Company Quick10K Filing
Quick10K
Illumina
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$317.37 147 $46,650
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-30 Annual: 2018-12-30
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-07-01 Quarter: 2018-07-01
10-Q 2018-04-01 Quarter: 2018-04-01
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-10-01 Quarter: 2017-10-01
10-Q 2017-07-02 Quarter: 2017-07-02
10-Q 2017-04-02 Quarter: 2017-04-02
10-K 2017-01-01 Annual: 2017-01-01
10-Q 2016-10-02 Quarter: 2016-10-02
10-Q 2016-07-03 Quarter: 2016-07-03
10-Q 2016-04-03 Quarter: 2016-04-03
10-K 2016-01-03 Annual: 2016-01-03
10-Q 2015-09-27 Quarter: 2015-09-27
10-Q 2015-06-28 Quarter: 2015-06-28
10-Q 2015-03-29 Quarter: 2015-03-29
10-K 2014-12-28 Annual: 2014-12-28
10-Q 2014-09-28 Quarter: 2014-09-28
10-Q 2014-06-29 Quarter: 2014-06-29
10-Q 2014-03-30 Quarter: 2014-03-30
10-K 2013-12-29 Annual: 2013-12-29
8-K 2019-05-29 Shareholder Vote
8-K 2019-04-25 Earnings, Exhibits, Earnings, Exhibits
8-K 2019-02-05 Officers
8-K 2019-01-29 Earnings, Exhibits, Earnings, Exhibits
8-K 2019-01-07 Earnings, Exhibits
8-K 2018-10-31 Enter Agreement, Officers, Other Events, Exhibits
8-K 2018-10-23 Earnings, Exhibits, Earnings, Exhibits
8-K 2018-09-28 Other Events, Exhibits
8-K 2018-08-21 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-07-30 Earnings, Exhibits, Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-24 Earnings, Exhibits, Earnings, Exhibits
8-K 2018-01-30 Earnings, Exhibits, Earnings, Exhibits
8-K 2018-01-08 Earnings, Exhibits
XPO XPO Logistics 5,650
CCMP Cabot Microelectronics 3,320
CNMD Conmed 2,310
SNHY Sun Hydraulics 1,440
ALEC Alector 1,370
FDEF First Defiance Financial 593
ADMA ADMA Biologics 240
CRHM CRH Medical 210
XONE Exone 139
OXF Westmoreland Resource Partners 0
ILMN 2019-03-31
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 fy19q1ex311.htm
EX-31.2 fy19q1ex312.htm
EX-32.1 fy19q1ex321.htm
EX-32.2 fy19q1ex322.htm

Illumina Earnings 2019-03-31

ILMN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 fy2019q1form10-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2019
 
¨
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)
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   þ    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth 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. o    
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 April 18, 2019, there were 147 million shares of the registrant’s common stock outstanding.




ILLUMINA, INC.
INDEX
 
 
Page
 
 


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

ILLUMINA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
 
March 31,
2019
 
December 30,
2018
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,270

 
$
1,144

Short-term investments
1,345

 
2,368

Accounts receivable, net
457

 
514

Inventory
412

 
386

Prepaid expenses and other current assets
61

 
78

Total current assets
4,545

 
4,490

Property and equipment, net
852

 
1,075

Operating lease right-of-use assets
574

 

Goodwill
831

 
831

Intangible assets, net
175

 
185

Deferred tax assets, net
87

 
70

Other assets
326

 
308

Total assets
$
7,390

 
$
6,959

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
137

 
$
184

Accrued liabilities
473

 
513

Long-term debt, current portion
631

 
1,107

Total current liabilities
1,241

 
1,804

Operating lease liabilities
718

 

Long-term debt
1,112

 
890

Other long-term liabilities
212

 
359

Redeemable noncontrolling interests
37

 
61

Stockholders’ equity:
 
 
 
Common stock
2

 
2

Additional paid-in capital
3,385

 
3,290

Accumulated other comprehensive income (loss)
2

 
(1
)
Retained earnings
3,298

 
3,083

Treasury stock, at cost
(2,702
)
 
(2,616
)
Total Illumina stockholders’ equity
3,985

 
3,758

Noncontrolling interests
85

 
87

Total stockholders’ equity
4,070

 
3,845

Total liabilities and stockholders’ equity
$
7,390

 
$
6,959

See accompanying notes to condensed consolidated financial statements.


3


ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
 
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Revenue:
 
 
 
Product revenue
$
667

 
$
628

Service and other revenue
179

 
154

Total revenue
846

 
782

Cost of revenue:
 
 
 
Cost of product revenue
182

 
174

Cost of service and other revenue
71

 
62

Amortization of acquired intangible assets
9

 
8

Total cost of revenue
262

 
244

Gross profit
584

 
538

Operating expense:
 
 
 
Research and development
169

 
137

Selling, general and administrative
211

 
183

Total operating expense
380

 
320

Income from operations
204

 
218

Other income (expense):
 
 
 
Interest income
23

 
5

Interest expense
(15
)
 
(11
)
Other income, net
21

 
9

Total other income, net
29

 
3

Income before income taxes
233

 
221

Provision for income taxes
9

 
24

Consolidated net income
224

 
197

Add: Net loss attributable to noncontrolling interests
9

 
11

Net income attributable to Illumina stockholders
$
233

 
$
208

Earnings per share attributable to Illumina stockholders:
 
 
 
Basic
$
1.58

 
$
1.42

Diluted
$
1.57

 
$
1.41

Shares used in computing earnings per share:
 
 
 
Basic
147

 
147

Diluted
149

 
148

See accompanying notes to condensed consolidated financial statements.


