Glenn Coleman
Thank you, Birgit, and good morning. As a reminder, my comments on financial performance will largely be related to non-GAAP results, which exclude amortization and other acquisition and divestiture-related adjustments, costs related primarily to restructuring and efficiency initiatives and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. We are pleased with our financial performance for the second quarter with both revenue and non-GAAP earnings per share exceeding our prior outlook. On an organic basis, revenue was essentially flat year-over-year compared to our prior forecast of a low single-digit decline, driven by better-than-expected performance in our DSA and Manufacturing segments. The non-GAAP operating margin of 20.5% was in line with our forecast, but improved by 420 basis points on a sequential basis over the first quarter. Non-GAAP earnings per share of $3.02 also exceeded our expectations with over half of the outperformance driven by better-than-expected top line results and the remainder by a favorable contribution from nonoperating items, which I'll discuss in more detail shortly. In the second quarter, we also repurchased $100 million in shares at approximately $174 per share under the $1 billion stock repurchase authorization approved last October. This brings our total year-to-date share repurchases to $300 million and reflects the continuation of our thoughtful and diligent approach to capital deployment to enhance shareholder value as we balance organic investments in the business, pursue strategic acquisitions and repay debt. Our updated guidance assumes an average diluted share count of approximately 48.5 million shares for the full year 2026. Moving to details on our segment performance. DSA revenue was $607 million in the second quarter, a decrease of 1.9% on a reported basis compared to the second quarter of 2025 due primarily to the impact of the divestiture of certain European discovery sites. On an organic basis, revenue increased 0.2% and was also the first time we reported organic growth in DSA since the third quarter of 2023. Year-over-year, operating margin decreased by 180 basis points to 25.6%, however, increased by 460 basis points on a sequential basis from the first quarter. The year-over-year decline was primarily due to higher study-related direct costs. However, we expect this year-over-year margin headwind to turn favorable in the coming quarters as we benefit from lower NHP sourcing costs as a result of the acquisition of our Cambodian NHP supplier. The lower sourcing costs for Cambodian NHPs will begin to benefit the DSA operating margin in the third quarter, but will have a more significant margin contribution in the fourth quarter as we increase our use of these models on studies. As a result, we expect the operating margin in DSA to be the highest in the fourth quarter. Shifting to the RMS segment. Revenue was $209 million in the quarter, representing an organic decline of 1.4% year-over-year. Small model revenue experienced lower volume for research models in North America and for research model services, partially offset by continued strong demand in China. Operating margin declined by 80 basis points to 24.5% in the second quarter due largely to the impact of lower sales volume and an unfavorable geographic revenue mix. Wrapping up the segment performance, the Manufacturing segment reported second quarter revenue of $188 million, an increase of 1.3% on an organic basis. The CDMO business reduced the segment organic revenue growth rate by nearly 400 basis points in the quarter, with the segment growing at a mid-single-digit organic growth rate, excluding CDMO. The strong performance in our Manufacturing segment was largely driven by high single-digit organic growth in our Microbial Solutions business as we saw increases in demand across our 3 major geographic regions for endotoxin testing reagents, including our PTS rapid testing cartridges as well as adding new clients to our strong broad-based quality control testing platform. Operating margin improved by 500 basis points year-over-year to 37.8%, driven primarily by the benefit of the CDMO divestiture. We expect the Manufacturing segment to remain a meaningful contributor to margin expansion during the second half of the year with the operating margin approaching 40% with the full benefit being recognized from the CDMO divestiture. Moving on to other financial metrics. Unallocated corporate costs were higher than expected in the second quarter, totaling $72 million or 7.2% of revenue compared to 5.9% in the prior year period. The increase was primarily driven by increased costs related to our deferred compensation plan of $6 million or $0.10 per share due to the market performance of the plan assets during the quarter. To fund the deferred compensation plan, we separately invest in certain funds, which experienced gains of $19 million or $0.29 per share in the second quarter. These gains are included in other income. The net benefit associated with our deferred compensation plan was $0.19 per share in the second quarter, which we do not expect to recur. Based upon our second quarter results and updated forecast, which also encompasses higher performance-based compensation, we now expect unallocated corporate costs of approximately 6.0% of revenue for the full year compared to our prior outlook of approximately 5.5%. Net interest expense was $28 million in the second quarter, a decline of $1.2 million year-over-year. For the full year, our