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Illumina Reports Financial Results for Third Quarter 2011

SAN DIEGO--(BUSINESS WIRE)--Illumina, Inc. (NASDAQ:ILMN) today announced its financial results for the third quarter of 2011.

Third quarter 2011 results:

  • Revenue of $235.5 million, a 1% decrease compared to the $237.3 million in the third quarter of 2010.
  • GAAP net income for the quarter of $20.2 million, or $0.15 per diluted share, compared to net income of $35.4 million, or $0.24 per diluted share, for the third quarter of 2010.
  • Non-GAAP net income for the quarter of $29.7 million, or $0.22 per diluted share, compared to $40.7 million, or $0.30 per diluted share, for the third quarter of 2010.

Gross margin in the third quarter of 2011 was 66.7% compared to 66.2% in the prior year period. Excluding the effect of non-cash charges associated with stock compensation and the amortization of acquired intangibles, non-GAAP gross margin was 68.9% for the third quarter of 2011 compared to 67.8% in the prior year period.

Research and development (R&D) expenses for the third quarter of 2011 were $50.4 million compared to $44.8 million in the third quarter of 2010. R&D expenses included $8.6 million and $6.5 million of non-cash stock compensation expense in the third quarters of 2011 and 2010, respectively. Excluding these charges and contingent compensation expense, R&D expenses as a percentage of revenue were 17.4% compared to 15.7% in the prior year period.

Selling, general and administrative (SG&A) expenses for the third quarter of 2011 were $66.0 million compared to $55.0 million for the third quarter of 2010. SG&A expenses included $13.8 million and $9.9 million of non-cash stock compensation expense in the third quarters of 2011 and 2010, respectively. SG&A expenses also included contingent compensation expense and amortization of acquired intangibles in the third quarter of 2011. Excluding these charges, SG&A expenses as a percentage of revenue were 22.2% compared to 19.0% in the prior year period.

The company generated $90.0 million in cash flow from operations during the third quarter of 2011 compared to $54.8 million in the prior year period. Depreciation and amortization expenses were $17.5 million and capital expenditures were $22.2 million during the third quarter of 2011. The company ended the third quarter of 2011 with $1.1 billion in cash and short-term investments compared to $894.3 million as of January 2, 2011.

Given the uncertainties associated with academic and government research funding and the global economic environment, the company is implementing a restructuring to better align the company’s organization and cost structure. As a result, the company expects to record a restructuring charge of approximately $15-17 million, the majority of which will be recorded during the fourth quarter of 2011.

Highlights since our last earnings release

  • Commenced commercial shipments of the MiSeq system and announced three innovative workflow solutions for the platform:
    • TruSeq Custom Amplicon kits for low-cost, rapid, scalable, multiplexed assay for sequencing
    • New Nextera DNA Sample Prep kits delivering sequencing's fastest and easiest sample prep
    • BaseSpace, a secure and customizable cloud computing environment
  • Launched three new exome microarrays: the Infinium HumanExome, OmniExpressExome, and HumanOmni5Exome BeadChips for rapid, economical interrogation of human exomes.
  • Announced a collaboration with the University of Oxford to sequence the whole genomes of 500 individuals afflicted with a range of life-threatening diseases that pose major challenges to diagnosis, treatment, and care.
  • Announced a wide-ranging collaborative research agreement with UNTHSC to use Illumina's next-generation sequencing technologies in forensics.
  • Launched the Infinium BovineLD BeadChip for genomic selection, parentage and traceability in dairy cows.
  • Repurchased $204.0 million of common stock under our previously announced 10b5-1 and discretionary share repurchase programs, which have been completed.

Financial outlook and guidance

As we indicated in our press release earlier this month, we believe that fourth quarter revenue will be higher than third quarter levels, as a result of the commercialization of the MiSeq platform. However, given the uncertainty surrounding budgets for government funding of research and development, the company is not providing further guidance at this time.

Quarterly conference call information

The conference call will begin at 5:00 am Pacific Time (8:00 am Eastern Time) on Tuesday, October 25, 2011. Interested parties may listen to the call by dialing 800-573-4842 (passcode: 87293748), or if outside North America, by dialing +1-617-224-4327 (passcode: 87293748). Individuals may access the live teleconference in the Investor Relations section of Illumina's web site under the “Company” tab at www.illumina.com.

A replay of the conference call will be available from 8:00 am Pacific Time (11:00 am Eastern Time) on October 25, 2011 through November 1, 2011 by dialing 888-286-8010 (passcode: 74207499), or if outside North America, by dialing +1-617-801-6888 (passcode: 74207499).

