Charles River Laboratories International, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Charles River provides research models and related services, plus outsourced preclinical drug-development services, through its RMS and PCS segments.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $1,142.6 million | $1,133.4 million |
| Gross margin | 35.2% | 33.9% |
| Operating income (loss) | $174.3 million | ($298.5) million |
| Net income (loss) attributable to common shareholders | $109.6 million | ($336.7) million |
| Diluted EPS | $2.14 | ($5.38) |
| Cash from operating activities | $206.8 million | $168.2 million |
| Capital expenditures | $49.1 million | $42.9 million |
| Cash and cash equivalents at year-end | $68.9 million | $179.2 million |
| Total debt and capital lease obligations | $717.9 million | $700.9 million |
| Working capital | $209.0 million | $293.1 million |
Reported sales rose 0.8%; favorable currency translation contributed 2.2%, and an additional fiscal week contributed approximately 1.0% to reported sales. Gross margin improved as cost-saving actions and higher RMS sales helped lower cost of sales as a share of revenue. Operating results rebounded primarily because 2010 included a $305.0 million goodwill impairment, $91.4 million of asset impairments, and a $30.0 million acquisition termination fee—not solely because of improved underlying demand.
Fourth-quarter 2011 sales were $291.0 million, operating income was $41.6 million, income from continuing operations was $27.1 million, and diluted EPS was $0.55.
Segments and year-over-year changes
- Research Models and Services (61.7% of sales): Revenue increased 5.8% to $705.4 million. Operating income was $206.3 million, with a 29.2% operating margin, up from 27.7%. Growth reflected higher other-product and research-model-services sales, including In Vitro and avian businesses.
- Preclinical Services (38.3% of sales): Revenue declined 6.3% to $437.2 million, reflecting slower demand, reduced biopharmaceutical spending, study-mix changes, and pricing pressure. Operating income was $24.9 million, or a 5.7% margin, versus a large loss in 2010 that included impairments and the termination fee.
- PCS backlog was $202.5 million at year-end, down from $219.9 million at the prior comparable year-end. Management cautions that backlog is not a reliable measure of future revenue because studies can change, be delayed, or be cancelled.
Liquidity, debt, and capital allocation
- Operating cash flow increased to $206.8 million. Less capital expenditures of $49.1 million implies approximate free cash flow of $157.7 million; this is a simple calculation, not a company-reported measure in the cited discussion.
- Cash fell by $110.3 million, mainly due to share repurchases, capital spending, and debt prepayments. Cash and cash equivalents plus marketable securities totaled about $85.3 million, but $11.1 million of auction-rate securities were illiquid after failed auctions.
- Year-end debt obligations were approximately $739.4 million on a principal basis; balance-sheet carrying value of debt and capital leases was $717.9 million. The $350 million revolving facility was available subject to the credit agreement. The company reported compliance with its financial covenants.
- The $350 million 2.25% convertible notes mature in June 2013. Management expected to fund the maturity using cash, operating cash flow, credit capacity, and potentially other financing alternatives.
- Charles River repurchased 8.4 million shares for approximately $299.5 million in 2011. It had $116.3 million remaining under its $750 million authorization at year-end. No cash dividends had been paid in the prior two years, and none were planned for the foreseeable future.
Outlook, commentary, and notable items
- Management said demand conditions appeared to be stabilizing but remained uncertain, citing client cost controls, delayed decisions, late-stage pipeline priorities, industry consolidation, funding conditions, and pricing pressure. It expects longer-term opportunity from outsourcing, particularly non-regulated discovery and other early-stage services, but did not provide formal revenue or EPS guidance.
- Management expected 2012 capital expenditures of approximately $50 million. A fourth-quarter 2011 workforce reduction of approximately 2%, primarily in PCS, was expected to generate about $7.5 million of annual savings beginning in 2012.
- The company reported a $6.8 million impairment of acquired in-process research and development and a $0.7 million impairment of an RMS facility in 2011. It also recorded a $7.7 million tax-exempt life-insurance gain and an $11.1 million tax benefit from releasing a valuation allowance related to the Phase I clinical business disposition.
- The Phase I clinical business was sold for a nominal amount in March 2011; Charles River remained guarantor of the facility lease, with remaining lease payments of $14.7 million at year-end. The PCS China facility was disposed of in 2011, with a reported $3.8 million gain on sale.
- Key risks include weaker pharmaceutical and biotechnology R&D spending or outsourcing, cancellable client contracts, fixed-price project overruns, competition and excess industry capacity, animal contamination or supply disruptions, foreign-exchange exposure, regulatory compliance, and the company’s substantial debt. The filing also describes a January 2012 California wage-and-hour putative class action; the company intended to defend it and could not estimate a possible loss.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether RMS growth and cost savings can offset continued PCS revenue weakness and pricing pressure, especially after adjusting for currency and the extra fiscal week.
- The quality and convertibility of liquidity, including the failed-auction securities, and the company’s plan to meet the June 2013 convertible-note maturity.
- Progress in reducing leverage while maintaining share repurchases and funding planned capital expenditures; confirm covenant headroom as leverage tests tighten in 2012.
- Whether the expected $7.5 million annual savings materialize and whether they support sustainable margins rather than merely offsetting weaker demand.
- Potential liabilities and cash commitments related to the Phase I lease guarantee, the California employment lawsuit, tax controversies, and cancellable or delayed PCS backlog.