ILLUMINA INC

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.(1)

(1)Percentages may not recalculate due to rounding.

Revenue

Core Illumina consumables revenue increased in Q3 2024 and YTD 2024 primarily due to an increase in sequencing consumables revenue of $46 million and $48 million, respectively, driven primarily by an increase in NovaSeq X consumables. Core Illumina instruments revenue decreased in Q3 2024 and YTD 2024 primarily due to a decrease in sequencing instruments revenue of $75 million and $196 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 Q3 2024 and YTD 2024 primarily due to increased revenue from our strategic partnerships and extended maintenance service contracts, partially offset by decreased revenue from development and licensing agreements. The increase in YTD 2024 Core Illumina service and other revenue was also partially offset by decreased revenue from genotyping services.

The decrease in GRAIL revenue in Q3 2024 and YTD 2024 was due to the Spin-Off in Q2 2024.

Gross Margin

*Not meaningful.

The increase in Core Illumina gross margin in Q3 2024 and YTD 2024 was driven primarily by a favorable impact from the execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity, a more favorable mix of sequencing consumables, and a decrease in warranty and field service costs. The increase in YTD 2024 was offset by higher strategic partnership revenue that is lower margin.

The decrease in GRAIL gross loss in Q3 2024 and YTD 2024 was due to the Spin-Off in Q2 2024.

Operating Expense

Core Illumina R&D expense increased by $15 million, or 6%, in Q3 2024 primarily due to an increase in share-based compensation expense related to PSU awards. Core Illumina R&D expense decreased by $39 million, or 5%, in YTD 2024 primarily due to decreases in headcount and employee related compensation costs, restructuring charges of $14 million, and lab supply costs, as we continue to focus on our cost reduction initiatives.

Core Illumina SG&A expense increased by $23 million, or 11%, in Q3 2024 primarily due to a decrease in the gains recognized on our GRAIL contingent consideration liability of $61 million and an increase in share-based compensation expense related to PSU awards. The increase was offset by decreases in restructuring charges of $49 million and GRAIL-related transaction expenses, given the Spin-Off of GRAIL in Q2 2024. Core Illumina SG&A expense decreased by $236 million, or 28%, in YTD 2024 primarily due to an increase in the gains recognized on our GRAIL contingent consideration liability of $222 million and decreases in restructuring charges of $29 million, proxy contest charges of $28 million, and facility related costs, as we continue to exit certain of our facilities. The decrease was offset by increases in share-based compensation expense related to PSU awards and GRAIL-related transaction expenses, which included $53 million of expenses incurred in YTD 2024 directly related to the Spin-Off.

The decrease in GRAIL R&D and SG&A expense in Q3 2024 and YTD 2024 was due to the Spin-Off in Q2 2024.

GRAIL goodwill and intangible impairment for 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 information. GRAIL goodwill and intangible impairment for Q3 2023 and YTD 2023 consisted of goodwill impairment of $712 million and IPR&D intangible asset impairment of $109 million as a result of performing an interim impairment test in Q3 2023. Core Illumina goodwill and intangible impairment for YTD 2024 consisted of an IPR&D intangible asset impairment recorded in Q1 2024.

Core Illumina legal contingency and settlement in Q3 2024 and YTD 2024 primarily consisted of a gain of $489 million resulting from the reversal of the EC fine accrual, and related accrued interest, following the European Commission’s decision to withdraw its previously imposed fine. See note 8. Legal Proceedings for additional details. Core Illumina legal contingency and settlement in YTD 2023 primarily consisted of an adjustment to our accrual for the fine previously imposed by the European Commission and other patent litigation settlement activity.

Other Income (Expense)

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

Interest income in Q3 2024 and YTD 2024 consisted primarily of interest on our money market funds, which decreased primarily due to a lower cash balance in Q3 2024 as compared to the prior year. Interest expense consisted primarily of interest on our outstanding term debt and a loss on debt extinguishment of $5 million related to the repayment of our delayed draw term loan in Q3 2024. The fluctuation in other income (expense), net in Q3 2024 was primarily driven by a favorable net impact related to foreign currency activity as compared to the prior period and a decrease in net losses recognized on our strategic investments of $7 million. The fluctuation in other income (expense), net in YTD 2024 was primarily driven by an increase in net losses recognized on our strategic investments of $303 million, which included an unrealized loss of $332 million on our retained investment in GRAIL subsequent to the Spin-Off. This was offset by a favorable net impact related to foreign currency activity as compared to the prior year and an increase in the gains recognized on our Helix contingent value right of $7 million.

Provision (Benefit) for Income Taxes

Our effective tax rate was 2.1% and (3.2)% in Q3 2024 and YTD 2024, respectively, compared to 3.6% and (3.8)% in Q3 2023 and YTD 2023, respectively. The variance from the U.S. federal statutory tax rate of 21% for Q3 2024 was primarily because of the $25 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 $10 million income tax expense impact of capitalizing research and development expenses for tax purposes. The variance from the U.S. federal statutory tax rate of 21% for YTD 2024 was primarily because of the $308 million income tax expense impact from the impairment of goodwill, which is nondeductible for tax purposes, $141 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, and the $53 million income tax expense impact of capitalizing research and development expenses for tax purposes. The income tax rate in Q3 2024 and YTD 2024 was favorably impacted by the reversal of the European Commission fine related to the GRAIL acquisition, which is excluded from taxable income, and 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 Q3 2023 and YTD 2023, the variance from the U.S. federal statutory tax rate of 21% was primarily because of the $149 million income tax expense impact from the impairment of goodwill, which is nondeductible for tax purposes, the $20 million and $84 million income tax expense impact of capitalizing research and development expenses for tax purposes, respectively, and the $38 million and $63 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 Q3 2023 and YTD 2023 were 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.

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.