On May 11, 2023 Charles River Laboratories International, Inc. (NYSE: CRL) reported its results for the first quarter of 2023 (Press release, Charles River Laboratories, MAY 11, 2023, View Source [SID1234631494]). For the quarter, revenue was $1.03 billion, an increase of 12.6% from $913.9 million in the first quarter of 2022.
Schedule your 30 min Free 1stOncology Demo!
Discover why more than 1,500 members use 1stOncology™ to excel in:
Early/Late Stage Pipeline Development - Target Scouting - Clinical Biomarkers - Indication Selection & Expansion - BD&L Contacts - Conference Reports - Combinatorial Drug Settings - Companion Diagnostics - Drug Repositioning - First-in-class Analysis - Competitive Analysis - Deals & Licensing
Schedule Your 30 min Free Demo!
Acquisitions contributed 1.8% to consolidated first-quarter revenue growth, and the divestiture of the Avian Vaccine business in December 2022 reduced reported revenue growth by 2.5%. The impact of foreign currency translation reduced reported revenue growth by 2.1%. Excluding the effect of these items, organic revenue growth of 15.4% was driven by the Discovery and Safety Assessment (DSA) and Research Models and Services (RMS) business segments.
On a GAAP basis, first-quarter net income attributable to common shareholders was $103.1 million, an increase of 10.9% from $93.0 million for the same period in 2022. First-quarter diluted earnings per share on a GAAP basis were $2.01, an increase of 11.0% from $1.81 for the first quarter of 2022. GAAP earnings per share included a loss from the Company’s venture capital and other strategic investments of $0.03 per share in the first quarter of 2023, compared to a loss of $0.20 per share for the same period in 2022. The Company’s venture capital and other strategic investment performance has been excluded from non-GAAP results.
On a non-GAAP basis, net income was $143.0 million for the first quarter of 2023, an increase of 1.3% from $141.1 million for the same period in 2022. First-quarter diluted earnings per share on a non-GAAP basis were $2.78, an increase of 1.1% from $2.75 per share for the first quarter of 2022.
The GAAP and non-GAAP net income and earnings per share increases were primarily driven by higher revenue and operating income, partially offset by increased interest expense and a higher tax rate, as well as the impact of the Avian Vaccine divestiture.
James C. Foster, Chairman, President and Chief Executive Officer, said, "We had a strong start to the year with a continuation of the healthy demand and pricing environment in our DSA segment, resulting in better-than-expected first quarter results. We believe that our clients have the funding to move their promising drug candidates forward, and the strength of our backlog continues to support more than one year of DSA revenue. Based on changing macroeconomic factors and following the unprecedented level of biomedical research activity that occurred over the past several years, demand trends are normalizing towards pre-pandemic levels. However, these trends, when balanced with our strong first-quarter financial performance, continue to give us confidence in our financial guidance for 2023."
First-Quarter Segment Results
Research Models and Services (RMS)
Revenue for the RMS segment was $199.8 million in the first quarter of 2023, an increase of 13.2% from $176.5 million in the first quarter of 2022. The Explora BioLabs acquisition contributed 8.9% to RMS revenue growth, and the impact of foreign currency translation reduced revenue by 2.5% in the quarter. Organic revenue growth of 6.8% was primarily driven by broad-based growth for small research models, research model services, and the Cell Solutions business.
In the first quarter of 2023, the RMS segment’s GAAP operating margin decreased to 20.2% from 27.1% in the first quarter of 2022, and on a non-GAAP basis, the operating margin decreased to 23.4% from 29.9%. The GAAP and non-GAAP operating margin decreases were driven primarily by the timing of large model shipments in China, as well as the segment’s overall revenue mix.
Discovery and Safety Assessment (DSA)
Revenue for the DSA segment was $662.4 million in the first quarter of 2023, an increase of 21.7% from $544.3 million in the first quarter of 2022. The impact of foreign currency translation reduced revenue by 2.1%, and the SAMDI Tech acquisition contributed 0.2% to reported DSA revenue growth in the quarter. Organic revenue growth of 23.6% was driven principally by broad-based growth in the Safety Assessment business, resulting from higher study volume and meaningful price increases.
In the first quarter of 2023, the DSA segment’s GAAP operating margin increased to 25.9% from 19.3% in the first quarter of 2022, and on a non-GAAP basis, the operating margin increased to 29.0% from 22.9%. The GAAP and non-GAAP operating margin increases were driven by operating leverage from higher revenue in the Safety Assessment business.
Manufacturing Solutions (Manufacturing)
Revenue for the Manufacturing segment was $167.3 million in the first quarter of 2023, a decrease of 13.4% from $193.1 million in the first quarter of 2022. The impact of the Avian Vaccine divestiture reduced revenue by 9.7%, and the impact of foreign currency translation reduced revenue by 1.9%. The decrease of 1.8% in organic revenue for the quarter was driven primarily by lower revenue in the CDMO business, which faced a challenging year-over-year comparison due to commercial readiness milestones in the first quarter of last year, and the Biologics Testing Solutions business, which experienced lower-than-anticipated testing volumes at the beginning of the year and a difficult comparison associated with last year’s COVID-related testing revenue. These factors were partially offset by revenue growth in the Microbial Solutions business.
