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 29, 2019~~

June 28, 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,, CA92122

(Address of principal executive offices) (Zip code)

(~~858~~) (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

☐

~~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. ☐

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 18, 2019,~~July 31, 2020, there were ~~147~~146 million shares of the registrant’s common stock outstanding.

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ILLUMINA, INC.

~~INDEX~~FORM 10-Q

FOR THE FISCAL QUARTER ENDED JUNE 28, 2020

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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~~PAGE
~~PART I. FINANCIAL INFORMATION~~
~~Item 1. Financial Statements~~	3
Condensed Consolidated Balance Sheets	35
Condensed Consolidated Statements of Income		46
Condensed Consolidated Statements of Comprehensive Income		57
Condensed Consolidated Statement of Stockholders’ Equity		68
Condensed Consolidated Statements of Cash Flows		810
Notes to Condensed Consolidated Financial Statements		911
~~Item 2. Management’s Discussion~~1. Organization and ~~Analysis of Financial Condition and Results of Operations~~Significant Accounting Policies		2311
2. Revenue		~~Item~~ 12
3. Investments and Fair Value Measurements		14
4. Debt		17
5. Stockholders’ Equity		18
6. Supplemental Balance Sheet Details		20
7. Legal Proceedings		22
8. Income Taxes		22
9. Segment Information		22

MANAGEMENT’S DISCUSSION & ANALYSIS
Management’s Overview and Outlook		24
Results of Operations		26
Liquidity and Capital Resources		29
Critical Accounting Policies and Estimates		31
Recent Accounting Pronouncements		31
Off-Balance Sheet Arrangements		31
Quantitative and Qualitative Disclosures About Market Risk		3032

OTHER KEY INFORMATION
Controls and Procedures		32
~~Item 4. Controls and Procedures~~Legal Proceedings		3033
~~PART II. OTHER INFORMATION~~Risk Factors
~~Item 1. Legal Proceedings~~	3133
~~Item 1A. Risk Factors~~Share Repurchases and Sales		3133
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~Exhibits		3134
~~Item 3. Defaults Upon Senior Securities~~Form 10-Q Cross-Reference Index		3135
~~Item 4. Mine Safety Disclosures~~	31
~~Item 5. Other Information~~	31
~~Item 6. Exhibits~~	31
~~SIGNATURES~~	32

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~~PART I. FINANCIAL INFORMATION~~

Consideration Regarding Forward-Looking Statements

~~Item 1. Financial 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;

•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;

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

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•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.

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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ILLUMINA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)


	September 29, 2019			December 30, 2018				June 28, 2020		December 29, 2019
	(Unaudited)							(Unaudited)
ASSETS	ASSETS						ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	1,815		$	1,144		Cash and cash equivalents	$	1,770	$	2,042
Short-term investments	1,351			2,368			Short-term investments	1,498		1,372
Accounts receivable, net	541			514			Accounts receivable, net	385		573
Inventory	417			386			Inventory	435		359

Prepaid expenses and other current assets	98			78			Prepaid expenses and other current assets	106		105
Total current assets	4,222			4,490			Total current assets	4,194		4,451
Property and equipment, net	875			1,075			Property and equipment, net	890		889
Operating lease right-of-use assets	555			—			Operating lease right-of-use assets	549		555
Goodwill	824			831			Goodwill	894		824
Intangible assets, net	152			185			Intangible assets, net	156		145
Deferred tax assets, net	88			70			Deferred tax assets, net	13		64
Other assets	373			308			Other assets	552		388
Total assets	$	7,089		$	6,959		Total assets	$	7,248	$	7,316

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY						LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:							Current liabilities:
Accounts payable	$	143		$	184		Accounts payable	$	135	$	149
Accrued liabilities	476			513			Accrued liabilities	477		516

Long-term debt, current portion	—			1,107			Long-term debt, current portion	503		—
Total current liabilities	619			1,804			Total current liabilities	1,115		665
Operating lease liabilities	691			—			Operating lease liabilities	681		695
Long-term debt	1,131			890			Long-term debt	659		1,141

Other long-term liabilities	209			359			Other long-term liabilities	230		202
Redeemable noncontrolling interests	—			61

Stockholders’ equity:							Stockholders’ equity:

Common stock	2			2			Common stock	2		2
Additional paid-in capital	3,510			3,290			Additional paid-in capital	3,649		3,560
Accumulated other comprehensive income (loss)	5			(1		)
Accumulated other comprehensive income							Accumulated other comprehensive income	14		5
Retained earnings	3,828			3,083			Retained earnings	4,287		4,067
Treasury stock, at cost	(2,906		)	(2,616		)	Treasury stock, at cost	(3,389)		(3,021)
Total Illumina stockholders’ equity	4,439			3,758
Noncontrolling interests	—			87

Total stockholders’ equity	4,439			3,845			Total stockholders’ equity	4,563		4,613
Total liabilities and stockholders’ equity	$	7,089		$	6,959		Total liabilities and stockholders’ equity	$	7,248	$	7,316

See accompanying notes to condensed consolidated financial statements.

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ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In millions, except per share amounts)


	Three Months Ended						Nine Months Ended							Three Months Ended						Six Months Ended
	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018				June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
Revenue:													Revenue:
Product revenue	$	746		$	710		$	2,117		$	2,011		Product revenue	$	527	$	704	$	1,228	$	1,372
Service and other revenue	161			143			474			455			Service and other revenue	106		134		264		312
Total revenue	907			853			2,591			2,466			Total revenue	633		838		1,492		1,684
Cost of revenue:													Cost of revenue:
Cost of product revenue	195			184			573			540			Cost of product revenue	152		196		326		378
Cost of service and other revenue	55			62			185			190			Cost of service and other revenue	46		59		105		130
Amortization of acquired intangible assets	9			10			28			26			Amortization of acquired intangible assets	7		10		14		19
Total cost of revenue	259			256			786			756			Total cost of revenue	205		265		445		527
Gross profit	648			597			1,805			1,710			Gross profit	428		573		1,047		1,157
Operating expense:													Operating expense:
Research and development	151			159			486			447			Research and development	155		166		311		335
Selling, general and administrative	189			197			602			577			Selling, general and administrative	177		202		451		412

Total operating expense	340			356			1,088			1,024			Total operating expense	332		368		762		747
Income from operations	308			241			717			686			Income from operations	96		205		285		410
Other (expense) income:
Other income (expense):													Other income (expense):
Interest income	16			14			59			31			Interest income	7		20		21		43
Interest expense	(11		)	(15		)	(41		)	(37		)	Interest expense	(11)		(15)		(22)		(30)
Other (expense) income, net	(43		)	(8		)	114			5
Total other (expense) income, net	(38		)	(9		)	132			(1		)

Other income, net													Other income, net	73		136		58		157
Total other income, net													Total other income, net	69		141		57		170
Income before income taxes	270			232			849			685			Income before income taxes	165		346		342		580
Provision for income taxes	36			44			98			100			Provision for income taxes	118		53		122		63
Consolidated net income	234			188			751			585			Consolidated net income	47		293		220		517
Add: Net loss attributable to noncontrolling interests	—			11			12			31			Add: Net loss attributable to noncontrolling interests	—		3		—		12

Net income attributable to Illumina stockholders	$	234		$	199		$	763		$	616		Net income attributable to Illumina stockholders	$	47	$	296	$	220	$	529
Earnings per share attributable to Illumina stockholders:													Earnings per share attributable to Illumina stockholders:
Basic	$	1.59		$	1.35		$	5.19		$	4.20		Basic	$	0.32	$	2.01	$	1.50	$	3.60
Diluted	$	1.58		$	1.33		$	5.13		$	4.15		Diluted	$	0.32	$	1.99	$	1.49	$	3.56
Shares used in computing earnings per share:													Shares used in computing earnings per share:
Basic	147			147			147			147			Basic	147		147		147		147
Diluted	148			149			149			148			Diluted	148		149		148		149

See accompanying notes to condensed consolidated financial statements.

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ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In millions)


	Three Months Ended					Nine Months Ended						Three Months Ended						Six Months Ended
	September 29, 2019		September 30, 2018			September 29, 2019		September 30, 2018				June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
Consolidated net income	$	234	$	188		$	751	$	585		Consolidated net income	$	47	$	293	$	220	$	517
Unrealized (loss) gain on available-for-sale debt securities, net of deferred tax	—		(1		)	6		(1		)
Unrealized gain on available-for-sale debt securities, net of deferred tax											Unrealized gain on available-for-sale debt securities, net of deferred tax	8		3		9		6
Total consolidated comprehensive income	234		187			757		584			Total consolidated comprehensive income	55		296		229		523
Add: Comprehensive loss attributable to noncontrolling interests	—		11			12		31			Add: Comprehensive loss attributable to noncontrolling interests	—		3		—		12
Comprehensive income attributable to Illumina stockholders	$	234	$	198		$	769	$	615		Comprehensive income attributable to Illumina stockholders	$	55	$	299	$	229	$	535

See accompanying notes to condensed consolidated financial statements.

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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

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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 of repurchases 1
—
1
—
—
(1 ) (154 ) —
(153 )
Share-based compensation —
—
48
—
—
—
—
—
48
Adjustment to the carrying value of redeemable noncontrolling interests —
—
148
—
—
—
—
—
148

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
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


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

See accompanying notes to condensed consolidated financial statements.

