Illumina Inc. (NASDAQ:ILMN)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes (NOPAT) generally increased from 2016 to 2019, followed by a substantial decrease in 2020. Simultaneously, the cost of capital exhibited a gradual upward trend throughout the period. Invested capital increased consistently until 2020, where it experienced a slight decline.

Economic Profit Trend

Economic profit began at a negative value in 2016, at -36 US$ millions. A significant positive shift occurred in 2017, reaching 122 US$ millions. This positive trend continued, albeit at a slower pace, with economic profit reported at 91 US$ millions in 2018 and 86 US$ millions in 2019. However, 2020 witnessed a considerable decline, resulting in an economic loss of -276 US$ millions.

NOPAT and Cost of Capital Relationship

While NOPAT increased from 2016 to 2019, the concurrent rise in the cost of capital suggests increasing funding expenses. The substantial drop in NOPAT in 2020, coupled with the highest cost of capital observed during the period (17.71%), contributed significantly to the negative economic profit in that year. The cost of capital increased from 17.02% in 2016 to 17.71% in 2020, representing a 0.69 percentage point increase over the five-year period.

Invested Capital Impact

Invested capital grew from 2,874 US$ millions in 2016 to 4,997 US$ millions in 2019, indicating expansion and investment activities. The slight decrease to 4,907 US$ millions in 2020 did not offset the impact of the reduced NOPAT and higher cost of capital on economic profit. The increasing capital base likely required higher levels of funding, contributing to the rising cost of capital.

The shift from positive to negative economic profit in 2020 highlights a potential disconnect between profitability and capital deployment. Further investigation into the factors driving the decline in NOPAT during 2020 is warranted to understand the underlying causes and inform future strategic decisions.

Net Income Attributable to Illumina Stockholders

The net income demonstrated an overall upward trend from 2016 to 2019, starting at 463 million US dollars in 2016 and reaching a peak of 1002 million US dollars in 2019. This represents a substantial growth over the four-year period. However, in 2020, there was a notable decline to 656 million US dollars, which indicates a reversal of the previous growth trend.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar pattern to net income, increasing consistently from 453 million US dollars in 2016 to 957 million US dollars in 2019. This increase reflects improving operational efficiency and profitability. However, in 2020, NOPAT decreased to 593 million US dollars, signaling a significant downturn in operating profitability in that year.

Overall Observations

Both net income and NOPAT showed strong positive growth through 2019, indicating solid financial performance and effective management of operational costs and taxes. The decline observed in 2020 suggests that external factors or internal challenges may have adversely affected profitability. The 2020 results warrant further investigation to identify specific causes and to assess the sustainability of future earnings.

The financial data reveals the trends in tax-related expenses over five fiscal years ending from 2016 to 2020. Both the provision for income taxes and cash operating taxes have exhibited fluctuations throughout this period.

Provision for Income Taxes

This item showed a significant increase from $133 million in 2016 to a peak of $365 million in 2017. Subsequently, it decreased sharply to $112 million in 2018 and remained relatively stable in 2019 with a slight increase to $128 million. In 2020, there was a notable rise again to $200 million.

Cash Operating Taxes

Cash operating taxes also followed a somewhat similar pattern, increasing from $140 million in 2016 to $344 million in 2017. After 2017, there was a decline to $133 million in 2018, followed by a further decrease to $114 million in 2019. In 2020, cash operating taxes dropped dramatically to $35 million, reaching the lowest level in the five-year span.

Overall, both tax provisions and cash operating taxes peaked sharply in 2017, followed by declines in subsequent years. However, while the provision for income taxes saw a rebound in 2020, cash operating taxes continued to decline substantially. This divergence in 2020 may indicate changes in tax payment timing, tax strategy, or the recognition of deferred tax liabilities.

The financial data indicates several notable trends in the company's capital structure and financing components over the five-year period ending December 31, 2020.

Total reported debt & leases

This metric exhibits moderate fluctuations, beginning at $1,795 million in 2016, rising to a peak of $2,599 million in 2018, before decreasing to approximately $1,881 million in 2019 and stabilizing around $1,906 million in 2020. The increase through 2018 suggests a period of increased borrowing or lease commitments, followed by a reduction implying possible debt repayment or lease adjustments.

