Charles River Laboratories Announces Fourth-Quarter and Full-Year 2018 Results and Provides 2019 Guidance

– Fourth-Quarter Revenue of $601.5 Million and Full-Year Revenue of
$2.27 Billion –

– Fourth-Quarter GAAP Earnings per Share of $1.21 and Non-GAAP
Earnings per Share of $1.49 –

– Full-Year GAAP Earnings per Share of $4.59 and Non-GAAP Earnings
per Share of $6.03 –

– Provides 2019 Guidance –

– Announces Binding Offer to Acquire Citoxlab –

WILMINGTON, Mass.–(BUSINESS WIRE)–lt;a href=”https://twitter.com/search?q=%24CRL&src=ctag” target=”_blank”gt;$CRLlt;/agt; lt;a href=”https://twitter.com/hashtag/earnings?src=hash” target=”_blank”gt;#earningslt;/agt;–Charles River Laboratories International, Inc. (NYSE: CRL) today
reported its results for the fourth-quarter and full-year 2018 and
provided guidance for 2019. For the quarter, revenue was $601.5 million,
an increase of 25.7% from $478.5 million in the fourth quarter of 2017.

Acquisitions, which included MPI Research and KWS BioTest, contributed
15.7% to consolidated fourth-quarter revenue growth. The impact of
foreign currency translation reduced reported revenue growth by 1.4%.
Excluding the effect of these items, organic revenue growth of 11.4% was
driven by all three business segments.

On a GAAP basis, fourth-quarter net income from continuing operations
attributable to common shareholders was $59.7 million, compared to a net
loss of $29.8 million for the same period in 2017. Fourth-quarter
diluted earnings per share on a GAAP basis were $1.21, compared to a
loss per share of $0.63 for the fourth quarter of 2017. The increase was
primarily driven by last year’s GAAP loss per share that resulted from
one-time expenses related to U.S. tax reform, which reduced earnings by
$78.5 million, or $1.66 per share.

On a non-GAAP basis, net income from continuing operations was $73.2
million for the fourth quarter of 2018, an increase of 7.3% from $68.2
million for the same period in 2017. Fourth-quarter diluted earnings per
share on a non-GAAP basis were $1.49, an increase of 6.4% from $1.40 per
share for the fourth quarter of 2017.

The non-GAAP net income and earnings per share increases were driven
primarily by higher revenue, including the contribution from the MPI
acquisition, and operating margin improvement, as well as a lower
tax rate. These increases were partially offset by higher interest
expense and losses on the Company’s venture capital investments. The
losses from the Company’s venture capital investments were $0.10 per
share in the fourth quarter of 2018, compared to gains of $0.13 in the
fourth quarter of 2017.

James C. Foster, Chairman, President and Chief Executive Officer, said,
“We believe our strong financial performance in 2018 and outlook for
2019 reflect continuing robust industry fundamentals and the benefit of
actions we have taken to enhance our position as the leading early-stage
CRO. By focusing on expanding our global scale and enhancing our
scientific expertise, by improving our operating efficiency, and by
providing a more seamless and flexible client experience, we are able to
provide the individualized support which our clients require to expedite
their drug research efforts and meet their extensive scientific needs.”

“The proposed acquisition of Citoxlab would be another strategic
expansion of our portfolio. We believe this acquisition would further
strengthen our Discovery and Safety Assessment business and enhance our
ability to achieve our long-term growth goals,” Mr. Foster concluded.

Fourth-Quarter Segment Results

Research Models and Services (RMS)

Revenue for the RMS segment was $128.5 million in the fourth quarter of
2018, an increase of 6.7% from $120.4 million in the fourth quarter of
2017. Organic revenue growth was 8.1%, driven primarily by higher
revenue for research model services, as well as increased demand for
research models in China. Research model services benefited from a large
government contract in the Insourcing Solutions (IS) business, which
commenced in September 2018, and strong client demand in the Genetically
Engineered Models and Services business.

