Illumina, Inc. 2012 Form 10-K Summary
Business context and reporting period
Illumina develops, manufactures, and markets genetic analysis systems, instruments, consumables, services, and related software for sequencing, genotyping, gene expression, PCR, and genomic diagnostics. Customers include research institutions, government laboratories, pharmaceutical and biotechnology companies, agricultural organizations, clinical research organizations, and IVF clinics.
The filing covers the 52-week fiscal year ended December 30, 2012, with quarterly information for the fourth quarter ended December 30, 2012. Diagnostics activity remained immaterial and was reported together with Life Sciences as one reportable segment. International shipments represented 51% of fiscal 2012 revenue.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $1,148.5 million | $1,055.5 million | +9% |
| Gross profit | $773.5 million | $709.1 million | +9% |
| Gross margin | 67.4% | 67.2% | +0.2 percentage points |
| Income from operations | $200.8 million | $199.5 million | +$1.3 million |
| Operating margin | 17.5% | 18.8% | -1.3 percentage points |
| Net income | $151.3 million | $86.6 million | +75% |
| Diluted EPS | $1.13 | $0.62 | +82% |
| Cash flow from operations | $291.9 million | $358.1 million | -18% |
Fourth-quarter revenue was $309.3 million, gross profit was $203.6 million, and net income was $71.9 million. Fourth-quarter diluted EPS was $0.53. The filing does not separately state a fourth-quarter operating margin.
- Consumables revenue increased 22% to $729.3 million, driven by higher sequencing consumable usage and growth in the HiSeq and MiSeq installed base.
- Instrument revenue declined 16% to $314.3 million, primarily because of fewer HiSeq shipments. Consumables represented 64% of total revenue, versus 56% in 2011; instruments represented 27%, versus 35%.
- Service and other revenue increased 36% to $92.7 million, reflecting growth in instrument service contracts and sequencing and genotyping services.
- Cash, cash equivalents, and short-term investments totaled $1.35 billion at year-end, including $434.0 million of cash and cash equivalents and $916.2 million of short-term investments.
- Working capital was $1.48 billion and total stockholders’ equity was $1.32 billion.
- Capital expenditures were $68.8 million, acquisition cash payments were $83.2 million, and share repurchases used $82.5 million.
Debt and contractual obligations
Outstanding convertible-note principal totaled approximately $960.1 million at year-end, consisting of $920.0 million due in 2016 and $40.1 million due in 2014. Net carrying value of the debt liability was $842.4 million. Annual contractual interest payments were approximately $8.4 million.
Total disclosed contractual obligations were $1.51 billion, including $968.6 million of debt obligations, $515.2 million of operating leases, $12.3 million of purchase obligations, and $12.1 million under the executive deferred compensation plan. The filing also excludes $37.6 million of uncertain tax benefits and up to $35.0 million of potential acquisition-related contingent consideration because timing or payment likelihood could not be reliably estimated.
Material changes versus the prior comparable period
- Revenue growth shifted toward recurring consumables and service revenue, while instrument revenue declined.
- Gross margin improved modestly because of the higher-margin consumables mix and the completion of the Genome Analyzer trade-in program.
- Operating margin declined as research and development expense rose 17% to $231.0 million and selling, general and administrative expense rose 9% to $286.0 million.
- Fiscal 2012 included $26.3 million of headquarters relocation expense, $23.1 million of expenses related to Roche’s unsolicited tender offer, $3.5 million of restructuring charges, and a $21.4 million impairment of acquired in-process research and development.
- Net income benefited from $45.9 million of net cost-method investment gains, including a $48.6 million gain on the sale of the Company’s deCODE Genetics investment, compared with a $37.6 million debt-extinguishment loss in 2011.
- Cash flow from operations decreased despite higher net income, partly because 2012 included investment-related gains and greater working-capital uses, including increases in accounts receivable and inventory.
- Illumina acquired BlueGnome for total consideration of $95.5 million, including contingent consideration, and recorded approximately $47.5 million of goodwill.
Guidance, outlook, commentary, and risks
- Management expected revenue to continue growing in 2013 and expected research and development, sales, marketing, and infrastructure spending to increase in absolute dollars.
- Management expected future gross margin to depend on pricing conditions, product mix, manufacturing costs, new-product mix, and the success of premium products.
- Management stated that current cash, short-term investments, and expected operating cash flow should fund near-term operating, capital, and acquisition needs for at least the next 12 months, including the planned Verinata acquisition.
- The Company began full commercial shipments of the HiSeq 2500 in the fourth quarter of 2012 and expected continued growth in sequencing consumables as the installed base expanded.
- In January 2013, Illumina agreed to acquire Verinata Health for $350 million in cash plus up to $100 million in milestone payments through 2015, and agreed to provide up to $45 million of bridge financing.
- Key risks include reductions or delays in government and academic research funding, particularly NIH funding; intense competition and rapid technological change; product quality and manufacturing constraints; reliance on certain single-source suppliers; acquisition integration; regulatory approval for diagnostic products; international and foreign-currency exposure; intellectual-property litigation; tax uncertainty; and volatility in quarterly results.
- The Syntrix patent litigation remained unresolved. Trade-secret claims were dismissed in January 2013, but patent claims remained pending and the Company could not estimate a possible loss range. The Company recorded $3.0 million of aggregate legal contingency losses in fiscal 2012.
- The filing states that no significant off-balance-sheet arrangements existed and that management and the auditors concluded internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether recurring consumables growth continues to offset lower instrument placements and any pricing pressure.
- The effect of NIH and other government funding changes, including sequestration-related actions, on customer purchasing.
- Integration, milestone payments, financing, and commercial performance related to BlueGnome and the planned Verinata acquisition.
- Cash requirements and potential dilution or cash settlement associated with the 2014 and 2016 convertible notes and related warrants.
- The ultimate outcome and financial exposure from Syntrix and other intellectual-property proceedings.
- Regulatory progress and commercialization prospects for MiSeqDx, cystic-fibrosis assays, prenatal testing, reproductive-health, and cancer-diagnostic products.
- Whether unusual fiscal 2012 items, particularly the deCODE investment gain, headquarters relocation costs, Roche tender-offer expenses, and IPR&D impairment, distort comparisons with future periods.