UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 27, 2020

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to            

Commission File Number 001-35406 

Illumina, Inc.

(Exact name of registrant as specified in its charter)

Delaware	33-0804655
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5200 Illumina Way, San Diego, CA 92122

(Address of principal executive offices) (Zip code)

(858) 202-4500

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ILMN	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☑    No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	þ	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐	Emerging growth company	☐
				(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No   þ

As of October 23, 2020, there were 146 million shares of the registrant’s common stock outstanding.

ILLUMINA, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 27, 2020

TABLE OF CONTENTS

See “Form 10-Q Cross-Reference Index” within Other Key Information for a cross-reference to the parts and items requirements of the Securities and Exchange Commission Quarterly Report on Form 10-Q.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	PAGE
Condensed Consolidated Balance Sheets	5
Condensed Consolidated Statements of Income	6
Condensed Consolidated Statements of Comprehensive Income	7
Condensed Consolidated Statement of Stockholders’ Equity	8
Condensed Consolidated Statements of Cash Flows	10
Notes to Condensed Consolidated Financial Statements	11
1. Organization and Significant Accounting Policies	11
2. Revenue	13
3. Investments and Fair Value Measurements	14
4. Debt	18
5. Stockholders’ Equity	19
6. Supplemental Balance Sheet Details	21
7. Legal Proceedings	23
8. Income Taxes	23
9. Segment Information	23
MANAGEMENT’S DISCUSSION & ANALYSIS
Management’s Overview and Outlook	25
Results of Operations	27
Liquidity and Capital Resources	30
Critical Accounting Policies and Estimates	32
Recent Accounting Pronouncements	32
Off-Balance Sheet Arrangements	32
Quantitative and Qualitative Disclosures About Market Risk	33
OTHER KEY INFORMATION
Controls and Procedures	33
Legal Proceedings	34
Risk Factors	34
Share Repurchases and Sales	36
Exhibits	37
Form 10-Q Cross-Reference Index	39

2

Consideration Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “continue,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “potential,” “predict,” should,” “will,” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking.  Examples of forward-looking statements include, among others, statements we make regarding:

•our expectations as to our future financial performance, results of operations, or other operational results or metrics;

•our expectations regarding the launch of new products or services;

•the benefits that we expect will result from our business activities and certain transactions we have completed, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures;

•our expectations of the effect on our financial condition of claims, litigation, contingent liabilities, and governmental investigations, proceedings, and regulations;

•our strategies or expectations for product development, market position, financial results, and reserves;

•our expectations regarding the integration of any acquired technologies with our existing technology; and

•other expectations, beliefs, plans, strategies, anticipated developments, and other matters that are not historical facts.

Forward-looking statements are neither historical facts nor assurances of future performance.  Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control.  Our actual results and financial condition may differ materially from those indicated in the forward-looking statements.  Therefore, you should not rely on any of these forward-looking statements.  Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

•the impact to our business and operating results caused by the COVID-19 pandemic;

•our expectations and beliefs regarding prospects and growth for our business and the markets in which we operate;

•the timing and mix of customer orders among our products and services;

•challenges inherent in developing, manufacturing, and launching new products and services, including expanding manufacturing operations and reliance on third-party suppliers for critical components;

•the impact of recently launched or pre-announced products and services on existing products and services;

•our ability to develop and commercialize our instruments and consumables, to deploy new products, services, and applications, and to expand the markets for our technology platforms;

•our ability to manufacture robust instrumentation and consumables;

•our ability to identify and integrate acquired technologies, products, or businesses successfully;

•our expectations regarding the pending acquisition of GRAIL, Inc. (GRAIL);

•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;

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•uncertainty, or adverse economic and business conditions, including as a result of slowing or uncertain economic growth in the United States or worldwide; and

•other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in “Risk Factors” within the Business and Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, or in information disclosed in public conference calls, the date and time of which are released beforehand.

The foregoing factors should be considered together with other factors detailed in our filings with the Securities and Exchange Commission, including our most recent filings on Forms 10-K and 10-Q, or in information disclosed in public conference calls, the date and time of which are released beforehand.  We undertake no obligation, and do not intend, to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, or to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, in each case whether as a result of new information, future developments, or otherwise.

