Illumina, Inc. 2019 Form 10-K Summary
Business context and reporting period
Illumina is a global provider of sequencing- and array-based genomic analysis solutions for research, clinical, pharmaceutical, biotechnology, agricultural, consumer genomics, and other applied markets. Products include instruments, sequencing and array consumables, informatics tools, and genomic services.
This Form 10-K covers the 52-week fiscal year ended December 29, 2019, compared with fiscal years ended December 30, 2018 and December 31, 2017. The company reports one segment, Core Illumina, following the deconsolidation of Helix on April 25, 2019. The filing was signed February 10, 2020.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $3,543 million | $3,333 million | Up 6% |
| Gross profit | $2,467 million | $2,300 million | Up 7% |
| Gross margin | 69.6% | 69.0% | Up 0.6 percentage points |
| Income from operations | $985 million | $883 million | Up 12% |
| Operating margin | 27.8% | 26.5% | Up 1.3 percentage points |
| Net income attributable to Illumina stockholders | $1,002 million | $826 million | Up 21% |
| Diluted EPS | $6.74 | $5.56 | Up 21% |
| Cash flow from operations | $1,051 million | $1,142 million | Down 8% |
| Capital expenditures | $209 million | $296 million | Down 29% |
Fourth-quarter 2019 revenue was $953 million, gross profit was $662 million, net income attributable to Illumina stockholders was $239 million, and diluted EPS was $1.61. Revenue increased from $867 million in the fourth quarter of 2018.
Revenue composition and material changes
- Consumables revenue increased 10% to $2,392 million, driven primarily by a $251 million increase in sequencing consumables revenue and growth in the installed instrument base.
- Instrument revenue declined 6% to $537 million, primarily because of lower average selling prices for NovaSeq instruments and fewer microarray instrument shipments, partly offset by increased NextSeq shipments.
- Service and other revenue increased 5% to $614 million, mainly due to higher development and licensing revenue, partly offset by lower sequencing and genotyping services revenue.
- Sequencing revenue represented approximately 87% of total revenue, while array revenue represented approximately 13%. Microarray revenue declined, principally because of weakness in the direct-to-consumer market.
- Product revenue represented 82.7% of total revenue and service and other revenue represented 17.3%.
- International shipments represented 48% of total revenue, compared with 47% in 2018. No customer represented more than 10% of annual revenue.
- Research and development expense increased 4% to $647 million, while selling, general and administrative expense increased 5% to $835 million. SG&A included $43 million of expenses related to the proposed Pacific Biosciences acquisition.
- Other income, net increased to $110 million from $24 million, including mark-to-market gains on strategic investments, a $39 million gain from Helix deconsolidation, and a $15 million gain from settlement of a GRAIL-related contingency.
- The effective tax rate declined to 11.4% from 12.5%, primarily due to foreign earnings in lower-tax jurisdictions, discrete tax benefits related to uncertain tax positions, and share-based compensation tax benefits.
Liquidity, cash flow, debt, and capital allocation
- Cash, cash equivalents, and short-term investments totaled $3.414 billion at year-end, including $2.042 billion of cash and cash equivalents and $1.372 billion of short-term investments.
- Cash flow from operations was $1.051 billion. Investing activities provided $745 million, primarily reflecting maturities and sales of available-for-sale securities exceeding purchases. Financing activities used $897 million.
- The company repurchased 1.1 million shares for $324 million in 2019. A $226 million authorization remained available at year-end; on February 5, 2020, the board authorized a new $750 million repurchase program.
- Outstanding convertible debt consisted of $517 million of 0.5% notes due 2021 and $750 million of zero-coupon notes due 2023. The $633 million of 2019 notes matured in June 2019 and was paid in cash, with the excess conversion value settled in shares.
- Contractual obligations totaled $2.374 billion, including $1.271 billion of debt obligations, $970 million of operating lease liabilities, and $87 million of U.S. Tax Reform transition tax. The filing excludes uncertain tax positions, venture fund commitments, and $132 million of payments related to the terminated PacBio merger.
- Management stated that existing liquidity and expected operating cash flow were sufficient to fund near-term operating and capital requirements for at least the following 12 months.
- The company does not pay cash dividends and stated that it had no present intention to do so in the foreseeable future.
Guidance, outlook, unusual items, and risks
- Management expected revenue to continue increasing in 2020, while anticipating ongoing weakness in the direct-to-consumer market. The filing also stated that the company was monitoring the potential effects of the coronavirus outbreak on commercial and manufacturing operations and 2020 revenue.
- Operating expenses were expected to increase in absolute dollars during 2020, including continued investment in research, product development, manufacturing, sales, distribution, and facilities.
- Management noted that a Ninth Circuit decision concerning stock-compensation cost-sharing treatment could result in a discrete tax expense of up to $30 million, although the ultimate resolution was uncertain.
- The proposed acquisition of Pacific Biosciences was terminated on January 2, 2020. Illumina paid a $98 million reverse termination fee and made or expected additional continuation advance payments totaling $34 million after year-end. Some amounts may be recoverable if PacBio completes specified financing or change-of-control transactions.
- Helix was deconsolidated in April 2019, producing a $39 million gain and ending Illumina’s controlling financial interest. The company retained a contingent value right valued at $29 million at year-end.
- Reported results remain exposed to intense competition, rapid technological change, product launch and transition risks, pricing pressure, reliance on certain single-source suppliers, manufacturing and quality issues, regulatory approval requirements for diagnostic products, reimbursement uncertainty, intellectual-property litigation, international and foreign-currency risks, cybersecurity events, and fluctuations in research funding.
- The company had $980 million of backlog or remaining performance obligations at year-end, with approximately 66% expected to convert to revenue during 2020. Backlog may be delayed, modified, substituted, or canceled.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter was inventory valuation, particularly estimates for excess and obsolete inventory.
Important facts for investors to verify
- Reconcile the 2020 revenue outlook with the direct-to-consumer weakness, coronavirus-related risks, backlog conversion assumptions, and customer order timing.
- Assess the sustainability of the 69.6% gross margin, including sequencing-versus-array mix, instrument pricing, service volumes, royalties, and new-product costs.
- Review the timing and settlement economics of the $517 million 2021 convertible notes and $750 million 2023 convertible notes, including potential share dilution or cash requirements.
- Evaluate the financial impact and potential recoveries related to the terminated PacBio transaction.
- Monitor the uncertain tax position exposure, the potential additional tax expense of up to $30 million, and the expiration of Singapore tax incentives beginning in 2023.
- Review inventory valuation assumptions, supply-chain concentration, regulatory requirements for clinical products, reimbursement risks, intellectual-property matters, and the effect of international operations on revenue and margins.