Repligen Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Repligen supplies bioprocessing products and technologies used in biologic drug manufacturing, including protein, filtration and chromatography products. This unaudited report covers the three and nine months ended September 30, 2018; financial amounts below are in U.S. dollars. Year-over-year comparisons include Spectrum, acquired August 1, 2017, so growth is not solely organic.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $49.5m | $36.6m | $142.1m | $99.6m |
| Revenue growth | 35.4% | — | 42.6% | — |
| Gross margin | 55.2% | 45.4% | 55.7% | 51.9% |
| Operating income (loss) | $7.9m | $(0.4)m | $18.1m | $10.7m |
| Net income | $4.8m | $4.7m | $11.0m | $16.2m |
| Diluted EPS | $0.10 | $0.11 | $0.24 | $0.43 |
| Adjusted EBITDA (non-GAAP) | $12.4m | $8.7m | $32.4m | $25.8m |
Q3 revenue growth reflected continued customer adoption and Spectrum revenue. Spectrum contributed $13.2m of Q3 revenue and $37.2m for the nine-month period. Gross margin improved year over year. Operating expenses rose 12.6% in Q3 and 39.5% year to date, including higher R&D investment, integration costs, amortization and commercial/infrastructure spending. Nine-month GAAP net income declined despite higher operating income, in part because 2017 included substantial tax benefits from valuation-allowance releases and other tax items.
Cash flow and liquidity: Nine-month operating cash flow was $27.2m, versus $2.2m in 2017; investing cash outflow was $8.6m, mainly capital expenditures, and financing cash inflow was $2.4m. Cash and cash equivalents were $190.3m at September 30, up from $173.8m at year-end 2017. Working capital was $137.4m, down from $217.6m, principally reflecting the $102.4m carrying value of convertible notes reclassified as current. Capital expenditures were $8.6m year to date.
Debt: The 2.125% convertible notes have $115.0m principal, mature June 2021 and had a $102.4m carrying value. Following the stock-price conversion trigger, holders could convert during Q4 2018; none had converted as of the filing date. The company stated its intent to pay principal in cash and any conversion premium in shares. The notes’ reported fair value was approximately $202.4m, and the if-converted value exceeded principal by approximately $87.4m at September 30.
Changes, outlook and risks
- Management said product sales rose 35.6% in Q3 and 42.7% year to date, primarily from customer adoption and Spectrum. Order timing, customer development activity and regulatory approvals can cause significant quarterly fluctuations.
- Management expects operating expenses to increase as it integrates Spectrum, expands product development and grows commercial capabilities. It cautioned that gross margins may fluctuate in Q4 and future quarters with production volume and product mix. No specific financial guidance was provided.
- Management believes cash is adequate for at least 12 months from the filing date absent acquisitions. Additional acquisitions or investment could require financing; financing may be unavailable or unfavorable and equity issuance could dilute shareholders.
- Customer concentration is material: MilliporeSigma and GE Healthcare together represented 34% of Q3 revenue and 33% of nine-month revenue. Management also cites dependence on supply and collaboration relationships, product acceptance, manufacturing capacity, competition, regulatory approvals, intellectual property and foreign-exchange movements; the company did not hedge its primary currency exposures.
- The company entered a 126-month lease for 63,761 square feet in Marlborough, Massachusetts. A former Spectrum owner who holds more than 10% of the company is the landlord of certain Spectrum facilities; nine-month rent expense was $0.6m. The company also accrued $1.7m payable to former Spectrum shareholders for tax refunds, net of certain expenses.
- ASC 606 adoption had an immaterial financial-statement impact. The company had not finalized its accounting policy for GILTI tax treatment and noted provisional tax accounting could be adjusted. Management reported effective disclosure controls and no material change to previously disclosed risk factors.
Investor verification priorities
- Separate underlying organic growth from the contribution of Spectrum and check product-line trends, which are not quantified clearly in the supplied filing text.
- Assess whether gross-margin gains persist as product mix, production volumes and costs change.
- Track conversion or settlement of the $115.0m notes, including potential cash use and share dilution from any conversion premium.
- Review customer concentration, receivables and inventory growth, and the effect of working-capital needs on cash generation.
- Reconcile GAAP earnings with non-GAAP adjusted measures and evaluate the effects of acquisition costs, intangible amortization and unusual prior-year tax benefits.
- Monitor integration spending, lease commitments, related-party balances, GILTI/tax adjustments, foreign-exchange exposure and any financing needs for acquisitions.