Charles River Laboratories Announces Second-Quarter 2007 Results from Continuing Operations

Charles River Laboratories International, Inc. (NYSE: CRL) today reported second-quarter and year-to-date 2007 financial results. For the second quarter, net sales from continuing operations increased 14.8% to $307.4 million from $267.9 million in the second quarter of 2006. Pharmaceutical and biotechnology customers continued to demonstrate robust demand for research models and outsourced services, which drove the strong sales growth in both the Research Models and Services and Preclinical Services business segments. Foreign exchange contributed 2.1% to the net sales growth. On a GAAP basis, net income from continuing operations for the second quarter of 2007 was $37.8 million, or $0.55 per diluted share, compared to $32.8 million, or $0.46 per diluted share, for the second quarter of 2006. The 19.6% increase in earnings per share resulted primarily from higher sales, as well as the benefit of cost savings initiatives implemented in 2006, a lower share count due to the Company’s stock repurchase program, lower amortization of intangible assets and reduced net interest expense. On a non-GAAP basis, net income from continuing operations was $43.8 million for the second quarter of 2007, compared to $41.6 million for the same period in 2006. Second-quarter diluted earnings per share on a non-GAAP basis were $0.64, an increase of 10.3% compared to $0.58 per share in the second quarter of 2006. Non-GAAP earnings per share in the second quarter of 2007 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 decision to accelerate the exit of the Company’s Preclinical Services facility in Worcester, Massachusetts. The Company continues to anticipate completion of the transition to the new Shrewsbury, Massachusetts, facility by the end of 2007, and as a result, expects to record total related charges in 2007 of approximately $0.03 to $0.05. For the second quarter of 2006, non-GAAP results excluded $9.5 million of amortization of intangible assets and stock-based compensation related to acquisitions and a charge of $5.3 million related to cost-savings initiatives. James C. Foster, Chairman, President and Chief Executive Officer, said, "We are extremely pleased with our second-quarter performance, which reflects strong demand across our broad portfolio of essential products and services. As a result of higher-than-expected first-half sales and our expectation for robust sales growth in the second half of the year, we are raising our sales guidance and narrowing our EPS guidance to the upper end of the range. In addition, we have increased our stock repurchase authorization from $300.00 million to $400.00 million.” The Company reports results from continuing operations, which exclude results of the Interventional and Surgical Services (ISS) business. The Company is in the process of closing that business and as a result, reports it as discontinued operations. Historical comparisons have been reclassified accordingly. Net income from discontinued operations was $0.1 million in the second quarter of 2007. Including discontinued operations, net income for the second quarter of 2007 was $38.0 million, or $0.55 per diluted share, compared to net income of $25.7 million, or $0.36 per diluted share, in the second quarter of 2006. Discontinued operations in 2006 included both ISS and the Phase II – IV clinical services business, which the Company sold in August 2006. Research Models and Services (RMS) Sales for the RMS segment were $143.8 million in the second quarter of 2007, an increase of 9.9% from $130.8 million in the second quarter of 2006. Sales benefited from strong demand for research models from large pharmaceutical and biotechnology customers in North America and Europe, increased demand for Transgenic Services, and higher sales of in vitro products. In the second quarter of 2007, the RMS segment’s GAAP operating margin increased to 31.5% compared to 29.1% in the second quarter of 2006. On a non-GAAP basis, which excluded charges of $0.4 million for acquisition-related amortization, the operating margin was 31.7%, compared to 30.9% for the same period in the prior year. The improvement was due primarily to higher sales. Preclinical Services (PCS) Second-quarter net sales for the PCS segment were $163.6 million, an increase of 19.4% from $137.0 million in the second quarter of 2006. Sales were driven by continuing strong demand for general and specialty toxicology