On August 9, 2023 Charles River Laboratories International, Inc. (NYSE: CRL) reported its results for the second quarter of 2023 (Press release, Charles River Laboratories, AUG 9, 2023, View Source [SID1234634054]). For the quarter, revenue was $1.06 billion, an increase of 8.9% from $973.1 million in the second quarter of 2022.
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Acquisitions contributed 0.2% to consolidated second-quarter revenue growth. The divestiture of the Avian Vaccine business in December 2022 reduced reported revenue growth by 2.3%, and the impact of foreign currency translation reduced reported revenue growth by 0.2% for the quarter. Excluding the effect of these items, organic revenue growth of 11.2% was driven primarily by the Research Models and Services (RMS) and Discovery and Safety Assessment (DSA) business segments.
On a GAAP basis, second-quarter net income attributable to common shareholders was $97.0 million, a decrease of 11.3% from $109.3 million for the same period in 2022. Second-quarter diluted earnings per share on a GAAP basis were $1.89, a decrease of 11.3% from $2.13 for the second quarter of 2022. GAAP earnings per share included a loss from the Company’s venture capital and other strategic investments of $0.03 per share in the second quarter of 2023, compared to a loss of $0.14 per share for the same period in 2022. Certain venture capital and other strategic investment performance has been excluded from the Company’s non-GAAP results.
On a non-GAAP basis, net income was $138.3 million for the second quarter of 2023, a decrease of 2.5% from $141.9 million for the same period in 2022. Second-quarter diluted earnings per share on a non-GAAP basis were $2.69, a decrease of 2.9% from $2.77 per share for the second quarter of 2022.
The lower GAAP and non-GAAP net income and earnings per share were driven primarily by non-operating items, including increased interest expense and a higher tax rate, as well as the impact of the Avian Vaccine divestiture.
James C. Foster, Chairman, President and Chief Executive Officer, said, "We were pleased with our second-quarter financial results, highlighted by another strong quarter for the DSA segment and the expected improvement in the RMS and Manufacturing segments. We believe our significant scientific breadth and experience, as well as the substantial scale and duration of our DSA backlog, are important differentiators during times of macroeconomic or funding uncertainty."
"We are also closely monitoring the near-term demand trends that show more cautious spending by biopharmaceutical clients. In this environment, we believe clients will look for scientific partners who can provide even more efficiency and speed to market, and that they will continue to choose Charles River in order to derive additional value through our flexible and efficient outsourcing solutions. We believe these factors will enable us to effectively manage the business and give us confidence in our revenue growth and non-GAAP earnings per share guidance for the year, which we are narrowing to the upper ends of the previous ranges," Mr. Foster concluded.
Second-Quarter Segment Results
Research Models and Services (RMS)
Revenue for the RMS segment was $209.9 million in the second quarter of 2023, an increase of 12.6% from $186.4 million in the second quarter of 2022. The impact of foreign currency translation reduced revenue by 1.3% in the quarter. Organic revenue growth of 13.9% was driven by broad-based growth for research models in all geographies, particularly in China, as well as for research model services, primarily the Insourcing Solutions (IS) business.
In the second quarter of 2023, the RMS segment’s GAAP operating margin increased to 23.3% from 21.2% in the second quarter of 2022, and on a non-GAAP basis, the operating margin increased to 26.4% from 24.9%. The GAAP and non-GAAP operating margin increases were driven primarily by the timing of large model shipments in China.
Discovery and Safety Assessment (DSA)
Revenue for the DSA segment was $663.5 million in the second quarter of 2023, an increase of 12.1% from $591.9 million in the second quarter of 2022. The SAMDI Tech acquisition contributed 0.3% to reported DSA revenue growth, and the impact of foreign currency translation was negligible in the quarter. Organic revenue growth of 11.7% was driven by the Safety Assessment business, as a result of higher pricing and study volume.
In the second quarter of 2023, the DSA segment’s GAAP operating margin increased to 24.3% from 21.8% in the second quarter of 2022, and on a non-GAAP basis, the operating margin increased to 27.6% from 25.3%. The GAAP and non-GAAP operating margin increases were driven by operating leverage from higher revenue in the Safety Assessment business.
