Charles River Laboratories International, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks); fourth-quarter figures are included below. Charles River is a global early-stage contract research organization, with Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing segments.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $2,266.1 million | $1,857.6 million | +22.0% |
| Operating income | $331.4 million | $288.3 million | +15.0% |
| Operating margin | 14.6% | 15.5% | Down 0.9 percentage points |
| Income from continuing operations | $227.2 million | $125.6 million | +80.9% |
| Net income attributable to common shareholders | $226.4 million | $123.4 million | +83.5% |
| Diluted EPS from continuing operations | $4.59 | $2.54 | +80.7% |
| Cash from operations | $441.1 million | $318.1 million | +$123.0 million |
| Capital expenditures | $140.1 million | $82.4 million | +$57.6 million |
Revenue growth reflected stronger demand, acquisitions, and a $23.7 million favorable foreign-exchange effect. Service revenue rose 30.0% to $1,687.9 million; product revenue increased 3.4% to $578.2 million. Cash from operations less capital expenditures was approximately $301.1 million.
Segments: RMS revenue was $519.7 million (+5.3%) and operating margin 26.3%; DSA revenue was $1,316.9 million (+34.4%) and margin 17.3%; Manufacturing revenue was $429.6 million (+11.9%) and margin 31.7%. DSA growth included MPI Research, KWS BioTest, and Brains On-Line; MPI contributed $209.5 million in revenue after its April acquisition.
Fourth quarter: Revenue was $601.5 million versus $478.5 million in Q4 2017; operating income was $102.5 million versus $62.8 million. Net income attributable to common shareholders was $59.7 million, compared with a $29.8 million loss a year earlier. The prior-year quarter was affected by U.S. Tax Reform charges.
Debt, liquidity, and balance sheet
- Cash and cash equivalents were $195.4 million at year-end, compared with $163.8 million a year earlier.
- Total debt was $1,655.0 million, including $731.3 million of term loans, $397.5 million drawn on the revolving facility, and $500.0 million of 5.5% senior notes due 2026. The debt balance rose substantially following the MPI acquisition; interest expense increased to $63.8 million from $29.8 million.
- The company had a $2.3 billion credit facility, including a $1.55 billion multi-currency revolver; the facility matures in 2023. It reported compliance with its debt covenants at year-end. A 100-basis-point interest-rate increase was estimated to add $11.3 million to annual pretax interest expense.
- Total assets were $3,855.9 million. Goodwill and other intangibles totaled approximately $1.9 billion. Current assets were $897.8 million and current liabilities $558.2 million.
- Contractual cash obligations totaled $2,076.8 million, including debt, leases, purchase obligations, venture-fund commitments, and contingent payments.
Material changes, outlook, and risks
- Operating income grew more slowly than revenue, and operating margin declined, principally due to acquisition-related costs and amortization, increased staffing and facility investment, and corporate expenses. Segment margins fell in DSA and Manufacturing but improved in RMS.
- The effective tax rate fell to 19.3% from 57.7%, largely reflecting U.S. Tax Reform and the unusually high 2017 comparison. The resulting increase in net income should be considered alongside this tax-driven comparison.
- Management described demand as strong in Safety Assessment, Discovery Services, Manufacturing, and research model services, citing client outsourcing, biotechnology funding, and higher facility utilization. The filing does not provide a quantified FY2019 earnings or revenue guidance target.
- In February 2019, the company signed a binding offer to acquire Citoxlab for €448 million (approximately $510 million), expected to close in Q2 2019 subject to conditions. It expected to finance the purchase with cash and its revolver; specified termination circumstances could trigger an €18.2 million fee.
- Key risks include reduced client or government R&D spending, contract cancellations or delays, acquisition integration and leverage, interest and currency movements, regulatory or data-integrity failures, animal-model contamination, cybersecurity and privacy breaches, and Brexit-related disruption. Backlog increased to $1,081.7 million from $733.7 million, but management cautions that timing, scope changes, delays, and cancellations make backlog an uncertain indicator of future revenue.
- The company began the process in January 2019 to terminate its U.S. defined-benefit pension plan over approximately two years; required contributions and settlement costs may affect cash needs.
Important facts for investors to verify
- How much FY2018 growth and operating contribution came from acquisitions versus underlying business growth, especially in DSA.
- Whether acquired operations deliver expected integration benefits and whether margins recover as acquisition and expansion costs moderate.
- Citoxlab closing, financing, purchase-price adjustments, and the effect on debt, interest expense, and covenant headroom.
- Cash conversion and capital requirements, including pension-plan termination funding, contractual commitments, and future facility investment.
- Exposure to tax-law changes, foreign exchange, client R&D budgets, regulatory compliance, and backlog conversion.
Audit and controls: The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. MPI Research and KWS BioTest, together representing 9.6% of consolidated revenue and 5.4% of assets, were excluded from the 2018 internal-control assessment and audit.