services from pharmaceutical and biotechnology customers, and the addition on October 30, 2006, of the Northwest Kinetics Phase I clinical services business. The PCS segment’s GAAP operating margin improved to 16.8% from 16.4%. On a non-GAAP basis, which excludes $7.8 million of acquisition-related amortization and the $0.9 million charge for the accelerated exit from the Worcester facility, the second-quarter operating margin declined to 22.0% from 25.4% in the second quarter of 2006. All of the Company’s preclinical toxicology facilities reported improved profitability, with the exception of Massachusetts. As expected, the higher operating costs associated with the Massachusetts facility transition offset the gains. Six-Month Results For the first six months of 2007, net sales from continuing operations increased by 14.7% to $598.6 million, from $522.0 million in the same period in 2006. Foreign exchange contributed approximately 2.4% to the sales growth rate. On a GAAP basis, net income from continuing operations was $75.1 million, or $1.10 per diluted share, for the first half of 2007, compared to $61.3 million, or $0.84 per diluted share, for the same period in 2006. On a non-GAAP basis, net income from continuing operations for the first six months of 2007 was $87.0 million, or $1.28 per diluted share, compared to $76.4 million, or $1.05 per diluted share, for the same period in 2006. For the first six months of 2007, non-GAAP net income excluded $16.1 million of amortization and stock-based compensation costs associated with acquisitions, and $1.7 million related to the decision to accelerate the exit of the Company’s Preclinical Services facility in Worcester, Massachusetts. Non-GAAP net income for the first half of 2006 excluded acquisition-related charges of $18.9 million and charges of $5.3 million related to cost-savings initiatives. Including a loss of $0.3 million from discontinued operations, net income for the first six months of 2007 was $74.7 million, or $1.10 per diluted share, compared to a net loss of $74.4 million, or $1.02 per diluted share, for the same period in 2006. Results for the prior year included the $129.2 million goodwill impairment recorded in the first quarter of 2006 related to the sale of the Clinical Phase II – IV business. Research Models and Services (RMS) For the first six months of 2007, RMS net sales were $286.9 million, an increase of 10.4% from the first-half 2006 net sales of $259.8 million. The RMS segment’s GAAP operating margin was 32.2% in the first half of 2007, compared to 30.2% for the year-ago period. On a non-GAAP basis, which excluded $0.7 million of amortization of intangible assets related to acquisitions, the operating margin was 32.4% compared to 31.2% in the first six months of 2006. Preclinical Services (PCS) For the first six months of 2007, PCS net sales were $311.8 million, an increase of 18.9% over first-half 2006 net sales of $262.2 million. On a GAAP basis, the PCS segment operating margin was 16.3% in the first half of 2007, compared to 13.9% in the year-ago period. On a non-GAAP basis, the operating margin was 21.7% in the first half of 2007 compared to 22.0% for the same period in 2006. 2007 Guidance Based on strong demand for its products and services, the Company is increasing its sales guidance and narrowing the GAAP and non-GAAP earnings per share ranges to the upper end. The revised forward-looking guidance, shown in the table below, is based on current foreign exchange rates. 2007 GUIDANCE (from continuing operations) REVISED   PRIOR Net sales growth (in %) 12% - 14% 9% - 12% Sales ($ in millions) $1,185 - $1,205 $1,160 - $1,190 GAAP EPS estimate $2.15 - $2.21 $2.11 - $2.21 Acquisition-related amortization $0.32 $0.32 Charge to exit Worcester facility and gain on sale of building, net $0.01 - $0.03   $0.01 - $0.03 Non-GAAP EPS estimate $2.47 - $2.53   $2.43 - $2.53 Board Increases Stock Repurchase Authorization Charles River’s Board of Directors has increased the existing authorization for the repurchase of Charles River common stock to $400.0 million from $300.0 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. As of August 1, 2007, the Company had repurchased 6.7 million shares of common stock at a total cost of approximately $278.0 million, leaving a balance of approximately $122.0 million under the $400.00 million stock repurchase authorization. There are currently no specific plans for the shares that have been or may be purchased under the program. As of August 1, 2007, Charles River had approximately 67.9 million shares of common stock outstanding. Webcast Charles River Laboratories 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 to comparable GAAP 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, impairments due to our accelerated exit from our Worcester Preclinical Services facility, and the potential gain on the sale of real estate in Scotland. 