filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2021. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” included elsewhere within this Form 10-Q. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, leading global non-clinical drug development partner. We have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, which is able to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities, including our recently acquired contract development and manufacturing organization (CDMO) business. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.
Our client base includes major global biopharmaceutical companies, many biotechnology companies; agricultural and industrial chemical, life science, veterinary medicine, medical device, diagnostic and consumer product companies; contract research and contract manufacturing organizations; and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing). Our RMS reportable segment includes the Research Models, Research Model Services, and Research and GMP-Compliant Cells businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of our clients’ research operations (including recruitment, training, staffing, and management services). Research and GMP-Compliant Cells supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. Our DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO); and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.
Russia-Ukraine Conflict
In February 2022, the Russian Federation launched an invasion of the country of Ukraine resulting in conflict in the region and a variety of sanctions against the Russian Federation enacted by several governments, including the U.S, United Kingdom, Canada and European Union. The conflict has had and continues to have, direct and indirect adverse effects on financial markets and global supply chain disruptions. We do not have any direct operations in either Russia or Ukraine and there were no material impacts to our financial statements for the three and nine months ended September 24, 2022 as a result of the situation. We will continue to monitor the situation as it evolves for potential impacts to our operating and financial results such as increased inflationary, supply chain, or cybersecurity risks in subsequent periods. Refer to Item 1A, Risk Factors disclosed herein and in our Annual Report on Form 10-K for fiscal 2021 for our assessment of risk factors surrounding inflationary, supply chain and cybersecurity risks.
Recent Acquisitions
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.
Fiscal Year 2022 Acquisition
On April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements our existing IS business, specifically our CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The purchase price of Explora BioLabs was $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from our Credit Facility. This business is reported as part of our RMS reportable segment.
Fiscal Year 2021 Acquisitions
On June 28, 2021, we acquired Vigene Biosciences, Inc. (Vigene), a gene therapy CDMO, providing viral vector-based gene delivery solutions. The acquisition enables clients to seamlessly conduct analytical testing, process development, and manufacturing for advanced modalities with the same scientific partner. The purchase price of Vigene was $323.9 million, net of $2.7 million in cash, and included $34.5 million of contingent consideration (maximum contingent payments of up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our Manufacturing reportable segment. As of September 24, 2022, the fair value of the contingent consideration was zero as certain financial targets have not and are not expected to be achieved.
On March 30, 2021, we acquired Retrogenix Limited (Retrogenix), an outsourced discovery services provider specializing in bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances our scientific expertise with additional large molecule and cell therapy discovery capabilities. The purchase price of Retrogenix was $53.9 million, net of $8.5 million in cash. Included in the purchase price are additional payments up to $6.9 million, which are contingent on future performance. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.
On March 29, 2021, we acquired Cognate BioServices, Inc. (Cognate), a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the production of plasmid DNA and other inputs in the CDMO value chain. The acquisition of Cognate establishes us as a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research and discovery through cGMP production. The purchase price of Cognate was $877.9 million, net of $70.5 million in cash and includes $15.7 million of consideration for an approximate 2% ownership interest not acquired, which was redeemed in April 2022 with the ultimate payout tied to performance in 2021. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility and Senior Notes issued in fiscal 2021. This business is reported as part of our Manufacturing reportable segment.
On March 3, 2021, we acquired certain assets from a distributor that supports our DSA reportable segment. The purchase price was $35.4 million, which includes $19.5 million in cash paid ($5.5 million of which was paid in fiscal 2020), and $15.9 million of contingent consideration (the maximum contingent contractual payments are up to $17.5 million). The business is reported as part of our DSA reportable segment. As of September 24, 2022, the fair value of the contingent consideration was zero as certain operational targets were not achieved.
On December 31, 2020, we acquired Distributed Bio, Inc. (Distributed Bio), a next-generation antibody discovery company with technologies specializing in enhancing the probability of success for delivering high-quality, readily formattable antibody fragments to support antibody and cell and gene therapy candidates to biopharmaceutical clients. The acquisition of Distributed Bio expands our capabilities with an innovative, large-molecule discovery platform, and creates an integrated, end-to-end platform for therapeutic antibody and cell and gene therapy discovery and development. The purchase price of Distributed Bio was $97.0 million, net of $0.8 million in cash. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously issued by us during prior fiscal years, and $14.1 million of contingent consideration (the maximum contingent contractual payments are up to $21.0 million). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment. During the nine months ended September 24, 2022, $7.0 million of contingent consideration was paid as certain operational milestones were achieved. Other financial targets associated with the contingent consideration were not met and the fair value of the remaining contingent consideration is zero as of September 24, 2022.
