Illumina, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Illumina provides sequencing- and array-based solutions for research, clinical, and applied markets. The filing covers the 13-week quarter ended October 3, 2021 and the 39-week year-to-date period ended October 3, 2021, compared with periods ended September 27, 2020.
Illumina completed its acquisition of GRAIL on August 18, 2021. GRAIL, which develops the Galleri early multi-cancer detection test, is reported as a separate segment and is included in consolidated results from the acquisition date. Illumina stated that GRAIL would be held separately during the European Commission’s merger review.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Revenue | $1,108 million | $794 million | $3,327 million | $2,286 million |
| Gross profit | $770 million | $526 million | $2,337 million | $1,573 million |
| Gross margin | 69.5% | 66.2% | 70.2% | 68.8% |
| Operating income (loss) | $(545) million | $162 million | $(164) million | $447 million |
| Net income | $317 million | $179 million | $650 million | $399 million |
| Diluted EPS | $2.08 | $1.21 | $4.36 | $2.70 |
| Operating cash flow | Not separately provided | Not separately provided | $263 million | $674 million |
Q3 revenue increased 40%, while YTD revenue increased 46%. Product revenue increased 45% in Q3 and 52% YTD, led by sequencing consumables and instruments. Service and other revenue increased 10% in Q3 and 11% YTD.
Operating results were adversely affected by GRAIL-related items, including $615 million of post-combination share-based compensation expense for accelerated employee awards, $66 million of GRAIL transaction costs in Q3, and $35 million of pre-acquisition Continuation Payments in Q3. GRAIL reported a $750 million operating loss for both Q3 and YTD periods, while Core Illumina reported operating income of $205 million in Q3 and $586 million YTD.
Other income, net was $965 million in Q3 and $962 million YTD, including a $900 million gain from remeasuring Illumina’s previously held GRAIL investment. This gain was a major contributor to reported net income despite the operating loss.
At October 3, 2021, cash and cash equivalents were $1.080 billion and short-term investments were $185 million, compared with $3.472 billion combined at January 3, 2021. Approximately $532 million of cash and cash equivalents was held by foreign subsidiaries. The company stated that available liquidity, operating cash flow, and borrowing capacity were sufficient for near-term needs for at least the next 12 months.
YTD operating cash flow declined to $263 million from $674 million, primarily reflecting acquisition-related and working-capital effects. Investing cash flow was $(1.069) billion, including $2.444 billion of net cash paid for acquisitions. Financing cash flow was $78 million, reflecting $988 million of net debt proceeds, the $517 million repayment of 2021 convertible notes, and $452 million of taxes paid related to net share settlement of equity awards.
Debt and capital structure
- Illumina issued $500 million of 0.550% term notes due 2023 and $500 million of 2.550% term notes due 2031, receiving net proceeds of $992 million.
- Term notes had a net carrying value of $993 million at October 3, 2021.
- The $517 million principal amount of 2021 convertible notes matured and was repaid in cash during the first half of 2021; $313 million of conversion value above principal was settled in shares.
- The remaining 2023 convertible notes had a net carrying value of $694 million and were not convertible as of October 3, 2021.
- The company had a $750 million unsecured revolving credit facility maturing in 2026, with no borrowings outstanding and all covenants satisfied at quarter-end.
- No shares were repurchased during YTD 2021; approximately $15 million remained available under the repurchase authorization, and management did not intend to repurchase shares during fiscal 2021.
Material changes versus the prior comparable period
- Revenue rose from $794 million to $1.108 billion in Q3 and from $2.286 billion to $3.327 billion YTD, reflecting recovery in customer activity following COVID-19-related disruption and growth in the installed instrument base.
- Gross margin improved to 69.5% in Q3 and 70.2% YTD, primarily from higher revenue and fixed-cost leverage, partly offset by product mix.
- Operating income shifted to losses because of GRAIL acquisition costs, accelerated equity compensation, higher performance-based compensation, and increased operating expenses.
- Net income increased despite the operating loss because of the $900 million GRAIL remeasurement gain and other investment-related gains.
- Total assets increased to $15.063 billion from $7.585 billion at January 3, 2021, largely due to the GRAIL acquisition, which added approximately $6.1 billion of goodwill and $3.2 billion of identifiable intangible assets on a preliminary basis.
- Share-based compensation expense increased to $844 million YTD from $116 million in the prior-year period, including $615 million associated with GRAIL.
Guidance, outlook, risks, and unusual items
Management expected 2021 revenue to grow compared with 2020 and expected operating expenses to continue increasing in absolute dollars. The filing does not provide a detailed numerical full-year revenue or earnings outlook.
- The GRAIL acquisition remains subject to FTC litigation and European Commission merger review. The European Commission adopted interim measures on October 29, 2021 requiring Illumina and GRAIL to operate independently, restrict information sharing, preserve GRAIL’s viability, and appoint a monitoring trustee.
- Illumina stated that the European Commission may seek fines of up to 10% of consolidated annual revenue, along with other remedies, penalties, operational restrictions, or divestiture requirements. The amount and outcome cannot be predicted from the filing.
- GRAIL’s contingent value rights create a liability valued at $754 million at October 3, 2021. Payments are based on specified GRAIL revenue levels over a 12-year period.
- COVID-19 continued to create uncertainty regarding customer activity, supply chains, manufacturing, and operating results.
- Illumina faces patent and antitrust litigation involving BGI and Complete Genomics. The company disclosed claimed damages and royalties but stated that it could not estimate any possible loss or range of loss.
- The preliminary allocation of the GRAIL purchase price remained incomplete; goodwill, intangible assets, and related tax impacts could change during the measurement period.
- The company expects to adopt ASU 2020-06, affecting convertible debt and diluted EPS accounting, beginning in the first quarter of 2022; the impact was still under evaluation.
Investor verification checklist
- Verify the status and potential financial consequences of the FTC and European Commission proceedings involving GRAIL, including interim measures and any proposed fines or remedies.
- Separate recurring Core Illumina operating performance from GRAIL acquisition-related expenses, accelerated equity compensation, and the $900 million remeasurement gain.
- Assess the sustainability of revenue growth, sequencing consumables demand, instrument placements, and the 70.2% YTD gross margin.
- Review liquidity after the GRAIL acquisition, including cash balances, remaining short-term investments, debt maturities, contingent value rights, and operating cash flow.
- Monitor the preliminary purchase-price allocation, goodwill and intangible-asset impairment risk, and future amortization expense.
- Follow BGI and Complete Genomics patent and antitrust litigation, as the filing does not provide a reliable loss estimate.