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Text: Actual results may differ materially from those indicated.
The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP.
In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website.
I'm very pleased to speak with you today about another exceptional quarter at Charles River.
Our robust first quarter financial performance, highlighted by 13% organic revenue growth and 170 basis points of year-over-year operating margin improvement demonstrates the strength of the biopharmaceutical market environment and the power of our unique portfolio, both of which we believe are as strong as they have ever been.
We believe clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions, with scientific depth and breadth of our portfolio and our unwavering focus on seamlessly serving their diverse needs.
Clients are opting to work with a smaller number of CROs who offer broader scientific capabilities which enables them to drive greater efficiency and accelerate the speed of the research, nonclinical development and manufacturing programs.
The complexity of scientific research is also increasing our clients' reliance on a high-science outsourcing partner like Charles River.
To further differentiate ourselves from the competition, we are strategically expanding our portfolio in areas that deliver the greatest value to clients and offers significant growth potential.
Already this year, we have enhanced our scientific capabilities for advanced drug modalities through the acquisitions of Distributed Bio, Cognate BioServices and Retrogenix.
Distributed Bio and Retrogenix strengthen our discovery portfolio.
And the acquisition of Cognate, which was completed on March 29, provides an excellent growth opportunity by allowing us to offer CDMO services in the high-growth, high-science cell and gene therapy sector.
We believe the strength of our portfolio and robust industry fundamentals are leading to unprecedented client demand across most of our businesses.
In the first quarter, we experienced a continuation of the robust demand from the end of last year, including new record booking and proposal levels in the Safety Assessment business.
Organic revenue was about 10% for a second consecutive quarter, even after normalizing for last year's COVID-19 impact.
Overall, we believe our robust first quarter performance and solid business trends support our improved outlook for the year.
I will now provide highlights of our first quarter performance.
Quarterly revenue surpassed $800 million for the first time and an $824.6 million for the first quarter of 2021 represented a 16.6% increase over last year.
Organic revenue growth of 13% was driven by double-digit growth across all three segments.
The year-over-year comparison to last year's COVID-related revenue impact, which primarily affected the RMS segment, contributed approximately 140 basis points to the revenue growth rate this quarter.
We experienced broad-based growth across all client segments, with biotech clients leading the way as they continue to benefit from a robust funding environment.
The operating margin was 20.7%, an increase of 170 basis points year-over-year.
The improvement was driven by RMS and DSA segments and reflected operating leverage and the robust revenue growth as well as our continued efforts to drive efficiency.
We expect the same factors will drive margin improvement for the year and believe the operating margin will approach 21%, above our prior target.
Earnings per share were $2.53 in the first quarter, an increase of 37.5% from $1.84 in the first quarter of last year.
This outstanding earnings growth principally reflected the double-digit revenue growth and meaningful operating margin improvement.
Based on the first quarter performance and our positive outlook for the remainder of the year, we are meaningfully increasing our revenue growth and non-GAAP earnings per share guidance for 2021.
We now expect organic revenue growth in a range of 12% to 14%, a 300 basis point increase from our prior range.
Normalized for last year's COVID-19 impact, we would still expect low double-digit organic revenue growth this year.
Non-GAAP earnings per share are expected to be $9.75 to $10, which represents 20% to 23% year-over-year growth and an increase of $0.75 at the midpoint from our prior outlook.
I'd like to provide you with details on the first quarter segment performance, beginning with the DSA segment.
Revenue was $501.2 million in the first quarter, an 11.6% increase on an organic basis over the first quarter 2020 driven by broad-based demand for both Discovery and Safety Assessment.
Safety Assessment business continued to perform exceptionally well, reflecting robust demand from both biotech and global biopharma clients and price increases.
Bookings and proposal volume reached record highs in the first quarter, with strength across all regions and major service areas.
Bookings increased substantially more than our target.
Clients are expanding our preclinical pipeline and intensifying their focus on complex biologics.
And we believe they are securing space with us further in advance to ensure they do not delay the research, which in turn provides us with greater visibility.
We believe this positions the Safety Assessment business extremely well and supports low double-digit organic revenue growth in the DSA segment this year, which is higher than our prior outlook.
We are pleased with the extensive depth and breadth of our Safety Assessment portfolio and remain intently focused on continuing to enhance the value we provide to our clients.
The Discovery business had another exceptional quarter, led by broad-based demand for oncology, early discovery and CNS services.
Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research, and clients increasingly view Charles River as a premier scientific partner who can support their efforts to identify new drug targets and discover novel therapeutics.
We intend to build our Discovery portfolio so that clients can outsource complex discovery projects to us, including for advanced modalities.