4


ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Consolidated net income
$
224

 
$
197

Unrealized gain on available-for-sale debt securities, net of deferred tax
3

 

Total consolidated comprehensive income
227

 
197

Add: Comprehensive loss attributable to noncontrolling interests
9

 
11

Comprehensive income attributable to Illumina stockholders
$
236

 
$
208

See accompanying notes to condensed consolidated financial statements.


5


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 31, 2017
191

 
$
2

 
$
2,833

 
$
(1
)
 
$
2,256

 
(44
)
 
$
(2,341
)
 
$

 
$
2,749

Net income (loss)

 

 

 

 
208

 

 

 
(1
)
 
207

Issuance of common stock, net of repurchases

 

 
21

 

 

 

 
(13
)
 

 
8

Share-based compensation

 

 
48

 

 

 

 

 

 
48

Adjustment to the carrying value of redeemable noncontrolling interests

 

 
(5
)
 

 

 

 

 

 
(5
)
Contributions from noncontrolling interest owners

 

 

 

 

 

 

 
61

 
61

Issuance of subsidiary shares in business combination

 

 

 

 

 

 

 
5

 
5

Balance as of April 1, 2018
191

 
2

 
2,897

 
(1
)
 
2,464

 
(44
)
 
(2,354
)
 
65

 
3,073

Net income (loss)

 

 

 

 
209

 

 

 
(2
)
 
207

Issuance of common stock, net of repurchases

 

 
1

 

 

 

 
(2
)
 

 
(1
)
Share-based compensation

 

 
50

 

 

 

 

 

 
50

Vesting of redeemable equity awards

 

 
(1
)
 

 

 

 

 

 
(1
)
Adjustment to the carrying value of redeemable noncontrolling interests

 

 
(8
)
 

 

 

 

 

 
(8
)
Contributions from noncontrolling interest owners

 

 

 

 

 

 

 
31

 
31

Balance as of July 1, 2018
191

 
2

 
2,939

 
(1
)
 
2,673

 
(44
)
 
(2,356
)
 
94

 
3,351

Net income (loss)

 

 

 

 
199

 

 

 
(3
)
 
196

Unrealized loss on available-for-sale debt securities, net of deferred tax

 

 

 
(1
)
 

 

 

 

 
(1
)
Issuance of common stock, net of repurchases

 

 
23

 

 

 

 
(106
)
 

 
(83
)
Share-based compensation

 

 
47

 

 

 

 

 

 
47

Vesting of redeemable equity awards

 

 
(1
)
 

 

 

 

 

 
(1
)
Adjustment to the carrying value of redeemable noncontrolling interests

 

 
(8
)
 

 

 

 

 

 
(8
)
Issuance of convertible senior notes, net of tax impact

 

 
93

 

 

 

 

 

 
93

Balance as of September 30, 2018
191

 
2

 
3,093

 
(2
)
 
2,872

 
(44
)
 
(2,462
)
 
91

 
3,594

Net income (loss)

 

 

 

 
210

 

 

 
(4
)
 
206

Unrealized gain on available-for-sale debt securities, net of deferred tax

 

 

 
1

 

 

 

 

 
1

Issuance of common stock, net repurchases
1

 

 
1

 

 

 
(1
)
 
(154
)
 

 
(153
)
Share-based compensation

 

 
48

 

 

 

 

 

 
48

Adjustment to the carrying value of redeemable noncontrolling interests

 

 
148

 

 

 

 

 

 
148


6


Cumulative-effect adjustment from adoption of ASU 2016-01

 

 

 

 
1

 

 

 

 
1

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

Vesting of redeemable equity awards

 

 
(1
)
 

 

 

 

 

 
(1
)
Adjustment to the carrying value of redeemable noncontrolling interests

 

 
18

 

 

 

 

 

 
18

Cumulative-effect adjustment from adoption of ASU 2016-02, net of deferred tax

 

 

 

 
(18
)
 

 

 

 
(18
)
Balance as of March 31, 2019
192

 
$
2

 
$
3,385

 
$
2

 
$
3,298

 
(45
)
 
$
(2,702
)
 
$
85

 
$
4,070


See accompanying notes to condensed consolidated financial statements.


7


ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Cash flows from operating activities:
 
 
 
Consolidated net income
$
224

 
$
197

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
37

 
30

Amortization of intangible assets
10

 
9

Share-based compensation expense
51

 
48

Accretion of debt discount
14

 
8

Deferred income taxes
(11
)
 
(11
)
Gain on deconsolidation of GRAIL
(15
)
 

Other
(5
)
 
(6
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
56

 
11

Inventory
(26
)
 
(17
)
Prepaid expenses and other current assets
6

 
(2
)
Operating lease right-of-use assets and liabilities, net
(1
)
 

Other assets
(8
)
 
(1
)
Accounts payable
(47
)
 
2

Accrued liabilities
(70
)
 
(18
)
Other long-term liabilities
(17
)
 
5

Net cash provided by operating activities
198

 
255

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(117
)
 
(598
)
Sales of available-for-sale securities
118

 
288

Maturities of available-for-sale securities
1,031

 
415

Proceeds from deconsolidation of GRAIL
15

 

Net purchases of strategic investments
(3
)
 
(3
)
Purchases of property and equipment
(56
)
 
(90
)
Net cash provided by investing activities
988

 
12

Cash flows from financing activities:
 
 
 
Payments on financing obligations
(1
)
 
(2
)
Common stock repurchases
(63
)
 

Taxes paid related to net share settlement of equity awards
(23
)
 
(13
)
Proceeds from issuance of common stock
27

 
21

Contributions from noncontrolling interest owners

 
61

Net cash (used in) provided by financing activities
(60
)
 
67

Effect of exchange rate changes on cash and cash equivalents

 
1

Net increase in cash and cash equivalents
1,126

 
335

Cash and cash equivalents at beginning of period
1,144

 
1,225

Cash and cash equivalents at end of period
$
2,270

 
$
1,560

Supplemental cash flow information:
 
 
 
Cash paid for operating lease liabilities
$
21

 
$


See accompanying notes to condensed consolidated financial statements.