Statement regarding use of non-GAAP financial measures

The company reports non-GAAP results for diluted net income per share, net income, gross margins, operating expenses, operating margins, other income, and free cash flow in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

The company’s financial measures under GAAP include substantial non-cash and other charges related to stock compensation expense, non-cash interest expense associated with the company’s convertible debt instruments that may be settled in cash, headquarter relocation expense, amortization expense related to acquired intangible assets, loss on the extinguishment of convertible debt, contingent compensation expense, and acquisition related gain or expense. Per share amounts also include the double dilution associated with the accounting treatment of the company’s 0.625% convertible senior notes outstanding and the corresponding call option overlay. Management believes that presentation of operating results that excludes these charges and per share double dilution provides useful supplemental information to investors and facilitates the analysis of the company’s core operating results and comparison of operating results across reporting periods. Management also believes that this supplemental non-GAAP information is therefore useful to investors in analyzing and assessing the company’s past and future operating performance.

The company encourages investors to carefully consider its results under GAAP, as well as its supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand its business. Reconciliations between GAAP and non-GAAP results are presented in the tables of this release.

Use of forward-looking statements

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Among the important factors that could cause actual results to differ materially from those in any forward-looking statements are (i) our ability to develop and commercialize further our sequencing, BeadArray™, VeraCode®, Eco™, and consumables technologies and to deploy new sequencing, genotyping, gene expression, and diagnostics products and applications for our technology platforms, (ii) our ability to manufacture robust instrumentation and consumables, and (iii) significant uncertainty concerning government and academic research funding worldwide as governments in the United States and Europe, in particular, focus on reducing fiscal deficits while at the same time confronting slowing economic growth, together with other factors detailed in our filings with the Securities and Exchange Commission, including our most recent filings on Forms 10-K and 10-Q, or in information disclosed in public conference calls, the date and time of which are released beforehand. We undertake no obligation, and do not intend, to update these forward-looking statements, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of the current financial quarter.

About Illumina

Illumina (www.illumina.com) is a leading developer, manufacturer, and marketer of life science tools and integrated systems for the analysis of genetic variation and function. We provide innovative sequencing and array-based solutions for genotyping, copy number variation analysis, methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA and protein. We also provide tools and services that are fueling advances in consumer genomics and diagnostics. Our technology and products accelerate genetic analysis research and its application, paving the way for molecular medicine and ultimately transforming healthcare.

Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
 
      October 2, 2011     January 2, 2011
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 229,846 $ 248,947
Short-term investments 902,344 645,342
Accounts receivable, net 169,052 165,598
Inventory, net 139,265 142,211
Deferred tax assets, current portion 25,122 19,378
Prepaid expenses and other current assets   38,585   36,922
Total current assets 1,504,214 1,258,398
Property and equipment, net 135,393 129,874
Goodwill 321,853 278,206
Intangible assets, net 109,767 91,462
Deferred tax assets, long-term portion 19,356 39,497
Other assets   56,476   41,676
Total assets $ 2,147,059 $ 1,839,113
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 52,249 $ 66,744
Accrued liabilities 211,171 156,164
Long-term debt, current portion   33,793   311,609
Total current liabilities 297,213 534,517
Long-term debt 765,077 -
Other long-term liabilities 42,897 28,531
Conversion option subject to cash settlement 6,332 78,390
Stockholders’ equity   1,035,540   1,197,675
Total liabilities and stockholders’ equity $ 2,147,059 $ 1,839,113
 
Illumina, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(unaudited)
         
      Three Months Ended   Nine Months Ended

October 2,
2011

 

October 3,
2010

 

October 2,
2011

 

October 3,
2010

Revenue:
Product revenue $ 220,296 $ 224,668 $ 756,884 $ 596,885
Service and other revenue   15,203     12,641     48,580     44,558  
Total revenue   235,499     237,309     805,464     641,443  
Cost of Revenue:

Cost of product revenue (a)

