Illumina, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Illumina provides sequencing- and array-based genomic solutions for research, clinical, and applied markets. The filing covers the 13-week quarter and 26-week year-to-date period ended July 3, 2022, compared with the periods ended July 4, 2021. GRAIL, acquired August 18, 2021, is consolidated as a separate reportable segment and remains subject to U.S. and European regulatory proceedings.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Total revenue | $1,162 million | $1,126 million | $2,386 million | $2,219 million |
| Gross profit | $767 million | $802 million | $1,583 million | $1,566 million |
| Gross margin | 66.0% | 71.2% | 66.3% | 70.6% |
| Income (loss) from operations | $(579) million | $187 million | $(395) million | $381 million |
| Net income (loss) | $(535) million | $185 million | $(449) million | $333 million |
| Diluted EPS | $(3.40) | $1.26 | $(2.85) | $2.26 |
| Cash flow from operations | Not separately provided | Not separately provided | $297 million | $535 million |
- Revenue increased 3% in Q2 and 8% year to date. YTD Core Illumina revenue increased 7%, led by sequencing consumables and instruments; GRAIL contributed $22 million of YTD revenue, primarily from Galleri testing.
- Core Illumina YTD gross margin was 69.5%, down from 70.6%, due primarily to lower fixed-cost leverage, higher freight costs, and the prior-year patent litigation settlement benefit. Consolidated margin was also reduced by GRAIL's gross loss and acquired-intangible amortization.
- Operating results included $609 million of Q2 legal-contingency expense, comprising a $453 million accrual for a potential European Commission fine and an estimated $156 million accrual related to the BGI litigation settlement.
- Research and development expense increased 63% YTD to $650 million, primarily due to higher headcount and GRAIL-related spending. YTD selling, general and administrative expense declined 9% to $719 million, mainly because of lower acquisition-related costs.
- Other expense was $91 million YTD, primarily reflecting unrealized losses on marketable and strategic investments and the Helix contingent value right.
- Cash, cash equivalents, and short-term investments totaled approximately $1.3 billion at July 3, 2022, including $611 million held by foreign subsidiaries. Cash and cash equivalents increased $57 million from year-end 2021.
- YTD investing cash outflows were $239 million, including $132 million of capital expenditures, $85 million for acquisitions, and $22 million for strategic investments.
- Debt included $500 million of term notes due in 2023, $500 million of term notes due in 2031, and $750 million of convertible notes due August 2023. The $750 million revolving credit facility had no borrowings outstanding, and the company was in covenant compliance.
- Inventory increased to $518 million from $431 million at January 2, 2022, while accrued liabilities increased to $1.354 billion from $761 million, largely because of legal contingencies.
Material changes versus the prior comparable period
- Revenue growth was offset by substantially higher operating expenses and legal accruals, resulting in a shift from YTD operating income of $381 million to an operating loss of $395 million.
- Net income changed from $333 million of YTD profit to a $449 million YTD loss.
- Amortization of acquired intangible assets increased to $79 million YTD from $13 million, primarily reflecting the GRAIL acquisition.
- GRAIL generated a YTD operating loss of $359 million, including $67 million of intangible-asset amortization, and had $9.625 billion of reported assets at July 3, 2022.
- Cash flow from operations declined to $297 million from $535 million, despite a $470 million increase in accrued liabilities that primarily reflected legal accruals.
- The company adopted ASU 2020-06 in Q1 2022, increasing convertible-note carrying value and retained earnings and changing the accounting for conversion features and interest expense.
Guidance, outlook, risks, and unusual items
- Management expects revenue to continue increasing in 2022 but also expects operating expenses to grow in absolute dollars. The filing does not provide a specific numerical revenue or earnings forecast.
- Management believes cash, investments, operating cash flow, and available revolver capacity are sufficient to fund near-term operating and capital requirements for at least 12 months.
- The European Commission asserted jurisdiction over the GRAIL acquisition, and the EU General Court ruled in its favor on July 13, 2022; Illumina intends to appeal. The European Commission issued a Statement of Objections on July 19, 2022 and may seek a fine of up to 10% of consolidated annual revenue. Illumina accrued $453 million for the potential fine.
- Illumina must continue operating GRAIL separately under interim measures monitored by an independent trustee. Potential outcomes include additional fines, operating restrictions, loss of synergies, or a required divestiture of all or part of GRAIL.
- On July 14, 2022, after quarter-end, Illumina agreed to pay $325 million to settle and license certain BGI/Complete Genomics litigation. The payment was made July 25, 2022. The company estimated $177 million of the payment would be recorded as an intangible asset in Q3 and expects to recognize an estimated $8 million gain contingency.
- The GRAIL goodwill impairment analysis showed $700 million of excess fair value over carrying value using a 16.0% discount rate; a rate above 16.4% would have resulted in impairment. The EU General Court decision was identified as a Q3 triggering event requiring an interim impairment test, which could result in material GRAIL impairment charges.
- Additional risks include COVID-19 effects, Russia-Ukraine-related supply and shipping disruption, foreign-exchange exposure, supply-chain constraints, product development and commercialization risk, and market volatility affecting strategic investments.
- Joydeep Goswami was serving as interim CFO following the departure of Sam Samad. The company disclosed additional compensation for Mr. Goswami effective July 2022.
Most important facts for investors to verify
- Final resolution, timing, and cash impact of the European Commission and FTC proceedings concerning GRAIL.
- Results of the Q3 interim GRAIL impairment test and any resulting goodwill or intangible-asset charges.
- Accounting and cash-flow treatment of the $325 million BGI settlement and the value and amortization period of the related license.
- Ability of Core Illumina revenue growth and gross margins to offset GRAIL losses, higher R&D investment, and legal costs.
- Near-term debt maturities totaling $1.25 billion of principal in 2023, including the $500 million term notes and $750 million convertible notes.
- Inventory growth, foreign-exchange effects, supply-chain conditions, and the sustainability of operating cash generation excluding the benefit of legal-related accruals.