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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Illumina, Inc.    ILMN

ILLUMINA, INC.

(ILMN)
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Illumina : MANAGEMENT'S DISCUSSION & ANALYSIS

10/30/2020 | 05:09am EST
Our Management's Discussion and Analysis (MD&A) will help readers understand our
results of operations, financial condition, and cash flow. It is provided in
addition to the accompanying condensed consolidated financial statements and
notes. This MD&A is organized as follows:

•Management's Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.

•Results of Operations. Detailed discussion of our revenues and expenses.


•Liquidity and Capital Resources. Discussion of key aspects of our condensed
consolidated statements of cash flows, changes in our financial position, and
our financial commitments.

•Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.

•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.

•Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.

•Quantitative and Qualitative Disclosure About Market Risk. Discussion of our financial instruments' exposure to market risk.


Our discussion of our results of operations, financial condition, and cash flow
for Q3 2019 and YTD 2019 can be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" within our filing of   Form
10-Q   for the fiscal quarter ended September 29, 2019.

This MD&A discussion contains forward-looking statements that involve risks and
uncertainties. Please see "  Consideration Regarding Forward-Looking
Statements  " preceding the Condensed Consolidated Financial Statements section
of this report for additional factors relating to such statements. This MD&A
should be read in conjunction with our condensed consolidated financial
statements and accompanying notes included in this report and our Annual Report
on Form   10-K   for the fiscal year ended December 29, 2019. Operating results
are not necessarily indicative of results that may occur in future periods.

MANAGEMENT'S OVERVIEW AND OUTLOOK


This overview and outlook provides a high-level discussion of our operating
results and significant known trends that affect our business. We believe that
an understanding of these trends is important to understanding our financial
results for the periods being reported herein as well as our future financial
performance. This summary is not intended to be exhaustive, nor is it intended
to be a substitute for the detailed discussion and analysis provided elsewhere
in this report.

About Illumina

We have one reportable segment, Core Illumina, which relates to Illumina's core
operations. Prior to the Helix deconsolidation on April 25, 2019, our reportable
segments included both Core Illumina and Helix.
Our focus on innovation has established us as the global leader in DNA
sequencing and array-based technologies, serving customers in the research,
clinical and applied markets. Our products are used for applications in the life
sciences, oncology, reproductive health, agriculture and other emerging
segments.

Our customers include a broad range of academic, government, pharmaceutical, biotechnology, and other leading institutions around the globe.


Our comprehensive line of products addresses the scale of experimentation and
breadth of functional analysis to advance disease research, drug development,
and the development of molecular tests. This portfolio of leading-
edge sequencing and array-based solutions addresses a range of genomic
complexity and throughput, enabling researchers and clinical practitioners to
select the best solution for their scientific challenge.

On September 20, 2020, we entered into an Agreement and Plan of Merger to
acquire GRAIL for total consideration of $8 billion, consisting of $3.5 billion
in cash and $4.5 billion in shares of Illumina common stock, subject to a
collar. We believe our acquisition of GRAIL will accelerate the adoption of
NGS-based early multi-cancer detection tests, enhance our position in Clinical
Genomics, and increase our directly accessible total addressable market. The
transaction is subject to customary closing conditions, including applicable
regulatory approvals, and is expected to close in the second half of 2021. See
note "  3. Investments and Fair Value Measurements  " for further details.

Our financial results have been, and will continue to be, impacted by several
significant trends, which are described below. While these trends are important
to understanding and evaluating our financial results, this discussion should be
read in conjunction with our condensed consolidated financial statements and the
notes thereto within the Condensed Consolidated Financial Statements section of
this report, and the other transactions, events, and trends discussed in "  Risk
Factors  " within the Other Key Information section of this report.

Financial Overview


The COVID-19 pandemic and international efforts to control its spread have
significantly curtailed the movement of people, goods, and services worldwide,
including in the regions in which we sell our products and services and conduct
our business operations. As a result, we experienced a decline in our sales and
results of operations during Q3 2020 compared to Q3 2019 and YTD 2020 compared
to YTD 2019. We expect the COVID-19 pandemic to continue to have a negative
impact on our sales and our results of operations, the size and duration of
which we are currently unable to predict. As such, we will provide an update on
our Q3 2020 and YTD 2020 results only, without discussion about our expectations
for the rest of the year.

Consolidated financial highlights for YTD 2020 included the following:


•Revenue decreased 12% in YTD 2020 to $2,286 million compared to $2,591 million
in YTD 2019 primarily due to decreased shipments of sequencing consumables and
instruments to our customers impacted by the effects of the COVID-19 pandemic.

