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SUPPLEMENTAL BALANCE SHEET DETAILS | 9 Months Ended
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Sep. 29, 2024
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
SUPPLEMENTAL BALANCE SHEET DETAILS |
7. SUPPLEMENTAL BALANCE SHEET DETAILS
Accounts Receivable
In millions | September 29, 2024 |  | December 31, 2023
Trade accounts receivable, gross | $ | 710 |  |  | $ | 741 |
Allowance for credit losses | (11) |  |  | (7) |
Total accounts receivable, net | $ | 699 |  |  | $ | 734 |
Inventory
In millions | September 29, 2024 |  | December 31, 2023
Raw materials | $ | 238 |  |  | $ | 276 |
Work in process | 419 |  |  | 402 |
Finished goods | 37 |  |  | 30 |
Inventory, gross | 694 |  |  | 708 |
Inventory reserve | (120) |  |  | (121) |
Total inventory, net | $ | 574 |  |  | $ | 587 |
Accrued Liabilities
In millions | September 29, 2024 |  | December 31, 2023
Legal contingencies(1) | $ | 1 |  |  | $ | 484 |
Contract liabilities, current portion | 235 |  |  | 252 |
Accrued compensation expenses | 237 |  |  | 223 |
Accrued taxes payable | 127 |  |  | 79 |
Operating lease liabilities, current portion | 73 |  |  | 86 |
Liability-classified equity incentive awards | — |  |  | 55 |
Other, including warranties(2) | 111 |  |  | 146 |
Total accrued liabilities | $ | 784 |  |  | $ | 1,325 |
_____________ (1)See note 8. Legal Proceedings for additional details. (2)See table below for changes in the reserve for product warranties. Changes in the reserve for product warranties were as follows:
In millions | Q3 2024 |  | Q3 2023 |  | YTD 2024 |  | YTD 2023
Balance at beginning of period | $ | 17 |  |  | $ | 20 |  |  | $ | 21 |  |  | $ | 18 |
Additions charged to cost of product revenue | 8 |  |  | 10 |  |  | 30 |  |  | 30 |
Repairs and replacements | (9) |  |  | (11) |  |  | (35) |  |  | (29) |
Balance at end of period | $ | 16 |  |  | $ | 19 |  |  | $ | 16 |  |  | $ | 19 |
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue. Restructuring In Q2 2023, we implemented a cost reduction initiative that included workforce reductions, the consolidation of certain facilities and other actions to reduce expenses, all as part of a plan to realign operating expenses while maintaining focus on our innovation roadmap and sustainable long-term growth. In YTD 2024, we recorded restructuring charges primarily consisting of asset impairment charges related to our leased facilities. A summary of the pre-tax restructuring charges are as follows:
In millions | Q3 2024 |  | Q3 2023 |  | YTD 2024 |  | YTD 2023 |  | Cumulative charges recorded since inception
Employee separation costs | $ | 6 |  |  | $ | 7 |  |  | $ | 13 |  |  | $ | 33 |  |  | $ | 61 |
Asset impairment charges(1) | — |  |  | 49 |  |  | 32 |  |  | 56 |  |  | 132 |
Other costs | — |  |  | 2 |  |  | 1 |  |  | 2 |  |  | 5 |
Total restructuring charges(2) | $ | 6 |  |  | $ | 58 |  |  | $ | 46 |  |  | $ | 91 |  |  | $ | 198 |
_____________ (1)For YTD 2024, charges primarily relate to impairment of right-of-use assets and leasehold improvements for our Foster City campus. For YTD 2023, charges primarily relate to impairment of right-of-use assets and leasehold improvements for our i3 campus. (2)For Q3 2024, $5 million was recorded in SG&A expense and $1 million in R&D expense. For YTD 2024, $43 million was recorded in SG&A expense, $2 million in R&D expense, and remainder in cost of revenue. For Q3 2023, $55 million was recorded in SG&A expense, $2 million in R&D expense, and remainder in cost of revenue. For YTD 2023, $74 million was recorded in SG&A expense, $13 million in R&D expense, and remainder in cost of revenue. We recorded right-of-use asset impairments of $18 million in Q1 2024 related to our campus in Foster City, California and another property in San Diego, California. The impairments, which were recognized in selling, general and administrative expense, were determined by comparing the fair values of the impacted right-of-use assets to the carrying values of the assets as of the impairment measurement date. The fair values of the right-of-use assets were estimated using the discounted future cash flows method, which includes estimates and assumptions for future sublease rental rates that reflect current sublease market conditions, as well as discount rates. The estimates and assumptions used in our assessments represent Level 3 measurements because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. We also recorded $14 million of leasehold improvement impairments in Q1 2024, related to our Foster City campus, recognized in selling, general and administrative expense. We continue to evaluate our options with respect to the rest of our campus in Foster City, California and the other property in San Diego, California. As of September 29, 2024, we had remaining assets, consisting primarily of right-of-use assets and leasehold improvements, related to our Foster City campus and the other property in San Diego, California of approximately $136 million. A summary of the restructuring liability is as follows:
In millions | Employee Separation Costs(1) |  |  |  | Other Costs |  | Total
Amount recorded in accrued liabilities as of December 31, 2023 | $ | 17 |  |  |  |  | $ | 1 |  |  | $ | 18 |
Additional expense recorded | 13 |  |  |  |  | 1 |  |  | 14 |
Cash payments | (22) |  |  |  |  | (2) |  |  | (24) |
Adjustments to accrual | (2) |  |  |  |  | — |  |  | (2) |
Amount recorded in accrued liabilities as of September 29, 2024 | $ | 6 |  |  |  |  | $ | — |  |  | $ | 6 |
