•the impact of recently launched or pre-announced products and services on existing products and services;
•risks and uncertainties regarding legal and regulatory proceedings;
•risks associated with contracts or other agreements containing provisions that might be implicated by the divestiture of GRAIL, including our ability to fully realize the anticipated economic benefits of our commercial arrangements with GRAIL and our obligations with respect to contingent value rights (the CVRs) issued by us in connection with the GRAIL acquisition, which may adversely affect us and our business and/or the market value of the CVRs;
•the risk of additional litigation arising against us in connection with the GRAIL acquisition;
•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, as well as the cost and potential diversion of management resources associated with these proceedings;
•uncertainty, or adverse economic and business conditions, including as a result of slowing or uncertain economic growth, public health crisis, or armed conflict; and
•other factors detailed in our filings with the Securities and Exchange Commission (SEC), including the risks, uncertainties, and assumptions described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, the “Other Key Information” section of our Quarterly Report on Form 10-Q for the period ended March 31, 2024, and on Form 10-Q for the period ended June 30, 2024, the “Risk Factors” section below, or in information disclosed in public conference calls, the date and time of which are released beforehand.
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation, and do not intend, to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, or to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, in each case whether as a result of new information, future developments, or otherwise.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context requires otherwise, references in this report to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview
We are a provider of sequencing- and array-based solutions for genetic and genomic analysis, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.
On June 24, 2024, we completed the separation (the Spin-Off) of GRAIL into a new public company through the distribution of 26,547,021 shares of GRAIL common stock to Illumina stockholders on a pro rata basis. The distribution reflected approximately 85.5% of the outstanding common stock of GRAIL as of 5:00 p.m. New York time on June 13, 2024, the record date for the distribution (the Record Date). We retained approximately 14.5% of the shares of GRAIL common stock immediately following the Spin-Off. The disposition of GRAIL did not meet the criteria to be reported as a discontinued operation and accordingly, GRAIL’s assets, liabilities, results of operations and cash flows have not been reclassified.Refer to note 2. GRAIL Spin-Off for additional details.
Basis of Presentation
The 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 31, 2023, 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 macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn present additional uncertainty, we continue to use the best information available to form our critical accounting estimates. Actual results could differ from those estimates.
The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, and majority-owned or controlled companies. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
Fiscal Year
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 Q3 2024 and Q3 2023 refer to the three months ended September 29, 2024 and October 1, 2023, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2024 and 2023 refer to the nine months ended September 29, 2024 and October 1, 2023, respectively, which were both 39 weeks.
During YTD 2024, 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 31, 2023.
Accounting Pronouncements Pending Adoption
In December 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The new standard requires a company to disclose incremental segment information on an annual and interim basis, including significant segment expenses and measures of profit or loss that are regularly provided to the chief operating decision maker (CODM). The standard is effective for us beginning in fiscal year 2024 and interim periods within fiscal year 2025, with early adoption permitted. We do not expect to early adopt the new standard. We are currently evaluating the impact of ASU 2023-07 on the consolidated financial statements and related disclosures and will adopt the new standard using a retrospective approach.
In December 2023, the FASB also issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The new standard requires a company to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid. The standard is effective for us beginning in fiscal year 2025, with early adoption permitted. We do not expect to early adopt the new standard. The new standard is expected to be applied prospectively, but retrospective application is permitted. We are currently evaluating the impact of ASU 2023-09 on the consolidated financial statements and related disclosures.
Earnings (Loss) per Share
Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. In loss periods, basic and diluted loss per share are identical since the effect of potentially dilutive common shares is antidilutive and therefore excluded. 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.
The weighted average shares used to calculate basic and diluted earnings (loss) per share were as follows:
In millions
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Weighted average shares outstanding
159
158
159
158
Effect of potentially dilutive common shares from:
Equity awards
1
—
—
—
Weighted average shares used in calculating diluted earnings (loss) per share
160
158
159
158
Antidilutive shares:
Equity awards
2
3
4
3
Convertible senior notes
—
1
—
1
Potentially dilutive shares excluded from calculation due to antidilutive effect
On June 24, 2024, we completed the Spin-Off of GRAIL into a separate, independent publicly traded company through the distribution of 26,547,021 shares of GRAIL common stock to Illumina stockholders on a pro rata basis. The GRAIL common stock distributed in the Spin-Off consisted of approximately 85.5% of the outstanding common stock of GRAIL as of the Record Date. The Spin-Off was structured as a tax-free spin-off and Illumina stockholders received one share of GRAIL common stock for every six shares of Illumina common stock held on the Record Date. We retained approximately 14.5% of the shares of GRAIL common stock immediately following the Spin-Off. The disposition of GRAIL did not meet the criteria to be reported as a discontinued operation and accordingly, GRAIL’s assets, liabilities, results of operations and cash flows have not been reclassified.
As part of the Spin-Off, we contributed to GRAIL an amount, in cash, to cover 2.5 years of GRAIL’s operations (the Disposal Funding), which was determined to be $974 million, less the cash and cash equivalents held by GRAIL.
The carrying amounts of GRAIL’s assets and liabilities included as part of the disposal group were as follows:
In millions
Cash and cash equivalents
$
968
Accounts receivable, net
13
Inventory, net
22
Prepaid expenses and other current assets
27
Property and equipment, net
80
Operating lease right-of-use assets
74
Intangible assets, net
2,201
Other assets
14
Accounts payable
(12)
Accrued liabilities
(118)
Operating lease liabilities
(62)
Other long term-liabilities
(469)
GRAIL net assets
$
2,738
Amount of GRAIL net assets recorded to short-term investments
$
397
Amount of GRAIL net assets recorded to additional paid-in capital
$
2,341
Additional adjustments recorded to additional paid-in capital as a result of the GRAIL Spin-Off:
Non-contingent indemnification liability (see Note 6)
1
Tax adjustment for difference between the book and tax values of our retained investment in GRAIL
57
Total recorded to additional paid-in capital as a result of the GRAIL Spin-Off
$
2,399
See note 10. Segment Information for GRAIL’s results of operations, prior to the Spin-Off, included in our condensed consolidated statements of operations for the periods presented within.
In planning for and executing the Spin-Off, we incurred $53 million in separation-related transaction costs during YTD 2024, which were recognized in selling, general, and administrative expense. These transaction costs primarily related to financial advisory, legal, regulatory and other professional services fees directly related to the Spin-Off.
In connection with the Spin-Off, Illumina and GRAIL entered into various agreements to effect the Spin-Off and provide a framework for GRAIL’s relationship with Illumina after the Spin-Off, including a separation and distribution agreement, an employee matters agreement, a tax matters agreement, an amended supply and commercialization agreement and a stockholder’s and registration rights agreement (the Agreements). The Agreements determine the treatment of the assets, employees, liabilities and obligations (including certain tax-related assets and liabilities) of Illumina attributable to periods prior to, at and after GRAIL’s separation and also govern certain relationships between Illumina and GRAIL after the Spin-Off.
Our revenue is generated from the sale of products and services. Product revenue consists of sales of instruments and consumables used in genetic analysis. Service and other revenue consists of revenue generated from genotyping and sequencing services, instrument service contracts, development and licensing agreements, and, prior to the Spin-Off of GRAIL on June 24, 2024, cancer detection testing services related to the GRAIL business.
Revenue by Source
Q3 2024
Q3 2023
In millions
Sequencing
Microarray
Total
Sequencing
Microarray
Total
Consumables
$
741
$
66
$
807
$
689
$
71
$
760
Instruments
104
3
107
178
3
181
Total product revenue
845
69
914
867
74
941
Service and other revenue
150
16
166
162
16
178
Total revenue
$
995
$
85
$
1,080
$
1,029
$
90
$
1,119
YTD 2024
YTD 2023
In millions
Sequencing
Microarray
Total
Sequencing
Microarray
Total
Consumables
$
2,160
$
216
$
2,376
$
2,108
$
219
$
2,327
Instruments
330
12
342
524
13
537
Total product revenue
2,490
228
2,718
2,632
232
2,864
Service and other revenue
499
51
550
456
62
518
Total revenue
$
2,989
$
279
$
3,268
$
3,088
$
294
$
3,382
Revenue by Geographic Area
Based on region of destination (in millions)
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Americas
$
609
$
663
$
1,852
$
1,920
Europe
291
260
859
825
Greater China (1)
75
98
228
302
Asia-Pacific, Middle East, and Africa (2)
105
98
329
335
Total revenue
$
1,080
$
1,119
$
3,268
$
3,382
_____________
(1)Region includes revenue from China, Taiwan, and Hong Kong.
(2)Region includes revenue from Russia and Turkey.
Performance Obligations
We regularly enter into contracts with multiple performance obligations. These contracts are believed to be firm as of the balance sheet date. However, we may allow customers to make product substitutions as we launch new products. The timing of shipments depends on several factors, including agreed upon shipping schedules, which may span multiple quarters. Most performance obligations are generally satisfied within a short time frame, approximately three to six months, after the contract execution date. As of September 29, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $688 million, of which approximately 82% is expected to be converted to revenue in the next twelve months, approximately 13% in the following twelve months, and the remainder thereafter.
Contract Assets and Liabilities
Contract assets, which consist of revenue recognized and performance obligations satisfied or partially satisfied in advance of customer billing, were $16 million and $18 million as of September 29, 2024 and December 31, 2023, respectively, and were recorded in prepaid expenses and other current assets.
Contract liabilities, which consist of deferred revenue and customer deposits, as of September 29, 2024 and December 31, 2023, were $293 million and $329 million, respectively, of which $235 million and $252 million, respectively, was short-term and recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q3 2024 and YTD 2024 included $48 million and $213 million, respectively, of previously deferred revenue that was included in contract liabilities as of December 31, 2023.
4. INVESTMENTS AND FAIR VALUE MEASUREMENTS
Strategic Investments
Marketable Equity Securities
Our short-term investments consist of marketable equity securities. As of September 29, 2024 and December 31, 2023, the fair value of our marketable equity securities totaled $70 million and $6 million, respectively. The increase in our marketable equity securities relates to the investment we retained in GRAIL subsequent to the Spin-Off, which was initially recorded as $397 million, representing 14.5% of GRAIL’s net assets disposed of at Spin-Off. Refer to note 2. GRAIL Spin-Off for details. We recorded an unrealized loss of $332 million in YTD 2024, subsequent to the Spin-Off, based on the fair value of our investment in GRAIL as of September 29, 2024.
