Illumina, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2011, comprising 52 weeks. The filing also provides unaudited fourth-quarter fiscal 2010 data for the 13 weeks ended January 2, 2011. Comparisons are primarily with the 53-week fiscal year ended January 3, 2010.
Business context
Illumina develops, manufactures, and markets genetic analysis systems, instruments, consumables, reagents, software, and related services for sequencing, genotyping, gene expression, molecular diagnostics, and real-time PCR. Customers include academic and government research institutions, genomic centers, pharmaceutical and biotechnology companies, agrigenomics businesses, clinical research organizations, and consumer genomics companies. Diagnostics activity remained limited, so the company reported one operating segment.
Financial performance
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $902.7 million | $666.3 million | 35% |
| Product revenue | $842.5 million | $627.2 million | 34% |
| Service and other revenue | $60.2 million | $39.1 million | 54% |
| Gross profit | $601.5 million | $453.9 million | 33% |
| Gross margin | 66.6% | 68.1% | Down 150 bps |
| Income from operations | $211.7 million | $125.6 million | 68% |
| Net income | $124.9 million | $72.3 million | 73% |
| Diluted EPS | $0.87 | $0.53 | 64% |
| Operating cash flow | $272.6 million | $172.2 million | 58% |
Consumable revenue increased 29% to $505.0 million, while instrument revenue increased 44% to $324.6 million. Instruments represented 36% of total revenue and consumables represented 56%. International revenue was $403.8 million, or 45% of total revenue, compared with 48% in 2009.
Research and development expense increased 27% to $177.9 million, and selling, general and administrative expense increased 25% to $221.0 million. Share-based compensation expense was $71.6 million. The effective tax rate declined to 32.6% from 36.7%.
Liquidity, debt, and balance sheet
- Cash, cash equivalents, and short-term investments totaled $894.3 million at January 2, 2011, including $248.9 million of cash and cash equivalents and $645.3 million of short-term investments.
- Working capital was $723.9 million; total assets were $1.84 billion; and stockholders’ equity was $1.20 billion.
- Operating cash flow was $272.6 million. Investing cash use was $285.1 million, including $98.2 million for acquisitions, $49.8 million for capital expenditures, and $27.7 million for strategic investments.
- The company had $390.0 million principal amount of 0.625% convertible senior notes due in 2014, recorded at a net carrying amount of $311.6 million. The notes had a conversion price of approximately $21.83 per share.
- Contractual obligations totaled $903.1 million, including $499.3 million of operating leases and $398.5 million of debt obligations. The filing excludes $22.7 million of uncertain tax benefits and up to $35.0 million of contingent acquisition consideration from the table.
- Management stated that existing cash and operating income should fund operating needs for at least the next 12 months, barring unforeseen circumstances.
Fourth-quarter and material changes
- Fourth-quarter fiscal 2010 revenue was $261.3 million, gross profit was $166.1 million, net income was $38.4 million, and diluted EPS was $0.25.
- Revenue growth was driven by strong demand for next-generation sequencing systems, particularly the HiSeq 2000, increased sequencing consumable pull-through, and growth in microarray products.
- Gross margin declined because of HiSeq 2000 discounts, the Genome Analyzer trade-in program, and lower margins on newer products. Management expected margin improvement in 2011 from completion of the trade-in program, higher consumable mix, and manufacturing efficiencies.
- Operating results benefited from a $10.4 million fourth-quarter gain from reducing the estimated fair value of Helixis contingent consideration. This was partly offset by a $13.2 million impairment charge on a cost-method investment and related note receivable.
- Backlog increased to $299.0 million from $227.6 million. Management expected approximately 90% of the January 2, 2011 backlog to ship during fiscal 2011.
- The company acquired Helixis in April 2010 for approximately $86.7 million, expanding into real-time PCR, and acquired Epicentre in January 2011 for consideration including $60 million in cash, $15 million in stock, and up to $15 million in contingent consideration.
- In the subsequent period, noteholders elected to convert $251.1 million principal amount of convertible notes. Management expected a first-quarter 2011 loss on conversion because the notes’ implied interest rate exceeded the applicable market borrowing rate.
- The company authorized a $200 million stock repurchase program and repurchased 489,002 shares for $28.3 million during the fourth quarter. Fiscal 2010 repurchases totaled approximately $44.0 million.
Outlook, risks, and unusual items
- Management expected continued growth in sequencing instruments and consumables, further HiSeq 2000 performance enhancements, and volume customer shipments of the MiSeq system in the fourth quarter of 2011.
- Research and development, sales, marketing, infrastructure, and manufacturing costs were expected to increase in 2011. Management also anticipated significant income tax payments as tax loss and credit carryforwards were utilized.
- Recovery Act grants were estimated to have directly supported approximately $70.4 million of 2010 orders; related funding was expected to continue through 2012, creating potential post-stimulus demand risk.
- Key risks include intense competition and rapid technological change, product quality and manufacturing scale-up, dependence on single-source suppliers, fluctuations in research and government funding, international and currency exposure, intellectual-property litigation, regulatory approval for diagnostic products, acquisition integration, and uncertain quarterly revenue timing.
- The company entered into a new San Diego headquarters lease with a 20-year initial term. It expected to begin relocating in late 2011 and disclosed an estimated one-time non-cash charge of approximately $30 million related to remaining obligations on the existing headquarters lease, in addition to relocation expenses.
- Potentially material contingencies include uncertain tax benefits of $22.7 million, contingent acquisition consideration, convertible-note conversion accounting, long-term lease obligations, warranty costs, and future impairment risk for acquired technology and other assets.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of HiSeq-driven instrument growth and the associated consumable pull-through.
- Assess whether gross margin improves as projected after the trade-in program and with greater consumable mix.
- Review the financial impact and share-count consequences of the $251.1 million convertible-note conversion elections.
- Evaluate the integration, milestones, and contingent consideration associated with the Helixis and Epicentre acquisitions.
- Monitor dependence on research funding, including the expected expiration or normalization of Recovery Act-related demand.
- Review the new headquarters lease, relocation costs, existing lease obligations, and potential sublease assumptions.
- Assess exposure to product quality, supply-chain, intellectual-property, regulatory, tax, and investment-impairment risks.