Charles River Laboratories Announces Third-Quarter 2013 Results from Continuing Operations

Charles River Laboratories International, Inc. (NYSE: CRL) today reported its results for the third quarter of 2013. For the quarter, net sales from continuing operations were $292.1 million, an increase of 4.8% from $278.7 million in the third quarter of 2012. Foreign currency translation reduced sales by 0.8%. On a segment basis, sales increased in both the Research Models and Services (RMS) and Preclinical Services (PCS) segments.

On a GAAP basis, net income from continuing operations for the third quarter of 2013 was $31.3 million, or $0.64 per diluted share, compared to $22.4 million, or $0.46 per diluted share, for the third quarter of 2012.

On a non-GAAP basis, net income from continuing operations was $38.2 million for the third quarter of 2013, an increase of 22.6% from $31.2 million for the same period in 2012. Third-quarter diluted earnings per share on a non-GAAP basis were $0.79, an increase of 21.5% compared to $0.65 per share in the third quarter of 2012. Higher sales contributed to the earnings per share increase, as did a $0.05 gain on our limited partnership investments and a $0.02 net benefit from certain tax-related items.

James C. Foster, Chairman, President and Chief Executive Officer, said, “The efforts we have made to improve our operating efficiency, to maintain and enhance scientific expertise, to effectively deploy sales resources and to broaden the portfolio through targeted acquisitions have successfully positioned Charles River as the partner of choice for early-stage drug development. Demand trends are more favorable: global pharmaceutical clients are outsourcing more as they reduce infrastructure and the funding environment appears to have improved for biotechnology companies. We are leveraging all of these factors to win market share and drive sales and earnings growth. This is evident in our third-quarter results, which were highlighted by mid-single-digit sales growth for both segments, as well as meaningful margin expansion in our Preclinical Services segment.”

Third-Quarter Segment Results

Research Models and Services (RMS)

Net sales for the RMS segment were $173.4 million in the third quarter of 2013, an increase of 4.2% from $166.5 million in the third quarter of 2012. Foreign currency translation reduced reported sales by 0.9%. Higher sales were driven primarily by the acquisitions of Vital River and Accugenix, as well as growth in the legacy Endotoxin and Microbial Detection (EMD) business.

In the third quarter of 2013, the RMS segment’s GAAP operating margin was 23.2% compared to 26.1% for the third quarter of 2012. On a non-GAAP basis, the operating margin decreased to 29.0% from 29.3% in the third quarter of 2012. The non-GAAP operating margin decline was primarily attributable to lower legacy sales volume for research models.

Preclinical Services (PCS)

Third-quarter 2013 net sales from continuing operations for the PCS segment were $118.7 million, an increase of 5.8% from $112.2 million in the third quarter of 2012. Foreign currency translation reduced reported sales by 0.5%. PCS sales growth was driven by increased sales to both large biopharmaceutical and mid-tier clients, primarily as a result of market share gains and improved client demand.

In the third quarter of 2013, the PCS segment’s GAAP operating margin was 15.7% compared to 9.8% in the third quarter of 2012. On a non-GAAP basis, the operating margin increased to 18.2% from 13.0% in the third quarter of 2012. The non-GAAP operating margin improvement was due in part to favorable study mix and increased study volume. In addition, several tax-related items contributed approximately 370 basis points to the PCS third-quarter operating margin including: a multi-year Canadian tax settlement, a real estate tax abatement in Scotland, and a tax law change in the United Kingdom which resulted in reclassification of research and development tax credits to segment operating income.

Stock Repurchase Update

During the third quarter of 2013, the Company repurchased approximately 1.4 million shares of its common stock for $65.5 million. As of September 28, 2013, the Company had $66.3 million remaining on its $850 million stock repurchase authorization.

Nine-Month Results

For the first nine months of 2013, net sales increased by 3.2% to $876.3 million from $849.4 million in the same period in 2012. Foreign currency translation reduced reported sales by 0.9%.

On a GAAP basis, net income from continuing operations for the first nine months of 2013 was $85.9 million, or $1.75 per diluted share, compared to $79.4 million, or $1.63 per diluted share, for the same period in 2012.

On a non-GAAP basis, net income from continuing operations for the first nine months of 2013 was $107.1 million, or $2.20 per diluted share, compared to $101.5 million, or $2.09 per diluted share, for the same period in 2012.

Research Models and Services (RMS)

For the first nine months of 2013, RMS net sales were $534.9 million, an increase of 2.2% from $523.2 million in the same period in 2012. Foreign currency translation reduced reported sales by 1.3%. On a GAAP basis, the RMS segment operating margin was 27.1% in the first nine months of 2013, compared to 30.3% for the prior-year period. On a non-GAAP basis, the operating margin was 30.3% in the first nine months of 2013, compared to 31.9% for the same period in 2012.