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ILLUMINA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)


	Nine Months Ended							Six Months Ended
	September 29, 2019			September 30, 2018				June 28, 2020		June 30, 2019
Cash flows from operating activities:							Cash flows from operating activities:
Consolidated net income	$	751		$	585		Consolidated net income	$	220	$	517
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	113			100			Depreciation expense	75		76
Amortization of intangible assets	30			29			Amortization of intangible assets	15		20
Share-based compensation expense	145			146			Share-based compensation expense	55		99
Accretion of debt discount	36			26			Accretion of debt discount	19		27

Deferred income taxes	(13		)	(32		)	Deferred income taxes	47		6
Unrealized gains on marketable equity securities	(57		)	—			Unrealized gains on marketable equity securities	(69)		(104)

Payment of accreted debt discount	(84		)	—			Payment of accreted debt discount	—		(84)
Gains on deconsolidation	(54		)	—			Gains on deconsolidation	—		(54)
Loss on derivative assets related to terminated acquisition							Loss on derivative assets related to terminated acquisition	107		—
Other	(10		)	—			Other	(12)		(5)
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable	(29		)	(24		)	Accounts receivable	190		46
Inventory	(33		)	(40		)	Inventory	(75)		(36)
Prepaid expenses and other current assets	(14		)	7			Prepaid expenses and other current assets	3		(11)
Operating lease right-of-use assets and liabilities, net	(3		)	—			Operating lease right-of-use assets and liabilities, net	(7)		(3)
Other assets	(29		)	(9		)	Other assets	(23)		(11)
Accounts payable	(46		)	13			Accounts payable	(13)		(43)
Accrued liabilities	(81		)	45			Accrued liabilities	(41)		(87)

Other long-term liabilities	(14		)	(4		)	Other long-term liabilities	30		(12)
Net cash provided by operating activities	608			842			Net cash provided by operating activities	521		341
Cash flows from investing activities:							Cash flows from investing activities:
Maturities of available-for-sale securities	1,262			710			Maturities of available-for-sale securities	218		1,204
Purchases of available-for-sale securities	(760		)	(2,352		)	Purchases of available-for-sale securities	(547)		(393)
Sales of available-for-sale securities	528			520			Sales of available-for-sale securities	287		386

Proceeds from the deconsolidation of GRAIL							Proceeds from the deconsolidation of GRAIL	—		15
Cash paid for derivative assets related to terminated acquisition							Cash paid for derivative assets related to terminated acquisition	(132)		—
Purchases of property and equipment	(152		)	(231		)	Purchases of property and equipment	(79)		(103)
Deconsolidation of Helix cash	(29		)	—			Deconsolidation of Helix cash	—		(29)
Proceeds from deconsolidation of GRAIL	15			—

Net purchases of strategic investments	(15		)	(12		)	Net purchases of strategic investments	(107)		(13)
Net cash paid for acquisitions	—			(100		)
Net cash provided by (used in) investing activities	849			(1,465		)
Net cash paid for acquisition							Net cash paid for acquisition	(95)		—

Net cash (used in) provided by investing activities							Net cash (used in) provided by investing activities	(455)		1,067
Cash flows from financing activities:							Cash flows from financing activities:
Payments on financing obligations	(550		)	(3		)	Payments on financing obligations	—		(550)
Net proceeds from issuance of debt	—			735

Common stock repurchases	(261		)	(103		)	Common stock repurchases	(330)		(63)
Taxes paid related to net share settlement of equity awards	(30		)	(18		)	Taxes paid related to net share settlement of equity awards	(38)		(26)

Proceeds from issuance of common stock	59			45			Proceeds from issuance of common stock	34		30
Contributions from noncontrolling interest owners	—			92
Net cash (used in) provided by financing activities	(782		)	748

Net cash used in financing activities							Net cash used in financing activities	(334)		(609)
Effect of exchange rate changes on cash and cash equivalents	(4		)	(4		)	Effect of exchange rate changes on cash and cash equivalents	(4)		—
Net increase in cash and cash equivalents	671			121
Net (decrease) increase in cash and cash equivalents							Net (decrease) increase in cash and cash equivalents	(272)		799
Cash and cash equivalents at beginning of period	1,144			1,225			Cash and cash equivalents at beginning of period	2,042		1,144
Cash and cash equivalents at end of period	$	1,815		$	1,346		Cash and cash equivalents at end of period	$	1,770	$	1,943
Supplemental cash flow information:
Cash paid for operating lease liabilities	$	63		$	—

See accompanying notes to condensed consolidated financial statements.

~~Illumina, Inc.~~

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~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~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. Basis~~


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Business Overview

We are a provider of ~~Presentation~~sequencing- and ~~Summary of Significant Accounting Policies~~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 ~~30, 2018,~~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.

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. Effective April 25, 2019, we deconsolidated the financial statements of Helix Holdings I, LLC (Helix). See note “2. Balance Sheet Account Details” for further details.

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 (expense) income, net~~.

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~~References to Q2 2020 and Q2 2019 refer to the three ~~and nine~~ months ended ~~September 29,~~June 28, 2020 and June 30, 2019, ~~and~~ ~~September 30, 2018~~ respectively, which were both 13 weeks, and ~~26 weeks, respectively.~~

~~Reclassifications~~

~~Certain prior period amounts have been reclassified~~references to ~~conform~~year-to-date (YTD) 2020 and 2019 refer to the ~~current period presentation.~~six months ended June 28, 2020 and June 30, 2019, respectively, which were both 26 weeks.

Significant Accounting Policies

During the ~~three and nine months ended September 29, 2019,~~first half of 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 ~~30, 2018,~~29, 2019, except as described in Recently Adopted Accounting Pronouncements 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-effect adjustment to retained earnings.

~~Accounting Pronouncements Pending Adoption~~

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

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trade receivables and available-for-sale debt securities. We ~~expect to adopt~~adopted the standard on its effective date in the first quarter of 2020 using a modified retrospective approach. ~~We currently do~~The cumulative effect of applying the new credit loss standard was not ~~expect~~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 ~~to have a material impact~~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 ~~consolidated financial statements.~~trade receivables as described in our Accounts Receivable policy, below.

Accounts Receivable

~~Revenue Recognition~~

~~Our revenue~~Trade accounts receivable are considered past due based on the contractual payment terms. We reserve specific receivables when collectibility 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, instrument service contracts, and development and licensing agreements.

no longer probable. We ~~recognize revenue when control~~also reserve a percentage of our ~~products~~trade receivable balance based on collection history and ~~services is transferred to our customers in an amount~~current economic trends that ~~reflects the consideration~~ we expect ~~to receive from~~will impact the level of credit losses over the life of our ~~customers in exchange for those products~~receivables. These reserves are re-evaluated on a regular basis and ~~services. This process involves identifying the contract with~~adjusted, as needed. Once 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~~receivable is deemed to be ~~transferred. Invoicing typically occurs upon shipment; and payment~~uncollectible, such balance is ~~typically due within 60 days from invoice. In instances where right of payment or transfer of title is contingent upon~~charged against the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. 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 from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from development and licensing agreements generally includes upfront and periodic licensing fees, contract research and development services, and payments for development and regulatory milestones. Revenue for these agreements is recognized when each distinct performance obligation is satisfied.reserve.

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 September 29, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,009 million, of which approximately 63% is expected to be converted to revenue in the next twelve months, approximately 10% in the following twelve months, and 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 September 29, 2019 and December 30, 2018 were $193 million and $206 million, respectively, of which the short-term portions of $161 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 and nine months ended September 29, 2019 included $27 million and $133 million, respectively, of previously deferred revenue that was included in contract liabilities as of December 30, 2018. Contract assets as of September 29, 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.

~~The following table represents revenue by source (in millions):~~

Three Months Ended
September 29,
2019 September 30,
2018
Sequencing Microarray Total Sequencing Microarray Total
Consumables $ 525
$ 75
$ 600
$ 472
$ 83
$ 555
Instruments 142
4
146
138
17
155
Total product revenue 667
79
746
610
100
710
Service and other revenue 138
23
161
109
34
143
Total revenue $ 805
$ 102
$ 907
$ 719
$ 134
$ 853

Nine Months Ended
September 29,
2019 September 30,
2018
Sequencing Microarray Total Sequencing Microarray Total
Consumables $ 1,503
$ 224
$ 1,727
$ 1,353
$ 256
$ 1,609
Instruments 376
14
390
375
27
402
Total product revenue 1,879
238
2,117
1,728
283
2,011
Service and other revenue 353
121
474
312
143
455
Total revenue $ 2,232
$ 359
$ 2,591
$ 2,040
$ 426
$ 2,466

~~Revenue related to our previously consolidated VIE, Helix, is included in sequencing service and other revenue up to April 25, 2019, the date of Helix’s deconsolidation.~~

~~The following table represents revenue by geographic area, based on region of destination (in millions):~~

Three Months Ended Nine Months Ended
September 29,
2019 September 30,
2018 September 29,
2019 September 30,
2018
Americas $ 514
$ 474
$ 1,463
$ 1,380
Europe, Middle East, and Africa 235
219
653
615
Greater China (1) 95
102
280
288
Asia-Pacific 63
58
195
183
Total revenue $ 907
$ 853
$ 2,591
$ 2,466

~~____________________________________~~

~~(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. Up to April 25, 2019, the date of ~~Helix’s~~Helix Holdings I, LLC’s (Helix) deconsolidation, per-share ~~earnings~~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.

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


	Three Months Ended		Nine Months Ended
	September 29, 2019	September 30, 2018	September 29, 2019	September 30, 2018
In millions					In millions	Q2 2020	Q2 2019	YTD 2020	YTD 2019
Weighted average shares outstanding	147	147	147	147	Weighted average shares outstanding	147	147	147	147
Effect of potentially dilutive common shares from:					Effect of potentially dilutive common shares from:
Equity awards	1	1	1	1	Equity awards	1	1	1	1
Convertible senior notes	—	1	1	—	Convertible senior notes	—	1	—	1

Weighted average shares used in calculating diluted earnings per share	148	149	149	148	Weighted average shares used in calculating diluted earnings per share	148	149	148	149
Potentially dilutive shares excluded from calculation due to anti-dilutive effect					Potentially dilutive shares excluded from calculation due to anti-dilutive effect	—	—	1	—


2. REVENUE

~~2. Balance Sheet Account Details~~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, instrument service contracts, and development and licensing agreements.

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~~Short-term Investments~~

Revenue by Source



	Q2 2020										Q2 2019
In millions	Sequencing		Microarray		Total		Sequencing		Microarray		Total
Consumables	$	387	$	49	$	436	$	497	$	74	$	571
Instruments	88		3		91		129		4		133

Total product revenue	475		52		527		626		78		704
Service and other revenue	91		15		106		102		32		134
Total revenue	$	566	$	67	$	633	$	728	$	110	$	838


	YTD 2020										YTD 2019
In millions	Sequencing		Microarray		Total		Sequencing		Microarray		Total
Consumables	$	940	$	116	$	1,056	$	978	$	149	$	1,127
Instruments	166		6		172		234		11		245
Total product revenue	1,106		122		1,228		1,212		160		1,372
Service and other revenue	219		45		264		215		97		312
Total revenue	$	1,325	$	167	$	1,492	$	1,427	$	257	$	1,684

Revenue by Geographic Area



Based on region of destination (in millions)	Q2 2020		Q2 2019		YTD 2020		YTD 2019
Americas	$	335	$	476	$	812	$	949
Europe, Middle East, and Africa	168		208		389		418
Greater China (1)	79		97		163		185
Asia-Pacific	51		57		128		132
Total revenue	$	633	$	838	$	1,492	$	1,684

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

Performance Obligations

We regularly enter into contracts with multiple performance obligations. Most performance obligations are generally satisfied within a short time frame, approximately three to six months, after the contract execution date. As of June 28, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $784 million, of which approximately 85% is expected to be converted to revenue in the next twelve months, and the remainder thereafter.

Contract Liabilities

Contract liabilities, which consist of deferred revenue and customer deposits, as of June 28, 2020 and December 29, 2019 were $196 million and $209 million, respectively, of which the short-term portions of $153 million and $167 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q2 2020 and YTD 2020 included $38 million and $106 million, respectively, of previously deferred revenue that was included in contract liabilities as of December 29, 2019.

