Repligen Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Repligen develops and sells bioprocessing products used in biologic-drug manufacturing, including chromatography, filtration and protein products. Results are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $32.5 million | $29.2 million | $63.0 million | $54.3 million |
| Operating income | $5.5 million | $5.9 million | $11.2 million | $9.3 million |
| Net income | $8.4 million | $3.9 million | $11.5 million | $5.5 million |
| Diluted EPS | $0.24 | $0.11 | $0.33 | $0.16 |
| Operating cash flow | Not separately stated for the quarter | $4.0 million | $6.8 million |
- Q2 revenue rose 11.3%; first-half revenue rose 16.2%. Product revenue accounted for nearly all sales. Management attributed growth mainly to higher XCell ATF system and OPUS column orders, as well as Atoll and TangenX acquisition contributions.
- Q2 gross margin was approximately 57.0%, versus 56.7% a year earlier; operating margin was approximately 16.9%, versus 20.1%. Higher selling, general and administrative expense—including commercial and infrastructure investment and acquisition costs—contributed to lower operating income. Management cautioned that gross margins could fluctuate with production volume and product mix.
- GAAP net income benefited from a $5.625 million tax benefit related to an internal intellectual-property transfer and release of part of the U.S. deferred-tax valuation allowance. The effective tax rate was negative 130.9% for Q2 and negative 49.0% for the first half. Adjusted net income, a company-defined non-GAAP measure, was $6.9 million ($0.20 diluted per share) for Q2 and $11.9 million ($0.34) for the first half.
- First-half operating cash flow declined year over year, with cash use from accounts receivable of $6.3 million and accrued liabilities of $4.2 million among the key working-capital movements. Investing activities provided $14.1 million, largely from marketable-security redemptions, while capital expenditures were $2.7 million.
- At June 30, cash and cash equivalents were $142.2 million and marketable securities were $2.7 million. Working capital was $179.4 million. Convertible notes had $115 million principal and a $97.2 million carrying value; they bear 2.125% coupon interest and mature in 2021. Their reported fair value was approximately $165.5 million.
Changes, transactions and outlook
- SG&A increased 37.4% in Q2 and 34.4% in the first half. Acquisition costs were $2.4 million in Q2 and $2.8 million in the first half. The company reported no contingent-consideration fair-value expense in 2017, compared with $0.6 million and $2.6 million in the respective 2016 periods.
- After quarter-end, Repligen completed its Spectrum acquisition on August 1, 2017, for approximately $124.2 million in cash and 6,153,995 shares, with a preliminary total purchase price of $371.8 million. The preliminary allocation included $276.2 million of goodwill and is subject to revision. The filing says Spectrum pro forma financial information was not reasonably available for this report.
- On July 3, 2017, Repligen completed a public offering of 3,228,069 shares at $42.75 per share, generating approximately $129.4 million net proceeds. These post-quarter events are not reflected in June 30 balance-sheet cash or shares.
- Management said June 30 cash balances were adequate for at least 12 months absent additional acquisitions. It expected 2017 operating expenses to rise and continued spending on product development, commercial expansion and the Spectrum integration. No specific revenue or earnings guidance was provided. The filing warns that the Spectrum acquisition is expected to result in a GAAP loss per share in 2017.
- Key risks include integration execution and costs, possible unknown Spectrum liabilities and limited indemnification, product-demand and customer-order timing variability, customer concentration, manufacturing and quality issues, competition, intellectual-property disputes, foreign-exchange exposure, and the possibility of additional financing and shareholder dilution. GE Healthcare and MilliporeSigma represented 28% and 19% of Q2 revenue, respectively.
- Management reported effective disclosure controls. It was still integrating TangenX into internal controls; no other material changes to internal control over financial reporting were identified for the quarter. The company reported no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying demand versus acquisition contributions, and whether major customer ordering patterns remain stable.
- The final Spectrum purchase-price allocation, acquired liabilities and financial contribution, along with actual integration costs, synergies and 2017 earnings impact.
- The sustainability of earnings excluding the $5.625 million tax benefit, and the assumptions underlying the remaining U.S. deferred-tax valuation allowance.
- Cash conversion and working-capital trends, particularly receivables and accrued liabilities, following the first-half decline in operating cash flow.
- Convertible-note dilution and settlement exposure, plus the effect of the July share issuance and Spectrum consideration on per-share results.