Illumina, Inc. Fiscal 2018 Form 10-K Summary
Business context and reporting period
Illumina is a global provider of sequencing- and array-based genetic 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 December 30, 2018; fiscal 2017 also comprised 52 weeks. Fourth-quarter 2018 revenue was $867 million, compared with $778 million in fourth-quarter 2017.
Sequencing represented approximately 83% of annual revenue and arrays approximately 17%. Consumables accounted for 65% of revenue, instruments 17%, and services 18%. International shipments represented 47% of revenue, compared with 45% in 2017.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $3.333 billion | $2.752 billion | +21% |
| Gross profit | $2.300 billion | $1.826 billion | +26% |
| Gross margin | 69.0% | 66.4% | +260 bps |
| Income from operations | $883 million | $606 million | +46% |
| Operating margin | 26.5% | 22.0% | +450 bps |
| Consolidated net income | $782 million | $678 million | +15% |
| Net income attributable to Illumina stockholders | $826 million | $726 million | +14% |
| Diluted EPS | $5.56 | $4.92 | +13% |
| Operating cash flow | $1.142 billion | $875 million | +31% |
| Capital expenditures | $296 million | $310 million | -5% |
Revenue growth was led by consumables, which increased 23% to $2.156 billion, including a $338 million increase in sequencing consumables. Instrument revenue increased 10% to $569 million, while service and other revenue increased 26% to $584 million. Research and development expense rose 14% to $623 million, and selling, general and administrative expense rose 18% to $794 million.
Cash, cash equivalents, and short-term investments totaled $3.512 billion at year-end, including $1.144 billion of cash and cash equivalents and $2.368 billion of short-term investments. Approximately $487 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents declined by $81 million during the year, primarily reflecting substantial purchases of marketable securities, acquisitions, capital expenditures, and share repurchases.
Debt principal consisted of $633 million of convertible notes due 2019, $517 million due 2021, and $750 million due 2023. The balance sheet reported $1.107 billion of current debt and $890 million of long-term debt. The company stated that available liquidity and operating cash flow should fund near-term operating and capital needs, including the planned PacBio acquisition.
Material changes versus the prior comparable period
- Revenue, operating income, gross profit, and operating cash flow increased materially, supported by growth in the sequencing installed base and higher consumables utilization.
- Gross margin expanded to 69.0%, partly because consumables represented a larger revenue mix and because 2017 included an $18 million acquired-intangible impairment and inventory reserves related to product transitions.
- The effective tax rate decreased to 12.5% from 35.0%, reflecting the lower U.S. federal statutory rate, foreign earnings in lower-tax jurisdictions, and excess tax benefits from share-based compensation. The 2017 rate included a $150 million provisional U.S. Tax Reform charge; an additional $11 million tax expense was recorded in 2018.
- Other income declined to $11 million from $437 million because 2017 included a $453 million pretax gain from the deconsolidation of GRAIL.
- Illumina issued $750 million of convertible senior notes due 2023, received $735 million of net proceeds, repurchased $201 million of common stock, and invested $100 million in Edico Genome.
- Backlog was approximately $909 million at year-end, down from $935 million, with approximately 80% expected to ship during fiscal 2019.
- Helix remained consolidated and received $100 million of additional investment. Redeemable noncontrolling interests declined to $61 million from $220 million.
Guidance, outlook, risks, and unusual items
Management expected revenue to continue increasing in 2019 and expected research and development expense to rise to support product development and growth. The filing does not provide a specific 2019 revenue, earnings, or margin target.
On November 1, 2018, Illumina agreed to acquire Pacific Biosciences of California for approximately $1.2 billion in cash, subject to shareholder and antitrust approvals. The company expected closing in mid-2019. The FTC issued a second request for information, and failure or delay of the transaction could result in additional costs, termination fees, or loss of expected strategic benefits. Illumina could owe PacBio a $98 million termination fee in certain antitrust-related circumstances; PacBio could owe Illumina a $43 million fee in specified circumstances.
Other material obligations included $3.192 billion of contractual commitments, consisting principally of debt, operating and build-to-suit leases, purchase obligations, tax-reform payments, and deferred compensation. The table excluded $88 million of uncertain tax positions, $61 million of redeemable noncontrolling interests, $69 million of venture-fund commitments, and the approximately $1.2 billion PacBio purchase price.
Principal risks include rapid technological change and competition, dependence on new product launches, manufacturing capacity and single-source suppliers, product quality, regulatory approval of diagnostic products and potential regulation of laboratory-developed tests, reimbursement uncertainty, intellectual-property litigation, international and foreign-exchange exposure, cybersecurity, research-funding variability, tax examinations, and the conversion or refinancing of convertible notes. The company also relies on significant estimates for revenue recognition, investments, inventory reserves, contingencies, acquired intangible assets, share-based compensation, and income taxes.
The company adopted the revenue-recognition standard Topic 606 in 2018; management reported no material adoption impact. Lease accounting standard Topic 842 was scheduled for adoption in the first quarter of 2019, with expected additional assets of approximately $329 million and liabilities of approximately $354 million.
Important facts for investors to verify
- Whether PacBio received all required regulatory approvals and closed on the expected terms and timing.
- The pace of sequencing installed-base growth, consumables utilization, and demand for NovaSeq and NextSeq products.
- Whether the 69.0% gross margin is sustainable as product mix, pricing, manufacturing costs, and product transitions change.
- Funding and settlement of the $633 million 2019 convertible notes and potential dilution or cash requirements from convertible-note conversions.
- The effect of the new lease standard and the company’s substantial lease and build-to-suit commitments.
- Whether the low 12.5% effective tax rate is sustainable, including the impact of foreign tax incentives, U.S. Tax Reform, GILTI, and tax examinations.
- Regulatory, reimbursement, litigation, intellectual-property, supplier, cybersecurity, and product-quality developments that could affect clinical and research-market growth.
- The use and availability of cash held by foreign subsidiaries, Helix funding requirements, and the new $550 million share-repurchase authorization approved after year-end.