Manufacturing Solutions (Manufacturing)
Revenue for the Manufacturing segment was $186.5 million in the second quarter of 2023, a decrease of 4.2% from $194.8 million in the second quarter of 2022. The impact of the Avian Vaccine divestiture reduced revenue by 10.8%, and the impact of foreign currency translation was negligible. Organic revenue growth of 6.6% for the quarter was driven primarily by the CDMO and Microbial Solutions businesses.
In the second quarter of 2023, the Manufacturing segment’s GAAP operating margin decreased to 13.1% from 32.1% in the second quarter of 2022, and on a non-GAAP basis, the operating margin decreased to 22.9% from 28.6% in the second quarter of 2022. The GAAP and non-GAAP operating margin declines were primarily the result of lower operating margins in the Biologics Testing and CDMO businesses. The GAAP operating margin decline was also driven by an acquisition-related adjustment in the CDMO business that benefited second-quarter 2022 results.
Updates 2023 Guidance
The Company is updating its 2023 financial guidance, which was previously provided on May 11, 2023. The Company is narrowing its revenue growth and non-GAAP earnings per share outlooks to largely reflect its solid first-half financial performance and the successful implementation of mitigation efforts around NHP supply constraints. These benefits are anticipated to be partially offset by near-term demand trends as biopharmaceutical clients appear to be reprioritizing their pipelines and tightening R&D budgets.
The Company’s 2023 guidance for revenue growth and earnings per share is as follows:
2023 GUIDANCE
CURRENT
PRIOR
Revenue growth, reported
2.5% – 4.5%
2.0% – 4.5%
Impact of divestitures/(acquisitions), net
~1.5%
~1.5%
Impact of 53rd week in 2022
~1.5%
~1.5%
Unfavorable/(favorable) impact of foreign exchange
0.0% – (0.5)%
0.0% – (0.5)%
Revenue growth, organic (1)
5.5% – 7.5%
5.0% – 7.5%
GAAP EPS estimate
$7.60 – $8.20
$7.45 – $8.45
Acquisition-related amortization
~$2.00
~$2.00
Acquisition and integration-related adjustments (2)
$0.20 – $0.25
~$0.10
Venture capital and other strategic investment losses/(gains), net (3)
$0.06
$0.03
Other items (4)
~$0.40
$0.30 – $0.35
Non-GAAP EPS estimate
$10.30 – $10.90
$9.90 – $10.90
Footnotes to Guidance Table:
(1) Organic revenue growth is defined as reported revenue growth adjusted for completed acquisitions and divestitures, the 53rd week in 2022, and foreign currency translation.
(2) These adjustments are related to the evaluation and integration of acquisitions and divestitures, and primarily include transaction, advisory, certain third-party integration costs, and certain costs associated with acquisition-related efficiency initiatives.
(3) Venture capital and other strategic investment performance only includes recognized gains or losses on certain investments. The Company does not forecast the future performance of these investments.
(4) These items primarily relate to charges associated with U.S. and international tax legislation that necessitated changes to the Company’s international financing structure; certain third-party legal costs related to (a) environmental litigation related to the Microbial Solutions business and (b) investigations by the U.S. government into the NHP supply chain related to our Safety Assessment business; and (c) severance and other costs related to the Company’s efficiency initiatives.
Webcast
Charles River has scheduled a live webcast on Wednesday, August 9th, at 8:30 a.m. ET to discuss matters relating to this press release. To participate, please go to ir.criver.com and select the webcast link. You can also find the associated slide presentation and reconciliations of GAAP financial measures to non-GAAP financial measures on the website.
Investor Day
Charles River will host a virtual Meeting with Management on Thursday, September 21st, beginning at 8:30 a.m. ET. Investors will have the opportunity to listen to a webcast of the virtual event through the Investor Relations section of the Company’s website at ir.criver.com. A replay will be accessible through the same website.