Charles River Laboratories International, Inc. — Q1 2019 Form 10-Q
Reporting period: 13 weeks ended March 30, 2019; comparative period ended March 31, 2018. Unaudited consolidated results. The company is a global early-stage contract research organization, with Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing segments.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $604.6 million | $494.0 million | +22.4% |
| Service revenue | $450.9 million | $345.5 million | +30.5% |
| Product revenue | $153.6 million | $148.5 million | +3.4% |
| Operating income | $69.8 million | $67.8 million | +2.9% |
| Operating margin | 11.5% | 13.7% | -2.2 percentage points |
| Net income attributable to common shareholders | $55.1 million | $52.6 million | +4.8% |
| Diluted EPS | $1.11 | $1.08 | +2.8% |
| Cash from operating activities | $14.9 million | $60.1 million | Down $45.2 million |
| Capital expenditures | $16.7 million | $27.7 million | Down $11.0 million |
- Revenue growth reflected MPI Research, acquired in April 2018, and organic growth in DSA and Manufacturing. Foreign exchange reduced reported revenue growth by $13.9 million, or 2.8%.
- Segment revenue: RMS $137.2 million (+2.4%); DSA $354.2 million (+36.2%); Manufacturing $113.2 million (+13.2%). DSA growth included $70.7 million of service revenue from MPI Research.
- Operating income increased, but margins contracted amid higher amortization, acquisition-related costs, and investment in staffing and facilities. Segment operating margins were 27.6% for RMS, 13.2% for DSA, and 27.8% for Manufacturing.
- Operating cash flow fell primarily because of less favorable changes in contract-related balances and accrued compensation. Operating cash flow less capital expenditures was approximately negative $1.9 million.
- Cash and cash equivalents were $126.3 million at quarter-end, down from $195.4 million at fiscal year-end. Total current assets were $866.2 million and current liabilities $529.8 million.
- Borrowings under term loans, revolving facility, and senior notes totaled $1.558 billion; total debt and finance leases were $1.587 billion. The weighted-average debt interest rate was 3.77%. The company reported compliance with credit-facility covenants.
- The company reported $127.2 million of cash, cash equivalents, and investments in its liquidity discussion. It stated that available funds, operating cash flow, and financing access should fund operations for the foreseeable future.
Material changes, outlook, and risks
- On April 29, 2019, after quarter-end, the company acquired Citoxlab for a preliminary €448 million, approximately $500 million, funded with cash and revolving-credit borrowings. The acquisition will be included in DSA. Purchase-price allocation and pro forma results were not available in the filing.
- In March 2019, the company detected unauthorized access to portions of its information systems. It said some client data had been copied; investigation and remediation were ongoing, and the potential revenue and financial impact had not been determined. The company warned of possible client losses, reputational harm, legal claims, and regulatory investigations.
- The filing provides no clear numerical forward guidance. Management described demand and pricing growth in several service areas, alongside continued investment to support growth.
- The company recognized $10.6 million of venture-capital investment gains in other income, versus $6.5 million a year earlier. These gains are a notable non-operating item.
- Adoption of the new lease standard added operating right-of-use assets of $130.7 million and operating lease liabilities totaling $128.0 million at March 30, 2019; management said adoption did not significantly affect income or cash flows.
- Citoxlab generated $5.2 million of transaction and integration costs in the quarter. Restructuring costs were $1.5 million, compared with $0.6 million in Q1 2018.
- A 100-basis-point rise in interest rates was estimated to increase annual pretax interest expense by $10.6 million. Routine litigation was pending; management did not expect existing matters to materially adversely affect the business or financial condition.
- The effective tax rate was 16.0%, compared with 15.5%. Unrecognized tax benefits were $19.5 million; the company estimated they could decrease by up to $8.2 million over the following 12 months, primarily depending on tax audits.
Important facts for investors to verify
- Progress, scope, and financial or customer consequences of the cybersecurity incident, including whether remediation is complete.
- Citoxlab’s final purchase accounting, financing impact, integration costs, and contribution to revenue and margins.
- Whether the sharp year-over-year operating cash-flow decline reverses as receivables, deferred revenue, deposits, and accrued compensation normalize.
- DSA and consolidated margin trends as acquisition amortization, staffing, and facility investments continue.
- Debt levels, interest-rate exposure, covenant headroom, and liquidity after funding Citoxlab.
- Performance and valuation of venture-capital investments, which contributed material gains to quarterly earnings.