Recent Divestitures
On November 1, 2022, we signed an agreement with a private investor group to sell our Avian Vaccine Services business (“Avian”) for approximately $170 million in cash, subject to certain customary closing adjustments, and future contingent payments up to an additional $30 million. We are in the process of evaluating the transaction and its impact on the consolidated financial statements. The proposed transaction is expected to close in the fourth quarter of fiscal 2022.
On October 12, 2021, we completed two separate divestitures. We sold our RMS Japan operations to The Jackson Laboratory for a purchase price of $70.9 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments. We also sold our gene therapy CDMO site in Sweden to a private investor group for a purchase price of $59.6 million, net of $0.2 million in cash and certain post-closing adjustments. Included in the purchase price are contingent payments fair valued at $15.3 million, (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10 million between the parties. As of September 24, 2022, the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
fair value of the contingent payments was reduced to $7.5 million as certain financial targets are not expected to be achieved. We routinely evaluate the strategic fit and fundamental performance of our businesses. As part of this assessment, we determined that the above capital could be better deployed in other long-term growth opportunities.
Fiscal Quarters
Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which will occur in this fiscal year 2022.
Overview of Results of Operations and Liquidity
Revenue for the three months ended September 24, 2022 increased $93.3 million, or 10.4%, to $989.2 million compared to $895.9 million in the corresponding period in 2021. Revenue for the nine months ended September 24, 2022 increased $241.1 million, or 9.1%, to $2.9 billion compared to $2.6 billion in the corresponding period in 2021. The increase in revenue in both periods was primarily due to increased demand within our DSA segment and recent acquisition of Explora BioLabs; partially offset by the divestitures of RMS Japan and CDMO Sweden and the negative effect of changes in foreign currency exchange rates when compared to the corresponding three and nine month periods in 2021.
In the three months ended September 24, 2022, our operating income and operating income margin were $151.0 million and 15.3%, respectively, compared with $155.8 million and 17.4%, respectively, in the corresponding period of 2021. In the nine months ended September 24, 2022, our operating income and operating income margin were $487.2 million and 16.9%, respectively, compared with $417.1 million and 15.8%, respectively, in the corresponding period of 2021. The decreases in operating income and operating margin for the three months ended September 24, 2022 was primarily due to higher operating costs associated with our CDMO business, higher staffing costs and modest inflationary pressures. The increases in operating income and operating income margin for the nine months ended September 24, 2022 was primarily due to the contribution of higher revenue described above, lower acquisition related costs, changes in contingent consideration; partially offset by higher operating costs associated with our CDMO business, higher staffing costs and modest inflationary pressures.
Net income attributable to common shareholders decreased to $96.5 million in the three months ended September 24, 2022, from $103.4 million in the corresponding period of 2021. The decrease in Net income attributable to common shareholders was primarily due to decreases in operating income described above and a decreased tax benefit from stock-based compensation deductions.
Net income attributable to common shareholders increased to $298.8 million in the nine months ended September 24, 2022, from $253.4 million in the corresponding period of 2021. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above and by the absence of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in 2021; partially offset by higher provision for income taxes and higher losses on our investments compared to the corresponding period in 2021.
During the nine months ended September 24, 2022, our cash flows from operations was $384.9 million compared with $531.5 million for the same period in 2021. The decrease was driven by timing and amount of our working capital balances, principally collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits), inventory purchases, and variable compensation payments.
