On November 2, 2022 Charles River Laboratories International, Inc. (NYSE: CRL) reported its results for the third quarter of 2022 (Press release, Charles River Laboratories, NOV 2, 2022, View Source [SID1234622813]). For the quarter, revenue was $989.2 million, an increase of 10.4% from $895.9 million in the third quarter of 2021.
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Acquisitions contributed 1.7% to consolidated third-quarter revenue growth. The divestitures of the Research Models and Services operations in Japan (RMS Japan) and CDMO site in Sweden (CDMO Sweden) in October 2021 reduced reported revenue growth by 2.1%. The impact of foreign currency translation reduced reported revenue growth by 4.5%. Excluding the effect of these items, organic revenue growth of 15.3% was driven by contributions from all three business segments, particularly the Discovery and Safety Assessment (DSA) business segment.
On a GAAP basis, third-quarter net income attributable to common shareholders was $96.5 million, a decrease of 6.7% from net income of $103.4 million for the same period in 2021. Third-quarter diluted earnings per share on a GAAP basis were $1.88, a decrease of 6.5% from $2.01 for the third quarter of 2021.
On a non-GAAP basis, net income was $134.7 million for the third quarter of 2022, a decrease of 3.2% from $139.1 million for the same period in 2021. Third-quarter diluted earnings per share on a non-GAAP basis were $2.63, a decrease of 2.6% from $2.70 per share for the third quarter of 2021.
The decreases in GAAP and non-GAAP net income and earnings per share were primarily driven by lower operating margins, as well as increased interest expense and a higher tax rate. These factors were largely offset by higher revenue. On a GAAP basis, higher acquisition-related adjustments were offset by the performance of venture capital and other strategic investments, which totaled a gain of $0.04 per share in the third quarter of 2022, compared to a loss of $0.15 per share for the same period in 2021. The Company’s venture capital and other strategic investment performance has been excluded from non-GAAP results.
James C. Foster, Chairman, President and Chief Executive Officer, said, "We are pleased with our third-quarter operating performance, which demonstrates the power of our unique portfolio that is centered on preclinical R&D services to support the biopharmaceutical industry. With a large and diversified client base and a broad, non-clinical portfolio that differentiates Charles River from other outsourced service providers, we believe that we are an excellent barometer of the sustained health of the biopharmaceutical industry."
"The third-quarter results reflect substantial revenue growth acceleration in the DSA segment, resulting from the strength of the Safety Assessment backlog that continues to afford us with excellent visibility into future client demand. We are confident that we will finish 2022 on a strong note and are encouraged by the solid growth prospects as we look into the new year," Mr. Foster concluded.
Third-Quarter Segment Results
Research Models and Services (RMS)
Revenue for the RMS segment was $180.1 million in the third quarter of 2022, an increase of 5.2% from $171.3 million in the third quarter of 2021. Organic revenue growth of 8.0% was primarily driven by research model services, particularly the Insourcing Solutions (IS) business, as well as small research models in North America and China.
In the third quarter of 2022, the RMS segment’s GAAP operating margin decreased to 19.9% from 22.8% in the third quarter of 2021, and on a non-GAAP basis, the operating margin decreased to 23.5% from 26.1%. The GAAP and non-GAAP operating margin decreases were primarily driven by the revenue mix and higher costs in China, as well as expansion costs related to opening new CRADL and Explora sites in the Insourcing Solutions business.
Discovery and Safety Assessment (DSA)
Revenue for the DSA segment was $619.5 million in the third quarter of 2022, an increase of 16.5% from $531.8 million in the third quarter of 2021. Organic revenue growth of 20.8% was primarily driven by broad-based growth in the Safety Assessment business, resulting from meaningful price increases and substantially higher study volume, both year-over-year and from first-half levels.
In the third quarter of 2022, the DSA segment’s GAAP operating margin increased to 22.9% from 21.9% in the third quarter of 2021, and on a non-GAAP basis, the operating margin increased to 26.2% from 24.3%. The GAAP and non-GAAP operating margin increases were driven primarily by operating leverage from higher revenue in the Safety Assessment business.
