REPLIGEN CORP (RGEN) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Results of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.
Revenues
Total revenues for years ended December 31, 2023 and 2022 were comprised of the following:
| For the Years Ended December 31, | 2023 vs 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (Amounts in thousands, except for percentage data) | ||||||||||||||||
| Revenue: | ||||||||||||||||
| Product | $ | 638,381 | $ | 801,183 | $ | (162,802 | ) | (20.3 | %) | |||||||
| Royalty and other income | 383 | 353 | 30 | 8.5 | % | |||||||||||
| Total revenue | $ | 638,764 | $ | 801,536 | $ | (162,772 | ) | (20.3 | %) |
Product revenues
Since 2016, we have been increasingly focused on selling our products directly to customers in the pharmaceutical industry and to our contract manufacturers. These direct sales have represented 85.8% of our total product revenue during 2023 compared to 87.8% of our total product revenue in 2022. Sales of our bioprocessing products can be impacted by the timing of large-scale production orders and the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations.
Product revenues were comprised of the following:
| For the Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023(1) | 2022 | ||||||
| (Amounts in thousands) | |||||||
| Filtration products | $ | 347,781 | $ | 495,930 | |||
| Chromatography products | 126,629 | 131,680 | |||||
| Process analytics products | 56,820 | 53,512 | |||||
| Proteins products | 103,463 | 114,320 | |||||
| Other | 3,688 | 5,741 | |||||
| Total product revenue | $ | 638,381 | $ | 801,183 |
(1)
2023 revenue for filtration products includes revenue related to FlexBiosys, Inc. (“FlexBiosys”) from April 17, 2023, as well as Metenova Holding AB (“Metenova”) from October 2, 2023.
(2)
2021 revenue for filtration products includes revenue related to Polymem S.A. (“Polymem”) from July 1, 2021, as well as BioFlex Solutions LLC (“BioFlex”) and Newton T&M Corp (“NTM”) from December 16, 2021 through December 31, 2021. 2021 revenue for proteins products includes revenue related to Avitide from September 20, 2021 through December 31, 2021.
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Revenue from the sale of our products which make up our filtration, chromatography, process analytics and proteins franchises comes from the sale of a number of products as described in Part I, Item 1. “Business - Our Products” of this report. Other revenue primarily consists of revenue from the sale of our operating room products to hospitals as well as freight revenue.
For 2023, product revenue decreased by $162.8 million, or 20.3%, as compared to 2022. This is mainly due to a decrease in revenue from programs related to COVID-19 as customers’ inventory has reduced at a slower pace than initially expected, which has primarily affected revenue from sales of our filtration products. Partially offsetting these revenue declines in 2023, as compared to 2022, were price increases and strong performances within our chromatography and process analytics franchises, specifically from chromatography systems and flowpaths, as well as slope spectroscopy, consumables and service. The impact of our acquisitions of FlexBiosys and Metenova also increased revenue in 2023, as compared to 2022.
Sales of our bioprocessing products are impacted by the timing of orders, development efforts at our customers or end-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend.
Royalty revenues
Royalty revenues for all periods presented relate to royalties received from a third-party systems manufacturer associated with our OPUS® chromatography columns. Royalty revenues are variable and are dependent on sales generated by our partner.
