Repligen Corporation — Q2 2016 Form 10-Q
Business context and period. Repligen develops and sells bioprocessing products used in biologics manufacturing, including Protein A products, XCell ATF systems and OPUS chromatography columns. This unaudited report covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Atoll GmbH, acquired April 1, 2016, was consolidated from that date.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Product revenue | $29.170 million | $21.457 million | $54.265 million | $42.274 million |
| Gross margin | 56.7% | 60.0% | 56.3% | 60.6% |
| Operating income | $5.859 million | $4.609 million | $9.321 million | $8.648 million |
| Net income | $3.872 million | $3.612 million | $5.496 million | $6.542 million |
| Diluted EPS | $0.11 | $0.11 | $0.16 | $0.19 |
| Operating cash flow | Not separately provided | Not separately provided | $6.753 million | $5.113 million |
- Q2 revenue grew 36%; six-month revenue grew 28%. Management attributed growth primarily to increased orders for chromatography columns and ATF products.
- Gross margin declined year over year in both periods as cost of product revenue increased faster than revenue. Management cautioned that margins may fluctuate with production volume, shipments and product mix.
- Q2 operating income increased 27%, while six-month operating income increased 8%. Six-month net income fell 16%, reflecting higher expenses below operating income, including interest and foreign-exchange-related expense.
- At June 30, cash and cash equivalents were $172.622 million and marketable securities were $9.181 million, totaling $181.803 million. Working capital was $196.591 million, versus $84.471 million at year-end 2015.
- Cash increased $118.530 million during the first half. Financing activities provided $111.783 million, principally from the notes offering. Operating activities provided $6.753 million; investing activities provided $20,000.
- Inventory rose to $23.197 million from $17.998 million at year-end. The company cited inventory build to support future revenues; higher inventory consumed $5.093 million of first-half cash.
Material changes and unusual items
- In May 2016, Repligen issued $115 million principal amount of 2.125% convertible senior notes due June 2021, receiving approximately $111.3 million net proceeds. The balance-sheet carrying amount was $93.380 million after discount and issuance costs; disclosed fair value was approximately $124.3 million. Effective interest rate, including discount and issuance-cost amortization, was 6.6%.
- Atoll was acquired for total consideration of approximately $25.3 million: about $10.2 million cash, $14.1 million in Repligen shares, and an estimated $0.952 million contingent consideration. Up to $1.1 million additional cash may be payable if specified 2016 revenue-growth targets are achieved. The purchase-price allocation remains preliminary.
- Q2 SG&A included $725,000 of Atoll acquisition costs. First-half contingent-consideration fair-value expense was $2.642 million, including a $2.629 million increase in the estimated Refine 2016 milestone payment. These estimates depend on sales forecasts and may be reversed or revised.
- Management’s non-GAAP adjusted net income was $5.616 million for Q2 and $9.638 million for the first half, excluding specified acquisition costs, contingent-consideration expense and, where applicable, non-cash interest. These are supplemental measures, not GAAP results.
- Revenue concentration remained significant: GE Healthcare and MilliporeSigma accounted for 28% and 30% of Q2 revenue, respectively. GE Healthcare represented 49% of trade receivables at quarter-end.
Outlook, risks and contingencies
- Management expects 2016 operating expenses to increase as it expands the bioprocessing business, product development and commercial capabilities. It stated that existing cash is adequate for foreseeable needs absent additional acquisitions.
- No specific revenue, earnings or margin guidance is provided. Management warns that order timing, customer development activity and regulatory approvals can cause significant quarterly revenue fluctuations and that fluctuations may not indicate a trend.
- Risks include customer and supplier concentration, product demand and acceptance, competition, manufacturing capacity and third-party dependence, successful integration of Refine and Atoll, foreign-exchange movements, and the need for financing to pursue acquisitions. The company does not currently hedge foreign-exchange exposure.
- The new debt adds servicing, refinancing, conversion and potential repurchase obligations. Management reported no note default or circumstances then allowing holders to call or convert the notes; the filing identifies the possibility that cash generation may be insufficient to meet future debt obligations.
- Contingent consideration and inventory valuations rely on forecasts and estimates. The filing reports no known legal proceedings expected to have a material adverse effect and no material change to previously reported risk factors other than risks related to the new convertible debt.
Important facts for investors to verify
- Whether revenue growth and gross-margin performance persist, given management’s warning about order timing and product mix.
- Progress on integrating Atoll and Refine, and whether Atoll’s purchase-price allocation or revenue-linked contingent payment changes.
- Customer concentration and collection exposure, particularly GE Healthcare’s share of receivables.
- Cash use, inventory levels and operating cash conversion as the company expands.
- The terms, cash-servicing capacity and potential dilution or repurchase effects of the convertible notes.
- Changes in Refine milestone estimates, foreign-exchange impacts and the company’s ability to achieve growth without additional financing.