CRL Charles River Laboratories International Inc

Charles River Laboratories International, Inc. (NYSE: CRL) today reported its results for the second quarter and first six months of 2008. For the quarter, net sales increased 14.5% to $352.1 million from $307.4 million in the second quarter of 2007. Both the Research Models and Services (RMS) and Preclinical Services (PCS) business segments reported significantly higher sales, with the RMS segment showing particular strength due to continued demand from pharmaceutical and biotechnology companies. Foreign exchange contributed 4.1% to the net sales growth. On a GAAP basis, net income for the second quarter of 2008 was $50.2 million, or $0.71 per diluted share, compared to $38.0 million, or $0.55 per diluted share, for the second quarter of 2007. On a non-GAAP basis, net income was $55.4 million for the second quarter of 2008, compared to $43.8 million for the same period in 2007, an increase of 26.4%. Second-quarter diluted earnings per share on a non-GAAP basis were $0.79, an increase of 23.4% compared to $0.64 per share in the second quarter of 2007. Non-GAAP earnings per share in the second quarter of 2008 excluded $7.6 million of amortization of intangible assets related to acquisitions, a charge of $2.8 million primarily related to the Company�s disposition of its legacy preclinical facility in Worcester, Massachusetts, and a gain of $3.3 million as a result of the Company�s curtailment of its U.S. defined benefit pension plan. For the second quarter of 2007, non-GAAP results excluded $8.2 million of amortization of intangible assets and stock-based compensation related to acquisitions and a charge of $0.9 million related to the exit of the Worcester facility. James C. Foster, Chairman, President and Chief Executive Officer, said, �A continuation of strong market demand for our broad portfolio of essential products and services enabled us to sustain our momentum in the second quarter. We believe that this demand will continue, as pharmaceutical and biotechnology customers maintain their focus on the discovery of new therapies and rely on Charles River�s scientific expertise to enhance the efficiency of their research. We are optimistic that we will effectively capitalize on these opportunities, as we increasingly provide the support which is crucial to our clients� drug discovery and development efforts. Therefore, we are confident that we will achieve our increased sales and non-GAAP earnings guidance for 2008.� Research Models and Services (RMS) Sales for the RMS segment were $172.8 million in the second quarter of 2008, an increase of 20.2% from $143.8 million in the second quarter of 2007. Sales growth was broad based, with strong global demand from pharmaceutical and biotechnology companies for research models and services, as well as In Vitro Detection products. In the second quarter of 2008, the RMS segment�s GAAP operating margin decreased to 30.2% compared to 31.5% in the second quarter of 2007. The decrease was due primarily to an increase in operating expenses in Japan, which are not expected to continue at that level, as well as a greater proportion of services in the sales mix. On a non-GAAP basis, which excluded charges of $0.6 million for acquisition-related amortization and $0.6 million for an asset impairment related to our Vaccine business in Mexico, the operating margin was 30.9% compared to 31.7% for the same period in the prior year. Non-GAAP results in the second quarter of 2007 excluded $0.4 million of amortization related to acquisitions. Preclinical Services (PCS) Second-quarter 2008 net sales for the PCS segment were $179.3 million, an increase of 9.6% from $163.6 million in the second quarter of 2007. Continuing strong demand for general and specialty toxicology services drove significantly higher sales at the Company�s U.S. flagship facilities in Massachusetts and Nevada, and Clinical Services Northwest benefited from demand for its Phase I services. The sales gains were partially offset by less favorable preclinical study mix and some study delays, as well as capacity constraints at other preclinical facilities. The segment�s profits were affected, as expected, by the additional costs associated with the transition to the new