Charles River(CRL) - 2024 Q2 - Quarterly Results

Executive Summary Second-Quarter 2024 Financial Highlights Charles River Laboratories reported revenue of $1.03 billion in Q2 2024, a 3.2% year-over-year decrease, with GAAP diluted EPS at $1.74 and non-GAAP diluted EPS at $2.80, alongside a new $1 billion stock repurchase authorization and revised full-year 2024 guidance Key Financial Data for Q2 2024 | Metric | Q2 2024 | Q2 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue ($) | $1.03 Billion | $1.06 Billion | -3.2% | | GAAP Operating Margin (%) | 14.8% | 15.6% | -0.8 pp | | Non-GAAP Operating Margin (%) | 21.3% | 20.4% | +0.9 pp | | GAAP Net Income ($) | $90.0 Million | $97.0 Million | -7.2% | | Non-GAAP Net Income ($) | $144.9 Million | $138.3 Million | +4.8% | | GAAP Diluted EPS ($) | $1.74 | $1.89 | -7.9% | | Non-GAAP Diluted EPS ($) | $2.80 | $2.69 | +4.1% | - The company's Board of Directors approved a new $1 billion stock repurchase authorization[1] - The company revised its full-year 2024 financial guidance[1] CEO's Strategic Outlook and Response CEO James C. Foster noted that despite in-line H1 financial performance, forward-looking data indicates no improvement in H2 DSA business demand, particularly from global biopharmaceutical clients, prompting the company to actively manage costs, innovate business transformation, invest prudently, and strengthen commercial efforts - DSA business demand is not expected to improve in H2 2024, but rather decline, primarily impacted by global biopharmaceutical clients[5] - The company will implement the following strategic measures to address weak demand: * Actively manage cost structure * Initiate new innovative approaches for business transformation * Invest prudently * Strengthen commercial efforts to win new business[5] - The company believes clients will continue to seek treatments for rare diseases and other unmet medical needs, prompting further measures to help clients achieve their goals with a stronger, leaner posture[5] Segment Performance Research Models and Services (RMS) The RMS segment reported Q2 revenue of $206.4 million, a 1.7% year-over-year decrease, with organic revenue down 3.9%, primarily due to reduced non-human primate (NHP) revenue from China and lower research model services and cell solutions, partially offset by growth in small research model sales RMS Segment Performance for Q2 2024 | Metric | Q2 2024 | Q2 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue ($) | $206.4 Million | $209.9 Million | -1.7% | | Organic Revenue Growth (%) | -3.9% | - | - | | GAAP Operating Margin (%) | 14.5% | 23.3% | -8.8 pp | | Non-GAAP Operating Margin (%) | 23.1% | 26.4% | -3.3 pp | - Revenue decline primarily due to reduced non-human primate (NHP) revenue from China, and lower revenue from research model services and cell solutions businesses[6] - The revenue decline was partially offset by increased sales of small research models, particularly in Europe and China[6] - The decrease in GAAP operating margin also reflects higher costs associated with the company's restructuring plan, including site consolidation costs for the California CRADL business[7] Discovery and Safety Assessment (DSA) The DSA segment's Q2 revenue was $627.4 million, a 5.4% year-over-year decrease, with organic revenue down 5.0%, driven by reduced revenue from discovery services and safety assessment businesses, leading to declines in both GAAP and non-GAAP operating margins DSA Segment Performance for Q2 2024 | Metric | Q2 2024 | Q2 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue ($) | $627.4 Million | $663.5 Million | -5.4% | | Organic Revenue Growth (%) | -5.0% | - | - | | GAAP Operating Margin (%) | 22.1% | 24.3% | -2.2 pp | | Non-GAAP Operating Margin (%) | 27.1% | 27.6% | -0.5 pp | - Revenue decline primarily driven by reduced revenue from discovery services and safety assessment businesses[9] - Operating margin decline primarily impacted by lower sales volume, partially offset by reduced performance-based compensation accruals[9] - The decrease in GAAP operating