Gains and (losses) recognized in other income (expense), net on marketable equity securities were as follows:
In millions
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Net losses recognized during the period on marketable equity securities
$
(4)
$
—
$
(333)
$
(2)
Less: Net losses recognized during the period on marketable equity securities sold during the period
—
—
—
(2)
Net unrealized losses recognized during the period on marketable equity securities still held at the reporting date
$
(4)
$
—
$
(333)
$
—
Non-Marketable Equity Securities
As of September 29, 2024 and December 31, 2023, the aggregate carrying amount of non-marketable equity securities, without readily determinable fair values, included in other assets, was $27 million and $28 million, respectively.
Venture Funds
We invest in three venture capital investment funds (the Funds), which are accounted for as equity-method investments. The aggregate carrying amount of the Funds, included in other assets, was $191 million and $168 million as of September 29, 2024 and December 31, 2023, respectively. We recorded losses of $6 million and $3 million in Q3 2024 and YTD 2024, respectively, and losses of $19 million and $33 millionin Q3 2023 and YTD 2023, respectively, in other income (expense), net. Our commitments to the Funds are as follows:
$ in millions
Capital commitments
Callable through date
Remaining callable as of September 29, 2024(1)
Fund I
$
100
April 2026
$
3
Fund II
$
150
July 2029
$
49
Fund III
$
60
December 2034
$
47
_____________
(1)Fund I also had recallable distributions of approximately $10 million.
Revenue recognized from transactions with our strategic investees was $7 million and $13 million for Q3 2024 and YTD 2024, respectively, and $2 million and $68 million for Q3 2023 and YTD 2023, respectively.
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:
September 29, 2024
December 31, 2023
In millions
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets:
Money market funds (cash equivalents)
$
674
$
—
$
—
$
674
$
774
$
—
$
—
$
774
Marketable equity securities
70
—
—
70
6
—
—
6
Helix contingent value right
—
—
—
—
—
—
68
68
Deferred compensation plan assets
—
70
—
70
—
61
—
61
Total assets measured at fair value
$
744
$
70
$
—
$
814
$
780
$
61
$
68
$
909
Liabilities:
Contingent consideration liabilities
$
—
$
—
$
84
$
84
$
—
$
—
$
387
$
387
Deferred compensation plan liability
—
64
—
64
—
59
—
59
Total liabilities measured at fair value
$
—
$
64
$
84
$
148
$
—
$
59
$
387
$
446
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.
Helix Contingent Value Right
In conjunction with the deconsolidation of Helix Holdings I, LLC (Helix) in April 2019, we received a contingent value right with a 7-year term that entitled us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events. We elected the fair value option to measure the contingent value right received from Helix. Changes in the estimated fair value are recognized in other income (expense), net. Historically, we estimated the fair value of the contingent value right using a Monte Carlo simulation. Estimates and assumptions used in the Monte Carlo simulation included probabilities related to the timing and outcome of future financing and/or liquidity events, assumptions regarding collectability and volatility, and an estimated equity value of Helix. These unobservable inputs represented a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. On July 31, 2024, we received cash of $83 million to settle the contingent value right early. Changes in the Helix contingent value right during YTD 2024 were as follows:
In millions
Balance as of December 31, 2023 (included in other assets)
We reassess the fair value of contingent consideration related to acquisitions on a quarterly basis, with changes in the fair value, subsequent to the acquisition date, recognized in selling, general and administrative expense. The contingent value rights issued as part of the GRAIL acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period (through August 2033). As defined in the Contingent Value Rights Agreement, this will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during this same period. Covered Revenues for the period Q4 2023 through Q2 2024 were $89 million in aggregate and for the period Q4 2022 through Q2 2023 were $65 million in aggregate, driven primarily by sales of GRAIL’s Galleri test. Covered Revenue Payments relating to such periods were $836,000 and $609,000 in YTD 2024 and YTD 2023, respectively.
The fair value of our contingent consideration liability related to GRAIL was $82 million and $387 million as of September 29, 2024 and December 31, 2023, respectively, of which $81 million and $385 million, respectively, was included in other long-term liabilities, with the remaining balances included in accrued liabilities. We use a Monte Carlo simulation to estimate the fair value of the GRAIL contingent consideration liability. Estimates and assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility estimate, an operational leverage ratio and a counterparty credit spread. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Subsequent to the Spin-Off of GRAIL, we no longer have access to GRAIL management’s forecasts and therefore must rely on information made public by GRAIL’s management to estimate forecasted revenues through August 2033. In August 2024, GRAIL management publicly announced a corporate restructure, including a reduction in headcount and planned hires and a substantial decrease in certain R&D projects and investments. To estimate the liability as of September 29, 2024, we selected a revenue risk premium of 18%, which was derived from reconciling our forecasted revenues for GRAIL to GRAIL’s market capitalization based on a 60-day trailing average. The significant decrease in the contingent consideration liability from December 31, 2023 was due to the decrease in the forecasted revenues, following revised revenue projections announced by GRAIL in May 2024 and the restructuring announcement in August 2024, and the increase in the revenue risk premium resulting from the lower market capitalization observed at or subsequent to the Spin-Off.
The assumptions used in estimating the fair value of the contingent consideration liability related to GRAIL are inherently subject to uncertainty and we note that small changes in these assumptions could have a significant impact on the concluded value. For example, an increase or decrease of 20%, in each year, to the forecasted revenues would have resulted in an increase of $21 million and a decrease of $20 million, respectively, in the liability as of September 29, 2024. Additionally, an increase or decrease of 250 basis points to the selected revenue risk premium would have resulted in a decrease of $15 million and an increase of $16 million, respectively. We expect certain levels of volatility in the GRAIL contingent consideration liability are possible in future quarters.
Changes in the estimated fair value of our contingent consideration liabilities during YTD 2024 were as follows:
Interest expense, which included amortization of debt discounts and issuance costs, was $36 million and $74 million in Q3 2024 and YTD 2024, respectively, and $18 million and $55 million in Q3 2023 and YTD 2023, respectively.
4.650% Term Notes due 2026 (2026 Term Notes)
On September 9, 2024, we issued $500 million aggregate principal amount of 2026 Term Notes. After deducting discounts and issuance costs, we received net proceeds of $497 million, which were used to repay a portion of the outstanding debt under the Delayed Draw Credit Agreement. The 2026 Term Notes, which mature on September 9, 2026, accrue interest at a rate of 4.650% per annum, payable semi-annually on March 9 and September 9 of each year, beginning on March 9, 2025. We may redeem for cash all or any portion of the 2026 Term Notes, at our option, at any time prior to maturity at make-whole premium redemption prices as defined in the form of the notes.
5.800% Term Notes due 2025 (2025 Term Notes) and 5.750% Term Notes due 2027 (2027 Term Notes)
In December 2022, we issued $500 million aggregate principal amount of 2025 Term Notes and $500 million aggregate principal amount of 2027 Term Notes. The 2025 Notes, which mature on December 12, 2025, and the 2027 Notes, which mature on December 13, 2027, accrue interest at a rate of 5.800% and 5.750% per annum, respectively, payable semi-annually. Interest for the 2025 Notes is payable on June 12 and December 12 of each year and interest for the 2027 Notes is payable on June 13 and December 13 of each year, beginning in June 2023.
We may redeem for cash all or any portion of the 2025 or 2027 Term Notes, at our option, at any time prior to maturity. Prior to November 12, 2025 for the 2025 Notes and prior to November 13, 2027 for the 2027 Notes, the notes are redeemable at make-whole premium redemption prices as defined in the applicable forms of note. After November 12, 2025 and November 13, 2027, respectively, the notes are redeemable at a redemption price equal to 100% of the principal to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date.
2.550% Term Notes due 2031 (2031 Term Notes)
In March 2021, we issued $500 million aggregate principal amount of 2031 Term Notes. The notes mature on March 23, 2031 and accrue interest at a rate of 2.550% per annum, payable semi-annually on March 23 and September 23 of each year. We may redeem for cash all or any portion of the notes, at our option, at any time prior to maturity. Prior to December 23, 2030, the notes are redeemable at make-whole premium redemption prices as defined in the form of the notes. After December 23, 2030, the notes are redeemable at a redemption price equal to 100% of the principal to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date.
On June 17, 2024, we entered into a 364-day delayed draw credit agreement (the Delayed Draw Credit Agreement), which provided us with a senior unsecured term loan credit facility in an aggregate principal amount of up to $750 million (the Delayed Draw Credit Facility). On June 20, 2024, we borrowed $750 million on the credit facility in order to provide a portion of the Disposal Funding to GRAIL as part of the Spin-Off. The delayed draw term loan incurred interest at a rate of 6.7%. On September 9, 2024, we repaid the full principal outstanding on the Delayed Draw Credit Facility, including accrued interest, of $761 million and terminated the Delayed Draw Credit Agreement. We recognized a loss on debt extinguishment of $5 million in Q3 2024 related to the write-off of unamortized debt issuance costs, which was included in interest expense in the condensed consolidated statements of operations.
Revolving Credit Agreement
On January 4, 2023, we entered into a credit agreement (the Revolving Credit Agreement), which provides us with a $750 million senior unsecured five-year revolving credit facility, including a $40 million sublimit for swingline borrowings and a $50 million sublimit for letters of credit (the Revolving Credit Facility). Proceeds of the loans under the Revolving Credit Facility may be used to finance working capital needs and for general corporate purposes.
The Revolving Credit Facility matures, and all amounts outstanding become due and payable in full, on January 4, 2028, subject to twoone-year extensions at our option, the consent of the extending lenders and certain other conditions. We may prepay amounts borrowed and terminate commitments under the Revolving Credit Facility at any time without premium or penalty. As of September 29, 2024, there were no borrowings or letters of credit outstanding under the credit facility, and we were in compliance with all financial and operating covenants.
