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Supplemental Balance Sheet Details
 9 Months Ended
Oct. 02, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Supplemental Balance Sheet Details
6. SUPPLEMENTAL BALANCE SHEET DETAILS
Accounts Receivable
In millionsOctober 2,
2022		January 2,
2022
Trade accounts receivable, gross$632 $651 
Allowance for credit losses(4)(3)
Total accounts receivable, net$628 $648 
Inventory
In millionsOctober 2,
2022		January 2,
2022
Raw materials$231 $144 
Work in process387 333 
Finished goods29 32 
Inventory, gross647 509 
Inventory reserve(88)(78)
Total inventory, net$559 $431 
Intangible Assets and Goodwill
We recorded a developed technology intangible asset of $23 million, with a useful life of 7 years, and a database intangible asset of $12 million, with a useful life of 7 years, as a result of an acquisition in Q2 2022. We are still finalizing the allocation of the purchase price as additional information is received to complete our analysis. We expect to finalize the valuation as soon as practicable, but no later than one year after the acquisition date.
In addition, we recorded a licensed technology intangible asset of $180 million, with a useful life of 6.5 years, as a result of our litigation settlement with BGI in Q3 2022. Refer to note “7. Legal Proceedings” for additional details.
Changes to goodwill during YTD 2022 were as follows:
In millions
Balance as of January 2, 2022$7,113 
Impairment(3,914)
Acquisition45 
Measurement period adjustment(6)
Balance as of October 2, 2022$3,238 
We recorded a measurement period adjustment in Q3 2022 related to our GRAIL acquisition to decrease goodwill and increase deferred tax assets by $6 million, as a result of finalizing GRAIL’s U.S. tax returns. The measurement period adjustment was made to reflect facts and circumstances that existed as of the acquisition date. We finalized the allocation of the purchase price for the GRAIL acquisition in August 2022.
Impairment of Goodwill
We test goodwill for impairment annually, as of May, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We performed our annual impairment test in Q2 2022, as of May 2022. We performed a qualitative assessment for the Core Illumina reporting unit, noting no impairment. For the GRAIL reporting unit, we performed a quantitative assessment and determined a fair value for the reporting unit using a discounted cash flow model, which included assumptions for projected cash flows and a discount rate of 16.0%. The selected discount rate was determined using a weighted average cost of capital for risk factors specific to GRAIL and other market and industry data. The estimates and assumptions used represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Based on the quantitative test performed, the fair value of the GRAIL reporting unit exceeded its carrying value by $700 million and no goodwill impairment was recorded in Q2 2022.
On July 13, 2022, the EU General Court ruled that the European Commission has jurisdiction to review our acquisition of GRAIL. Additionally, on September 6, 2022, the European Commission issued its decision prohibiting the acquisition. Refer to note “7. Legal Proceedings” for additional details. These decisions, along with a continued and significant decrease in the Company’s stock price and market capitalization, led us to believe that a triggering event occurred and that an interim goodwill and intangible asset impairment test was required in Q3 2022.

Based on our interim analysis, we concluded that our GRAIL reporting unit’s carrying value exceeded its estimated fair value. As a result, we recorded $3,914 million of goodwill impairment related to our GRAIL reporting unit in Q3 2022, primarily due to the negative impact of current capital market conditions and a higher discount rate selected for the fair value calculation of the GRAIL reporting unit. No impairment was recorded for our Core Illumina reporting unit, noting its fair value exceeded its carrying value by more than $30 billion.
We performed our interim goodwill impairment test using a combination of both an income and a market approach to determine the fair value of each reporting unit. The income approach utilized the estimated discounted cash flows for each reporting unit while the market approach utilized comparable company information. Estimates and assumptions used in the income approach included projected cash flows for both the GRAIL and Core Illumina reporting units and a discount rate for each reporting unit. Discount rates were determined using a weighted average cost of capital for risk factors specific to each reporting unit and other market and industry data. For the GRAIL reporting unit, the discount rate selected was 22.0%. The estimates and assumptions used in our assessment represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. The assumptions used in our impairment analysis are inherently subject to uncertainty and we note that small changes in these assumptions could have a significant impact on the concluded value. In order to further validate the reasonableness of the fair
values concluded for our reporting units, a reconciliation to market capitalization was performed by estimating a reasonable implied control premium and other market factors.
As a result of the impairment taken in Q3 2022, the carrying value of our GRAIL reporting unit now approximates its fair value. As such, changes in our future operating results, cash flows, share price, market capitalization or discount rates, as well as future regulatory decisions related to our acquisition of GRAIL, used when conducting future goodwill impairment tests could affect the estimated fair values of our reporting units and may result in additional goodwill impairment charges in the future. We will continue to monitor events occurring or circumstances changing which may suggest that goodwill should be reevaluated during interim periods prior to the annual impairment test. As of Q3 2022, remaining goodwill allocated to the GRAIL reporting unit was $2,178 million.
In conjunction with the interim goodwill impairment test, we also evaluated the IPR&D intangible asset, assigned to the GRAIL reporting unit, for potential impairment. We performed our interim impairment test by comparing the carrying value of the IPR&D intangible asset to its estimated fair value, which was determined by the income approach, using a discounted cash flow model. Estimates and assumptions used in the income approach included projected cash flows and a discount rate. These estimates and assumptions represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Based on our interim impairment test, the carrying value of the IPR&D intangible asset did not exceed its estimated fair value. As a result, no impairment for the IPR&D intangible asset was recorded in Q3 2022.
We also performed a recoverability test for the definite-lived intangible assets assigned to the GRAIL reporting unit, which includes developed technology and trade name, noting no impairment in Q3 2022. Additionally, no impairment was noted for the definite-lived intangible assets assigned to our Core Illumina reporting unit.
Accrued Liabilities
In millionsOctober 2,
2022		January 2,
2022
Legal contingencies(1)
$453 $— 
Contract liabilities, current portion225 234 
Accrued compensation expenses173 241 
Accrued taxes payable81 98 
Operating lease liabilities, current portion77 71 
Liability-classified equity incentive awards24 11 
Other, including warranties(2)
109 106 
Total accrued liabilities$1,142 $761 
_____________
(1)See note “7. Legal Proceedings” for additional details.
(2)See table below for changes in the reserve for product warranties.
Changes in the reserve for product warranties were as follows:
In millionsQ3 2022Q3 2021YTD 2022YTD 2021
Balance at beginning of period$21 $16 $22 $13 
Additions charged to cost of product revenue5 5 17 20 
Repairs and replacements(7)(6)(20)(18)
Balance at end of period$19 $15 $19 $15 
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.
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 (expense) income, net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of October 2, 2022, 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 October 2, 2022 and January 2, 2022, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $472 million and $462 million, respectively.
We also 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 income and are reclassified to revenue in the same period the underlying hedged transactions are recorded. Accordingly, we reclassified $16 million and $32 million to revenue in Q3 2022 and YTD 2022, respectively, and $3 million and $4 million in Q3 2021 and YTD 2021, respectively. The fair value of the foreign currency forward contracts recorded in total assets on the condensed consolidated balance sheets was $47 million and $19 million as of October 2, 2022 and January 2, 2022, respectively, of which $40 million and $19 million, respectively, was recorded within prepaid expenses and other current assets. The estimated net gains reported in accumulated other comprehensive income that are expected to be reclassified into earnings within the next 12 months are $40 million as of October 2, 2022. We regularly review the effectiveness of our cash flow 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, will be recognized in other (expense) income, net. As of October 2, 2022, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, and Canadian dollar. As of October 2, 2022 and January 2, 2022, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $419 million and $450 million, respectively.