Costs and operating expenses
Total costs and operating expenses for the years ended December 31, 2023 and 2022 were comprised of the following:
| For the Years Ended December 31, | 2023 vs 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (Amounts in thousands, except for percentage data) | ||||||||||||||||
| Cost of product revenue | $ | 353,922 | $ | 345,830 | $ | 8,092 | 2.3 | % | ||||||||
| Research and development | 42,722 | 43,936 | (1,214 | ) | (2.8 | )% | ||||||||||
| Selling, general and administrative | 218,113 | 215,829 | 2,284 | 1.1 | % | |||||||||||
| Contingent consideration | (30,569 | ) | (28,729 | ) | (1,840 | ) | 6.4 | % | ||||||||
| Total costs and operating expenses | $ | 584,188 | $ | 576,866 | $ | 7,322 | 1.3 | % |
Cost of product revenue
In 2023, cost of product revenue increased $8.1 million, or 2.3%, compared to 2022, primarily due to restructuring charges, including $23.6 million in inventory adjustments to reflect inventory at net realizable value, a $3.8 million charge for accelerated depreciation on equipment related to manufacturing facilities closed and $3.0 million in severance and other charges during 2023 as a result of our restructuring activities, which commenced in July 2023. See Note 5, “Restructuring Plan” of this report for more information on the restructuring activities to simplify and streamline our organization and strengthen our overall effectiveness of our operations (“Restructuring Plan”). Our restructuring activities include consolidating a portion of our manufacturing facilities between certain U.S. locations, discontinuing the sale of certain product SKUs, and evaluating the fair value of finished goods and raw materials secured during the COVID-19 Period to meet increasing demand during a challenging supply chain environment in the industry. Where demand has reduced, finished goods and raw materials, whose value exceeded the projected requirements to be used before reaching their expiration date, were written down to their net realizable value. The inventory adjustments include reserved values which may be recoverable in future periods, if salvageable. Also contributing to the increase in cost of product revenue is cost inflation, primarily in raw materials as well as freight charges due to fuel costs and carrier market conditions in 2023, compared to 2022. Also, our occupancy costs and depreciation expense increased during 2023, as compared to 2022, due to expanded facilities and manufacturing equipment being placed into service towards the end of 2022 and throughout 2023. These increases were partially offset by a decrease in costs associated with lower revenue as well as a decrease in employee-related costs not related to the restructuring activities in 2023, as compared to 2022.
Gross margin was 44.6% in 2023, compared to 56.9% in 2022. The reduction in gross margin in 2023 as compared to 2022, is primarily due to restructuring activities as noted above during 2023 to simplify and streamline our organization and strengthen the
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overall effectiveness of our operations for which there were no comparable costs in 2022. In addition, lower margins were a result of lower overall sales and production volumes, and a change in product mix, where we saw a significant decline in revenue associated with higher-margin consumable products due to the decrease in COVID-19 vaccine demand. We also experienced an increase in manufacturing costs from an increase in occupancy costs due to added capacity and an increase in depreciation expense.
Research and development expenses
R&D expenses are related to bioprocessing products, which include personnel, supplies and other research expenses. Due to the fact that these various programs share personnel and fixed costs, we do not track all of our expenses or allocate any fixed costs by program, and therefore, have not provided historical costs incurred by project.
R&D expenses decreased $1.2 million, or 2.8%, during 2023, compared to 2022. The decrease during the periods is primarily due to a decrease in occupancy costs for facilities where R&D work is performed, which more than offset the increase in employee-related costs, depreciation expense and spending on new product development during 2023, as compared to 2022.
R&D expense also includes payments made to expand our proteins product offering through our development agreement with Navigo Proteins GmbH (“Navigo”). Such expenses were $3.8 million in 2023, $2.6 million in 2022 and $2.3 million in 2021 in the form of milestone payments to Navigo.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses include the costs associated with selling our commercial products and costs required to support our marketing efforts, including legal, accounting, patent, shareholder services, amortization of intangible assets and other administrative functions.
SG&A costs increased by $2.3 million, or 1.1%, in 2023, as compared to 2022 primarily due to an increase in SG&A costs related to the operations of FlexBiosys and Metenova, which have been included in our results of operations since their acquisition dates in April 2023 and October 2023, respectively. In addition, there were $1.7 million in one-time costs incurred from restructuring activities during 2023, for which there were no comparable costs in 2022. Partially offsetting this increase was a decrease in the amount of commissions paid out resulting from lower revenue and a decrease in employee-related costs.
Contingent consideration
Contingent consideration represents the change in fair value of the contingent consideration obligation included in current and noncurrent contingent consideration on the consolidated balance sheets as of the end of each period. Remeasurement of the contingent consideration obligation is done each quarter and the carrying value of the obligation is adjusted to the current fair value through our consolidated statements of comprehensive income. In 2023, 2022 and 2021, actual and expected results and a change in market inputs used to calculate the discount rate, resulted in adjustments to the fair value of the contingent consideration obligation for the years ended December 31, 2023, 2022 and 2021 of ($30.6) million, ($28.7) million and $5.9 million, respectively.
