Charles River's (CRL) Q3 Earnings Beat, Margins Decline
Charles River Laboratories International, Inc. CRL reported third-quarter 2023 adjusted earnings per share (EPS) of $2.72, which reflected a 3.4% increase year over year. The metric surpassed the Zacks Consensus Estimate by 15.7%.
On a GAAP basis, however, earnings declined 10.1% year over year to $1.69 per share.
The year-over-year decline in GAAP earnings was primarily due to site consolidation and associated costs as well as non-operating items, including a loss on certain venture capital and other strategic investments, increased interest expense and a higher tax rate.
Revenues
Revenues in the third quarter totaled $1.03 billion, beating the Zacks Consensus Estimate by 3%. The top line improved 3.8% from the year-ago quarter (up 4.1% organically, excluding the impact of acquisition, divestiture and foreign currency translation).
Segments in Detail
Charles River’s third-quarter total Research Models and Services (RMS) revenues of $186.8 million were up 3.7% year over year (up 3.2% organically). Organic revenue growth was primarily driven by research model services, particularly the Insourcing Solutions business. Our model estimated the RMS business to grow 12.6% on a reported basis (13.9% growth organically) in the third quarter.
Discovery and Safety Assessment (DSA) revenues of $664 million rose 7.2% (up 5.3% organically). Organic revenue growth was mainly driven by growth in the Safety Assessment business on meaningful price increases and higher study volume. Going by our model, the DSA business was expected to register 1.8% growth in the third quarter (1% growth organically).
Charles River Laboratories International, Inc. Price, Consensus and EPS Surprise
Charles River Laboratories International, Inc. price-consensus-eps-surprise-chart | Charles River Laboratories International, Inc. Quote
Manufacturing Solutions revenues totaled $175.7 million, down 7.3% year over year (up 0.9% organically). Organic revenue growth was primarily driven by contract development and manufacturing organization businesses.This was almost entirely offset by lower revenues in the Biologics Testing Solutions and Microbial Solutions businesses.
Margins
Gross profit in the reported quarter was $361.8 million, down 2.3% from the prior-year quarter. Gross margin of 35.3% contracted 218 basis points (bps) year over year on a 7.4% rise in total costs of the company.
Selling, general & administrative expenses rose 4.1% to $176.1 million.
Adjusted operating income totaled $185.7 million, reflecting a 0.4% decline from the prior-year quarter. The adjusted operating margin in the third quarter contracted 76 bps to 18.1%.
Liquidity and Cash Position
Charles River exited the third quarter with cash and cash equivalents of $157.1 million, compared with $200.4 million at the end of the second quarter.
Cumulative net cash provided by operating activities at the end of the third quarter was $462.9 million compared with the prior-year period’s $384.9 million.
2023 Guidance
The company has narrowed its 2023 guidance.
For 2023, revenue growth is now expected in the band of 2.5-3.5% (from the earlier band of 2.5-4.5%) on a reported basis. Organic revenue growth is expected in the range of 5.5-6.5% (5.5-7.5%). The Zacks Consensus Estimate for total revenues is pegged at $4.11 billion, indicating a 3.5% rise from 2022.
Adjusted EPS for 2023 is now expected in the range of $10.50-$10.70 ($10.30-$10.90 expected previously). The current Zacks Consensus Estimate is pegged at $10.49.
Our Take
Charles River exited the third quarter of 2022 with better-than-expected earnings and revenues. The results highlighted strong organic revenue growth, driven by strength across the DSA and RMS business segments. The company registered robust growth in small research models, research model services and the Safety Assessment business.
On the flip side, the contraction of operating margins on escalating expenses is concerning. Headwinds associated with interest expense due to a rising interest rate environment increase concerns.
Zacks Rank and Key Picks
Charles River currently carries Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader medical space that have announced quarterly results are Abbott Laboratories ABT, Inari Medical NARI and Integer Holdings Corporation ITGR.
Abbott, carrying a Zacks Rank of 2 (Buy), reported adjusted EPS of $1.14 for third-quarter 2023, beating the Zacks Consensus Estimate by 3.6%. Revenues of $10.14 billion outpaced the consensus mark by 3.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Abbott has a long-term estimated growth rate of 5.1%. ABT’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 6.8%.
Inari Medical, carrying a Zacks Rank #2, reported adjusted EPS of 4 cents for third-quarter 2023, beating the Zacks Consensus Estimate by a staggering 128.6%. Revenues of $119 million outpaced the consensus estimate by 2.3%.
Inari Medical has an estimated earnings growth rate of 725% for the following year. Inari Medical’s earnings surpassed estimates in all the trailing four quarters, the average being 66.8%.
Integer Holdings reported third-quarter 2023 adjusted EPS of $1.27, beating the Zacks Consensus Estimate by 20.9%. Revenues of $404.7 million surpassed the Zacks Consensus Estimate by 8.7%. It currently carries a Zacks Rank #2.
Integer Holdings has a long-term estimated growth rate of 15.8%. ITGR’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 11.9%.
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