8


Illumina, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report toIllumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.

1. Basis of Presentation and Summary of Significant Accounting Policies

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 30, 2018, 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. 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. 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.

We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are VIEs, and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE. See note “10. Subsequent Event.”

We use the equity method to account for investments through which we have the ability to exercise significant influence, but not control, over the investee. Such investments are recorded in other assets, and our share of net income or loss is recognized on a one quarter lag in other income, net.

Redeemable Noncontrolling Interests

Noncontrolling interests represent the portion of equity (net assets) in Helix, our consolidated but not wholly-owned entity, that is neither directly nor indirectly attributable to us. Noncontrolling interests with embedded contingent redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests, and are presented outside of stockholders’ equity on the condensed consolidated balance sheets.

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. The three months ended March 31, 2019 and April 1, 2018 were both 13 weeks.

9



Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Significant Accounting Policies

During the three months ended March 31, 2019, there have been no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, except as described below.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets and to disclose key information about leasing arrangements. We adopted Topic 842 on its effective date in the first quarter of 2019 using a modified retrospective approach by recognizing a cumulative-effect adjustment to retained earnings as of December 31, 2018. We elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We continue to report our financial position as of December 30, 2018 under the former lease accounting standard (Topic 840) in our condensed consolidated balance sheet.
The following table summarizes the impact of Topic 842 on our condensed consolidated balance sheet upon adoption on December 31, 2018 (in millions):
 
December 31, 2018
(unaudited)
 
Pre-adoption
 
Adoption Impact
 
Post-adoption
ASSETS
 
 
 
 
 
Prepaid expenses and other current assets
$
78

 
$
(8
)
 
$
70

Property and equipment, net
1,075

 
(241
)
 
834

Operating lease right-of-use assets

 
579

 
579

Deferred tax assets, net
70

 
6

 
76

Total assets
$
1,223

 
$
336

 
$
1,559

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Accrued liabilities
$
513

 
$
36

 
$
549

Operating lease liabilities

 
722

 
722

Long-term debt
1,107

 
(269
)
 
838

Other long-term liabilities
359

 
(135
)
 
224

Retained earnings
3,083

 
(18
)
 
3,065

Total liabilities and stockholders’ equity
$
5,062

 
$
336

 
$
5,398

 
The adoption impact summarized above was primarily due to the recognition of operating lease liabilities with corresponding right-of-use assets based on the present value of our remaining minimum lease payments, and the derecognition of existing fixed assets and financing obligations related to build-to-suit leasing arrangements that, under Topic 840, did not qualify for sale-leaseback accounting. The difference between these amounts, net of deferred tax, was recorded as a cumulative-effective adjustment to retained earnings.

Recently Issued Accounting Pronouncements

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. The standard is effective for us beginning in the first quarter of 2020, with early adoption permitted.  We are currently evaluating the expected impact of ASU 2016-13 on our consolidated financial statements.


10


Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services and instrument service contracts.

We recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service.

Revenue from product sales is recognized generally upon delivery to the end customer, which is when control of the product is deemed to be transferred. Invoicing typically occurs upon shipment; and payment is typically due within 60 days from invoice. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer.

Revenue is recorded net of discounts, distributor commissions, and sales taxes collected on behalf of governmental authorities. Employee sales commissions are recorded as selling, general and administrative expenses when incurred as the amortization period for such costs, if capitalized, would have been one year or less.

We regularly enter into contracts with multiple performance obligations. Revenue recognition for contracts with multiple deliverables is based on the separate satisfaction of each distinct performance obligation within the contract. Most performance obligations are generally satisfied within a short time frame, approximately three to six months after the contract execution date. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,083 million, of which approximately 85% is expected to be converted to revenue in the next twelve months, with the remainder thereafter.

The contract price is allocated to each performance obligation in proportion to its standalone selling price. We determine our best estimate of standalone selling price using average selling prices over a rolling 12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts.

Contract liabilities, which consist of deferred revenue and customer deposits, as of March 31, 2019 and December 30, 2018 were $201 million and $206 million, respectively, of which the short-term portions of $169 million and $175 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded during the three months ended March 31, 2019 included $64 million of previously deferred revenue that was included in contract liabilities as of December 30, 2018. Contract assets as of March 31, 2019 and December 30, 2018 were not material.

In certain markets, products and services are sold to customers through distributors. In most sales through distributors, the product is delivered directly to customers by us. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers.

11



The following table represents revenue by source (in millions):
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
 
Sequencing
 
Microarray
 
Total
 
Sequencing
 
Microarray
 
Total
Consumables
$
481

 
$
75

 
$
556

 
$
422

 
$
88

 
$
510

Instruments
105

 
6

 
111

 
112

 
6

 
118

Total product revenue
586

 
81

 
667

 
534

 
94

 
628

Service and other revenue
113

 
66

 
179

 
96

 
58

 
154

Total revenue
$
699

 
$
147

 
$
846

 
$
630

 
$
152

 
$
782


Revenue related to our consolidated VIE, Helix, is included in sequencing service and other revenue.

