ILLUMINA, INC. annual report, FY2022

Illumina, Inc. — FY2022 Form 10-K Summary

Business context and reporting period

Illumina is a global provider of sequencing- and array-based genomic analysis systems, consumables, software, and services serving research, clinical, pharmaceutical, biotechnology, agricultural, and consumer genomics markets. The filing covers the 52-week fiscal year ended January 1, 2023; references to “2022” refer to this fiscal year, rather than a standalone fourth quarter. GRAIL, acquired on August 18, 2021, is reported as a separate segment and remains subject to regulatory proceedings and operating restrictions.

Key financial metrics

Metric	FY2022	FY2021	Change
Revenue	$4.584 billion	$4.526 billion	Up 1%
Gross profit	$2.972 billion	$3.154 billion	Down 6%
Gross margin	64.8%	69.7%	Down 490 basis points
Operating income (loss)	$(4.179) billion	$(123) million	Material deterioration
Net income (loss)	$(4.404) billion	$762 million	Material deterioration
Diluted EPS	$(28.00)	$5.04	Material deterioration
Cash flow from operations	$392 million	$545 million	Down $153 million

• Core Illumina revenue was $4.553 billion, up 1%; GRAIL revenue was $55 million, compared with $12 million for the post-acquisition period in 2021.
• Core Illumina revenue consisted primarily of $3.246 billion of consumables, $729 million of instruments, and $578 million of service and other revenue. Consumables represented approximately 70% of total revenue, instruments 16%, and services 14%.
• Sequencing revenue was $4.171 billion, or approximately 91% of total revenue; array revenue was $413 million, or approximately 9%.
• Core Illumina operating income declined to $481 million from $808 million. GRAIL recorded an operating loss of $4.657 billion, including the goodwill impairment charge.
• Research and development expense increased 11% to $1.321 billion. Selling, general and administrative expense decreased 38% to $1.297 billion, primarily because of lower acquisition-related and contingent-consideration costs.
• Cash, cash equivalents, and short-term investments totaled approximately $2.0 billion at year-end, including $2.011 billion of cash and cash equivalents and $26 million of short-term investments.
• Operating cash flow was $392 million; capital expenditures were $286 million; investing cash flow was $(591) million; and financing cash flow was $1.0 billion, principally from debt issuance.
• Total assets were $12.252 billion and stockholders’ equity was $6.599 billion at January 1, 2023.

Material changes versus the prior comparable period

• Revenue increased modestly, driven by higher sequencing consumables and service revenue, partly offset by lower sequencing instrument revenue. Customers deferred certain capital purchases while awaiting the NovaSeq X Series and managed spending more conservatively amid macroeconomic uncertainty.
• Core Illumina gross margin fell to 68.2% from 70.7%, primarily because of lower manufacturing-volume leverage, higher freight costs, and the absence of a favorable 2021 patent litigation settlement.
• Illumina recorded a $3.914 billion goodwill impairment charge related to GRAIL after regulatory developments, a significant decline in market capitalization, and higher valuation risk. Remaining GRAIL goodwill was $2.178 billion at year-end.
• The company accrued $458 million for a potential European Commission fine related to completing the GRAIL acquisition during the regulatory review. The filing states that the potential fine could be up to 10% of consolidated annual revenue.
• Illumina recorded a net $145 million loss related to settlement of BGI litigation and capitalized a $180 million license intangible asset arising from that settlement.
• Other income declined sharply to $(157) million from $1.007 billion, primarily because 2021 included an $899 million gain on the previously held GRAIL investment and an $86 million gain on the exchange of GRAIL contingent value rights. FY2022 also included $122 million of net losses on strategic investments.
• Cash flow from operations declined despite the large net loss because the loss included substantial noncash goodwill impairment and other adjustments. Cash increased by $779 million, largely because of $991 million of net debt proceeds.

Guidance, outlook, commentary, risks, and unusual items

• Management expects revenue to increase in 2023 and operating expenses to increase in absolute dollars. The filing does not provide a specific numerical revenue, earnings, or margin forecast.
• The NovaSeq X Series was announced in 2022 and became available in the first quarter of 2023. Its launch, customer adoption, product transitions, manufacturing scale-up, and potential cannibalization of existing instruments are important execution factors.
• Management expects current cash, investments, operating cash flow, and available borrowing capacity to fund near-term operating and capital needs for at least the next 12 months.
• Debt included $500 million of 2023 term notes, $500 million of 2031 term notes, $500 million of 2025 term notes, $500 million of 2027 term notes, and $750 million of convertible senior notes due August 2023. A new $750 million revolving credit facility was entered into on January 4, 2023; no borrowings were outstanding under the prior facility at year-end.
• The company expects to repay $74 million of transition tax over the next three years and had operating lease liabilities of $820 million, including $76 million current.
• The European Commission prohibited the GRAIL acquisition in September 2022 and issued a Statement of Objections in December 2022 regarding a proposed divestiture. GRAIL must be held and operated separately under interim measures, creating additional costs and limiting expected synergies. The FTC appeal of an administrative law judge’s decision favorable to Illumina remained pending at the filing date.
• A forced GRAIL divestiture could create significant advisory, tax, contractual, contingent value right, and operational costs. The filing estimates Illumina’s tax basis in GRAIL at approximately $500 million to $1 billion and states that a divestiture could result in significant taxable gain.
• Other principal risks include macroeconomic weakness, inflation, foreign exchange volatility, COVID-19 effects, supply-chain and single-source supplier dependence, intense competition, regulatory approval uncertainty for diagnostic products and laboratory-developed tests, reimbursement risk, cybersecurity, intellectual-property litigation, and international geopolitical restrictions.
• Illumina settled BGI litigation for a $325 million payment, obtaining licenses to specified technology and agreeing to a litigation standstill through October 2025, subject to stated exceptions. RavGen patent litigation remained unresolved; the filing states that a possible loss could not be estimated, although an accrual was recorded at the low end of a possible range.
• The financial statements received an unqualified audit opinion, and management and Ernst & Young concluded that internal control over financial reporting was effective as of January 1, 2023.

Most important facts for investors to verify

1. Whether the European Commission and FTC ultimately require a GRAIL divestiture, impose fines or other remedies, and the resulting cash, tax, contractual, and strategic effects.
2. Whether the remaining $2.178 billion of GRAIL goodwill and other GRAIL intangible assets avoid further impairment.
3. NovaSeq X Series launch execution, customer adoption, instrument revenue recovery, and related consumables growth.
4. Progress toward restoring Core Illumina operating margins and converting revenue growth into operating cash flow.
5. Liquidity and refinancing plans for the $500 million 2023 term notes and $750 million convertible notes maturing in 2023.
6. Actual 2023 revenue, operating-expense growth, cash flow, capital expenditures, and any numerical guidance subsequently issued by management.
7. Potential outcomes and financial exposure from RavGen, BGI-related obligations, regulatory proceedings, contingent value rights, and other legal contingencies.