68,764 72,248 238,719 184,814
Cost of service and other revenue (a) 6,585 5,621 19,178 15,705
Amortization of acquired intangible assets   3,035     2,295     9,055     5,510  
Total cost of revenue   78,384     80,164     266,952     206,029  
Gross profit   157,115     157,145     538,512     435,414  
Operating Expenses:
Research and development (a) 50,399 44,804 151,400 132,146
Selling, general and administrative (a) 66,031 55,006 200,925 158,420
Acquisition related (gain) expense, net (2,598 ) - 2,442 1,861
Headquarter relocation expense   6,519     -     11,583     -  
Total operating expenses   120,351     99,810     366,350     292,427  
Income from operations 36,764 57,335 172,162 142,987
Other expense, net   (8,973 )   (2,625 )   (59,339 )   (8,391 )
Income before income taxes 27,791 54,710 112,823 134,596
Provision for income taxes   7,640     19,263     37,915     48,145  
Net income $ 20,151   $ 35,447   $ 74,908   $ 86,451  
Net income per basic share $ 0.17   $ 0.28   $ 0.60   $ 0.70  
Net income per diluted share $ 0.15   $ 0.24   $ 0.52   $ 0.61  
Shares used in calculating basic net income per share   122,079     124,684     124,017     122,816  
Shares used in calculating diluted net income per share   135,966     145,205     143,620     140,854  
       
(a) Includes total stock-based compensation expense for stock based awards:
 
Three Months Ended Nine Months Ended

October 2,
2011

 

October 3,
2010

 

October 2,
2011

 

October 3,
2010

Cost of product revenue $ 1,955 $ 1,359 $ 5,267 $ 3,869
Cost of service and other revenue 194 $ 137 536 $ 394
Research and development 8,621 $ 6,521 24,810 $ 18,451
Selling, general and administrative   13,801   $ 9,943     39,663   $ 29,090  
Stock-based compensation expense before taxes $ 24,571   $ 17,960   $ 70,276   $ 51,804  
 
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
               
Three Months Ended Nine Months Ended

October 2,
2011

October 3,
2010

October 2,
2011

October 3,
2010

Net cash provided by operating activities $ 90,042 $ 54,828 $ 249,840 $ 191,092
Net cash provided by (used in) investing activities 67,101 (93,872 ) (358,039 ) (214,996 )
Net cash (used in) provided by financing activities (187,830 ) 12,408 89,168 89,930
Effect of exchange rate changes on cash and cash equivalents   (551 )   216     (70 )   108  
Net (decrease) increase in cash and cash equivalents (31,238 ) (26,420 ) (19,101 ) 66,134
Cash and cash equivalents, beginning of period   261,084     237,187     248,947     144,633  
Cash and cash equivalents, end of period $ 229,846   $ 210,767   $ 229,846   $ 210,767  
 
Calculation of free cash flow (a):
Net cash provided by operating activities $ 90,042 $ 54,828 $ 249,840 $ 191,092
Purchases of property and equipment   (22,183 )   (13,111 )   (50,686 )   (37,434 )
Free cash flow $ 67,859   $ 41,717   $ 199,154   $ 153,658  
 

(a) Free cash flow, which is a non-GAAP financial measure, is calculated as net cash provided by operating activities reduced by purchases of property and equipment. Free cash flow is useful to management as it is one of the metrics used to evaluate our performance and to compare us with other companies in our industry. However, our calculation of free cash flow may not be comparable to similar measures used by other companies.

Illumina, Inc.
Results of Operations - Non-GAAP
(In thousands, except per share amounts)
(unaudited)
           
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME PER SHARE:
Three Months Ended   Nine Months Ended

October 2,
2011

 

October 3,
2010

October 2,
2011

 

October 3,
2010

GAAP net income per share - diluted $ 0.15 $ 0.24 $ 0.52 $ 0.61
Pro forma impact of weighted average shares (a) - 0.01 0.02 0.03
Adjustments to net income:
Non-cash interest expense (b) 0.07 0.04 0.17 0.12
Headquarter relocation expense (c) 0.05 - 0.08 -
Amortization of acquired intangible assets 0.02 0.02 0.07 0.04
Loss on extinguishment of debt 0.01 - 0.27 -
Contingent compensation expense (d) 0.00 0.01 0.04 0.03
Acquisition related (gain) expense, net (e) (0.02 ) - 0.02 (0.01 )
Incremental non-GAAP tax expense (f)   (0.06 )   (0.02 )   (0.24 )   (0.06 )
Non-GAAP net income per share - diluted (g) $ 0.22   $ 0.30   $ 0.95   $ 0.76  
Shares used in calculating non-GAAP diluted net income per share   134,674     135,913     138,735     132,473  
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME:
GAAP net income $ 20,151 $ 35,447 $ 74,908 $ 86,451
Non-cash interest expense (b) 9,200 5,258 23,953 15,468
Headquarter relocation expense (c) 6,519 - 11,583 -
Amortization of acquired intangible assets 3,188 2,295 9,501 5,510
Loss on extinguishment of debt 755 - 37,611 -
Contingent compensation expense (d) 496 919 5,326 2,757
Acquisition related (gain) expense, net (e) (2,598 ) - 2,442 (1,053 )
Incremental non-GAAP tax expense (f)   (7,983 )   (3,179 )   (32,839 )   (7,798 )
Non-GAAP net income (g) $ 29,728   $ 40,740   $ 132,485   $ 101,335  
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP DILUTED NUMBER OF SHARES:
Weighted average shares used in calculation of GAAP diluted net income per share 135,966 145,205 143,620 140,854
Weighted average dilutive potential common shares issuable of redeemable convertible senior notes (a)   (1,292 )   (9,292 )   (4,885 )   (8,381 )
Weighted average shares used in calculation of Non-GAAP diluted net income per share   134,674     135,913     138,735     132,473  
 

