Repligen Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
Repligen supplies bioprocessing products and technologies used to manufacture biologic drugs, including protein, chromatography and filtration products. The quarter included Spectrum LifeSciences, acquired in August 2017; Spectrum contributed $11.7 million of Q1 2018 revenue. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $44.8 | $30.6 |
| Gross profit / gross margin | $25.2 / 56.1% | $16.6 / 54.3% |
| Operating income / margin | $6.0 / 13.3% | $5.7 / 18.6% |
| Net income | $3.4 | $3.1 |
| Diluted EPS | $0.08 | $0.09 |
| Operating cash flow | $1.6 | $1.1 |
- Revenue increased 47%, primarily from continued customer adoption and the inclusion of Spectrum. The filing does not quantify organic growth separately.
- Cost of product revenue rose 41%; R&D increased 89% to $3.3 million, and SG&A increased 73% to $15.9 million. Management attributed higher expenses to Spectrum, product development and expansion of commercial and administrative capabilities.
- Cash and cash equivalents were $173.9 million at March 31, versus $173.8 million at year-end. Working capital was $228.0 million, up from $217.6 million.
- Capital expenditures were $1.6 million. Cash increased $0.1 million during the quarter.
- Convertible senior notes had $115.0 million principal and a $100.3 million net carrying value; they bear 2.125% coupon interest, have a 6.6% effective interest rate and mature June 1, 2021. Reported fair value was $150.5 million.
Changes versus the prior comparable period
- Although net income rose to $3.4 million from $3.1 million, diluted EPS declined to $0.08 from $0.09. Weighted-average basic shares increased to 43.6 million from 33.9 million, reflecting the larger share base following the Spectrum acquisition.
- Operating income grew modestly while revenue rose sharply; operating margin declined, in part amid higher operating expenses and acquisition-related amortization.
- Q1 2018 operating cash flow improved to $1.6 million from $1.1 million. Investing cash flow was a $1.6 million outflow, compared with $6.1 million provided in Q1 2017, when marketable securities were redeemed.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; the reported impact was immaterial. Adoption of the intra-entity asset transfer tax standard reduced opening accumulated deficit by $0.7 million.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management expects operating expenses to increase as it integrates Spectrum, develops product lines and expands commercial capabilities.
- Management stated that, absent acquisitions, current cash was adequate for at least 12 months from the filing date. Future capital needs may include acquisitions, R&D, capital expenditures and debt repayment; additional financing could dilute shareholders or may not be available on favorable terms.
- Management cautioned that quarterly sales can fluctuate with order timing, customer development activity and regulatory approvals, and that such fluctuations may not indicate future trends. Gross margins may also fluctuate with production volume, shipments and product mix.
- Two customers, GE Healthcare and MilliporeSigma, represented 17% and 14% of Q1 revenue, respectively. The filing identifies customer-specific economic factors as a potential source of revenue and cash-flow variability.
- Foreign-exchange movements may affect results; the company said it did not hedge this exposure. Spectrum’s internal controls were excluded from the current assessment while the company reviews and updates them.
- A 126-month lease for 63,761 square feet in Marlborough, Massachusetts is scheduled to commence in Q2 2018. No legal proceedings believed likely to have a material adverse effect were reported; the filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the 47% reported revenue increase reflects underlying growth versus Spectrum, and whether acquisition integration produces expected benefits.
- Whether gross-margin performance and operating expense growth improve as Spectrum is integrated; assess GAAP results alongside management’s non-GAAP adjustments.
- Customer concentration, including continuing sales and receivables exposure to GE Healthcare and MilliporeSigma.
- The convertible notes’ cash repayment and potential share dilution implications, and the significant difference between their carrying value and reported fair value.
- Execution of the Marlborough lease, Spectrum’s control integration, and the effect of tax-law changes and foreign-exchange exposure.