Loans under the Revolving Credit Facility will have a variable interest rate based on either the term secured overnight financing rate (SOFR) or the alternate base rate, plus an applicable rate that varies with our debt rating and, in the case of loans bearing interest based on term SOFR, a credit spread adjustment equal to 0.10% per annum. The Revolving Credit Agreement includes an option for us to elect to increase commitments under the credit facility or enter into one or more tranches of term loans in the aggregate principal amount of up to $250 million, subject to consent of the lenders providing the additional commitments or loans and certain other conditions.
The Revolving Credit Agreement contains financial and operating covenants. Pursuant to the Revolving Credit Agreement, we are required to maintain a ratio of total debt to adjusted annual earnings before interest, taxes, depreciation and amortization (EBITDA), calculated based on the four consecutive fiscal quarters ending with the most recent fiscal quarter, of not greater than 3.50 to 1.00 as of the end of each fiscal quarter. Upon the consummation of any Qualified Acquisition (as defined in the Revolving Credit Agreement) and us providing notice to the Administrative Agent, the ratio increases to 4.00 to 1.00 for the fiscal quarter in which the acquisition is consummated and the three consecutive fiscal quarters thereafter. The operating covenants include, among other things, limitations on (i) the incurrence of indebtedness by our subsidiaries, (ii) liens on our and our subsidiaries assets, and (iii) certain fundamental changes and the disposition of assets by us and our subsidiaries. The Credit Agreement contains other customary covenants, representations and warranties, and events of default.
6. STOCKHOLDERS' EQUITY
As of September 29, 2024, approximately 5.4 million shares remained available for future grants under the Amended and Restated 2015 Stock and Incentive Compensation Plan (the 2015 Plan). In connection with the GRAIL Spin-Off, all unvested RSU and PSU were equitably adjusted pursuant to the plan to preserve their intrinsic value and the number of shares reserved for issuance under the 2015 Plan was increased by 160,000 shares.
(1)We issue PSU for which the number of shares issuable is based on our performance relative to specified earnings per share targets (EPS PSU) and PSU with a market condition that vest based on the Company’s relative total shareholder return as compared to a peer group of companies (rTSR PSU). In Q1 2024, we began to issue PSU for which the number of shares issuable is based on our performance relative to specified operating margin targets (OM PSU). For EPS and OM PSU, the number of units reflect the estimated number of shares to be issued at the end of the performance period. For rTSR PSU, the number of units reflect the estimated number of shares to be issued based on performance as of the current reporting period. Awarded units are presented net of performance adjustments.
Stock Options
Stock option activity was as follows:
Units in thousands
Options
Weighted-Average Exercise Price
Performance Options(1)
Weighted-Average Exercise Price
Outstanding at December 31, 2023
35
$
330.25
16
$
87.74
Cancelled
(35)
$
330.25
(16)
$
87.74
Outstanding at September 29, 2024
—
$
—
—
$
—
_____________
(1)In connection with the GRAIL acquisition, we issued replacement performance stock options to GRAIL employees in 2021. In connection with the GRAIL Spin-Off, all outstanding performance stock options were assumed by GRAIL.
Liability-Classified Awards
Prior to the GRAIL Spin-Off, we granted cash-based equity incentive awards to GRAIL employees, which were accounted for as liability-classified awards. In connection with the Spin-Off, these awards were assumed by GRAIL.
Cash-based equity incentive award activity was as follows:
In millions
Outstanding at December 31, 2023
$
292
Granted
67
Vested and paid in cash
(54)
Cancelled
(13)
Change in fair value
(9)
Derecognition for GRAIL Spin-Off(1)
(283)
Outstanding at September 29, 2024
$
—
_____________
(1)The estimated liability immediately prior to the Spin-Off, recorded in accrued liabilities, was $53 million, which was disposed of as part of GRAIL’s net assets. See note 2. GRAIL Spin-Off for additional details.
We recognized share-based compensation expense on these cash-based equity incentive awards of $52 million in YTD 2024, prior to the Spin-Off, and $26 million and $72 million in Q3 2023 and YTD 2023, respectively.
In connection with the acquisition of GRAIL, we assumed a performance-based award for which vesting was based on GRAIL’s future revenues and had an aggregate potential value of up to $78 million. Prior to the GRAIL Spin-Off, it was not probable that the performance conditions associated with the award would be achieved and, therefore, no share-based compensation expense was recognized in the condensed consolidated statements of operations. In connection with the Spin-Off, this award was assumed by GRAIL. For a period of 2.5 years following the Spin-Off, we are obligated to indemnify GRAIL for cash payments that become earned and payable related to this award. The indemnification is accounted for in accordance with ASC 460. As of September 29, 2024, we recognized a non-contingent liability of $1 million for this indemnification, with a corresponding charge to additional paid-in capital.
Employee Stock Purchase Plan (ESPP)
The price at which common stock is purchased under the ESPP is equal to 85% 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 2024, approximately 0.5 million shares were issued under the plan. As of September 29, 2024, there were approximately 12.4 million shares available for issuance under the ESPP, which reflects an upward adjustment of approximately 0.5 million shares pursuant to the terms of the plan to account for the GRAIL Spin-Off.
The assumptions used and the resulting estimate of weighted-average fair value per share for stock purchased under the ESPP during YTD 2024 were as follows:
Risk-free interest rate
4.35% - 5.54%
Expected volatility
41% - 49%
Expected term
0.5 - 1.1 year
Expected dividends
0
%
Weighted-average grant-date fair value per share
$
37.24
Share Repurchases
In August 2024, our Board of Directors authorized a new share repurchase program, which cancels and supersedes all prior and available repurchase authorizations, to repurchase up to $1.5 billion of our outstanding common stock. The repurchases may be completed through open market purchases, pursuant to Rule 10b5-1 or Rule 10b-18, or through an accelerated share repurchase program. Authorizations to repurchase up to $1.4 billion of our outstanding common stock remained available as of September 29, 2024.
Share repurchase activity during Q3 2024 was as follows:
In millions, except shares in thousands
Number of shares repurchased
770
Total cost of shares repurchased(1)
$
99
_____________
(1)Total cost of shares repurchased includes the 1% excise tax imposed as part of the Inflation Reduction Act of 2022, which is calculated based on share repurchases, net of certain share issuances, and was immaterial for Q3 2024.
Share-Based Compensation
Share-based compensation expense, which includes expense for both equity and liability-classified awards, reported in our condensed consolidated statements of operations was as follows:
As of September 29, 2024, unrecognized compensation cost, related to restricted stock and ESPP shares issued to date, of $655 million was expected to be recognized over a weighted-average period of approximately 2.5 years.
Changes in the reserve for product warranties were as follows:
In millions
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Balance at beginning of period
$
17
$
20
$
21
$
18
Additions charged to cost of product revenue
8
10
30
30
Repairs and replacements
(9)
(11)
(35)
(29)
Balance at end of period
$
16
$
19
$
16
$
19
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to twelve 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.
Restructuring
In Q2 2023, we implemented a cost reduction initiative that included workforce reductions, the consolidation of certain facilities and other actions to reduce expenses, all as part of a plan to realign operating expenses while maintaining focus on our innovation roadmap and sustainable long-term growth. In YTD 2024, we recorded restructuring charges primarily consisting of asset impairment charges related to our leased facilities.
A summary of the pre-tax restructuring charges are as follows:
In millions
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Cumulative charges recorded since inception
Employee separation costs
$
6
$
7
$
13
$
33
$
61
Asset impairment charges(1)
—
49
32
56
132
Other costs
—
2
1
2
5
Total restructuring charges(2)
$
6
$
58
$
46
$
91
$
198
_____________
(1)For YTD 2024, charges primarily relate to impairment of right-of-use assets and leasehold improvements for our Foster City campus.
For YTD 2023, charges primarily relate to impairment of right-of-use assets and leasehold improvements for our i3 campus.
(2)For Q3 2024, $5 million was recorded in SG&A expense and $1 million in R&D expense.
For YTD 2024, $43 million was recorded in SG&A expense, $2 million in R&D expense, and remainder in cost of revenue.
For Q3 2023, $55 million was recorded in SG&A expense, $2 million in R&D expense, and remainder in cost of revenue.
For YTD 2023, $74 million was recorded in SG&A expense, $13 million in R&D expense, and remainder in cost of revenue.
We recorded right-of-use asset impairments of $18 million in Q1 2024 related to our campus in Foster City, California and another property in San Diego, California. The impairments, which were recognized in selling, general and administrative expense, were determined by comparing the fair values of the impacted right-of-use assets to the carrying values of the assets as of the impairment measurement date. The fair values of the right-of-use assets were estimated using the discounted future cash flows method, which includes estimates and assumptions for future sublease rental rates that reflect current sublease market conditions, as well as discount rates. The estimates and assumptions used in our assessments represent Level 3 measurements because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. We also recorded $14 million of leasehold improvement impairments in Q1 2024, related to our Foster City campus, recognized in selling, general and administrative expense. We continue to evaluate our options with respect to the rest of our campus in Foster City, California and the other property in San Diego, California. As of September 29, 2024, we had remaining assets, consisting primarily of right-of-use assets and leasehold improvements, related to our Foster City campus and the other property in San Diego, California of approximately $136 million.
A summary of the restructuring liability is as follows:
In millions
Employee Separation Costs(1)
Other Costs
Total
Amount recorded in accrued liabilities as of December 31, 2023
$
17
$
1
$
18
Additional expense recorded
13
1
14
Cash payments
(22)
(2)
(24)
Adjustments to accrual
(2)
—
(2)
Amount recorded in accrued liabilities as of September 29, 2024
$
6
$
—
$
6
_____________
(1)It is expected that substantially all of the employee separation related charges will be paid by the end of Q4 2024.
Impairment of Goodwill and Intangible Assets
Goodwill is reviewed for impairment annually, during the second quarter of our fiscal year, or more frequently if an event occurs indicating the potential for impairment. In May 2024, we performed our annual goodwill impairment test for our two reporting units: Core Illumina and GRAIL. We performed a quantitative test for both reporting units. GRAIL’s carrying value exceeded its fair value, estimated as $580 million, and we recorded a goodwill impairment of $1,466 million in Q2 2024. There was no impairment for Core Illumina, as its fair value exceeded its carrying value.