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3. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Debt Securities

Our short-term investments are primarily available-for-sale debt securities that consisted of the ~~following (in millions):~~following:

September 29, 2019 December 30, 2018

Amortized
Cost

Gross
Unrealized
Gains

Estimated
Fair Value

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
Debt securities in government-sponsored entities $ 31
$ —
$ 31
$ 21
$ —
$ —
$ 21
Corporate debt securities 632
4
636
1,060
—
(2 ) 1,058
U.S. Treasury securities 573
1
574
1,250
1
(1 ) 1,250
Total $ 1,236
$ 5
$ 1,241
$ 2,331
$ 1
$ (3 ) $ 2,329


	June 28, 2020										December 29, 2019
In millions	Amortized Cost		Gross Unrealized Gains		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains			Estimated Fair Value

Debt securities in government-sponsored entities	$	50	$	—	$	50	$	18	$	—		$	18
Corporate debt securities	598		9		607		627		3			630
U.S. Treasury securities	656		9		665		616		2			618
Total	$	1,304	$	18	$	1,322	$	1,261	$	5		$	1,266

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 ~~September 29, 2019~~,June 28, 2020, were as ~~follows (in millions):~~follows:

Estimated
Fair Value
Due within one year $ 497
After one but within five years 744
Total $ 1,241


In millions	Estimated Fair Value
Due within one year	$	525
After one but within five years	797
Total	$	1,322

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.

Strategic Investments

~~We have strategic investments in privately held companies (non-marketable equity securities) and companies that have completed initial public offerings (marketable equity securities).~~

Marketable Equity Securities

~~Our marketable equity securities are measured at fair value.~~

As of ~~September~~June 28, 2020 and December 29, 2019, ~~and December 30, 2018,~~ the fair value of our marketable equity securities, included in short-term investments, totaled ~~$110~~$176 million and ~~$39~~$106 million, respectively. Total unrealized ~~losses and~~ gains on our marketable equity securities, included in other ~~(expense)~~ income, net,, were ~~$47~~$66 million and ~~$57~~$69 million in Q2 2020 and YTD 2020, respectively, ~~for the three~~ and ~~nine months ended September 29, 2019.~~$102 million and $104 million in Q2 2019 and YTD 2019, respectively.

Non-Marketable Equity Securities

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.

As of ~~September~~June 28, 2020 and December 29, 2019, ~~and~~ ~~December 30, 2018~~, the aggregate carrying amounts of our non-marketable equity ~~investments~~securities without readily determinable fair values, included in other assets, were ~~$221~~$305 million and ~~$231~~$220 million,, respectively.

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~~$250 million and $190 million as of ~~September~~June 28, 2020 and December 29, 2019, respectively, recorded in other assets. During Q2 2020, we made an additional $60 million investment in this VIE.

Revenue recognized from transactions with our strategic investees was $10 million and ~~December 30, 2018.~~$23 million for Q2 2020 and YTD 2020, respectively, and $18 million and $34 million for Q2 2019 and YTD 2019, respectively.

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Venture Funds

We invest in 2 venture capital investment funds (the Funds) with capital commitments of $100 million, callable through April 2026, and up to $160 million, callable through July 2029, respectively, of which ~~$55~~$44 million and up to ~~$160~~$143 million, respectively, remained callable as of ~~September 29, 2019.~~June 28, 2020. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were ~~$49~~$79 million and ~~$29~~$53 million as of ~~September~~June 28, 2020 and December 29, 2019, ~~and December 30, 2018,~~ respectively.

Revenue recognized from transactions with our strategic investees was $15 million and $49 million, respectively, for the three and nine months ended September 29, 2019 and $32 million and $104 million, respectively, for the three and nine months ended September 30, 2018.

~~Inventory~~

~~Inventory consisted of the following (in millions):~~

September 29,
2019 December 30,
2018
Raw materials $ 123
$ 117
Work in process 270
218
Finished goods 24
51
Total inventory $ 417
$ 386

Previously Consolidated Variable Interest Entity

~~Property and Equipment~~

~~Property and equipment, net consisted of the following (in millions):~~

September 29,
2019 December 30,
2018
Leasehold improvements $ 587
$ 567
Machinery and equipment 389
382
Computer hardware and software 257
217
Furniture and fixtures 43
45
Buildings 44
285
Construction in progress 91
100
Total property and equipment, gross 1,411
1,596
Accumulated depreciation (536 ) (521 )
Total property and equipment, net $ 875
$ 1,075

Helix Holdings I, LLC (Helix)

Property and equipment, net included non-cash expenditures of $25 million and $38 million for the nine months ended September 29, 2019 and September 30, 2018, respectively, which were excluded from the condensed consolidated statements of cash flows. Such non-cash expenditures included $18 million recorded under build-to-suit lease accounting for the nine months ended September 30, 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 2.6 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.

~~As of September 29, 2019, the maturities of our operating lease liabilities were as follows (in millions):~~

Remaining Lease Payments
2019 $ 19
2020 83
2021 82
2022 84
2023 85
Thereafter 622
Total remaining lease payments (1) 975
Less: imputed interest (235 )
Total operating lease liabilities 740
Less: current portion (49 )
Long-term operating lease liabilities $ 691
Weighted-average remaining lease term 11.4 years
Weighted-average discount rate 4.6 %

~~(1) Total remaining lease payments exclude $47 million of legally binding minimum lease payments for leases signed but not yet commenced.~~

~~The components of our lease costs included in our condensed consolidated statements of income were as follows (in millions):~~

Three Months Ended Nine Months Ended
September 29, 2019 September 29, 2019
Operating lease costs $ 21
$ 63
Sublease income (3 ) (9 )
Total lease costs $ 18
$ 54

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.

~~Goodwill~~

We test the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require us to estimate the fair value of each reporting unit annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment is required. We performed the annual assessment for goodwill impairment in the second quarter of 2019, noting no impairment.

~~Changes to goodwill during the nine months ended September 29, 2019 were as follows (in millions):~~

Goodwill
Balance as of December 30, 2018 $ 831
Helix deconsolidation (7 )
Balance as of September 29, 2019 $ 824

~~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 (expense) income, net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.~~

As of September 29, 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 September 29, 2019 and December 30, 2018, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $244 million and $122 million, respectively.

~~Accrued Liabilities~~

~~Accrued liabilities consisted of the following (in millions):~~

September 29,
2019 December 30,
2018
Contract liabilities, current portion $ 161
$ 175
Accrued compensation expenses 112
193
Accrued taxes payable 96
82
Operating lease liabilities, current portion 49
—
Other, including warranties 58
63
Total accrued liabilities $ 476
$ 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 and nine months ended~~ ~~September 29, 2019~~ ~~and September 30, 2018 were as follows (in millions):~~

Three Months Ended Nine Months Ended
September 29,
2019 September 30,
2018 September 29,
2019 September 30,
2018
Balance at beginning of period $ 16
$ 15
$ 19
$ 17
Additions charged to cost of product revenue 3
8
12
20
Repairs and replacements (5 ) (6 ) (17 ) (20 )
Balance at end of period $ 14
$ 17
$ 14
$ 17

~~Deconsolidation of Helix~~

In July 2015, we obtained a 50% voting equity ownership interest in Helix. WeAt that time, we determined that we had unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and, as a result, we were deemed to be the primary beneficiary of Helix and were required to consolidate Helix. The operations of Helix ~~up to the date of the deconsolidation described below,~~ are included in the accompanying condensed consolidated statements of income for ~~the three and nine months ended September 29,~~Q2 2019 and ~~September 30, 2018.~~the first half of 2019, up to the date of the deconsolidation, described below. During ~~these periods,~~this period, we absorbed 50% of Helix’s losses.

On April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, Helix. As part of the agreement, (i) Helix repurchased all of our outstanding equity interests in exchange for a contingent value right with a 7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events, (ii) we ceased having a controlling financial interest in Helix, including unilateral power over one of the activities that most significantly impacts the economic performance of Helix, (iii) we were relieved of any potential obligation to redeem certain noncontrolling interests, and (iv) we no longer have representation on Helix’s board of directors. As a result, we deconsolidated Helix’s financial statements effective April 25, 2019 and recorded a gain on deconsolidation of $39 million in other ~~(expense)~~ income, ~~net~~.net. The gain on deconsolidation included (i) the contingent value right received from Helix recorded at a fair value of approximately $30 million, (ii) the derecognition of the carrying amounts of Helix’s assets and liabilities, and (iii) the derecognition of the noncontrolling interests related to Helix.

~~As of September 29, 2019,~~During Q2 2020 and YTD 2020, changes in the fair value of the contingent value right ~~received from Helix was $28~~resulted in unrealized gains of $8 million and $5 million, respectively, included in other ~~assets.~~income, net. During ~~the three and nine months ended September 29,~~Q2 2019, ~~the fair value measurement~~such changes resulted in ~~a $2 million unrealized gain and a $1 million~~an unrealized loss ~~respectively, included in~~ ~~other (expense) income, net~~.of $3 million.

~~Redeemable Noncontrolling Interests~~

~~The activity of the redeemable noncontrolling interests during the nine months ended September 29, 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 (9 )
Adjustment down to the redemption value (16 )
Release of potential obligation to noncontrolling interests (37 )
Balance as of September 29, 2019 $ —

~~3. Pending~~Derivative Assets Related to Terminated Acquisition

On November 1, 2018, we entered into an Agreement and Plan of Merger (the Merger ~~Agreement)~~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 is subject~~On January 2, 2020, we entered into an agreement 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~~terminate the Merger Agreement ~~under specified circumstances, including but not limited to, a termination of the Merger~~(the Termination Agreement ~~in connection with PacBio accepting a superior offer or due~~). Pursuant to the ~~withdrawal by PacBio’s board of directors of its recommendation of the merger, PacBio will pay us~~Termination Agreement, we made a cash ~~termination fee of $43 million. In certain other circumstances related~~payment to ~~antitrust approvals, we may be required to pay~~ PacBio ~~a termination fee~~ of $98 million ~~assuming~~on January 2, 2020, which represented the ~~other closing conditions not related~~Reverse Termination Fee (as defined in the Merger Agreement). The Reverse Termination Fee is repayable, without interest, to ~~antitrust~~us if PacBio enters into a definitive agreement providing for, or ~~competition laws have been satisfied.~~

Onconsummates, a Change of Control Transaction by September ~~25,~~30, 2020 (as defined in the Termination Agreement), and such transaction is consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction. In addition, we made cash payments to PacBio of $18 million in Q4 2019, ~~we entered into~~pursuant to Amendment No. 1 to the Merger Agreement ~~(the Amendment). The Amendment extended~~, and $34 million in Q1 2020, pursuant to the ~~End Time of~~Termination Agreement, collectively referred to as the Merger Agreement (as defined in the Merger Agreement) to December 31, 2019 and provides that we make cash payments to PacBio of $6 million on or before each of October 1, 2019, November 1, 2019, and December 2, 2019. We may also unilaterally extend the End Time date until March 31, 2020 by making additional payments to PacBio totaling $34 million.Continuation Advances. Up to the ~~full amount~~$52 million of ~~these payments~~Continuation Advances is repayable without interest ~~only if: (1) the Merger Agreement is terminated and (2)~~to us if, within two years of ~~termination,~~March 31, 2020, PacBio enters into ~~certain change-of-control transactions with~~ a ~~third party~~Change of Control Transaction or raises at least $100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio). ~~On October 1, 2019, we made our first $6~~

The potential repayments of the Continuation Advances and Reverse Termination Fee meet the definition of derivative assets and are recorded at fair value. The $92 million difference between the $132 million in cash paid during Q1 2020 for the Continuation Advances and Reverse Termination Fee and the $40 million fair value of these derivative assets on the payment ~~to PacBio.~~dates was recorded as selling, general and administrative expenses. Changes in the fair value of the derivative assets are included in other income, net, and totaled $11 million and $15 million in unrealized losses in Q2 2020 and YTD 2020, respectively.

