ILLUMINA, INC. annual report, FY2021

Illumina, Inc. Form 10-K Summary

Business Context and Reporting Period

Illumina is a global provider of sequencing- and array-based genomic analysis solutions for research, clinical, oncology, reproductive health, agriculture, and other applied markets. The filing covers the 52-week fiscal year ended January 2, 2022; fiscal 2020 ended January 3, 2021 and contained 53 weeks.

Illumina acquired GRAIL on August 18, 2021. GRAIL, which commercialized the Galleri multi-cancer early-detection test in 2021, is reported as a separate segment and was consolidated from the acquisition date, while being operated separately under an interim European Commission hold-separate order.

Key Financial Metrics

Metric	2021	2020	Change
Revenue	$4,526 million	$3,239 million	Up 40%
Gross profit	$3,154 million	$2,203 million	Up 43%
Gross margin	69.7%	68.0%	Up 1.7 percentage points
Operating income (loss)	$(123) million	$580 million	Declined materially
Net income attributable to Illumina stockholders	$762 million	$656 million	Up 16%
Diluted EPS	$5.04	$4.45	Up 13%
Cash flow from operations	$545 million	$1,080 million	Down 50%
Capital expenditures	$208 million	$189 million	Up 10%

Core Illumina revenue was $4,519 million, up 40%. Consumables revenue increased 40% to $3,220 million, instruments increased 75% to $753 million, and service and other revenue increased 8% to $546 million.
GRAIL contributed $12 million of service and other revenue after acquisition and reported a $931 million operating loss. Consolidated operating results included significant GRAIL-related acquisition, compensation, and integration-restriction costs.
Research and development expense increased 74% to $1,185 million, while selling, general and administrative expense increased 122% to $2,092 million.
Share-based compensation expense rose to $941 million from $194 million, including $615 million related to accelerated GRAIL equity awards and $24 million related to replacement awards.
Net income benefited substantially from $1,068 million of other income, including an $899 million gain on the previously held GRAIL investment and an $86 million gain from exchanging GRAIL contingent value rights.
The effective tax rate was 13.8%, compared with 23.3% in 2020, primarily reflecting earnings in jurisdictions with lower statutory tax rates, including Singapore and the United Kingdom.

Liquidity, Cash Flow, Debt, and Capital Resources

Cash and cash equivalents were $1,232 million at January 2, 2022, down from $1,810 million. Short-term investments were $107 million, down from $1,662 million, as investments were liquidated to help fund the GRAIL transaction.
Total cash, cash equivalents, and short-term investments were approximately $1.3 billion, including approximately $446 million held by foreign subsidiaries.
Illumina paid $2,444 million net of cash acquired for acquisitions during 2021 and funded the GRAIL transaction with cash, debt, and equity consideration. Total GRAIL purchase consideration was $9.745 billion.
Debt included $500 million of 0.550% term notes due 2023, $500 million of 2.550% term notes due 2031, and $750 million of 0% convertible senior notes due 2023. The $750 million revolving credit facility had no borrowings outstanding.
Operating cash flow of $545 million was below capital expenditures of $208 million before acquisition spending. Financing cash flow was a use of $51 million, including $517 million to repay the 2021 convertible notes and $511 million of taxes related to net share settlement of equity awards.
Management stated that cash, investments, operating cash flow, and available credit capacity should be sufficient to fund near-term operating and capital needs for at least the next 12 months.
Backlog was approximately $1,035 million at year-end, compared with $816 million a year earlier; approximately 89% was expected to ship in 2022.

Material Changes Versus the Prior Comparable Period

Revenue recovered strongly as sequencing demand and customer activity improved following COVID-19-related disruption in 2020. Sequencing revenue represented 91% of total revenue, compared with 89% in 2020.
Product mix shifted toward products: product revenue rose to 87.7% of revenue from 84.4%, while service and other revenue declined to 12.3% from 15.6%.
Gross margin improved from operating leverage and a patent litigation settlement, partly offset by less favorable product mix.
Operating profitability reversed from income of $580 million to a loss of $123 million, primarily because of GRAIL-related share-based compensation, transaction costs, Continuation Payments, and higher performance-based compensation.
Net income increased despite the operating loss because of acquisition-related remeasurement gains and other investment-related gains.
Balance sheet goodwill increased to $7,113 million from $897 million and intangible assets increased to $3,250 million from $142 million, primarily because of the GRAIL acquisition.
No common-stock repurchases were made in 2021. Management stated that it did not intend to repurchase shares during fiscal 2022.

Guidance, Outlook, Risks, and Unusual Items

Management expects revenue to increase in 2022 and expects research and development expense to increase to support product development and business expansion. The filing does not provide a specific numerical revenue or earnings forecast.
COVID-19 may continue to affect demand, customer access, manufacturing, supply chains, shipping, research, and product development; the duration and magnitude remain uncertain.
The GRAIL acquisition remains subject to FTC and European Commission proceedings. Illumina stated that the European Commission may seek a fine of up to 10% of consolidated annual revenue, in addition to other possible remedies, restrictions, penalties, or divestiture requirements. The filing does not provide a clear estimate of the ultimate exposure.
The interim measures order prohibits integration of Illumina and GRAIL, requires separate operations and arm’s-length dealings, and imposes monitoring and compliance costs. These restrictions may delay or prevent expected synergies.
Illumina faces patent litigation involving BGI and Complete Genomics. Illumina received an $8 million jury award against BGI, while BGI and CGI asserted damages and ongoing royalty claims against Illumina. The company stated that it could not estimate the possible loss or range of loss from those claims.
Other significant risks include intense competition, rapid technological change, regulatory approval uncertainty for diagnostic products and laboratory-developed tests, reimbursement uncertainty, reliance on single-source suppliers, manufacturing constraints, cybersecurity, international operations, foreign exchange, tax examinations, and impairment risk for acquired goodwill and intangible assets.
The company’s critical audit matter involved the valuation of GRAIL’s acquired intangible assets and contingent consideration, which relied on significant assumptions about revenue growth, discount rates, technology obsolescence, and future payments.

Important Facts for Investors to Verify

Whether the GRAIL acquisition ultimately receives European Commission clearance and the outcome of related FTC and court proceedings, including potential fines, remedies, or divestiture.
Whether GRAIL can scale Galleri revenue and achieve commercial viability while operating under the hold-separate restrictions.
The sustainability of Core Illumina’s 2021 revenue recovery, backlog conversion, instrument placements, and consumables pull-through.
The extent to which elevated share-based compensation, amortization, acquisition costs, and contingent consideration will continue to affect operating margins and cash flow.
Liquidity needs related to the $500 million term notes due 2023, $750 million convertible notes due 2023, lease obligations, contingent value rights, and potential litigation or regulatory liabilities.
Potential impairment of the $7.1 billion goodwill balance and $3.25 billion intangible asset balance if GRAIL or other acquired businesses underperform expectations.
Progress of BGI and CGI litigation and any resulting royalties, damages, injunctions, or restrictions on product sales.