Results of Operations
Three Months Ended September 24, 2022 Compared to the Three Months Ended September 25, 2021
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Three Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 812.9 | $ | 703.8 | $ | 109.1 | 15.5 | % | |||||||||||||||
| Product revenue | 176.3 | 192.1 | (15.8) | (8.2) | % | ||||||||||||||||||
| Total revenue | $ | 989.2 | $ | 895.9 | $ | 93.3 | 10.4 | % |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
| Three Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 180.1 | $ | 171.3 | $ | 8.8 | 5.2 | % | (4.0) | % | |||||||||||||||||||
| DSA | 619.5 | 531.8 | 87.7 | 16.5 | % | (4.3) | % | ||||||||||||||||||||||
| Manufacturing | 189.6 | 192.8 | (3.2) | (1.7) | % | (5.4) | % | ||||||||||||||||||||||
| Total revenue | $ | 989.2 | $ | 895.9 | $ | 93.3 | 10.4 | % | (4.5) | % |
The following table presents operating income by reportable segment:
| Three Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 35.9 | $ | 39.1 | $ | (3.2) | (8.2) | % | (4.8) | % | |||||||||||||||||||
| DSA | 142.1 | 116.5 | 25.6 | 22.0 | % | (1.6) | % | ||||||||||||||||||||||
| Manufacturing | 31.5 | 48.6 | (17.1) | (35.2) | % | (9.3)% | |||||||||||||||||||||||
| Unallocated corporate | (58.5) | (48.4) | (10.1) | 20.9 | % | (1.7) | % | ||||||||||||||||||||||
| Total operating income | $ | 151.0 | $ | 155.8 | $ | (4.8) | (3.1) | % | (5.0) | % | |||||||||||||||||||
| Operating income % of revenue | 15.3 | % | 17.4 | % | (210) bps |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| Three Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 180.1 | $ | 171.3 | $ | 8.8 | 5.2 | % | (4.0) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 113.2 | 103.8 | 9.4 | 9.1 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 25.5 | 24.3 | 1.2 | 5.1 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 5.5 | 4.1 | 1.4 | 34.2 | % | ||||||||||||||||||||||||
| Operating income | $ | 35.9 | $ | 39.1 | $ | (3.2) | (8.2) | % | (4.8) | % | |||||||||||||||||||
| Operating income % of revenue | 19.9 | % | 22.8 | % | (290) bps |
RMS revenue increased $8.8 million due primarily to higher small research model product revenue in North America and China, higher research model services revenue, specifically the Insourcing Solutions business, which included the acquisition of Explora BioLabs contributing $15.1 million; partially offset by the divestiture of RMS Japan, which decreased product revenue by $12.1 million and the effect of changes in foreign currency exchange rates.
RMS operating income decreased $3.2 million compared to the corresponding period in 2021. RMS operating income as a percentage of revenue for the three months ended September 24, 2022 was 19.9%, a decrease of 290 bps from 22.8% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue decreased primarily due to revenue mix and higher operating costs in China, as well as expansion costs related to new CRADL and Explora sites in the Insourcing Solutions business.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
DSA
| Three Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 619.5 | $ | 531.8 | $ | 87.7 | 16.5 | % | (4.3) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 400.5 | 356.6 | 43.9 | 12.3 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 56.9 | 37.8 | 19.1 | 50.7 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 20.0 | 20.9 | (0.9) | (4.5) | % | ||||||||||||||||||||||||
| Operating income | $ | 142.1 | $ | 116.5 | $ | 25.6 | 22.0 | % | (1.6) | % | |||||||||||||||||||
| Operating income % of revenue | 22.9 | % | 21.9 | % | 100 bps |
DSA revenue increased $87.7 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased demand and pricing of services; partially offset by the effect of changes in foreign currency exchange rates.
DSA operating income increased $25.6 million during the three months ended September 24, 2022 compared to the corresponding period in 2021. DSA operating income as a percentage of revenue for the three months ended September 24, 2022 was 22.9%, an increase of 100 bps from 21.9% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above partially offset by higher staffing costs, modest inflationary pressures, and the absence of adjustments to contingent considerations arrangements related to certain acquisition compared to the same period in 2021.
Manufacturing
| Three Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 189.6 | $ | 192.8 | $ | (3.2) | (1.7) | % | (5.4) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 105.3 | 98.2 | 7.1 | 7.2 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 42.7 | 38.2 | 4.5 | 11.9 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 10.1 | 7.8 | 2.3 | 28.2 | % | ||||||||||||||||||||||||
| Operating income | $ | 31.5 | $ | 48.6 | $ | (17.1) | (35.2) | % | (9.3)% | ||||||||||||||||||||
| Operating income % of revenue | 16.6 | % | 25.2 | % | (860) bps |
Manufacturing revenue decreased $3.2 million due primarily to the divestiture of the CDMO Sweden business, which decreased revenue by $4.2 million, a reduction within our CDMO business, and the effect of changes in foreign currency exchange rates; partially offset by higher service revenue within our Biologics Testing Solutions business, and an increased demand for endotoxin products in our Microbial Solutions business.
