CHARLES RIVER LABORATORIES INTERNATIONAL, INC. quarterly report, Q3 FY2012

Charles River Laboratories International, Inc. — Q3 2012 Form 10-Q

Reporting period: Quarter ended September 29, 2012; comparisons are with the quarter ended September 24, 2011. Financial amounts below are in millions of U.S. dollars unless stated otherwise. Charles River provides research models and services and outsourced preclinical drug-development services through its RMS and PCS segments.

Financial performance

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Net sales	$278.7	$277.6	$849.4	$851.7
Operating income	$37.7	$37.1	$130.7	$132.7
Operating margin	13.5%	13.4%	15.4%	15.6%
Net income attributable to common shareowners	$22.0	$18.8	$78.9	$82.5
Diluted EPS	$0.46	$0.37	$1.63	$1.58
Cash from operating activities	Not stated for quarter	Not stated for quarter	$143.7	$134.9

Q3 gross margin was 33.5%, versus 33.4%; nine-month gross margin was 35.4%, essentially unchanged year over year.
Nine-month income from continuing operations was $79.4 million, compared with $88.4 million. The 2012 period had $0.1 million of discontinued-operation losses, versus $5.7 million in 2011.
Cash and cash equivalents were $83.2 million at September 29, 2012, up from $68.9 million at year-end 2011. Current assets were $457.9 million and current liabilities $325.2 million.
Total debt was $668.7 million, including $125.6 million classified as current. The company reported compliance with its credit-agreement financial covenants. Cash plus current marketable securities totaled about $89.6 million.
Nine-month capital expenditures were $33.8 million; operating cash flow less capital expenditures was approximately $109.9 million. This is a simple calculation, not a company-defined free-cash-flow measure.

Changes and segment trends

Q3 sales rose 0.4%; management attributed the increase chiefly to PCS, partly offset by a 3.2% adverse foreign-exchange effect. Nine-month sales fell 0.3%, including a 2.4% adverse currency impact.
Q3 RMS sales declined 2.9% to $166.5 million, while operating income fell to $43.4 million from $48.5 million. Management cited currency and lower sales against fixed costs; RMS operating margin declined to 26.1% from 28.3%.
Q3 PCS sales increased 5.7% to $112.2 million, driven mainly by safety-assessment demand. Operating income rose to $11.0 million from $3.7 million, and operating margin improved to 9.8% from 3.5%, reflecting higher sales, utilization, cost actions, and lower amortization.
Nine-month operating income declined 1.5%, partly because 2011 included a $7.7 million insurance gain. Nine-month diluted EPS nevertheless increased to $1.63 from $1.58, aided in part by lower interest expense and fewer weighted-average shares.
Nine-month interest expense fell to $25.0 million from $32.6 million, primarily due to lower debt balances and rates. The effective tax rate increased to 23.3% from 11.6%, largely because 2011 included a $11.1 million tax benefit related to the Phase I business disposition and a tax-exempt insurance gain.

Outlook, commentary, and notable items

Management described customer demand as uncertain amid measured R&D spending, delayed decisions, pricing pressure, industry excess capacity, biopharmaceutical funding constraints, and pharmaceutical-sector consolidation. It noted stronger demand for certain non-GLP discovery and pharmacology services, while cautioning that timing of longer-term demand drivers is difficult to predict.
No full-year revenue or earnings guidance is provided in the filing. Management expected 2012 capital expenditures of approximately $50 million and stated it believed existing capacity could support growth without significant additional expansion investment.
The company acquired Accugenix in August for $18.4 million in cash, net of cash acquired, to expand microbial-identification services. In October it agreed to acquire a 75% interest in China-based Vital River for approximately $27 million, subject to closing conditions and regulatory approvals; closing was expected in Q1 2013.
European research-model operations consolidation led to a $3.5 million impairment charge and $0.9 million of Q3 severance and retention charges. The company also recorded a $1.2 million Q3 tax benefit associated with settlement of a Canadian tax controversy and UK tax-rate remeasurement.
The $350.0 million principal amount of 2.25% convertible notes is due in June 2013. Management expected to fund the maturity using cash and future borrowings, including revolving-credit capacity, and said it would evaluate other financing alternatives. The credit agreement’s revolving facility matures in 2016.
Management cited foreign-exchange and variable-interest-rate exposure; a 100-basis-point adverse rate change was estimated to increase annual pretax interest expense by about $6.5 million. Days sales outstanding rose to 52 from 48 at year-end 2011; management estimated a one-day DSO change affects operating cash flow by about $3.1 million.
The company remained guarantor of the former Phase I facility lease; remaining lease payments were $13.6 million through January 2021. Management said pending routine litigation was not expected to materially affect the financial statements. No material changes to the 2011 Form 10-K risk factors were reported.

Key facts for investors to verify

Whether PCS demand and improved utilization persist, and whether RMS sales and margins stabilize despite currency and fixed-cost pressures.
Cash conversion and receivables collection trends, including the elevated DSO and the geographic availability of cash: $75.9 million of the $83.2 million cash balance was held by non-U.S. subsidiaries.
The financing and settlement plan for the June 2013 convertible-note maturity, alongside scheduled debt repayments and available revolver capacity.
Integration, purchase accounting, and returns from Accugenix, and completion and funding of the proposed Vital River acquisition.
Potential effects of customer spending uncertainty, pricing pressure, foreign-exchange movements, rate changes, tax audits, and the Phase I lease guarantee.