Other income (expenses), net
The table below provides detail regarding our other income (expenses), net:
| For the Years Ended December 31, | 2023 vs 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (Amounts in thousands, except for percentage data) | ||||||||||||||||
| Investment income | $ | 24,135 | $ | 6,978 | $ | 17,157 | 245.9 | % | ||||||||
| Interest expense | (1,951 | ) | (1,162 | ) | (789 | ) | 67.9 | % | ||||||||
| Loss on extinguishment of debt | (12,676 | ) | — | (12,676 | ) | 100.0 | % | |||||||||
| Amortization of debt issuance costs | (8,075 | ) | (1,815 | ) | (6,260 | ) | 344.9 | % | ||||||||
| Other income (expenses) | 8,123 | (9,531 | ) | 17,654 | (185.2 | )% | ||||||||||
| Total other income (expenses), net | $ | 9,556 | $ | (5,530 | ) | $ | 15,086 | (272.8 | )% |
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Investment income
Investment income includes income earned on invested cash balances. Our investment income increased by $17.2 million in 2023, as compared to 2022 due to an increase in interest rates on higher average invested cash balances since December 31, 2022, as well as interest earned on U.S. treasury bills purchased at the end of 2022.
Interest expense
Interest expense in 2023 is primarily from contractual coupon interest on the convertible debt outstanding as of December 31, 2023. On December 14, 2023, we entered into a privately negotiated exchange and subscription agreement with certain holders of the 2019 Notes and certain new investors pursuant to which we issued $600.0 million aggregate principal amount of the 2023 Notes. Interest expense in 2023 includes $1.0 million of interest on the 2019 Notes, compared to $1.1 million of interest expense on the 2019 Notes in 2022. Interest expense in 2023 also includes $0.3 million of contractual coupon interest on the 2023 Notes for which there were no comparable amounts in 2022 as well as $0.6 million in accretion of the $82.1 million debt discount on the modified notes, which includes the accretion of an increase in principal and the accretion of increased fair value of the conversion option in 2023, for which there were no comparable costs in 2022. See Note 14, “Convertible Senior Notes,” to our consolidated financial statements included in this report for more information on this transaction.
Loss on extinguishment of debt
In 2023, as part of the Exchange Transaction, we exchanged $217.7 million in aggregate principal amount of the 2019 Notes for $309.9 million in aggregate principal amount of the 2023 Notes. Upon evaluation of the Exchange Transaction, approximately $29.6 million, of the $217.7 million in aggregate principal amount of the 2019 Notes were deemed extinguished. As a result, we recorded a $12.7 million loss on extinguishment of debt in our consolidated statements of comprehensive income in 2023, which includes a $12.6 million write-off for the increase in principal of the converted notes being extinguished and a $0.1 million write-off of unamortized debt issuance costs related to the converted notes being extinguished.
Amortization of debt issuance costs
Transaction costs related to the issuance of the 2019 Notes and the 2023 Notes are amortized to amortization of debt issuance costs on the consolidated statements of comprehensive income. Amortization of debt issuance costs increased during 2023, as compared to 2022. Under ASC 470, “Debt”, any third-party costs directly related to the modification or exchange are expensed as incurred. Therefore, in 2023, we recorded $6.4 million to amortization of debt issuance costs in accordance to this guidance, which included $6.2 million of debt issuance costs directly related to the modified notes and $0.2 million of amortization of the capitalized debt issuance costs.
Other income (expenses), net
The changes in other expenses, net in 2023, as compared to 2022, is primarily attributable to realized and unrealized foreign currency gains and losses related to transactions with customers and vendors, as well as the revaluation impact of intercompany loans with subsidiaries.
