Repligen Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Repligen develops and sells bioprocessing products, including Protein A ligands, XCell ATF systems, OPUS chromatography columns, growth factors and, following its December acquisition of TangenX, Sius TFF products.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $104.5 million | $83.5 million | +25% |
| Gross margin | 55% | 58% | Down 3 percentage points |
| Operating income | $16.0 million | $13.8 million | +16% |
| Net income | $11.7 million | $9.3 million | +25% |
| Diluted EPS | $0.34 | $0.28 | Up $0.06 |
| Operating cash flow | $7.5 million | $15.1 million | Down $7.5 million |
- Product revenue grew 25%; product-line revenue was $54.7 million for protein products, $19.8 million for filtration and $29.5 million for chromatography. Acquisitions contributed to growth, particularly in chromatography; TangenX contributed only from mid-December.
- Gross margin fell to 55%, which management attributed to product mix and increased investment in manufacturing operations. SG&A rose 25% to $30.9 million and R&D rose 28% to $7.4 million.
- Cash and marketable securities totaled $141.8 million at year-end, versus $73.4 million a year earlier. Working capital was $163.1 million and total assets were $288.9 million.
- Repligen issued $115.0 million principal of 2.125% convertible senior notes due 2021, receiving $111.1 million net proceeds. The notes’ year-end carrying value was $95.3 million; disclosed fair value was approximately $135.6 million. The effective interest rate, including discount and issuance-cost amortization, was 6.6%.
- Atoll and TangenX acquisitions used $8.8 million and $35.8 million of cash, respectively, net of cash acquired. Atoll consideration also included 538,700 shares. Year-end contingent consideration was $6.1 million.
Quarterly results and changes
Fourth-quarter 2016 revenue was $25.6 million, compared with $21.4 million in Q4 2015. Operating income was $2.9 million versus $1.4 million, and reported net income was $5.0 million versus $0.3 million. Q4 2016 included a reported income tax benefit of $3.5 million; quarterly results may therefore not represent underlying run-rate earnings.
- Revenue mix continued shifting toward direct sales, which management reported at approximately 52% of bioprocessing revenue in 2016, versus approximately 20% in 2012.
- GE Healthcare represented 29% of FY 2016 revenue and MilliporeSigma 28%, together accounting for 57%. Their respective shares were 37% and 29% in 2015.
- Operating cash flow declined despite higher net income, chiefly as accounts receivable and inventory increased and accounts payable and accrued liabilities decreased.
- Reported GAAP operating income was $16.0 million. Management’s non-GAAP adjusted operating income was $21.4 million, excluding $2.2 million of acquisition costs and $3.2 million of contingent-consideration fair-value adjustments. Adjusted EBITDA was $25.9 million, versus $22.0 million in 2015.
Outlook, risks and unusual items
- Management expected 2017 operating expenses to increase as the company expanded its bioprocessing business, and R&D expense to increase moderately. It stated that, absent acquisitions, existing cash was adequate for at least 24 months. No quantified revenue or earnings guidance was provided.
- Key risks include customer concentration and reliance on long-term supply and distribution relationships; competition and product-adoption uncertainty; limited suppliers for certain XCell ATF materials; acquisition integration and potential impairment of goodwill and intangibles; manufacturing capacity and quality; foreign-exchange exposure; and dependence on patents and proprietary know-how.
- Foreign currencies accounted for 40% of 2016 revenue and 22% of costs and expenses; the company did not hedge this exposure. Management cited a hypothetical 100-basis-point interest-rate increase as reducing investment fair value by approximately $64,000.
- The convertible notes create future interest, conversion, repurchase and refinancing obligations. The company’s ability to use tax-loss and credit carryforwards may be limited by ownership changes. No material legal proceeding was identified.
- The 2016 income tax provision was only $11,000, reflecting a deferred tax benefit associated largely with a reduction in the valuation allowance. The company continued to maintain a valuation allowance against remaining U.S. deferred tax assets where realization was not considered more likely than not.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The control assessment excluded Atoll and TangenX, acquired during 2016; those businesses represented $70.6 million of year-end assets and $3.5 million of 2016 revenue.
Important facts for investors to verify
- How much of revenue growth came from organic volume and pricing versus acquired businesses, and whether acquired product lines sustain growth.
- Whether gross margin stabilizes as capacity and manufacturing investments ramp, and whether operating expenses convert into durable operating leverage.
- Whether working-capital investment and lower operating cash flow reverse as revenue grows.
- The terms, potential dilution and cash-settlement implications of the convertible notes, including their market value above carrying value.
- Ongoing dependence on GE Healthcare and MilliporeSigma, and customer retention following changes in product mix or channel strategy.
- The final purchase-price allocation for TangenX, acquisition earnout outcomes, and the recoverability of goodwill and acquired intangible assets.
- The timing and effect of the reported tax benefits, quarterly tax presentation and future realization of deferred tax assets.