The following table represents revenue by geographic area, based on region of destination (in millions):
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Americas
$
473

 
$
440

Europe, Middle East, and Africa
210

 
194

Greater China (1)
88

 
78

Asia-Pacific
75

 
70

Total revenue
$
846

 
$
782

____________________________________
(1) Region includes revenue from China, Taiwan, and Hong Kong.

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. Per-share earnings of our consolidated VIE, Helix, are 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.

The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in millions):
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Weighted average shares outstanding
147

 
147

Effect of potentially dilutive common shares from:
 
 
 
Convertible senior notes
1

 

Equity awards
1

 
1

Weighted average shares used in calculating diluted earnings per share
149

 
148

Potentially dilutive shares excluded from calculation due to anti-dilutive effect
1

 



12


2. Balance Sheet Account Details

Investments

Debt Securities

Available-for-sale debt securities, included in short-term investments, consisted of the following (in millions):
 
March 31, 2019
 
December 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Debt securities in government sponsored entities
$
21

 
$

 
$

 
$
21

 
$
21

 
$

 
$

 
$
21

Corporate debt securities
716

 
2

 
(1
)
 
717

 
1,060

 

 
(2
)
 
1,058

U.S. Treasury securities
566

 

 

 
566

 
1,250

 
1

 
(1
)
 
1,250

Total
$
1,303

 
$
2

 
$
(1
)
 
$
1,304

 
$
2,331

 
$
1

 
$
(3
)
 
$
2,329


Realized gains and losses are determined based on the specific identification method and are reported in interest income.

Contractual maturities of available-for-sale debt securities, as of March 31, 2019, were as follows (in millions):
 
Estimated
Fair Value
Due within one year
$
711

After one but within five years
593

Total
$
1,304


We have the ability, if necessary, to liquidate any of our cash equivalents and short-term investments to meet our liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying condensed consolidated balance sheets.

Equity Securities

Our equity securities are strategic investments primarily in privately held companies.

The carrying values of our non-marketable equity securities without readily determinable market values are initially measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Unrealized gains and losses on non-marketable equity securities are recognized in other income, net. As of March 31, 2019 and December 30, 2018, the aggregate carrying amounts of our non-marketable equity investments without readily determinable fair values were $230 million and $231 million, respectively, included in other assets.

One of our non-marketable equity investments is a VIE for which we have concluded that we are not the primary beneficiary, and therefore, we do not consolidate this VIE in our consolidated financial statements. We have determined our maximum exposure to loss, as a result of our involvement with the VIE, to be the carrying value of our investment, which was $189 million as of March 31, 2019 and December 30, 2018.

Our marketable equity security is measured at fair value. Unrealized gains and losses are recognized in other income, net. As of March 31, 2019 and December 30, 2018, the fair value of our marketable equity investment was $41 million and $39 million, respectively, included in short-term investments.

Revenue recognized from transactions with our strategic equity investees was $15 million and $36 million for the three months ended March 31, 2019 and April 1, 2018, respectively.

Venture Fund

We invest in a venture capital investment fund (the Fund) with a capital commitment of $100 million that is callable through April 2026, of which $66 million remained callable as of March 31, 2019. Our investment in the Fund is accounted for

13


as an equity-method investment. The carrying amounts of the Fund, included in other assets, were $38 million and $29 million as of March 31, 2019 and December 30, 2018, respectively.

Inventory

Inventory consisted of the following (in millions):
 
March 31,
2019
 
December 30,
2018
Raw materials
$
115

 
$
117

Work in process
234

 
218

Finished goods
63

 
51

Total inventory
$
412

 
$
386


Property and Equipment

Property and equipment, net consisted of the following (in millions):
 
March 31,
2019
 
December 30,
2018
Leasehold improvements
$
622

 
$
567

Machinery and equipment
390

 
382

Computer hardware and software
256

 
217

Furniture and fixtures
48

 
45

Buildings
44

 
285

Construction in progress
46

 
100

Total property and equipment, gross
1,406

 
1,596

Accumulated depreciation
(554
)
 
(521
)
Total property and equipment, net
$
852

 
$
1,075


Property and equipment, net included non-cash expenditures of $17 million and $33 million for the three months ended March 31, 2019 and April 1, 2018, respectively, which were excluded from the condensed consolidated statements of cash flows. Such non-cash expenditures included $6 million recorded under build-to-suit lease accounting for the three months ended April 1, 2018.

As of December 30, 2018, property and equipment, net included $241 million of project construction costs paid or reimbursed by our landlord related to our build-to-suit leases that did not qualify for sale-leaseback accounting under Topic 840. Upon adoption of Topic 842 on December 31, 2018, we derecognized the Buildings related to our build-to-suit leasing arrangements and began to account for these leases as operating leases. See note “1. Basis of Presentation and Summary of Significant Accounting Policies” for further details on the adoption impact of Topic 842.

Leases

We lease approximately 2.7 million square feet of office, lab, and manufacturing facilities under various non-cancellable operating lease agreements (real estate leases). Our real estate leases have remaining lease terms of 1 to 20 years, which represent the non-cancellable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms, ranging from 6 months to 20 years. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms as well as payments for common-area-maintenance and administrative services. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.

Operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components; therefore, fixed payments for common-area-maintenance and administrative services are included in our operating lease right-of-use assets and liabilities. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our leases are not readily determinable.