Income tax provision
Income tax provision for the years ended December 31, 2023 and 2022 was as follows:
| For the Years Ended December 31, | 2023 vs 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (Amounts in thousands, except for percentage data) | ||||||||||||||||
| Income tax provision | $ | 22,555 | $ | 33,181 | $ | (10,626 | ) | (32.0 | )% | |||||||
| Effective tax rate | 35.2 | % | 15.1 | % |
For 2023, we recorded an income tax provision of $22.6 million. The effective tax rate was 35.2% for 2023 and is based upon the income for the year ended December 31, 2023 and the composition of income in different jurisdictions. The difference in effective tax rates between 2023 and 2022 was primarily due to a loss on extinguishment of debt and a debt discount basis difference, partially offset by increased benefits from business tax credits and nontaxable contingent consideration. Our effective tax rate for 2023 was
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higher than the U.S. statutory rate of 21% primarily due to a debt discount basis difference partially offset by business tax credits and nontaxable contingent consideration.
Non-GAAP Financial Measures
In addition to our key financial metrics presented above, we provide non-GAAP adjusted income from operations, adjusted net income and adjusted EBITDA as supplemental measures to accounting principles generally accepted in the United States (“GAAP”) measures regarding our operating performance. These financial measures exclude the items detailed below and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of each non-GAAP financial measures to its most comparable GAAP financial measure are provided below.
We include this financial information because we believe these measures provide a more accurate comparison of our financial results between periods that more accurately reflects how management reviews its financial results and measures the performance of our ongoing operations for the periods in which such changes incurred. We excluded the impact of certain acquisition-related items and items related to the issuance of our 2023 Notes and 2019 Notes because we believe that the resulting charges do not accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
Non-GAAP adjusted income from operations
Non-GAAP adjusted income from operations is measured by taking income from operations as reported in accordance with GAAP and excluding inventory step-up charges, acquisition and integration costs, restructuring costs, contingent consideration fair value adjustments and intangible amortization booked through our consolidated statements of comprehensive income. The following is a reconciliation of income from operations in accordance with GAAP to non-GAAP adjusted income from operations for the years ended December 31, 2023 and 2022:
| For the Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (Amounts in thousands) | ||||||||
| GAAP income from operations | $ | 54,576 | $ | 224,670 | ||||
| Non-GAAP adjustments to income from operations: | ||||||||
| Inventory step-up charges | 1,238 | — | ||||||
| Acquisition and integration costs | 5,861 | 9,253 | ||||||
| Restructuring costs(1) | 32,200 | — | ||||||
| Contingent consideration | (30,569 | ) | (28,729 | ) | ||||
| Intangible amortization | 30,981 | 27,016 | ||||||
| Non-GAAP adjusted income from operations | $ | 94,287 | $ | 232,210 |
Non-GAAP adjusted net income and adjusted earnings per share
Non-GAAP adjusted net income and adjusted earnings per share is measured by taking net income as reported in accordance with GAAP and excluding inventory step-up charges, acquisition and integration costs, restructuring costs, contingent consideration fair value adjustments, intangible amortization, loss on extinguishment of debt, non-cash interest expense, amortization of debt issuance costs, foreign currency impact of certain intercompany loans and the tax effects on these items. The following are reconciliations of
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net income and fully diluted earnings per share in accordance with GAAP to non-GAAP adjusted net income and adjusted fully diluted earnings per share for the years ended December 31, 2023 and 2022:
| For the Years Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||||||||
| Fully Diluted | Fully Diluted | |||||||||||||||
| Earnings per | Earnings per | |||||||||||||||
| Amount | Share* | Amount | Share* | |||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||
| GAAP net income | $ | 41,577 | $ | 0.74 | $ | 185,959 | $ | 3.24 | ||||||||
| Non-GAAP adjustments to net income: | ||||||||||||||||
| Inventory step-up charges | 1,238 | 0.02 | — | — | ||||||||||||
| Acquisition and integration costs | 5,861 | 0.10 | 9,514 | 0.17 | ||||||||||||
| Restructuring costs(1) | 32,200 | 0.57 | — | — | ||||||||||||
| Contingent consideration | (30,569 | ) | (0.54 | ) | (28,729 | ) | (0.50 | ) | ||||||||
| Intangible amortization | 30,981 | 0.55 | 27,016 | 0.47 | ||||||||||||
| Loss on extinguishment of debt | 12,676 | 0.22 | — | — | ||||||||||||
| Non-cash interest expense | 620 | 0.01 | — | — | ||||||||||||
| Amortization of debt issuance costs(2) | 8,075 | 0.14 | 1,815 | 0.03 | ||||||||||||
| Foreign currency impact of certain intercompany loans(4) | (7,743 | ) | (0.14 | ) | ||||||||||||
| Tax effect of non-GAAP charges | 3,485 | 0.06 | (7,002 | ) | (0.12 | ) | ||||||||||
| Non-GAAP adjusted net income | $ | 98,401 | $ | 1.75 | $ | 188,573 | $ | 3.28 |
* Note that earnings per share amounts may not add due to rounding.