To determine the fair value of GRAIL as of May 2024, we utilized enterprise value estimates of GRAIL, as estimated by investment bankers for purposes of determining pricing for the Spin-Off. Estimates and assumptions used to derive the investment bankers’ enterprise value estimates included estimated revenues for a two year period based on assumed growth rates and implied revenue multiples for comparable companies. These estimates and assumptions represent a Level 3 measurement as they are supported by little or no market activity and reflect our own assumptions in measuring fair value. An increase in estimated enterprise values for GRAIL of 100% would still have resulted in a full impairment of goodwill. In prior periods, we used a combination of both an income (discounted cash flows) and market approach to determine the fair value of GRAIL. The income approach utilized projected cash flows for GRAIL based on a long-range plan which contemplated FDA approval and estimated cash flows for a 15 year period. Based on this approach, in Q3 2023, we estimated the fair value of GRAIL to be $3.6 billion, using a selected discount rate of 24.0%, and recorded a goodwill impairment of $712 million. An increase of 50 to 100 basis points to the discount rate used in our assessment at that time would have resulted in additional goodwill impairment of $200 million to $350 million. Using this same approach in Q4 2023 suggested no further decrement in fair value. Initial analyst coverage of GRAIL from December 2023 into the spring of 2024 suggested that GRAIL could be valued between $3 billion and $4 billion. By May 2024, prior to the consummation of the GRAIL Spin-Off, additional information about GRAIL had become available in GRAIL’s amended Form 10 filings and a publicly available management presentation, which included updated disclosure about GRAIL’s business and anticipated near term financial trends. Prior to the consummation of the GRAIL Spin-Off, the amount of GRAIL’s Disposal Funding, $974 million, was also disclosed. Analyst and banker valuation estimates then began to estimate fair values between $400 million and $770 million, consistent with the impairment recorded in Q2 2024.
To determine the fair value of Core Illumina, we used a combination of both an income and market approach consistent with prior periods. The income approach utilized estimated discounted cash flows for the reporting unit, while the market approach utilized comparable company information. Estimates and assumptions used in the income approach included projected cash flows and a discount rate and represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.
We also evaluated GRAIL’s in-process research and development (IPR&D) asset for potential impairment, in May 2024, as part of our annual test. We further concluded the when-issued trading activity for GRAIL’s common stock, in June 2024, to be an additional triggering event that required an additional impairment test be performed. The carrying value of the IPR&D asset exceeded its estimated fair value and we recorded an impairment of $420 million in Q2 2024. The fair value of GRAIL’s IPR&D was determined using an income approach, specifically a discounted cash flow model. Estimates and assumptions used in the income approach, which represent a Level 3 measurement, included projected cash flows and a discount rate of 46.5%. The discount rate was derived from reconciling GRAIL’s long-range plan, which contemplated FDA approval and estimated cash flows for a 15 year period, to observed market values of GRAIL based on the when-issued trading activity. An increase of 300 basis points to the discount rate used in our assessment would have resulted in additional impairment of $20 million. There is substantial risk inherent in forecasting revenues and spend associated with research and development, including assumptions around the timing and level of resources and investment to be made, which were made more challenging in light of the Spin-Off and related Disposal Funding.
We performed a recoverability test for GRAIL’s definite-lived intangible assets, which include developed technology and trade name, noting no impairment. No impairment was noted for Core Illumina definite-lived intangible assets.
Goodwill
Changes to goodwill during YTD 2024 were as follows:
In millions
Balance as of December 31, 2023(1)
$
2,545
Acquisition
34
Impairment
(1,466)
Balance as of September 29, 2024
$
1,113
_____________
(1)The balance as of December 31, 2023 includes accumulated impairment of $4,626 million related to our GRAIL reporting unit.
Intangible Assets
The following is a summary of our identifiable intangible assets:
September 29, 2024
December 31, 2023
In millions
Gross Carrying Amount
Accumulated Amortization
Intangible Assets, Net
Gross Carrying Amount
Accumulated Amortization
Impairment
Intangible Assets, Net
Developed technologies
$
465
$
(296)
$
169
$
2,807
$
(585)
$
—
$
2,222
Licensed technologies
227
(107)
120
274
(133)
—
141
Trade name
2
(2)
—
43
(14)
—
29
Customer relationships
16
(14)
2
14
(13)
—
1
License agreements
19
(13)
6
14
(13)
—
1
Database
12
(4)
8
12
(3)
—
9
Total finite-lived intangible assets, net
741
(436)
305
3,164
(761)
—
2,403
In-process research and development (IPR&D)
—
—
—
705
—
(115)
590
Total intangible assets, net
$
741
$
(436)
$
305
$
3,869
$
(761)
$
(115)
$
2,993
The significant decrease in developed technologies, trade name, and IPR&D reflect the GRAIL intangible assets disposed of in connection with the Spin-Off. See note 2. GRAIL Spin-Off for more information. Additionally, in Q1 2024, we placed into service (reflected in developed technologies) the IPR&D asset we acquired in Q2 2021.
As a result of the Fluent BioSciences acquisition in Q3 2024, we recorded a developed technology intangible of $42 million, with a useful life of 7 years, and a customer relationship intangible of $2 million, with a useful life of 11 years. We are still finalizing the allocation of the purchase price as it relates to the completion of certain tax returns. We expect to finalize the valuation as soon as practicable, but no later than one year after the acquisition.
Amortization expense for Q3 2024 and YTD 2024 was $17 millionand $113 million, respectively, and $49 million and $148 million in Q3 2023 and YTD 2023, respectively. The estimated future annual amortization of finite-lived intangible assets is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors.
In millions
Estimated Annual Amortization
2024 (remainder of year)
$
17
2025
68
2026
56
2027
54
2028
52
Thereafter
58
Total
$
305
Derivative Financial Instruments
We are exposed to foreign exchange rate risks in the normal course of business and use derivative financial instruments to partially offset this exposure. We do not use derivative financial instruments for speculative or trading purposes. Foreign exchange contracts are carried at fair value in other current assets, other assets, accrued liabilities, or other long-term liabilities, as appropriate, on the condensed consolidated balance sheets.
We use foreign exchange forward contracts to manage foreign currency risks related to monetary assets and liabilities denominated in currencies other than the U.S. dollar. These derivative financial instruments have terms of one month or less and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income (expense), net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of September 29, 2024, 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 September 29, 2024 and December 31, 2023, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $497 million and $926 million, respectively. In September 2024, as a result of the European Commission withdrawing its previously imposed fine, the related forward contracts we previously entered into for a total notional amount of €432 million were terminated.
We use foreign currency forward contracts to hedge portions of our foreign currency exposure associated with forecasted revenue transactions. These derivative financial instruments have terms up to 24 months and are designated as cash flow hedges. Changes in fair value of our cash flow hedges are recorded as a component of accumulated other comprehensive loss and are reclassified to revenue in the same period the underlying hedged transactions are recorded. We regularly review the effectiveness of our hedges and consider them to be ineffective if it becomes probable that the forecasted transactions will not occur in the identified period. Changes in fair value of the ineffective portions of our cash flow hedges, if any, are recognized in other income (expense), net. As of September 29, 2024, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, Canadian dollar, and Chinese Yuan Renminbi. As of September 29, 2024 and December 31, 2023, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $671 million and $628 million, respectively. We reclassified $3 million and $10 million to revenue in Q3 2024 and YTD 2024, respectively, and $5 million and $9 million to revenue in Q3 2023 and YTD 2023, respectively. As of September 29, 2024, the fair value of foreign currency forward contracts recorded in total assets and total liabilities was $2 million and $10 million, respectively. As of December 31, 2023, the fair value of foreign currency forward contracts recorded in total assets and total liabilities was $5 million and $9 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 condensed consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations, and/or cash flows.
Acquisition of GRAIL
As of September 6, 2024, all previously disclosed regulatory proceedings in the United States and European Union related to our acquisition of GRAIL have been resolved (as further described below).
On April 19, 2021, the European Commission sought and subsequently accepted a request for a referral of the GRAIL acquisition for European Union merger review, submitted by a Member State of the European Union (France), and joined by several other EEA Member States (Belgium, Greece, Iceland, the Netherlands and Norway), under Article 22(1) of Council Regulation (EC) No 139/2004 (the EU Merger Regulation). The European Commission had never solicited referrals to take jurisdiction over an acquisition of a U.S. company that had no revenue in Europe. On April 28, 2021, we filed an action in the General Court of the European Union (the EU General Court) asking for annulment of the European Commission’s assertion of jurisdiction to review the acquisition under Article 22 of the EU Merger Regulation, as the acquisition does not meet the jurisdictional criteria under the EU Merger Regulation or under the national merger control laws of any Member State of the European Union. On July 13, 2022, the EU General Court reached a decision in favor of the European Commission, holding that the European Commission has jurisdiction under the EU Merger Regulation to review the acquisition. On September 22, 2022, we filed an appeal in the Court of Justice of the European Union (the EU Court of Justice) asking for annulment of the EU General Court’s judgment.
On December 17, 2023, we announced that we would divest GRAIL. On April 12, 2024, the European Commission issued a decision approving our divestment plan, which was submitted to the EC pursuant to its October 12, 2023 decision requiring Illumina to unwind its acquisition of GRAIL. On June 24, 2024, we completed the separation (the Spin-Off) of GRAIL into a separate, independent publicly traded company through the distribution of approximately 85.5% of the outstanding GRAIL common stock to Illumina stockholders on a pro rata basis.
On September 3, 2024, the EU Court of Justice ruled in our favor, confirming that the European Commission had unlawfully asserted jurisdiction over our acquisition of GRAIL, and hence annulling the EU General Court’s judgment and the European Commission’s decisions accepting the referral of the GRAIL acquisition for EU merger review (the EU Court of Justice Judgment). The EU Court of Justice Judgment concludes these proceedings and is not subject to further appeals. In view of this judgment, on September 6, 2024, the European Commission issued a decision (the Withdrawal Decision) withdrawing all of its prior decisions, including (1) its July 22, 2021 decision opening an investigation of Illumina’s proposed acquisition of GRAIL, (2) its September 6, 2022 decision prohibiting Illumina’s acquisition of GRAIL, (3) its October 29, 2021 and October 28, 2022 decisions concerning interim measures, (4) its October 12, 2023 decision requiring Illumina to unwind its acquisition of GRAIL, and (5) its July 12, 2023 decision fining Illumina €432 million and GRAIL for closing the acquisition before approval by the European Commission. The Withdrawal Decision resolves all ongoing regulatory proceedings in the European Union.