Our recent acquisitions Distributed Bio and Retrogenix enhance our large molecule discovery capabilities.
Retrogenix through its proprietary cell microarray technology offers target receptor identification and off-target screening services, which will enhance our clients' early discovery efforts and also enable them to explore potential preclinical safety liabilities.
Combination of Distributed Bio, our large molecule discovery platform, and Retrogenix capabilities will further strengthen our integrated end-to-end solution to therapeutic antibody and cell and gene therapy discovery and development.
We are also continuing to add cutting-edge technologies through our strategic partnership strategy, most recently with the new artificial intelligence or AI drug discovery partner, Valence Discovery.
The DSA operating margin increased by 180 basis points to 23.8% in the first quarter.
Leverage from the robust DSA revenue growth was the primary driver of margin improvement, and we expect this trend will continue to propel the DSA margin into the mid-20% range for the year.
RMS revenue was $176.9 million, an increase of 14.8% on an organic basis over the first quarter of 2020.
Robust demand for research models in China was the primary driver of first quarter RMS revenue growth, and higher revenue for research model services, including GEMS and our CRADL initiative, also contributed.
Approximately 620 basis points of the increase was attributable to the comparison to last year's COVID-related revenue impact from client site closures and disruption.
Demand trends for the research models were largely consistent with those prior to the pandemic, with growth in China widely outpacing mature markets.
Research models business in China had an exceptional quarter even after normalizing for last year's COVID-19 impact, driven by a resurgence in demand across all segments.
Biomedical research in China has returned to pre-COVID levels, and in some areas, even greater levels.
In the U.S. and Europe, client order activity has also rebounded.
Research Model Services also continued to perform well.
GEMS is benefiting from renewed outsourcing demand as our clients seek greater flexibility and efficiency afforded to them when we manage their proprietary model colonies, as we did for many clients during the COVID-19 pandemic.
In addition, complex research models will play an increasingly critical role as drug research continues to shift to oncology, rare disease and cell and gene therapies, which reinforces the value proposition for the GEMS business.
We are also continuing to generate substantial client interest for our CRADL initiative or Charles River accelerator and development labs, as both small and large biopharmaceutical clients increasingly seek turnkey research capacity, which allows them to invest in people and research instead of infrastructure.
We have CRADL sites in the Boston, Cambridge, Massachusetts area and South San Francisco biohubs and are actively expanding in these regions to accommodate client demand.
Utilizing CRADL also provides clients with collaborative opportunities to seamlessly access other Charles River services from Discovery to GEMS, which further enhances the speed and efficiency of their research programs.
Revenue growth for our cell supply businesses, HemaCare and Cellero, remained below the targeted level in the first quarter due to some limitations on donor access.
We believe cell supply revenue will increase during the year as donor availability continues to improve.
We are also continuing to work diligently to expand our donor base in the U.S. and add more comprehensive capabilities at all of our sites to accommodate the robust demand in the broader cell therapy market.
We believe that the acquisition of Cognate is particularly timing -- timely because it creates new business opportunities for HemaCare and Cellero in the cell and gene therapy development area.
Our expanded capabilities are expanding -- are establishing Charles River as a trusted partner, who can move clients programs forward using the same cellular products through each step of research and early stage development phases and into CGMP production.
In the first quarter, the RMS operating margin increased 570 basis points to 28.7%.
This significant improvement is due to two factors.
First, last year's 23% margin was depressed by the onset of COVID-related client disruptions and the resulting impact on the research model order activity.
In addition, this year's performance reflects the operating leverage attributable to the robust revenue growth, particularly for research models in China.
Revenue for the Manufacturing segment was $146.5 million, a 15.6% increase on an organic basis over the first quarter of last year.
The increase was driven by double-digit revenue growth in both the Biologics Testing Solutions and Microbial Solutions businesses.
The Manufacturing segment's first quarter operating margin was stable at 35.5%.
This is consistent with the historical trend in the first quarter and in line with our revised expectations in 2021 for a mid-30% operating margin when factoring in the Cognate acquisition.
Microbial Solutions growth rate rebounded above the 10% level in the first quarter, reflecting strong demand for our Endosafe endotoxin testing systems, cartridges and core reagents for all geographic regions.
We continue to work through the delayed instrument installations that resulted from COVID-19 restrictions and are gaining access to more client sites.
We are pleased with the strength of the underlying demand for our endotoxin testing platform, which performs FDA-mandated lot-release testing for our clients' critical quality control testing needs.
Clients prefer our comprehensive and efficient microbial testing solutions because of the quality, speed and accuracy of our testing platform.