4

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ILLUMINA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

	September 27, 2020		December 29, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,761	$	2,042
Short-term investments	1,563		1,372
Accounts receivable, net	464		573
Inventory	415		359
Prepaid expenses and other current assets	126		105
Total current assets	4,329		4,451
Property and equipment, net	910		889
Operating lease right-of-use assets	545		555
Goodwill	897		824
Intangible assets, net	149		145
Deferred tax assets, net	19		64
Other assets	555		388
Total assets	$	7,404	$	7,316
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	156	$	149
Accrued liabilities	452		516
Long-term debt, current portion	507		—
Total current liabilities	1,115		665
Operating lease liabilities	678		695
Long-term debt	666		1,141
Other long-term liabilities	245		202
Stockholders’ equity:
Common stock	2		2
Additional paid-in capital	3,737		3,560
Accumulated other comprehensive income	12		5
Retained earnings	4,466		4,067
Treasury stock, at cost	(3,517)		(3,021)
Total stockholders’ equity	4,700		4,613
Total liabilities and stockholders’ equity	$	7,404	$	7,316

See accompanying notes to condensed consolidated financial statements.

5

ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In millions, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Revenue:
Product revenue	$	676	$	746	$	1,904	$	2,117
Service and other revenue	118		161		382		474
Total revenue	794		907		2,286		2,591
Cost of revenue:
Cost of product revenue	209		195		535		573
Cost of service and other revenue	52		55		157		185
Amortization of acquired intangible assets	7		9		21		28
Total cost of revenue	268		259		713		786
Gross profit	526		648		1,573		1,805
Operating expense:
Research and development	172		151		483		486
Selling, general and administrative	192		189		643		602
Total operating expense	364		340		1,126		1,088
Income from operations	162		308		447		717
Other income (expense):
Interest income	5		16		26		59
Interest expense	(11)		(11)		(33)		(41)
Other income (expense), net	59		(43)		117		114
Total other income (expense), net	53		(38)		110		132
Income before income taxes	215		270		557		849
Provision for income taxes	36		36		158		98
Consolidated net income	179		234		399		751
Add: Net loss attributable to noncontrolling interests	—		—		—		12
Net income attributable to Illumina stockholders	$	179	$	234	$	399	$	763
Earnings per share attributable to Illumina stockholders:
Basic	$	1.22	$	1.59	$	2.72	$	5.19
Diluted	$	1.21	$	1.58	$	2.70	$	5.13
Shares used in computing earnings per share:
Basic	146		147		147		147
Diluted	148		148		148		149

See accompanying notes to condensed consolidated financial statements.

6

ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In millions)

	Three Months Ended				Nine Months Ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Consolidated net income	$	179	$	234	$	399	$	751
Unrealized (loss) gain on available-for-sale debt securities, net of deferred tax	(2)		—		7		6
Total consolidated comprehensive income	177		234		406		757
Add: Comprehensive loss attributable to noncontrolling interests	—		—		—		12
Comprehensive income attributable to Illumina stockholders	$	177	$	234	$	406	$	769

See accompanying notes to condensed consolidated financial statements.

7

ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In millions)

