Business Context and Reporting Period
Illumina, Inc. provides sequencing- and array-based genomic solutions for research, clinical, and applied markets, including life sciences, oncology, reproductive health, agriculture, and emerging applications. This Form 10-Q covers the 13 weeks ended March 29, 2020, compared with the 13 weeks ended March 31, 2019. The company reported one segment, Core Illumina, following the April 2019 deconsolidation of Helix.
Financial Performance and Liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $859 million | $846 million | 2% increase |
| Product revenue | $701 million | $667 million | 5% increase |
| Service and other revenue | $158 million | $179 million | 12% decrease |
| Gross profit | $619 million | $584 million | 6% increase |
| Gross margin | 72.1% | 69.1% | 300 basis-point increase |
| Income from operations | $189 million | $204 million | 7% decrease |
| Operating margin | 22.0% | 24.2% | 220 basis-point decrease |
| Net income attributable to Illumina | $173 million | $233 million | 26% decrease |
| Diluted EPS | $1.17 | $1.57 | 25% decrease |
| Cash flow from operations | $281 million | $198 million | 42% increase |
Consumables revenue increased 12% to $620 million, led by a $72 million increase in sequencing consumables. Instruments revenue declined 27% to $81 million, while service and other revenue declined 12%. The company cited growth in sequencing consumables and licensing and development agreements, offset by weaker microarray demand, lower genotyping services revenue, and fewer instrument shipments.
Cash, cash equivalents, and short-term investments totaled approximately $3.3 billion at quarter-end, including $1.991 billion of cash and cash equivalents and $1.341 billion of short-term investments. Approximately $798 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents decreased $51 million during the quarter.
Capital expenditures were $40 million. Financing cash outflows included $188 million of share repurchases and $35 million of taxes related to net share settlement of equity awards. The company stated that available liquidity and operating cash flow should fund near-term operating and capital needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but product mix shifted toward higher-margin sequencing consumables.
- Gross margin improved to 72.1% from 69.1%, primarily because sequencing consumables represented a greater share of revenue and development and licensing revenue increased.
- Operating expenses increased 13% to $430 million. Selling, general and administrative expense increased 30% to $274 million, primarily due to costs related to the terminated PacBio acquisition.
- Research and development expense decreased 8% to $156 million.
- Other income changed from $29 million of net income in Q1 2019 to $11 million of net expense in Q1 2020, reflecting the absence of a prior-year GRAIL-related gain and fair-value losses on certain assets.
- Net income attributable to Illumina declined primarily because of higher operating expenses and unfavorable other income, partially offset by higher gross profit and lower taxes.
- Q1 2019 included consolidated Helix results; Helix was deconsolidated on April 25, 2019. The company reported no Helix revenue or operating results in Q1 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide full-year guidance, stating that the COVID-19 pandemic created uncertainty regarding the size and duration of its effect. The company said it would provide updates on quarterly results without discussing expectations for the remainder of the year.
- COVID-19 had already reduced instrument shipments and was expected to adversely affect demand, sales activity, customer support, shipping, supply chains, research, product development, and operating results. The ultimate impact was not predictable.
- Illumina terminated its planned PacBio acquisition. During Q1 2020, it paid $132 million, consisting of a $98 million reverse termination fee and $34 million of continuation advances. A $92 million difference between cash paid and the initial fair value of related derivative assets was recorded in selling, general and administrative expense. The company recorded a further $4 million unrealized loss from fair-value changes.
- Potential repayments associated with the PacBio termination had a $47 million fair value at March 29, 2020. Up to $52 million of continuation advances and the $98 million reverse termination fee may be repayable subject to specified future PacBio financing or change-of-control events.
- The effective tax rate was unusually low at 2.5%, primarily due to discrete tax benefits related to the PacBio derivative assets, foreign earnings mix, and share-based compensation. Management noted a potential future discrete tax expense of less than $30 million related to a tax case, although the outcome remained uncertain.
- Debt consisted principally of $750 million of 2023 convertible notes and $517 million of 2021 convertible notes. Net debt carrying value was $1.151 billion, including $499 million classified as current because the 2021 notes become convertible within 12 months. Neither note series was convertible as of March 29, 2020.
- The board authorized a $750 million share repurchase program. The company repurchased approximately $187 million of stock during Q1 2020, leaving approximately $563 million authorized at quarter-end.
- The company had callable commitments of $51 million and up to $160 million to two venture capital funds. It also made an additional $60 million investment in a variable interest entity on April 17, 2020, after the quarter-end.
- Routine litigation includes intellectual-property, employment, and contractual matters. The filing does not identify a specific material loss amount or clear aggregate exposure.
Important Facts for Investors to Verify
- How COVID-19 affected subsequent instrument shipments, consumables demand, customer activity, supply-chain execution, and full-year results.
- Whether sequencing consumables growth and improved gross margin were sustained after the initial pandemic period.
- The timing and liquidity impact of the $499 million current portion of convertible debt due to the 2021 notes.
- Whether PacBio satisfies conditions that could require repayment of the $98 million reverse termination fee or continuation advances.
- The realization and volatility of the $47 million PacBio derivative assets and the $26 million Helix contingent value right.
- The effect of the unusually low 2.5% effective tax rate and the potential tax expense of less than $30 million.
- Future use of the remaining $563 million share-repurchase authorization amid pandemic-related uncertainty.