14



As of March 31, 2019, the maturities of our operating lease liabilities were as follows (in millions):
 
Remaining Lease Payments
2019
$
64

2020
85

2021
82

2022
85

2023
86

Thereafter
621

Total remaining lease payments
1,023

Less: imputed interest
(253
)
Total operating lease liabilities
770

Less: current portion
(52
)
Long-term operating lease liabilities
$
718

Weighted-average remaining lease term
12 years

Weighted-average discount rate
4.6
%

The components of our lease costs included in our condensed consolidated statements of income were as follows (in millions):
 
Three months ended
 
March 31, 2019
Operating lease costs
$
22

Sublease income
(3
)
Total lease costs
$
19


Operating lease costs consist of the fixed lease payments included in our operating lease liabilities and are recorded on a straight-line basis over the lease terms. We sublease certain real estate to third parties and this sublease income is also recorded on a straight-line basis.

Derivatives

We are exposed to foreign exchange rate risks in the normal course of business. We enter into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other current assets or accrued liabilities and are not designated as hedging instruments. Changes in the value of the derivatives are recognized in other income, net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.

As of March 31, 2019, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, and British pound. As of March 31, 2019 and December 30, 2018, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $272 million and $122 million, respectively.

15



Accrued Liabilities

Accrued liabilities consisted of the following (in millions):
 
March 31,
2019
 
December 30,
2018
Contract liabilities, current portion
$
169

 
$
175

Accrued compensation expenses
105

 
193

Accrued taxes payable
83

 
82

Operating lease liabilities, current portion
52

 

Other, including warranties
64

 
63

Total accrued liabilities
$
473

 
$
513


Warranties

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.

Changes in the reserve for product warranties during the three months ended March 31, 2019 and April 1, 2018 were as follows (in millions):
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Balance at beginning of period
$
19

 
$
17

Additions charged to cost of product revenue
3

 
6

Repairs and replacements
(6
)
 
(7
)
Balance at end of period
$
16

 
$
16


Investment in Helix

In July 2015, we obtained a 50% voting equity ownership interest in Helix Holdings I, LLC (Helix), a limited liability company formed with unrelated third-party investors to pursue the development and commercialization of a marketplace for consumer genomics. We determined that Helix is a VIE as the holders of the at-risk equity investments as a group lack the power to direct the activities of Helix that most significantly impact Helix’s economic performance. Additionally, we determined that we have (a) unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and no one individual party has unilateral power over the remaining significant activities of Helix and (b) the obligation to absorb losses of and the right to receive benefits from Helix that are potentially significant to Helix. As a result, we are deemed to be the primary beneficiary of Helix and are required to consolidate Helix.

As contractually committed, in July 2015, we contributed certain perpetual licenses, instruments, intangibles, initial laboratory setup, and discounted supply terms in exchange for voting equity interests in Helix. Such contributions were recorded at their historical basis as they remained within our control. Helix is financed through cash contributions made by us and third-party investors in exchange for voting equity interests in Helix. During the year ended December 30, 2018, we made additional investments of $100 million in exchange for voting equity interests in Helix. During the three months ended March 31, 2019, we did not provide any other financial or other support to Helix that we were not previously contractually required to provide. As of March 31, 2019, the noncontrolling shareholders and Illumina each held 50% of Helix’s outstanding voting equity interests.


16


Certain noncontrolling Helix investors may require us to redeem certain noncontrolling interests in cash at the then approximate redemption fair market value. Such redemption right is exercisable at the option of certain noncontrolling interest holders after January 1, 2021, provided that a bona fide pursuit of the sale of Helix has occurred and an initial public offering of Helix has not been completed. As the contingent redemption is outside of our control, the redeemable noncontrolling interests in Helix are classified outside of stockholders’ equity on the accompanying condensed consolidated balance sheets. The balance of the redeemable noncontrolling interests is reported at the greater of its carrying value after receiving its allocation of Helix’s profits and losses or its estimated redemption fair value at each reporting date. The fair value of the redeemable noncontrolling interests is considered a Level 3 instrument.

As of March 31, 2019, the accompanying condensed consolidated balance sheet included $106 million of cash, cash equivalents, and short-term investments attributable to Helix that will be used to settle its respective obligations and will not be available to settle obligations of Illumina. The remaining assets and liabilities of Helix were not significant to our financial position as of March 31, 2019. Helix had an immaterial impact on our condensed consolidated statements of income and cash flows for the three months ended March 31, 2019. Refer to note “10. Subsequent Event.”

Redeemable Noncontrolling Interests

The activity of the redeemable noncontrolling interests during the three months ended March 31, 2019 was as follows (in millions):
 
Redeemable Noncontrolling Interests
Balance as of December 30, 2018
$
61

Vesting of redeemable equity awards
1

Net loss attributable to noncontrolling interests
(7
)
Adjustment down to the redemption value
(18
)
Balance as of March 31, 2019
$
37


3. Pending Acquisition

On November 1, 2018, we entered into an Agreement and Plan of Merger (the Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share). The transaction, which is expected to close mid-2019, is subject to certain customary closing conditions, including the receipt of certain required antitrust approvals. The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including but not limited to, a termination of the Merger Agreement in connection with PacBio accepting a superior offer or due to the withdrawal by PacBio’s board of directors of its recommendation of the merger, PacBio will pay us a cash termination fee of $43 million. In certain other circumstances related to antitrust approvals, we may be required to pay PacBio a termination fee of $98 million assuming the other closing conditions not related to antitrust or competition laws have been satisfied.


