Charles River Laboratories International, Inc. — Q2 2015 Form 10-Q
Business context and period. The company is a global, early-stage contract research organization serving drug development and manufacturing clients. This unaudited report covers the quarter and six months ended June 27, 2015; comparisons are with the periods ended June 28, 2014. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $339.6 million | $341.2 million | $660.0 million | $640.5 million |
| Operating income | $55.7 million | $51.0 million | $98.7 million | $90.7 million |
| Net income attributable to common shareholders | $48.5 million | $35.3 million | $80.1 million | $67.5 million |
| Diluted EPS | $1.02 | $0.74 | $1.68 | $1.41 |
| Operating margin | 16.4% | 15.0% | 15.0% | 14.2% |
For the six months, cash from continuing operations was $97.6 million, versus $85.4 million a year earlier. Investing activities used $36.5 million, including $24.6 million of capital expenditures; financing activities used $63.7 million, including $99.5 million for treasury stock purchases. Cash and cash equivalents were $150.8 million at June 27, 2015, down from $160.0 million at year-end. Cash plus investments totaled $168.9 million.
Borrowings under the term loans and revolving facility totaled $742.9 million at quarter-end. The amended $1.3 billion credit facility comprises a $400 million term loan and a $900 million multicurrency revolver, both maturing in 2020. The weighted-average debt interest rate was 1.31%; the company reported covenant compliance. Debt is primarily floating-rate; a 100-basis-point rate increase would raise annual pretax interest expense by approximately $13 million.
Changes and segment performance
- Q2 revenue declined 0.5% reported; management attributed a 6.2% adverse revenue impact to foreign exchange. For the six months, revenue rose 3.0% reported despite a 6.0% adverse FX impact.
- Discovery and Safety Assessment revenue increased 7.5% in Q2 and 18.4% for the six months, supported by safety assessment demand, market-share gains, pricing and acquisitions, including ChanTest and Argenta/BioFocus.
- Research Models and Services revenue declined 9.8% in Q2 and 9.6% for the six months, principally reflecting lower Europe and Japan research-model revenue and lower research-model services revenue. Manufacturing Support revenue was nearly flat in Q2 and down 0.5% for the six months.
- Operating income increased in both comparison periods, and consolidated costs as a percentage of revenue improved. Management cited efficiency savings and improved DSA cost ratios; higher corporate SG&A, including stock compensation and acquisition-related costs, partly offset gains.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said existing funds, operating cash generation and financing access should be sufficient to fund operations for the foreseeable future.
- Q2 results included a $9.9 million bargain-purchase gain from the Sunrise acquisition, recorded in other income and not taxable. The acquisition expanded Avian Vaccine Services. The lower effective tax rate also reflected tax-position releases and other discrete tax items; the six-month effective rate was 12.4%, compared with 26.1%.
- After quarter-end, on July 24, the company acquired Celsis for a preliminary $212 million cash purchase price to expand its Endotoxin and Microbial Detection business. Purchase-price allocation was not yet practicable to disclose.
- Foreign currency movements remain a material exposure. The company said a stronger U.S. dollar reduces the translated value of non-U.S. revenue; no foreign-exchange contracts were open at quarter-end.
- The company reserved $1.5 million for excess billing identified on certain government contracts and said additional losses were reasonably possible, but it could not estimate a range beyond the reserve. It did not expect existing lawsuits or current tax controversies to materially affect its financial position or results.
- Other items to note: the company repurchased approximately 1.2 million shares for $90.8 million during the six months, with $87.6 million remaining under the authorization at quarter-end; DSO rose to 54 days from 52 at year-end. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- How much of the operating and revenue trends reflects underlying demand versus foreign exchange, acquired businesses and the Sunrise bargain-purchase gain.
- Whether DSA growth and improved segment cost ratios persist, and whether weakness in Research Models and Services stabilizes.
- The final Celsis purchase-price allocation, integration costs and contribution to results, as well as final adjustments to Sunrise’s preliminary allocation.
- Cash deployment, debt levels and floating-rate exposure following the Celsis acquisition, alongside continued share repurchases.
- Developments in the government-contract billing matter and any additional loss beyond the $1.5 million reserve.