As a result of the European Commission withdrawing its previously imposed fine, we recognized a net gain of $481 million in Q3 2024. We recognized a gain of $489 million in operating expense, resulting from reversal of the accrued fine and related accrued interest, offset by a loss of $8 million, recognized in other income (expense), net, for the reversal of associated foreign currency fluctuations. The fine accrued interest at a rate of 5.5% per annum while it was outstanding. The guarantees we provided in October 2023 to satisfy the obligation in lieu of cash payment while we appealed the European Commission’s jurisdictional and fine decisions are no longer outstanding.
On August 15, 2024, the U.S. Federal Trade Commission dismissed the previously disclosed administrative complaint in light of the completion of the Spin-Off.
SEC Inquiry Letter
In July 2023, we were informed that the staff of the SEC was conducting an investigation relating to Illumina and was requesting documents and communications primarily related to Illumina’s acquisition of GRAIL and certain statements and disclosures concerning GRAIL, its products and its acquisition, and related to the conduct and compensation of certain members of Illumina and GRAIL management, among other things. Illumina is cooperating with the SEC in this investigation.
Shareholder Derivative Complaints
On October 17, 2023, a stockholder derivative and class action complaint captioned Icahn Partners LP, et al. v. deSouza, et al., purportedly brought on behalf of Illumina and public holders of Illumina’s common stock, was filed in the Delaware Court of Chancery against certain current and former directors (including our former Chief Executive Officer). We are named as a nominal defendant in the complaint. The lawsuit alleges the named directors breached their fiduciary duties by knowingly causing Illumina to unlawfully close the GRAIL acquisition, concealing material facts related to the GRAIL acquisition and making inadequate disclosures. Before the filing of the complaint, the purported stockholders did not make a demand that our Board of Directors pursue the claims asserted therein. The complaint seeks damages, costs and expenses, including attorney fees, the certification and consolidation of a putative class, the issuance of amended disclosures, the removal of conflicted directors and declaratory and other equitable relief. Since the lawsuit is brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us.
On November 1, 2023, the defendants filed a motion to dismiss the complaint, which has not yet been briefed. On the same day, Illumina-joined by the director defendants-moved to strike portions of the complaint that contain improperly included confidential and privileged information. On January 16, 2024, the Court granted the motion to strike. On December 5, 2023, the plaintiffs moved to expedite the proceedings with respect to their direct claims. The director defendants opposed that motion and Illumina joined their opposition. On January 19, 2024, the Court denied plaintiffs’ motion to expedite. On January 23, 2024, the plaintiffs filed a motion for reargument of the Court’s January 16 opinion, which the Court denied on February 19, 2024. On February 29, 2024, the plaintiffs filed an application to the trial court to certify the orders granting the motion to strike and denying the motion for reargument for interlocutory appeal. The Court refused the application on March 20, 2024. On March 14, 2024, the plaintiffs filed an application for interlocutory appeal with the Supreme Court of Delaware, which the Court denied on April 11, 2024.
On February 26, 2024, a stockholder derivative complaint captioned City of Omaha Police and Firefighters Retirement System v. deSouza, et al., purportedly brought on behalf of Illumina, was filed in the Delaware Court of Chancery against certain current and former directors. On April 16, 2024, a stockholder derivative complaint captioned City of Roseville General Employees Retirement System, et al. v. deSouza, et al., purportedly brought on behalf of Illumina, was filed in the Delaware Court of Chancery against certain current and former directors and officers. On August 16, 2024, a stockholder derivative complaint captioned Thomas P. DiNapoli v. John Thompson et al., purportedly brought on behalf of Illumina, was filed in the Delaware Court of Chancery against certain current and former directors. We are named as a nominal defendant in the complaints. The lawsuits allege the named directors and officers breached their fiduciary duties by knowingly causing Illumina to unlawfully close the GRAIL acquisition. The stockholders previously made requests to inspect certain books and records under Delaware law, and they purport to base their complaint in part on documents obtained from Illumina in response to those requests. Before the filing of the complaint, the purported stockholders did not make a demand that our Board of Directors pursue the claim asserted therein. The complaints seek damages, costs and expenses, including attorney fees and other equitable relief. Since the lawsuits are brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us.
On March 26, 2024, the defendants filed a motion to dismiss the complaint in the lawsuit filed by City of Omaha Police and Firefighters Retirement System. The motion has not yet been briefed. On May 16, 2024, the defendants filed a motion to dismiss the complaint in the lawsuit filed by City of Roseville General Employees Retirement System, et al. The motion has not yet been briefed. On September 16, 2024, the defendants filed a motion to dismiss the complaint in the lawsuit filed by Thomas DiNapoli. The motion has not yet been briefed.
In light of the fact that these lawsuits are in an early stage, we cannot predict the ultimate outcome of the suits. We deny the allegations in the complaints and intend to vigorously defend the litigations.
On February 21, 2024, a stockholder derivative complaint captioned Elaine Wang, et al. v. deSouza, et al., purportedly brought on behalf of the Company was filed in the United States District Court for the District of Delaware (District of Delaware) against certain current and former directors. The Company is named as a nominal defendant in the complaint. The lawsuit alleges that the named directors breached their fiduciary duties by knowingly causing the Company to unlawfully close the GRAIL acquisition. Before the filing of the complaint, the purported stockholder did not make a demand that our Board of Directors pursue the asserted claims therein. The complaint seeks, among other things, restitution to the Company for the alleged damages caused by the named defendants. Since the lawsuit was brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us.
On March 8, 2024, a stockholder derivative complaint captioned Michael Warner, et al. v. deSouza, et al., purportedly brought on behalf of Illumina was also filed in the United States District Court for the Southern District of California against certain current and former directors. We are named as a nominal defendant in the complaint. The lawsuit alleges that the named directors breached their fiduciary duties by knowingly causing us to unlawfully close the GRAIL acquisition. Before the filing of the complaint, the purported stockholder did not make a demand that our Board of Directors pursue the asserted claims therein. The complaint seeks, among other things, restitution to Illumina for the alleged damages caused by the named defendants. Since the lawsuit was brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us. On March 28, 2024, the parties submitted a Joint Motion to Transfer the lawsuit to the District of Delaware, which the Court granted on March 29, 2024, and the Court transferred the lawsuit to the District of Delaware on the same day.
Elaine Wang, et al. v. deSouza, et al. and Michael Warner, et al. v. deSouza, et al. were voluntarily dismissed on April 29, 2024, and May 1, 2024, respectively. On May 1, 2024, Michael Warner sent a litigation demand to our Board of Directors requesting that a civil action for monetary damages be brought by the Board of Directors on behalf of Illumina against officers and directors involved with the GRAIL acquisition. On July 30, 2024, the Board unanimously determined that it was in the best interest of the Company and its shareholders to defer a final decision on the demand given, among other things, the pending stockholder lawsuits described herein and the similarity of issues raised in the demand and those lawsuits. Our Board will monitor the stockholder lawsuits and revisit the demand as warranted as the lawsuits progress. On June 3, 2024, Elaine Wang made requests to inspect certain books and records under Delaware law and the Company sent a production of documents in response to that demand.
On August 21, 2024, an additional stockholder, Jane Davidson, sent a litigation demand to our Board of Directors requesting that a civil action for breaches of fiduciary duty, indemnification, contribution and other appropriate claims be brought by the Board of Directors on behalf of Illumina against officers and directors involved with the GRAIL acquisition. On October 29, 2024, the Board unanimously determined that it was in the best interest of the Company and its shareholders to defer a final decision on the demand given, among other things, the pending stockholder lawsuits described herein and the similarity of issues raised in the demand and those lawsuits. Our Board will monitor the stockholder lawsuits and revisit the demand as warranted as the lawsuits progress.
Securities Class Actions
Federal Securities Class Actions. On November 11, 2023, the first of three securities class action complaints was filed against Illumina and certain of its current and former executive officers in the United States District Court for the Southern District of California. The first-filed case is captioned Kangas v. Illumina, Inc. et al., the second-filed case is captioned Roy v. Illumina, Inc. et al., and the third-filed case is captioned Louisiana Sheriffs’ Pension & Relief Fund v. Illumina, Inc. et al. (collectively, the Actions). The complaints generally allege, among other things, that defendants made materially false and misleading statements and omitted material facts relating to Illumina’s acquisition of Grail. The complaints seek unspecified damages, interest, fees, and costs. On January 9, 2024, four movants filed motions to consolidate the Actions and to appoint a lead plaintiff (Lead Plaintiff Motions). On April 11, 2024, the Court issued an order consolidating the Actions into a single action (captioned in re Illumina, Inc. Securities Litigation No. 23-cv-2082-LL-MMP), and appointed Universal-Investment-Gesellschaft mbH, UI BVK Kapitalverwaltungsgesellschaft mbH, and ACATIS Investment Kapitalverwaltungsgesellschaft mbH as lead plaintiffs (the Lead Plaintiffs). On June 21, 2024, the Lead Plaintiffs filed their consolidated amended complaint. The complaint alleges that Illumina and GRAIL and certain of their current and former directors and officers violated
Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5 in connection with Illumina’s acquisition of GRAIL. On September 13, 2024, the Lead Plaintiffs filed a second amended consolidated complaint. Illumina’s response is due November 12, 2024.
State Securities Class Actions. On February 2, 2024, the first of two additional securities class actions was filed against Illumina, certain of its officers and directors, and several other individuals and entities in the Superior Court of the State of California, County of San Mateo, captioned Loren Scott Mar v. Illumina, et al. and Scott Zerzanek v. Illumina, Inc. et al.. Both complaints generally allege, among other things, that defendants made materially false and misleading statements and omitted material facts in the November 2020 and February 2021 registration statements and prospectus relating to Illumina’s acquisition of Grail. The complaints seek unspecified damages, interest, fees, and costs. On March 29, 2024, the parties to the actions filed a Joint Stipulation to Consolidate the actions and to appoint co-lead counsel for plaintiffs, which the Court granted on April 5, 2024. On August 12, 2024, the Plaintiffs filed their consolidated complaint. On September 6, 2024, Illumina and the other named defendants filed a motion to stay the litigation. On October 4, 2024, the plaintiffs opposed the motion to stay. A hearing on the motion to stay is scheduled for December 6, 2024.