17


4. Fair Value Measurements

The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 30, 2018 (in millions):
 
March 31, 2019
 
December 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (cash equivalents)
$
1,805

 
$

 
$

 
$
1,805

 
$
832

 
$

 
$

 
$
832

Debt securities in government-sponsored entities

 
21

 

 
21

 

 
21

 

 
21

Corporate debt securities

 
717

 

 
717

 

 
1,058

 

 
1,058

U.S. Treasury securities
566

 

 

 
566

 
1,250

 

 

 
1,250

Marketable equity security
41

 

 

 
41

 
39

 

 

 
39

Deferred compensation plan assets

 
43

 

 
43

 

 
34

 

 
34

Total assets measured at fair value
$
2,412

 
$
781

 
$

 
$
3,193

 
$
2,121

 
$
1,113

 
$

 
$
3,234

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan liability
$

 
$
41

 
$

 
$
41

 
$

 
$
33

 
$

 
$
33


We hold available-for-sale securities that consist of highly-liquid, investment-grade debt securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. 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.


18


5. Debt and Other Commitments

Summary of debt obligations

Debt obligations consisted of the following (dollars in millions):
 
March 31,
2019
 
December 30,
2018
Principal amount of 2023 Notes outstanding
$
750

 
$
750

Principal amount of 2021 Notes outstanding
517

 
517

Principal amount of 2019 Notes outstanding
632

 
633

Unamortized discount of liability component of convertible senior notes
(160
)
 
(175
)
Net carrying amount of liability component of convertible senior notes
1,739

 
1,725

Obligations under financing leases

 
269

Other
4

 
3

Less: current portion
(631
)
 
(1,107
)
Long-term debt
$
1,112

 
$
890

Carrying value of equity component of convertible senior notes, net of debt issuance costs
$
287

 
$
287

Fair value of convertible senior notes outstanding (Level 2)
$
2,298

 
$
2,222

Weighted-average remaining amortization period of discount on the liability component of convertible senior notes
3.8 years

 
3.9 years


Convertible Senior Notes

0% Convertible Senior Notes due 2023 (2023 Notes)

On August 21, 2018, we issued $750 million aggregate principal amount of convertible senior notes due 2023 (2023 Notes). The 2023 Notes mature on August 15, 2023, and the implied estimated effective rate of the liability component of the Notes was 3.7%, assuming no conversion option.

The 2023 Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate, subject to adjustment, of 2.1845 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $457.77 per share of common stock), only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price in effect on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2023 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events described in the indenture. Regardless of the foregoing circumstances, the holders may convert their notes on or after May 15, 2023 until August 11, 2023.

We may redeem for cash all or any portion of the 2023 Notes, at our option, on or after August 20, 2021 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect (currently $595.10) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date.
 
The 2023 Notes were not convertible as of March 31, 2019 and had no dilutive impact during the three months ended March 31, 2019. If the 2023 Notes were converted as of March 31, 2019, the if-converted value would not exceed the principal amount.

19



0% Convertible Senior Notes due 2019 (2019 Notes) and 0.5% Convertible Senior Notes due 2021 (2021 Notes)

In June 2014, we issued $633 million aggregate principal amount of 2019 Notes and $517 million aggregate principal amount of 2021 Notes. The 2019 and 2021 Notes mature on June 15, 2019 and June 15, 2021, respectively, and the implied estimated effective rates of the liability components of the Notes were 2.9% and 3.5%, respectively, assuming no conversion option.

Both the 2019 and 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $254.34 per share), only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending September 30, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2019 and 2021 Notes for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified events described in the indenture for the 2019 and 2021 Notes. Regardless of the foregoing circumstances, the holders may convert their notes on or after March 15, 2019 until June 13, 2019 for the 2019 Notes and March 15, 2021 until June 11, 2021 for the 2021 Notes.

The potential dilutive impact of the 2019 and 2021 notes has been included in our calculation of diluted earnings per share for the three months ended March 31, 2019. If the 2019 and 2021 Notes were converted as of March 31, 2019, their if-converted values would exceed their principal amounts by $128 million and $105 million, respectively. The carrying values of the 2019 Notes were classified as current liabilities as they were convertible as of March 31, 2019 and mature within twelve months of the balance sheet date.

Obligations under financing leases

As of December 30, 2018, obligations under financing leases of $269 million represented project construction costs paid or reimbursed by our landlord related to our build-to-suit leases that did not qualify for sale-leaseback accounting under Topic 840. Upon adoption of Topic 842 on December 31, 2018, we derecognized the remaining financing obligations for our build-to-suit leasing arrangements and began to account for these leases as operating leases. See note “1. Basis of Presentation and Summary of Significant Accounting Policies” for further details on the adoption of Topic 842.

6. Stockholders’ Equity

As of March 31, 2019, approximately 4.8 million shares remained available for future grants under the 2015 Stock Plan.

20



Restricted Stock

Restricted stock activity for the three months ended March 31, 2019 was as follows (units in thousands):
 
Restricted
Stock Units
(RSU)
 
Performance
Stock Units
(PSU)(1)
 
Weighted-Average
Grant-Date Fair Value per Share
 
 
 
RSU
 
PSU
Outstanding at December 30, 2018
1,840

 
660

 
$
227.00

 
$
196.99

Awarded
24

 

 
$
291.79

 
$

Vested
(28
)
 

 
$
176.83

 

Cancelled
(43
)
 
(39
)
 
$
204.64

 
$
163.53

Outstanding at March 31, 2019
1,793

 
621

 
$
229.18

 
$
199.48

______________________________________
(1)
The number of units reflect the estimated number of shares to be issued at the end of the performance period.