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Fair Value Measurements

The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring ~~basis as of~~ ~~September 29, 2019~~ ~~and~~ ~~December 30, 2018~~ ~~(in millions):~~basis:

September 29, 2019 December 30, 2018
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets:
Money market funds (cash equivalents) $ 1,541
$ —
$ —
$ 1,541
$ 832
$ —
$ —
$ 832
Debt securities in government-sponsored entities —
31
—
31
—
21
—
21
Corporate debt securities —
636
—
636
—
1,058
—
1,058
U.S. Treasury securities 574
—
—
574
1,250
—
—
1,250
Marketable equity securities 110
—
—
110
39
—
—
39
Contingent value right —
—
28
28
—
—
—
—
Deferred compensation plan assets —
45
—
45
—
34
—
34
Total assets measured at fair value $ 2,225
$ 712
$ 28
$ 2,965
$ 2,121
$ 1,113
$ —
$ 3,234
Liabilities:
Deferred compensation plan liability $ —
$ 43
$ —
$ 43
$ —
$ 33
$ —
$ 33


	June 28, 2020														December 29, 2019
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds (cash equivalents)	$	1,468	$	—	$	—	$	1,468	$	1,732	$	—	$	—	$	1,732
Debt securities in government-sponsored entities	—		50		—		50		—		18		—		18
Corporate debt securities	—		607		—		607		—		630		—		630
U.S. Treasury securities	665		—		—		665		618		—		—		618
Marketable equity securities	176		—		—		176		106		—		—		106
Contingent value right	—		—		33		33		—		—		29		29
Derivative assets related to terminated acquisition	—		—		36		36		—		—		10		10
Deferred compensation plan assets	—		48		—		48		—		48		—		48
Total assets measured at fair value	$	2,309	$	705	$	69	$	3,083	$	2,456	$	696	$	39	$	3,191
Liabilities:

Deferred compensation plan liability	$	—	$	46	$	—	$	46	$	—	$	46	$	—	$	46

~~We hold~~

Our available-for-sale securities ~~that~~ consist of highly-liquid, investment-grade debt securities and marketable equity 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 marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. We elected the fair value option to measure the contingent value right received from Helix. The fair value of our contingent value right, included in other assets, is derived using a Monte Carlo simulation. The derivative assets related to the terminated acquisition of PacBio are financial instruments measured at fair value, included in other assets. Significant estimates and assumptions required for ~~this valuation~~these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.

~~5. Debt and Other Commitments~~

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4. DEBT

Summary of debt obligations

~~Debt obligations consisted of the following (dollars in millions):~~

September 29,
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 —
633
Unamortized discount of liability component of convertible senior notes (136 ) (175 )
Net carrying amount of liability component of convertible senior notes 1,131
1,725
Obligations under financing leases —
269
Other —
3
Less: current portion —
(1,107 )
Long-term debt $ 1,131
$ 890
Carrying value of equity component of convertible senior notes, net of debt issuance costs $ 213
$ 287
Fair value of convertible senior notes outstanding (Level 2) $ 1,517
$ 2,222
Weighted-average remaining amortization period of discount on the liability component of convertible senior notes 3.4 years
3.9 years


In millions	June 28, 2020		December 29, 2019
Principal amount of 2023 Notes outstanding	$	750	$	750
Principal amount of 2021 Notes outstanding	517		517

Unamortized discount of liability component of convertible senior notes	(105)		(126)
Net carrying amount of liability component of convertible senior notes	1,162		1,141


Less: current portion	(503)		—
Long-term debt	$	659	$	1,141
Carrying value of equity component of convertible senior notes, net of debt issuance costs	$	213	$	213
Fair value of convertible senior notes outstanding (Level 2)	$	1,563	$	1,549
Weighted-average remaining amortization period of discount on the liability component of convertible senior notes	2.8 years		3.2 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 5 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 ~~September 29, 2019~~June 28, 2020 and had no dilutive impact during ~~the nine months ended September 29, 2019.~~YTD 2020. If the 2023 Notes were converted as of ~~September 29, 2019,~~June 28, 2020, the if-converted value would not exceed the principal amount.

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0.5% Convertible Senior Notes due 2021 (2021 Notes)

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

The 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 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 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 2021 Notes. Regardless of the foregoing circumstances, the holders of the 2021 Notes may convert their notes on or after March 15, 2021 until June 11, 2021.

The market price of our common stock met the stock trading price conversion requirement of $330.64 and the 2021 Notes became convertible on July 1, 2020, and continue to be convertible through September 30, 2020. The potential dilutive impact of the 2021 Notes has been included in our calculation of diluted earnings per share for ~~the three~~Q2 2020 and ~~nine months ended September 29, 2019.~~YTD 2020. If the 2021 Notes were converted as of ~~September 29, 2019,~~June 28, 2020, the if-converted value would exceed the principal amount by ~~$71~~$211 million.

0% Convertible Senior Notes due 2019 (2019 Notes)

In June 2014, we issued $633 million aggregate principal amount of 2019 Notes, and the implied estimated effective rate of the liability component ~~of the Notes~~ was 2.9%, assuming no conversion option. The 2019 Notes were convertible into cash, shares of common stock, or a combination of common stock, at our election, based on conversion rates as defined in the indenture.. The 2019 Notes matured on June 15, 2019, ~~by which time~~and the ~~principal had been converted and was repaid in cash. The~~ excess of the conversion value over the principal amount was paid in 0.4 million shares of common stock.

~~The following table summarizes information about the conversion of the 2019 Notes during the nine months ended September 29, 2019 (in millions):~~

2019 Notes
Cash paid for principal of notes converted $ 633
Conversion value over principal amount, paid in shares of common stock $ 153
Number of shares of common stock issued upon conversion 0.4

~~Obligations under financing leases~~


5. STOCKHOLDERS’ EQUITY

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 September 29, 2019,~~June 28, 2020, approximately ~~4.9~~4.1 million shares remained available for future grants under the 2015 Stock Plan.

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Restricted Stock

Restricted stock activity ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 29, 2019~~was as ~~follows (units in thousands):~~follows:

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 70
(54 ) $ 305.75
$ 260.24
Vested (96 ) —
$ 197.49
—
Cancelled (111 ) (62 ) $ 220.55
$ 178.85
Outstanding at September 29, 2019 1,703
544
$ 232.31
$ 192.83


	Restricted Stock Units (RSU)	Performance Stock Units (PSU)(1)	Weighted-Average Grant Date Fair Value per Share
Units in thousands					RSU		PSU
Outstanding at December 29, 2019	1,700	271	$	271.49	$	258.66
Awarded	208	(200)	$	292.92	$	257.76
Vested	(58)	—	$	218.61	—
Cancelled	(135)	(71)	$	264.36	$	261.19
Outstanding at June 28, 2020	1,715	—	$	276.43	—


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

(1)The number of units reflect the estimated number of shares to be issued at the end of the performance period. Awarded units are presented net of performance adjustments.

Stock Options

Stock option activity ~~during the~~ ~~nine~~ ~~months ended~~ ~~September 29, 2019~~was as follows:

Options
(in thousands)

Weighted-Average
Exercise Price
Outstanding at December 30, 2018 192
$ 54.52
Exercised (128 ) $ 53.00
Outstanding and exercisable at September 29, 2019 64
$ 57.58


	Options (in thousands)	Weighted-Average Exercise Price
Outstanding at December 29, 2019	58	$	56.65

Exercised	(48)	$	56.33

Outstanding and exercisable at June 28, 2020	10	$	58.21

ESPP

The price at which common stock is purchased under the Employee Stock Purchase Plan (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~~ ~~nine~~ ~~months ended~~ ~~September 29, 2019~~,YTD 2020, approximately ~~0.2~~0.1 million shares were issued under the ESPP. As of ~~September 29, 2019~~,June 28, 2020, there were approximately ~~13.5~~13.4 million shares available for issuance under the ESPP.

Share Repurchases

On February ~~6, 2019,~~5, 2020, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase ~~$550~~$750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. During ~~the nine months ended September 29, 2019,~~YTD 2020, we repurchased ~~0.9~~1.1 million shares for approximately ~~$261~~$330 million. Authorizations to repurchase approximately ~~$289~~$420 million of our common stock remained available as of ~~September 29, 2019.~~June 28, 2020.

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Share-based Compensation

Share-based compensation expense reported in our condensed consolidated statements of income was as ~~follows (in millions):~~follows:

Three Months Ended Nine Months Ended
September 29,
2019 September 30,
2018 September 29,
2019 September 30,
2018
Cost of product revenue $ 5
$ 4
$ 15
$ 12
Cost of service and other revenue 1
1
3
3
Research and development 15
15
50
45
Selling, general and administrative 24
28
77
86
Share-based compensation expense before taxes 45
48
145
146
Related income tax benefits (10 ) (8 ) (31 ) (29 )
Share-based compensation expense, net of taxes $ 35
$ 40
$ 114
$ 117



In millions	Q2 2020		Q2 2019		YTD 2020		YTD 2019
Cost of product revenue	$	3	$	5	$	7	$	10
Cost of service and other revenue	1		1		2		2
Research and development	12		16		27		34
Selling, general and administrative	1		26		19		53
Share-based compensation expense before taxes	17		48		55		99
Related income tax benefits	(6)		(11)		(15)		(21)
Share-based compensation expense, net of taxes	$	11	$	37	$	40	$	78

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock purchased under the ESPP during ~~the~~ ~~nine~~ ~~months ended September 29, 2019~~YTD 2020 were as follows:

Employee Stock Purchase Rights
Risk-free interest rate 1.88% - 2.56%
Expected volatility 30% - 38%
Expected term 0.5 - 1.0 year
Expected dividends 0 %
Weighted-average grant-date fair value per share $ 75.47


	Employee Stock Purchase Rights
Risk-free interest rate	1.46% - 2.56%
Expected volatility	30% - 37%
Expected term	0.5 - 1.0 year
Expected dividends	0		%
Weighted-average grant-date fair value per share	$	77.19

As of ~~September 29, 2019,~~June 28, 2020, approximately ~~$320~~$378 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 ~~1.9~~2.4 years.