margin also reflects higher costs associated with the company's restructuring plan and higher adjustments related to the Noveprim acquisition[9] Manufacturing Solutions The Manufacturing Solutions segment reported Q2 revenue of $192.3 million, a 3.1% year-over-year increase, with organic revenue up 3.7%, reflecting growth across all businesses and significant improvements in both GAAP and non-GAAP operating margins due to enhanced profitability and reduced legal costs Manufacturing Solutions Segment Performance for Q2 2024 | Metric | Q2 2024 | Q2 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue ($) | $192.3 Million | $186.5 Million | +3.1% | | Organic Revenue Growth (%) | +3.7% | - | - | | GAAP Operating Margin (%) | 19.4% | 13.1% | +6.3 pp | | Non-GAAP Operating Margin (%) | 26.6% | 22.9% | +3.7 pp | - Organic revenue growth reflects revenue growth across all businesses in the segment[10] - Operating margin growth primarily benefited from improved profitability across all businesses[10] - GAAP operating margin growth also benefited from reduced third-party legal costs related to the microbial solutions business and lower acquisition-related adjustments[10] Corporate Actions & Outlook New Stock Repurchase Authorization The company's Board of Directors approved a new $1 billion stock repurchase authorization, replacing the prior $1.3 billion authorization which had $129.1 million remaining - The company's Board of Directors approved a new $1 billion stock repurchase authorization[11] - This new authorization replaces the prior $1.3 billion stock repurchase authorization which had $129.1 million remaining[11] Revised 2024 Financial Guidance The company revised its 2024 financial guidance, reflecting the continued lack of recovery in demand from small and mid-sized biotech clients and increasing weakness from global biopharmaceutical clients, no longer expecting overall demand trends to improve in the second half, significantly impacting the DSA segment outlook - The primary reasons for the revised guidance are the continued lack of recovery in demand from small and mid-sized biotech clients and increasing weakness from global biopharmaceutical clients[12] - The company no longer expects overall demand trends to improve in the second half, which will significantly impact the DSA segment's outlook[12] - The company is implementing a restructuring plan, expected to save over $150 million annually, with approximately $100 million realized in 2024[12] Revised 2024 Financial Guidance Comparison | Metric | Current Guidance | Prior Guidance | | :--- | :--- | :--- | | Reported Revenue Growth/(Decline) (%) | (4.5)% – (2.5)% | 1.0% – 4.0% | | Organic Revenue Growth/(Decline) (%) | (5.0)% – (3.0)% | 0.0% – 3.0% | | GAAP EPS Estimate ($) | $5.65 – $5.95 | $7.60 – $8.10 | | Non-GAAP EPS Estimate ($) | $9.90 – $10.20 | $10.90 – $11.40 | Financial Statements Condensed Consolidated Statements of Income The unaudited condensed consolidated statements of income show total revenue of $1.026 billion for Q2 2024, down from $1.059 billion in the prior year, with GAAP net income attributable to common shareholders of $89.988 million and diluted EPS of $1.74 Condensed Consolidated Statements of Income Summary (Q2 2024) | Metric | Q2 2024 (USD thousands) | Q2 2023 (USD thousands) | | :--- | :--- | :--- | | Service Revenue | 842,900 | 874,891 | | Product Revenue | 183,217 | 185,046 | | Total Revenue | 1,026,117 | 1,059,937 | | Operating Income | 151,652 | 164,945 | | Net Income | 94,261 | 99,443 | | Net Income Attributable to Common Shareholders | 89,988 | 97,020 | | Diluted EPS ($) | $1.74 | $1.89 | Condensed Consolidated Balance Sheets As of June 29, 2024, total assets were $7.948 billion, a decrease from $8.195 billion at December 30, 2023, with total liabilities at $4.175 billion and total equity at $3.727 billion Condensed Consolidated Balance Sheets Summary (as of June 29, 2024) | Metric | June 29, 2024 (USD thousands) | Dec 30, 2023 (USD thousands) | | :--- | :--- | :--- | | Cash and Cash Equivalents | 179,213 | 276,771 | | Accounts Receivable and Contract Assets, Net | 762,221 | 780,375 | | Inventories | 349,111 | 380,259 | | Total Current Assets | 1,499,273 | 1,608,662 | | Property, Plant and Equipment, Net | 1,613,895 | 1,639,741 | | Goodwill | 3,079,693 | 3,095,045 | | Intangible Assets, Net | 800,129 | 864,051 | | Total Assets | 7,948,283 | 8,195,001 | | Total Current Liabilities | 947,519 | 1,055,082 | | Long-Term Debt, Net and Finance Leases | 2,409,380 | 2,647,147 | | Total Liabilities | 4,175,189 | 4,536,003 | | Equity Attributable to Charles River Laboratories International, Inc. | 3,722,729 | 3,596,882 | | Total Equity | 3,727,018 | 3,602,276 | Condensed Consolidated Statements of Cash Flows For the six months ended June 29, 2024, net cash provided by operating activities was $323.4 million, net cash used in investing activities was $147.7 million, and net cash used in financing activities was $267.5 million, with cash and cash equivalents at period-end totaling $181.0 million Condensed Consolidated Statements of Cash Flows Summary (Six Months Ended June 29, 2024) | Metric | Six Months Ended June 29, 2024 (USD thousands) | Six Months Ended July 1, 2023 (USD thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 323,423 | 257,505 | | Net Cash Used in Investing Activities | (147,658) | (245,227) | | Net Cash Used in Financing Activities | (267,512) | (46,223) | | Effect of Exchange Rate Changes | (11,729) | 1,508 | | Net Change in Cash and Cash Equivalents | (103,476) | (32,437) | | Cash and Cash Equivalents at End of Period | 181,004 | 208,777 | Non-GAAP Reconciliations & Disclosures Non-GAAP Financial Measures Explanation Non-GAAP financial measures are reported to exclude one-time and non-operating items, providing investors with a clearer understanding of core operating results and future prospects, with organic revenue growth defined as reported revenue growth adjusted for foreign currency translation, acquisitions, and divestitures - Non-GAAP financial measures aim to exclude one-time expenses and non-operating items, providing a deeper understanding of core operating results and future prospects[18] - Items excluded from non-GAAP metrics include intangible asset amortization, acquisition and divestiture-related expenses and adjustments, restructuring costs, investment gains/losses, and certain legal costs[18] - Organic revenue growth is defined as reported revenue growth adjusted for foreign currency translation, acquisition, and divestiture impacts[18] Reconciliation of GAAP to Non-GAAP Segment Information The company provides a detailed reconciliation of GAAP to non-GAAP operating income for each business segment, with non-GAAP adjustments primarily including acquisition-related amortization, acquisition-related adjustments, severance, site consolidation, impairment charges, and third-party legal costs, to offer a clearer view of segment operational performance Reconciliation of GAAP to Non-GAAP Operating Income Summary (Q2 2024) | Segment | GAAP Operating Income (USD thousands) | Total Non-GAAP Adjustments (USD thousands) | Non-GAAP Operating Income (USD thousands) | GAAP Operating Margin (%) | Non-GAAP Operating Margin (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | RMS | 29,948 | 17,753 | 47,701 | 14.5% | 23.1% | | DSA | 138,376 | 31,765 | 170,141 | 22.1% | 27.1% | | Manufacturing Solutions | 37,230 | 13,973 | 51,203 | 19.4% | 26.6% | | Total | 151,652 | 66,903 | 218,555 | 14.8% | 21.3% | - Non-GAAP adjustments primarily include acquisition-related amortization, acquisition-related adjustments, severance, site consolidation and impairment charges, and third-party legal costs[34] Reconciliation of GAAP to Non-GAAP Earnings The company provides a detailed reconciliation of GAAP to non-GAAP earnings per share, with non-GAAP adjustments including redeemable non-controlling interest adjustments, incremental dividends to non-controlling interest holders, non-GAAP operating income adjustments, investment gains/losses, divestiture gains/losses, and tax impacts, to present a more accurate view of core profitability