	Illumina Stockholders
				Additional		Accumulated Other									Total
	Common Stock			Paid-In		Comprehensive		Retained		Treasury Stock			Noncontrolling		Stockholders’
	Shares	Amount		Capital		(Loss) Income		Earnings		Shares	Amount		Interests		Equity
Balance as of December 30, 2018	192	$	2	$	3,290	$	(1)	$	3,083	(45)	$	(2,616)	$	87	$	3,845
Net income (loss)	—	—		—		—		233		—	—		(2)		231
Unrealized gain on available-for-sale debt securities, net of deferred tax	—	—		—		3		—		—	—		—		3
Issuance of common stock, net of repurchases	—	—		27		—		—		—	(86)		—		(59)
Share-based compensation	—	—		51		—		—		—	—		—		51
Cumulative-effect adjustment from adoption of ASU 2016-02, net of deferred tax	—	—		—		—		(18)		—	—		—		(18)
Vesting of redeemable equity awards	—	—		(1)		—		—		—	—		—		(1)
Adjustment to the carrying value of redeemable noncontrolling interests	—	—		18		—		—		—	—		—		18
Balance as of March 31, 2019	192	2		3,385		2		3,298		(45)	(2,702)		85		4,070
Net income (loss)	—	—		—		—		296		—	—		(1)		295
Unrealized gain on available-for-sale debt securities, net of deferred tax	—	—		—		3		—		—	—		—		3
Issuance of common stock, net of repurchases	1	—		3		—		—		—	(3)		—		—
Share-based compensation	—	—		48		—		—		—	—		—		48
Adjustment to the carrying value of redeemable noncontrolling interests	—	—		(2)		—		—		—	—		—		(2)
Deconsolidation of Helix	—	—		2		—		—		—	—		(84)		(82)
Balance as of June 30, 2019	193	2		3,436		5		3,594		(45)	(2,705)		—		4,332
Net income	—	—		—		—		234		—	—		—		234
Issuance of common stock, net of repurchases	—	—		29		—		—		(1)	(201)		—		(172)
Share-based compensation	—	—		45		—		—		—	—		—		45
Balance as of September 29, 2019	193	2		3,510		5		3,828		(46)	(2,906)		—		4,439
Net income	—	—		—		—		239		—	—		—		239
Issuance of common stock, net of repurchases	1	—		—		—		—		(1)	(115)		—		(115)
Share-based compensation	—	—		50		—		—		—	—		—		50
Balance as of December 29, 2019	194	2		3,560		5		4,067		(47)	(3,021)		—		4,613
Net income	—	—		—		—		173		—	—		—		173
Unrealized gain on available-for-sale debt securities, net of deferred tax	—	—		—		1		—		—	—		—		1
Issuance of common stock, net of repurchases	—	—		32		—		—		—	(223)		—		(191)
Share-based compensation	—	—		39		—		—		—	—		—		39
Balance as of March 29, 2020	194	2		3,631		6		4,240		(47)	(3,244)		—		4,635
Net income	—	—		—		—		47		—	—		—		47
Unrealized gain on available-for-sale debt securities, net of deferred tax	—	—		—		8		—		—	—		—		8

8

Issuance of common stock, net of repurchases	—	—		2		—		—		(1)	(145)		—		(143)
Share-based compensation	—	—		16		—		—		—	—		—		16
Balance as of June 28, 2020	194	2		3,649		14		4,287		(48)	(3,389)		—		4,563
Net income	—	—		—		—		179		—	—		—		179
Unrealized loss on available-for-sale debt securities, net of deferred tax	—	—		—		(2)		—		—	—		—		(2)
Issuance of common stock, net of repurchases	—	—		27		—		—		—	(128)		—		(101)
Share-based compensation	—	—		61		—		—		—	—		—		61
Balance as of September 27, 2020	194	$	2	$	3,737	$	12	$	4,466	(48)	$	(3,517)	$	—	$	4,700

See accompanying notes to condensed consolidated financial statements.

9

ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

	Nine Months Ended
	September 27, 2020		September 29, 2019
Cash flows from operating activities:
Consolidated net income	$	399	$	751
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	114		113
Amortization of intangible assets	23		30
Share-based compensation expense	116		145
Accretion of debt discount	29		36
Deferred income taxes	50		(13)
Unrealized gains on marketable equity securities	(128)		(57)
Payment of accreted debt discount	—		(84)
Gains on deconsolidation	—		(54)
Loss on derivative assets related to terminated acquisition	116		—
Other	(14)		(10)
Changes in operating assets and liabilities:
Accounts receivable	108		(29)
Inventory	(56)		(33)
Prepaid expenses and other current assets	(15)		(14)
Operating lease right-of-use assets and liabilities, net	(9)		(3)
Other assets	(25)		(29)
Accounts payable	(2)		(46)
Accrued liabilities	(68)		(81)
Other long-term liabilities	36		(14)
Net cash provided by operating activities	674		608
Cash flows from investing activities:
Maturities of available-for-sale securities	327		1,262
Purchases of available-for-sale securities	(757)		(760)
Sales of available-for-sale securities	379		528
Proceeds from the deconsolidation of GRAIL	—		15
Cash paid for derivative assets related to terminated acquisition	(132)		—
Purchases of property and equipment	(127)		(152)
Deconsolidation of Helix cash	—		(29)
Net purchases of strategic investments	(112)		(15)
Net cash paid for acquisitions	(98)		—
Net cash (used in) provided by investing activities	(520)		849
Cash flows from financing activities:
Payments on financing obligations	—		(550)
Common stock repurchases	(455)		(261)
Taxes paid related to net share settlement of equity awards	(41)		(30)
Proceeds from issuance of common stock	61		59
Net cash used in financing activities	(435)		(782)
Effect of exchange rate changes on cash and cash equivalents	—		(4)
Net (decrease) increase in cash and cash equivalents	(281)		671
Cash and cash equivalents at beginning of period	2,042		1,144
Cash and cash equivalents at end of period	$	1,761	$	1,815