Preclinical Services (PCS)

For the first nine months of 2013, PCS net sales were $341.4 million, an increase of 4.7% from $326.1 million in the same period in 2012. Foreign currency translation reduced reported sales by 0.4%. On a GAAP basis, the PCS segment operating margin was 11.0% in the first nine months of 2013, compared to 8.0% for the prior-year period. On a non-GAAP basis, the operating margin was 13.8% in the first nine months of 2013, compared to 11.7% for the same period in 2012. The third-quarter tax-related items contributed approximately 130 basis points to the year-to-date PCS operating margin.

2013 Guidance

The Company is updating its 2013 forward-looking guidance based on continuing operations. For 2013, net sales are expected to be at the low end of the prior range. The Company is narrowing its 2013 non-GAAP earnings per share guidance to the high end of the prior range to reflect the strong year-to-date performance. GAAP earnings per share are expected to be lower than the prior range, due primarily to charges associated with the consolidation of research model production operations in California.

(1) GAAP and non-GAAP EPS guidance include limited partnership investment gains and the net benefit from certain tax-related items.

(2) These costs relate primarily to the Company’s PCS-Massachusetts facility.

(3) Other items include an accelerated depreciation charge related to the consolidation of research model production operations in California, severance related to cost-savings actions, costs associated with the evaluation of acquisitions, a government contract billing adjustment and related expenses, and the write-off of deferred financing costs and fees related to debt refinancing.

Webcast

Charles River Laboratories has scheduled a live webcast on Wednesday, October 30, at 8:00 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 non-GAAP financial measures to comparable GAAP financial measures on the website.

Non-GAAP Reconciliations/Discontinued Operations

The Company reports non-GAAP results in this press release, which exclude certain 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, expenses associated with evaluating acquisitions, charges and operating losses attributable to businesses we plan to close, consolidate or divest, severance costs associated with our cost-savings actions, accelerated depreciation charges related to the consolidation of research model production operations in California, costs and adjustments related to our ongoing investigation of inaccurate billing with respect to certain government contracts, and the additional interest recorded as a result of the adoption in 2009 of an accounting standard related to our convertible debt accounting which increased interest and depreciation expense. We exclude these items from the non-GAAP financial measures because they are outside our normal operations. This press release also refers to our sales in both a GAAP and non-GAAP (constant currency) basis. 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 in certain cases, the evaluation of such acquisitions, 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, such as business acquisitions, happen infrequently and the underlying costs associated with such activities do not recur on a regular basis. Presenting sales on a constant currency basis allows investors to measure our sales growth net of 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,” “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 our projected future financial performance including sales, earnings per share, and the expected impact of foreign exchange rates; the future demand for drug discovery and development products and services, including our expectations for future revenue trends; the development and performance of our services and products, including the impact this can have on our clients’ drug development models; market and industry conditions including the outsourcing of these services and spending trends by our customers; the potential outcome of and impact to our business and financial operations due to litigation and legal proceedings, including with respect to our ongoing investigation of inaccurate billing with respect to certain government contracts; and Charles River’s future performance as delineated in our forward-looking guidance, and particularly our expectations with respect to sales and foreign exchange impact. 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 cost-savings actions on an effective and timely basis (including divestitures and site closures); 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 customers; the ability to convert backlog to sales; 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 27, 2013, 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

Accelerating Drug Development. Exactly. 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.

(1) Charles River management believes that supplementary non-GAAP financial measures provide useful information to allow investors to gain a meaningful understanding of our core operating results and future prospects, without the effect of one-time charges and other items which are outside our normal operations, consistent with the manner in which management measures and forecasts the Company’s performance. The supplementary non-GAAP financial measures included 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, regulations and guidance.

(2) The three and nine months ended September 28, 2013 primarily includes accelerated depreciation related to the consolidation of research model production operations in California.

(3) Includes operating losses related primarily to the Company's PCS-Massachusetts facility.

(1) Charles River management believes that supplementary non-GAAP financial measures provide useful information to allow investors to gain a meaningful understanding of our core operating results and future prospects, without the effect of one-time charges and other items which are outside our normal operations, consistent with the manner in which management measures and forecasts the Company’s performance. The supplementary non-GAAP financial measures included 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, regulations and guidance.

(2) The three and nine months ended September 28, 2013 primarily includes accelerated depreciation related to the consolidation of research model production operations in California.

(3) Includes operating losses related primarily to the Company's PCS-Massachusetts facility.

(4) The nine months ended September 28, 2013 include the impact of convertible debt accounting adopted at the beginning of 2009, which increased interest expense by $6,603 and depreciation expense by $107, respectively. The three and nine months ended September 29, 2012 include the impact of convertible debt accounting adopted at the beginning of 2009, which increased interest expense by $3,807 and $10,768 and depreciation expense by $53 and $160, respectively.

Charles River management believes that supplementary non-GAAP financial measures provide useful information to allow investors to gain a meaningful understanding of our core operating results and future prospects, without the effect of one-time charges, consistent with the manner in which management measures and forecasts the Company’s performance. The supplementary non-GAAP financial measures included 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.