~~7. Legal Proceedings~~


6. SUPPLEMENTAL BALANCE SHEET DETAILS

Accounts Receivable


In millions	June 28, 2020		December 29, 2019
Trade accounts receivable, gross	$	389	$	575
Allowance for credit losses	(4)		(2)
Total accounts receivable, net	$	385	$	573

Inventory


In millions	June 28, 2020		December 29, 2019
Raw materials	$	147	$	108
Work in process	261		225
Finished goods	27		26
Total inventory	$	435	$	359

Intangible Assets and Goodwill

We recorded a developed technology intangible asset of $26 million, with a useful life of 10 years, as a result of an acquisition in Q2 2020.

Changes to goodwill during the first half of 2020 were as follows:

Table of Contents


In millions	Goodwill
Balance as of December 29, 2019	$	824
Acquisition	70
Balance as of June 28, 2020	$	894

Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in Q2 2020, noting 0 impairment.

Accrued Liabilities


In millions	June 28, 2020		December 29, 2019
Contract liabilities, current portion	$	153	$	167
Accrued compensation expenses	164		154
Accrued taxes payable	44		86


Operating lease liabilities, current portion	48		45
Other, including warranties (a)	68		64
Total accrued liabilities	$	477	$	516

(a) Changes in the reserve for product warranties were as follows:



In millions	Q2 2020		Q2 2019		YTD 2020		YTD 2019
Balance at beginning of period	$	12	$	16	$	14	$	19
Additions charged to cost of product revenue	2		6		5		9
Repairs and replacements	(4)		(6)		(9)		(12)
Balance at end of period	$	10	$	16	$	10	$	16

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 June 28, 2020, 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 June 28, 2020 and December 29, 2019, the total notional amounts of outstanding forward contracts in place for foreign currency purchases were $321 million and $252 million, respectively.

Table of Contents


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~~


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 rates for ~~the three~~Q2 2020 and ~~nine months ended September 29, 2019~~YTD 2020 were ~~13.2%~~71.6% and ~~11.5%~~35.7%, respectively. ~~For~~In Q2 2020, the ~~three and nine months ended September 29, 2019, the decrease~~increase from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax expense of $62 million related to the valuation allowance recorded against the deferred tax asset for California research and development credits, and discrete tax expense of $28 million related to the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments, partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United ~~Kingdom, and discrete tax benefits related to uncertain tax positions. For~~Kingdom. In YTD 2020, the ~~nine months ended September 29, 2019, the decrease~~increase from the U.S. federal statutory tax rate was ~~also~~primarily attributable to ~~excess~~the items noted above for Q2 2020, partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition and tax benefits related to share-based compensation.

~~9. Segment Information~~


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 we have 1 reportable segment, Core Illumina, as of June 28, 2020, which relates to Illumina’s core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix.

See note “3. Investments and Fair Value Measurements” for further details.

~~Core Illumina~~:

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 previously consolidated VIE, Helix.

Helix:

Helix 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. ~~Helix was deconsolidated on April 25, 2019. See note “2. Balance Sheet Account Details” for further details.~~

~~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 Nine Months Ended
September 29,
2019 September 30,
2018 September 29,
2019 September 30,
2018
Revenue:
Core Illumina $ 907
$ 855
$ 2,591
$ 2,467
Helix —
2
1
8
Elimination of intersegment revenue —
(4 ) (1 ) (9 )
Consolidated revenue $ 907
$ 853
$ 2,591
$ 2,466

Income (loss) from operations:
Core Illumina $ 308
$ 264
$ 740
$ 748
Helix —
(23 ) (24 ) (64 )
Elimination of intersegment earnings —
—
1
2
Consolidated income from operations $ 308
$ 241
$ 717
$ 686

~~The following table presents the total assets of each reportable segment (in millions):~~

September 29,
2019 December 30,
2018
Core Illumina $ 7,089
$ 6,912
Helix —
154
Elimination of intersegment assets —
(107 )
Consolidated total assets $ 7,089
$ 6,959

Table of Contents

~~Item 2. Management’s Discussion and Analysis~~



In millions	Q2 2020		Q2 2019		YTD 2020		YTD 2019
Revenue:
Core Illumina	$	633	$	838	$	1,492	$	1,684
Helix	—		—		—		1
Elimination of intersegment revenue	—		—		—		(1)
Consolidated revenue	$	633	$	838	$	1,492	$	1,684

Income (loss) from operations:
Core Illumina	$	96	$	211	$	285	$	433
Helix	—		(6)		—		(24)
Elimination of intersegment earnings	—		—		—		1
Consolidated income from operations	$	96	$	205	$	285	$	410

Table of ~~Financial Condition and Results of Operations.~~Contents


MANAGEMENT’S DISCUSSION & ANALYSIS

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~~

•Management’s Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.

•Results of Operations. Detailed discussion of our revenues and expenses.

•Liquidity and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our financial commitments.

•Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.

•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.

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

•Quantitative and Qualitative Disclosure About Market Risk. Discussion of our financial instruments’ exposure to market risk.

Our discussion of our results of operations, financial condition, and cash flow for Q2 2019 and YTD 2019 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our filing of Form 10-Q for the fiscal quarter ended June 30, 2019.

~~. 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~~“Consideration Regarding Forward-Looking ~~Statements”~~Statements” preceding ~~Item 3~~the Condensed Consolidated Financial Statements section of this report for additional factors relating to such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended December ~~30, 2018~~.29, 2019. Operating results are not necessarily indicative of results that may occur in future periods.

~~Business Overview and Outlook~~MANAGEMENT’S 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 one reportable segment, Core Illumina, which relates to Illumina’s core operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable segments included both Core Illumina and Helix.

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~~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). 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 subject to certain customary closing conditions, including the receipt of certain required antitrust approvals. See note “3. Pending Acquisition” in Part I, Item 1 of this report for further details.

Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto ~~in Item 1, Part I~~within the Condensed Consolidated Financial Statements section of this report, and the other transactions, events, and trends discussed in ~~“Risk Factors” in Item 1A, Part II~~“Risk Factors” within the Other Key Information section of this ~~report and Item 1A of our Annual Report on Form~~ ~~10-K~~ ~~for the fiscal year ended~~ ~~December 30, 2018~~.report.

Financial Overview

The COVID-19 pandemic and international efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions in which we sell our products and services and conduct our business operations. As a result, we experienced a decline in our sales and results of operations during Q2 2020 and YTD 2020. We expect the COVID-19 pandemic to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. As such, we will provide an update on our Q2 2020 and YTD 2020 results only, without discussion about our expectations for the rest of the year.

Consolidated financial highlights for ~~the first three quarters of 2019~~YTD 2020 included the following:

•Revenue ~~increased 5% during the first three quarters of 2019~~decreased 11% in YTD 2020 to ~~$2,591~~$1,492 million compared to ~~$2,466~~$1,684 million in ~~the first three quarters of 2018~~YTD 2019 primarily due to ~~growth in~~decreased shipments of sequencing ~~consumables. We expect~~consumables and instruments to our ~~revenue, as compared to~~customers impacted by the ~~prior year, to continue to increase in 2019, although we are anticipating ongoing weakness in~~effects of the ~~direct-to-consumer (DTC) market.~~COVID-19 pandemic.

•Gross profit as a percentage of revenue (gross margin) was ~~69.7%~~70.2% in ~~the first three quarters of 2019~~YTD 2020 compared to ~~69.4%~~68.7% in ~~the first three quarters of 2018.~~YTD 2019. The gross margin increase was driven primarily by ~~an increase in revenue from development and licensing agreements as well as~~ an increase in sequencing consumables as a percentage of total revenue, which generate higher gross margins, ~~partially offset by lower average selling prices on instruments~~ and ~~consumables~~an increase in revenue from development and ~~lower volumes in our service business.~~licensing agreements. Our gross margin ~~in future periods will depend~~depends on ~~several~~many 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 was ~~27.7%~~19.1% in ~~the first three quarters of 2019~~YTD 2020 compared to ~~27.8%~~24.3% in ~~the first three quarters of 2018.~~YTD 2019. The ~~slight~~ decrease was due to an increase in operating expenses as a percentage of revenue, primarily due to the decrease in revenue in YTD 2020 compared to YTD 2019, offset partially by an increase in gross margin. ~~We expect our operating expenses, as compared to the prior year, to continue to grow on an absolute basis in 2019.~~

•Our effective tax rate was ~~11.5%~~35.7% in ~~the first three quarters of 2019~~YTD 2020 compared to ~~14.6%~~10.8% in ~~the first three quarters of 2018.~~YTD 2019. In ~~the first three quarters of 2019,~~YTD 2020, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments. This was partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition, 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, ~~discrete tax benefits related to uncertain tax positions,~~ and ~~excess~~ tax benefits related to share-based compensation.

•We ended ~~the first three quarters of 2019~~Q2 2020 with cash, cash equivalents, and short-term investments totaling ~~$3.2~~$3.3 billion as of ~~September 29, 2019,~~June 28, 2020, of which approximately ~~$618~~$464 million was held by our foreign subsidiaries.

~~Results~~

Table of ~~Operations~~Contents

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.



~~Q3 2019~~	~~Q3 2018~~	~~YTD 2019~~	~~YTD 2018~~


										Q2 2020		Q2 2019		YTD 2020		YTD 2019
Revenue:									Revenue:
Product revenue	82.2	%	83.2	%	81.7	%	81.5	%	Product revenue	83.3	%	84.0	%	82.3	%	81.5	%
Service and other revenue	17.8		16.8		18.3		18.5		Service and other revenue	16.7		16.0		17.7		18.5
Total revenue	100.0		100.0		100.0		100.0		Total revenue	100.0		100.0		100.0		100.0
Cost of revenue:									Cost of revenue:
Cost of product revenue	21.5		21.6		22.1		21.9		Cost of product revenue	24.0		23.4		21.8		22.4
Cost of service and other revenue	6.0		7.2		7.1		7.7		Cost of service and other revenue	7.2		7.0		7.1		7.8
Amortization of acquired intangible assets	1.0		1.2		1.1		1.0		Amortization of acquired intangible assets	1.1		1.2		0.9		1.1
Total cost of revenue	28.5		30.0		30.3		30.6		Total cost of revenue	32.3		31.6		29.8		31.3
Gross profit	71.5		70.0		69.7		69.4		Gross profit	67.7		68.4		70.2		68.7
Operating expense:									Operating expense:
Research and development	16.7		18.6		18.8		18.1		Research and development	24.5		19.8		20.8		19.9
Selling, general and administrative	20.9		23.2		23.2		23.5		Selling, general and administrative	28.0		24.1		30.3		24.5

