Charles River Laboratories International, Inc. — Q2 2023 Form 10-Q
Business and period. Charles River provides research models, drug discovery and safety-assessment services, and manufacturing products and services. This unaudited report covers the three and six months ended July 1, 2023; comparisons are to periods ended June 25, 2022.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,059.9m | $973.1m | $2,089.3m | $1,887.1m |
| Operating income | $164.9m | $187.4m | $332.8m | $336.2m |
| Operating margin | 15.6% | 19.3% | 15.9% | 17.8% |
| Net income attributable to common shareholders | $97.0m | $109.3m | $200.2m | $202.3m |
| Diluted EPS | $1.89 | $2.13 | $3.90 | $3.94 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $257.5m | $252.1m |
Q2 revenue grew 8.9%; service revenue rose 11.8%, while product revenue fell 2.8%. For the first half, revenue grew 10.7%, led by service revenue growth of 15.2%; product revenue declined 7.0%. Management attributed growth mainly to Safety Assessment volume and pricing and acquisitions, partly offset by the Avian divestiture and foreign exchange.
Q2 operating margin contracted 370 basis points; first-half margin fell 190 basis points. Operating income was pressured chiefly by Manufacturing, including higher Biologics operating costs, an asset impairment charge in the first half, the Avian divestiture, and the absence of a favorable $19m indirect-tax ruling benefit recognized in Q2 2022. Higher corporate costs also reflected variable-compensation timing and digital investments. Net income and EPS declined despite revenue growth, with higher interest expense contributing.
Segments
- RMS: Q2 revenue $209.9m, up 12.6%; operating income $48.9m, up 23.8%, with margin rising to 23.3%. First-half revenue was $409.7m, up 12.9%; operating income was $89.3m, up 2.2%, and margin fell to 21.8%, partly reflecting acquisition-related costs and foreign exchange.
- DSA: Q2 revenue $663.5m, up 12.1%; operating income $161.5m, up 25.4%, with margin at 24.3%. First-half revenue was $1,325.8m, up 16.7%; operating income was $333.0m, up 42.4%, and margin rose to 25.1%. Growth reflected Safety Assessment demand and pricing; management also cited higher legal costs related to the primate-supply investigations.
- Manufacturing: Q2 revenue $186.5m, down 4.2%; operating income $24.4m, down 61.0%, with margin falling to 13.1%. First-half revenue was $353.8m, down 8.8%; operating income was $26.5m, down 75.7%, and margin fell to 7.5%. The Avian sale and weaker Biologics results were key factors; CDMO and Microbial Solutions revenue partly offset declines.
Liquidity, debt, and capital allocation
At July 1, 2023, cash and cash equivalents were $200.4m, total current assets $1,504.8m, and current liabilities $1,007.6m. Long-term debt, net, and finance leases totaled $2,678.5m; the revolving facility balance was $1,168.1m. The weighted-average debt interest rate was 4.89%, up from 4.58% at year-end 2022. The company reported $257.5m of first-half operating cash flow, $245.2m of investing cash outflow, and $46.2m of financing cash outflow. Capital expenditures were $174.3m.
Management believes existing funds, operating cash generation, and financing access are sufficient to fund operations for the foreseeable future. The company had $129.1m remaining under its $1.3bn share-repurchase authorization but made no open-market program repurchases in the first half. It acquired shares through employee-award tax withholding netting. A $500m interest-rate swap fixes the rate on a portion of floating-rate exposure at 4.65% through November 2024.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance or quantified full-year outlook. Management described biopharmaceutical client spending as more cautious and reported DSA backlog of $2.76bn, down from $3.15bn at December 31, 2022, while saying drug-development activity remained stable.
- DOJ and U.S. Fish and Wildlife Service investigations, including a grand-jury subpoena, concern several Cambodian non-human-primate shipments. The company is cooperating, has voluntarily suspended future Cambodia-to-U.S. shipments pending additional procedures, and cannot estimate timing, outcome, or potential fines or liabilities. Inventory tied to certain shipments was valued at about $20m. The SEC also requested information regarding primate sourcing.
- A securities class action filed May 19, 2023 alleges misleading disclosures about primate imports. The company says it intends to seek dismissal and cannot reasonably estimate potential exposure beyond amounts accrued.
- On July 28, 2023, after quarter-end, the company agreed to acquire an additional 41% stake in a DSA supplier for a preliminary $143m cash price, subject to closing conditions and regulatory approval, with contingent payments up to $55m. Closing timing is uncertain.
- Other relevant factors include higher variable borrowing costs, foreign-exchange exposure, and global economic uncertainty. Management reported no material banking-system impact as of the period end. No material changes to the risk factors in the 2022 Form 10-K were reported.
Key facts for investors to verify
- Progress and financial consequences of the DOJ, USFWS, and SEC inquiries, the Cambodian shipment suspension, and the related securities litigation.
- Whether the decline in DSA backlog continues and how it translates into revenue and utilization.
- Recovery in Manufacturing and Biologics profitability, including the effects of impairment and higher operating costs.
- Debt, floating-rate exposure, and interest expense as rates and borrowing balances change.
- Regulatory approval, closing terms, and funding for the proposed additional supplier stake acquisition.