Adjusted EBITDA
Adjusted EBITDA is measured by taking net income as reported in accordance with GAAP, excluding investment income, interest expense, amortization of debt issuance costs, income tax provision, depreciation and amortization, inventory step-up charges, acquisition and integration costs, restructuring costs, contingent consideration fair value adjustments booked through our consolidated statements of comprehensive income, loss on extinguishment of debt and foreign currency impact of certain intercompany loans. The following is a reconciliation of net income in accordance with GAAP to adjusted EBITDA for years ended December 31, 2023 and 2022:
| For the Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (Amounts in thousands) | ||||||||
| GAAP net income | $ | 41,577 | $ | 185,959 | ||||
| Non-GAAP EBITDA adjustments to net income: | ||||||||
| Investment income | (24,135 | ) | (6,978 | ) | ||||
| Interest expense | 1,951 | 1,162 | ||||||
| Amortization of debt issuance costs | 8,075 | 1,815 | ||||||
| Income tax provision | 22,555 | 33,181 | ||||||
| Depreciation | 36,994 | 23,859 | ||||||
| Intangible amortization | 31,091 | 27,126 | ||||||
| EBITDA | 118,108 | 266,124 | ||||||
| Other non-GAAP adjustments: | ||||||||
| Inventory step-up charges | 1,238 | — | ||||||
| Acquisition and integration costs | 5,861 | 9,514 | ||||||
| Restructuring costs(1)(3) | 28,384 | — | ||||||
| Contingent consideration | (30,569 | ) | (28,729 | ) | ||||
| Loss on extinguishment of debt | 12,676 | — | ||||||
| Foreign currency impact of certain intercompany loans(4) | (7,743 | ) | — | |||||
| Adjusted EBITDA | $ | 127,955 | $ | 246,909 |
(1)
See Note 5, “Restructuring Plan,” in this report, for more information on the restructuring activities in 2023.
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(2)
See Note 2, “Summary of Significant Accounting Policies - Earnings Per Share,” in this report, for more information on the effects of adopting ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40),” which we adopted effective January 1, 2022, to these financial statement line items.
(3)
Excludes $3.8 million of accelerated depreciation related to the Restructuring Plan. This amount is included in the depreciation line item of this table.
(4)
In 2023 we recorded foreign currency gains on certain intercompany loans. The impact was recorded to other income (expenses), net in our consolidated statements of comprehensive income.
Liquidity and Capital Resources
We have financed our operations primarily through revenues derived from product sales, the issuance of the 2016 Notes in May 2016, our 2019 Notes in July 2019, the 2023 Notes in December 2023 and the issuance of common stock in our December 2020, July 2019 and May 2019 public offerings. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue.
At December 31, 2023, we had cash and cash equivalents of $751.3 million compared to cash and cash equivalents of $523.5 million at December 31, 2022. There were no restrictions on cash as of December 31, 2023.
On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Subsequently, the U.S. Treasury, Federal Reserve and FDIC announced that SVB depositors would have access to all of their money. We have a banking relationship with SVB and hold cash, cash equivalents and marketable securities of $0.1 million as of December 31, 2023 in SVB depository accounts to cover short-term operational payments. While we have not experienced any losses in such accounts, the recent failure of SVB caused us to utilize our accounts at other financial institutions in order to mitigate potential operational risks stemming from the temporary inability to access funds in our SVB operating accounts. As a result of bank failures, such as SVB, our access to funding sources in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired and could negatively impact the financial institutions with which we have direct arrangements, or the financial services industry or economy in general.