(a) Pro forma impact of weighted average shares represents the impact of double dilution associated with the accounting treatment of the company's outstanding convertible debt and the corresponding call option overlay.

 
(b) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.
 
(c) Headquarter relocation expense in Q3 2011 and the first three quarters of 2011 represents accelerated depreciation expense and double rent expense during the transition to our new headquarter facility. During the remainder of 2011, we expect to incur additional headquarter relocation expenses, the majority of which are non-cash in nature. These expenses include items such as a cease-use loss upon vacating our current headquarters, accelerated depreciation of certain property and equipment, and double rent expense during the transition to the new facility.
 
(d) Contingent compensation expense represents contingent consideration for post-combination services associated with acquisitions.
 
(e) Acquisition related (gain) expense, net includes the following current year and prior year adjustments related to acquisitions:
 

2011 adjustments:

   

2010 adjustments:

- IPR&D charge of $5.4 million recorded in Q2 2011 related to milestone payments for a prior acquisition

- IPR&D charge of $1.3 million recorded in Q2 2010 related to milestone payments for a prior acquisition

- Changes in fair value of contingent consideration in respective quarters:

- Acquisition expenses of $0.5 million recorded in Q2 2010

Q3 - gain of $2.6 million
Q2 - gain of $0.7 million
Q1 - loss of $0.3 million

- Gain on acquisition of $2.9 million recorded in Q2 2010 for the difference between the carrying value of a cost method investment prior to acquisition and the fair value of that investment at the time of acquisition

 
(f) Incremental non-GAAP tax expense reflects the increase to GAAP tax expense related to the non-GAAP adjustments listed above.
 

(g) Non-GAAP net income per share and net income exclude the effect of the pro forma adjustments as detailed above. Non-GAAP diluted net income per share and net income are key drivers of our core operating performance and major factors in management's bonus compensation each year. Management has excluded the effects of these items in these measures to assist investors in analyzing and assessing our past and future core operating performance.

 
Illumina, Inc.
Results of Operations - Non-GAAP (continued)
(Dollars in thousands)
(unaudited)
 
ITEMIZED RECONCILIATION BETWEEN GAAP AND NON-GAAP RESULTS OF OPERATIONS AS A PERCENT OF REVENUE:
 
  Three Months Ended     Nine Months Ended

October 2,
2011

   

October 3,
2010

October 2,
2011

   

October 3,
2010

GAAP gross profit $ 157,115   66.7 % $ 157,145   66.2 % $ 538,512   66.9 % $ 435,414   67.9 %
Stock-based compensation expense 2,149 0.9 % 1,496 0.6 % 5,803 0.7 % 4,263 0.7 %
Amortization of acquired intangible assets   3,035   1.3 %   2,295   1.0 %   9,055   1.1 %   5,510   0.9 %
Non-GAAP gross profit $ 162,299   68.9 % $ 160,936   67.8 % $ 553,370   68.7 % $ 445,187   69.4 %
 
Research and development expense $ 50,399 21.4 % $ 44,804 18.9 % $ 151,400 18.8 % $ 132,146 20.6 %
Stock-based compensation expense (8,621 ) (3.7 %) (6,521 ) (2.7 %) (24,810 ) (3.1 %) (18,451 ) (2.9 %)
Contingent compensation expense (a)   (775 ) (0.3 %)   (919 ) (0.4 %)   (4,067 ) (0.5 %)   (2,757 ) (0.4 %)
Non-GAAP research and development expense $ 41,003   17.4 % $ 37,364   15.7 % $ 122,523   15.2 % $ 110,938   17.3 %
 