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 2007 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; expectations regarding stock repurchases; the timing of the opening of new and expanded facilities; the potential sale of real estate in Scotland; 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. 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: 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 27, 2007, 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 Laboratories Charles River Laboratories based in Wilmington, Massachusetts, partners with global pharmaceutical and biotechnology companies, government agencies and leading academic institutions to advance the drug discovery and development process, bringing drugs to market faster and more efficiently. Charles River's 8,000 employees serve clients worldwide. For more information on Charles River, visit our website at 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 30, 2007 July 1, 2006 June 30, 2007 July 1, 2006   Total net sales $ 307,435 $ 267,859 $ 598,634 $ 522,000 Cost of products sold and services provided   186,479     160,749     362,105     319,385   Gross margin 120,956 107,110 236,529 202,615 Selling, general and administrative 56,092 50,031 109,109 92,765 Amortization of intangibles   8,139     9,377     15,994     18,452   Operating income 56,725 47,702 111,426 91,398 Interest income (expense) (2,595 ) (3,661 ) (4,654 ) (6,677 ) Other income (expense)   (1,069 )   (736 )   (920 )   (688 ) Income before income taxes and minority interests 53,061 43,305 105,852 84,033 Provision for income taxes   15,101     9,870     30,411     21,681   Income before minority interests 37,960 33,435 75,441 62,352 Minority interests   (119 )   (654 )   (373 )   (1,056 ) Income from continuing operations 37,841 32,781 75,068 61,296 Income (loss) from discontinued businesses, net of tax   115     (7,032 )   (349 )   (135,662 ) Net income (loss) $ 37,956   $ 25,749   $ 74,719   $ (74,366 )   Earnings (loss) per common share Basic: Continuing operations $ 0.57 $ 0.46 $ 1.13 $ 0.86 Discontinued operations $ - $ (0.10 ) $ (0.01 ) $ (1.89 ) Net income $ 0.57 $ 0.36 $ 1.12 $ (1.04 ) Diluted: Continuing operations $ 0.55 $ 0.46 $ 1.10 $ 0.84 Discontinued operations $ - $ (0.10 ) $ (0.01 ) $ (1.86 ) Net income $ 0.55 $ 0.36 $ 1.10 $ (1.02 )   Weighted average number of common shares outstanding Basic 66,830,155 70,851,430 66,587,863 71,615,867 Diluted 68,517,657 71,835,166 67,971,898 72,798,832 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands)       June 30, 2007 December 30, 2006 Assets Current assets Cash and cash equivalents $ 162,050 $ 175,380 Trade receivables, net 228,622 202,658 Inventories 77,169 72,362 Other current assets 58,583 44,363 Current assets of discontinued businesses   1,123   6,330 Total current assets 527,547 501,093 Property, plant and equipment, net 622,492 534,745 Goodwill, net 1,119,350 1,119,309 Other intangibles, net 158,442 160,204 Deferred tax asset 96,121 107,498 Other assets 135,910 133,944 Long-term assets of discontinued businesses   4,217   751 Total assets $ 2,664,079 $ 2,557,544   Liabilities and Shareholders’ Equity Current liabilities Current portion of long-term debt $ 24,098 $ 24,977 Accounts payable 35,707 28,223 Accrued compensation 42,804 41,651 Deferred income 94,963 93,197 Accrued liabilities 53,976 41,991 Other current liabilities 18,017 25,625 Current liabilities of discontinued businesses   116   3,667 Total current liabilities 269,681 259,331 Long-term debt 511,816 547,084 Other long-term liabilities   149,294   146,695 Total liabilities   930,791   953,110 Minority interests 3,420 9,223 Total shareholders’ equity   1,729,868   1,595,211 Total liabilities and shareholders’ equity $ 2,664,079 $ 2,557,544 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. SELECTED BUSINESS SEGMENT INFORMATION (UNAUDITED) (dollars in thousands)   Three Months Ended Six Months Ended June 30, 2007 July 1, 2006 June 30, 2007 July 1, 2006 Research Models and Services Net sales $ 143,803 $ 130,816 $ 286,871 $ 259,788 Gross