Charles River Laboratories International, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter ended September 24, 2016; the nine-month period is compared with the nine months ended September 26, 2015. Amounts are in U.S. dollars unless noted. The company provides early-stage contract research, research models, safety assessment, and manufacturing-support products and services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $425.7 million | $349.5 million | $1,214.6 million | $1,009.5 million |
| Operating income | $58.8 million | $55.4 million | $168.3 million | $154.2 million |
| Operating margin | 13.8% | 15.9% | 13.9% | 15.3% |
| Net income attributable to common shareholders | $37.7 million | $37.4 million | $110.1 million | $117.4 million |
| Diluted EPS | $0.79 | $0.79 | $2.30 | $2.47 |
| Operating cash flow | Not provided for the quarter | $186.1 million | $185.9 million |
- Q3 revenue rose 21.8%; nine-month revenue rose 20.3%. Acquisitions, especially WIL Research, contributed substantially. Foreign exchange reduced revenue by $5.2 million in Q3 and $11.6 million for the nine months.
- Q3 service revenue increased 31.6% and product revenue 4.7%. DSA revenue rose 36.4% in Q3, including $53.6 million of growth attributed to WIL Research; management also cited softer demand from global clients in legacy Discovery Services.
- Operating income increased, but operating margin declined. Q3 costs of services and products were 63.3% of revenue, flat year over year; nine-month costs were 61.6%, versus 61.3%. Higher amortization, acquisition-related costs, and DSA costs weighed on profitability.
- Effective tax rate was 29.2% for Q3 and 30.4% for the nine months, compared with 28.7% and 18.3%, respectively, in 2015. The prior-year nine-month rate benefited from tax items and a non-taxable bargain-purchase gain.
Liquidity, debt, and cash flows
- At September 24, 2016, cash and cash equivalents were $105.7 million; total debt was approximately $1.238 billion, plus $28.9 million of capital lease obligations. Debt was $836.2 million at December 26, 2015. Cash less debt was therefore approximately negative $1.13 billion, before leases.
- Current assets were $654.6 million and current liabilities $412.0 million. The company reported $186.1 million of operating cash flow, $29.6 million of capital expenditures, and $156.5 million of operating cash flow less capital expenditures for the nine months.
- Acquisitions used $597.6 million of cash; investing activities used $615.4 million in total. Financing activities provided $414.2 million, including net borrowings. Cash declined $12.2 million from year-end.
- The $1.65 billion credit facility had $1.0 billion of revolving capacity and a $650 million term loan commitment; outstanding borrowings were $1.238 billion. The weighted-average debt rate was 1.95%, and the company was compliant with covenants. A 100-basis-point rate increase would raise annual pretax interest expense by approximately $12.4 million.
- Management stated existing funds, operating cash generation, and financing access were expected to fund operations for the foreseeable future. The company had $69.7 million remaining under its share-repurchase authorization and made no program repurchases during the nine months.
Material changes, outlook, and risks
- WIL Research was acquired April 4 for approximately $604.8 million; its safety-assessment and contract-manufacturing operations contributed to DSA and Manufacturing. Blue Stream was acquired June 27 for approximately $11.7 million. After quarter-end, on September 28, the company acquired Agilux for approximately $64.0 million, funded with revolver borrowings.
- Q3 included a $4.3 million asset impairment charge related to consolidating a small Ireland safety-assessment facility. Nine-month results also included a $1.9 million impairment of certain DSA intangibles and $8.1 million of severance and retention costs.
- Other income for the nine months included venture-capital and life-insurance investment gains; prior-year comparisons were also affected by a $9.9 million Sunrise bargain-purchase gain and a $10.4 million reduction in unrecognized tax benefits. WIL acquisition and integration costs were $13.7 million for the nine months.
- No specific financial guidance is provided in the supplied filing text. Management discussed acquisition-led growth, increased study volume and pricing in legacy safety assessment, and softer demand in legacy Discovery Services.
- Risks include Brexit-related economic, regulatory, and currency uncertainty; foreign exchange exposure (a hypothetical 10% U.S. dollar strengthening would reduce quarterly revenue by about $16.7 million and operating income by about $2.2 million); and floating-rate debt. The IDEXX patent case remained pending, and the company said a possible loss range could not be estimated. A government-contract billing matter had a recorded estimated liability of $1.8 million, subject to settlement.
- The company reported effective disclosure controls. It began centralizing certain accounting transaction-processing functions during the quarter. The filing states no material changes to previously disclosed risk factors other than Brexit.
Investor verification priorities
- Separate acquired revenue from organic growth and assess whether softer legacy Discovery Services demand persists.
- Track DSA profitability, consolidated margins, and integration costs as WIL and other acquisitions are absorbed.
- Review post-quarter Agilux purchase accounting, funding, and contribution; the filing does not yet provide its allocation or results.
- Monitor leverage, floating-rate exposure, covenant headroom, and cash generation relative to acquisition spending.
- Follow the IDEXX litigation and government-contract billing resolution, along with Brexit and foreign-exchange impacts.