Illumina, Inc. — Q1 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 weeks ended April 3, 2022, compared with the 13 weeks ended April 4, 2021. GRAIL, acquired August 18, 2021, is consolidated as a separate reportable segment while subject to ongoing regulatory proceedings.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1,223 million | $1,093 million | 12% increase |
| Product revenue | $1,070 million | $953 million | 12% increase |
| Service and other revenue | $153 million | $140 million | 9% increase |
| Gross profit | $815 million | $764 million | 7% increase |
| Gross margin | 66.6% | 69.9% | Down 330 basis points |
| Income from operations | $184 million | $193 million | 5% decrease |
| Operating margin | 15.0% | 17.7% | Down 270 basis points |
| Net income | $86 million | $147 million | 41% decrease |
| Diluted EPS | $0.55 | $1.00 | Decrease |
| Operating cash flow | $172 million | $282 million | 39% decrease |
Core Illumina revenue was $1,221 million, up 12%, driven primarily by an $85 million increase in consumables and a $39 million increase in instruments. GRAIL generated $10 million of revenue and an operating loss of $172 million. Consolidated results included $29 million of GRAIL gross loss, primarily from $34 million of acquired-intangible amortization.
Research and development expense increased 64% to $323 million, including $85 million attributable to GRAIL. Selling, general and administrative expense decreased 18% to $308 million, partly because Q1 2021 included significant GRAIL acquisition-related costs and Q1 2022 included a $49 million gain from remeasurement of GRAIL contingent consideration.
Other expense, net was $44 million versus $24 million in the prior-year quarter, reflecting investment losses and the absence of a $26 million gain related to terminated PacBio acquisition assets recognized in Q1 2021. The effective tax rate increased to 38.3% from 13.1%, primarily due to GRAIL pre-acquisition net operating losses affecting GILTI, foreign tax credit utilization, and capitalization of research and development costs for tax purposes.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $1.351 billion at April 3, 2022, compared with $1.232 billion at January 2, 2022. Short-term investments were $65 million, producing total cash, cash equivalents, and short-term investments of approximately $1.4 billion.
- Approximately $650 million of cash and cash equivalents was held by foreign subsidiaries.
- Cash flow from operations was $172 million; capital expenditures were $61 million; and investing cash flow was negative $74 million.
- Term notes had $1.0 billion principal outstanding: $500 million due in 2023 and $500 million due in 2031. The 2023 notes were classified as current.
- The company had $750 million principal amount of zero-coupon convertible notes due August 2023, carried at $746 million. The notes were not convertible as of April 3, 2022.
- No borrowings were outstanding under the $750 million revolving credit facility, which matures in 2026. The company was in compliance with its covenants.
- Management stated that available liquidity, operating cash flow, and borrowing capacity are sufficient for near-term capital and operating needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue increased 12%, led by sequencing consumables and instruments, including increased NovaSeq shipments.
- Gross and operating margins declined because of GRAIL losses, acquired-intangible amortization, and higher freight costs.
- Net income declined 41%, primarily due to lower operating income, higher other expense, and a substantially higher tax rate.
- Operating cash flow declined from $282 million to $172 million, while Q1 2021 benefited from substantially higher securities activity and debt financing.
- GRAIL contributed $10 million of revenue, a $172 million operating loss, $9.6 billion of assets, and a $566 million contingent consideration liability at quarter-end.
- Illumina adopted ASU 2020-06 for convertible debt accounting on January 3, 2022. The adoption increased convertible-note liabilities by $43 million and retained earnings by $61 million, reduced additional paid-in capital by $93 million, and decreased Q1 diluted EPS by less than $0.01.
- No shares were repurchased during the quarter, and management stated it did not intend to repurchase shares during fiscal 2022.
Guidance, outlook, commentary, risks, and unusual items
Management expects revenue to continue increasing in 2022 and operating expenses to grow in absolute dollars. The filing does not provide a clear full-year numerical revenue or earnings forecast.
- GRAIL remains subject to FTC and European Commission proceedings. The European Commission may seek a fine of up to 10% of consolidated annual revenue in connection with completion of the acquisition during its review. GRAIL is being operated separately under oversight of an independent monitoring trustee.
- The company recorded a $566 million fair value liability for GRAIL contingent value rights. Future payments are based on specified GRAIL revenues over a 12-year period.
- The company faces ongoing patent and antitrust litigation involving BGI and CGI. A BGI jury award of $8 million and related injunction were upheld post-trial, subject to appeals. CGI is seeking $334 million in alleged past damages plus an ongoing royalty; the company states that any potential loss cannot currently be estimated.
- COVID-19, supply-chain and freight costs, the Russia-Ukraine conflict, sanctions, component availability, product development, and customer order timing could affect results. Russia and Ukraine represented approximately $73 million of 2021 net sales.
- If the tax-law requirement to capitalize research and development expenses is not repealed, modified, or deferred, management estimated that cash tax payments could increase by approximately $103 million in 2022.
- The company identified no material changes in internal control over financial reporting and stated that disclosure controls were effective.
Important facts for investors to verify
- Progress and potential financial consequences of the FTC and European Commission proceedings concerning GRAIL, including any fine, required remedy, or impact on integration and expected synergies.
- Whether GRAIL revenue growth can offset its substantial operating losses, acquired-intangible amortization, contingent consideration, and employee incentive liabilities.
- Conversion, refinancing, or repayment plans for the $500 million 2023 term notes and $750 million 2023 convertible notes.
- Trends in sequencing consumables, NovaSeq shipments, installed-base utilization, pricing, freight costs, and gross margin.
- Cash-tax effects of research and development capitalization and the sustainability of the 38.3% effective tax rate.
- Outcomes and potential damages from the BGI and CGI patent and antitrust matters.
- Effects of COVID-19, supply constraints, sanctions, and geopolitical conditions on shipments and customer demand.