Illumina, Inc. Form 10-Q Summary
Business context and reporting period
Illumina provides sequencing- and array-based genomic solutions to research, clinical, and applied markets. The filing covers the 13-week quarter ended July 4, 2021 and the 26-week year-to-date period, compared with the quarters and year-to-date periods ended June 28, 2020. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Total revenue | $1,126 million | $633 million | $2,219 million | $1,492 million |
| Gross profit | $802 million | $428 million | $1,566 million | $1,047 million |
| Gross margin | 71.2% | 67.7% | 70.6% | 70.2% |
| Income from operations | $187 million | $96 million | $381 million | $285 million |
| Operating margin | 16.6% | 15.2% | 17.2% | 19.1% |
| Net income | $185 million | $47 million | $333 million | $220 million |
| Diluted EPS | $1.26 | $0.32 | $2.26 | $1.49 |
| Operating cash flow | Not separately provided | Not separately provided | $535 million | $521 million |
Q2 product revenue was $972 million, including $778 million from consumables and $194 million from instruments. Service and other revenue was $154 million. Sequencing revenue represented $1,021 million of Q2 revenue, while microarray revenue represented $105 million.
As of July 4, 2021, cash and cash equivalents were $4.196 billion and short-term investments were $90 million, for total cash, cash equivalents, and short-term investments of approximately $4.3 billion. Approximately $618 million of cash and cash equivalents was held by foreign subsidiaries. Current assets were $5.310 billion versus current liabilities of $874 million.
Total debt included $992 million of term notes and $687 million of convertible senior notes. The company had no borrowings under its $750 million revolving credit facility and was in compliance with its covenants. The 2021 Convertible Notes matured in June 2021; $517 million of principal was repaid in cash and the conversion premium was settled in shares.
YTD investing cash flow was $1.379 billion, primarily reflecting sales and maturities of debt securities, sales of strategic investments, and repayment of $52 million of PacBio continuation advances. YTD financing cash flow was $472 million, including $988 million of net debt proceeds and the $517 million repayment of convertible notes. Capital expenditures were $86 million.
Material changes versus the prior comparable period
- Q2 revenue increased 78% and YTD revenue increased 49%, primarily due to recovery in customer activity following COVID-19-related disruption, growth in the installed instrument base, and higher sequencing consumables and instrument shipments.
- Q2 consumables revenue increased 78% to $778 million; Q2 instruments revenue increased 113% to $194 million. YTD consumables revenue increased 47% and instruments revenue increased 117%.
- Gross margin improved, benefiting from increased fixed-cost leverage and, in Q2, revenue from a patent litigation settlement. Product mix partially offset the improvement.
- Operating expenses increased 85% in Q2 and 56% YTD. Research and development increased primarily because of higher headcount and performance-based compensation. Selling, general and administrative expense increased substantially because of GRAIL-related expenses, including $105 million in Q2 and $210 million YTD of continuation payments.
- YTD operating margin declined to 17.2% from 19.1% despite higher revenue, reflecting increased operating expenses.
- The effective tax rate declined to 10.8% in Q2 and 11.8% YTD, compared with 71.6% and 35.7%, respectively, primarily because of discrete tax benefits related to GRAIL continuation payments and the mix of earnings across jurisdictions.
- Other income declined year over year, partly because the company sold its available-for-sale debt securities in anticipation of funding the GRAIL acquisition and recorded net losses on marketable equity securities. YTD 2021 included a $26 million gain from repayment of PacBio continuation advances.
Guidance, outlook, commentary, risks, and unusual items
Management expects revenue to grow in 2021 compared with 2020 but cautions that the COVID-19 pandemic may continue to affect sales and operating results. Management expects operating expenses to increase in absolute terms during 2021, including expenses related to the pending GRAIL acquisition and performance-based compensation. The filing does not provide a specific numerical revenue or earnings forecast.
The proposed GRAIL acquisition has an announced value of approximately $8 billion, consisting of $3.5 billion in cash and $4.5 billion in Illumina shares, subject to a collar and other terms. The transaction remained subject to regulatory and other closing conditions. Illumina was required to make monthly $35 million continuation payments to GRAIL and had made $210 million through July 4, 2021, plus an additional $35 million payment in July.
The Federal Trade Commission challenged the acquisition, and an administrative trial was scheduled to begin August 24, 2021. The European Commission initiated a Phase II review, with a stated decision deadline of November 29, 2021, subject to possible extensions. If the transaction is terminated under specified circumstances, Illumina may be required to pay a $300 million termination fee and make an additional $300 million investment in GRAIL.
Other significant contingencies include patent litigation with BGI and its affiliates. The counterparties sought approximately $54 million and $225.4 million in alleged damages in separate matters, plus ongoing royalties; Illumina disputes the claims and stated that it could not estimate any potential loss or range of loss.
Unusual items included the GRAIL continuation payments, a patent litigation settlement contributing to Q2 service revenue and gross margin, the $26 million PacBio-related gain, and $147 million of YTD share-based compensation expense. The company recorded no goodwill impairment in Q2 2021 and reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the GRAIL acquisition received all required U.S. and European regulatory approvals, closed, was delayed, or was terminated, including any resulting fees or additional investments.
- The sustainability of the post-COVID recovery in sequencing consumables, instruments, and service revenue.
- The effect of elevated GRAIL-related payments, performance-based compensation, and other operating expenses on future operating margins.
- The company’s available liquidity after funding the proposed GRAIL transaction and meeting debt maturities and continuation-payment obligations.
- The outcomes and potential financial exposure from the BGI and CGI patent and antitrust litigation.
- The impact of marketable equity security gains or losses, foreign exchange movements, and unusually low tax rates on future earnings.
- The conversion, redemption, or refinancing requirements for the 2023 convertible notes and 2023 term notes.