In the first quarter of 2023, the Manufacturing segment’s GAAP operating margin decreased to 1.3% from 24.0% in the first quarter of 2022, and on a non-GAAP basis, the operating margin decreased to 13.7% from 33.1% in the first quarter of 2022. The GAAP and non-GAAP operating margin declines were the result of lower operating margins in each of the segment’s business units, particularly the CDMO and Biologics Testing Solutions businesses.
Updates 2023 Guidance
The Company is updating its 2023 financial guidance, which was initially provided on February 22, 2023. The Company is narrowing its revenue growth and earnings per share outlooks to reflect the strong first-quarter financial performance and expectations for the remainder of the year that are largely consistent with its initial outlook. This outlook continues to reflect the anticipated impact of Cambodian NHP supply constraints, which is expected to affect the Company’s financial results principally in the second half of the year.
The Company’s 2023 guidance for revenue growth and earnings per share is as follows:
2023 GUIDANCE
CURRENT
PRIOR
Revenue growth, reported
2.0% – 4.5%
1.5% – 4.5%
Impact of divestitures/(acquisitions), net
~1.5%
~1.5%
Impact of 53rd week in 2022
~1.5%
~1.5%
Unfavorable/(favorable) impact of foreign exchange
0.0% – (0.5)%
0.0% – (0.5)%
Revenue growth, organic (1)
5.0% – 7.5%
4.5% – 7.5%
GAAP EPS estimate
$7.45 – $8.45
$7.40 – $8.60
Acquisition-related amortization
~$2.00
~$2.00
Acquisition and integration-related adjustments (2)
~$0.10
~$0.10
Venture capital and other strategic investment losses/(gains), net (3)
$0.03
—
Other items (4)
$0.30 – $0.35
~$0.20
Non-GAAP EPS estimate
$9.90 – $10.90
$9.70 – $10.90
Footnotes to Guidance Table:
(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.
(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) investigations by the U.S. government into the NHP supply chain related 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 Thursday, May 11th, at 8:30 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.
Non-GAAP Reconciliations
The Company reports non-GAAP results in this press release, which exclude often-one-time charges and other items that are outside of normal operations. A reconciliation of GAAP to non-GAAP results is provided in the schedules at the end of this press release.
Use of Non-GAAP Financial Measures
This press release contains non-GAAP financial measures, such as non-GAAP earnings per diluted share, non-GAAP operating income, non-GAAP operating margin, and non-GAAP net income. Non-GAAP financial measures exclude, but are not limited to, the amortization of intangible assets, and other charges and adjustments related to our acquisitions and divestitures, including the gain on our sale of our Avian Vaccine business; expenses associated with evaluating and integrating acquisitions and divestitures, including advisory fees and certain other transaction-related costs, as well as fair value adjustments associated with contingent consideration; charges, gains, and losses attributable to businesses or properties we plan to close, consolidate, or divest; severance and other costs associated with our efficiency initiatives; the write-off of deferred financing costs and fees related to debt financing; investment gains or losses associated with our venture capital and other strategic equity investments; certain legal costs in our Microbial Solutions business related to environmental litigation and in our Safety Assessment business related to U.S. government investigations into the NHP supply chain; and adjustments related to the recognition of deferred tax assets expected to be utilized as a result of changes to the our international financing structure and the revaluation of deferred tax liabilities as a result of foreign tax legislation. This press release also refers to our revenue on both a GAAP and non-GAAP basis: "organic revenue growth," which we define as reported revenue growth adjusted for foreign currency translation, acquisitions, divestitures, and the impact of the 53rd week in 2022. We exclude these items from the non-GAAP financial measures because they are outside our normal operations. There are limitations in using non-GAAP financial measures, as they are not presented in accordance with generally accepted accounting principles, and may be different than non-GAAP financial measures used by other companies. In particular, we believe that the inclusion of supplementary non-GAAP financial measures in this press release helps investors to gain a meaningful understanding of our core operating results and future prospects without the effect of these often-one-time charges, and is consistent with how management measures and forecasts the Company’s performance, especially when comparing such results to prior periods or forecasts. We believe that the financial impact of our acquisitions and divestitures (and in certain cases, the evaluation of such acquisitions and divestitures, whether or not ultimately consummated) is often large relative to our overall financial performance, which can adversely affect the comparability of our results on a period-to-period basis. In addition, certain activities and their underlying associated costs, such as business acquisitions, generally occur periodically but on an unpredictable basis. We calculate non-GAAP integration costs to include third-party integration costs incurred post-acquisition. Presenting revenue on an organic basis allows investors to measure our revenue growth exclusive of acquisitions, divestitures, the 53rd week in 2022, and foreign currency exchange fluctuations more clearly. Non-GAAP results also allow investors to compare the Company’s operations against the financial results of other companies in the industry who similarly provide non-GAAP results. The non-GAAP financial measures included in this press release are not meant to be considered superior to or a substitute for results of operations presented in accordance with GAAP. The Company intends to continue to assess the potential value of reporting non-GAAP results consistent with applicable rules and regulations. Reconciliations of the non-GAAP financial measures used in this press release to the most directly comparable GAAP financial measures are set forth in this press release, and can also be found on the Company’s website at ir.criver.com.