In 2023, we acquired two companies for an aggregate of $186.6 million in cash, net of cash acquired. In connection with the acquisitions, the Company has an obligation to pay up to $52.0 million (undiscounted) in contingent consideration earnout payments in cash over a two-year earnout period beginning January 1, 2023 and ending December 31, 2024). See Note 3, “Fair Value Measurements,” and Note 4, “Acquisitions,” for additional information.
On December 14, 2023, we issued $600.0 million aggregate principal amount of our 2023 Notes in Exchange and Subscription Agreements with a limited number of holders of our outstanding 2019 Notes and certain other investors. Pursuant to the Exchange and Subscription Agreements, we exchanged $217.7 million aggregate principal amount of the 2019 Notes for $309.9 million in aggregate principal amount of the 2023 Notes (the "Exchange Transaction") and issued $290.1 million aggregate principal amount of the 2023 Notes (the "Subscription Transactions") for $290.1 million in cash. Immediately following the closing of the aforementioned transactions, the exchanged 2019 Notes were cancelled and $69.7 million in aggregate principal amount of the 2019 Notes remained outstanding. We evaluated all exchanges and determined approximately $29.6 million of the exchanged notes were accounted for as extinguishment of debt and approximately $188.1 million were accounted for as modification of debt. As a result, we recognized a $12.7 million loss on extinguishment of debt on our consolidated statement of comprehensive income in 2023.
Proceeds from the Subscription Transactions amounted to $276.1 million after debt issuance costs of $14.0 million. The exchange resulted in $6.2 million of the debt issuance costs related to the modified notes to be recorded to amortization of debt issuance costs in our 2023 consolidated statement of comprehensive income under the rules of modification accounting. The remaining debt issuance costs of $7.8 million as well as $0.7 million of unamortized costs carried over from the 2019 Notes at the exchange date, were capitalized within long-term debt (as a contra-liability) in our consolidated balance sheets as of December 31, 2023 and will be amortized as an adjustment to amortization of debt issuance costs over the five-year term of the 2023 Notes in our consolidated statements of comprehensive income. The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a rate of 1.00% per year. Interest is payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2024. The 2023 Notes will mature on December 15, 2028, unless earlier redeemed, repurchased or converted.
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Prior to the close of business on the business day immediately preceding September 15, 2028, the 2023 Notes will be convertible at the option of the holders of 2023 Notes only upon the satisfaction of specified conditions and during certain periods into cash up to their principal amount, and into cash, shares of the Company's common stock or a combination of cash and the Company's common stock, at the Company's election, for the conversion value above the principal amount, if any. Thereafter until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2023 Notes will be convertible at the options of the holders of 2023 Notes at any time regardless of these conditions.
During the fourth quarter of 2023, the closing price of our common stock exceeded 130% of the conversion price of the 2019 Notes for more than 20 trading days of the last 30 consecutive trading days of the quarter. As a result, the 2019 Notes are convertible at the option of the holders of the 2019 Notes during the first quarter of 2024, the quarter immediately following the quarter when the conditions are met, as stated in the terms of the 2019 Notes. These conditions have been met each quarter since the third quarter of 2020. As a result, as of the date of this filing and prior to the Exchange Transaction, we received requests to convert $0.2 million aggregate principal amount of the 2019 Notes and all but $0.1 million of the requests have been settled as of December 31, 2023. The remaining conversions will settle in the first quarter of 2024. The conversions resulted in the issuance of a nominal number of shares of our common stock to the note holders. Because the 2019 Notes mature within one year of the report date, we classify the carrying value of the 2019 Notes of $69.5 million as current liabilities on our consolidated balance sheets at December 31, 2023.
In 2023, our Board authorized the repurchase of up to $25.0 million of our common stock concurrent with the issuance of the 2023 Notes. The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of our Board. In December 2023, we used $14.4 million of cash of the proceeds from the issuance of the 2023 Notes to repurchase and retire 92,090 shares of our common stock at an average price of $156.22 per share, including $0.02 per share commission.
