Illumina, Inc. 2020 Form 10-K Summary
Business context and reporting period
Illumina is a global provider of sequencing- and array-based solutions used in life sciences research, clinical genomics, oncology, reproductive health, agriculture, and consumer genomics. The filing covers the 53-week fiscal year ended January 3, 2021, rather than a standalone fourth quarter. Illumina reports one segment, Core Illumina.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $3.239 billion | $3.543 billion | Down 9% |
| Gross profit | $2.203 billion | $2.467 billion | Down 11% |
| Gross margin | 68.0% | 69.6% | Down 1.6 points |
| Income from operations | $580 million | $985 million | Down 41% |
| Operating margin | 17.9% | 27.8% | Down 9.9 points |
| Net income attributable to Illumina | $656 million | $1.002 billion | Down 35% |
| Diluted EPS | $4.45 | $6.74 | Down 34% |
| Cash flow from operations | $1.080 billion | $1.051 billion | Up 3% |
- Consumables revenue was $2.304 billion, down 4%; instruments revenue was $431 million, down 20%; and service and other revenue was $504 million, down 18%.
- Sequencing revenue was $2.879 billion, or approximately 89% of total revenue. Array revenue was $360 million, or approximately 11%.
- International shipments represented 49% of revenue, compared with 48% in 2019. No customer represented more than 10% of revenue.
- Cash, cash equivalents, and short-term investments totaled $3.472 billion at year-end, including $1.810 billion of cash and cash equivalents and $1.662 billion of short-term investments.
- Debt consisted principally of $517 million of convertible notes due in 2021 and $750 million of convertible notes due in 2023. Net carrying value of convertible debt was $1.184 billion, including $511 million classified as current.
- Contractual obligations totaled $2.349 billion, excluding the pending GRAIL cash consideration, uncertain tax positions, venture fund commitments, and continuing GRAIL payments.
Material changes versus the prior comparable period
- COVID-19 reduced customer shipments, particularly instruments, sequencing consumables, microarray consumables, and sequencing and genotyping services. Microarray weakness also reflected ongoing weakness in the direct-to-consumer market.
- Gross margin declined because of higher pandemic-related freight costs, less favorable consumables mix, lower fixed-cost leverage, and lower development and licensing revenue.
- Operating expenses increased 10% to $1.623 billion. Research and development increased 5% to $682 million, while selling, general and administrative expense increased 13% to $941 million.
- SG&A included $92 million of payments and fees related to the terminated PacBio transaction and expenses related to the pending GRAIL acquisition. A $27 million litigation gain partially offset these costs.
- Other income increased to $276 million from $133 million, primarily because of $270 million of unrealized gains on marketable equity securities. This significantly benefited pretax results but may not be recurring.
- The effective tax rate increased to 23.3% from 11.4%, including a $68 million valuation allowance related to California research and development credits and $28 million of expense resulting from the final Altera court decision.
- Net cash decreased $232 million. Financing outflows included $736 million of share repurchases and $91 million of taxes related to net share settlement of equity awards. Capital expenditures were $189 million.
- Backlog declined to approximately $816 million from $980 million. Management expected approximately 90% of year-end 2020 backlog to ship in 2021.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected revenue to grow in 2021 compared with 2020 and 2019, but did not provide a specific revenue or earnings range in the filing. The company expected operating expenses to increase, including additional GRAIL-related expenses and higher stock-based compensation.
- Illumina agreed to acquire GRAIL for approximately $8 billion: $3.5 billion in cash and $4.5 billion in Illumina stock, subject to a collar. Closing was expected in the second half of 2021 and required shareholder and regulatory approvals.
- The GRAIL transaction required $35 million monthly continuation payments until closing or termination. Illumina had paid $35 million in 2020 and an additional $35 million in January 2021. Specified termination circumstances could require a $300 million termination fee and an additional $300 million investment in GRAIL.
- Illumina expected to fund approximately $3.1 billion of GRAIL cash consideration with available cash, GRAIL cash, and up to $1 billion of debt financing. A $1 billion, 364-day bridge facility had been committed, subject to transaction-related conditions.
- GRAIL stockholders were also entitled to contingent value rights tied to certain future revenue for 12 years, including a 2.5% right on the first $1 billion of annual revenue and a 9% right on revenue above that threshold.
- The terminated PacBio acquisition resulted in a $98 million reverse termination fee and $34 million of continuation advances paid in 2020. Up to $52 million of continuation advances was potentially recoverable; the filing stated that PacBio’s subsequent financing was expected to trigger repayment.
- Principal risks include the uncertain duration and effects of COVID-19, intense competition and rapid technological change, dependence on research funding, single-source suppliers, manufacturing and quality issues, international and foreign-currency exposure, intellectual-property claims, cybersecurity, regulatory approval and reimbursement for diagnostic products, and risks associated with the GRAIL transaction.
- The 2021 convertible notes became convertible on January 1, 2021 and matured June 15, 2021. Illumina had no present intention to pay cash dividends.
- The company reported no material off-balance-sheet arrangements. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter was valuation of excess and obsolete inventory.
Most important facts for investors to verify
- Whether COVID-19-related demand weakness reversed and whether revenue growth and margin recovery materialized in 2021.
- The final regulatory outcome, financing structure, closing status, dilution, integration costs, and contingent payment obligations associated with GRAIL.
- The settlement or refinancing of the $517 million 2021 convertible notes and the potential share dilution from both convertible note issues.
- Whether the $270 million of marketable-equity-security gains and other unusual items are recurring or materially affected reported earnings.
- The recoverability of deferred tax assets, including the $81 million valuation allowance and $80 million of gross uncertain tax positions.
- Progress converting the $816 million backlog into revenue and the extent to which backlog cancellations, substitutions, or delays occur.
- Inventory valuation, supply-chain continuity, product quality, regulatory approvals, reimbursement trends, intellectual-property matters, and cybersecurity exposures.