Charles River Laboratories International, Inc. — FY2021 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 25, 2021, not a standalone Q4 report. Charles River is a global, non-clinical contract research organization serving drug discovery and development and biopharmaceutical manufacturing. Its segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $3,540.2 million | $2,923.9 million |
| Operating income / margin | $589.9 million / 16.7% | $432.7 million / 14.8% |
| Income before taxes | $480.7 million | $447.1 million |
| Net income attributable to common shareholders | $391.0 million | $364.3 million |
| Diluted EPS | $7.60 | $7.20 |
| Cash provided by operating activities | $760.8 million | $546.6 million |
| Cash used in investing activities | $1,437.9 million | $601.5 million |
| Cash and cash equivalents at year-end | $241.2 million | $228.4 million |
| Debt and finance leases | $2,689.0 million | $1,994.1 million |
Revenue rose 21.1%; service revenue increased 20.0% and product revenue 25.0%. Operating margin expanded 190 basis points. Net income growth was more modest than operating income growth, partly because FY2021 included $30.4 million of venture-capital and strategic-investment losses, versus $100.9 million of gains in FY2020. FY2021 also included a $22.7 million gain on the RMS Japan divestiture and debt extinguishment costs related to refinancing.
Segment performance
| Segment | Revenue | Change | Operating income | Operating margin |
|---|---|---|---|---|
| RMS | $690.5 million | +20.9% | $166.8 million | 24.2%, up 620 bps |
| DSA | $2,107.2 million | +14.7% | $407.0 million | 19.3%, up 160 bps |
| Manufacturing | $742.5 million | +44.1% | $246.4 million | 33.2%, down 200 bps |
Growth reflected recovering research activity and strong client demand across segments, pricing gains in DSA, and acquired CDMO revenue in Manufacturing. Manufacturing margin declined primarily with Cognate and Vigene acquisition-related costs and amortization.
Material changes and capital position
- Operating cash flow increased by $214.2 million, attributed to higher earnings and working-capital timing and initiatives. Investing outflow rose substantially, chiefly due to $1.29 billion of acquisitions and $228.8 million of capital expenditures.
- FY2021 acquisitions included Cognate ($879.0 million preliminary purchase price), Vigene ($323.9 million), Retrogenix ($53.9 million), Distributed Bio (acquired December 31, 2020; $97.0 million), and distributor assets. Cognate and Vigene contributed $109.9 million of FY2021 revenue and $2.5 million of operating income after acquisition.
- The company sold RMS Japan and a Sweden CDMO site in October 2021. RMS Japan generated a $22.7 million gain; no gain or loss was recorded on the Sweden sale.
- Debt at year-end was $2.66 billion excluding finance leases, including $1.16 billion drawn on a $3.0 billion revolving facility. The facility maturity was extended to April 2026. The company issued $1.0 billion of notes due 2029 and 2031, repaid its 2026 notes and remaining term loan, and reported compliance with credit-facility financial covenants.
- Management said existing funds, operating cash generation, and financing access should fund operations for the foreseeable future. No cash dividends are expected for the foreseeable future; no shares were repurchased under the authorization in FY2021.
Outlook, risks, and unusual items
Management described robust demand, strong biotechnology funding, increased strategic outsourcing, and continued client interest in integrated discovery, development, testing, and manufacturing services. It gave no quantified FY2022 revenue, earnings, or margin guidance in the supplied filing text. The company expected to increase inventory and supplies in 2022 amid pandemic-related supply-chain delays and costs. Fiscal 2022 is expected to include a 53rd week.
- Principal risks: continuing COVID-19 effects on staffing, sites, client activity, logistics, and supply; limited availability and higher costs for certain research models and other inputs; contract cancellations, delays, underpricing, or overruns; competition and possible shifts away from outsourcing or animal models; acquisition integration and CDMO quality, regulatory-approval, and customer-product risks; cybersecurity and data privacy; foreign exchange and interest-rate exposure; and ability to recruit and retain skilled employees.
- Management reported no material COVID-related asset impairment or material impact on liquidity, and no material changes to internal controls over financial reporting. It noted that operations had experienced supply-chain delays and increased costs. Cognate and Vigene were excluded from management’s internal-control assessment and the auditor’s internal-control audit because they were acquired during 2021.
- Audit firm PwC issued unqualified opinions on the financial statements and internal controls. It identified critical audit matters involving valuation of Cognate and Vigene customer-relationship intangibles and DSA revenue recognized over time, which relies on estimates of progress and total contract costs.
- The filing says the company is not party to legal proceedings it believes material; it also describes ordinary-course claims that management does not expect to have a material adverse effect. Unconditional purchase obligations were approximately $260 million, mostly expected to be settled in 2022. Outstanding letters of credit were $17.7 million.
Important facts for investors to verify
- Assess how much FY2021 growth and future earnings depend on acquisitions, particularly Cognate and Vigene, and whether their operating margins improve as integration proceeds.
- Review the quality and sustainability of DSA demand, pricing, backlog, and service-contract cost estimates; reported DSA backlog was $2.4 billion, but the company cautions backlog is not necessarily a reliable indicator of future revenue.
- Track leverage, floating-rate exposure, refinancing needs, and covenant headroom. A 100-basis-point rate increase was estimated to add $11.6 million to annual pretax interest expense.
- Monitor supply constraints, staffing and turnover, pandemic disruption, and the company’s ability to meet CDMO quality and regulatory requirements.
- Evaluate investment volatility and unusual items: FY2021 investment losses, the RMS Japan gain, contingent consideration adjustments, and acquisition-related costs affected reported results.