net interest expense outlook remains unchanged at $103 million to $108 million on a non-GAAP basis. At the end of the second quarter, our net leverage improved slightly to 2.5x from the first quarter. The non-GAAP tax rate in the second quarter was 23.8%, an increase of 110 basis points year-over-year due primarily to the impact of discrete items. For the full year, we now anticipate our non-GAAP tax rate will be in the range of 23% to 24%, an increase of approximately 100 basis points from our prior outlook, primarily as a result of the unfavorable second quarter rate and a higher tax rate due to proposed tax legislation changes in a foreign tax jurisdiction. The higher tax rate outlook for the year is expected to be a $0.20 headwind to earnings per share with about half of the impact in the third quarter. Free cash flow was $149 million in the second quarter, a decrease of $21 million compared to the prior year period. This decline was primarily driven by the timing of working capital. CapEx declined to $31 million or approximately 3.1% of revenue in the second quarter from $35 million last year. For the full year, we're raising our free cash flow projections to be in the range of $400 million to $420 million compared to our prior outlook of $375 million to $400 million, largely driven by higher earnings. Turning to full year 2026 P&L guidance. We are increasing both the reported and organic revenue outlook due primarily to the DSA and manufacturing outperformance in the second quarter and our expectations for further improvements during the remainder of the year. We now expect reported revenue to decline in the range of 2.5% to 3.5%, driven by the impact of completed divestitures. We're also raising our organic revenue growth in the range of flat to a 1% increase, which represents a 150 basis point improvement to our prior guidance. By segment, on an organic basis, we're increasing our DSA revenue outlook to low single-digit growth for the year, and we're also adjusting our manufacturing revenue outlook higher to a low to mid-single-digit growth rate. Our RMS outlook remains unchanged. Moving to profitability. We continue to expect operating margin expansion of approximately 120 to 150 basis points in 2026, with the Manufacturing and DSA segments driving the year-over-year increase. We have a clear line of sight into the second half improvement of at least 500 basis points compared to the first half of the year. As shown on Slide 14, approximately 50% of the second half improvement will be attributable to the portfolio actions already completed, including the full benefit of the divestitures as well as the lower NHP sourcing costs from the K.F. acquisition, which will largely benefit the fourth quarter. Lower corporate costs are estimated to drive approximately 150 basis points of the improvement with the balance derived from other operational contributors, including efficiency savings. Lower corporate costs in the second half will reflect favorable stock compensation expense related to the CEO transition and fringe costs, which are typically lower in the second half of the year. We are also increasing our non-GAAP earnings per share guidance to a range of $11.15 to $11.45, which represents 8% to 11% year-over-year growth and an increase of $0.25 at the midpoint of our prior outlook. The increase reflects the expected operational outperformance for the year, driven primarily by improving trends in the DSA segment and a better-than-expected performance in the Manufacturing segment. Separately, we expect the $0.19 net benefit associated with the deferred compensation plan will not have a meaningful impact on non-GAAP earnings per share in 2026 as it is expected to be entirely offset by the higher tax rate outlook for the year, which is an approximate $0.20 headwind. For the third quarter, revenue is expected to decline approximately 4% to 6% on a reported basis, primarily driven by the impact of the completed divestitures. We expect organic revenue growth of approximately 1% to 3% year-over-year, reflecting improving demand trends in the DSA segment and an expected rebound in Biologics Testing growth rate, which will drive higher manufacturing revenue growth. In addition, operating margin is projected to improve approximately 200 basis points sequentially versus the second quarter due largely to lower corporate costs and a full quarter benefit from the divestitures. For the third quarter, we expect non-GAAP earnings per share in the range of $2.90 to $3.00, representing an approximate 20% year-over-year increase. As previously mentioned, the higher tax rate outlook creates a $0.10 headwind to third quarter earnings per share, which has been included in the guidance. In conclusion, I'm encouraged by the recent improvement in the underlying business trends and our first half performance, including the execution of our strategic priorities, which demonstrate our commitment to our pathway to purpose strategy and enhancing long-term shareholder value. Over the past several months, I've had the opportunity to meet with employees across our global organization as well as shareholders and other stakeholders. These interactions have further strengthened my confidence in our capabilities, our people and the momentum we are building across the organization. I look forward to continuing to work with the team to execute our strategy and to sharing more information about our long-term priorities and financial targets at our upcoming Investor Day on September 24. Thank you.
