Charles River Laboratories International, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; comparative periods ended June 29, 2019. Charles River is an early-stage contract research organization, reporting Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing segments. Amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $682.6 million | $657.6 million | $1,389.6 million | $1,262.1 million |
| Operating income | $76.8 million | $79.8 million | $171.0 million | $149.6 million |
| Operating margin | About 11.2% | 12.1% | 12.3% | 11.8% |
| Net income attributable to common shareholders | $67.4 million | $43.7 million | $118.2 million | $98.9 million |
| Diluted EPS | $1.34 | $0.88 | $2.36 | $1.99 |
| Operating cash flow | Not separately reported for the quarter | $230.9 million | $144.4 million |
The MD&A gives Q2 operating margin as 11.3% in one passage and 11.2% in its detailed results; the statements imply approximately 11.2%.
- Q2 service revenue rose 8.8% to $550.6 million, while product revenue fell 13.0% to $132.0 million. First-half service revenue increased 14.7%; product revenue declined 4.2%.
- Q2 segment revenue: RMS $116.5 million, down 14.3%; DSA $442.6 million, up 9.1%; Manufacturing $123.5 million, up 6.4%. DSA and Manufacturing operating income improved, while RMS operating income fell sharply to $3.8 million from $31.5 million.
- First-half operating income increased 14.4%, led by DSA and Manufacturing; RMS operating income decreased 55.0% to $31.2 million.
- Q2 other income was $26.3 million, versus a $0.2 million expense a year earlier. Management attributed the swing mainly to gains on venture-capital and life-insurance investments. The filing reports $23.9 million of Q2 venture-capital investment gains.
- First-half effective tax rate was 15.0%, down from 20.2%, primarily due to greater tax benefits from stock-based compensation and fewer nondeductible transaction costs.
Liquidity, cash flow and debt
- At June 27, 2020, cash and cash equivalents were $402.0 million, compared with $238.0 million at December 28, 2019. Current assets were $1.235 billion and current liabilities were $727.9 million.
- First-half operating cash flow was $230.9 million. Investing activities used $442.3 million, including $382.3 million for acquisitions and $52.5 million of capital expenditures; financing activities provided $375.1 million.
- Total debt and finance leases were $2.277 billion, including $53.7 million current, compared with $1.906 billion at year-end 2019. The weighted-average debt interest rate was 3.04%. The company reported approximately $1 billion of availability on its revolving facility.
- The company borrowed an additional $150 million on its revolver in Q1 as a precaution against pandemic-related liquidity uncertainty, and said it did not currently expect to need that borrowing for operations or to borrow more during 2020. It reported compliance with credit-facility covenants.
Material changes, outlook and risks
- COVID-19: All operating sites remained open and adequately staffed as of the filing, but client and supplier closures, shipping delays, absenteeism and added supply costs created operating challenges. RMS research-model demand was materially affected by closures, particularly at academic clients. DSA and Manufacturing were not significantly affected overall in the first half, although some work shifted and installations were delayed.
- Management expected a small adverse impact on revenue growth, operating income, margins and cash flows in DSA and Manufacturing through the rest of 2020. RMS demand was not expected to recover until affected clients reopened and resumed research. The filing provides no specific full-year revenue or earnings guidance.
- Cost actions included hiring restrictions, reduced hours and discretionary spending, delayed compensation increases and reduced acquisition and capital-project activity. Some annual compensation increases were reinstated beginning in Q3. Management said current liquidity and operating cash flows were expected to support operations and obligations for the foreseeable future.
- HemaCare was acquired on January 3, 2020, for $379.8 million in cash. It contributed $6.4 million of Q2 revenue and $18.7 million in the first half, but recorded operating losses of $5.9 million and $8.1 million, respectively. Acquisition-related amortization and an inventory fair-value adjustment weighed on RMS results.
- On August 4, 2020, after quarter-end, the company signed an agreement to acquire Cellero for approximately $38 million in cash, subject to customary closing conditions; it expected to fund the purchase with cash on hand.
- No goodwill or long-lived-asset impairment trigger was identified at quarter-end, but management said impairment indicators would remain under review. A prolonged disruption or materially weaker expected cash flows could result in impairments or receivable write-offs.
- Other disclosed risks include uncertainty over the pandemic and customer R&D spending, supply-chain disruption, foreign exchange and interest-rate exposure, acquisition integration, cybersecurity and regulatory compliance. The company cited a 2019 unauthorized systems-access incident and continuing cyber-risk mitigation. It reported no material change in internal control over financial reporting and said disclosure controls were effective.
- Routine lawsuits were pending; management did not expect their resolution to materially adversely affect the business or financial condition. The revolving credit facility is LIBOR-linked and matures in 2023; the company was evaluating transition options ahead of LIBOR phase-out.
Investor verification points
- Assess whether research-model demand and RMS profitability recover as academic and other client sites reopen.
- Separate underlying operating performance from investment gains, particularly the Q2 venture-capital and life-insurance gains.
- Track acquisition integration, HemaCare losses and amortization, Cellero closing and funding, and the resulting debt and goodwill levels.
- Monitor cash conversion and the extent to which first-half operating cash-flow growth depended on tax-payment deferrals and working-capital timing.
- Verify revolver availability, covenant headroom, interest-rate sensitivity, and the company’s transition plan for LIBOR-linked borrowings.
- Follow COVID-19 effects on staffing, suppliers, client activity and future performance obligations, as well as any updated impairment assessments.