Total operating expense	37.6		41.8		42.0		41.6		Total operating expense	52.5		43.9		51.1		44.4
Income from operations	33.9		28.2		27.7		27.8		Income from operations	15.2		24.5		19.1		24.3
Other (expense) income:
Other income (expense):									Other income (expense):
Interest income	1.8		1.6		2.3		1.3		Interest income	1.1		2.4		1.4		2.6
Interest expense	(1.2	)	(1.8	)	(1.6	)	(1.5	)	Interest expense	(1.8)		(1.8)		(1.5)		(1.8)
Other (expense) income, net	(4.8	)	(0.9	)	4.4		0.2
Total other (expense) income, net	(4.2	)	(1.1	)	5.1		—

Other income, net									Other income, net	11.5		16.2		3.9		9.3
Total other income, net									Total other income, net	10.8		16.8		3.8		10.1
Income before income taxes	29.7		27.1		32.8		27.8		Income before income taxes	26.0		41.3		22.9		34.4
Provision for income taxes	3.9		5.1		3.8		4.1		Provision for income taxes	18.6		6.3		8.2		3.7
Consolidated net income	25.8		22.0		29.0		23.7		Consolidated net income	7.4		35.0		14.7		30.7
Add: Net loss attributable to noncontrolling interests	—		1.3		0.5		1.3		Add: Net loss attributable to noncontrolling interests	—		0.3		—		0.7
Net income attributable to Illumina stockholders	25.8	%	23.3	%	29.5	%	25.0	%	Net income attributable to Illumina stockholders	7.4	%	35.3	%	14.7	%	31.4	%

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~~References to Q2 2020 and Q2 2019 refer to the three months ended June 28, 2020 and ~~nine month periods ended~~ ~~September 29,~~June 30, 2019, ~~and~~ ~~September 30, 2018~~ respectively, which were both 13 weeks, and references to year-to-date (YTD) of 2020 and 2019 refer to the six months ended June 28, 2020 and June 30, 2019, respectively, which were both 26 ~~weeks, respectively.~~weeks.

Revenue

~~Revenue~~


Dollars in millions	Q2 2020		Q2 2019		Change		% Change		YTD 2020		YTD 2019		Change		% Change
Consumables	$	436	$	571	$	(135)	(24)	%	$	1,056	$	1,127	$	(71)	(6)	%
Instruments	91		133		(42)		(32)		172		245		(73)		(30)
Total product revenue	527		704		(177)		(25)		1,228		1,372		(144)		(10)
Service and other revenue	106		134		(28)		(21)		264		312		(48)		(15)
Total revenue	$	633	$	838	$	(205)	(25)	%	$	1,492	$	1,684	$	(192)	(11)	%

(Dollars in millions) Q3 2019 Q3 2018 Change % Change YTD 2019 YTD 2018 Change % Change
Consumables $ 600
$ 555
$ 45
8 % $ 1,727
$ 1,609
$ 118
7 %
Instruments 146
155
(9 ) (6 ) 390
402
(12 ) (3 )
Total product revenue 746
710
36
5
2,117
2,011
106
5
Service and other revenue 161
143
18
13
474
455
19
4
Total revenue $ 907
$ 853
$ 54
6 % $ 2,591
$ 2,466
$ 125
5 %

Table of Contents

Service and other revenue primarily consists of revenue generated from genotyping and sequencing services, instrument service contracts, and development and licensing agreements. Total revenue relates primarily to Core Illumina for all periods presented.

The ~~increases~~decreases in consumables revenue in ~~Q3 2019~~Q2 2020 and ~~the first three quarters of 2019~~YTD 2020 were primarily due to ~~increases~~decreases in sequencing consumables revenue of ~~$53~~$110 million and ~~$150~~$38 million, respectively, driven primarily by decreased shipments to our customers impacted by the effects of the COVID-19 pandemic, which more than offset the positive impacts from the growth in ~~the~~ instrument installed base. ~~The increases in sequencing~~Microarray consumables revenue ~~were partially offset by decreases~~also decreased in ~~microarray consumables revenue primarily~~Q2 2020 and YTD 2020 due to the COVID-19 pandemic and ongoing weakness in the direct-to-consumer (DTC) market. Instruments revenue decreased in ~~Q3 2019~~Q2 2020 and ~~the first three quarters of 2019~~YTD 2020 primarily due to decreases in sequencing instruments revenue of $41 million and $68 million, respectively, which were driven by decreased shipments to our customers impacted by the effects of the COVID-19 pandemic. We experienced fewer shipments ofacross our ~~microarray instruments driven by a DTC customer scaling for anticipated demand~~portfolio in Q3 2018 as well as a lower average selling price for our NovaSeq instrument compared to its historic range. These decreases were partially offset by increased shipments of our NovaSeq instruments in Q3 2019Q2 2020 and ~~increased shipments~~YTD 2020, with the exception of our NextSeq ~~instruments~~2000 platform, which launched in ~~the first three quarters of 2019.~~Q1 2020. Service and other revenue ~~increased~~decreased in ~~Q3 2019~~Q2 2020 and ~~in the first three quarters of 2019,~~YTD 2020, primarily due to decreased revenue from genotyping and sequencing services. The YTD 2020 decrease in service and other revenue was partially offset by increased revenue from development and licensing ~~agreements,~~agreements.

~~partially offset by decreased revenue from genotyping and sequencing services.~~

Gross Margin

(Dollars in millions) Q3 2019 Q3 2018 Change % Change YTD 2019 YTD 2018 Change % Change
Gross profit $ 648
$ 597
$ 51
9% $ 1,805
$ 1,710
$ 95
6%
Gross margin 71.5 % 70.0 % 69.7 % 69.4 %


Dollars in millions	Q2 2020			Q2 2019			Change		% Change	YTD 2020			YTD 2019			Change		% Change
Gross profit	$	428		$	573		$	(145)	(25)%	$	1,047		$	1,157		$	(110)	(10)%
Gross margin	67.7		%	68.4		%				70.2		%	68.7		%

The gross margin ~~increases~~decrease in ~~Q3 2019 and the first three quarters of 2019 were~~Q2 2020 was driven primarily by anlower revenue, which generated less fixed cost leverage, and increased freight costs attributable to the COVID-19 pandemic. The gross margin increase in ~~revenue from development and licensing agreements as well as~~YTD 2020 was primarily driven by an increase in sequencing consumables as a percentage of total revenue, which generate higher gross margins, ~~partially offset by lower average selling prices on instruments~~ and ~~consumables~~an increase in revenue from development and ~~lower volumes in our service business.~~licensing agreements.

Operating Expense

(Dollars in millions) Q3 2019 Q3 2018 Change % Change YTD 2019 YTD 2018 Change % Change
Research and development $ 151
$ 159
$ (8 ) (5 )% $ 486
$ 447
$ 39
9 %
Selling, general and administrative 189
197
(8 ) (4 ) 602
577
25
4
Total operating expense $ 340
$ 356
$ (16 ) (4 )% $ 1,088
$ 1,024
$ 64
6 %


Dollars in millions	Q2 2020		Q2 2019		Change		% Change		YTD 2020		YTD 2019		Change		% Change
Research and development	$	155	$	166	$	(11)	(7)	%	$	311	$	335	$	(24)	(7)	%
Selling, general and administrative	177		202		(25)		(12)		451		412		39		9




Total operating expense	$	332	$	368	$	(36)	(10)	%	$	762	$	747	$	15	2	%

Core Illumina R&D expense ~~remained flat~~decreased by $9 million, or 5%, in ~~Q3 2019,~~Q2 2020 and by $15 million, or 5%, in YTD 2020 primarily due to ~~an increase~~decreases in ~~headcount, offset by a decrease in~~outside services, performance-based ~~compensation. Core Illumina R&D expense increased by $51 million, or 12%, in the first three quarters of 2019, primarily due to increased headcount, as we continue to invest in the research~~compensation, and ~~development of new products and enhancements to existing products, partially offset by a decrease in performance-based compensation.~~travel expenses. Helix R&D expense decreased by $8$2 million in ~~Q3 2019~~Q2 2020 and by ~~$12~~$9 million in ~~the first three quarters of 2019, primarily~~YTD 2020 due to its deconsolidation on April 25, 2019.

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Core Illumina SG&A expense decreased by $22 million, or 11%, in Q2 2020, primarily due to decreases in travel expenses, acquisition-related expenses, and performance-based compensation, partially offset by an increase in other compensation related expenses. Core Illumina SG&A expense increased by $3$48 million, or 2%12%, in ~~Q3 2019, and by $44 million, or 8%, in the first three quarters of 2019,~~YTD 2020, primarily due to expenses related to the ~~pending Pacific Biosciences acquisition, increased headcount,~~Reverse Termination Fee and ~~investment~~Continuation Advances paid to PacBio in ~~facilities to support the continued growth and scale of our operations,~~Q1 2020, partially offset by ~~a decrease~~decreases in travel expenses and performance-based compensation. Helix SG&A expense decreased by ~~$11~~$3 million in ~~Q3 2019~~Q2 2020 and by ~~$19~~$9 million in ~~the first three quarters of 2019, primarily~~YTD 2020 due to its deconsolidation on April 25, 2019.

Other ~~(Expense)~~ Income, Net

(Dollars in millions) Q3 2019 Q3 2018 Change % Change YTD 2019 YTD 2018 Change % Change
Interest income $ 16
$ 14
$ 2
14 % $ 59
$ 31
$ 28
90 %
Interest expense (11 ) (15 ) 4
(27 ) (41 ) (37 ) (4 ) 11
Other (expense) income, net (43 ) (8 ) (35 ) 438
114
5
109
2,180
Total other (expense) income, net $ (38 ) $ (9 ) $ (29 ) 322 % $ 132
$ (1 ) $ 133
(13,300 )%


Dollars in millions	Q2 2020		Q2 2019		Change		% Change		YTD 2020		YTD 2019		Change		% Change
Interest income	$	7	$	20	$	(13)	(65)	%	$	21	$	43	$	(22)	(51)	%
Interest expense	(11)		(15)		4		(27)		(22)		(30)		8		(27)

Other income, net	73		136		(63)		(46)		58		157		(99)		(63)
Total other income, net	$	69	$	141	$	(72)	(51)	%	$	57	$	170	$	(113)	(66)	%

Other ~~(expense)~~ income, net, relates primarily to Core Illumina for all periods presented.

Interest income ~~increased~~decreased in ~~Q3 2019~~Q2 2020 and ~~in the first three quarters of 2019~~YTD 2020 as a result of ~~higher~~lower yields on our short-term debt securities and ~~higher~~lower cash and cash-equivalent balances. Interest expense consisted primarily of accretion of discount on our convertible senior notes. The ~~fluctuations~~decreases in other ~~(expense)~~ income, net, in Q2 2020 and YTD 2020 were primarily due to ~~mark-to-market adjustments~~decreased unrealized gains on our ~~strategic investments in~~ marketable equity ~~securities. Additionally, during the first three quarters of~~securities, which included a $92 million unrealized gain recorded in Q2 2019 ~~we recorded~~from a strategic investment that completed an initial public offering, a $39 million gain ~~in Q2 2019 related to~~recorded on the deconsolidation of Helix in Q2 2019, and decreases in the fair value of our derivative assets related to the terminated PacBio acquisition.The YTD 2020 decrease in other income, net, is also due to a $15 million gain recorded in Q1 2019 from the settlement of a contingency related to the deconsolidation of GRAIL in 2017.

