On August 7, 2024 Charles River Laboratories International, Inc. (NYSE: CRL) reported its results for the second quarter of 2024 (Press release, Charles River Laboratories, AUG 7, 2024, View Source [SID1234645492]). For the quarter, revenue was $1.03 billion, a decrease of 3.2% from $1.06 billion in the second quarter of 2023.
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The impact of foreign currency translation reduced reported revenue by 0.3%, a divestiture reduced reported revenue by 0.2%, and an acquisition contributed 0.5% to consolidated second-quarter revenue. Excluding the effect of these items, revenue also declined 3.2% on an organic basis. On a segment basis, organic revenue growth in the Manufacturing Solutions (Manufacturing) segment was more than offset by lower revenue in the Discovery and Safety Assessment (DSA) and Research Models and Services (RMS) segments.
In the second quarter of 2024, the GAAP operating margin decreased to 14.8% from 15.6% in the second quarter of 2023. This GAAP decrease was primarily driven by lower operating margins in the RMS and DSA segments, due in part to costs associated with the Company’s restructuring initiatives. On a non-GAAP basis, the second-quarter operating margin increased to 21.3% from 20.4%, driven primarily by lower performance-based compensation accruals, as well as operating margin improvement in the Manufacturing segment.
On a GAAP basis, second-quarter net income attributable to common shareholders was $90.0 million, a decrease of 7.2% from $97.0 million for the same period in 2023. Second-quarter diluted earnings per share on a GAAP basis were $1.74, a decrease of 7.9% from $1.89 for the second quarter of 2023. The GAAP net income and earnings per share decreases were driven primarily by lower revenue and operating income, which included higher costs associated with the Company’s restructuring initiatives. On a non-GAAP basis, net income was $144.9 million for the second quarter of 2024, an increase of 4.8% from $138.3 million for the same period in 2023. Second-quarter diluted earnings per share on a non-GAAP basis were $2.80, an increase of 4.1% from $2.69 per share for the second quarter of 2024. The increases in non-GAAP net income and earnings per share were driven primarily by lower performance-based compensation accruals, as well as higher revenue and operating income in the Manufacturing segment.
James C. Foster, Chair, President and Chief Executive Officer, said, "Our financial performance through the first half of this year has been largely in line with our initial outlook; however, forward-looking DSA trends suggest that demand will not improve during the second half of the year as we had previously anticipated, and in fact, will decline for global biopharmaceutical clients. This has caused us to take a much more negative view of our growth prospects for the second half of the year. We believe that our clients are currently more focused on reassessing their budgets and reprioritizing their pipelines, but continue to view strategic outsourcing as a compelling solution to improve their cost efficiency and speed to market, presenting a longer-term opportunity for us."
"Therefore, it is imperative for us to navigate through this period of softer demand by aggressively managing our cost structure, initiating new and innovative ways to transform our business, being disciplined with our investments, and enhancing our commercial efforts to win new business. We firmly believe that our clients will continue to seek life-saving treatments for rare diseases and other unmet medical needs, which drives us to take further steps to position Charles River for the future. These steps will enable us to emerge as a stronger, leaner partner to help our clients achieve their goals by utilizing our scientific expertise and flexible solutions," Mr. Foster concluded.
Second-Quarter Segment Results
Research Models and Services (RMS)
Revenue for the RMS segment was $206.4 million in the second quarter of 2024, a decrease of 1.7% from $209.9 million in the second quarter of 2023. The Noveprim acquisition in November 2023 contributed 2.7% to second-quarter RMS reported revenue, and the impact of foreign currency translation reduced revenue by 0.5%. Organic revenue decreased by 3.9%, due primarily to lower revenue for non-human primates (NHPs) in China. In addition, lower revenue for research model services and the Cell Solutions business also contributed to the decline. The decline was partially offset by higher sales of small research models, particularly in Europe and China.
In the second quarter of 2024, the RMS segment’s GAAP operating margin decreased to 14.5% from 23.3% in the second quarter of 2023. On a non-GAAP basis, the operating margin decreased to 23.1% from 26.4%. The GAAP and non-GAAP operating margin declines were driven primarily by lower NHP revenue. On a GAAP basis, the lower operating margin also reflects higher costs associated with the Company’s restructuring initiatives, including site consolidation costs related to the Company’s CRADL operations in California.
Discovery and Safety Assessment (DSA)
Revenue for the DSA segment was $627.4 million in the second quarter of 2024, a decrease of 5.4% from $663.5 million in the second quarter of 2023. A divestiture of a small Safety Assessment site reduced reported revenue by 0.3% and the impact of foreign currency translation reduced DSA revenue by 0.1%. Organic revenue decreased by 5.0%, driven by lower revenue in the Discovery Services and Safety Assessment businesses.
In the second quarter of 2024, the DSA segment’s GAAP operating margin decreased to 22.1% from 24.3% in the second quarter of 2023. On a non-GAAP basis, the operating margin decreased to 27.1% from 27.6% in the second quarter of 2023. The GAAP and non-GAAP operating margin decreases were driven primarily by the impact of lower sales volume, partially offset by lower performance-based compensation accruals. On a GAAP basis, the lower operating margin also reflects higher costs associated with the Company’s restructuring initiatives, as well as higher acquisition-related adjustments associated with Noveprim.
Manufacturing Solutions (Manufacturing)
Revenue for the Manufacturing segment was $192.3 million in the second quarter of 2024, an increase of 3.1% from $186.5 million in the second quarter of 2023. The impact of foreign currency translation reduced Manufacturing revenue by 0.6%. Organic revenue growth of 3.7% reflected higher revenue across all of the segment’s businesses.
In the second quarter of 2024, the Manufacturing segment’s GAAP operating margin increased to 19.4% from 13.1% in the second quarter of 2023, and on a non-GAAP basis, the operating margin increased to 26.6%, from 22.9% in the second quarter of 2023. The GAAP and non-GAAP operating margin increases were driven primarily by improved profitability for each of segment’s businesses. On a GAAP basis, lower third-party legal costs related to the Microbial Solutions business and lower acquisition-related adjustments also contributed to the increase.
New Stock Repurchase Authorization
The Company’s Board of Directors has approved a new stock repurchase authorization of $1.0 billion. This new authorization replaces a prior stock repurchase authorization of $1.3 billion that had $129.1 million remaining on the plan when it was terminated.
Revises 2024 Guidance
The Company is revising its financial guidance for 2024, which was previously updated on May 9, 2024. The reduced guidance primarily reflects the lack of a recovery in demand from our small and mid-sized biotechnology clients in the second half of the year, as well as softer demand trends from global biopharmaceutical clients whose deterioration has become increasingly evident in the past couple of months. As a result, the Company no longer expects that overall demand trends will improve during the second half of the year. In particular, these trends will have a meaningful impact on the outlook for the DSA segment. The Company is implementing restructuring initiatives that are expected to result in annualized cost savings of over $150 million (inclusive of actions implemented last year through the third quarter of 2024), of which approximately $100 million will be realized in 2024.