Business context and reporting period
Charles River Laboratories International, Inc. provides research models and services, drug discovery and safety assessment services, and products and services supporting biopharmaceutical manufacturing. This unaudited Form 10-Q covers the three and nine months ended September 24, 2022; comparisons are with periods ended September 25, 2021. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $989.2 | $895.9 | $2,876.2 | $2,635.1 |
| Operating income | $151.0 | $155.8 | $487.2 | $417.1 |
| Operating margin | 15.3% | 17.4% | 16.9% | 15.8% |
| Net income attributable to common shareholders | $96.5 | $103.4 | $298.8 | $253.4 |
| Diluted EPS | $1.88 | $2.01 | $5.83 | $4.93 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $384.9 | $531.5 |
Q3 service revenue increased 15.5% to $812.9; product revenue declined 8.2% to $176.3. For the first nine months, service revenue rose 13.2% to $2,316.2, while product revenue fell 5.0% to $560.0.
At September 24, 2022, cash and cash equivalents were $193.7, total current assets $1,415.4 and current liabilities $1,014.2. Reported debt borrowings were $2,929.2, including $1,429.2 on the revolving facility and $1,500.0 of Senior Notes; finance leases brought total debt and finance leases to $2,958.8. The weighted-average debt interest rate was 3.85%, versus 2.78% at year-end 2021.
Nine-month investing cash outflow was $652.3, including $283.4 for acquisitions, $235.7 in capital expenditures and net investment purchases of $126.3. Cash and cash equivalents declined from $241.2 at December 25, 2021. Management attributed lower operating cash flow primarily to working-capital timing, including customer contract balances, inventory purchases and variable compensation payments.
Material changes versus the prior comparable period
- Q3 revenue grew 10.4%, led by Discovery and Safety Assessment (DSA), whose revenue rose 16.5% to $619.5. Research Models and Services (RMS) revenue increased 5.2% to $180.1; Manufacturing revenue declined 1.7% to $189.6.
- Q3 operating income fell 3.1% and margin contracted 210 basis points. DSA operating income increased 22.0% to $142.1, but RMS operating income fell 8.2% to $35.9 and Manufacturing operating income fell 35.2% to $31.5.
- For the first nine months, revenue increased 9.1% and operating income increased 16.8%. DSA drove much of the improvement: revenue rose 11.6% and operating income 20.5%. Manufacturing operating income declined 9.3%, and RMS operating income declined 2.6%.
- Q3 net income attributable to common shareholders decreased 6.7%; nine-month net income increased 17.9%. The nine-month comparison benefited from the absence of substantial 2021 debt-extinguishment costs, while higher taxes and investment losses were offsets.
- Foreign exchange reduced reported revenue growth: management reported a 4.5% adverse FX impact on Q3 revenue growth and 3.2% for the nine-month period.
Outlook, management commentary, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management stated that available funds, expected operating cash generation and access to financing should be sufficient to fund operations for the foreseeable future. In November 2022, the company entered a $500 million interest-rate swap at a fixed 4.700% rate, producing a stated total rate of 5.825% at the then-current spread.
Management cited higher staffing costs, modest inflationary pressures and higher operating costs in the CDMO business as pressures on results. The U.S. dollar’s strength, China COVID-related restrictions, supply-chain disruption and the Russia-Ukraine conflict were identified as risks. The company had no operations in Russia or Ukraine, had ceased business with Russian customers and distributors, and reported no material financial-statement impact from the conflict through the period. A 10% strengthening of the U.S. dollar was estimated to reduce nine-month revenue by $86.9 and operating income by $2.0, all else equal. A 100-basis-point increase in floating rates was estimated to raise annual pretax interest expense by $14.3.
Unusual and strategic items include the April 2022 acquisition of Explora BioLabs for $284.5, funded with credit-facility proceeds; a favorable tax ruling that reversed a previously recorded $17.0 Cognate-related indirect-tax liability; and nine-month net investment losses, including $20.1 on venture-capital investments. The company also reported a $151.0 foreign-currency translation loss in other comprehensive income for the nine months.
On November 1, 2022, after quarter-end, the company agreed to sell Avian Vaccine Services for approximately $170 in cash, subject to customary adjustments, plus contingent payments of up to $30; closing was expected in Q4 2022. The company reported pending lawsuits but did not expect their resolution to materially adversely affect its business or financial condition. It reported no material change to previously disclosed risk factors other than the conflict-related risks.
Most important facts for investors to verify
- Whether DSA growth and profitability can offset margin pressure in RMS and Manufacturing, particularly CDMO operating costs.
- Whether weaker operating cash flow reflects temporary working-capital timing or persists; monitor receivables, contract assets, inventory and collections.
- Debt levels, floating-rate exposure and interest costs, including the effectiveness and terms of the subsequent interest-rate swap.
- The closing, final proceeds and contingent-payment terms of the Avian divestiture, and any resulting financial-statement effects.
- Foreign-exchange exposure, China-related demand effects, supply-chain and inflation risks, and the valuation and performance of investment holdings.