Total stockholders’ equity

Equity shows a consistent, steady increase year-over-year, rising from $2,197 million in 2016 to $4,694 million in 2020. The equity nearly doubled over the period, reflecting retained earnings growth, possible capital raises, or accumulated comprehensive income, indicating strengthening financial stability and increased shareholder value.

Invested capital

Invested capital generally trends upward from $2,874 million in 2016 to a peak of $4,997 million in 2019, with a slight decrease to $4,907 million in 2020. This overall growth reflects increased funding employed in the business, either through equity or liabilities, aligning with growth or expansion strategies. The small decline in 2020 suggests a minor contraction or adjustment in the capital base.

Overall, the company demonstrates a strengthening equity base coupled with management of debt levels, maintaining total invested capital at elevated levels consistent with potential expansion or operational scaling. The reduction in debt after 2018, alongside rising equity, may suggest a strategic shift towards lower leverage, improving financial flexibility.

The economic spread ratio exhibited considerable fluctuation between 2016 and 2020. Initially negative, it demonstrated improvement before declining significantly in the final year of the observed period. This analysis details the observed trends in economic profit, invested capital, and the resulting economic spread ratio.

Economic Spread Ratio

The economic spread ratio began at -1.25% in 2016, indicating that the company’s return on invested capital was less than its cost of capital. A substantial increase was observed in 2017, reaching 3.39%, signifying a positive economic spread and improved value creation. This positive trend continued, albeit at a slower pace, with the ratio at 2.29% in 2018 and 1.72% in 2019. However, a marked decline occurred in 2020, with the ratio falling to -5.63%, representing a significant deterioration in economic performance and a return to a position where returns failed to cover the cost of capital.

Economic Profit

Economic profit mirrored the trend in the economic spread ratio. A loss of US$36 million was recorded in 2016, followed by a substantial profit of US$122 million in 2017. Profitability remained positive through 2019, reaching US$91 million in 2018 and US$86 million in 2019. However, a significant loss of US$276 million was reported in 2020, aligning with the negative economic spread ratio.

Invested Capital

Invested capital consistently increased throughout the period. From US$2,874 million in 2016, it rose to US$3,596 million in 2017, US$3,989 million in 2018, and US$4,997 million in 2019. While the rate of increase slowed, invested capital remained at US$4,907 million in 2020. The continued growth in invested capital, coupled with the decline in economic profit in 2020, likely contributed to the substantial decrease in the economic spread ratio.

In summary, the period began with negative economic value creation, followed by several years of improvement. However, the final year witnessed a significant reversal, with both economic profit and the economic spread ratio declining substantially despite continued growth in invested capital. This suggests a potential issue with profitability relative to capital employed in 2020.

The economic profit exhibited considerable fluctuation between 2016 and 2020. Initially negative in 2016, it became positive for the subsequent three years before returning to a substantial negative value in 2020. Revenue demonstrated a generally increasing trend over the same period, although it experienced a slight decrease in the final year.

Economic Profit

Economic profit began at -36 US$ million in 2016, indicating the company’s return on capital employed was less than its cost of capital. A significant improvement was observed in 2017, with economic profit reaching 122 US$ million. This positive trend continued, albeit at a slower pace, reaching 91 US$ million in 2018 and 86 US$ million in 2019. However, 2020 saw a dramatic decline, resulting in an economic profit of -276 US$ million, representing the largest negative value within the observed timeframe.

Revenue

Revenue increased from 2,398 US$ million in 2016 to 2,752 US$ million in 2017, representing a growth of approximately 14.8%. Continued growth was seen in 2018 and 2019, reaching 3,333 US$ million and 3,543 US$ million respectively. However, revenue decreased to 3,239 US$ million in 2020, a decline of approximately 8.8% from the prior year.

Economic Profit Margin

The economic profit margin mirrored the trend in economic profit. It started at -1.49% in 2016, improved to 4.43% in 2017, and then decreased gradually to 2.74% in 2018 and 2.43% in 2019. The most significant change occurred in 2020, with the margin plummeting to -8.53%, reflecting the substantial negative economic profit recorded that year. The margin demonstrates a strong correlation with the absolute value of economic profit.

The divergence between revenue growth and economic profit in 2020 is noteworthy. While revenue experienced a moderate decline, the substantial decrease in economic profit suggests a significant increase in the cost of capital or a decrease in operational efficiency, or a combination of both, impacting the company’s ability to generate returns exceeding its capital costs.