In light of the fact that the lawsuits are in an early stage, we cannot predict the ultimate outcome of the suits. We deny the allegations in the complaints and intend to vigorously defend the litigation.
DOJ Civil Investigative Demand
On January 18, 2024, we received a civil investigative demand (CID) from the U.S. Department of Justice, requiring production of certain documents and information in the course of a False Claims Act investigation to determine whether there is or has been a violation of 31 U.S.C. § 3729. The False Claims Act investigation concerns allegations that the Company caused the submission of false claims to Medicare and other federal government programs because it misrepresented its compliance with cybersecurity requirements to the Food and Drug Administration and other federal agencies that purchase its devices. The Company is cooperating with the government.
Books and Records Action
On February 14, 2024, a stockholder filed a complaint in the Delaware Court of Chancery captioned Pavers and Road Builders Benefit Funds v. Illumina, Inc. seeking to inspect certain books and records related to the GRAIL transaction, including certain materials and minutes from meetings of our Board of Directors, which have been withheld because the Company contends they are non-responsive to the request or subject to the attorney-client privilege. Illumina previously provided documents to the stockholder in response to a demand made by letter under Delaware law, but the stockholder seeks additional and unredacted materials through this action. On March 11, 2024, Illumina filed an answer to the complaint, denying that the stockholder was entitled to inspection. We deny that the stockholder is entitled to review the documents and intend to vigorously defend the litigation. The trial took place on June 7, 2024. On July 16, 2024, the Court issued a decision requiring the Company to produce certain additional documents to plaintiff. On July 26, 2024, the stockholder filed a motion seeking in camera review of certain documents that the Company maintains are not subject to the Court’s July 16, 2024 order to produce documents. The Court granted the motion on August 19, 2024, and the Company filed the documents for in camera review on August 29, 2024. On October 7, 2024, the Court ruled that the Company need not produce the documents subject to the motion for in camera review because they are privileged under the attorney opinion work product doctrine.
9. 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 (loss) before income taxes and taxable income.
Our effective tax rates for Q3 2024 and YTD 2024 were 2.1% and (3.2)%, respectively, compared to 3.6% and (3.8)% in Q3 2023 and YTD 2023, respectively. The variance from the U.S. federal statutory tax rate of 21% for Q3 2024 was primarily because of the $25 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax, respectively, and the $10 million income tax expense impact of capitalizing research and development expenses for tax purposes. The variance from the U.S. federal statutory tax rate of 21% for YTD 2024 was primarily because of the $308 million income tax expense impact from the impairment of goodwill, which is nondeductible for tax purposes, $141 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax, and the $53 million income tax expense impact of capitalizing research and development expenses for tax purposes. The income tax rate in Q3 2024 and YTD 2024 was favorably impacted by the reversal of the European Commission fine related to the GRAIL acquisition, which is excluded from taxable income, and by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
As of September 29, 2024 and December 31, 2023, prepaid income taxes, included within prepaid expenses and other current assets on the condensed consolidated balance sheets, were $16 million and $75 million, respectively.
10. SEGMENT INFORMATION
We report segment information based on the management approach, which designates the internal reporting used by the Chief Operating Decision Maker (CODM) for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment using information about its revenue and income (loss) from operations. Our CODM does not evaluate our operating segments using discrete asset information. We do not allocate expenses between segments.
Core Illumina: Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of GRAIL. Core Illumina sells products and provides services to GRAIL, and vice versa, in accordance with contractual agreements between the entities.
GRAIL: GRAIL is a healthcare company focused on early detection of multiple cancers. We completed the Spin-Off of GRAIL on June 24, 2024. Refer to note 2. GRAIL Spin-Off for additional details.
In millions
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Revenue:
Core Illumina
$
1,080
$
1,106
$
3,228
$
3,341
GRAIL
—
21
55
62
Eliminations
—
(8)
(15)
(21)
Consolidated revenue
$
1,080
$
1,119
$
3,268
$
3,382
Income (loss) from operations:
Core Illumina
$
741
$
262
$
1,298
$
519
GRAIL
—
(1,015)
(2,305)
(1,424)
Eliminations
—
(1)
(1)
—
Consolidated income (loss) from operations
$
741
$
(754)
$
(1,008)
$
(905)
Total other expense, net primarily relates to Core Illumina, and we do not allocate income taxes to our segments.
Our Management’s Discussion and Analysis (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying condensed consolidated financial statements and notes. This MD&A is organized as follows:
•Management’s Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.
•Results of Operations. Detailed discussion of our revenues and expenses.
•Liquidity and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.
•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.
•Quantitative and Qualitative Disclosure About Market Risk. Discussion of our financial instruments’ exposure to market risk.
Our discussion of our results of operations, financial condition, and cash flow for Q3 2023 and YTD 2023 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 October 1, 2023.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. See Consideration Regarding Forward-Looking Statements preceding the Condensed Consolidated Financial Statements section of this report for additional factors relating to such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Operating results are not necessarily indicative of results that may occur in future periods.
MANAGEMENT’S OVERVIEW AND OUTLOOK
This overview and outlook provide a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report.
About Illumina
Our focus on innovation has established us as a global leader in DNA sequencing and array-based technologies, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies. Our comprehensive line of products addresses the scale of experimentation and breadth of functional analysis to advance disease research, drug development, and the development of molecular tests. This portfolio of leading-edge sequencing and array-based solutions addresses a range of genomic complexity and throughput, enabling researchers and clinical practitioners to select the best solution for their scientific challenge.
On June 24, 2024, we completed the Spin-Off of GRAIL into a new public company through the distribution of approximately 85.5% of the outstanding shares of common stock of GRAIL to Illumina stockholders on a pro rata basis. We retained approximately 14.5% of the shares of GRAIL common stock immediately following the Spin-Off. The disposition of GRAIL did not meet the criteria to be reported as a discontinued operation and accordingly, GRAIL’s assets, liabilities, results of operations and cash flows have not been reclassified. In connection with the Spin-Off, Illumina’s stockholders received one share of GRAIL common stock for every six shares of Illumina common stock held on the Record Date. Refer to note 2. GRAIL Spin-Off for further details.
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto 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
Since 2023, macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn, competitive challenges in our China region, and the sanctions imposed on Russia as a result of the armed conflict between Russia and Ukraine have impacted both Illumina directly and our customers’ behavior. For example, some customers experienced supply chain pressures that delayed their lab expansions and others are managing inventory and capital more conservatively. We expect these factors to continue to have an impact on our sales and results of operations for the remainder of 2024, the size and duration of which is significantly uncertain.
Financial highlights for YTD 2024 included the following:
•Revenue decreased 3% in YTD 2024 to $3,268 million compared to $3,382 million in YTD 2023 primarily due to a decrease in sequencing instruments revenue, driven by fewer shipments of our high-throughput and mid-throughout instruments, offset by increases in sequencing consumables revenue and service and other revenue, primarily driven by our strategic partnerships and service contracts.
•Gross profit as a percentage of revenue (gross margin) was 65.3% in YTD 2024 compared to 61.2% in YTD 2023. The increase in gross margin was driven primarily by execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity, a more favorable mix of sequencing consumables, and a decrease in warranty and field service costs. This was offset by certain strategic partnership revenue that is lower margin. Our gross margin depends on many factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, services, and development and licensing revenue; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; freight costs; and product support obligations.
•Loss from operations was $1,008 million in YTD 2024 compared to $905 million in YTD 2023. The increase in loss from operations was due to an increase in operating expense of $166 million, which included an increase in goodwill and intangible impairment of $1,068 million, offset by a $488 million favorable impact in legal contingency and settlement, as a result of the European Commission withdrawing its previously imposed fine in September 2024, and an increase in the gains recognized on our GRAIL contingent consideration liability of $222 million, offset by a $63 million increase in gross profit. We continue to focus on our cost reduction initiatives to accelerate progress toward higher margins and create flexibility for further investment in high-growth areas.
•Our effective tax rate was (3.2)% in YTD 2024 compared to (3.8)% in YTD 2023. The variance from the U.S. federal statutory tax rate of 21% was primarily because of the income tax expense impact of the impairment of goodwill, which is nondeductible for tax purposes, the income tax expense impact of the reversal of the European Commission fine related to the GRAIL acquisition, which is excluded from taxable income, the income tax expense impact of research and development expense capitalization for tax purposes, and the income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax. This was partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
•We ended Q3 2024 with cash, cash equivalents, and short-term investments totaling $939 million, of which approximately $464 million was held by our foreign subsidiaries.
RESULTS OF OPERATIONS
To enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified reporting periods, stated as a percentage of total revenue.(1)
Q3 2024
Q3 2023
YTD 2024
YTD 2023
Revenue:
Product revenue
84.6
%
84.1
%
83.2
%
84.7
%
Service and other revenue
15.4
15.9
16.8
15.3
Total revenue
100.0
100.0
100.0
100.0
Cost of revenue:
Cost of product revenue
21.8
26.2
22.5
26.1
Cost of service and other revenue
7.8
8.5
8.8
8.4
Amortization of acquired intangible assets
1.5
4.2
3.4
4.3
Total cost of revenue
31.1
38.9
34.7
38.8
Gross profit
68.9
61.1
65.3
61.2
Operating expense:
Research and development
23.4
28.1
27.9
30.0
Selling, general and administrative
22.2
27.0
24.8
33.3
Goodwill and intangible impairment
—
73.4
57.8
24.3
Legal contingency and settlement
(45.3)
(0.1)
(14.4)
0.4
Total operating expense
0.3
128.4
96.1
88.0
Income (loss) from operations
68.6
(67.3)
(30.8)
(26.8)
Other income (expense):
Interest income
1.0
1.2
1.1
1.4
Interest expense
(3.4)
(1.7)
(2.3)
(1.7)
Other income (expense), net
0.4
(2.1)
(9.8)
(1.0)
Total other expense, net
(2.0)
(2.6)
(11.0)
(1.3)
Income (loss) before income taxes
66.6
(69.9)
(41.8)
(28.1)
Provision (benefit) for income taxes
1.4
(2.5)
1.3
1.1
Net income (loss)
65.2
%
(67.4)
%
(43.1)
%
(29.2)
%
_____________
(1)Percentages may not recalculate due to rounding.