See accompanying notes to condensed consolidated financial statements.

10

ILLUMINA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Business Overview

We are a provider of sequencing- and array-based solutions, serving customers in the research, clinical and applied markets.  Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.

Basis of Presentation

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 29, 2019, from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results could differ from those estimates.

The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, majority-owned or controlled companies, and variable interest entities (VIEs) for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. 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 2020 and Q3 2019 refer to the three months ended September 27, 2020 and September 29, 2019, respectively, which were both 13 weeks, and references to year-to-date (YTD) 2020 and 2019 refer to the nine months ended September 27, 2020 and September 29, 2019, respectively, which were both 39 weeks.

Significant Accounting Policies

During Q3 2020 and YTD 2020, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, except as described in Recently Adopted Accounting Pronouncements below.

Recently Adopted Accounting Pronouncements

In May 2020, the SEC issued Final Rule Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, which amends the disclosure requirements applicable to acquisitions and dispositions of businesses, including the required pro forma financial information. The amendments are effective for

11

us beginning January 1, 2021, with early compliance permitted. Among other changes, the final amendments revised the investment and income tests used to determine whether a business acquisition is significant, and reduced the filing requirements for financial statements and pro forma financial information of a significant acquired business to cover a maximum of two years. We have elected to adopt the amendments in Q3 2020 in connection with our pending acquisition of GRAIL, which is further described in note “3. Investments and Fair Value Measurements”.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. We adopted the standard on its effective date in the first quarter of 2020 using a modified retrospective approach. The cumulative effect of applying the new credit loss standard was not material and, therefore, did not result in an adjustment to retained earnings. There was no material difference to the condensed consolidated financial statements in YTD 2020 due to the adoption of ASU 2016-13.

In accordance with ASU 2016-13, we no longer evaluate whether our available-for-sale debt securities in an unrealized loss position are other than temporarily impaired. Instead, we assess whether such unrealized loss positions are credit-related. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in interest income through an allowance account. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive income (loss). We estimate our allowance for credit losses on our trade receivables as described in our Accounts Receivable policy, below.

Accounts Receivable

Trade accounts receivable are considered past due based on the contractual payment terms. We reserve specific receivables when collectibility is no longer probable. We also reserve a percentage of our trade receivable balance based on collection history and current economic trends that we expect will impact the level of credit losses over the life of our receivables. These reserves are re-evaluated on a regular basis and adjusted, as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.

Accounting Pronouncements Pending Adoption

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new standard reduces the number of accounting models for convertible debt instruments, amends the accounting for certain contracts in an entity’s own equity, and modifies how certain convertible instruments and contracts that may be settled in cash or shares impact the calculation of diluted EPS. The standard is effective for us beginning in the first quarter of 2022, with early adoption permitted in Q1 2021. We are currently evaluating the impact of ASU 2020-06 on the consolidated financial statements.

Earnings per Share

Basic earnings per share attributable to Illumina stockholders is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to Illumina stockholders is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Up to April 25, 2019, the date of Helix Holdings I, LLC’s (Helix) deconsolidation, per-share losses of Helix were included in the consolidated basic and diluted earnings per share computations based on our share of Helix’s securities.

Potentially dilutive common shares consist of shares issuable under convertible senior notes and equity awards. Convertible senior notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.

12

The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share:

In millions	Q3 2020	Q3 2019	YTD 2020	YTD 2019
Weighted average shares outstanding	146	147	147	147
Effect of potentially dilutive common shares from:
Equity awards	1	1	1	1
Convertible senior notes	1	—	—	1
Weighted average shares used in calculating d