•Gross profit as a percentage of revenue (gross margin) was 68.8% in YTD 2020
compared to 69.7% in YTD 2019. The gross margin decrease was driven primarily by
lower revenue, which generated less fixed cost leverage, increased freight costs
attributable to the COVID-19 pandemic, and decreased revenue from development
and licensing agreements. Our gross margin depends on many factors, including:
market conditions that may impact our pricing; sales mix changes among
consumables, instruments, and services; product mix changes between established
products and new products; excess and obsolete inventories; royalties; our cost
structure for manufacturing operations relative to volume; and product support
obligations.

•Income from operations as a percentage of revenue was 19.6% in YTD 2020
compared to 27.7% in YTD 2019. The decrease was due to an increase in operating
expenses as a percentage of revenue, primarily due to the decrease in revenue in
YTD 2020 compared to YTD 2019, and a decrease in gross margin.

•Our effective tax rate was 28.4% in YTD 2020 compared to 11.5% in YTD 2019. In
YTD 2020, the variance from the U.S. federal statutory tax rate of 21% was
primarily attributable to discrete tax expense related to the valuation
allowance recorded against the deferred tax asset for California research and
development credits and the finalization of the Altera court case which
determined stock-based compensation must be included in intercompany cost
sharing payments. This was partially offset by the mix of earnings in
jurisdictions with lower statutory tax rates than the U.S. federal statutory tax
rate, such as in Singapore and the United Kingdom, discrete tax benefits related
to the derivative assets recorded as a result of the terminated PacBio
acquisition, and tax benefits related to share-based compensation.

•We ended Q3 2020 with cash, cash equivalents, and short-term investments totaling $3.3 billion as of September 27, 2020, of which approximately $546 million was held by our foreign subsidiaries.

RESULTS OF OPERATIONS


To enhance comparability, the following table sets forth unaudited condensed
consolidated statement of operations data for the specified reporting periods,
stated as a percentage of total revenue.
                                                 Q3 2020                 Q3 2019                 YTD 2020                 YTD 2019
Revenue:
Product revenue                                       85.1  %                 82.2  %                  83.3  %                  81.7  %
Service and other revenue                             14.9                    17.8                     16.7                     18.3
Total revenue                                        100.0                   100.0                    100.0                    100.0
Cost of revenue:
Cost of product revenue                               26.4                    21.5                     23.4                     22.1
Cost of service and other revenue                      6.5                     6.0                      6.9                      7.1
Amortization of acquired intangible assets             0.9                     1.0                      0.9                      1.1
Total cost of revenue                                 33.8                    28.5                     31.2                     30.3
Gross profit                                          66.2                    71.5                     68.8                     69.7
Operating expense:
Research and development                              21.6                    16.7                     21.1                     18.8
Selling, general and administrative                   24.2                    20.9                     28.1                     23.2

Total operating expense                               45.8                    37.6                     49.2                     42.0
Income from operations                                20.4                    33.9                     19.6                     27.7
Other income (expense):
Interest income                                        0.6                     1.8                      1.1                      2.3
Interest expense                                      (1.5)                   (1.2)                    (1.4)                    (1.6)

Other income (expense), net                            7.5                    (4.8)                     5.1                      4.4
Total other income (expense), net                      6.6                    (4.2)                     4.8                      5.1
Income before income taxes                            27.0                    29.7                     24.4                     32.8
Provision for income taxes                             4.5                     3.9                      6.9                      3.8
Consolidated net income                               22.5                    25.8                     17.5                     29.0
Add: Net loss attributable to
noncontrolling interests                                 -                       -                        -                      0.5
Net income attributable to Illumina
stockholders                                          22.5  %                 25.8  %                  17.5  %                  29.5  %


Percentages may not recalculate due to rounding


Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31,
with quarters of 13 or 14 weeks ending the Sunday closest to
March 31, June 30, September 30, and December 31. References to Q3 2020 and Q3
2019 refer to the three months ended September 27, 2020 and September 29, 2019,
respectively, which were both 13 weeks, and references to year-to-date (YTD) of
2020 and 2019 refer to the nine months ended September 27, 2020 and
September 29, 2019, respectively, which were both 39 weeks.

Revenue

Dollars in millions              Q3 2020           Q3 2019          Change            % Change            YTD 2020          YTD 2019          Change            % Change
Consumables                    $    562$    600$  (38)                   (6) %       $  1,618$  1,727$ (109)                   (6) %
Instruments                         114               146             (32)                  (22)              286               390            (104)                  (27)
Total product revenue               676               746             (70)                   (9)            1,904             2,117            (213)                  (10)
Service and other revenue           118               161             (43)                  (27)              382               474             (92)                  (19)
Total revenue                  $    794$    907$ (113)                  (12) %       $  2,286$  2,591$ (305)                  (12) %


                                       25

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Table of Contents

Service and other revenue primarily consists of revenue generated from genotyping and sequencing services, instrument service contracts, and development and licensing agreements. Total revenue relates primarily to Core Illumina for all periods presented.


