Business Context and Reporting Period
Illumina, Inc. provides sequencing- and array-based genomic solutions for research, clinical, and applied markets. GRAIL, focused on early cancer detection, is a separate reportable segment and remains subject to divestiture orders and ongoing appeals.
This Form 10-Q covers the 13-week quarter ended October 1, 2023 and the 39-week year-to-date period. Comparisons are with the quarter ended October 2, 2022 and the corresponding nine-month period.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Total revenue | $1,119 million | $1,115 million | $3,382 million | $3,501 million |
| Gross profit | $684 million | $717 million | $2,070 million | $2,300 million |
| Gross margin | 61.1% | 64.3% | 61.2% | 65.7% |
| Loss from operations | $(754) million | $(3,657) million | $(905) million | $(4,052) million |
| Net loss | $(754) million | $(3,816) million | $(986) million | $(4,265) million |
| Basic and diluted loss per share | $(4.77) | $(24.26) | $(6.23) | $(27.13) |
| Cash flow from operations | Not separately provided | Not separately provided | $254 million | $245 million |
Q3 revenue consisted of $941 million of product revenue and $178 million of service and other revenue. YTD revenue consisted of $2,864 million of product revenue and $518 million of service and other revenue.
- Core Illumina revenue was $1,106 million in Q3, essentially flat year over year, and $3,341 million YTD, down 4%.
- GRAIL revenue was $21 million in Q3, up 110%, and $62 million YTD, up 94%, primarily from Galleri sales.
- YTD operating cash flow was $254 million. Investing cash use was $146 million, including $144 million of capital expenditures. Financing cash use was $1,183 million, primarily reflecting repayment of $500 million of 2023 Term Notes and $750 million of convertible notes.
- Cash and cash equivalents were $927 million at October 1, 2023, compared with $2,011 million at January 1, 2023. Including short-term investments, liquidity was $933 million. Approximately $499 million of cash was held by foreign subsidiaries.
- Debt consisted of $1.5 billion of term notes, with principal maturities of $500 million in 2025, $500 million in 2027, and $500 million in 2031. The $750 million revolving credit facility was undrawn, and the company reported compliance with its covenants.
Material Changes Versus Prior Comparable Period
- YTD revenue declined 3%, primarily due to lower sequencing consumables and instrument revenue, partly offset by higher service and other revenue.
- Core Illumina gross margin declined to 64.7% YTD from 69.0%, driven by lower manufacturing volume leverage, lower initial NovaSeq X instrument margins, unfavorable mix, and higher field service and installation costs.
- Consolidated gross margin declined to 61.2% YTD from 65.7%.
- Operating loss and net loss improved substantially because the prior-year period included a $3.914 billion GRAIL goodwill impairment and $598 million of legal contingency and settlement expense. The current YTD period included an $821 million GRAIL goodwill and intangible impairment charge and $14 million of legal contingency and settlement expense.
- Selling, general and administrative expense increased 30% YTD to $1.127 billion, reflecting lower gains on GRAIL-related contingent consideration, $74 million of restructuring costs, and $29 million of proxy-contest costs.
- The company recorded $712 million of GRAIL goodwill impairment and $109 million of GRAIL in-process research and development impairment in Q3. Remaining GRAIL goodwill was $1.466 billion and the GRAIL IPR&D asset had a $561 million carrying value at quarter-end.
- The company exited its i3 campus in San Diego during Q3 and recorded $58 million of Q3 restructuring charges, including $49 million of asset impairment charges. Approximately $2 million of additional restructuring costs were expected.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects 2023 revenue to decrease 2% to 3% versus 2022. The filing does not provide a specific full-year earnings or cash-flow outlook.
- Management expects cash, operating cash flow, and available borrowing capacity to fund near-term capital and operating needs for at least 12 months, subject to business conditions and obligations.
- Macroeconomic conditions, inflation, foreign exchange, potential economic weakness, customer inventory management, supply-chain constraints, and competitive pressure in China are expected to continue affecting sales and results.
- The European Commission imposed an approximately €432 million fine related to the GRAIL acquisition. Illumina accrued $458 million, including foreign-exchange effects, and provided guarantees in October 2023 instead of making a cash payment while appealing. The fine accrues interest at 5.5% annually.
- The European Commission’s October 12, 2023 decision requires Illumina to divest GRAIL and imposes transitional measures. The FTC also ordered divestiture, with the order stayed pending Illumina’s appeal. Illumina is preparing for sale and capital-markets alternatives while pursuing appeals.
- The GRAIL hold-separate and potential divestiture requirements could cause additional costs, operational restrictions, loss of synergies or revenue, tax liabilities, contractual consequences, and adverse effects on contingent value rights.
- The SEC is investigating matters primarily related to the GRAIL acquisition, GRAIL disclosures and products, and conduct and compensation of certain management personnel. Illumina stated that it is cooperating.
- A derivative and class action complaint was filed in Delaware in October 2023 concerning the GRAIL acquisition and related disclosures. The filing states that the outcome cannot currently be predicted.
- Future GRAIL impairment remains possible. Management disclosed that a 50-to-100-basis-point increase in GRAIL’s 24.0% discount rate would have produced approximately $200 million to $350 million of additional goodwill impairment.
Important Facts for Investors to Verify
- Reconcile the 2023 revenue outlook with trends in sequencing consumables, NovaSeq X adoption, instrument margins, customer purchasing behavior, and China revenue.
- Monitor GRAIL divestiture requirements, FTC and European appeals, transitional-measure compliance, the €432 million fine and accrued interest, and any additional penalties or costs.
- Assess the sustainability of liquidity after $1.25 billion of debt repayments, including the timing of the 2025 debt maturity and potential funding for GRAIL operations and the fine.
- Evaluate whether additional GRAIL goodwill or intangible impairments could result from changes in share price, discount rates, projected cash flows, or regulatory outcomes.
- Review restructuring benefits, remaining restructuring costs, the Foster City campus assets of approximately $182 million, and the effect of cost reductions on innovation and operating performance.
- Track the SEC inquiry and Delaware litigation, including potential financial, governance, disclosure, and reputational consequences.