In the fourth quarter of 2018, the RMS segment’s GAAP operating margin
increased to 24.6% from 10.5% in the fourth quarter of 2017. The GAAP
operating margin increase was related primarily to an asset impairment
and other charges in the fourth quarter of 2017 associated with the
Company’s research model production site in Maryland. On a non-GAAP
basis, the operating margin decreased to 25.1% from 25.9% in the fourth
quarter of 2017. The non-GAAP operating margin decrease was driven
primarily by the large government contract in the Insourcing Solutions
business.

Discovery and Safety Assessment (DSA)

Revenue for the DSA segment was $358.2 million in the fourth quarter of
2018, an increase of 41.5% from $253.2 million in the fourth quarter of
2017. Acquisitions contributed 29.6% to DSA revenue growth, due
primarily to the revenue contribution from MPI Research. Organic revenue
growth of 12.9% 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 biotechnology clients.

In the fourth quarter of 2018, the DSA segment’s GAAP operating margin
increased to 18.8% from 18.5% in the fourth quarter of 2017. On a
non-GAAP basis, the operating margin increased to 23.2% from 21.8% in
the fourth quarter of 2017. The GAAP and non-GAAP operating margin
increases were driven primarily by higher revenue in both the Discovery
Services and Safety Assessment businesses.

Manufacturing Support (Manufacturing)

Revenue for the Manufacturing segment was $114.9 million in the fourth
quarter of 2018, an increase of 9.6% from $104.8 million in the fourth
quarter of 2017. Organic revenue growth was 11.4%, driven primarily by
robust demand in the Microbial Solutions and Biologics Testing Solutions
businesses.

In the fourth quarter of 2018, the Manufacturing segment’s GAAP
operating margin increased to 35.1% from 34.7% in the fourth quarter of
2017. On a non-GAAP basis, the operating margin decreased to 37.4% from
37.6% in the fourth quarter of 2017.

Full-Year Results

For 2018, revenue increased by 22.0% to $2.27 billion from $1.86 billion
in 2017. Organic revenue growth was 8.7%.

On a GAAP basis, net income from continuing operations attributable to
common shareholders was $224.9 million in 2018, an increase of 82.1%
from $123.5 million in 2017. Diluted earnings per share on a GAAP basis
in 2018 were $4.59, an increase of 80.7% from $2.54 in 2017.

On a non-GAAP basis, net income from continuing operations was $295.4
million in 2018, an increase of 15.4% from $256.0 million in 2017.
Diluted earnings per share on a non-GAAP basis in 2018 were $6.03, an
increase of 14.4% from $5.27 in 2017.

On both a GAAP and non-GAAP basis, the Company recorded gains from
venture capital investments totaling $0.23 per share in 2018, compared
to gains of $0.28 in 2017.

Research Models and Services (RMS)

For 2018, RMS revenue was $519.7 million, an increase of 5.3% from
$493.6 million in 2017. Organic revenue growth was 3.7%.

On a GAAP basis, the RMS segment operating margin increased to 26.3% in
2018 from 23.2% in 2017. On a non-GAAP basis, the operating margin
decreased to 26.9% in 2018 from 27.3% in 2017.

Discovery and Safety Assessment (DSA)

For 2018, DSA revenue was $1.32 billion, an increase of 34.4% from
$980.0 million in 2017. Organic revenue growth was 10.4%.

On a GAAP basis, the DSA segment operating margin decreased to 17.3% in
2018 from 18.7% in 2017. On a non-GAAP basis, the operating margin
decreased to 21.7% in 2018 from 22.1% in 2017.

Manufacturing Support (Manufacturing)

For 2018, Manufacturing revenue was $429.6 million, an increase of 11.9%
from $384.0 million in 2017. Organic revenue growth was 10.9%.

On a GAAP basis, the Manufacturing segment operating margin decreased to
31.7% in 2018 from 32.3% in 2017. On a non-GAAP basis, the operating
margin decreased to 34.2% in 2018 from 35.5% in 2017.

