Charles River Laboratories International, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 28, 2015, compared with the quarter ended March 29, 2014. Charles River provides research models, contract research and safety assessment services, and manufacturing-support products and services through three segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $320.4 million | $299.4 million | Up 7.0%; foreign exchange reduced reported growth by 5.8 percentage points |
| Operating income | $43.0 million | $39.7 million | Up 8.3% |
| Operating margin | 13.4% | 13.3% | Up 0.1 percentage point |
| Net income attributable to common shareholders | $31.5 million | $32.2 million | Down 2.1% |
| Diluted EPS | $0.66 | $0.67 | Down $0.01 |
| Cash provided by operating activities | $11.3 million | $28.5 million | Down $17.2 million |
| Capital expenditures | $10.6 million | $11.2 million | Down $0.5 million |
Service revenue rose to $196.8 million from $172.3 million, while product revenue fell to $123.6 million from $127.0 million. Costs of services and products were 62.6% of revenue versus 63.7%; SG&A was 22.3% of revenue versus 21.6%. Net income was supported by a 1.0% effective tax rate, compared with 24.1% in the prior-year quarter; the rate fell mainly because $10.4 million of tax benefits and related interest were recognized after a statute of limitations expired. Other income/expense shifted from $5.9 million of income to an $8.3 million expense.
Segment results
| Segment | Revenue | Operating income | Notable change |
|---|---|---|---|
| RMS | $120.0 million, down 9.4% | $28.8 million, versus $35.4 million | Lower research models revenue in Europe and Japan and lower research model services revenue; efficiency savings reduced costs. |
| DSA | $140.0 million, up 33.1% | $23.5 million, versus $11.7 million | Growth included $24.1 million from the Argenta, BioFocus and ChanTest acquisitions, as well as higher Safety Assessment revenue. |
| Manufacturing Support | $60.4 million, down 2.1% | $16.8 million, versus $18.4 million | Higher Avian revenue was offset by lower Biologics revenue. |
Liquidity, debt and balance sheet
- At March 28, 2015, cash and cash equivalents were $151.9 million; current assets were $614.1 million and current liabilities $270.5 million.
- Total debt was approximately $760.1 million, including $392.4 million drawn on the revolving facility; debt and capital lease obligations on the balance sheet totaled $786.4 million. The weighted-average debt interest rate was 1.42%. The company reported compliance with all debt covenants.
- Cash declined $8.1 million during the quarter. Operating cash flow was pressured primarily by changes in operating assets and liabilities, including accrued compensation and taxes payable/prepaid taxes. Days sales outstanding rose to 54 from 52 at year-end.
- The company repurchased approximately 0.7 million shares for $50.0 million under its program; $128.5 million remained authorized. Financing cash flows also included $8.6 million of shares acquired for employee tax withholding.
Material changes, outlook and risks
- Revenue growth was concentrated in DSA and was partly acquisition-driven; RMS and Manufacturing Support revenue declined. The filing attributes a substantial adverse revenue translation effect to foreign exchange.
- On April 22, 2015, after quarter-end, the company amended its credit agreement, increasing facility capacity from $970 million to $1.3 billion and extending maturity to April 2020. Management said existing funds, operating cash generation and financing access should fund operations for the foreseeable future. No specific revenue or earnings guidance is provided in this filing.
- Floating-rate debt creates interest exposure: a 100-basis-point rate increase was estimated to raise annual pretax interest expense by approximately $9.2 million. Foreign exchange remains a material operating risk; no foreign exchange contracts were open at quarter-end.
- The company reserved $1.5 million for identified excess billings on certain government contracts. It said additional losses are reasonably possible but the potential range beyond the reserve cannot be estimated; the company is cooperating with government agencies.
- Other notable items include a $10.4 million reversal of an indemnification asset affecting other income/expense, lower limited-partnership gains ($1.3 million versus $6.1 million), and $1.4 million of additional stock-compensation expense from award modifications and a new retirement provision. The company reported no material change to the risk factors in its 2014 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much DSA growth is sustainable and attributable to acquired operations versus underlying demand, and whether RMS weakness persists.
- Whether operating cash flow recovers from working-capital and tax-payment pressures, and how receivables and days sales outstanding develop.
- Debt use, borrowing costs and covenant headroom under the amended $1.3 billion facility, given variable-rate exposure and ongoing share repurchases.
- The outcome and potential additional exposure from the government-contract billing matter; losses beyond the $1.5 million reserve are not quantifiable in the filing.
- The durability of the unusually low 1.0% effective tax rate; the quarter’s rate benefited from a discrete tax-related item.