Illumina, Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Illumina develops and sells DNA sequencing and array-based technologies serving research, clinical, pharmaceutical, biotechnology, academic, government, and applied markets. The filing covers the 13 weeks ended March 31, 2019, compared with the 13 weeks ended April 1, 2018. Reportable segments were Core Illumina and Helix, a consolidated variable-interest entity. On April 25, 2019, Illumina agreed to sell its interest in Helix and relinquish control, ending consolidation after that date.
Financial Highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $846 million | $782 million | Up 8% |
| Product revenue | $667 million | $628 million | Up 6% |
| Service and other revenue | $179 million | $154 million | Up 16% |
| Gross profit | $584 million | $538 million | Up 9% |
| Gross margin | 69.1% | 68.8% | Up 0.3 points |
| Income from operations | $204 million | $218 million | Down 6% |
| Operating margin | 24.2% | 27.8% | Down 3.6 points |
| Net income attributable to Illumina | $233 million | $208 million | Up 12% |
| Diluted EPS | $1.57 | $1.41 | Up 11% |
| Operating cash flow | $198 million | $255 million | Down 22% |
- Consumables revenue increased to $556 million from $510 million, primarily reflecting a $59 million increase in sequencing consumables driven by growth in the installed instrument base.
- Instrument revenue declined to $111 million from $118 million, primarily because of the timing of NovaSeq shipments.
- Research and development expense increased 23% to $169 million, while selling, general and administrative expense increased 15% to $211 million.
- Other income, net increased to $29 million from $3 million, including a $15 million gain related to settlement of a contingency associated with the 2017 deconsolidation of GRAIL.
- The effective tax rate was 3.9%, compared with 10.6% in the prior-year quarter, benefiting from uncertain-tax-position items, lower-tax jurisdictions, and excess tax benefits from share-based compensation.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $2.270 billion at March 31, 2019, compared with $1.144 billion at December 30, 2018. Short-term investments were $1.345 billion, resulting in total cash, cash equivalents, and short-term investments of approximately $3.6 billion.
- Approximately $610 million of cash and cash equivalents was held by foreign subsidiaries. Approximately $106 million of Helix cash, cash equivalents, and short-term investments was restricted to Helix obligations.
- Net cash provided by investing activities was $988 million, primarily reflecting $1.149 billion of securities sales and maturities. Capital expenditures were $56 million.
- Net cash used in financing activities was $60 million, including $63 million of share repurchases and $23 million of taxes paid on net share settlements of equity awards.
- Convertible senior notes due June 15, 2019 had an aggregate principal balance of $632 million and were convertible as of March 31, 2019. Long-term debt was $1.112 billion, excluding the current portion.
- Management stated that available cash, investments, and operating cash flow were expected to fund near-term needs, including repayment of the 2019 notes and the planned approximately $1.2 billion cash acquisition of Pacific Biosciences of California.
Material Changes, Outlook, and Risks
- Management expects revenue to continue increasing in 2019 versus the prior year, but the filing provides no specific numeric revenue or earnings guidance.
- Operating expenses are expected to continue increasing in absolute dollars, reflecting investments in personnel, facilities, product development, and the pending PacBio transaction.
- Gross margin benefited from a greater mix of higher-margin sequencing consumables and a non-recurring licensing agreement; future margins remain sensitive to pricing, product mix, manufacturing costs, inventory charges, royalties, and support obligations.
- Illumina agreed to acquire PacBio for approximately $1.2 billion, subject to antitrust and other customary approvals. Depending on the termination circumstances, PacBio could owe a $43 million fee, or Illumina could owe a $98 million fee in certain antitrust-related circumstances.
- The company adopted the new lease accounting standard, recognizing operating lease right-of-use assets of $574 million and operating lease liabilities of $718 million at March 31, 2019. The adoption reduced retained earnings by $18 million.
- Key risks include product development and commercialization, manufacturing and supply-chain execution, customer order timing and product mix, competition, acquisition integration and regulatory approval, taxation, litigation, and global economic conditions.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important Facts for Investors to Verify
- Confirm the closing, financing, regulatory approvals, and integration effects of the PacBio acquisition.
- Assess the repayment or conversion outcome of the $632 million 2019 convertible notes and any resulting share dilution.
- Track post-April 25, 2019 financial reporting after Helix was deconsolidated.
- Evaluate whether operating expense growth, particularly R&D and SG&A, pressures operating margins despite revenue growth.
- Separate recurring earnings and cash generation from the non-recurring licensing revenue, GRAIL-related gain, and unusually low 3.9% effective tax rate.
- Monitor sequencing consumables growth, installed-base expansion, and the timing of NovaSeq and other instrument shipments.