Proposed Acquisition of Citoxlab

In a separate press release today, Charles River announced it has signed
a binding offer to acquire Citoxlab for €448 million in cash (or
approximately $510 million based on current exchange rates), subject to
customary closing adjustments.

Citoxlab is a premier, non-clinical contract research organization
(CRO), specializing in regulated safety assessment services,
non-regulated discovery services, and medical device testing. With
operations in Europe and North America, the proposed acquisition of
Citoxlab would further strengthen Charles River’s position as the
leading, global early-stage CRO by expanding its scientific portfolio
and geographic footprint, which would enhance the Company’s ability to
partner with clients across the drug discovery and development continuum.

The proposed acquisition is expected to add $115 to $130 million to
Charles River’s 2019 consolidated revenue based on the anticipated
timing of the close in the second quarter, and approximately $200
million to 2020 consolidated revenue. The proposed transaction is
expected to be accretive to non-GAAP earnings per share by approximately
$0.15 in 2019 and by at least $0.35 in 2020. Items excluded from
non-GAAP earnings per share are expected to include all
acquisition-related costs, which primarily include amortization of
intangible assets, advisory fees, and integration costs.

2019 Guidance

The Company is providing the following revenue growth and earnings per
share guidance for 2019, both excluding and including the impact of the
proposed acquisition of Citoxlab, which was announced on February 13,
2019.

Excluding Citoxlab, earnings per share in 2019 are expected to benefit
from higher revenue and modest operating margin improvement. This
expectation is based on the Company’s belief that robust client demand
will continue. Beginning in the first quarter of 2019, the Company will
exclude the performance of its venture capital investments from non-GAAP
financial results. As a result, the Company has not included an estimate
of venture capital gains or losses in its 2019 earnings per share
guidance. On a comparable basis excluding venture capital investment
gains in 2018, year-over-year earnings per share growth is expected to
be 16% to 19% on a GAAP basis, and 8% to 10% on a non-GAAP basis in
2019. A higher tax rate is expected to partially offset the
contributions from higher revenue and modest operating margin
improvement.

The Company’s revenue and earnings per share guidance excluding the
impact of Citoxlab is as follows:

     
2019 GUIDANCE EXCLUDING CITOXLAB    
Revenue growth, reported   10.5% – 12.0%
Less: Contribution from acquisitions (1) (~3.0%)
Add: Negative impact of foreign exchange   ~0.5%
Revenue growth, organic (2)   8.0% – 9.5%
GAAP EPS estimate (3) $5.05 – $5.20
Amortization of intangible assets ~$1.10
Charges related to global efficiency initiatives (4) ~$0.05
Acquisition-related adjustments (5)   ~$0.05
Non-GAAP EPS estimate   $6.25 – $6.40
Free cash flow (6)   $320 – $330 million
 

Footnotes to Guidance Table excluding Citoxlab:

(1) The contribution from acquisitions reflects only those acquisitions
which have been completed.

(2) Organic revenue growth is defined as reported revenue growth
adjusted for acquisitions and foreign currency translation.

(3) GAAP EPS guidance and related adjustments do not include any
acquisition-related costs and charges associated with the planned
acquisition of Citoxlab because the transaction has not been completed
and estimates for these costs have not been finalized.

(4) These charges, which primarily include severance and other costs,
relate primarily to the Company’s planned efficiency initiatives. Other
projects in support of global productivity and efficiency initiatives
are expected, but these charges reflect only the decisions that have
already been finalized.

(5) These adjustments are related to the evaluation and integration of
acquisitions completed prior to February 2019, and primarily include
transaction, advisory, and certain third-party integration costs, as
well as certain costs associated with acquisition-related efficiency
initiatives.

(6) See Schedule 6 for a GAAP to non-GAAP reconciliation of Cash Flow
from Operating Activities to Free Cash Flow.

