Repligen Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; interim financial statements are unaudited. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Repligen supplies bioprocessing technologies and products used in biologic-drug manufacturing, including filtration, chromatography, protein products and, following its May 31 acquisition of C Technologies, process analytics instruments and consumables.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $69.4m | $49.5m | $200.8m | $142.1m |
| Revenue growth | 40.2% | 41.3% | ||
| Gross margin | 54.7% | Not clearly stated | 55.7% | Not clearly stated |
| Income from operations | $8.0m | $7.9m | $30.2m | $18.1m |
| Net income | $1.7m | $4.8m | $17.8m | $11.0m |
| Diluted EPS | $0.03 | $0.10 | $0.37 | $0.24 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $49.5m | $27.2m |
- Product revenue rose 40.2% in Q3 and 41.3% year to date, driven mainly by continued adoption of chromatography and filtration products; C Technologies contributed $7.0m of Q3 revenue and $9.1m from acquisition through September.
- Q3 operating income was nearly flat year over year despite higher sales. Net income declined, principally reflecting a $5.65m loss on extinguishment of debt and higher interest expense. For the first nine months, net income increased 62%.
- Q3 gross margin was 54.7%, or 55.2% excluding $0.3m of acquired-inventory step-up amortization. Nine-month gross margin was 55.7%, or 56.4% excluding $1.5m of step-up amortization.
- Management’s non-GAAP adjusted EBITDA was $17.3m for Q3 versus $12.4m and $56.5m for nine months versus $32.4m. Adjusted net income was $13.3m for Q3 versus $8.2m and $41.7m for nine months versus $21.2m. These measures exclude specified items and are not GAAP results.
Cash, liquidity and capital structure
- At September 30, cash and cash equivalents were $513.5m, plus $9.0m of restricted cash; cash and restricted cash totaled $522.4m. Working capital was $582.8m, up from $145.9m at year-end 2018.
- Nine-month cash flows: $49.5m provided by operations, $198.2m used in investing (including $182.2m net cash paid for C Technologies and $16.0m in capitalized software and capital expenditures), and $485.0m provided by financing.
- In July, Repligen issued $287.5m face value of 0.375% convertible notes due 2024, receiving $278.6m net proceeds. Their carrying value was $230.2m at quarter-end; they are long-term, unsecured obligations. The company also completed May and July common-stock offerings, generating $320.7m net proceeds combined.
- The prior 2.125% convertible notes due 2021 were settled during Q3 using cash and shares. The transactions generated the $5.65m extinguishment loss. Shares outstanding increased to 52.1m from 43.9m at December 31, 2018, reflecting offerings, conversions, acquisition shares and equity awards.
- Operating lease liabilities were $29.1m at quarter-end. Management said current cash was adequate for at least 24 months from filing, absent acquisitions of additional products, candidates or intellectual property.
Material changes, outlook and risks
- C Technologies was acquired for total consideration of approximately $239.9m, including $185.9m cash consideration and $53.9m in shares; an additional $9.0m is payable to employees subject to continued employment. The preliminary allocation included $90.8m of identifiable intangible assets and $142.9m of goodwill. Acquisition results included a Q3 net loss of $1.2m and a $2.7m loss from acquisition through September; purchase accounting remained subject to refinement.
- The company adopted the new lease standard in 2019, recognizing right-of-use assets and lease liabilities. It also began phased implementation of a new ERP system, with the first phase completed in Q3 and implementation expected through 2020.
- No formal revenue or earnings guidance is provided in the supplied filing text. Management expected R&D expense to increase slightly for the rest of 2019 and operating expenses to rise as the business and commercial capabilities expand. It expects continued investment in product development, manufacturing capacity and commercial operations.
- Management noted that large-scale customer orders, customer development activity and regulatory approvals can cause significant quarterly revenue fluctuations. It also expected the largest OEM-product customer to diversify its supply chain starting in 2020.
- Customer concentration and credit risk remain relevant: MilliporeSigma represented 14% of Q3 revenue; GE Healthcare and MilliporeSigma represented 12% and 14% of nine-month revenue, respectively. Foreign-exchange movements may affect results; the company said it does not currently hedge this exposure.
- Other risks include integrating acquired businesses, competition, product acceptance and demand, reliance on collaborations and supply relationships, manufacturing capacity and third parties, regulatory and intellectual-property matters, and potential need for additional financing. The filing reported no material change to previously disclosed risk factors and no known legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported growth reflects underlying product demand versus C Technologies and other acquired-business effects.
- Whether elevated margins and cash generation are sustainable after purchase-accounting charges, acquisition costs and working-capital investment.
- The integration progress and final purchase-price allocation for C Technologies, including the outlook for its revenue and profitability.
- Potential dilution and settlement consequences of the 2024 convertible notes, and the company’s stated intention to pay principal in cash and any conversion premium in shares.
- The effect of OEM customer supply-chain diversification, customer concentration, quarterly order timing and foreign-exchange exposure on future results.
- Whether available liquidity remains sufficient if acquisition spending, operating costs or capital needs exceed management’s assumptions.