Charles River Laboratories Announces Second-Quarter 2018 Results from Continuing Operations

The acquisitions of MPI Research, Brains On-Line, and KWS BioTest contributed 15.1% to consolidated second-quarter revenue growth. The impact of foreign currency translation benefited reported revenue growth by 2.6%. Excluding the effect of these items, organic revenue growth was 7.1%.

On a GAAP basis, second-quarter net income from continuing operations attributable to common shareholders was $52.2 million, a decrease of 3.4% from net income of $54.0 million for the same period in 2017. Second-quarter diluted earnings per share on a GAAP basis were $1.06, a decrease of 5.4% from $1.12 for the second quarter of 2017. The lower GAAP net income and earnings per share were driven primarily by acquisition and integration costs, including amortization of intangible assets, primarily related to MPI Research.

On a non-GAAP basis, net income from continuing operations was $79.3 million for the second quarter of 2018, an increase of 27.2% from $62.4 million for the same period in 2017. Second-quarter diluted earnings per share on a non-GAAP basis were $1.62, an increase of 25.6% from $1.29 per share for the second quarter of 2017. The non-GAAP net income and earnings per share increases were driven primarily by the contribution from the MPI acquisition, as well as gains on the Company’s venture capital investments and a lower tax rate. The gains on the Company’s venture capital investments were $0.17 per share in the second quarter of 2018, compared to gains of $0.03 for the same period in 2017.

James C. Foster, Chairman, President and Chief Executive Officer, said, “We believe our robust second-quarter revenue growth is indicative of an extremely healthy market environment, and our position as the premier, early-stage CRO with a unique ability to support our clients from target discovery through non-clinical development. Our clients, both large and small, are intensifying investments in their pipelines, which is creating new business opportunities for Charles River. At this critical time, we believe that it is incumbent upon us to invest in our portfolio, our people, and our infrastructure to solidify our position as our clients’ early-stage partner of choice, and to enhance shareholder value. We are pleased with our second-quarter performance, and optimistic about the opportunities for growth in 2018 and beyond. As a result, we are increasing our revenue and earnings per share guidance for the year.”

Second-Quarter Segment Results

Research Models and Services (RMS)

Revenue for the RMS segment was $130.4 million in the second quarter of 2018, an increase of 5.2% from $124.0 million in the second quarter of 2017. Organic revenue growth was 2.0%, driven primarily by increased demand for research models in China, as well as higher revenue for research model services.

In the second quarter of 2018, the RMS segment’s GAAP operating margin decreased to 26.3% from 27.1% in the second quarter of 2017. On a non-GAAP basis, the operating margin decreased to 26.8% from 27.4% in the second quarter of 2017. The non-GAAP operating margin decline was driven primarily by research model services.

Discovery and Safety Assessment (DSA)

Revenue from continuing operations for the DSA segment was $346.4 million in the second quarter of 2018, an increase of 37.4% from $252.1 million in the second quarter of 2017. Acquisitions contributed 28.1% to DSA revenue growth, due primarily to the revenue contribution from MPI Research. Organic revenue growth of 7.3% was driven by both the Safety Assessment and Discovery Services businesses. By client segment, the DSA revenue increase was driven primarily by robust demand from both biotechnology and global biopharmaceutical clients.

In the second quarter of 2018, the DSA segment’s GAAP operating margin decreased to 16.3% from 20.4% in the second quarter of 2017. The GAAP operating margin decline was driven primarily by acquisition and integration costs, principally amortization of intangible assets related to MPI Research. On a non-GAAP basis, the operating margin decreased to 21.5% from 23.5% in the second quarter of 2017. The GAAP and non-GAAP operating margin declines were driven primarily by study mix and foreign exchange. Foreign exchange reduced the DSA operating margin by approximately 60 basis points.

Manufacturing Support (Manufacturing)

Revenue for the Manufacturing segment was $108.5 million in the second quarter of 2018, an increase of 16.6% from $93.0 million in the second quarter of 2017. Organic revenue growth was 13.1%, driven primarily by robust demand across all businesses: Microbial Solutions, Biologics Testing Solutions, and Avian Vaccine Services.

In the second quarter of 2018, the Manufacturing segment’s GAAP operating margin increased to 31.5% from 31.2% in the second quarter of 2017. On a non-GAAP basis, the operating margin decreased to 33.6% from 34.2% in the second quarter of 2017. The non-GAAP operating margin decline was driven primarily by cost associated with capacity expansions, principally in the Biologics Testing Solutions business.

Increases 2018 Guidance

The Company is updating its 2018 financial guidance, which was previously provided on May 10, 2018.

The Company is increasing its guidance for both reported and organic revenue growth, due primarily to its belief that the strong demand trends in the second quarter are expected to continue in the second half of the year. Foreign exchange is now expected to contribute approximately 2% to reported revenue growth, compared to the Company’s prior outlook of an approximate 3% benefit.

The Company is increasing its guidance for GAAP and non-GAAP earnings per share, due primarily to higher-than-expected gains from venture capital investments. The Company has not included any venture capital investment gains in its outlook for the remainder of the year, since its initial, full-year estimate of $0.14 per share was exceeded during the first half of the year.

The Company’s revenue and earnings per share guidance is as follows:

Webcast

Charles River has scheduled a live webcast on Wednesday, August 8, at 8:30 a.m. ET to discuss matters relating to this press release. To participate, please go to ir.criver.com and select the webcast link. You can also find the associated slide presentation and reconciliations of GAAP financial measures to non-GAAP financial measures on the website.

Investor Day

Charles River will host a Meeting with Management on Tuesday, August 14, from 8:00 a.m. to 12:30 p.m. ET in New York. The meeting will also be webcast live on the Investor Relations section of the Company’s website at ir.criver.com.