Reconciliation of GAAP to Non-GAAP EPS Summary (Q2 2024) | Metric | Q2 2024 (USD thousands) | Q2 2023 (USD thousands) | | :--- | :--- | :--- | | GAAP Net Income Attributable to Common Shareholders | 89,988 | 97,020 | | Total Non-GAAP Adjustments | 65,576 | 51,256 | | Investment Gains/(Losses) | (902) | 1,873 | | Divestiture Gains/(Losses) | 0 | 1,003 | | Tax Impact | (13,816) | (13,463) | | Non-GAAP Net Income Attributable to Common Shareholders | 144,939 | 138,285 | | GAAP Diluted EPS ($) | $1.74 | $1.89 | | Non-GAAP Diluted EPS ($) | $2.80 | $2.69 | - Non-GAAP adjustments include redeemable non-controlling interest adjustments, incremental dividends to non-controlling interest holders, non-GAAP operating income adjustments, investment gains/losses, divestiture gains/losses, and tax impacts[36] Reconciliation of GAAP to Non-GAAP Revenue Growth, Organic The company provides a detailed reconciliation of GAAP reported revenue growth to non-GAAP organic revenue growth, which is calculated by adjusting for foreign currency exchange rate impacts, acquisition contributions, and divestiture impacts to reflect the actual growth of the core business Reconciliation of GAAP to Non-GAAP Organic Revenue Growth Summary (Q2 2024) | Metric | Total Company | RMS Segment | DSA Segment | Manufacturing Solutions Segment | | :--- | :--- | :--- | :--- | :--- | | Reported Revenue Growth (%) | (3.2)% | (1.7)% | (5.4)% | 3.1% | | Foreign Currency Exchange Rate Impact (%) | 0.3% | 0.5% | 0.1% | 0.6% | | Acquisition Contribution (%) | (0.5)% | (2.7)% | —% | —% | | Divestiture Impact (%) | 0.2% | —% | 0.3% | —% | | Non-GAAP Organic Revenue Growth (%) | (3.2)% | (3.9)% | (5.0)% | 3.7% | - Organic revenue growth is calculated by adjusting for foreign currency exchange rate impacts, acquisition contributions, and divestiture impacts to reflect the actual growth of the core business[38] Caution Concerning Forward-Looking Statements This press release contains forward-looking statements, based on current expectations and beliefs, involving risks and uncertainties that could cause actual results to differ materially, including NHP supply constraints, global economic changes, acquisition integration, R&D spending trends, and regulatory changes - Forward-looking statements are based on the company's current expectations and beliefs, involving difficult-to-predict risks and uncertainties[21] - Risks and uncertainties that could cause actual results to differ materially from forward-looking statements include: * Non-human primate (NHP) supply constraints and the impact of U.S. government investigations * Changes in global economic and financial markets * Ability to successfully integrate acquired businesses, including Noveprim * Negative trends in R&D spending and outsourcing service levels * Regulatory changes, loss of key personnel, interest rate and foreign exchange fluctuations[21][23] - The company undertakes no obligation to update the information contained in this press release, except as required by law[23] Company Information About Charles River Charles River Laboratories International, Inc. provides essential products and services to global pharmaceutical and biotechnology companies, government agencies, and leading academic institutions to accelerate their research and drug development efforts - Charles River provides products and services to global pharmaceutical and biotechnology companies, government agencies, and leading academic institutions to accelerate research and drug development[24] - The company focuses on helping clients discover, early develop, and safely manufacture new therapies through scientific expertise and flexible solutions[24] Investor & Media Contacts Contact information is provided for investor relations and the Chief Communications Officer - Investor Contact: Todd Spencer, Corporate Vice President, Investor Relations, Phone: 781.222.6455, Email: todd.spencer@crl.com[25] - Media Contact: Amy Cianciaruso, Corporate Vice President, Chief Communications Officer, Phone: 781.222.6168, Email: amy.cianciaruso@crl.com[25]