The Biologics business reported another exceptional quarter of strong double-digit revenue growth, principally driven by robust market demand for testing cell and gene therapies and COVID-19 therapeutics.
We believe cell and gene therapies will continue to be significant growth drivers for the years to come.
And demand for COVID-19 vaccine testing is intensifying as these therapies move on to the commercial production phase even as some of the early stage testing activity subsides.
Given the strength of the demand environment, we are continuing to build our extensive portfolio of services to support the safe manufacture of Biologics to ensure we have available capacity to accommodate client demand.
We believe the acquisition of Cognate will be highly complementary to our Biologics business and our portfolio as a whole.
The acquisition establishes Charles River as a premier scientific partner to cell and gene therapy development, testing and manufacturing.
Our broader services will provide clients with an integrated solution from basic research through CGMP production, enabling them to outsource CGMP cell therapy production and the required analytical testing to one scientific partner, reducing the bottlenecks and efficiencies of utilizing multiple outsourced providers.
Because we already were a provider of extensive nonclinical services for cell and gene therapies, our integration process, which is proceeding smoothly, is particularly focused on unlocking new business opportunities across our portfolio.
The acquisition of Cognate is part of our ongoing strategy to broaden our unique portfolio and scientific expertise in order to support new paradigms in therapeutic areas of research.
As biopharmaceutical clients seek to drive greater efficiency and leverage scientific benefits by working with fewer trusted partners who have broad integrated capabilities, we have transformed our business over the last decade to accommodate their needs through M&A, scientific partnerships, internal investment and by promoting a culture of continuous improvement in everything that we do.
We built the leading safety assessment franchise in the world and established an integrated end-to-end discovery offering for both small and large molecules.
So given the emerging importance of complex biologics and cell and gene therapies, adding CDMO capabilities is a logical extension for our portfolio.
We will continue to move our growth strategy forward.
Disciplined M&A and strategic partnerships remain vital components of our strategy as we endeavor to further enhance the scientific expertise, global reach and innovative technologies that we can offer clients across all three of our business segments.
Investing in our scientific capabilities as well as internally in the necessary staff and resources will help us ensure that we can meet the needs of our clients and support the robust growth in our markets.
The biotech funding environment has never been stronger.
Clients are investing more in research and development, and it is incumbent upon us to be the scientific partner who can help them move their programs forward, from concept to nonclinical development, to the safe manufacture of their life segment therapeutics.
We look forward to discussing our strategy with you and where we think that we can take the company over the next several years at our upcoming virtual Investor Day on May 27.
Now David Smith will give you additional details on our first quarter results and 2021 guidance.
Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiatives, our venture capital and other strategic investment performance and certain other items.
Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.
We're very pleased with our accomplishments in the first quarter, which widely outperformed our outlook.
We delivered strong revenue growth, well above the 10% level on an organic basis and significant operating margin expansion of 170 basis points, which drove earnings-per-share growth of 37.5% to $2.53.
The operating margin performance was particularly encouraging as the consistent margin improvement reflects our efforts to build a more scalable and efficient infrastructure and leverage the robust growth in our end market.
As Jim mentioned, we have increased this year's financial guidance to reflect the enhanced growth profile for the full year, including the strong performance for the first quarter and the addition of Cognate and other acquisitions that we have completed.
We now expect to deliver reported revenue growth of 19% to 21% and organic revenue growth in a range of 12% to 14% for the full year.
Given the robust top line performance, we expect to drive meaningful operating margin improvement this year with the full year margin approaching 21%.
This is expected to drive better-than-expected earnings per share in a range of $9.25 to $10, which represents year-over-year growth above 20%.
By segment, our outlook for 2021 continues to reflect the strong business environment and the differentiated capabilities we provide to support our clients' needs.
RMS organic revenue growth guidance for the year is unchanged from our initial high-teens outlook, reflecting recovery from the impact of the COVID-19 pandemic last year, exceptional growth in China and the expectation of our cell supply revenue growth will improve during the year.
The DSA segment is now expected to deliver low double-digit growth for the full year, reflecting the strong first quarter performance and intensified early stage research activity.
For the Manufacturing segment, we now expect to achieve mid-teens organic revenue growth, with both the Biologics and Microbial Solution businesses contributing.
Including the acquisition of Cognate, Manufacturing's reported revenue growth rate is expected to be in the high-30% range.
With regard to operating margin, RMS will continue to be a primary contributor to the overall improvement for the year, with the segment margin meaningfully above 25%.
We also expect the DSA segment operating margin to increase over the prior year into the mid-20% range.
