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 increased significantly from $35 million in 2016 to $211 million in 2017, and remained robust at $190 million in 2018 and $212 million in 2019. However, a marked shift occurred in 2020, with economic profit declining to a negative $150 million. This indicates that, in 2020, the company’s returns did not exceed its cost of capital.

NOPAT and Cost of Capital Relationship

While NOPAT generally rose between 2016 and 2019, the concurrent increase in the cost of capital suggests a narrowing margin of economic profit. The substantial drop in NOPAT in 2020, combined with the highest cost of capital observed during the period (15.13%), directly contributed to the negative economic profit recorded that year.

Invested Capital Impact

The consistent growth in invested capital from 2016 to 2019 likely supported the increases in NOPAT observed during those years. The slight decrease in invested capital in 2020 did not, however, offset the significant decline in NOPAT, resulting in the negative economic profit. The increasing invested capital base, without a corresponding increase in profitability, may have contributed to the higher cost of capital.

Overall, the analysis reveals a period of positive economic profit generation followed by a substantial reversal. The decline in 2020 appears to be driven primarily by a decrease in NOPAT, exacerbated by a rising cost of capital. The relationship between invested capital and profitability warrants further investigation.

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 a fluctuating pattern over the observed period. Initially, the ratio demonstrated substantial growth, followed by a period of stabilization, and ultimately a significant decline.

Economic Spread Ratio Trend

In 2016, the economic spread ratio stood at 1.22%. This value increased considerably to 5.88% in 2017, indicating a substantial improvement in the return generated relative to the capital invested. The ratio continued to be positive, though with a moderate decrease to 4.77% in 2018 and further to 4.25% in 2019. However, a marked shift occurred in 2020, with the ratio declining to -3.05%, signifying that the company’s return on invested capital fell below its cost of capital.

The economic profit mirrored the initial positive trend of the economic spread ratio, increasing from US$35 million in 2016 to US$211 million in 2017, and remaining relatively stable at US$190 million and US$212 million in 2018 and 2019 respectively. The substantial decline in the economic spread ratio in 2020 corresponded with a negative economic profit of US$150 million.

Invested Capital

Invested capital consistently increased from US$2,874 million in 2016 to US$4,997 million in 2019. A slight decrease was observed in 2020, with invested capital reported at US$4,907 million. This growth in invested capital occurred alongside the positive economic spread ratio trend, but did not prevent the eventual decline into negative economic profit and spread in 2020.

The correlation between economic profit and the economic spread ratio is evident, with both metrics moving in the same direction throughout the period. The negative economic spread ratio in 2020 suggests a potential issue with capital allocation or operational efficiency, as the company was not generating sufficient returns to cover its cost of capital.

The analysis of the financial data over the five-year period reveals notable trends and fluctuations in key performance indicators.

Revenue

Revenue exhibited a consistent upward trend from 2016 through 2019, increasing from $2,398 million to $3,543 million. This growth reflects a positive sales performance over these years. However, in 2020, revenue declined to $3,239 million, indicating a reduction in sales or other revenue-generating activities during that year.

Economic Profit

Economic profit showed significant volatility. It increased sharply from $35 million in 2016 to a peak of $211 million in 2017, followed by a slight decline to $190 million in 2018. The figure then stabilized at $212 million in 2019 before dropping to a negative value of -$150 million in 2020. This negative economic profit in 2020 suggests that the company incurred losses in terms of economic profit, signaling a challenging operational or financial environment.

Economic Profit Margin

The economic profit margin followed a generally positive trajectory from 2016 to 2019, moving from 1.46% to a high of 7.68% in 2017, then slightly decreasing but remaining strong at 5.7% in 2018 and 5.99% in 2019. In 2020, there was a marked reversal with the margin turning negative to -4.63%. This drop corresponds with the negative economic profit observed, indicating diminished profitability relative to revenue.

In summary, the company demonstrated growth in revenue and economic profit through 2019, accompanied by strong economic profit margins. However, the year 2020 marked a significant downturn with declines in revenue, a substantial negative economic profit, and a negative profit margin, highlighting financial challenges during that period.