Charles River Laboratories International, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 25, 2010 (12 months). The filing is an annual report, not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Business context
Charles River provides research models and related services (RMS) and outsourced preclinical services (PCS) to pharmaceutical, biotechnology, academic, government, and other life-sciences customers. It operated approximately 68 facilities in 16 countries. RMS generated 58.8% of continuing-operations sales and PCS 41.2%.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $1,133.4 million | $1,171.6 million |
| Gross profit / gross margin | $384.8 million / 33.9% | $423.0 million / 36.1% |
| Operating income (loss) | $(298.5) million | $169.6 million |
| Income (loss) from continuing operations, after tax | $(334.1) million | $111.2 million |
| Net income (loss) attributable to common shareowners | $(336.7) million; diluted EPS $(5.38) | $114.4 million; diluted EPS $1.74 |
| Cash from operating activities | $168.2 million | $215.6 million |
| Capital expenditures | $42.9 million | $79.9 million |
| Cash and cash equivalents at year-end | $179.2 million | $182.6 million |
| Working capital at year-end | $293.1 million | $345.8 million |
| Total debt and capital lease obligations at year-end | $700.9 million | $492.8 million |
Operating cash flow less capital expenditures was approximately $125.4 million in 2010, versus $135.7 million in 2009; this is a simple cash-flow proxy, not a company-reported free-cash-flow measure. Marketable securities totaled $21.2 million, including $11.4 million of auction-rate securities with limited liquidity. The company reported $168.2 million of continuing-operations operating cash flow; its cash-flow statement separately reports cash from discontinued operations.
At year-end, current assets were $552.9 million and current liabilities were $259.8 million. The company had a $350 million revolving facility within a $750 million credit agreement and reported compliance with its financial covenants. Debt principal maturities include $415.9 million in 2013, largely reflecting the convertible notes. The company estimated that a 100-basis-point interest-rate increase would add about $7.4 million to annual pretax interest expense.
Material changes versus FY2009
- Sales declined 3.3%. RMS sales rose 1.1% to $667.0 million, while PCS sales fell 8.8% to $466.4 million.
- PCS faced lower demand, pricing pressure, and reduced capacity utilization. Its gross margin declined to 22.8% from 28.2%; its reported operating result was heavily affected by impairments.
- RMS operating margin fell to 27.7% from 29.3%, reflecting fixed costs and higher SG&A despite slightly higher sales.
- Operating results included a $305.0 million PCS goodwill impairment, $91.4 million in asset impairments, and a $30.0 million fee to terminate the proposed WuXi acquisition. These charges drove the reported operating loss.
- Operating cash flow declined by $47.3 million. Debt and capital lease obligations increased by approximately $208.0 million, while year-end cash was nearly unchanged.
- The company repurchased 9.76 million shares during 2010, including shares delivered under a $300 million accelerated repurchase program. It had $397.1 million remaining under its $750 million authorization after the program’s February 2011 settlement.
Outlook, commentary, and risks
Management said demand remained uncertain, particularly for PCS, citing customer cost controls, pharmaceutical and biotechnology consolidations, delayed decisions, excess preclinical industry capacity and pricing pressure, and a near-term shift toward later-stage drug development. Management expected preclinical demand to improve over time as customers restart early-stage pipelines and outsource more work, but said the timing was difficult to predict. The filing gives no specific revenue or earnings guidance.
Management’s stated priorities were improving operating margins and free cash flow, investing selectively in growth areas (including GEMS, Discovery Services, In Vitro, and Biopharmaceutical Services), and returning capital to shareholders. Planned 2011 capital expenditures were approximately $50 million. The company was pursuing strategic alternatives for its U.S. Phase I clinic and China preclinical facility, and had classified Phase I clinical services as discontinued operations.
Key risks include further reductions or delays in customer R&D spending and outsourcing, cancellable customer contracts and project delays, pricing competition and excess capacity, additional goodwill or asset impairments, regulatory and animal-welfare requirements, contamination of animal populations, foreign-exchange and tax exposure, and debt service and interest-rate risk. The company also disclosed tax-credit disputes in Canada and Quebec; management did not expect resolution to materially affect financial position or results, but similar adjustments could be proposed for later years. No material legal proceedings were reported. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether PCS demand, utilization, pricing, and backlog recover; PCS backlog fell to $219.9 million from $268.8 million.
- Whether the substantial 2010 impairments and site actions fully capture the risks at PCS, particularly Massachusetts and China, or whether further charges arise.
- Whether operating cash flow can sustain debt service, planned investment, and the remaining share-repurchase program while preserving liquidity.
- The timing, proceeds, and ongoing lease or other obligations associated with strategic alternatives for the Phase I clinic and China facility.
- The availability of auction-rate securities and the outcomes of the Canadian and Quebec tax-credit disputes, tax audits, and related reserves.