Manufacturing operating income decreased $17.1 million during the three months ended September 24, 2022 compared to the corresponding period in 2021. Manufacturing operating income as a percentage of revenue for the three months ended September 24, 2022 was 16.6%, a decrease of 860 bps from 25.2% for the corresponding period in 2021. The decrease in operating income and operating income as a percentage of revenue was due to lower revenue described above, adjustments to contingent consideration arrangements related to certain acquisitions, and higher operating costs associated with our CDMO business.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Unallocated Corporate
| Three Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Unallocated corporate | $ | 58.5 | $ | 48.4 | $ | 10.1 | 20.9 | % | (1.7) | % | |||||||||||||||||||
| Unallocated corporate % of revenue | 5.9 | % | 5.4 | % | 50 bps |
Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The increase in unallocated corporate costs of $10.1 million, or 20.9%, compared to the corresponding period in 2021 is primarily related to higher compensation and benefit expenses. Costs as a percentage of revenue for the three months ended September 24, 2022 was 5.9%, an increase of 50 bps from 5.4% for the corresponding period in 2021.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.1 million for both the three months ended September 24, 2022 and the corresponding period in 2021.
Interest Expense
Interest expense for the three months ended September 24, 2022 was $11.4 million, a decrease of $5.1 million, or 30.9%, compared to $16.5 million for the corresponding period in 2021. The decrease was due primarily to a higher foreign currency gain recognized in connection with a debt-related foreign exchange forward contract in the three months ended September 24, 2022, partially offset by higher interest rates on our variable debt as compared to the corresponding period in 2021.
Other Expense, Net
Other expense, net, was $16.6 million for the three months ended September 24, 2022, an increase of $0.4 million compared to $16.2 million for the corresponding period in 2021. The increase in the three months ended September 24, 2022 was due primarily to higher foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency as compared to the corresponding period in 2021, offset by venture capital investment gains compared to losses incurred for the corresponding period in 2021.
Income Taxes
Income tax expense for the three months ended September 24, 2022 was $25.5 million, an increase of $7.4 million compared to $18.1 million for the corresponding period in 2021. Our effective tax rate was 20.7% for the three months ended September 24, 2022, compared to 14.7% for the corresponding period in 2021. The increase in our effective tax rate in the 2022 period compared to the 2021 period was primarily attributable to decreased tax benefit from stock-based compensation deductions, as well as lower research and development tax credits due to a discrete benefit in the three months ended September 25, 2021.
Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Nine Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 2,316.2 | $ | 2,045.8 | $ | 270.4 | 13.2 | % | |||||||||||||||
| Product revenue | 560.0 | 589.3 | (29.3) | (5.0) | % | ||||||||||||||||||
| Total revenue | $ | 2,876.2 | $ | 2,635.1 | $ | 241.1 | 9.1 | % |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 543.1 | $ | 524.9 | $ | 18.2 | 3.5 | % | (2.7) | % | |||||||||||||||||||
| DSA | 1,755.6 | 1,573.1 | 182.5 | 11.6 | % | (3.1) | % | ||||||||||||||||||||||
| Manufacturing | 577.5 | 537.1 | 40.4 | 7.5 | % | (4.2) | % | ||||||||||||||||||||||
| Total revenue | $ | 2,876.2 | $ | 2,635.1 | $ | 241.1 | 9.1 | % | (3.2) | % |
The following table presents operating income by reportable segment:
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 123.3 | $ | 126.6 | $ | (3.3) | (2.6) | % | (3.0) | % | |||||||||||||||||||
| DSA | 375.9 | 312.0 | 63.9 | 20.5 | % | (1.1) | % | ||||||||||||||||||||||
| Manufacturing | 140.4 | 154.7 | (14.3) | (9.3) | % | (6.4) | % | ||||||||||||||||||||||
| Unallocated corporate | (152.4) | (176.2) | 23.8 | (13.6) | % | (0.8) | % | ||||||||||||||||||||||
| Total operating income | $ | 487.2 | $ | 417.1 | $ | 70.1 | 16.8 | % | (3.8) | % | |||||||||||||||||||
| Operating income % of revenue | 16.9 | % | 15.8 | % | 110 bps |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 543.1 | $ | 524.9 | $ | 18.2 | 3.5 | % | (2.7) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 330.5 | 315.2 | 15.3 | 4.9 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 74.5 | 70.9 | 3.6 | 5.1 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 14.8 | 12.2 | 2.6 | 20.9 | % | ||||||||||||||||||||||||
| Operating income | $ | 123.3 | $ | 126.6 | $ | (3.3) | (2.6) | % | (3.0) | % | |||||||||||||||||||
| Operating income % of revenue | 22.7 | % | 24.1 | % | (140) bps |
RMS revenue increased $18.2 million due primarily to higher research model product revenue in North America and China, however China was negatively impacted by COVID-related restrictions that affected client order activity, higher research model services revenue, specifically the Insourcing Solutions business, which included the acquisition of Explora BioLabs contributing $27.8 million; partially offset by the divestiture of RMS Japan, which decreased product revenue by $36.4 million and the effect of changes in foreign currency exchange rates.