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Provision for Income Taxes


(Dollars in millions)	Q3 2019			Q3 2018			Change			% Change		YTD 2019			YTD 2018			Change			% Change
Dollars in millions																							Dollars in millions	Q2 2020			Q2 2019			Change		% Change		YTD 2020			YTD 2019			Change		% Change
Income before income taxes	$	270		$	232		$	38		16	%	$	849		$	685		$	164		24	%	Income before income taxes	$	165		$	346		$	(181)	(52)	%	$	342		$	580		$	(238)	(41)	%
Provision for income taxes	36			44			(8		)	(18	)	98			100			(2		)	(2	)	Provision for income taxes	118			53			65		123		122			63			59		94
Consolidated net income	$	234		$	188		$	46		24	%	$	751		$	585		$	166		28	%	Consolidated net income	$	47		$	293		$	(246)	(84)	%	$	220		$	517		$	(297)	(57)	%
Effective tax rate	13.2		%	19.0		%						11.5		%	14.6		%						Effective tax rate	71.6		%	15.4		%					35.7		%	10.8		%

Our effective tax rate was ~~13.2% for Q3 2019~~71.6% in Q2 2020 compared to ~~19.0%~~15.4% in ~~Q3 2018.~~Q2 2019. The variance from the U.S. federal statutory tax rate of 21% in Q3Q2 2020 was primarily attributable to discrete tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments, partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom. In Q2 2019, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to 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, benefits~~Kingdom.

In evaluating our ability to realize the deferred tax asset for California research and development credits we considered all available positive and negative evidence, including operating results and forecasted ranges of future taxable income, and determined it is more likely than not that our California research and development credits will not be realized.As a result, a discrete tax expense of $62 million was recorded in Q2 2020 related to ~~prior year~~establishing a valuation allowance against the deferred tax ~~adjustments,~~asset for California research and development credits. We will continue to monitor all available positive and negative evidence in assessing the realization of the deferred tax asset for California research and development credits in the future. In the event there is a need to release the valuation allowance a tax benefit will be recorded.

On June 22, 2020, the Supreme Court denied petition for certiorari for Altera Corporation v. Commissioner. This effectively means the Ninth Circuit decision that stock-based compensation must be included in cost sharing is final. As a result, a discrete tax ~~benefits related~~expense of $28 million was recorded in Q2 2020.

Our effective tax rate was 35.7% in YTD 2020 compared to ~~uncertain tax positions. For Q3 2018,~~10.8% in YTD 2019. In YTD 2020, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to discrete tax expense related to the valuation allowance recorded against the deferred tax asset for California research and development credits and the finalization of the Altera court case which determined stock-based compensation must be included in intercompany cost sharing payments. This was partially offset by discrete tax benefits related to the derivative assets recorded as a result of the terminated PacBio acquisition, 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, ~~offset partially by the discrete~~and tax ~~expense associated with updating our 2017 estimates of the impact of U.S. Tax Reform.~~

~~Our effective tax rate was 11.5% for the first three quarters of 2019 compared~~benefits related to ~~14.6% for the first three quarters of 2018. For the first three quarters of~~share-based compensation. In YTD 2019, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to 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, a discrete tax ~~benefits~~benefit related to uncertain tax positions recorded in Q1 2019, and excess tax benefits related to share-based compensation. For the first three quarters of 2018, the variance from the U.S. federal statutory tax rate of 21% was primarily attributable to the mix of earnings in jurisdictions with lower statutory rates than the U.S. federal statutory rate, such as in Singapore and the United Kingdom, and the discrete benefit associated with the recognition of prior year losses from our investment in Helix, offset partially by the discrete tax expense associated with updating our 2017 estimates of the impact of U.S. Tax Reform.

Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” described in ~~Part I Item 1A~~“Risk Factors” within the Business and Market Information section of our Annual Report on Form 10-K for the fiscal year ended December ~~30,~~29, 2019.

LIQUIDITY AND CAPITAL RESOURCES

~~2018. As a result of the Ninth Circuit decision on~~

At June 7, 2019 to overturn a U.S. Tax Court opinion provided in Q3 2015 that stock compensation should be excluded from cost sharing charges, we anticipate our effective tax rate may be adversely impacted. The final resolution of this case is uncertain, but if it is determined that the outcome of this decision is more likely than not, we anticipate a discrete tax expense of less than $30 million could be recorded.

~~Liquidity and Capital Resources~~

At ~~September 29, 2019~~,28, 2020, we had approximately ~~$1.8~~$1.8 billion in cash and cash equivalents, of which approximately ~~$618~~$464 million was held by our foreign subsidiaries. Cash and cash equivalents ~~increased~~decreased by ~~$0.7~~$0.3 billion from December ~~30, 2018,~~29, 2019, due to the factors described in the “Cash Flow Summary” below. Our primary source of liquidity, other than our holdings of cash, cash equivalents and investments, has been cash flows from operations and, from time to time, issuances of debt. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.

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Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. As of ~~September 29, 2019~~,June 28, 2020, we had ~~$1.4~~$1.5 billion in short-term investments. Our short-term investments are predominantly comprised of marketable securities consisting of debt securities in U.S. government-sponsored entities, corporate debt securities, and U.S. Treasury securities.

Our 2019 Notes matured on June 15, 2019, by which time the $633 million in principal had been converted and was paid in cash. The excess of the conversion value over the principal amount was paid in shares of common stock. Our convertible senior notes due in 2021, with an aggregate principal amount of $517 million, became convertible on July 1, 2020, and continue to be convertible through September 30, 2020. Our convertible senior notes due in 2023 were not ~~convertible as of September 29, 2019.~~convertible.

We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities are sufficient to fund our near-term capital and operating needs for at least the next 12 ~~months including the pending acquisition of PacBio for a cash price of approximately $1.2 billion.~~months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:

•support of commercialization efforts related to our current and future products;

•acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;

•the continued advancement of research and development efforts;

•potential strategic acquisitions and investments;

•repayment of debt obligations;

•the expansion needs of our facilities, including costs of leasing and building out additional facilities; and

•repurchases of our outstanding common stock.

On February ~~6, 2019,~~5, 2020, our Board of Directors authorized a new share repurchase program, which supersedes all prior and available repurchase authorizations, to repurchase ~~$550~~$750 million of outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. Authorizations to repurchase ~~$289~~$420 million of our common stock remained available as of ~~September 29, 2019.~~June 28, 2020.

We had ~~$55~~$44 million and up to ~~$160~~$143 million, respectively, remaining in our capital commitments to two venture capital investment funds as of ~~September 29, 2019~~June 28, 2020 that are callable through April 2026 and July 2029, respectively.

We expect that our revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.

Our future capital requirements and the adequacy of our available funds will depend on many factors, including:

•our ability to successfully commercialize and further develop our technologies and create innovative products in our markets;

•scientific progress in our research and development programs and the magnitude of those programs;

•competing technological and market developments; and

•the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.

Cash Flow Summary


In millions	YTD 2020		YTD 2019
Net cash provided by operating activities	$	521	$	341
Net cash (used in) provided by investing activities	(455)		1,067
Net cash used in financing activities	(334)		(609)
Effect of exchange rate changes on cash and cash equivalents	(4)		—
Net (decrease) increase in cash and cash equivalents	$	(272)	$	799

(In millions) YTD 2019 YTD 2018
Net cash provided by operating activities $ 608
$ 842
Net cash provided by (used in) investing activities 849
(1,465 )
Net cash (used in) provided by financing activities (782 ) 748
Effect of exchange rate changes on cash and cash equivalents (4 ) (4 )
Net increase in cash and cash equivalents $ 671
$ 121

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Operating Activities

Net cash provided by operating activities in ~~the first three quarters of 2019~~YTD 2020 primarily consisted of net income of ~~$751~~$220 million plus net adjustments of ~~$106~~$237 million, ~~partially offset by~~and net changes in operating assets and liabilities of ~~$249~~$64 million. The primary adjustments to net income included depreciation and amortization expenses of $90 million, a loss on derivative assets related to a terminated acquisition of $107 million, share-based compensation of $55 million, deferred income taxes of $47 million, and accretion of debt discount of $19 million, partially offset by and unrealized gains on marketable equity securities of $57 million, payment of the accreted debt discount related to our 2019 Notes of $84 million, gains on deconsolidation of $54 million, and deferred income taxes of $13 million, partially offset by share-based compensation of $145 million,~~depreciation and amortization expenses of $143 million, and accretion of debt discount of $36~~$69 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by a decrease in accounts receivable and an increase in other long-term liabilities, partially offset by increases in inventory ~~accounts receivable, other assets, and prepaid expenses~~ and other ~~current~~ assets and decreases in accrued liabilities and accounts ~~payable, and other long-term liabilities.~~payable.

Net cash provided by operating activities in the first three quarters of 2018 consisted of net income of $585 million plus net adjustments of $269 million, partially offset by net changes in operating assets and liabilities of $12 million. The primary adjustments to net income included depreciation and amortization expenses of $129 million, share-based compensation of $146 million, and accretion of debt discount of $26 million, partially offset by deferred income taxes of $32 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increases in inventory, accounts receivable, and other assets, partially offset by increases in accounts payable and accrued liabilities.

Investing Activities

Net cash ~~provided by~~used in investing activities totaled ~~$849~~$455 million in ~~the first three quarters of 2019.~~YTD 2020. We purchased ~~$760~~$547 million of available-for-sale securities and ~~$1,790~~$505 million of our available-for-sale securities matured or were sold during the period. We ~~received $15~~paid $132 million for derivative assets, consisting of a $98 million Reverse Termination Fee and $34 million in ~~proceeds from~~Continuation Advances, associated with the ~~settlement~~terminated acquisition of ~~a contingency related to the deconsolidation~~PacBio. We purchased strategic investments of ~~GRAIL in 2017.~~$107 million and completed an acquisition for total cash consideration of $95 million, net of cash acquired. We invested ~~$152~~$79 million in capital expenditures, primarily associated with our investment in facilities ~~and paid $15 million for strategic investments. We removed $29 million in cash from our balance sheet as a result of the deconsolidation of Helix.~~.

Net cash used in investing activities in the first three quarters of 2018 totaled $1,465 million. We purchased $2,352 million of available-for-sale securities and $1,230 million of our available-for-sale securities matured or were sold during the period. Our net cash paid for acquisitions was $100 million, and we invested $231 million in capital expenditures, primarily associated with our investment in facilities.