Stock Options

Stock option activity during the three months ended March 31, 2019 was as follows:
 
Options
(in thousands)
 
Weighted-Average
Exercise Price
Outstanding at December 30, 2018
192

 
$
54.52

Exercised
(34
)
 
$
47.86

Outstanding and exercisable at March 31, 2019
158

 
$
55.95


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 the three months ended March 31, 2019, approximately 0.1 million shares were issued under the ESPP. As of March 31, 2019, there were approximately 13.6 million shares available for issuance under the ESPP.
 
Share Repurchases

On February 6, 2019, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase $550 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During the three months ended March 31, 2019, we repurchased 0.2 million shares for approximately $63 million.  Authorizations to repurchase approximately $488 million of our common stock remained available as of March 31, 2019.


21


Share-based Compensation

Share-based compensation expense reported in our condensed consolidated statements of income was as follows (in millions):
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Cost of product revenue
$
5

 
$
4

Cost of service and other revenue
1

 
1

Research and development
18

 
15

Selling, general and administrative
27

 
28

Share-based compensation expense before taxes
51

 
48

Related income tax benefits
(10
)
 
(10
)
Share-based compensation expense, net of taxes
$
41

 
$
38


The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the Employee Stock Purchase Plan (ESPP) during the three months ended March 31, 2019 were as follows:
 
Employee Stock Purchase Rights
Risk-free interest rate
1.89% - 2.56%

Expected volatility
30% - 38%

Expected term
0.5 - 1.0 year

Expected dividends
0
%
Weighted-average grant-date fair value per share
$
71.48


As of March 31, 2019, approximately $433 million of total unrecognized compensation cost related to restricted stock and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately 2.3 years.

7. Legal Proceedings

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 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.

8. 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 before income taxes and taxable income. The effective tax rate for the three months ended March 31, 2019 was 3.9%. For the three months ended March 31, 2019, the decrease from the U.S. federal statutory tax rate of 21% was primarily attributable to a discrete tax benefit related to uncertain tax positions, the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, and excess tax benefits related to share-based compensation.



22


9. Segment Information

We report segment information based on the management approach. This approach 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. Based on the information used by the CODM, we have determined our reportable segments as follows:

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 our consolidated VIE, Helix.

Helix:

Helix, our consolidated VIE, was established to enable individuals to explore their genetic information by providing affordable sequencing and database services for consumers through third-party partners, driving the creation of an ecosystem of consumer applications.

Management evaluates the performance of our reportable segments based upon income (loss) from operations. We do not allocate expenses between segments. Core Illumina sells products and provides services to Helix in accordance with contractual agreements between the entities.

The following table presents the operating performance of each reportable segment (in millions):
 
Three Months Ended
 
March 31,
2019
 
April 1,
2018
Revenue:
 
 
 
Core Illumina
$
846

 
$
783

Helix
1

 
3

Elimination of intersegment revenue
(1
)
 
(4
)
Consolidated revenue
$
846

 
$
782

 
 
 
 
Income (loss) from operations:
 
 
 
Core Illumina
$
221

 
$
238

Helix
(18
)
 
(21
)
Elimination of intersegment earnings
1

 
1

Consolidated income from operations
$
204

 
$
218


The following table presents the total assets of each reportable segment (in millions):
 
March 31,
2019
 
December 30,
2018
Core Illumina
$
7,362

 
$
6,912

Helix
134

 
154

Elimination of intersegment assets
(106
)
 
(107
)
Consolidated total assets
$
7,390

 
$
6,959


10. Subsequent Event

On April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, our consolidated VIE, Helix. In connection with the transaction, the redeemable noncontrolling interest of $37 million as of March 31, 2019 was eliminated, and we will no longer consolidate Helix effective April 25, 2019.


23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (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:

Business 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.

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.

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.

This MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see “Consideration Regarding Forward-Looking Statements” preceding Item 3 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 30, 2018. Operating results are not necessarily indicative of results that may occur in future periods.

Business Overview and Outlook

This overview and outlook provides 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

We have two reportable segments: Illumina’s core operations (Core Illumina) and one segment related to the activities of our consolidated VIE, Helix. For information on Helix, refer to notes 2, 9, and 10 of the Notes to the Condensed Consolidated Financial Statements provided in this report.
 
Our focus on innovation has established us as the 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 a broad range of academic, government, pharmaceutical, biotechnology, and other leading institutions around the globe.

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 November 1, 2018, we entered into an Agreement and Plan of Merger to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share), subject to applicable regulatory approvals. We believe PacBio’s highly accurate long reads combined with our highly accurate and scalable short reads will provide researchers and clinicians with a more perfect view of the genome, enhancing their ability to make novel discoveries and broaden clinical utility across a range of applications. The transaction is expected to close mid-2019. See note “3. Pending Acquisition” in Part I, Item 1 of this report for further details regarding this acquisition.

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 in Item 1, Part I of this report, and the other transactions, events, and trends discussed in “Risk Factors” in Item 1A, Part II of this report and Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018.

Financial Overview

Consolidated financial highlights for Q1 2019 included the following:

Revenue increased 8% during Q1 2019 to $846 million compared to $782 million in Q1 2018 due to the growth in sales of our consumables and services, primarily driven by increases in sequencing. We expect our revenue, as compared to the prior year, to continue to increase in 2019.