Core Illumina consumables revenue increased in Q3 2024 and YTD 2024 primarily due to an increase in sequencing consumables revenue of $46 million and $48 million, respectively, driven primarily by an increase in NovaSeq X consumables. Core Illumina instruments revenue decreased in Q3 2024 and YTD 2024 primarily due to a decrease in sequencing instruments revenue of $75 million and $196 million, respectively, driven by fewer shipments of our high-throughput instruments, given we entered 2024 with a lower backlog of NovaSeq X instruments, as compared to 2023, given significant pre-orders following the launch, and fewer shipments of our mid-throughput instruments, primarily as capital and cash flow constraints continue to impact our customer’s purchasing behavior. Core Illumina service and other revenue increased in Q3 2024 and YTD 2024 primarily due to increased revenue from our strategic partnerships and extended maintenance service contracts, partially offset by decreased revenue from development and licensing agreements. The increase in YTD 2024 Core Illumina service and other revenue was also partially offset by decreased revenue from genotyping services.
The decrease in GRAIL revenue in Q3 2024 and YTD 2024 was due to the Spin-Off in Q2 2024.
The increase in Core Illumina gross margin in Q3 2024 and YTD 2024 was driven primarily by a favorable impact from the execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity, a more favorable mix of sequencing consumables, and a decrease in warranty and field service costs. The increase in YTD 2024 was offset by higher strategic partnership revenue that is lower margin.
The decrease in GRAIL gross loss in Q3 2024 and YTD 2024 was due to the Spin-Off in Q2 2024.
Operating Expense
Dollars in millions
Q3 2024
Q3 2023
Change
% Change
YTD 2024
YTD 2023
Change
% Change
Research and development:
Core Illumina
$
253
$
238
$
15
6
%
$
732
$
771
$
(39)
(5)
%
GRAIL
—
79
(79)
(100)
189
254
(65)
(26)
Eliminations
—
(2)
2
(100)
(8)
(12)
4
(33)
Consolidated research and development
253
315
(62)
(20)
913
1,013
(100)
(10)
Selling, general and administrative:
Core Illumina
239
216
23
11
621
857
(236)
(28)
GRAIL
—
87
(87)
(100)
192
271
(79)
(29)
Eliminations
—
—
—
—
—
(1)
1
(100)
Consolidated selling, general and administrative
239
303
(64)
(21)
813
1,127
(314)
(28)
Goodwill and intangible impairment:
Core Illumina
—
—
—
—
3
—
3
100
GRAIL
—
821
(821)
(100)
1,886
821
1,065
130
Consolidated goodwill and intangible impairment
—
821
(821)
(100)
1,889
821
1,068
130
Legal contingency and settlement:
Core Illumina
(488)
(1)
(487)
48,700
(474)
14
(488)
(3,486)
Total consolidated operating expense
$
4
$
1,438
$
(1,434)
(100)
%
$
3,141
$
2,975
$
166
6
%
Core Illumina R&D expense increased by $15 million, or 6%, in Q3 2024 primarily due to an increase in share-based compensation expense related to PSU awards. Core Illumina R&D expense decreased by $39 million, or 5%, in YTD 2024 primarily due to decreases in headcount and employee related compensation costs, restructuring charges of $14 million, and lab supply costs, as we continue to focus on our cost reduction initiatives.
Core Illumina SG&A expense increased by $23 million, or 11%, in Q3 2024 primarily due to a decrease in the gains recognized on our GRAIL contingent consideration liability of $61 million and an increase in share-based compensation expense related to PSU awards. The increase was offset by decreases in restructuring charges of $49 million and GRAIL-related transaction expenses, given the Spin-Off of GRAIL in Q2 2024. Core Illumina SG&A expense decreased by $236 million, or 28%, in YTD 2024 primarily due to an increase in the gains recognized on our GRAIL contingent consideration liability of $222 million and decreases in restructuring charges of $29 million, proxy contest charges of $28 million, and facility related costs, as we continue to exit certain of our facilities. The decrease was offset by increases in share-based compensation expense related to PSU awards and GRAIL-related transaction expenses, which included $53 million of expenses incurred in YTD 2024 directly related to the Spin-Off.
The decrease in GRAIL R&D and SG&A expense in Q3 2024 and YTD 2024 was due to the Spin-Off in Q2 2024.
GRAIL goodwill and intangible impairment for YTD 2024 consisted of goodwill impairment of $1,466 million and IPR&D intangible asset impairment of $420 million as a result of performing impairment tests in Q2 2024. See note 7. Supplemental Balance Sheet Details for additional information. GRAIL goodwill and intangible impairment for Q3 2023 and YTD 2023 consisted of goodwill impairment of $712 million and IPR&D intangible asset impairment of $109 million as a result of performing an interim impairment test in Q3 2023. Core Illumina goodwill and intangible impairment for YTD 2024 consisted of an IPR&D intangible asset impairment recorded in Q1 2024.
Core Illumina legal contingency and settlement in Q3 2024 and YTD 2024 primarily consisted of a gain of $489 million resulting from the reversal of the EC fine accrual, and related accrued interest, following the European Commission’s decision to withdraw its previously imposed fine. See note 8. Legal Proceedings for additional details. Core Illumina legal contingency and settlement in YTD 2023 primarily consisted of an adjustment to our accrual for the fine previously imposed by the European Commission and other patent litigation settlement activity.
Other Income (Expense)
Dollars in millions
Q3 2024
Q3 2023
Change
% Change
YTD 2024
YTD 2023
Change
% Change
Interest income
$
11
$
13
$
(2)
(15)
%
$
36
$
47
$
(11)
(23)
%
Interest expense
(36)
(19)
(17)
89
(75)
(59)
(16)
27
Other income (expense), net
4
(22)
26
(118)
(319)
(33)
(286)
867
Total other expense, net
$
(21)
$
(28)
$
7
(25)
%
$
(358)
$
(45)
$
(313)
696
%
Total other expense, net primarily relates to the Core Illumina segment.
Interest income in Q3 2024 and YTD 2024 consisted primarily of interest on our money market funds, which decreased primarily due to a lower cash balance in Q3 2024 as compared to the prior year. Interest expense consisted primarily of interest on our outstanding term debt and a loss on debt extinguishment of $5 million related to the repayment of our delayed draw term loan in Q3 2024. The fluctuation in other income (expense), net in Q3 2024 was primarily driven by a favorable net impact related to foreign currency activity as compared to the prior period and a decrease in net losses recognized on our strategic investments of $7 million. The fluctuation in other income (expense), net in YTD 2024 was primarily driven by an increase in net losses recognized on our strategic investments of $303 million, which included an unrealized loss of $332 million on our retained investment in GRAIL subsequent to the Spin-Off. This was offset by a favorable net impact related to foreign currency activity as compared to the prior year and an increase in the gains recognized on our Helix contingent value right of $7 million.
Our effective tax rate was 2.1% and (3.2)% in Q3 2024 and YTD 2024, respectively, compared to 3.6% and (3.8)% in Q3 2023 and YTD 2023, respectively. The variance from the U.S. federal statutory tax rate of 21% for Q3 2024 was primarily because of the $25 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax, respectively, and the $10 million income tax expense impact of capitalizing research and development expenses for tax purposes. The variance from the U.S. federal statutory tax rate of 21% for YTD 2024 was primarily because of the $308 million income tax expense impact from the impairment of goodwill, which is nondeductible for tax purposes, $141 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax, and the $53 million income tax expense impact of capitalizing research and development expenses for tax purposes. The income tax rate in Q3 2024 and YTD 2024 was favorably impacted by the reversal of the European Commission fine related to the GRAIL acquisition, which is excluded from taxable income, and by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
In Q3 2023 and YTD 2023, the variance from the U.S. federal statutory tax rate of 21% was primarily because of the $149 million income tax expense impact from the impairment of goodwill, which is nondeductible for tax purposes, the $20 million and $84 million income tax expense impact of capitalizing research and development expenses for tax purposes, respectively, and the $38 million and $63 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits, respectively. The income tax expense in Q3 2023 and YTD 2023 were also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 2024, we had $869 million in cash and cash equivalents, of which $464 million was held by our foreign subsidiaries. Cash and cash equivalents decreased by $179 million from December 31, 2023 due to factors described in the “Cash Flow Summary” below. In connection with the Spin-Off, we derecognized GRAIL’s cash and cash equivalents of $968 million, which included the required Disposal Funding (see note 2. GRAIL Spin-Off). 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. During YTD 2024, we received net proceeds from the issuance of our 2026 Term Notes of $497 million and repaid our delayed draw term loan of $750 million. Our ability to generate cash from operations, supplemented with the issuance of debt and/or liquidation of our short-term investments, provides us with the financial flexibility we need to meet operating, investing, and financing needs. As of September 29, 2024, we had $70 million in short-term investments, comprised of marketable equity securities.
In September 2024, the European Commission withdrew its previously imposed fine of €432 million. Accordingly, we reversed the related accrual and recognized a net gain of $481 million in Q3 2024. The guarantees we provided in October 2023 to satisfy the obligation in lieu of cash payment while we appealed the European Commission’s jurisdictional and fine decisions are no longer outstanding. Refer to note 8. Legal Proceedings for additional details.
In June 2024, we entered into a 364-day Delayed Draw Credit Facility, which provided us with a senior unsecured term loan credit facility in an aggregate principal amount of up to $750 million. On June 20, 2024, we borrowed $750 million on the Delayed Draw Credit Facility. The delayed draw term loan incurred interest at a rate of 6.7%. On September 9, 2024, we repaid the full principal amount outstanding under the Delayed Draw Credit Facility, including accrued interest, of $761 million and terminated the Delayed Draw Credit Agreement.