The decreases in consumables revenue in Q3 2020 and YTD 2020 were primarily due
to decreases in sequencing consumables revenue of $25 million and $63 million,
respectively, driven primarily by decreased shipments to our customers impacted
by the effects of the COVID-19 pandemic, which more than offset the positive
impacts from the growth in instrument installed base. Microarray consumables
revenue also decreased in Q3 2020 and YTD 2020 due to the COVID-19 pandemic and
ongoing weakness in the direct-to-consumer (DTC) market. Instruments revenue
decreased in Q3 2020 and YTD 2020 primarily due to decreases in sequencing
instruments revenue of $33 million and $100 million, respectively, which were
driven by decreased shipments to our customers impacted by the effects of the
COVID-19 pandemic. We experienced fewer shipments across our portfolio in Q3
2020 and YTD 2020, with the exception of our NextSeq 2000 platform, which
launched in Q1 2020. Service and other revenue decreased in Q3 2020 primarily
due to decreased revenue from development and licensing agreements. The decrease
in service and other revenue in YTD 2020 was primarily due to decreased revenue
from genotyping and sequencing services, as well as decreased revenue from
development and licensing agreements.

Gross Margin

Dollars in millions            Q3 2020          Q3 2019          Change           % Change           YTD 2020         YTD 2019         Change           % Change
Gross profit                  $   526$   648$ (122)             (19)%           $ 1,573$ 1,805$ (232)             (13)%
Gross margin                     66.2  %          71.5  %                                              68.8  %          69.7  %



The gross margin decrease in Q3 2020 and YTD 2020 was driven primarily by lower
revenue, which generated less fixed cost leverage, increased freight costs
attributable to the COVID-19 pandemic, and decreased revenue from development
and licensing agreements.

Operating Expense

Dollars in millions       Q3 2020           Q3 2019           Change            % Change            YTD 2020          YTD 2019           Change            % Change
Research and
development             $    172$    151$    21                    14  %       $    483$    486$    (3)                   (1) %
Selling, general and
administrative               192               189                3                     2               643               602               41                     7

Total operating expense $ 364$ 340$ 24

            7  %       $  1,126$  1,088$    38                     3  %



Core Illumina R&D expense increased by $21 million, or 14%, in Q3 2020 and by $6
million, or 1%, in YTD 2020 primarily due to increases in compensation related
expenses, including performance-based compensation, partially offset by
decreases in travel expenses and, for YTD 2020, a decrease in outside services.
Helix R&D expense decreased by $9 million in YTD 2020 due to its deconsolidation
on April 25, 2019.

Core Illumina SG&A expense increased by $3 million, or 2%, in Q3 2020, primarily
due to increases in compensation related expenses, including performance-based
compensation, outside services, and expenses related to the pending acquisition
of GRAIL, partially offset by a $25 million gain on litigation and decreased
travel expenses. Core Illumina SG&A expense increased by $51 million, or 9%, in
YTD 2020, primarily due to expenses related to the Reverse Termination Fee and
Continuation Advances paid to PacBio in Q1 2020, partially offset by a $25
million gain on litigation, and decreased travel expenses and performance-based
compensation. Helix SG&A expense decreased by $10 million in YTD 2020 due to its
deconsolidation on April 25, 2019.
                                       26

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  Table of Contents


Other Income (Expense), Net
Dollars in millions     Q3 2020           Q3 2019           Change            % Change             YTD 2020           YTD 2019          Change            % Change
Interest income       $      5$     16$   (11)                  (69) %       $      26$      59$  (33)                  (56) %
Interest expense           (11)              (11)               -                     -                (33)               (41)              8                   (20)

Other income
(expense), net              59               (43)             102                  (237)               117                114               3                     3
Total other income
(expense), net        $     53$    (38)$    91                  (239) %       $     110$     132$  (22)                  (17) %


Other income, net, relates primarily to Core Illumina for all periods presented.


Interest income decreased in Q3 2020 and YTD 2020 as a result of lower yields on
our short-term debt securities and money market funds. Interest expense
consisted primarily of accretion of discount on our convertible senior notes.
The increases in other income (expense), net, in Q3 2020 and YTD 2020 were
primarily due to increased unrealized gains on our marketable equity securities,
partially offset by decreases in the fair value of our derivative assets related
to the terminated PacBio acquisition and, for YTD 2020, the $39 million gain
recorded on the deconsolidation of Helix in Q2 2019 and the $15 million gain
recorded in Q1 2019 from the settlement of a contingency related to the
deconsolidation of GRAIL in 2017.

© Edgar Online, source Glimpses

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