Gross profit as a percentage of revenue (gross margin) was 69.1% in Q1 2019 compared to 68.8% in Q1 2018. The gross margin increase was primarily driven by an increase in sequencing consumables as a percentage of total revenue, which generate higher gross margins, and an increase in revenue generated from a non-recurring licensing agreement. Our gross margin in future periods will depend on several factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, and services; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product support obligations.

Income from operations as a percentage of revenue decreased to 24.2% in Q1 2019 compared to 27.8% in Q1 2018 primarily due to increased operating expenses as a percentage of revenue. We expect our operating expenses to continue to grow on an absolute basis.

Our effective tax rate was 3.9% in Q1 2019 compared to 10.6% in Q1 2018. In Q1 2019, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to a discrete tax benefit related to uncertain tax positions, the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom, and excess tax benefits related to share-based compensation.

We ended Q1 2019 with cash, cash equivalents, and short-term investments totaling $3.6 billion as of March 31, 2019, of which approximately $610 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.
 
Q1 2019
 
Q1 2018
Revenue:
 
 
 
Product revenue
78.8
 %
 
80.3
 %
Service and other revenue
21.2

 
19.7

Total revenue
100.0

 
100.0

Cost of revenue:
 
 
 
Cost of product revenue
21.5

 
22.3

Cost of service and other revenue
8.3

 
7.9

Amortization of acquired intangible assets
1.1

 
1.0

Total cost of revenue
30.9

 
31.2

Gross profit
69.1

 
68.8

Operating expense:
 
 
 
Research and development
20.0

 
17.5


24


Selling, general and administrative
24.9

 
23.5

Total operating expense
44.9

 
41.0

Income from operations
24.2

 
27.8

Other income (expense):
 
 
 
Interest income
2.7

 
0.6

Interest expense
(1.8
)
 
(1.4
)
Other income, net
2.5

 
1.2

Total other income, net
3.4

 
0.4

Income before income taxes
27.6

 
28.2

Provision for income taxes
1.1

 
3.0

Consolidated net income
26.5

 
25.2

Add: Net loss attributable to noncontrolling interests
1.0

 
1.4

Net income attributable to Illumina stockholders
27.5
 %
 
26.6
 %
Percentages may not recalculate due to rounding

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. The three-month periods ended March 31, 2019 and April 1, 2018 were both 13 weeks.
Revenue 
(Dollars in millions)
Q1 2019
 
Q1 2018
 
Change
 
% Change
Consumables
$
556

 
$
510

 
$
46

 
9
 %
Instruments
111

 
118

 
(7
)
 
(6
)
Total product revenue
667

 
628

 
39

 
6

Service and other revenue
179

 
154

 
25

 
16

Total revenue
$
846

 
$
782

 
$
64

 
8
 %

Service and other revenue consists primarily of sequencing and genotyping service revenue as well as instrument service contract revenue. Total revenue primarily relates to Core Illumina for all periods presented.

The increase in consumables revenue in Q1 2019 compared to Q1 2018 was primarily due to a $59 million increase in sequencing consumables revenue, driven primarily by growth in the instrument installed base. Instruments revenue decreased in Q1 2019 primarily due to a $7 million decrease in sequencing instruments revenue driven by timing of NovaSeq shipments, partially offset by increased shipments of our NextSeq instruments. Service and other revenue increased in Q1 2019 as a result of a non-recurring licensing agreement and increased revenue from co-development agreements.

Gross Margin
(Dollars in millions)
Q1 2019
 
Q1 2018
 
Change
 
% Change
Gross profit
$
584

 
$
538

 
$
46

 
9%
Gross margin
69.1
%
 
68.8
%
 
 
 
 

The gross margin increase in Q1 2019 was driven primarily by an increase in sequencing consumables as a percentage of total revenue, which generate higher gross margins, and an increase in revenue generated from a non-recurring licensing agreement.
 

25


Operating Expense
(Dollars in millions)
Q1 2019
 
Q1 2018
 
Change
 
% Change
Research and development
$
169

 
$
137

 
$
32

 
23
%
Selling, general and administrative
211

 
183

 
28

 
15

Total operating expense
$
380

 
$
320

 
$
60

 
19
%

Core Illumina R&D expense increased by $31 million, or 24%, in Q1 2019, primarily due to increased headcount, as we continue to invest in the research and development of new products and enhancements to existing products. Helix R&D expense increased by $1 million in Q1 2019.

Core Illumina SG&A expense increased by $31 million, or 18%, in Q1 2019, primarily due to expenses related to the pending Pacific Biosciences acquisition, increased headcount, and investments in facilities to support the continued growth and scale of our operations. Helix SG&A expense decreased by $3 million in Q1 2019.

Other Income, Net
(Dollars in millions)
Q1 2019
 
Q1 2018
 
Change
 
% Change
Interest income
$
23

 
$
5

 
$
18

 
360
%
Interest expense
(15
)
 
(11
)
 
(4
)
 
36

Other income, net
21

 
9

 
12

 
133

Total other income, net
$
29

 
$
3

 
$
26

 
867
%

Other income, net relates primarily to Core Illumina for all periods presented.

Interest income increased in Q1 2019 as a result of higher yields on our short-term debt securities and higher cash and cash-equivalent balances. Interest expense consisted primarily of accretion of discount on our convertible senior notes and increased in Q1 2019 primarily due to the 2023 Notes issued in August 2018. Other income, net, increased in Q1 2019 primarily due to a $15 million gain resulting from the settlement of a contingency related to the deconsolidation of GRAIL in 2017.

Provision for Income Taxes
(Dollars in millions)
Q1 2019
 
Q1 2018
 
Change
 
% Change