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, but experienced a substantial decline in 2020. Simultaneously, the cost of capital exhibited a gradual upward trend throughout the period. Invested capital increased consistently until 2020, where it showed a slight decrease.

Economic Profit Trend

Economic profit initially showed strong growth, rising from US$28 million in 2016 to US$202 million in 2017, and further to US$200 million in 2019. However, in 2020, economic profit turned negative, reaching US$ -163 million. This reversal indicates that the return generated from invested capital was insufficient to cover the cost of that capital in the most recent year.

NOPAT and Cost of Capital Relationship

While NOPAT increased between 2016 and 2019, the concurrent rise in the cost of capital suggests increasing funding expenses or perceived risk. The significant drop in NOPAT in 2020, coupled with the highest cost of capital during the period (15.39%), directly contributed to the negative economic profit observed that year. The increasing cost of capital appears to be outpacing the ability to generate profits.

Invested Capital Impact

Invested capital grew steadily from US$2,874 million in 2016 to US$4,997 million in 2019. The slight decrease to US$4,907 million in 2020 did not offset the impact of declining NOPAT and rising cost of capital. The larger capital base in recent years likely amplified the negative effect of insufficient returns, as a greater amount of capital was deployed at a time when profitability was decreasing.

Overall, the analysis reveals a shift from positive economic profit generation to economic loss in 2020. This outcome is attributable to a combination of declining operational profitability and a consistently increasing cost of capital, despite substantial investment.

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 period between 2016 and 2020 demonstrates a fluctuating performance in economic value creation. Initially, positive economic profit is observed, which then experiences growth before culminating in a substantial loss. This is reflected in the corresponding changes in the economic spread ratio.

Economic Profit

Economic profit begins at US$28 million in 2016 and increases significantly to US$202 million in 2017. It remains positive, at US$180 million in 2018 and US$200 million in 2019, before declining sharply to a loss of US$163 million in 2020. This represents a considerable reversal in profitability.

Invested Capital

Invested capital shows a consistent upward trend throughout the period, increasing from US$2,874 million in 2016 to US$4,997 million in 2019. A slight decrease is noted in 2020, with invested capital reported at US$4,907 million. The continued growth in invested capital, despite the eventual decline in economic profit, suggests potential inefficiencies in capital allocation or a challenging operating environment in the final year.

Economic Spread Ratio

The economic spread ratio mirrors the trend in economic profit. It increases from 0.97% in 2016 to a peak of 5.63% in 2017, then gradually decreases to 4.52% in 2018 and 4.00% in 2019. A significant shift occurs in 2020, with the ratio falling to -3.31%. This negative value indicates that the company’s return on invested capital is less than its cost of capital, resulting in value destruction. The decline in the ratio from 2017 onwards, culminating in a negative value, suggests a weakening ability to generate returns exceeding the cost of funding.

The observed trends indicate a period of initial success followed by a deterioration in economic performance. While invested capital continued to grow, the company’s ability to generate economic profit diminished, ultimately leading to a loss in 2020 and a negative economic spread ratio. Further investigation would be required to determine the underlying causes of this shift.

The economic profit exhibited substantial fluctuation between 2016 and 2020. Initially, economic profit increased significantly before declining to a negative value in the final year of the observed period. This trend is mirrored in the economic profit margin, which demonstrates a similar pattern of growth followed by a substantial decrease.

Economic Profit

Economic profit began at US$28 million in 2016 and rose dramatically to US$202 million in 2017. It remained relatively high at US$180 million in 2018 and US$200 million in 2019. However, a significant downturn occurred in 2020, resulting in an economic loss of US$163 million.

Revenue

Revenue demonstrated consistent growth from 2016 to 2019, increasing from US$2,398 million to US$3,543 million. A slight decrease in revenue was observed in 2020, with a value of US$3,239 million. While revenue generally increased, the decline in 2020 did not prevent the economic profit from becoming negative.

Economic Profit Margin

The economic profit margin increased from 1.17% in 2016 to a peak of 7.35% in 2017. It then decreased gradually to 5.41% in 2018 and 5.64% in 2019. A substantial decline was observed in 2020, with the margin falling to -5.02%. This indicates that, despite positive revenue figures, the cost of capital exceeded the economic profit generated in 2020.

The divergence between revenue growth and economic profit margin in 2020 suggests a potential increase in operational costs, a higher cost of capital, or a combination of both. Further investigation would be required to determine the underlying causes of this shift in profitability.