Selling, general and administrative expense $ 66,031 28.0 % $ 55,006 23.2 % $ 200,925 24.9 % $ 158,420 24.7 %
Stock-based compensation expense (13,801 ) (5.9 %) (9,943 ) (4.2 %) (39,663 ) (4.9 %) (29,090 ) (4.5 %)
Contingent compensation gain (expense) (a) 279 0.1 % - - (1,259 ) (0.2 %) - -
Amortization of acquired intangible assets   (152 ) (0.1 %)   -   -     (446 ) (0.1 %)   -   -  
Non-GAAP selling, general and administrative expense $ 52,357   22.2 % $ 45,063   19.0 % $ 159,557   19.8 % $ 129,330   20.2 %
 
GAAP operating profit $ 36,764 15.6 % $ 57,335 24.2 % $ 172,162 21.4 % $ 142,987 22.3 %
Stock-based compensation expense 24,571 10.4 % 17,960 7.6 % 70,276 8.7 % 51,804 8.1 %
Headquarter relocation expense (b) 6,519 2.8 % - - 11,583 1.4 % - -
Amortization of acquired intangible assets 3,187 1.4 % 2,295 1.0 % 9,501 1.2 % 5,510 0.9 %
Contingent compensation expense (a) 496 0.2 % 919 0.4 % 5,326 0.7 % 2,757 0.4 %
Acquisition related (gain) expense, net (c)   (2,598 ) (1.1 %)   -   0.0 %   2,442   0.3 %   1,861   0.3 %
Non-GAAP operating profit (d) $ 68,939   29.3 % $ 78,509   33.1 % $ 271,290   33.7 % $ 204,919   31.9 %
 
GAAP other expense, net $ (8,973 ) (3.8 %) $ (2,625 ) (1.1 %) $ (59,339 ) (7.4 %) $ (8,391 ) (1.3 %)
Loss on extinguishment of debt 755 0.3 % - - 37,611 4.7 % - -
Acquisition related gain (c) - - - - - - (2,914 ) (0.5 %)
Non-cash interest expense (e)   9,200   3.9 %   5,258   2.2 %   23,953   3.0 %   15,468   2.4 %
Non-GAAP other income, net (d) $ 982   0.4 % $ 2,633   1.1 % $ 2,225   0.3 % $ 4,163   0.6 %
 

(a) Contingent compensation expense represents contingent consideration for post-combination services associated with acquisitions.

 

(b) Headquarter relocation expense in Q3 2011 and the first three quarters of 2011 represents accelerated depreciation expense and double rent expense during the transition to our new headquarter facility. During the remainder of 2011, we expect to incur additional headquarter relocation expenses, the majority of which are non-cash in nature. These expenses include items such as a cease-use loss upon vacating our current headquarters, accelerated depreciation of certain property and equipment, and double rent expense during the transition to the new facility.

 

(c) Acquisition related (gain) expense, net includes the following current year and prior year adjustments related to acquisitions:

 

2011 adjustments:

   

2010 adjustments:

- IPR&D charge of $5.4 million recorded in Q2 2011 related to milestone payments for a prior acquisition

- IPR&D charge of $1.3 million recorded in Q2 2010 related to milestone payments for a prior acquisition

- Changes in fair value of contingent consideration in respective quarters:

- Acquisition expenses of $0.5 million recorded in Q2 2010

Q3 - gain of $2.6 million
Q2 - gain of $0.7 million
Q1 - loss of $0.3 million

- Gain on acquisition of $2.9 million recorded in Q2 2010 for the difference between the carrying value of a cost method investment prior to acquisition and the fair value of that investment at the time of acquisition

 
(d) Non-GAAP operating profit, and non-GAAP other income, net, exclude the effects of the pro forma adjustments as detailed above. Management has excluded the effects of these items in these measures to assist investors in analyzing and assessing our past and future core operating performance. Non-GAAP gross profit, included within the non-GAAP operating profit, is a key measure of the effectiveness and efficiency of our manufacturing processes, product mix and the average selling prices of our products and services.
 

(e) Non-cash interest expense is calculated in accordance with the authoritative accounting guidance for convertible debt instruments that may be settled in cash.

 

Contacts:

 

Illumina, Inc.
Investors:
Kevin Williams, MD
Investor Relations
858-332-4989
kwilliams@illumina.com
or
Media:
Laura Trotter
Public Relations
858-882-6822
PR@illumina.com