preclinical facility in Nevada and the negative impact of foreign exchange in Canada resulted in lower operating margins for the PCS segment compared to the second quarter of 2007. The second-quarter 2008 GAAP operating margin declined to 16.1% from 16.8% in the same period in the prior year. On a non-GAAP basis, which excluded $7.0 million of acquisition-related amortization and a charge of $2.2 million associated with the Company�s disposition of its Worcester, Massachusetts facility, the operating margin declined to 21.2% from 22.0% in the second quarter of 2007. As expected, the second-quarter GAAP and non-GAAP operating margins improved sequentially from the first quarter of 2008 by 230 and 290 basis points respectively. The improvement was attributable primarily to improved margins in Nevada as that facility ramps up and Clinical Services Northwest, which benefited from higher sales. Six-Month Results For the first six months of 2008, net sales increased by 15.2% to $689.8 million, from $598.6 million in the same period in 2007. Foreign exchange contributed approximately 4.1% to the sales growth rate. On a GAAP basis, net income was $95.3 million, or $1.35 per diluted share, for the first half of 2008, compared to $74.7 million, or $1.10 per diluted share, for the same period in 2007. On a non-GAAP basis, net income for the first six months of 2008 was $106.2 million, or $1.51 per diluted share, compared to $87.0 million, or $1.28 per diluted share, for the same period in 2007. For the first six months of 2008, non-GAAP net income excluded $15.2 million of acquisition-related amortization, a charge of $3.5 million primarily related to the Company�s disposition of its Worcester, Massachusetts facility, and a gain of $3.3 million as a result of the Company�s pension curtailment. Non-GAAP net income for the first half of 2007 excluded acquisition-related charges of $16.1 million and charges of $1.7 million related to the exit of the Worcester facility. Research Models and Services (RMS) For the first six months of 2008, RMS net sales were $341.4 million, an increase of 19.0% from first-half 2007 net sales of $286.9 million. The RMS segment�s GAAP operating margin was 31.6% in the first half of 2008, compared to 32.2% for the year-ago period. On a non-GAAP basis, the operating margin was 32.1% compared to 32.4% in the first six months of 2007. Preclinical Services (PCS) For the first six months of 2008, PCS net sales were $348.4 million, an increase of 11.7% over first-half 2007 net sales of $311.8 million. On a GAAP basis, the PCS segment operating margin was 15.0% in the first half of 2008, compared to 16.3% in the year-ago period. On a non-GAAP basis, the operating margin was 19.8% in the first half of 2008 compared to 21.7% for the same period in 2007. 2008 Guidance The Company is increasing its sales and non-GAAP earnings per share guidance and reducing GAAP earnings per share guidance for 2008. The reduction of GAAP earnings guidance is due primarily to a $0.04 charge for revaluation of a deferred tax asset for our convertible debt, due to a change in Massachusetts tax law. The charge will be excluded from non-GAAP results. The revised forward-looking guidance, which includes the anticipated acquisition of NewLab BioQuality AG by the end of the third quarter of 2008, is based on current foreign exchange rates. 2008 GUIDANCE � REVISED � PRIOR Net sales growth 12% - 14% 10% - 13% GAAP EPS estimate $2.59 - $2.65 $2.59 - $2.69 Amortization of intangible assets $0.30 $0.30 Revaluation of deferred tax asset, impairment and other charges $0.07 - $0.08 $0.01 - $0.02 Gain on curtailment of U.S. defined benefit pension plan ($0.03) ($0.04) Non-GAAP EPS estimate $2.94 - $3.00 $2.87 - $2.97 Company to Acquire NewLab BioQuality AG Charles River has entered into an agreement to acquire privately-held NewLab BioQuality AG (NewLab) for approximately $53 million in cash. NewLab, a Dusseldorf, Germany-based contract service organization, provides safety and quality control services to biopharmaceutical clients. NewLab is expected to achieve revenues in a range of $20-$23 million in 2008. The transaction is expected to close by the end of the third quarter of 2008, subject to customary regulatory approvals, and is expected