The Company is also providing revenue and non-GAAP earnings per share
guidance for 2019 including the benefit of the proposed Citoxlab
acquisition. This combined guidance assumes that the transaction will be
completed in the second quarter of 2019. Citoxlab is expected to be
reported as part of Charles River’s DSA segment.

     
2019 GUIDANCE INCLUDING CITOXLAB    
Charles River revenue growth, reported   10.5% – 12.0%
Contribution from Citoxlab   5% – 6%
Revenue growth including Citoxlab, reported   16% – 18%
Charles River non-GAAP EPS estimate   $6.25 – $6.40
Contribution from Citoxlab   ~$0.15
Non-GAAP EPS estimate including Citoxlab (1)   $6.40 – $6.55
 

Footnote to Guidance Table including Citoxlab:

(1) Additional items excluded from non-GAAP earnings per share are
expected to include Citoxlab acquisition and integration-related costs,
which primarily include amortization of intangible assets, transaction,
advisory, and integration costs. Estimates of these costs have not been
finalized.

Webcast

Charles River has scheduled a live webcast on Wednesday, February 13, at
8:30 a.m. EST 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.

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. Commencing in the first quarter of 2019, we exclude
the performance of our venture capital investments due to the
determination that such investment gains or losses are not core to our
overall 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,” “would,” “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,
including the proposed acquisition of Citoxlab, on the Company, our
service offerings, client perception, strategic relationships, revenue,
revenue growth rates, and earnings; our expectations regarding the
timing of the close of the proposed Citoxlab acquisition, and Citoxlab’s
final 2018 financial results; 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); 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; the impact of Brexit; 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.

 

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

         

SCHEDULE 1

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(1)

(in thousands, except for per share data)
 
Three Months Ended Twelve Months Ended
December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017
 
Total revenue $ 601,530 $ 478,477 $ 2,266,096 $ 1,857,601
Cost of revenue (excluding amortization of intangible assets) 375,113 311,083 1,426,029 1,156,683
Selling, general and administrative 106,918 94,109 443,854 371,266
Amortization of intangible assets   17,017     10,457     64,830     41,370  
Operating income 102,482 62,828 331,383 288,282
Interest income 118 193 812 690
Interest expense (16,741 ) (7,724 ) (63,772 ) (29,777 )
Other income, net   (10,811 )   13,756     13,258     37,760  
Income from continuing operations, before income taxes 75,048 69,053 281,681 296,955
Provision for income taxes   14,850     98,097     54,463     171,369  
Income (loss) from continuing operations, net of income taxes 60,198 (29,044 ) 227,218 125,586
Income (loss) from discontinued operations, net of income taxes       (23 )   1,506     (137 )
Net income (loss) 60,198 (29,067 ) 228,724 125,449
Less: Net income attributable to noncontrolling interests   533     782     2,351     2,094  
Net income (loss) attributable to common shareholders $ 59,665   $ (29,849 ) $ 226,373   $ 123,355  
 
Earnings (loss) per common share
Basic:
Continuing operations attributable to common shareholders $ 1.24 $ (0.63 ) $ 4.69 $ 2.60
Discontinued operations $ $ $ 0.03 $
Net income (loss) attributable to common shareholders $ 1.24 $ (0.63 ) $ 4.72 $ 2.60
Diluted:
Continuing operations attributable to common shareholders $ 1.21 $ (0.63 ) $ 4.59 $ 2.54
Discontinued operations $ $ $ 0.03 $
Net income (loss) attributable to common shareholders $ 1.21 $ (0.63 ) $ 4.62 $ 2.54
 
Weighted-average number of common shares outstanding
Basic 48,143 47,337 47,947 47,481
Diluted 49,210 47,337 49,018 48,564
 

Contacts

Investor Contacts:
Todd Spencer
Corporate Vice President,
Investor
Relations
781.222.6455
[email protected]

Media
Contact:
Amy Cianciaruso
Corporate Vice President,
Public
Relations
781.222.6168
[email protected]

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