In 2023, we had lease arrangements for certain equipment and facilities including corporate and manufacturing sites. As of December 31, 2023, the Company had fixed lease payment obligations of $132.2 million, with $5.6 million payable within 12 months. See Note 6, “Leases,” for additional information.
In 2023, we had other purchase obligations primarily consisting of purchase commitments with certain vendors and open purchase orders for the procurement of raw materials for manufacturing. As of December 31, 2023, the Company had other purchase obligations of $34.3 million, payable within 12 months.
Cash flows
| For the Years Ended December 31, | 2023 vs 2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | ||||||||||
| (Amounts in thousands) | ||||||||||||
| Cash provided by (used in): | ||||||||||||
| Operating activities | $ | 113,918 | $ | 172,083 | $ | (58,165 | ) | |||||
| Investing activities | (123,275 | ) | (233,236 | ) | 109,961 | |||||||
| Financing activities | 248,961 | (13,337 | ) | 262,298 | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (11,739 | ) | (5,866 | ) | (5,873 | ) | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 227,865 | $ | (80,356 | ) | $ | 308,221 |
Operating activities
For 2023, our operating activities provided cash of $113.9 million reflecting net income of $41.6 million and non-cash charges totaling $81.0 million primarily related to amortization of inventory step-up charges, depreciation, intangible amortization, amortization of debt discount and issuance costs, contingent consideration fair value adjustments, deferred income taxes, stock-based compensation charges and loss on extinguishment of debt. A decrease in inventory provided $41.0 million of which $23.6 million was related to the Restructuring Plan. An increase in prepaid expenses, primarily related to prepaid taxes and insurance as well as subscriptions, consumed $13.0 million. A decrease in accounts payable and accrued expenses consumed $37.7 million and was due to
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the timing of payments to vendors as well as the payment of employee bonuses related to 2022 during 2023. The remaining cash provided by operating activities resulted from favorable changes in various other working capital accounts.
For 2022, our operating activities provided cash of $172.1 million reflecting net income of $186.0 million and non-cash charges totaling $49.9 million primarily related to depreciation, amortization, contingent consideration adjustments, amortization of debt issuance costs, deferred income taxes and stock-based compensation charges. An increase in accounts receivable consumed $3.6 million of cash and was primarily driven by the 19.5% year-to-date increase in revenue in 2022, as compared to 2021. Additionally, we had an increase in inventory of $57.2 million to support expected increases in future revenue. Accounts payable decreased $8.2 million due to the timing of payments to vendors and accrued expenses decreased $2.0 million due to corporate income taxes paid. Offsetting these uses of cash was a $4.1 million net increase in operating lease liabilities due to new operating leases entered into during 2022 and a $2.4 million decrease in prepaid expenses, including corporate income taxes. The remaining cash used in operating activities resulted from unfavorable changes in various other working capital accounts.
Investing activities
Our investing activities consumed $123.3 million of cash in 2023, primarily due to $186.6 million in cash (net of cash received) used for the 2023 acquisitions of Metenova and FlexBiosys, in the aggregate. Capital expenditures consumed $39.0 million in 2023, as we continue to increase our manufacturing capacity worldwide. Of these expenditures, $2.8 million represented capitalized costs related to our internal-use software for 2023. These uses of cash were partially offset by the maturity of our short-term investment in U.S. treasury securities in June 2023, which provided cash of $102.3 million.
Our investing activities consumed $233.2 million of cash during 2022, mainly due to $88.3 million of capital expenditures in 2022 as we continued to increase our manufacturing capacity worldwide. Of these expenditures, $3.5 million represented capitalized costs related to our internal-use software for 2022. In addition, in September 2022, the Company paid a one-time, non-refundable, non-creditable upfront payment to Daylight as required under the Daylight Agreement for the commercialization and sale of Culpeo®QCL-IR Liquid Analyzer. In December 2022, the Company invested $100.0 million in short-term U.S. treasury securities.