to be neutral to earnings per share in 2008 and slightly accretive in 2009. Charles River Biopharmaceutical Services, which provides services to support the development and manufacture of biologics, is a world leader in cell bank manufacture from research through full-scale production, and a premier provider of testing to determine the potency of biologics, of drug product release testing, and of clinical-scale vaccine manufacture. Complementing these services, NewLab enhances Charles River�s capabilities in process validation services, which mimic new manufacturing processes to verify that potentially hazardous contaminants have been removed; in consulting services, which help manufacturers meet regional Good Manufacturing Practice (GMP) guidance on new drugs; and assists in designing International Conference on Harmonisation (ICH)-compliant stability testing programs. Together, Charles River and NewLab expect to provide the most comprehensive service package in the biopharmaceutical industry at a time when biologic drugs are becoming an increasing proportion of therapeutics in development. Board Increases Stock Repurchase Authorization Charles River�s Board of Directors has increased the existing authorization for the repurchase of Charles River common stock by $200.0 million. In addition to the remaining balance of $30.7 million as of August 1, 2008, the amount currently available under the authorization is $230.7 million. The stock purchases will be made from time to time on the open market, through block trades or otherwise in compliance with Rule 10b-18 of the federal securities laws. Depending on market conditions and other factors, these repurchases may be commenced or suspended at any time or from time to time without prior notice. Funds for the repurchases are expected to come from cash on hand or cash generated by operations. During the second quarter of 2008, the Company repurchased approximately 535,000 shares of common stock at a total cost of $32.8 million. There are currently no specific plans for the shares that have been or may be purchased under the program. As of August 1, 2008, Charles River had approximately 67.8 million shares of common stock outstanding. Webcast Charles River Laboratories has scheduled a live webcast on Wednesday, August 6, 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 non-GAAP financial measures to comparable GAAP financial measures on the website. Use of Non-GAAP Financial Measures This press release contains non-GAAP financial measures, such as non-GAAP earnings per diluted share from continuing operations, which exclude amortization of intangible assets and other charges related to our acquisitions, charges related to the disposition of our Worcester facility, an impairment of our Vaccine business in Mexico, the impact of the revaluation of a deferred tax asset as a result of changes to a Massachusetts tax law, and gains attributable to the curtailment of our U.S. pension plan. 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 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 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. 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 the text of this press release, and can also be found on the Company�s website at ir.criver.com. Caution Concerning Forward-Looking Statements This news 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 2008 sales and earnings; the future demand for drug discovery and development products and services, including the outsourcing of these services; the impact of specific actions intended to improve overall operating efficiencies and profitability; the timing of the opening of new and expanded facilities; our future stock purchase activities; future cost reduction activities by our customers; and Charles River�s future performance as delineated in our forward-looking guidance, and particularly our expectations with respect to sales growth. In addition, these statements include the intended acquisition of NewLab and the expected impact on our revenues and earnings. 