_____________ (1)It is expected that substantially all of the employee separation related charges will be paid by the end of Q4 2024. Impairment of Goodwill and Intangible Assets Goodwill is reviewed for impairment annually, during the second quarter of our fiscal year, or more frequently if an event occurs indicating the potential for impairment. In May 2024, we performed our annual goodwill impairment test for our two reporting units: Core Illumina and GRAIL. We performed a quantitative test for both reporting units. GRAIL’s carrying value exceeded its fair value, estimated as $580 million, and we recorded a goodwill impairment of $1,466 million in Q2 2024. There was no impairment for Core Illumina, as its fair value exceeded its carrying value. To determine the fair value of GRAIL as of May 2024, we utilized enterprise value estimates of GRAIL, as estimated by investment bankers for purposes of determining pricing for the Spin-Off. Estimates and assumptions used to derive the investment bankers’ enterprise value estimates included estimated revenues for a two year period based on assumed growth rates and implied revenue multiples for comparable companies. These estimates and assumptions represent a Level 3 measurement as they are supported by little or no market activity and reflect our own assumptions in measuring fair value. An increase in estimated enterprise values for GRAIL of 100% would still have resulted in a full impairment of goodwill. In prior periods, we used a combination of both an income (discounted cash flows) and market approach to determine the fair value of GRAIL. The income approach utilized projected cash flows for GRAIL based on a long-range plan which contemplated FDA approval and estimated cash flows for a 15 year period. Based on this approach, in Q3 2023, we estimated the fair value of GRAIL to be $3.6 billion, using a selected discount rate of 24.0%, and recorded a goodwill impairment of $712 million. An increase of 50 to 100 basis points to the discount rate used in our assessment at that time would have resulted in additional goodwill impairment of $200 million to $350 million. Using this same approach in Q4 2023 suggested no further decrement in fair value. Initial analyst coverage of GRAIL from December 2023 into the spring of 2024 suggested that GRAIL could be valued between $3 billion and $4 billion. By May 2024, prior to the consummation of the GRAIL Spin-Off, additional information about GRAIL had become available in GRAIL’s amended Form 10 filings and a publicly available management presentation, which included updated disclosure about GRAIL’s business and anticipated near term financial trends. Prior to the consummation of the GRAIL Spin-Off, the amount of GRAIL’s Disposal Funding, $974 million, was also disclosed. Analyst and banker valuation estimates then began to estimate fair values between $400 million and $770 million, consistent with the impairment recorded in Q2 2024. To determine the fair value of Core Illumina, we used a combination of both an income and market approach consistent with prior periods. The income approach utilized estimated discounted cash flows for the reporting unit, while the market approach utilized comparable company information. Estimates and assumptions used in the income approach included projected cash flows and a discount rate and represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. We also evaluated GRAIL’s in-process research and development (IPR&D) asset for potential impairment, in May 2024, as part of our annual test. We further concluded the when-issued trading activity for GRAIL’s common stock, in June 2024, to be an additional triggering event that required an additional impairment test be performed. The carrying value of the IPR&D asset exceeded its estimated fair value and we recorded an impairment of $420 million in Q2 2024. The fair value of GRAIL’s IPR&D was determined using an income approach, specifically a discounted cash flow model. Estimates and assumptions used in the income approach, which represent a Level 3 measurement, included projected cash flows and a discount rate of 46.5%. The discount rate was derived from reconciling GRAIL’s long-range plan, which contemplated FDA approval and estimated cash flows for a 15 year period, to observed market values of GRAIL based on the when-issued trading activity. An increase of 300 basis points to the discount rate used in our assessment would have resulted in additional impairment of $20 million. There is substantial risk inherent in forecasting revenues and spend associated with research and development, including assumptions around the timing and level of resources and investment to be made, which were made more challenging in light of the Spin-Off and related Disposal Funding. We performed a recoverability test for GRAIL’s definite-lived intangible assets, which include developed technology and trade name, noting no impairment. No impairment was noted for Core Illumina definite-lived intangible assets. Goodwill Changes to goodwill during YTD 2024 were as follows:
In millions |
Balance as of December 31, 2023(1) | $ | 2,545 |
Acquisition | 34 |
Impairment | (1,466) |
Balance as of September 29, 2024 | $ | 1,113 |
_____________ (1)The balance as of December 31, 2023 includes accumulated impairment of $4,626 million related to our GRAIL reporting unit. Intangible Assets The following is a summary of our identifiable intangible assets:
| September 29, 2024 |  | December 31, 2023