When factoring in Cognite, the Manufacturing segment's operating margin is expected to be in the mid-30% range this year or moderately below its 2020 level.
Unallocated corporate costs was slightly higher than our expectations, totaling 6.2% of total revenue or $51.2 million in the first quarter compared to 5.6% of revenue in the first quarter of last year.
The increase was primarily the result of continued investments to support the growth of our businesses and higher performance-based compensation costs due in part to the first quarter operating outperformance.
Despite the higher expenses in the first quarter, we continue to expect unallocated corporate costs to be in the mid-5% range as a percentage of revenue for the full year.
The first quarter tax rate was 14.5%, a 20 basis point increase year-over-year and consistent with our outlook in February, which calls for a tax rate in the mid-teens due to the gating of the excess tax benefit from stock-based compensation.
We continue to expect our full year tax rate will be in the low-20% range on a non-GAAP basis, which is unchanged from our outlook provided in February.
Total adjusted net interest expense for the first quarter was $17.1 million, which was essentially flat sequentially and a decrease of nearly $2 million year-over-year due to lower average debt levels, which resulted in interest rate savings based on our leverage ratio.
At the end of the first quarter, we had $2.2 billion of outstanding debt, representing a gross leverage ratio of 2.3 times and a net leverage ratio of 1.9 times.
In March, we issued $1 billion of senior notes to further optimize our capital structure and take advantage of the attractive interest rate environment.
The proceeds of this bond offering we used to redeem a previously issued higher-rate $500 million bond to pay down the existing term loan and a portion of the revolving credit facility and to finance a portion of the Cognate acquisition.
In April, we also amended our existing credit agreement to establish a new revolver with borrowing capacity of up to $3 billion.
The net result of these actions will reduce our average interest rate on debt by approximately 50 basis points to 2.65%.
An overview of our current capital structure is provided on slide 36.
On a pro forma basis, including the Cognate and Retrogenix acquisitions, our gross leverage ratio was just under three times, and we had total debt outstanding of slightly below $3 billion.
For the year, the higher debt balances due primarily to Cognate acquisition will be partially offset by the lower average interest rate from these refinancing activities, which is expected to result in total adjusted net interest expense of $83 million to $86 million.
Free cash flow was $142.2 million in the first quarter, a significant increase compared to $42.9 million last year.
The primary reason for the improvement was the strong first quarter operating performance, along with our continued focus on working capital management.
Capital expenditures were $28 million in the first quarter compared to $25.7 million last year.
Looking ahead, we are increasing our capex guidance for 2021 by $40 million to approximately $220 million.
The increase primarily reflects the investments we are making in Cognate to support its high-growth business.
Even with the additional capital, we expect capex will remain below 7% of our total revenue this year, which is consistent with the target that we provided at our last Investor Day in 2019.
For the full year, we are updating our free cash flow guidance to the upper end of the prior range and now expect free cash flow of approximately $435 million for the full year.
We are pleased to be able to increase free cash flow due primarily to the strong first quarter operating performance, even after incorporating the transaction costs and capital needs of Cognate.
A summary of our revised financial guidance for the full year, including Cognate, can be found on slide 38.
For the second quarter, our updated outlook reflects a continuation of the strong demand environment.
We now expect second quarter reported revenue growth at or near the 30% level, including the contribution of Cognate.
On an organic basis, we expect second quarter growth rate to be at or near 20%.
This reflects the prior year comparison to the COVID-related revenue impact, which will contribute approximately 700 basis points to the second quarter revenue growth.
As a result of the impact of COVID-19 on the second quarter of last year, we expect this year's second quarter non-GAAP operating margin and earnings per share to increase significantly versus the prior year.
Our expectation for non-GAAP earnings per share is a growth rate of more than 50% year-over-year.
In conclusion, we are very pleased with our strong first quarter performance, which included robust revenue aims and free cash flow growth.
We remain confident about our prospects for the year and our ability to consistently grow the top line, bottom line and cash generation, and as such, believe this is reflected in the substantial improvement in our outlook.
We look forward to hosting our upcoming virtual Investor Day in a few weeks.
At that time, we plan to update our longer-term financial targets, which we believe will reflect the strong demand environment.

user
compname reports q1 non gaap earnings per share of $2.53.
q1 non-gaap earnings per share $2.53.
q1 revenue rose 16.6 percent to $824.6 million.
updates 2021 guidance.
sees 2021 reported revenue growth of 19% - 21%.
sees 2021 organic revenue growth of 12% - 14%.
2021 gaap earnings per share estimate of $5.95 - $6.20.2021 non-gaap earnings per share estimate of $9.75 - $10.00.

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