Financing Activities

Net cash used in financing activities in ~~the first three quarters of 2019~~YTD 2020 totaled ~~$782~~$334 million. We used ~~$550 million to repay financing obligations primarily related to our 2019 Notes, $261~~$330 million to repurchase our common stock, including commissions, and ~~$30~~$38 million to pay taxes related to net share settlement of equity awards. We received ~~$59~~$34 million in proceeds from ~~the issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan.~~

Net cash provided by financing activities in the first three quarters of 2018 totaled $748 million. We received $735 million in net proceeds from the issuance of $750 million in principal amount of our 2023 Notes, and we used $103 million to repurchase our common stock concurrently with this debt offering. We received $45 million in proceeds from issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan and ~~contributions from noncontrolling interest owners were $92 million. We used $18 million to pay taxes related to net share settlement~~the issuance of ~~equity awards.~~common stock through the exercise of stock options.

~~Off-Balance Sheet Arrangements~~CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the first three quarters of 2019, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.

~~Critical Accounting Policies and Estimates~~

In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income and net income, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Critical Accounting Policies and Estimates” within the Management’s Discussion ~~and~~& Analysis ~~of Financial Condition and Results of Operations in Item 7~~section of our Annual Report on Form 10-K for the fiscal year ended December ~~30, 2018~~29, 2019 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. 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. There were no material changes to our critical accounting policies and estimates during the first ~~three quarters~~half of ~~2019.~~2020.

~~Recent Accounting Pronouncements~~

RECENT ACCOUNTING PRONOUNCEMENTS

For summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, see note ~~“1. Summary of~~“1. Organization and Significant Accounting ~~Policies” in Part I, Item 1, Notes to~~Policies” within the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.

~~Consideration Regarding Forward-Looking Statements~~

OFF-BALANCE SHEET ARRANGEMENTS

~~This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time~~

We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to ~~time make, “forward-looking statements”~~as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the first half of 2020, we were not involved in any “off-balance sheet arrangements” within the meaning of the ~~safe harbor provisions~~rules 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, cash flows 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;~~

~~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.~~

~~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 Pacific Biosciences of California, Inc.;~~

~~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;~~

~~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 Item 1A of our Annual Report on Form~~ ~~10-K~~ ~~for the fiscal year ended December 30, 2018, 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~~Commission.

Table 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.Contents

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk.~~

There were no substantial changes to our market risks in the ~~nine~~ ~~months ended~~ ~~September 29, 2019~~,first half of 2020, when compared to the disclosures in ~~Item 7A~~”Quantitative and Qualitative Disclosures about Market Risk” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended December ~~30, 2018~~.29, 2019.

~~Item 4. Controls and Procedures.~~


OTHER KEY INFORMATION

CONTROLS AND PROCEDURES

We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.

Based on management’s evaluation (under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO)), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

During ~~Q3 2019,~~Q2 2020, we continued to monitor and evaluate the design and operating effectiveness of key ~~controls.~~controls, including the impact of the COVID-19 pandemic on our internal control environment. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.

~~PART II — OTHER INFORMATION~~

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LEGAL PROCEEDINGS

~~Item 1. Legal Proceedings.~~

See discussion of legal proceedings in note ~~“7.~~“7. Legal ~~Proceedings”~~Proceedings” in ~~Part I, Item 1, Notes to~~the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.

~~Item 1A. Risk Factors.~~RISK FACTORS

Our business is subject to various risks, including those described in ~~Item 1A~~“Risk Factors” within the Business and Market Information Section of our Annual Report on Form 10-K for the fiscal year ended December ~~30, 2018~~,29, 2019, which we strongly encourage you to review. ~~There have been no material changes from~~In addition to the risk factors disclosed in ~~Item 1A~~our Form 10-K, the issues raised in the following risk factor could adversely affect our operating results and stock price:

We are unable to predict the extent to which the COVID-19 pandemic will adversely impact our business operations and financial performance.

The COVID-19 pandemic caused by the SARS-CoV-2 virus and international efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in the regions in which we sell our products and services and conduct our business operations. As a result, we experienced a decline in our sales and results of operations during Q2 2020 and YTD 2020. The magnitude and duration of the resulting decline in business activity cannot currently be estimated with any degree of certainty and will (1) negatively impact the demand for our products and services, (2) restrict our sales operations, marketing efforts, and customer field support, (3) impede the shipping and delivery of our ~~Form~~ products to customers (4) disrupt our supply chain, and (5) limit our ability to conduct research and product development and other important business activities. We continue to monitor our operations and applicable government recommendations, and we have made modifications to our normal operations because of the COVID-19 pandemic. In the U.S. and in most other key markets, we are requiring most of our employees to work remotely, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our laboratories and manufacturing facilities, and many may continue to work remotely for an indefinite period of time. Remote working arrangements could impact employees’ productivity and morale. In addition, in response to the COVID-19 pandemic, certain industry and customer events have been canceled, postponed or moved to virtual-only experiences, and we may further alter, postpone or cancel additional customer, employee or industry events in the future. We may incur increased costs and experience delays in sales, purchases, deliveries and other business activities associated with the invocation by customers, suppliers, service providers, and other business partners of contractual provisions they may claim are triggered by the COVID-19 pandemic. We expect the COVID-19 pandemic to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets which may adversely impact the fair value of our marketable securities.

~~10-K~~.

SHARE REPURCHASES AND SALES

~~Item 2. Unregistered Sales~~

Purchases of Equity Securities by the Issuer

On February 5, 2020, our Board of Directors authorized a share repurchase program, which superseded all prior and ~~Use~~available repurchase authorizations, to repurchase $750 million of ~~Proceeds.~~outstanding common stock. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. Shares repurchased in open-market transactions pursuant to this program during YTD 2020 were as follows:


In thousands, except price per share	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
First Quarter	660	$	284.08	660	$	562,500
Second Quarter (1)	410	$	348.63	410	$	419,624

Total	1,070	$	308.80	1,070	$	419,624

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(1) Repurchases during the second quarter of 2020 were as follows:


In thousands, except price per share	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
March 30, 2020 - April 26, 2020	—	—		—	$	562,500
April 27, 2020 - May 24, 2020	127	$	331.08	127	$	520,502
May 25, 2020 - June 28, 2020	283	$	356.50	283	$	419,624
Total	410	$	348.63	410	$	419,624

Unregistered Sales of Equity Securities

None during the quarterly period ended ~~September 29, 2019.~~June 28, 2020.

~~Purchases of Equity Securities by the Issuer~~

~~The following table summarizes shares repurchased pursuant to our share repurchase program during the three months ended September 29, 2019 (in thousands except for price per share):~~

Period

Total Number
of Shares
Purchased (1)

Average Price
Paid per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Programs Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Programs
July 1, 2019 - July 28, 2019 206
$ 302.72
206
$ 425,041
July 29, 2019 - August 25, 2019 210
$ 298.57
210
$ 362,500
August 26, 2019 - September 29, 2019 271
$ 272.34
271
$ 288,756
Total 687
$ 289.47
687
$ 288,756

~~______~~

~~(1) All shares repurchased were made in open-market transactions.~~

~~Item 3. Defaults Upon Senior Securities.~~

~~None.~~

~~Item 4. Mine Safety Disclosures.~~

~~Not applicable.~~

~~Item 5. Other Information.~~

~~None.~~

~~Item 6. Exhibits.~~EXHIBITS


Exhibit Number						Description of Document

~~Exhibit Number~~4.6						Description of ~~Document~~Illumina, Inc.’s securities registered pursuant to Section 12 of the Exchange Act of 1934

~~3.4~~10.35						~~Amended~~ 2000 Employee Stock Purchase Plan, as amended and ~~Restated Bylaws~~restated through April 29, 2020

31.1						Certification of Francis A. deSouza pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of Sam A. Samad pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of Francis A. deSouza pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Sam A. Samad pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH						XBRL Taxonomy Extension Schema

101.CAL						XBRL Taxonomy Extension Calculation Linkbase

101.LAB						XBRL Taxonomy Extension Label Linkbase

101.PRE						XBRL Taxonomy Extension Presentation Linkbase

101.DEF						XBRL Taxonomy Extension Definition Linkbase

104						Cover Page Interactive Data File - formatted in Inline XBRL and included as Exhibit 101

Table of Contents

FORM 10-Q CROSS-REFERENCE INDEX


			Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			5
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
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32

PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			None
Item 4. Mine Safety Disclosures			Not Applicable
Item 5. Other Information			None
Item 6. Exhibits			34
Signatures			36

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ILLUMINA, INC.
(registrant)

Date:

~~ILLUMINA, INC.~~

~~(registrant)~~

August 6, 2020

~~Date:~~

~~October 24, 2019~~

/s/ SAM A. SAMAD

Sam A. Samad

Senior Vice President and Chief Financial Officer

3235



	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



	September 29, 2019						December 30, 2018
	Amortized Cost		Gross Unrealized Gains		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities in government-sponsored entities	$	31	$	—	$	31	$	21	$	—	$	—		$	21
Corporate debt securities	632		4		636		1,060		—		(2		)	1,058
U.S. Treasury securities	573		1		574		1,250		1		(1		)	1,250
Total	$	1,236	$	5	$	1,241	$	2,331	$	1	$	(3	)	$	2,329



	September 29, 2019			December 30, 2018
Leasehold improvements	$	587		$	567
Machinery and equipment	389			382
Computer hardware and software	257			217
Furniture and fixtures	43			45
Buildings	44			285
Construction in progress	91			100
Total property and equipment, gross	1,411			1,596
Accumulated depreciation	(536		)	(521		)
Total property and equipment, net	$	875		$	1,075



	Remaining Lease Payments
2019	$	19
2020	83
2021	82
2022	84
2023	85
Thereafter	622
Total remaining lease payments (1)	975
Less: imputed interest	(235		)
Total operating lease liabilities	740
Less: current portion	(49		)
Long-term operating lease liabilities	$	691
Weighted-average remaining lease term	11.4 years
Weighted-average discount rate	4.6		%



	Goodwill
Balance as of December 30, 2018	$	831
Helix deconsolidation	(7		)
Balance as of September 29, 2019	$	824



	2019 Notes
Cash paid for principal of notes converted	$	633
Conversion value over principal amount, paid in shares of common stock	$	153
Number of shares of common stock issued upon conversion	0.4



	Options (in thousands)		Weighted-Average Exercise Price
Outstanding at December 30, 2018	192		$	54.52
Exercised	(128	)	$	53.00
Outstanding and exercisable at September 29, 2019	64		$	57.58



	Employee Stock Purchase Rights
Risk-free interest rate	1.88% - 2.56%
Expected volatility	30% - 38%
Expected term	0.5 - 1.0 year
Expected dividends	0		%
Weighted-average grant-date fair value per share	$	75.47



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
July 1, 2019 - July 28, 2019	206	$	302.72	206	$	425,041
July 29, 2019 - August 25, 2019	210	$	298.57	210	$	362,500
August 26, 2019 - September 29, 2019	271	$	272.34	271	$	288,756
Total	687	$	289.47	687	$	288,756