Charles River Laboratories International, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Charles River provides research models, drug discovery and safety assessment services, and manufacturing-related products and services. This unaudited report covers the three months ended April 1, 2023; comparisons are with the three months ended March 26, 2022.
Financial results and liquidity
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,029.4 million | $913.9 million | +12.6% |
| Operating income | $167.9 million | $148.8 million | +12.8% |
| Operating margin | 16.3% | 16.3% | No change |
| Net income attributable to common shareholders | $103.1 million | $93.0 million | +10.9% |
| Diluted EPS | $2.01 | $1.81 | +11.0% |
| Cash from operating activities | $109.4 million | $102.6 million | +$6.8 million |
| Capital expenditures | $106.9 million | $80.5 million | +$26.4 million |
Service revenue grew 19.0% to $857.4 million; product revenue fell 11.1% to $172.0 million. The company reported $36.9 million of total other expense, including $34.4 million of interest expense. The effective tax rate rose to 20.7% from 14.1%, primarily because of lower tax benefits from stock-based compensation deductions.
At April 1, 2023, cash and cash equivalents were $201.6 million, down from $233.9 million at year-end 2022. Long-term debt, net and finance leases were $2.744 billion; total debt and finance leases before debt discounts and current portions were $2.768 billion. The weighted-average debt interest rate was 4.78%. Management said existing funds, operating cash flow, and financing access were sufficient for operations for the foreseeable future.
Material changes and segment performance
- Discovery and Safety Assessment (DSA): Revenue increased 21.7% to $662.4 million and operating income rose 63.3% to $171.4 million; operating margin improved to 25.9% from 19.3%. Growth reflected higher Safety Assessment demand, particularly from biotechnology clients, and pricing. DSA backlog was $3.0 billion, down from $3.15 billion at December 31, 2022.
- Research Models and Services (RMS): Revenue increased 13.2% to $199.8 million, including $15.6 million from Explora BioLabs. Operating income fell 15.6% to $40.4 million and margin decreased to 20.2% from 27.1%, reflecting timing of large-model sales in China and higher acquisition-related amortization, operating, and staffing costs.
- Manufacturing: Revenue decreased 13.4% to $167.3 million, partly due to the Avian Vaccine Services divestiture, which reduced revenue by $19.2 million, and lower Biologics Solutions revenue. Operating income fell to $2.1 million from $46.4 million; margin declined to 1.3% from 24.0%. The company cited higher Biologics Solutions operating costs, an asset impairment, Avian divestiture effects, and higher administrative costs.
Consolidated revenue growth primarily reflected Safety Assessment demand and pricing and the Explora BioLabs acquisition, partly offset by the Avian divestiture and foreign exchange. Foreign exchange reduced reported revenue growth by 2.1 percentage points. The company acquired SAMDI Tech for a preliminary purchase price of $62.8 million, funded with cash and Credit Facility proceeds. Investing cash outflow was $168.6 million, including the acquisition and increased capital spending. Financing cash inflow was $25.2 million.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management described the biopharmaceutical end market as somewhat less robust than the prior year, with clients assessing spending, booking work closer to need, and focusing on nearer-term priorities. It also reported normalization toward pre-pandemic demand and continued drug-development activity.
- The company suspended future shipments of non-human primates from Cambodia while it works with the U.S. Fish and Wildlife Service on additional procedures. The DOJ and USFWS are conducting investigations, including a grand jury subpoena and a parallel civil investigation. The company is cooperating, says it believes the concerns are without merit, and cannot estimate the investigations’ outcome, timing, or potential financial impact. Related inventory had a carrying value of approximately $20 million.
- Management reported no material company impact from March 2023 banking-market concerns as of the quarter-end, but said it would monitor potential effects on rates, financing, and liquidity. It also identified inflation, supply-chain, currency, and cybersecurity risks.
- Interest expense increased substantially year over year, primarily due to higher interest rates and the absence of prior-year gains on a debt-related foreign-exchange forward contract. Prior-year other expense was also affected by foreign-currency losses and larger venture-investment losses.
Important facts for investors to verify
- Updates to the Cambodia-related DOJ and USFWS investigations, shipment suspension, and any effects on primate availability or costs.
- Whether DSA demand and backlog stabilize, and whether Manufacturing Solutions recovers margins, particularly in Biologics Solutions.
- Cash generation relative to elevated capital expenditures, debt levels, floating-rate exposure, and interest costs.
- Integration and performance of SAMDI and Explora BioLabs, and the continuing impact of the Avian divestiture.
- Potential changes in tax exposure, including the company’s ongoing tax controversies and evaluation of OECD Pillar II rules.