RMS operating income decreased $3.3 million compared to the corresponding period in 2021. RMS operating income as a percentage of revenue for the nine months ended September 24, 2022 was 22.7%, a decrease of 140 bps from 24.1% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue decreased primarily due to the divestiture of RMS Japan and the COVID-related revenue impact in China.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
DSA
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,755.6 | $ | 1,573.1 | $ | 182.5 | 11.6 | % | (3.1) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 1,164.8 | 1,062.6 | 102.2 | 9.6 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 151.9 | 134.0 | 17.9 | 13.4 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 63.0 | 64.5 | (1.5) | (2.4) | % | ||||||||||||||||||||||||
| Operating income | $ | 375.9 | $ | 312.0 | $ | 63.9 | 20.5 | % | (1.1) | % | |||||||||||||||||||
| Operating income % of revenue | 21.4 | % | 19.8 | % | 160 bps |
DSA revenue increased $182.5 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased demand and pricing of services; and the acquisition of Retrogenix which contributed $3.3 million to Discovery Services revenue; partially offset by the effect of changes in foreign currency exchange rates.
DSA operating income increased $63.9 million during the nine months ended September 24, 2022 compared to the corresponding period in 2021. DSA operating income as a percentage of revenue for the nine months ended September 24, 2022 was 21.4%, an increase of 160 bps from 19.8% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as lower acquisition related costs and adjustments to contingent consideration arrangements related to certain acquisitions; partially offset by higher staffing costs and modest inflationary pressures compared to the same period in 2021.
Manufacturing
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 577.5 | $ | 537.1 | $ | 40.4 | 7.5 | % | (4.2) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 317.2 | 269.6 | 47.6 | 17.7 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 86.6 | 94.9 | (8.3) | (8.8) | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 33.3 | 17.9 | 15.4 | 86.4 | % | ||||||||||||||||||||||||
| Operating income | $ | 140.4 | $ | 154.7 | $ | (14.3) | (9.3) | % | (6.4) | % | |||||||||||||||||||
| Operating income % of revenue | 24.3 | % | 28.8 | % | (450) bps |
Manufacturing revenue increased $40.4 million due primarily to our Biologics Solutions business, which includes the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $43.9 million, and higher service revenue within our Biologics Testing Solutions business, as well as increased revenue in our Microbial Solutions business; partially offset by the divestiture of the CDMO Sweden business, which decreased revenue by $9.0 million, and the effect of changes in foreign currency exchange rates.
Manufacturing operating income decreased $14.3 million during the nine months ended September 24, 2022 compared to the corresponding period in 2021, which was primarily due to higher amortization of intangible asset costs; partially offset by a favorable adjustment related to a contingent consideration arrangement and a favorable ruling from tax authorities on certain indirect tax positions recorded within selling, general and administrative expense. Manufacturing operating income as a percentage of revenue for the nine months ended September 24, 2022 was 24.3%, a decrease of 450 bps from 28.8% for the corresponding period in 2021, primarily due to higher operating costs associated with our CDMO acquisitions.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Unallocated Corporate
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Unallocated corporate | $ | 152.4 | $ | 176.2 | $ | (23.8) | (13.6) | % | (0.8) | % | |||||||||||||||||||
| Unallocated corporate % of revenue | 5.3 | % | 6.7 | % | (140) bps |
Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $23.8 million, or 13.6%, compared to the corresponding period in 2021 is primarily related to decreased costs associated with the evaluation and integration of our acquisition activity. Costs as a percentage of revenue for the nine months ended September 24, 2022 was 5.3%, a decrease of 140 bps from 6.7% for the corresponding period in 2021.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.4 million and $0.3 million for the nine months ended September 24, 2022 and the corresponding period in 2021, respectively.
