Repligen Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Repligen supplies technologies and products used in biopharmaceutical manufacturing. Year-over-year comparisons include Spectrum revenue in 2018 following its August 2017 acquisition, but not in the 2017 comparable period.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $47.7 | $32.5 | $92.6 | $63.0 |
| Gross profit / margin | $26.6 / 55.8% | $18.5 / 57.0% | $51.8 / 55.9% | $35.1 / 55.7% |
| Operating income / margin | $4.3 / 9.0% | $5.5 / 16.9% | $10.2 / 11.1% | $11.2 / 17.7% |
| Net income | $2.7 | $8.4 | $6.2 | $11.5 |
| Diluted EPS | $0.06 | $0.24 | $0.14 | $0.33 |
| Operating cash flow | Not provided separately | Not provided separately | $7.5 | $4.0 |
Revenue increased 47.1% in Q2 and 46.8% in the first half, driven by customer adoption and the addition of Spectrum. Operating expenses rose faster than revenue: Q2 R&D increased 211% and SG&A 48% year over year. The company reported non-GAAP adjusted net income of $7.0 million ($0.16 diluted per share) in Q2 and $14.5 million ($0.33) for the first half; these measures exclude specified costs and other items.
At June 30, cash and cash equivalents were $175.6 million, versus $173.8 million at year-end 2017. Current assets were $252.9 million and current liabilities $121.1 million; working capital was $131.8 million, down from $217.6 million, principally reflecting the reclassification of convertible notes to current liabilities. The company had $114.99 million principal amount of 2.125% convertible notes due 2021, carried at $101.3 million net of discount and classified as current. Cash from investing activities was a $4.4 million outflow, primarily capital expenditures; financing activities provided $1.5 million.
Material changes and unusual items
- Spectrum contributed $12.3 million of Q2 revenue and $24.0 million for the first half. Q2 growth comparisons therefore reflect acquisition-related expansion as well as underlying demand.
- GAAP net income declined versus 2017 despite strong revenue growth. The 2017 comparison included a $5.625 million tax benefit from reducing a deferred-tax-asset valuation allowance after an intercompany intellectual-property transfer. The 2018 tax provision was $0.6 million in Q2 and $1.8 million for the first half.
- R&D spending increased, including investment in the Navigo Proteins development agreement and acquired Spectrum development activities. SG&A growth reflected Spectrum, infrastructure expansion, and greater customer-facing activity. Spectrum acquisition and integration costs were $0.9 million in Q2 and $1.5 million in the first half.
- After the share-price conversion condition was met in Q2, holders could convert the notes during Q3 2018. The notes’ if-converted value exceeded principal by approximately $63.8 million at June 30. No Q3 conversions had occurred by the filing date.
- Foreign-currency translation reduced other comprehensive income by $5.0 million in Q2 and $4.8 million for the first half. The company does not hedge its foreign-exchange exposure.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is stated in the supplied filing text. Management expects operating expenses to increase as it integrates Spectrum, develops products, and expands commercial capabilities; it also expects gross margins may fluctuate in the second half based on production volume and product mix.
- Management said existing cash was adequate for at least 12 months from the filing date, absent acquisitions. Future cash needs may depend on growth investment, acquisitions, note conversions or repayment, and financing availability; additional financing may be unavailable or dilutive.
- Management cautioned that order timing, customer development activity, and regulatory approvals can cause significant quarterly revenue fluctuations that may not indicate a trend. Two customers accounted for a significant portion of revenue: MilliporeSigma and GE Healthcare represented 18% and 14% of Q2 revenue, respectively.
- Risks include customer and supply relationships, product acceptance and development, acquisition integration, manufacturing capacity and third-party dependence, competition, regulatory and intellectual-property matters, foreign exchange, and demand changes. The filing reported no material change to previously disclosed risk factors and no known legal proceedings expected to have a material adverse effect.
- The company entered a 126-month lease for 63,761 square feet in Marlborough, Massachusetts, with rent for the full space beginning 19 months after commencement. It expects adoption of the new lease accounting standard to have a material balance-sheet impact. Spectrum was excluded from the company’s internal-control assessment for 2018 while integration of its controls continues.
Important facts for investors to verify
- How much of reported growth reflects comparable organic demand versus Spectrum’s contribution, and whether customer adoption persists.
- Whether higher R&D and SG&A spending translates into sustained revenue and operating-margin improvement.
- The timing and cash or share consequences of any convertible-note conversions, given the notes’ current classification and conversion premium.
- Customer concentration, order volatility, gross-margin sensitivity to production mix, and unhedged foreign-exchange exposure.
- Integration progress, remaining acquisition-related costs, lease obligations, and the eventual balance-sheet effect of lease accounting adoption.