ILLUMINA INC

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.(1)

(1)Percentages may not recalculate due to rounding.

Revenue

Core Illumina consumables revenue remained relatively flat in Q2 2024 and YTD 2024. Core Illumina instruments revenue decreased in Q2 2024 and YTD 2024 primarily due to a decrease in sequencing instruments revenue of $77 million and $121 million, respectively, driven by fewer shipments of our high-throughput instruments, given we entered 2024 with a lower backlog of NovaSeq X instruments, as compared to 2023, given significant pre-orders following the launch, and fewer shipments of our mid-throughput instruments, primarily as capital and cash flow constraints continue to impact our customer’s purchasing behavior. Core Illumina service and other revenue increased in Q2 2024 and YTD 2024 primarily due to increased revenue from our strategic partnerships and extended maintenance service contracts, partially offset by decreases in revenues from development and licensing agreements and genotyping services.

GRAIL service and other revenue increased $7 million, or 32%, and $13 million, or 31%, in Q2 2024 and YTD 2024, respectively, primarily due to sales of Galleri.

Gross Margin

*Not meaningful.

The increase in Core Illumina gross margin in Q2 2024 and YTD 2024 was driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity. The increase in YTD 2024 was partially offset by certain strategic partnership revenue that is lower margin and increased warranty and field service costs.

GRAIL gross loss in Q2 2024 and Q2 2023 and YTD 2024 and YTD 2023 was primarily due to amortization of intangible assets of $31 million and $33 million and $65 million and $67 million, respectively.

Operating Expense

Core Illumina R&D expense decreased by $33 million, or 12%, in Q2 2024 and by $53 million, or 10%, in YTD 2024 primarily due to decreases in headcount and employee related compensation costs and lab supply costs, as we continue to focus on our cost reduction initiatives. The decrease is also due to a decrease in restructuring charges.

GRAIL R&D expense slightly decreased by $1 million, or 1%, in Q2 2024 primarily due to a decrease in employee related compensation costs, offset by increases in professional services and facilities related costs. GRAIL R&D expense increased by $14 million, or 8%, in YTD 2024 primarily due to increases in lab and consumables spend, employee related compensation costs, professional services and facilities related costs.

Core Illumina SG&A expense decreased by $311 million, or 84%, in Q2 2024 primarily due to a gain recognized on our contingent consideration liability related to the GRAIL CVRs of $271 million in Q2 2024 compared to a loss of $29 million in Q2 2023, a decrease in proxy contest charges of $25 million, a decrease in restructuring charges of $14 million, a decrease in legal contingency accruals and settlements of $12 million, and a decrease in headcount and employee related compensation costs. The decrease was partially offset by an increase in GRAIL-related transaction expenses, which included $37 million of expenses incurred in Q2 2024 directly related to the Spin-Off, and accrued interest recognized on the fine imposed by the European Commission of $7 million, which began accruing interest in October 2023. Core Illumina SG&A expense decreased by $260 million, or 40%, in YTD 2024 primarily due to a gain recognized on our contingent consideration liability related to the GRAIL CVRs of $255 million in YTD 2024 compared to a loss of $28 million in YTD 2023, a decrease in proxy contest charges of $31 million, a decrease of $15 million related to legal contingency accruals and settlements, a decrease in facility related costs, as we continue to exit certain of our facilities, and a decrease in headcount and employee related compensation costs. The decrease was partially offset by an increase in GRAIL-related transaction expenses, which included $52 million of expenses incurred in YTD 2024 directly related to the Spin-Off, an increase in restructuring charges of $21 million, primarily related to asset impairment charges, and accrued interest recognized on the fine imposed by the European Commission of $14 million.

GRAIL SG&A expense decreased by $3 million, or 3%, in Q2 2024 primarily due to a decrease in employee related compensation costs. GRAIL SG&A expense increased by $8 million, or 4%, in YTD 2024 primarily due to an increase in headcount and employee related compensation costs, partially offset by a decrease in marketing spend.

GRAIL goodwill and intangible impairment for Q2 2024 and YTD 2024 consisted of goodwill impairment of $1,466 million and IPR&D intangible asset impairment of $420 million as a result of performing impairment tests in Q2 2024. See note 7. Supplemental Balance Sheet Details for additional details. Core Illumina goodwill and intangible impairment for YTD 2024 consisted of an IPR&D intangible asset impairment recorded in Q1 2024.

Other Income (Expense)

Total other expense, net primarily relates to the Core Illumina segment.

Interest income in Q2 2024 and YTD 2024 consisted primarily of interest on our money market funds, which decreased primarily due to a lower cash balance in Q2 2024 as compared to the prior year. Interest expense consisted primarily of interest on our outstanding term debt. The fluctuation in other (expense) income, net in Q2 2024 and YTD 2024 was primarily driven by an unrealized loss of $328 million on our retained investment in GRAIL subsequent to the Spin-Off. See note 4. Investments and Fair Value Measurements for details. The Q2 2024 and YTD 2024 fluctuations were partially offset by favorable impacts on our Helix contingent value right of $8 million.

Provision for Income Taxes

Our effective tax rate was (0.6)% and (1.4)% in Q2 2024 and YTD 2024, respectively, compared to (163.8)% and (38.5)% in Q2 2023 and YTD 2023, respectively. The variance from the U.S. federal statutory tax rate of 21% for Q2 2024 and YTD 2024 was primarily because of the $308 million income tax expense impact from the impairment of goodwill, which is nondeductible for tax purposes, the $99 million and $116 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax, respectively, and the $41 million and $63 million income tax expense impact of capitalizing research and development expenses for tax purposes, respectively. The income tax expense in Q2 2024 and YTD 2024 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.

In Q2 2023 and YTD 2023, the variance from the U.S. federal statutory tax rate of 21% was primarily because of the $112 million and net $64 million income tax expense impact of capitalizing research and development expenses for tax purposes, respectively, and the $69 million and net $25 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits, respectively. The income tax expense in Q2 2023 and YTD 2023 was also favorably impacted 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.

Historically we calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period, except in Q1 2024 and Q2 2023 when a year-to-date effective tax rate method was utilized. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we determined the estimated annual effective tax rate method would provide a more reasonable estimate of the provision for income taxes for Q2 2024 and YTD 2024 since minor changes in the estimated income/(loss) before income taxes would not result in significant changes in the estimated annual effective tax rate.

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 “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.