Illumina, Inc. 10-Q Summary
Reporting period: Three months ended April 1, 2012; comparable period ended April 3, 2011. Both periods comprised 13 weeks. Illumina develops and sells genetic analysis systems, instruments, consumables, services, and related technologies for sequencing, genotyping, gene expression, PCR, and molecular diagnostics.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $272.8 million | $282.5 million | Down 3% |
| Gross profit | $181.0 million | $188.0 million | Down 4% |
| Gross margin | 66.4% | 66.6% | Down 0.2 points |
| Income from operations | $49.6 million | $69.4 million | Down 29% |
| Net income | $26.2 million | $24.1 million | Up 9% |
| Diluted EPS | $0.20 | $0.16 | Up $0.04 |
| Cash from operating activities | $65.4 million | $88.6 million | Down 26% |
Revenue mix: Consumables revenue increased 17% to $172.9 million, while instrument revenue decreased 30% to $79.6 million. Service and other revenue increased 8% to $17.1 million.
Cash and investments: Cash and cash equivalents were $260.2 million at April 1, 2012, compared with $303.0 million at January 1, 2012. Short-term investments increased to $1.006 billion from $886.6 million, resulting in approximately $1.3 billion of cash, cash equivalents, and short-term investments.
Debt and equity: Debt carrying value totaled approximately $816.0 million, consisting primarily of the 0.25% convertible senior notes due 2016. The remaining principal amount of the 0.625% convertible senior notes due 2014 was $40.1 million and was classified as current. Stockholders’ equity was $1.160 billion at quarter-end.
Material changes versus the prior comparable period
- Revenue declined because the prior-year period benefited from high HiSeq 2000 shipments, backlog conversion, and the Genome Analyzer trade-in program. The program was completed in the fourth quarter of 2011.
- Consumables growth and the expanding installed base were favorable, but did not offset the decline in instrument revenue.
- Operating expenses increased 11% to $131.4 million. Q1 2012 included $8.1 million of Roche tender-offer costs and $2.6 million of restructuring charges, compared with none in the prior-year period.
- Income from operations declined primarily because of the higher operating expenses. Net income and diluted EPS improved because Q1 2011 included a $27.2 million loss on extinguishment of debt.
- Operating cash flow declined by $23.1 million, primarily due to working-capital changes and the absence of the prior-year benefit from significant non-cash debt-extinguishment expense.
Outlook, commentary, risks, and unusual items
- Management expected continued growth in sequencing consumables as the installed base expanded. Manufacturing capacity for the MiSeq was increased during the quarter to support higher shipments and shorter lead times.
- Commercial shipments of the HiSeq 2500 were expected to begin in the second half of 2012.
- Management cited uncertainty in U.S. and European government and academic research funding. Approximately one-third of revenue was estimated to be derived directly or indirectly from U.S. NIH funding.
- Management expected additional Roche tender-offer and restructuring expenses during 2012. On April 20, 2012, the Roche offer expired without extension; the Board had recommended rejection of the revised $51.00-per-share offer.
- A federal jury found that certain products infringed a LadaTech patent. Appeals and further proceedings were pending, and damages had not been scheduled. The company recorded $2.2 million of incremental legal contingency accruals during the quarter.
- The company recorded $1.7 million of acquisition-related expense from a change in the fair value of contingent consideration and had estimated remaining restructuring costs of $13.9 million.
- Management stated that cash, investments, and operating cash flow were expected to fund operating needs for at least the next 12 months, barring unforeseen circumstances. No material capital-expenditure commitments were reported.
- The company reported no material changes to previously disclosed risk factors, market risks, or critical accounting policies.
Important facts for investors to verify
- Whether sequencing consumable growth and the MiSeq and HiSeq 2500 launches offset continuing pressure on instrument revenue.
- The timing and total amount of additional Roche-related, restructuring, relocation, and legal expenses.
- The potential financial impact and enforceability of the LadaTech patent verdict and related litigation.
- Conversion, maturity, and dilution exposure associated with the 2014 and 2016 convertible notes and approximately 18.3 million outstanding warrants.
- The effect of government and academic funding changes, including potential NIH sequestration-related reductions, on customer purchasing patterns.
- Execution of the $250 million share-repurchase authorization approved on April 18, 2012; no repurchases occurred during the reported quarter.