On September 9, 2024, we issued $500 million aggregate principal amount of 2026 Term Notes. We received net proceeds of $497 million, which were used to repay a portion of the outstanding debt under the Delayed Draw Credit Agreement. The 2026 Term Notes, which mature on September 9, 2026, accrue interest at a rate of 4.650% per annum, payable semi-annually on March 9 and September 9 of each year, beginning on March 9, 2025. We may redeem for cash all or any portion of the 2026 Term Notes, at our option, at any time prior to maturity.
In December 2022, we issued $500 million aggregate principal amount of 2025 Term Notes and $500 million aggregate principal amount of 2027 Term Notes. The 2025 Term Notes, which mature on December 12, 2025, and the 2027 Term Notes, which mature on December 13, 2027, accrue interest at a rate of 5.800% and 5.750% per annum, respectively, payable semi-annually in June and December of each year. In March 2021, we issued $500 million aggregate principal amount of 2031 Term Notes, which mature on March 23, 2031, and accrue interest at a rate of 2.550% per annum, payable semi-annually in March and September of each year. We may redeem for cash all or any portion of the 2025, 2027, or 2031 Term Notes, at our option, at any time prior to maturity.
In January 2023, we entered into the Revolving Credit Agreement, which provides us with a $750 million senior unsecured five year revolving credit facility, including a $40 million sublimit for swingline borrowings and a $50 million sublimit for letters of credit. The credit facility matures, and all amounts outstanding become due and payable in full, on January 4, 2028, subject to two one-year extensions at our option and consent of the extending lenders and certain other conditions. As of September 29, 2024, there were no outstanding borrowings.
As of September 29, 2024, the fair value of our contingent consideration liability related to GRAIL was $82 million, of which $81 million was included in other long-term liabilities. The contingent value rights entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year through August 2033. This reflects a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year is subject to a 9% contingent payment right during this same period. In YTD 2024, we paid $836,000 in aggregate Covered Revenue Payments related to Covered Revenues for the period Q4 2023 through Q2 2024 of $89 million in aggregate.
In August 2024, our Board of Directors authorized a new share repurchase program, which cancels and supersedes all prior and available repurchase authorizations, to repurchase up to $1.5 billion of our outstanding common stock. The repurchases may be completed through open market purchases, pursuant to Rule 10b5-1 or Rule 10b-18, or through an accelerated share repurchase program. Authorizations to repurchase up to $1.4 billion of our outstanding common stock remained available as of September 29, 2024.
We had $3 million (plus recallable distributions of approximately $10 million), $49 million, and $47 million, respectively, remaining in our capital commitments to three venture capital investment funds as of September 29, 2024 that are callable through April 2026, July 2029, and December 2034, respectively.
We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities and available borrowing capacity under theRevolving Credit Facility, are sufficient to fund our near-term capital and operating needs for at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, may 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;
•repurchases of our outstanding common stock; and
•the evolving needs of our facilities, including costs of leasing and building out facilities.
We expect that our revenue and results of operations, 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 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)
Effect of exchange rate changes on cash and cash equivalents
1
(9)
Net decrease in cash and cash equivalents
$
(179)
$
(1,084)
Operating Activities
Net cash provided by operating activities in YTD 2024 consisted of a net loss of $1,410 million, plus net adjustments of $2,368 million, less net changes in operating assets and liabilities of $485 million. The primary adjustments to net loss included goodwill and intangible impairment of $1,889 million, net loss on strategic investments of $342 million, share-based compensation expense of $291 million, depreciation and amortization expense of $283 million, and property and equipment and right-of-use asset impairment of $32 million, offset by change in fair value of contingent consideration liabilities of $304 million and deferred income taxes of $161 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by decreases in accrued liabilities and accounts payable.
Investing Activities
Net cash used in investing activities totaled $130 million in YTD 2024. We invested $99 million in capital expenditures, primarily associated with investments in facilities, paid $81 million for an acquisition, net of cash acquired, and other intangible assets, and purchased strategic investments, net of distributions, of $33 million. This was offset by the receipt of $83 million related to the settlement of our Helix contingent value right.
Financing Activities
Net cash used in financing activities totaled $523 million in YTD 2024. We deconsolidated cash and cash equivalents of $968 million, as a result of the GRAIL Spin-Off, repaid our delayed draw term loan of $750 million, and used $99 million to repurchase our common stock. This was offset by net borrowings on the Delayed Draw Credit Facility of $744 million, net proceeds received from the issuance of our 2026 Term Notes of $497 million, and proceeds received from the sale of shares under our employee stock purchase plan of $56 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income (loss), and net income (loss), as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Critical Accounting Policies and Estimates” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Though macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn present additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. There were no material changes to our critical accounting policies and estimates during YTD 2024.
For a summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, see note 1. Organization and Significant Accounting Policies within the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no substantial changes to our market risks in YTD 2024, 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 31, 2023.
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.
During the third quarter of 2024, we continued to monitor and evaluate the design and operating effectiveness of key controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.
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.
LEGAL PROCEEDINGS
See discussion of legal proceedings in note 8. Legal Proceedings in the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.
RISK FACTORS
Our business is subject to various risks, including those described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and the “Other Key Information” section of our Quarterly Report on Form 10-Q for the periods ended March 31, 2024 and June 30, 2024, 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:
On June 24, 2024, we completed the separation of GRAIL into a separate, independent publicly traded company. As of September 6, 2024, all previously disclosed regulatory proceedings in the United States and European Union related to our acquisition of GRAIL (the Acquisition) have come to an end. Litigation, regulation, and other proceedings related to or resulting from the Acquisition have resulted in operational restrictions and increased costs and could result in similar additional future consequences or further result in loss of revenues.
As previously disclosed, the Acquisition was subject to various legal challenges, including by the FTC and European Commission. As a result, we have been a party to a number of regulatory and administrative proceedings regarding the Acquisition.
On June 24, 2024, we completed the separation (the Spin-Off) of GRAIL into a separate, independent publicly traded company as described in note 2. GRAIL Spin-Off within the Consolidated Financial Statements. We incurred significant costs to complete the Spin-Off, including significant legal, financial advisory, regulatory and other professional services fees and additional expenses, and assumed certain liabilities in connection therewith. The Spin-Off also may result in loss of revenue and other adverse effects on our business, financial condition and results of operations. In addition, we have experienced and might continue to experience negative impacts on our stock price. We cannot predict what other adverse consequences to, among other things, our reputation, our relationships with governmental or regulatory authorities, or our ability to successfully complete future transactions, our ability to attract, retain and motivate customers, key personnel and those with whom we conduct business may result.
Furthermore, we have and may continue to become subject to stockholder inspection demands under Delaware law, investigations initiated by regulators and law firms, and derivative or other similar litigation that can be expensive, divert management attention and human and financial capital to less productive uses and result in potential reputational damage. The GRAIL acquisition and subsequent litigation resulted in (i) the announcement of an investigation by the SEC and others by law firms of possible securities law violations; (ii) stockholder inspection demands seeking to investigate possible breaches of fiduciary duties, corporate wrongdoing or a lack of independence of the members of the Board, including a complaint filed in the Delaware Court of Chancery seeking to inspect books and records captioned Pavers and Road Builders Benefit Funds v. Illumina, Inc.; (iii) the filing of four securities class actions in the United States District Court for the Southern District of California: Kangas v. Illumina, Inc. et al., Roy v. Illumina, Inc. et al., Louisiana Sheriffs’ Pension & Relief Fund v. Illumina, Inc. et al. and Warner v. deSouza et al.; (iv) the filing of a securities class action in the United States District Court for the District of Delaware captioned Wang v. deSouza et al.; (v) the filing of two securities class actions in the Superior Court of the State of California, County of San Mateo: Loren Scott Mar v. Illumina, et al. and Scott Zerzanek v. Illumina, Inc. et al.; (vi) the filing of a stockholder derivative and class action complaint captioned Icahn Partners LP, et al. v. deSouza, et al.; (vii) the filing of a stockholder derivative complaint captioned City of Omaha Police and Firefighters Retirement System v. deSouza, et al.; (viii) the filing of a stockholder derivative complaint captioned City of Roseville General Employees Retirement System, et al. v. deSouza, et al.; and (ix) the filing of a stockholder derivative complaint captioned Thomas P. DiNapoli v. John Thompson et al. See note 8. Legal Proceedings within the Consolidated Financial Statements for further details. In the event that any of the matters described above result in one or more adverse judgments or settlements, we may experience an adverse impact on our financial condition, results of operations or stock price.
SHARE REPURCHASES AND SALES
Purchases of Equity Securities by the Issuer
In August 2024, our Board of Directors authorized a new share repurchase program, which cancels and supersedes all prior and available repurchase authorizations, to repurchase up to $1.5 billion of our outstanding common stock. The repurchases may be completed through open market purchases, pursuant to Rule 10b5-1 or Rule 10b-18, or through an accelerated share repurchase program. Shares repurchased in open market transactions pursuant to this program during Q3 2024 were as follows:
In thousands, except price per share
Total Number of Shares Purchased
Average Price
Paid per Share(1)
Total Number of
Shares Purchased as Part of Publicly
Announced Program
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Program
July 29, 2024 - August 25, 2024
106
$
129.05
106
$
1,486,318
August 26, 2024 - September 29, 2024
664
$
127.50
664
$
1,401,684
Total
770
$
127.71
770
$
1,401,684
_____________
(1)Average price paid per share excludes the excise tax on share repurchases imposed as part of the Inflation Reduction Act of 2022.
None during the quarterly period ended September 29, 2024.
ADOPTIONS, MODIFICATIONS OR TERMINATIONS OF TRADING PLANS
During the quarterly period ended September 29, 2024, none of the Company’s directors or officers adopted, modified or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” in each case as such term is defined in Item 408 of Regulation S-K.
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+ Management contract or corporate plan or arrangement
* Portions of this exhibit omitted pursuant to Item 601(b)(2) and Item 601(b)(10) of Regulation S-K, as applicable. The Company agrees to furnish a supplemental and unredacted copy of any omitted schedule to the Securities and Exchange Commission upon its request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