Manufacturing Solutions (Manufacturing)
Revenue for the Manufacturing segment was $189.6 million in the third quarter of 2022, a decrease of 1.7% from $192.9 million in the third quarter of 2021. Organic revenue growth of 6.0% reflected higher revenue in the Biologics Testing and Microbial Solutions businesses. These trends were partially offset by a revenue decline in the CDMO business.
In the third quarter of 2022, the Manufacturing segment’s GAAP operating margin decreased to 16.6% from 25.2% in the third quarter of 2021, and on a non-GAAP basis, the operating margin decreased to 28.6% from 32.7%. The GAAP and non-GAAP operating margin decreases were primarily as a result of lower revenue in the CDMO business.
Avian Vaccine Divestiture
The Company announced that it has signed a definitive agreement to divest its Avian Vaccine business for approximately $170 million in cash with potential contingent payments of up to an additional $30 million, subject to certain closing adjustments.
The Avian Vaccine business, which is part of Charles River’s Manufacturing Solutions segment, produces specific-pathogen-free (SPF) chicken eggs and associated products and services, principally for avian vaccine manufacturers and researchers. It has approximately 250 employees across approximately 20 sites in the United States.
The transaction is expected to close by the end of the year, and will not have a meaningful impact on 2022 revenue and non-GAAP earnings per share. In 2023, the divestiture is expected to reduce annual revenue by approximately $80 million and non-GAAP earnings per share by approximately $0.35, prior to any benefit from redeploying the proceeds towards other capital priorities. Items excluded from non-GAAP diluted earnings per share are expected to include gains on the sale of the businesses and all divestiture-related costs, which primarily include advisory fees and certain other transaction-related costs.
Updates 2022 Guidance
The Company is updating 2022 financial guidance, which was previously provided on August 3, 2022.
Revenue growth and non-GAAP earnings per share guidance are being narrowed to the upper end of the prior ranges, reflecting the solid, third-quarter performance. GAAP earnings per share guidance is being narrowed to the low end of the prior range, primarily as a result of contingent consideration adjustments related to the CDMO Sweden divestiture. The planned divestiture of the Avian Vaccine business will not have a meaningful impact on revenue and non-GAAP earnings per share in 2022, and an estimate for the gain on the sale of the business has not been included in the GAAP earnings per share guidance below.
The impact of foreign exchange on reported revenue growth continues to be a meaningful headwind in 2022, which is unchanged from our prior outlook in August. Compared to 2021, foreign currency translation is expected to reduce GAAP and non-GAAP earnings per share by $0.43 per share this year, which will reduce the earnings per share growth rates by approximately 550 basis points and 400 basis points on a GAAP and non-GAAP basis, respectively.
The Company’s guidance includes the addition of a 53rd week this year, which is necessary to true up to a December 31 year-end. The 53rd week, which will occur in the fourth quarter, was previously incorporated into our 2022 financial guidance and is characterized by a light week of sales but normal costs. This is expected to result in a 1.5% benefit to full-year reported revenue growth, but generate a modest operating margin headwind in the fourth quarter.
(1) Organic revenue growth is defined as reported revenue growth adjusted for completed acquisitions and divestitures, the 53rd week in 2022, and foreign currency translation.
(2) These adjustments are related to the evaluation and integration of acquisitions and divestitures, and primarily include transaction, advisory, certain third-party integration costs, and certain costs associated with acquisition-related efficiency initiatives, offset by adjustments related to contingent consideration and certain indirect tax liabilities.
(3) Venture capital and other strategic investment performance only includes recognized gains or losses. The Company does not forecast the future performance of these investments.
(4) These items primarily relate to charges associated with U.S. and international tax legislation that necessitated changes to the Company’s international financing structure; certain third-party legal costs related to (a) environmental litigation related to the Microbial Solutions business and (b) responses to a U.S. government industry-wide supply chain management inquiry applicable to our Safety Assessment business; and severance and other costs related to the Company’s efficiency initiatives.
Webcast
Charles River has scheduled a live webcast on Wednesday, November 2nd, at 9:00 a.m. ET to discuss matters relating to this press release. To participate, please go to ir.criver.com and select the webcast link. You can also find the associated slide presentation and reconciliations of GAAP financial measures to non-GAAP financial measures on the website.