In millions | Gross Carrying Amount |  | Accumulated Amortization |  |  |  | Intangible Assets, Net |  | Gross Carrying Amount |  | Accumulated Amortization |  | Impairment |  | Intangible Assets, Net
Developed technologies | $ | 465 |  |  | $ | (296) |  |  |  |  | $ | 169 |  |  | $ | 2,807 |  |  | $ | (585) |  |  | $ | — |  |  | $ | 2,222 |
Licensed technologies | 227 |  |  | (107) |  |  |  |  | 120 |  |  | 274 |  |  | (133) |  |  | — |  |  | 141 |
Trade name | 2 |  |  | (2) |  |  |  |  | — |  |  | 43 |  |  | (14) |  |  | — |  |  | 29 |
Customer relationships | 16 |  |  | (14) |  |  |  |  | 2 |  |  | 14 |  |  | (13) |  |  | — |  |  | 1 |
License agreements | 19 |  |  | (13) |  |  |  |  | 6 |  |  | 14 |  |  | (13) |  |  | — |  |  | 1 |
Database | 12 |  |  | (4) |  |  |  |  | 8 |  |  | 12 |  |  | (3) |  |  | — |  |  | 9 |
Total finite-lived intangible assets, net | 741 |  |  | (436) |  |  |  |  | 305 |  |  | 3,164 |  |  | (761) |  |  | — |  |  | 2,403 |
In-process research and development (IPR&D) | — |  |  | — |  |  |  |  | — |  |  | 705 |  |  | — |  |  | (115) |  |  | 590 |
Total intangible assets, net | $ | 741 |  |  | $ | (436) |  |  |  |  | $ | 305 |  |  | $ | 3,869 |  |  | $ | (761) |  |  | $ | (115) |  |  | $ | 2,993 |
The significant decrease in developed technologies, trade name, and IPR&D reflect the GRAIL intangible assets disposed of in connection with the Spin-Off. See note 2. GRAIL Spin-Off for more information. Additionally, in Q1 2024, we placed into service (reflected in developed technologies) the IPR&D asset we acquired in Q2 2021. As a result of the Fluent BioSciences acquisition in Q3 2024, we recorded a developed technology intangible of $42 million, with a useful life of 7 years, and a customer relationship intangible of $2 million, with a useful life of 11 years. We are still finalizing the allocation of the purchase price as it relates to the completion of certain tax returns. We expect to finalize the valuation as soon as practicable, but no later than one year after the acquisition. Amortization expense for Q3 2024 and YTD 2024 was $17 million and $113 million, respectively, and $49 million and $148 million in Q3 2023 and YTD 2023, respectively. The estimated future annual amortization of finite-lived intangible assets is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors.
In millions | Estimated Annual Amortization
2024 (remainder of year) | $ | 17 |
2025 | 68 |
2026 | 56 |
2027 | 54 |
2028 | 52 |
Thereafter | 58 |
Total | $ | 305 |
Derivative Financial Instruments We are exposed to foreign exchange rate risks in the normal course of business and use derivative financial instruments to partially offset this exposure. We do not use derivative financial instruments for speculative or trading purposes. Foreign exchange contracts are carried at fair value in other current assets, other assets, accrued liabilities, or other long-term liabilities, as appropriate, on the condensed consolidated balance sheets. We use foreign exchange forward contracts to manage foreign currency risks related to monetary assets and liabilities denominated in currencies other than the U.S. dollar. These derivative financial instruments have terms of one month or less and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income (expense), net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of September 29, 2024, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, Chinese Yuan Renminbi, and British pound. As of September 29, 2024 and December 31, 2023, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $497 million and $926 million, respectively. In September 2024, as a result of the European Commission withdrawing its previously imposed fine, the related forward contracts we previously entered into for a total notional amount of €432 million were terminated. We use foreign currency forward contracts to hedge portions of our foreign currency exposure associated with forecasted revenue transactions. These derivative financial instruments have terms up to 24 months and are designated as cash flow hedges. Changes in fair value of our cash flow hedges are recorded as a component of accumulated other comprehensive loss and are reclassified to revenue in the same period the underlying hedged transactions are recorded. We regularly review the effectiveness of our hedges and consider them to be ineffective if it becomes probable that the forecasted transactions will not occur in the identified period. Changes in fair value of the ineffective portions of our cash flow hedges, if any, are recognized in other income (expense), net. As of September 29, 2024, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, Canadian dollar, and Chinese Yuan Renminbi. As of September 29, 2024 and December 31, 2023, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $671 million and $628 million, respectively. We reclassified $3 million and $10 million to revenue in Q3 2024 and YTD 2024, respectively, and $5 million and $9 million to revenue in Q3 2023 and YTD 2023, respectively. As of September 29, 2024, the fair value of foreign currency forward contracts recorded in total assets and total liabilities was $2 million and $10 million, respectively. As of December 31, 2023, the fair value of foreign currency forward contracts recorded in total assets and total liabilities was $5 million and $9 million, respectively.

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