Interest Expense
Interest expense for the nine months ended September 24, 2022 was $24.5 million, a decrease of $37.9 million, or 60.7%, compared to $62.4 million for the corresponding period in 2021. The decrease was due primarily to the absence of $26 million of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in the nine months ended September 25, 2021, higher foreign currency gains recognized in connection with a debt-related foreign exchange forward contract, partially offset by higher interest rates on our variable debt in the nine months ended September 24, 2022 compared to the corresponding period in 2021.
Other Expense, Net
Other expense, net, was $85.0 million for the nine months ended September 24, 2022, an increase of $47.0 million compared to $38.0 million for the corresponding period in 2021. The increase was due primarily to higher foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency in the nine months ended September 24, 2022 as compared to the corresponding period in 2021 and increased net losses on our venture capital investments, strategic equity investments, and life insurance investments for the nine months ended September 24, 2022 as compared to the corresponding period in 2021.
Income Taxes
Income tax expense for the nine months ended September 24, 2022 was $74.6 million, an increase of $16.5 million compared to $58.1 million for the corresponding period in 2021. Our effective tax rate was 19.7% for the nine months ended September 24, 2022 compared to 18.3% for the corresponding period in 2021. The increase in our effective tax rate in the 2022 period compared to the 2021 period was primarily attributable to a decreased tax benefit from stock-based compensation deductions, as well as lower research and development tax credits due to a discrete benefit in the three months ended September 25, 2021; partially offset with the deferred tax impact of tax law changes enacted during the nine months ended September 25, 2021.
Liquidity and Capital Resources
We currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
The following table presents our cash, cash equivalents and short-term investments:
| September 24, 2022 | December 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Held in U.S. entities | $ | 18.3 | $ | 28.2 | |||||||
| Held in non-U.S. entities | 175.4 | 213.0 | |||||||||
| Total cash and cash equivalents | 193.7 | 241.2 | |||||||||
| Short-term investments: | |||||||||||
| Held in non-U.S. entities | 1.0 | 1.1 | |||||||||
| Total cash, cash equivalents and short-term investments | $ | 194.7 | $ | 242.3 |
Borrowings
Amounts outstanding under our Credit Facility and our Senior Notes were as follows:
| September 24, 2022 | December 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Revolving facility | $ | 1,429.2 | $ | 1,161.4 | |||||||
| 4.25% Senior Notes due 2028 | 500.0 | 500.0 | |||||||||
| 3.75% Senior Notes due 2029 | 500.0 | 500.0 | |||||||||
| 4.00% Senior Notes due 2031 | 500.0 | 500.0 | |||||||||
| Total | $ | 2,929.2 | $ | 2,661.4 |
The interest rates applicable to the Credit Facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio.
Early in November 2022, we entered into an interest rate swap with a notional amount of $500 million to manage interest rate fluctuation related to our floating rate borrowings under the Credit Facility, at a fixed rate of 4.700% making the total interest rate 5.825% at our current spread. We designated this derivative instrument as a cash flow hedge at the inception of the contract and expect it to be highly effective.
Our off-balance sheet commitments related to our outstanding letters of credit as of September 24, 2022 were $17.7 million.
Repurchases of Common Stock
During the nine months ended September 24, 2022, we did not repurchase any shares under our authorized stock repurchase program. As of September 24, 2022, we had $129.1 million remaining on the authorized $1.3 billion stock repurchase program. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During the nine months ended September 24, 2022, we acquired 0.1 million shares for $38.5 million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Net income | $ | 303.5 | $ | 259.0 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | 290.8 | 273.6 | |||||||||
| Changes in assets and liabilities | (209.4) | (1.1) | |||||||||
| Net cash provided by operating activities | $ | 384.9 | $ | 531.5 |
Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for (1) non-
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
cash operating items such as depreciation and amortization, stock-based compensation, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, contingent consideration, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. For the nine months ended September 24, 2022, compared to the nine months ended September 25, 2021, the decrease in net cash provided by operating activities was driven by timing and amount of our working capital balances, principally collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits), inventory purchases, and variable compensation payments.
