Illumina, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 28, 2015, compared with the periods ended June 29, 2014. Both periods comprised 13 and 26 weeks, respectively. Illumina is a global provider of DNA sequencing and array-based technologies for research, clinical, reproductive health, oncology, agriculture, and other applications.
Financial Results and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Total revenue | $539.4 million | $447.6 million | $1,077.9 million | $868.3 million |
| Gross profit | $376.4 million | $300.5 million | $751.4 million | $578.8 million |
| Gross margin | 69.8% | 67.1% | 69.7% | 66.7% |
| Income from operations | $151.9 million | $100.2 million | $328.1 million | $192.3 million |
| Net income | $102.2 million | $46.6 million | $238.9 million | $106.6 million |
| Diluted EPS | $0.69 | $0.31 | $1.61 | $0.71 |
- Q2 revenue increased 21%; first-half revenue increased 24.1%. Consumables revenue increased 23% in Q2 and 25% year to date, while instrument revenue increased 11% and 18%, respectively. Service and other revenue increased 35% in both periods, primarily from higher NIPT test volumes and expanded service contracts.
- Q2 operating margin was 28.2%, compared with 22.3% in the prior-year quarter; first-half operating margin was 30.5%, compared with 22.2%.
- Net income growth benefited from higher revenue and gross margin, lower other expense than in the prior year, and the absence of the prior-year $31.4 million loss on extinguishment of debt. First-half results also included a $15.1 million gain on the sale of a cost-method investment.
- Effective tax rates were 27.6% for Q2 and 25.2% for the first half, compared with 22.9% and 26.1%, respectively. The first-half rate benefited partly from reversal of a valuation allowance related to research and development tax credits.
- Cash and cash equivalents were $591.1 million, and short-term investments were $919.3 million at June 28, 2015, for total cash, cash equivalents, and short-term investments of approximately $1.5 billion. Approximately $348 million of cash and $433 million of short-term investments were held by foreign subsidiaries.
- Operating cash flow was $238.2 million in the first half, compared with $215.1 million in the prior-year period. Investing cash flow used $296.6 million, principally for purchases of marketable securities and $77.9 million of capital expenditures. Financing cash flow provided $15.3 million.
- Total convertible-note principal outstanding was $1.462 billion, including $311.6 million of 0.25% notes due March 2016, $632.5 million of 0% notes due June 2019, and $517.5 million of 0.5% notes due June 2021. The current portion of debt was $302.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected continued expansion of the sequencing installed base, increased instrument shipments, and higher NIPT and other service volumes. Management stated that revenue growth would have been 25% in Q2 and 29% for the first half on a constant-currency basis.
- Gross margin expanded by 270 basis points in Q2 and 300 basis points for the first half, driven by manufacturing efficiencies and operating leverage. Prior-year gross margin was reduced by legal contingency charges related to Syntrix patent litigation.
- Research and development expense increased 16% in Q2 and 17% year to date, primarily due to increased headcount and outside services. Selling, general and administrative expense increased 9% and 7%, respectively, to support growth and operational scaling.
- Cash declined by $45.1 million during the first half, despite higher operating cash flow, because of increased investment purchases, capital expenditures, working-capital needs, and foreign-exchange effects.
- Accounts receivable increased to $368.6 million from $289.5 million at year-end 2014, and inventory increased to $223.6 million from $191.1 million.
- The company repurchased approximately 0.2 million shares for $34.8 million during the first half. No shares were repurchased during Q2; $245.6 million remained authorized for future repurchases at quarter-end.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued growth in sequencing consumables, supported by the expanding installed base, while acknowledging that some array studies may migrate to sequencing. Array pricing may remain pressured by demand for lower-complexity arrays.
- Management expects research and development and selling, general and administrative expenses to continue increasing as the company invests in new products, commercialization, headcount, facilities, and global business processes.
- Management stated that existing cash, cash equivalents, short-term investments, and expected operating cash flow should fund near-term operating and capital needs for at least the next 12 months.
- The 2016 convertible notes remained convertible through September 30, 2015 based on stock-price requirements. In July 2015, the company received notices to convert an additional $152.5 million principal amount; the filing does not state the ultimate settlement outcome for those notices.
- The company entered into long-term facility leases, including estimated minimum payments of $204.0 million over 16 years for Foster City facilities and approximately $147.9 million over 20 years for a Cambridge, England facility. An amended headquarters lease is expected to add $44.1 million of minimum payments over 15 years.
- Contingent consideration liabilities from acquisitions had a fair value of $36.6 million at quarter-end. The company recorded a $7.6 million reduction in the liability during the first half.
- The company faces ordinary-course intellectual property, employment, and contractual litigation. Management states that ultimate outcomes cannot currently be predicted and that losses exceeding accrued amounts could materially affect future results.
- The IRS was examining the company’s 2011 tax year; no adjustments had been proposed as of the filing date. No material changes were reported to previously disclosed risk factors or market risks.
- The company adopted no significant accounting-policy changes during the period and was evaluating the future impact of ASU 2015-02 and ASU 2014-09.
Important Facts for Investors to Verify
- Confirm the sustainability of growth in sequencing consumables, instruments, NIPT services, and extended service contracts, including the effect of foreign exchange.
- Assess whether gross-margin expansion reflects recurring manufacturing efficiencies or unusually favorable comparisons caused by prior-year legal charges.
- Review the timing and cash requirements associated with the $311.6 million of 2016 notes, including the additional $152.5 million of conversion notices received after quarter-end.
- Evaluate working-capital trends, particularly the substantial increases in accounts receivable and inventory relative to year-end 2014.
- Consider long-term lease commitments, acquisition-related contingent consideration, legal contingencies, tax examinations, and the company’s ability to fund planned capital expenditures, acquisitions, and share repurchases.
- Review the full Form 10-K risk factors and subsequent filings because interim results are not necessarily indicative of full-year performance.