | :------- | :------- | | Employee separation costs | $6 | $7 | $13 | $33 | | Asset impairment charges | — | $49 | $32 | $56 | | Total restructuring charges | $6 | $58 | $46 | $91 | - A goodwill impairment of $1,466 million for GRAIL was recorded in Q2 2024, as its carrying value exceeded its fair value94 - An IPR&D asset impairment of $420 million for GRAIL was recorded in Q2 202498 Intangible Assets, Net | Intangible Assets, Net (in millions) | September 29, 2024 | December 31, 2023 | | :----------------------------------- | :----------------- | :------------------ | | Total finite-lived intangible assets, net | $305 | $2,403 | | In-process research and development (IPR&D) | — | $590 | | Total intangible assets, net | $305 | $2,993 | - Acquired Fluent BioSciences in Q3 2024, recording $42 million in developed technology and $2 million in customer relationship intangibles103 - Foreign exchange forward contracts for non-hedging purposes had total notional amounts of $497 million as of September 29, 2024. Contracts for cash flow hedges had total notional amounts of $671 million107108 8. Legal Proceedings All GRAIL acquisition regulatory proceedings in the US and EU are resolved, with the EU fine of €432 million withdrawn, resulting in a $481 million gain, though ongoing SEC, shareholder, and DOJ actions persist - All regulatory proceedings in the United States and European Union related to the GRAIL acquisition were resolved as of September 6, 2024110 - The EU Court of Justice ruled in Illumina's favor on September 3, 2024, annulling the European Commission's assertion of jurisdiction over the GRAIL acquisition113 - The European Commission withdrew its previously imposed fine of €432 million on September 6, 2024, resulting in a net gain of $481 million in Q3 2024113114 - The U.S. Federal Trade Commission dismissed its administrative complaint on August 15, 2024115 - An SEC inquiry related to the GRAIL acquisition and certain statements/disclosures is ongoing116 - Multiple shareholder derivative complaints and federal and state securities class actions are ongoing, alleging breaches of fiduciary duties and misleading statements related to the GRAIL acquisition117119122123126128 - Received a DOJ civil investigative demand on January 18, 2024, concerning a False Claims Act investigation related to cybersecurity compliance130 9. Income Taxes The effective tax rate was 2.1% for Q3 2024 and (3.2)% for YTD 2024, unfavorably impacted by $308 million goodwill impairment and $141 million GRAIL NOLs, but favorably by the EC fine reversal Effective Tax Rate | Effective Tax Rate | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :----------------- | :------ | :------ | :------- | :------- | | Rate | 2.1% | 3.6% | (3.2)% | (3.8)% | - YTD 2024 effective tax rate was unfavorably impacted by a $308 million income tax expense from non-deductible goodwill impairment and a $141 million income tax expense from GRAIL pre-acquisition net operating losses on GILTI134 - The income tax rate in Q3 2024 and YTD 2024 was favorably impacted by the reversal of the European Commission fine (excluded from taxable income) and the mix of earnings in jurisdictions with lower statutory tax rates, such as Singapore134 10. Segment Information The company reports Core Illumina and GRAIL segments; post-Spin-Off, GRAIL no longer contributes revenue, while Core Illumina's revenue slightly decreased but income from operations significantly increased - Reportable segments are Core Illumina and GRAIL136 Core Illumina | Core Illumina (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :-------------------------- | :------ | :------ | :------- | :------- | | Revenue | $1,080 | $1,106 | $3,228 | $3,341 | | Income (loss) from operations | $741 | $262 | $1,298 | $519 | - GRAIL's revenue and income (loss) from operations are no longer reported after the Spin-Off in Q2 2024137139 Management's Discussion & Analysis This section provides management's perspective on the company's financial condition and results of operations, covering an overview, detailed results, liquidity, capital resources, and critical accounting policies Management's Overview and Outlook Illumina, a DNA sequencing leader, faces macroeconomic and competitive challenges; the GRAIL Spin-Off completed in June 2024, with YTD 2024 revenue down 3%, gross margin at 65.3%, and increased operating loss due to impairments - Illumina is a global leader in DNA sequencing and array-based technologies, serving research, clinical, and applied markets146 - Macroeconomic factors (inflation, exchange rates, economic downturn), competitive challenges in China, and Russia sanctions continue to impact sales and operations150 - The GRAIL Spin-Off was completed on June 24, 2024, with Illumina retaining approximately 14.5% of GRAIL common stock147 Financial Highlights (YTD 2024) | Financial Highlight (YTD 2024) | Value | Change from YTD 2023 | | :----------------------------- | :---- | :------------------- | | Revenue | $3,268M | -3% | | Gross Margin | 65.3% | +4.1 percentage points | | Loss from Operations | $(1,008)M | Increased by $103M | | Effective Tax Rate | (3.2)% | +0.6 percentage points | | Cash, Cash Equivalents, and Short-term Investments (Q3 2024) | $939M | - | | Goodwill and Intangible Impairment (YTD 2024) | $1,889M | +$1,068M | | Legal Contingency and Settlement (YTD 2024) | $(474)M | Favorable impact of $488M | | Gains on GRAIL Contingent Consideration Liability (YTD 2024) | - | Increased by $222M | Results of Operations Consolidated revenue decreased by 3% due to lower instrument sales, while gross margin improved; operating expenses were impacted by GRAIL impairments and the EC fine reversal, with other income affected by GRAIL investment losses Consolidated Financial Performance | Metric | Q3 2024 (Millions) | Q3 2023 (Millions) | YTD 2024 (Millions) | YTD 2023 (Millions) | | :---------------------------------- | :------ | :------ | :------- | :------- | | Total Revenue | $1,080 | $1,119 | $3,268 | $3,382 | | Consolidated Gross Profit | $745 | $684 | $2,133 | $2,070 | | Consolidated Gross Margin | 68.9% | 61.1% | 65.3% | 61.2% | | Consolidated Operating Expense | $4 | $1,438 | $3,141 | $2,975 | | Consolidated Research and Development | $253 | $315 | $913 | $1,013 | | Consolidated Selling, General and Administrative | $239 | $303 | $813 | $1,127 | | Consolidated Goodwill and Intangible Impairment | — | $821 | $1,889 | $821 | | Core Illumina Legal Contingency and Settlement | $(488) | $(1) | $(474) | $14 | | Total Other Expense, net | $(21) | $(28) | $(358) | $(45) | | Provision (Benefit) for Income Taxes | $15 | $(28) | $44 | $36 | - Core Illumina consumables revenue increased due to NovaSeq X consumables, while instrument revenue decreased due to fewer high-throughput and mid-throughput instrument shipments158 - GRAIL goodwill and intangible impairment for YTD 2024 included $1,466 million goodwill impairment and $420 million IPR&D intangible asset impairment170 - Core Illumina legal contingency and settlement in Q3 2024 and YTD 2024 primarily consisted of a $489 million gain from the reversal of the EC fine accrual171 - Other income (expense), net in YTD 2024 was primarily driven by an increase in net losses on strategic investments of $303 million, including an unrealized loss of $332 million on the retained investment in GRAIL173 Liquidity and Capital Resources Cash and cash equivalents decreased to $869 million due to GRAIL deconsolidation and debt repayments; $500 million in new term notes were issued, a $750 million loan repaid, and a $1.5 billion share repurchase program authorized Cash Flow Summary | Metric (in millions) | YTD 2024 | YTD 2023 | | :---------------------------------- | :------- | :------- | | Net cash provided by operating activities | $473 | $254 | | Net cash used in investing activities | $(130) | $(146) | | Net cash used in financing activities | $(523) | $(1,183) | | Net decrease in cash and cash equivalents | $(179) | $(1,084) | - Cash and cash equivalents were $869 million as of September 29, 2024, with $464 million held by foreign subsidiaries179 - The European Commission withdrew its €432 million fine, resulting in a net gain of $481 million in Q3 2024, and related guarantees are no longer outstanding180 - Issued $500 million aggregate principal amount of 2026 Term Notes and repaid the $750 million Delayed Draw Credit Facility in Q3 2024181182 - A new share repurchase program for up to $1.5 billion was authorized in August 2024, with $1.4 billion remaining available186 - The company expects current cash, cash equivalents, short-term investments, operating cash flows, and available borrowing capacity to be sufficient for near-term capital and operating needs for at least the next 12 months188 Critical Accounting Policies and Estimates No material changes occurred to critical accounting policies and estimates during YTD 2024, despite macroeconomic uncertainties - No material changes to critical accounting policies and estimates during YTD 2024195 Recent Accounting Pronouncements Recent accounting pronouncements applicable to the condensed consolidated financial statements are summarized in Note 1, 'Organization and Significant Accounting Policies' - Refer to Note 1 for a summary of recent accounting pronouncements196 Quantitative and Qualitative Disclosures About Market Risk No substantial changes to the company's market risks occurred in YTD 2024 compared to prior disclosures in the Annual Report on Form 10-K - No substantial changes to market risks in YTD 2024197 Other Key Information This section covers additional important information including controls and procedures, legal proceedings, risk factors, share repurchases, trading plans, and a list of exhibits Controls and Procedures Management concluded that disclosure controls and procedures were effective as of Q3 2024, with no material changes to internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of the end of Q3 2024200 - No material changes in internal control over financial reporting occurred during Q3 2024199 Legal Proceedings Detailed discussion of legal proceedings is provided in Note 8, 'Legal Proceedings', within the Condensed Consolidated Financial Statements section - Refer to Note 8 for details on legal proceedings201 Risk Factors The GRAIL Spin-Off introduced significant costs, potential revenue loss, and adverse impacts, while ongoing litigation, regulatory investigations, and shareholder lawsuits related to the acquisition persist - The GRAIL Spin-Off resulted in significant costs, potential loss of revenue, and adverse effects on business, financial condition, results of operations, and stock price204 - The company is subject to ongoing SEC investigations, shareholder inspection demands, derivative lawsuits, and securities class actions related to the GRAIL acquisition205 Share Repurchases and Sales A new $1.5 billion share repurchase program was authorized in August 2024, with 770 thousand shares repurchased for $99 million in Q3 2024 - A new share repurchase program for up to $1.5 billion of outstanding common stock was authorized in August 2024206 Share Repurchase Activity (Q3 2024) | Share Repurchase Activity (Q3 2024) | Value | | :---------------------------------- | :---- | | Total Number of Shares Purchased (thousands) | 770 | | Total Cost of Shares Repurchased (millions) | $99 | | Average Price Paid per Share | $127.71 | | Approximate Dollar Value of Shares Remaining Under Program (millions) | $1,401.684 | Adoptions, Modifications or Terminations of Trading Plans No directors or officers adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q3 2024 - No directors or officers adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q3 2024210 Exhibits This section lists exhibits filed with Form 10-Q, including amended bylaws, underwriting agreements, officer's certificates, a separation agreement, and SOX certifications - Exhibits include Amended and Restated Bylaws, Underwriting Agreement, Officer's Certificate, Separation Agreement, and Section 302 and 906 certifications212 Form 10-Q Cross-Reference Index This index provides a cross-reference to the parts and items requirements of the SEC Quarterly Report on Form 10-Q, indicating page numbers for each item - Provides a cross-reference index for the parts and items requirements of the SEC Quarterly Report on Form 10-Q215