Charles River Laboratories International, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to the corresponding periods ended June 25, 2011. The company supplies research models and outsourced drug discovery and preclinical services through Research Models and Services (RMS) and Preclinical Services (PCS). Financial figures below are in U.S. dollars; millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $284.7 | $288.3 | $570.7 | $574.1 |
| Operating income | $49.3 | $53.3 | $93.0 | $95.6 |
| Operating margin | 17.3% | 18.5% | 16.3% | 16.7% |
| Net income attributable to common shareholders | $30.5 | $32.3 | $56.9 | $63.7 |
| Diluted EPS | $0.63 | $0.63 | $1.17 | $1.17 |
- Q2 gross margin was 36.4%, versus 36.9%; first-half gross margin was 36.4%, flat year over year. Q2 net income from continuing operations was $30.5 million; first-half income from continuing operations was $57.0 million.
- Operating cash flow was $82.6 million for the first half, compared with $86.7 million. Capital expenditures were $23.6 million; investing cash outflow was $8.6 million and financing cash outflow was $65.5 million. Cash increased to $76.1 million from $68.9 million at year-end.
- At June 30, total debt was $686.2 million, including $335.6 million carrying value of 2.25% convertible notes due June 2013, $315.4 million in term loans, and $35.0 million drawn on the revolving facility. Current debt and capital lease obligations were $134.8 million; long-term debt and capital leases were $551.4 million. The $350 million revolving facility matures in 2016; the company reported covenant compliance.
- Cash plus marketable securities was approximately $82.7 million. Of cash, $9.6 million was held in the U.S. and $66.5 million abroad; the $6.6 million of marketable securities was held by non-U.S. subsidiaries. The company described itself as a net borrower.
- First-half share repurchases totaled $30.8 million for 889,791 shares. The company reported approximately $88.5 million remaining under its repurchase authorization at June 30.
Material changes and segment performance
- Q2 sales declined 1.2%; management attributed a 3.1% negative sales impact to foreign currency translation. First-half sales declined 0.6%, with a 2.0% negative currency impact.
- Q2 RMS sales fell 2.6% to $173.6 million, primarily due to currency. First-half RMS sales rose 1.5% to $356.8 million, supported by Other Products and Research Model Services. First-half RMS operating income increased 7.1% to $115.0 million.
- Q2 PCS sales increased 0.9% to $111.1 million, reflecting stronger non-GLP discovery services, partly offset by currency. First-half PCS sales declined 3.9% to $213.9 million, due to mix, lower biopharmaceutical services sales, and currency; operating income declined to $15.0 million from $17.2 million.
- Q2 consolidated operating income fell 7.5%. Management cited the prior-year $7.7 million life-insurance gain, unfavorable foreign exchange, and lower gross margin; a Japan-related insurance settlement partly offset these items. First-half operating income declined 2.7%, also compared with the prior-year insurance gain.
- First-half effective tax rate was 24.1%, versus 7.9%. The comparison was affected by prior-year tax benefits related to the Phase I business disposition and the tax-exempt insurance gain; 2012 also included an unbenefitted capital loss on auction-rate securities.
Outlook, management commentary, and risks
- No specific revenue or earnings guidance is provided in the filing. Management expected 2012 capital expenditures of approximately $50 million and said existing capacity could support segment revenue growth without significant additional expansion investment.
- Management described demand as stabilizing but uncertain. It cited customer R&D spending restraint, delayed decisions, pricing pressure and industry excess capacity, pharmaceutical and biotechnology consolidation, and reduced funding for biotech clients. It sees potential long-term demand from strategic outsourcing and increased use of non-GLP in vivo discovery services, but said timing is difficult to predict.
- The $350 million principal amount of convertible notes matures in June 2013. Management said it intends to meet the maturity using cash, available credit capacity and potentially other financing alternatives; the filing reports that no conversion triggers had been met at June 30, 2012.
- Foreign exchange remains a risk: it reduced reported sales, and the company recognized $1.4 million of losses on forward currency contracts during Q2. A hypothetical 100-basis-point adverse rate change could increase annual pretax interest expense by approximately $6.7 million.
- A putative California employee wage-and-hour class action was filed in January 2012. The company intends to defend it; it could not estimate a possible loss or range. The company also described Canadian and state tax examinations and disputed Canadian research-credit assessments, while stating it did not expect these matters to materially affect its financial position or results.
- Management reported disclosure controls were effective at a reasonable assurance level and no material changes to internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2011 Form 10-K.
Most important facts for investors to verify
- How the company plans to refinance or repay the June 2013 convertible-note maturity, and the availability and terms of revolving-credit capacity.
- Whether operating cash flow and working-capital trends—particularly receivables, which used $25.4 million of cash in the first half—remain consistent with management’s cash-generation objectives.
- Whether PCS utilization, service mix, and margins recover after first-half sales and operating income declined; and whether RMS growth persists excluding currency effects.
- The effects of foreign exchange, customer spending restraint, pricing pressure, and the client-protocol transfer under the expanded preferred-provider agreement.
- Updates on the employee litigation, Canadian tax-credit disputes, and other tax uncertainties; the filing does not quantify a potential loss for the employee case.