Non-GAAP Reconciliations/Discontinued Operations

The Company reports non-GAAP results in this press release, which exclude often-one-time charges and other items that are outside of normal operations. A reconciliation of GAAP to non-GAAP results is provided in the schedules at the end of this press release. In addition, the Company reports results from continuing operations, which exclude results of the Phase I clinical business that was divested in 2011. The Phase I business is reported as a discontinued operation.

Use of Non-GAAP Financial Measures

This press release contains non-GAAP financial measures, such as non-GAAP earnings per diluted share, which exclude the amortization of intangible assets, and other charges related to our acquisitions; bargain gains associated with our acquisitions; expenses associated with evaluating and integrating acquisitions and divestitures, as well as fair value adjustments associated with contingent consideration; charges, gains, and losses attributable to businesses or properties we plan to close, consolidate, or divest; severance and other costs associated with our efficiency initiatives; gain on and tax effect of the divestiture of the CDMO business; the write-off of deferred financing costs and fees related to debt financing; and costs related to a U.S. government billing adjustment and related expenses. This press release also refers to our revenue in both a GAAP and non-GAAP basis: “constant currency,” which we define as reported revenue growth adjusted for the impact of foreign currency translation, and “organic revenue growth,” which we define as reported revenue growth adjusted for foreign currency translation, acquisitions, and divestitures. We exclude these items from the non-GAAP financial measures because they are outside our normal operations. There are limitations in using non-GAAP financial measures, as they are not prepared in accordance with generally accepted accounting principles, and may be different than non-GAAP financial measures used by other companies. In particular, we believe that the inclusion of supplementary non-GAAP financial measures in this press release helps investors to gain a meaningful understanding of our core operating results and future prospects without the effect of these often-one-time charges, and is consistent with how management measures and forecasts the Company's performance, especially when comparing such results to prior periods or forecasts. We believe that the financial impact of our acquisitions and divestitures (and in certain cases, the evaluation of such acquisitions and divestitures, whether or not ultimately consummated) is often large relative to our overall financial performance, which can adversely affect the comparability of our results on a period-to-period basis. In addition, certain activities and their underlying associated costs, such as business acquisitions, generally occur periodically but on an unpredictable basis. We calculate non-GAAP integration costs to include third-party integration costs incurred post-acquisition. Presenting revenue on an organic basis allows investors to measure our revenue growth exclusive of acquisitions, divestitures, and foreign currency exchange fluctuations more clearly. Non-GAAP results also allow investors to compare the Company’s operations against the financial results of other companies in the industry who similarly provide non-GAAP results. The non-GAAP financial measures included in this press release are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. The Company intends to continue to assess the potential value of reporting non-GAAP results consistent with applicable rules and regulations. Reconciliations of the non-GAAP financial measures used in this press release to the most directly comparable GAAP financial measures are set forth in this press release, and can also be found on the Company’s website at ir.criver.com.

Caution Concerning Forward-Looking Statements

This press release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “may,” “estimate,” “plan,” “outlook,” and “project,” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These statements also include statements regarding the projected future financial performance of Charles River and our specific businesses, including revenue (on both a reported, constant-currency, and organic growth basis), operating margins, earnings per share, the expected impact of foreign exchange rates, and the expected benefit of our life science venture capital investments; the future demand for drug discovery and development products and services, including our expectations for future revenue trends; our expectations with respect to the impact of acquisitions on the Company, our service offerings, client perception, strategic relationships, revenue, revenue growth rates, and earnings; our expected operational synergies with MPI; the development and performance of our services and products; market and industry conditions including the outsourcing of services and spending trends by our clients; the potential outcome of and impact to our business and financial operations due to litigation and legal proceedings; the impact of U.S. tax reform enacted in the fourth quarter of 2017; and Charles River’s future performance as delineated in our forward-looking guidance, and particularly our expectations with respect to revenue, the impact of foreign exchange, and enhanced efficiency initiatives. Forward-looking statements are based on Charles River’s current expectations and beliefs, and involve a number of risks and uncertainties that are difficult to predict and that could cause actual results to differ materially from those stated or implied by the forward-looking statements. Those risks and uncertainties include, but are not limited to: the ability to successfully integrate businesses we acquire; the ability to execute our efficiency initiatives on an effective and timely basis (including divestitures and site closures, such as our Maryland research model production site); the timing and magnitude of our share repurchases; negative trends in research and development spending, negative trends in the level of outsourced services, or other cost reduction actions by our clients; the ability to convert backlog to revenue; special interest groups; contaminations; industry trends; new displacement technologies; USDA and FDA regulations; changes in law; continued availability of products and supplies; loss of key personnel; interest rate and foreign currency exchange rate fluctuations; changes in tax regulation and laws; changes in generally accepted accounting principles; and any changes in business, political, or economic conditions due to the threat of future terrorist activity in the U.S. and other parts of the world, and related U.S. military action overseas. A further description of these risks, uncertainties, and other matters can be found in the Risk Factors detailed in Charles River's Annual Report on Form 10-K as filed on February 13, 2018, as well as other filings we make with the Securities and Exchange Commission. Because forward-looking statements involve risks and uncertainties, actual results and events may differ materially from results and events currently expected by Charles River, and Charles River assumes no obligation and expressly disclaims any duty to update information contained in this news release except as required by law.

About Charles River

Charles River provides essential products and services to help pharmaceutical and biotechnology companies, government agencies and leading academic institutions around the globe accelerate their research and drug development efforts. Our dedicated employees are focused on providing clients with exactly what they need to improve and expedite the discovery, early-stage development and safe manufacture of new therapies for the patients who need them. To learn more about our unique portfolio and breadth of services, visit www.criver.com.

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