Financing activities
In 2023, cash provided by financing activities of $249.0 million included $290.1 million of proceeds from the issuance of the 2023 Notes in December 2023 and proceeds from stock option exercises during 2023 were $1.1 million. Offsetting these activities was $14.4 million for the buyback of 92,090 shares of our common stock, $13.2 million in cash disbursed for shares withheld to cover employee income tax due upon the vesting and release of restricted stock units, $7.3 million paid for debt issuance costs related to the 2023 Notes and the payment of $7.3 million to settle the cash portion of the First Earnout Year contingent earnout obligation related to our acquisition of Avitide in September 2021.
Our financing activities consumed $13.3 million of cash in 2022, which included cash disbursed in relation to shares withheld to cover employee income tax due upon the vesting and release of restricted stock units of $17.0 million. This was partially offset by proceeds received from stock option exercises during the period of $3.7 million.
Working capital increased by $359.0 million to $952.9 million at December 31, 2023 from $593.9 million at December 31, 2022 due to various changes noted above, primarily the exchange of $217.7 million in aggregate principal of the 2019 Notes in December 2023.
Effect of exchange rate changes on cash, cash equivalents and restricted cash
The effect of exchange rate changes on cash during 2023 is a result of the strengthening of the Swedish krona against the U.S. dollar by 3%, the strengthening of the Euro against the U.S. dollar by 3% and the strengthening of the British pound against the U.S. dollar by 5%.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
Capital Requirements
Our future capital requirements will depend on many factors, including the following:
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the expansion of our bioprocessing business;
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the ability to sustain sales and profits of our bioprocessing products and successfully integrate them into our business;
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our ability to acquire additional bioprocessing products;
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the scope of and progress made in our R&D activities;
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the scope of investment in our intellectual property portfolio;
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contingent consideration earnout payments resulting from our acquisitions;
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the extent of any share repurchase activity;
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the success of any proposed financing efforts;
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general economic and capital markets;
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change in accounting standards;
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the impact of inflation on our operations, including our expenditures on raw material and freight charges;
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fluctuations in foreign currency exchange rates; and
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costs associated with our ability to comply with emerging environmental, social and governance standards.
Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 24 months. We expect operating expenses in 2024 to increase as we continue to expand our bioprocessing business. We expect to incur continued spending related to the development and expansion of our bioprocessing product lines and expansion of our commercial capabilities for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property, plant and equipment, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, and continued investment in our intellectual property portfolio.
We plan to continue to invest in our bioprocessing business and in key R&D activities associated with the development of new bioprocessing products. We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, for example, due to acquisition-related financing needs or lower demand for our products, among potential other events, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt funding. The sale of equity and convertible debt securities may result in dilution to our shareholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, if at all.
Net Operating Loss Carryforwards
At December 31, 2023, we had federal net operating loss carryforwards of $31.1 million, state net operating loss carryforwards of $1.5 million, and foreign net operating loss carryforwards of $4.9 million. The state net operating loss carryforwards will expire at various dates through 2043, while the federal and foreign net operating loss carryforwards have unlimited carryforward periods and do not expire. We had federal and state business tax credits carryforwards of $5.0 million available to reduce future federal and state income taxes. The business tax credits carryforwards will expire at various dates through December 2043. Net operating loss carryforwards and available tax credits are subject to review and possible adjustment by the Internal Revenue Service, state and foreign jurisdictions and may be limited in the event of certain changes in the ownership interest of significant stockholders.
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Foreign Earnings
As of December 31, 2023, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $212.4 million. Because $5.7 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the Tax Cuts and Jobs Act enacted in December 2017, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. At December 31, 2023, we have not provided for taxes on outside basis differences of our foreign subsidiaries as it is not practicable and we have the ability and intent to indefinitely reinvest the undistributed earnings of our foreign subsidiaries, and there are no needs for such earnings in the United States that would contradict our plan to indefinitely reinvest.
Effects of Inflation
Our assets are primarily monetary, consisting of cash and cash equivalents and marketable securities. Because of their liquidity, these assets are not directly affected by inflation. Since we intend to retain and continue to use our equipment, furniture, fixtures and office equipment, computer hardware and software and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.