The following table presents our net cash used in investing activities:
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Acquisition of businesses and assets, net of cash acquired | $ | (283.4) | $ | (1,292.1) | |||||||
| Capital expenditures | (235.7) | (130.0) | |||||||||
| Investments, net | (126.3) | (26.0) | |||||||||
| Other, net | (6.8) | 0.9 | |||||||||
| Net cash used in investing activities | $ | (652.3) | $ | (1,447.2) |
For the nine months ended September 24, 2022, the primary use of cash used in investing activities related to the acquisition of Explora BioLabs, capital expenditures to support the growth of the business and investments in certain venture capital and strategic equity investments. For the nine months ended September 25, 2021, the primary use of cash used in investing activities related to the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix, and certain assets from a distributor, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments.
The following table presents our net cash provided by financing activities:
| Nine Months Ended | |||||||||||
| September 24, 2022 | September 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Proceeds from long-term debt and revolving credit facility | $ | 2,798.7 | $ | 6,119.7 | |||||||
| Payments on long-term debt, revolving credit facility, and finance lease obligations | (2,524.4) | (5,190.4) | |||||||||
| Proceeds from exercises of stock options | 17.7 | 43.3 | |||||||||
| Purchase of treasury stock | (38.5) | (40.4) | |||||||||
| Payment of debt extinguishment and financing costs | — | (38.3) | |||||||||
| Purchases of additional equity interests, net | (30.5) | — | |||||||||
| Payment of contingent considerations | (10.4) | (2.3) | |||||||||
| Other, net | (6.0) | — | |||||||||
| Net cash provided by financing activities | $ | 206.6 | $ | 891.6 |
For the nine months ended September 24, 2022, net cash provided by financing activities reflected the net proceeds of $274.3 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
-
Borrowings under our Credit Facility of $300 million, which were used primarily for the acquisition of Explora BioLabs;
-
Net borrowings of $153 million from our Credit Facility throughout the nine months ended September 24, 2022;
-
Payments of $2.0 billion partially offset by $1.9 billion of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Net cash provided by financing activities also reflected treasury stock purchases of $38.5 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, approximately $15 million payment to purchase an additional 10% interest in a subsidiary, $15.7 million payment to acquire the remaining 2% ownership interest in Cognate, and $10.4 million of contingent consideration payments; partially offset by proceeds from exercises of employee stock options of $17.7 million.
For the nine months ended September 25, 2021, net cash provided by financing activities reflected the net proceeds of $929.3 million our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
-
Payments of approximately $147 million on our term loan;
-
Proceeds of $1.0 billion from the issuance of the 2029 and 2031 Senior Notes, which were used to prepay our $500 million 2026 Senior Notes;
-
Borrowings under our Credit Facility of $1.2 billion, which were used primarily for the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix and certain assets from a distributor;
-
Payments of $544 million made to our Credit Facility throughout the nine months ended September 25, 2021;
-
Gross proceeds and borrowings of $1.5 billion, but having a net impact of zero, were incurred as part of amending and restating our Credit Facility;
-
Gross proceeds and payments of approximately $2.2 billion in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $43.3 million, offset by treasury stock purchases of $40.4 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. Additionally we paid $21 million of debt extinguishment costs associated with the 2026 Senior Notes repayment and $17 million of debt financing costs associated with the 2029 and 2031 Senior Notes issuances.
Off-Balance Sheet and Other Arrangements
There have been no material changes from the off-balance sheet and other arrangements previously disclosed in our Annual Report on Form 10-K for fiscal 2021 other than the changes described in Note 2, “Acquisitions and Divestitures,” Note 7, “Fair Value,” Note 9, “Debt and Other Financing Arrangements,”, and Note 13, “Commitments and Contingencies,” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Venture Capital Investments
We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to the funds as of September 24, 2022 was $190.3 million, of which we funded $125.1 million through September 24, 2022. Refer to Note 6, “Venture Capital and Strategic Equity Investments” in this Quarterly Report on Form 10-Q for additional information.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for fiscal year 2021.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements please refer to Note 1, “Basis of Presentation,” in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, “Basis of Presentation,” we did not adopt any other new accounting pronouncements during the nine months ended September 24, 2022 that had a significant effect on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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