Illumina, Inc. 2011 Form 10-K Summary
Business context and reporting period
Illumina develops, manufactures, and markets genetic analysis systems, instruments, consumables, software, and related services for sequencing, genotyping, gene expression, PCR, and emerging molecular diagnostics. Customers include academic and government laboratories, pharmaceutical and biotechnology companies, clinical research organizations, agrigenomics companies, and consumer genomics providers.
The filing covers the 52-week fiscal year ended January 1, 2012, with comparative fiscal years ended January 2, 2011 and January 3, 2010. The requested fourth quarter of fiscal 2011 was a 13-week quarter ended January 1, 2012. Diagnostics activity remained limited, so the Company reported one consolidated reportable segment.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenue | $1,055.5 million | $902.7 million | 17% increase |
| Product revenue | $987.3 million | $842.5 million | 17% increase |
| Consumables revenue | $595.8 million | $505.0 million | 18% increase |
| Instrument revenue | $373.1 million | $324.6 million | 15% increase |
| Gross profit | $709.1 million | $601.5 million | 18% increase |
| Gross margin | 67.2% | 66.6% | Up 0.6 percentage points |
| Income from operations | $199.5 million | $211.7 million | 6% decrease |
| Net income | $86.6 million | $124.9 million | 31% decrease |
| Diluted EPS | $0.62 | $0.87 | Decrease |
| Operating cash flow | $358.1 million | $272.6 million | 31% increase |
Fourth-quarter fiscal 2011 revenue was $250.1 million, gross profit was $170.6 million, net income was $11.7 million, basic EPS was $0.10, and diluted EPS was $0.09. Fourth-quarter revenue and net income were below the third quarter, which had revenue of $235.5 million and net income of $20.2 million; quarterly comparisons were affected by restructuring and other unusual expenses.
Cash, cash equivalents, and short-term investments totaled approximately $1.19 billion at January 1, 2012, including $303.0 million of cash and cash equivalents and $886.6 million of short-term investments. Working capital was $1.31 billion. Management stated that available liquidity and operating cash flow should fund operating needs, working capital, and capital expenditures for at least the next 12 months, barring unforeseen circumstances.
Capital expenditures were $77.8 million, cash used for acquisitions was $58.3 million, and cash used for strategic investments was $13.8 million. Investing activities used $401.0 million, while financing activities provided $97.0 million.
Debt consisted primarily of $920.0 million principal amount of 0.25% convertible senior notes due 2016 and $40.1 million principal amount of 0.625% convertible senior notes due 2014. The 2011 debt carrying value was $807.4 million. Contractual obligations totaled $1.47 billion, including $971.1 million of debt obligations and $487.3 million of operating leases.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher consumables sales from the expanding sequencing installed base, the MiSeq launch, and increased HiSeq instrument revenue.
- Sequencing consumables increased, but consumable revenue per sequencing instrument declined because of customer funding uncertainty and excess capacity created by higher-throughput kits.
- Gross margin improved because of higher instrument selling prices after the Genome Analyzer trade-in program and a shift toward higher-margin sequencing consumables. The trade-in program reduced estimated gross margin by approximately 1.1% in 2011 versus 5.3% in 2010.
- Operating income declined despite revenue growth because operating expenses increased 31%. Research and development expense increased 11% to $196.9 million, and selling, general, and administrative expense increased 19% to $261.8 million.
- The Company recorded $41.8 million of headquarters relocation expense, including a $23.6 million cease-use loss, accelerated depreciation, moving costs, and overlapping rent.
- A fourth-quarter restructuring charge of $8.1 million was recorded in connection with a plan to eliminate approximately 200 positions, or about 8% of the workforce, and consolidate facilities. Estimated total restructuring costs were $13.8 million.
- Other expense increased substantially, primarily because of a $37.6 million loss on extinguishment of converted 2014 notes and higher interest expense related to the 2016 notes.
- Net income declined more sharply than operating income because of higher debt-related expense and the debt extinguishment loss, as well as a higher effective tax rate of 34.9% versus 32.6%.
- The Company acquired Epicentre in January 2011 for total consideration of $71.4 million, including $59.4 million of net cash payments and contingent consideration.
Guidance, outlook, management commentary, risks, and unusual items
- Management expected research and development expense to increase in 2012 and expected additional headquarters relocation and restructuring costs during the first half of 2012.
- Commercial shipments of the HiSeq 2500 were expected to begin in the second half of 2012. Management expected future sequencing consumables growth from the MiSeq launch, the expanding HiSeq installed base, and greater customer utilization of available capacity.
- Management expected the effective tax rate to trend below the U.S. federal statutory rate over time as a greater portion of earnings became subject to lower foreign tax rates.
- Backlog was $250.5 million at January 1, 2012, down from $299.0 million one year earlier; approximately 90% was expected to ship during fiscal 2012.
- Approximately one-third of revenue was estimated to be derived directly or indirectly from NIH funding. Management warned that uncertainty or reductions in government and academic research funding could delay or reduce customer purchases.
- Roche commenced an unsolicited tender offer on January 27, 2012 to purchase Illumina for $44.50 per share. Illumina’s board unanimously recommended that stockholders reject the offer. The matter created risks of management distraction, increased legal and advisory costs, employee and customer uncertainty, proxy solicitation activity, and stock-price volatility.
- Four stockholder class-action lawsuits had been filed in connection with the Roche offer. The filing states that the ultimate outcome and potential loss of pending litigation could not be meaningfully estimated, although management did not expect aggregate losses to materially affect consolidated financial position, liquidity, or results of operations.
- Principal business risks include intense competition and rapid technological change, dependence on research funding, product quality and manufacturing scale-up, single-source suppliers, international operations, regulatory approval of molecular diagnostic products, intellectual-property claims, acquisitions, tax uncertainties, and the ability to retain key personnel.
- The Company had no significant off-balance-sheet arrangements. It maintained effective disclosure controls and effective internal control over financial reporting, with unqualified audit opinions from Ernst & Young LLP.
Most important facts for investors to verify
- Confirm whether sequencing consumable utilization and revenue per installed instrument improved after the excess-capacity issue identified in 2011.
- Track the effect of the MiSeq and HiSeq 2500 launches on instrument revenue, consumables revenue, gross margin, and customer adoption.
- Assess whether restructuring, facility-exit, and headquarters relocation costs ended as expected or required additional charges.
- Review the outcome and financial impact of the Roche tender offer, related litigation, and the Company’s stockholder-rights plan.
- Evaluate the maturity, conversion, dilution, and potential cash-settlement effects of the 2014 and 2016 convertible notes and the related warrants.
- Monitor exposure to NIH and other government-funded customers, international revenue, foreign receivables, and changing research budgets.
- Verify future cash requirements for operating leases, acquisitions, capital expenditures, repurchases, contingent consideration, and uncertain tax positions.