Charles River Laboratories International, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 25, 2021; comparisons are to the periods ended September 26, 2020. Amounts below are in millions except per-share data.
Business context
Charles River provides research models and related services, drug discovery and safety assessment, and manufacturing products and services. Its reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing. The company reported higher demand across segments and continued recovery in RMS from pandemic-related disruption in the prior-year period. Recent acquisitions expanded its cell- and gene-therapy and contract development and manufacturing capabilities.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $895.9 | $743.3 | $2,635.1 | $2,132.9 |
| Operating income | $155.8 | $132.8 | $417.1 | $303.8 |
| Operating margin | 17.4% | 17.9% | 15.8% | 14.2% |
| Net income attributable to common shareholders | $103.4 | $102.9 | $253.4 | $221.1 |
| Diluted EPS | $2.01 | $2.03 | $4.93 | $4.39 |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $531.5 | $408.2 |
Q3 revenue rose 20.5% year over year, including service revenue growth of 21.2% and product revenue growth of 18.2%. Nine-month revenue increased 23.5%. Management attributed growth to stronger demand, prior-year RMS recovery, acquisitions, and favorable foreign exchange. Nine-month foreign exchange increased revenue by $55.8, or 2.6%; the Q3 contribution was $8.3, or 1.0%.
Q3 operating margin declined 50 basis points despite higher operating income. For the nine-month period, operating margin expanded 160 basis points. Segment revenue and operating margins were:
| Segment | Q3 revenue | Q3 operating margin | Nine-month revenue | Nine-month operating margin |
|---|---|---|---|---|
| RMS | $171.3 | 22.8% | $524.9 | 24.1% |
| DSA | $531.8 | 21.9% | $1,573.1 | 19.8% |
| Manufacturing | $192.9 | 25.2% | $537.2 | 28.8% |
Manufacturing’s margin fell notably year over year, primarily because of acquisition-related amortization and production costs, as well as higher Microbial Solutions production costs. RMS Q3 margin also declined, reflecting product and geographic mix and higher production costs. DSA margins improved, supported by revenue growth, contingent-consideration gains, and lower amortization; nine-month results also benefited from lower costs associated with prior-year site closures.
Q3 other expense was $16.2, compared with other income of $21.2 a year earlier, mainly reflecting venture-capital investment losses rather than gains, lower life-insurance investment gains, and foreign-currency losses. For the nine months, other expense was $38.0 versus other income of $23.4. Nine-month interest expense was $62.4, including debt-extinguishment and financing-cost effects; the company reported $26 million of debt extinguishment costs and related deferred financing cost write-offs.
Cash, debt, and liquidity
- Cash and cash equivalents were $212.5 at September 25, 2021, versus $228.4 at December 26, 2020. Cash, cash equivalents, and restricted cash totaled $226.5 at period end.
- Nine-month operating cash flow was $531.5. Investing activities used $1,447.2, principally for acquisitions and $130.0 of capital expenditures. Financing activities provided $891.6.
- Long-term debt and finance leases, net, were $2,892.7, compared with $1,929.6 at year-end 2020. Debt principal was approximately $2,890.3, including $1,390.3 drawn on the revolving facility and $1,500.0 of senior notes due 2028, 2029, and 2031. The weighted-average debt interest rate was 2.65%.
- The revolving credit facility was increased to $3.0 billion and extended to April 2026. The company reported compliance with its financial covenants. Management said existing funds, operating cash flows, and financing access should be sufficient for the foreseeable future.
- A 100-basis-point increase in interest rates would increase annual pretax interest expense by an estimated $13.9. The debt portfolio was primarily floating-rate.
Material changes, outlook, and risks
Major 2021 acquisitions included Cognate BioServices, Vigene Biosciences, Retrogenix, and certain distributor assets. The acquisitions contributed materially to Manufacturing growth and increased goodwill, intangible assets, debt, integration costs, and contingent consideration. The filing does not provide specific forward-looking revenue, earnings, or margin guidance.
On October 12, 2021, after quarter-end, the company completed the sale of RMS Japan for approximately $63 million in cash and a Swedish gene-therapy CDMO site for approximately $52 million in cash, with potential contingent payments of up to $25 million. The company was evaluating the accounting impact and any resulting gain or loss. At quarter-end, related assets and liabilities classified as held for sale were $139.6 and $34.4, respectively.
Management reported no material change in its assessment of COVID-19’s effects during the nine-month period, but stated that the pandemic’s duration and financial impact remain uncertain. Disclosed risks include operational and supply-chain disruption, customer study delays, and newly expanded CDMO risks: product quality, regulatory approvals and inspections, customer product acceptance, competition, raw-material availability, and customer intellectual-property issues. The company also noted foreign-exchange exposure, tax audits and controversies, and ordinary-course litigation; it did not expect existing litigation or tax audits to materially affect the financial statements. U.S.-based employees were subject to a federal-contractor vaccination requirement, with a December 8, 2021 deadline subject to exemptions; operational effects were uncertain.
Most important facts for investors to verify
- How much reported growth reflects organic demand and pricing versus acquisitions and foreign exchange, particularly in Manufacturing.
- Whether acquired CDMO operations can improve margins while meeting customer, quality, regulatory, and production requirements.
- Debt levels, floating-rate exposure, covenant headroom, and cash generation following acquisition spending.
- The earnings and cash proceeds ultimately recognized from the October divestitures, including customary adjustments and contingent consideration.
- Whether pandemic, workforce, and supplier risks materially affect operations or the ability to deliver contracted services.