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 consummate the acquisition of NewLab; a decrease in research and development spending, a decrease 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 20, 2008, 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 more than 8,800 employees worldwide are focused on providing clients with exactly what they need to improve and expedite the discovery, development through first-in-human evaluation, 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. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except for per share data) � Three Months Ended Six Months Ended June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007 � Total net sales $ 352,134 $ 307,435 $ 689,819 $ 598,634 Cost of products sold and services provided � 214,147 � � 186,479 � � 421,455 � � 362,105 � Gross margin 137,987 120,956 268,364 236,529 Selling, general and administrative 61,064 56,092 120,370 109,109 Amortization of intangibles � 7,600 � � 8,139 � � 15,171 � � 15,994 � Operating income 69,323 56,725 132,823 111,426 Interest income (expense) (1,207 ) (2,595 ) (1,873 ) (4,654 ) Other income (expense) � (267 ) � (1,069 ) � (1,104 ) � (920 ) Income before income taxes and minority interests 67,849 53,061 129,846 105,852 Provision for income taxes � 17,920 � � 15,101 � � 34,846 � � 30,411 � Income before minority interests 49,929 37,960 95,000 75,441 Minority interests � 258 � � (119 ) � 341 � � (373 ) Income from continuing operations 50,187 37,841 95,341 75,068 Loss from discontinued businesses, net of tax � - � � 115 � � - � � (349 ) Net income (loss) $ 50,187 � $ 37,956 � $ 95,341 � $ 74,719 � � Earnings (loss) per common share Basic: Continuing operations $ 0.75 $ 0.57 $ 1.41 $ 1.13 Discontinued operations $ - $ - $ - $ (0.01 ) Net income $ 0.75 $ 0.57 $ 1.41 $ 1.12 Diluted: Continuing operations $ 0.71 $ 0.55 $ 1.35 $ 1.10 Discontinued operations $ - $ - $ - $ (0.01 ) Net income $ 0.71 $ 0.55 $ 1.35 $ 1.10 � Weighted average number of common shares outstanding Basic 67,328,432 66,830,155 67,416,639 66,587,863 Diluted 70,363,643 68,517,657 70,464,092 67,971,898 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) � � June 28, 2008 December 29, 2007 Assets Current assets Cash and cash equivalents $ 262,438 $ 225,449 Trade receivables, net 240,009 213,908 Inventories 93,602 88,023 Other current assets 80,328 79,477 Current assets of discontinued businesses � 563 � 1,007 Total current assets 676,940 607,864 Property, plant and equipment, net 826,835 748,793 Goodwill, net 1,121,900 1,120,540 Other intangibles, net 135,512 148,905 Deferred tax asset 65,342 89,255 Other assets 60,382 85,993 Long-term assets of discontinued businesses � 4,187 � 4,187 Total assets $ 2,891,098 $ 2,805,537 � Liabilities and Shareholders� Equity Current liabilities Current portion of long-term debt $ 210,042 $ 25,051 Accounts payable 43,523 36,715 Accrued compensation 52,517 53,359 Deferred revenue 94,889 102,021 Accrued liabilities 72,792 61,366 Other current liabilities 26,293 23,268 Current liabilities of discontinued businesses � 719 � 748 Total current liabilities 500,775 302,528 Long-term debt 312,260 484,998 Other long-term liabilities � 128,980 � 154,044 Total liabilities � 942,015 � 941,570 Minority interests 3,208 3,500 Total shareholders� equity � 1,945,875 � 1,860,467 Total liabilities and shareholders� equity $ 2,891,098 $ 2,805,537 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. SELECTED BUSINESS SEGMENT INFORMATION (UNAUDITED) (dollars in thousands) � � Three Months Ended Six Months Ended June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007 Research Models and Services Net sales $ 172,848 $ 143,803 $ 341,444 $ 286,871 Gross margin 76,429 63,109 152,685 126,763 Gross margin as a % of net sales 44.2 % 43.9 % 44.7 % 44.2 % Operating income 52,199 45,268 108,012 92,289 Operating income as a % of net sales 30.2 % 31.5 % 31.6 % 32.2 % Depreciation and amortization 7,016 5,663 13,675 11,232 Capital expenditures 23,510 10,688 33,656 17,772 � Preclinical Services Net sales $ 179,286 $ 163,632 $ 348,375 $ 311,763 Gross margin 61,558 57,847 115,679 109,766 Gross margin as a % of net sales 34.3 % 35.4 % 33.2 % 35.2 % Operating income 28,849 27,426 52,117 50,870 Operating income as a % of net sales 16.1 % 16.8 % 15.0 % 16.3 % Depreciation and amortization 16,004 15,569 31,678 29,913 Capital expenditures 40,667 38,724 70,225 69,564 � � Unallocated Corporate Overhead $ (11,725 ) $ (15,969 ) $ (27,306 ) $ (31,733 ) � � Total Net sales $ 352,134 $ 307,435 $ 689,819 $ 598,634 Gross margin 137,987 120,956 268,364 236,529 Gross margin as a % of net sales 39.2 % 39.3 % 38.9 % 39.5 % Operating income (loss) 69,323 56,725 132,823 111,426 Operating income as a % of net sales 19.7 % 18.5 % 19.3 % 18.6 % Depreciation and amortization 23,020 21,232 45,353 41,145 Capital expenditures 64,177 49,412 103,881 87,336 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. RECONCILIATION OF GAAP TO NON-GAAP SELECTED BUSINESS SEGMENT INFORMATION (UNAUDITED) (dollars in thousands) � � Three Months Ended Six Months Ended June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007 Research Models and Services Net sales $ 172,848 $ 143,803 $ 341,444 $ 286,871 Operating income 52,199 45,268 108,012 92,289 Operating income as a % of net sales 30.2 % 31.5 % 31.6 % 32.2 % Add back: Amortization related to acquisitions 594 371 1,128 745 Impairment and other charges � 634 � � - � � 634 � � - � Operating income, excluding specified charges (Non-GAAP) $ 53,427 $ 45,639 $ 109,774 $ 93,034 Non-GAAP operating income as a % of net sales 30.9 % 31.7 % 32.1 % 32.4 % � Preclinical Services Net sales $ 179,286 $ 163,632 $ 348,375 $ 311,763 Operating income 28,849 27,426 52,117 50,870 Operating income as a % of net sales 16.1 % 16.8 % 15.0 % 16.3 % Add back: Amortization related to acquisitions 7,006 7,768 14,043 15,249 Impairment and other charges � 2,187 � � 863 � � 2,873 � � 1,682 � Operating income, excluding specified charges (Non-GAAP) $ 38,042 $ 36,057 $ 69,033 $ 67,801 Non-GAAP operating income as a % of net sales 21.2 % 22.0 % 19.8 % 21.7 % � � Unallocated Corporate Overhead $ (11,725 ) $ (15,969 ) $ (27,306 ) $ (31,733 ) Add back: Stock-based compensation related to Inveresk acquisition - 18 - 88 Pension curtailment � (3,276 ) � - � � (3,276 ) � - � Unallocated corporate overhead, excluding specified charges (Non-GAAP) $ (15,001 ) $ (15,951 ) $ (30,582 ) $ (31,645 ) � � Total Net sales $ 352,134 $ 307,435 $ 689,819 $ 598,634 Operating income 69,323 56,725 132,823 111,426 Operating income as a % of net sales 19.7 % 18.5 % 19.3 % 18.6 % Add back: Amortization related to acquisition 7,600 8,139 15,171 15,994 Stock-based compensation related to Inveresk acquisition - 18 - 88 Impairment and other charges 2,821 863 3,507 1,682 Pension curtailment � (3,276 ) � - � � (3,276 ) � - � Operating income, excluding specified charges (Non-GAAP) $ 76,468 $ 65,745 $ 148,225 $ 129,190 Non-GAAP operating income as a % of net sales 21.7 % 21.4 % 21.5 % 21.6 % � � 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. CHARLES RIVER LABORATORIES INTERNATIONAL, INC. RECONCILIATION OF GAAP EARNINGS TO NON-GAAP EARNINGS (dollars in thousands, except for per share data) � Three Months Ended Six Months Ended June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007 � Net income (loss) $ 50,187 $ 37,956 $ 95,341 $ 74,719 Less: Discontinued operations � - � � (115 ) � - � � 349 � Net income from continuing operations 50,187 37,841 95,341 75,068 Add back: Amortization related to acquisitions 7,600 8,139 15,171 15,994 Stock-based compensation related to Inveresk acquisition - 18 - 88 Impairment and other charges 2,821 863 3,507 1,682 Pension curtailment (3,276 ) - (3,276 ) - Tax effect � (1,962 ) � (3,061 ) � (4,567 ) � (5,845 ) Net income from continuing operations, excluding specified charges (Non-GAAP) $ 55,370 � $ 43,800 � $ 106,176 � $ 86,987 � � Weighted average shares outstanding - Basic 67,328,432 66,830,155 67,416,639 66,587,863 Effect of dilutive securities: 2.25% senior convertible debentures 1,454,072 203,034 1,438,261 - Stock options and contingently issued restricted stock 1,271,120 1,350,004 1,318,566 1,250,385 Warrants � 310,019 � � 134,464 � � 290,626 � � 133,650 � Weighted average shares outstanding - Diluted � 70,363,643 � � 68,517,657 � � 70,464,092 � � 67,971,898 � � Basic earnings (loss) per share $ 0.75 $ 0.57 $ 1.41 $ 1.12 Diluted earnings (loss) per share $ 0.71 $ 0.55 $ 1.35 $ 1.10 � Basic earnings per share, excluding specified charges (Non-GAAP) $ 0.82 $ 0.66 $ 1.57 $ 1.31 Diluted earnings per share, excluding specified charges (Non-GAAP) $ 0.79 $ 0.64 $ 1.51 $ 1.28 � � 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.