Charles River Laboratories International, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2018; comparatives are the periods ended July 1, 2017. Charles River provides research models, drug discovery and safety assessment services, and manufacturing-support products and services. Results are unaudited.
Financial performance and liquidity
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $585.3 million, up 24.8% | $1,079.3 million, up 18.0% |
| Operating income / margin | $76.7 million / 13.1%; prior year $81.7 million / 17.4% | $144.5 million / 13.4%; prior year $151.4 million / 16.5% |
| Net income attributable to common shareholders | $53.7 million, versus $54.0 million | $106.3 million, versus $100.7 million |
| Diluted EPS | $1.10, versus $1.12 | $2.17, versus $2.08 |
| Operating cash flow | Not separately stated for the quarter | $183.9 million, versus $134.4 million |
| Capital expenditures | Not separately stated for the quarter | $48.9 million, versus $31.9 million |
Q2 service revenue was $438.5 million, up 33.1%; product revenue was $146.8 million, up 5.1%. Six-month revenue growth included a positive foreign-exchange effect of 3.7%; Q2 growth included 2.6%. By segment, Q2 revenue rose 5.2% in RMS, 37.4% in DSA, and 16.6% in Manufacturing. DSA growth substantially reflected acquisitions.
At June 30, cash and cash equivalents were $192.3 million, current assets $889.5 million, and current liabilities $518.1 million. Total debt was $1.815 billion, compared with $1.121 billion at year-end 2017; the weighted-average debt interest rate was 3.24%. Cash less reported debt was approximately $622 million net debt; this calculation excludes capital leases. The company reported compliance with its credit-facility covenants.
Material changes versus the prior comparable periods
- MPI Research was acquired on April 3 for $829.7 million in cash; it contributed $66.6 million of Q2 revenue and $8.2 million of operating income after acquisition. KWS BioTest was acquired in January for $20.3 million. These acquisitions increased DSA revenue and also increased amortization, integration costs, and debt.
- Operating income declined despite higher revenue: management cited acquisition-related amortization and costs, and continued investment in personnel, facilities, IT, and infrastructure. Q2 SG&A was $120.5 million, up 28.5%; intangible amortization was $18.7 million, up 90.9%.
- Interest expense rose to $18.6 million in Q2 from $7.4 million and to $29.8 million for six months from $14.4 million, primarily due to acquisition financing. The six-month effective tax rate fell to 20.4% from 34.4%, principally reflecting U.S. Tax Reform and the prior-year CDMO divestiture tax impact.
- Six-month operating cash flow improved by $49.6 million, supported by higher continuing-operations income and working-capital effects, including improved receivable collections and customer contract deposits. Investing cash flow was an outflow of $851.0 million, largely for acquisitions.
Outlook, management commentary, and risks
Management said existing funds, expected operating cash generation, and access to financing should be sufficient to fund operations for the foreseeable future. The filing provides no specific revenue, earnings, or margin guidance.
- The $2.3 billion credit facility matures in 2023; the $500 million 5.5% senior notes mature in 2026. A 100-basis-point increase in interest rates would raise annual pretax interest expense by an estimated $13.0 million.
- A 10% strengthening of the U.S. dollar, with other variables held constant, was estimated to reduce six-month revenue by about $41.0 million and operating income by about $2.9 million. No foreign-exchange contracts were open at quarter-end.
- MPI transaction and integration costs were $11.7 million in Q2 and $14.5 million for six months. The company also reported $17.4 million of six-month venture-capital investment gains, affecting comparison of other income.
- The Maryland RMS site restructuring was modified after quarter-end, with the facility to be repurposed. Remaining 2018 costs for that initiative were not expected to exceed $1.5 million. Existing lawsuits were described as normal to the business; management did not expect their resolution to materially harm financial position or results. No material risk-factor changes were reported.
- Key continuing exposures include floating-rate debt, foreign currency movements, acquisition integration and execution, and estimates involving revenue recognition, taxes, goodwill, and intangible assets. The company had $109.1 million of venture-fund commitments, of which $60.7 million had been funded.
Important facts for investors to verify
- How much of DSA’s reported growth and future profitability is attributable to MPI Research and other acquisitions, versus underlying organic demand and realized integration benefits.
- Whether operating margins recover as acquisition costs and amortization evolve, given the decline in reported margins despite strong revenue growth.
- Debt balances, variable-rate exposure, covenant headroom, and cash generation after acquisition spending and capital expenditures.
- The sustainability and valuation sensitivity of venture-capital gains, and the remaining tax effects of U.S. Tax Reform.
- Progress and costs of the Maryland restructuring and facility repurposing, plus the eventual purchase-price allocation for MPI Research, which remained preliminary.