margin 63,109 55,478 126,763 111,344 Gross margin as a % of net sales 43.9 % 42.4 % 44.2 % 42.9 % Operating income 45,268 38,003 92,289 78,479 Operating income as a % of net sales 31.5 % 29.1 % 32.2 % 30.2 % Depreciation and amortization 5,663 5,237 11,232 10,272 Capital expenditures 10,688 4,783 17,772 8,349   Preclinical Services Net sales $ 163,632 $ 137,043 $ 311,763 $ 262,212 Gross margin 57,847 51,632 109,766 91,271 Gross margin as a % of net sales 35.4 % 37.7 % 35.2 % 34.8 % Operating income 27,426 22,530 50,870 36,318 Operating income as a % of net sales 16.8 % 16.4 % 16.3 % 13.9 % Depreciation and amortization 15,569 15,288 29,913 29,913 Capital expenditures 38,724 12,620 69,564 48,441     Unallocated Corporate Overhead $ (15,969 ) $ (12,831 ) $ (31,733 ) $ (23,399 )     Total Net sales $ 307,435 $ 267,859 $ 598,634 $ 522,000 Gross margin 120,956 107,110 236,529 202,615 Gross margin as a % of net sales 39.3 % 40.0 % 39.5 % 38.8 % Operating income (loss) 56,725 47,702 111,426 91,398 Operating income as a % of net sales 18.5 % 17.8 % 18.6 % 17.5 % Depreciation and amortization 21,232 20,525 41,145 40,185 Capital expenditures 49,412 17,403 87,336 56,790 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 30, 2007 July 1, 2006 June 30, 2007 July 1, 2006 Research Models and Services Net sales $ 143,803 $ 130,816 $ 286,871 $ 259,788 Operating income 45,268 38,003 92,289 78,479 Operating income as a % of net sales 31.5 % 29.1 % 32.2 % 30.2 % Add back: Amortization related to acquisitions 371 99 745 179 Impairment and other charges   -     2,334     -     2,334   Operating income, excluding specified charges (Non-GAAP) $ 45,639 $ 40,436 $ 93,034 $ 80,992 Non-GAAP operating income as a % of net sales 31.7 % 30.9 % 32.4 % 31.2 %   Preclinical Services Net sales $ 163,632 $ 137,043 $ 311,763 $ 262,212 Operating income 27,426 22,530 50,870 36,318 Operating income as a % of net sales 16.8 % 16.4 % 16.3 % 13.9 % Add back: Amortization related to acquisitions 7,768 9,278 15,249 18,273 Impairment and other charges   863     2,966     1,682     2,966   Operating income, excluding specified charges (Non-GAAP) $ 36,057 $ 34,774 $ 67,801 $ 57,557 Non-GAAP operating income as a % of net sales 22.0 % 25.4 % 21.7 % 22.0 %     Unallocated Corporate Overhead $ (15,969 ) $ (12,831 ) $ (31,733 ) $ (23,399 ) Add back: Stock-based compensation related to Inveresk acquisition   18     117     88     402   Unallocated corporate overhead, excluding specified charges (Non-GAAP) $ (15,951 ) $ (12,714 ) $ (31,645 ) $ (22,997 )     Total Net sales $ 307,435 $ 267,859 $ 598,634 $ 522,000 Operating income 56,725 47,702 111,426 91,398 Operating income as a % of net sales 18.5 % 17.8 % 18.6 % 17.5 % Add back: Amortization related to acquisition 8,139 9,377 15,994 18,452 Impairment and other charges 863 5,300 1,682 5,300 Stock-based compensation related to Inveresk acquisition   18     117     88     402   Operating income, excluding specified charges (Non-GAAP) $ 65,745 $ 62,496 $ 129,190 $ 115,552 Non-GAAP operating income as a % of net sales 21.4 % 23.3 % 21.6 % 22.1 %     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, 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 30, 2007 July 1, 2006 June 30, 2007 July 1, 2006   Net income (loss) $ 37,956 $ 25,749 $ 74,719 $ (74,366 ) Less: Discontinued operations   (115 )   7,032     349     135,662   Net income from continuing operations 37,841 32,781 75,068 61,296 Add back: Amortization related to acquisitions 8,139 9,377 15,994 18,452 Stock-based compensation related to Inveresk acquisition 18 117 88 402 Impairment and other charges 863 5,300 1,682 5,300 Tax effect   (3,061 )   (5,995 )   (5,845 )   (9,061 ) Net income from continuing operations, excluding specified charges (Non-GAAP) $ 43,800   $ 41,580   $ 86,987   $ 76,389       Weighted average shares outstanding - Basic 66,830,155 70,851,430 66,587,863 71,615,867 Effect of dilutive securities: 2.25% senior convertible debentures 203,034 - - - Stock options and contingently issued restricted stock 1,350,004 851,925 1,250,385 1,043,535 Warrants   134,464     131,811     133,650     139,430   Weighted average shares outstanding - Diluted   68,517,657     71,835,166     67,971,898     72,798,832     Basic earnings (loss) per share $ 0.57 $ 0.36 $ 1.12 $ (1.04 ) Diluted earnings (loss) per share $ 0.55 $ 0.36 $ 1.10 $ (1.02 )   Basic earnings per share, excluding specified charges (Non-GAAP) $ 0.66 $ 0.59 $ 1.31 $ 1.07 Diluted earnings per share, excluding specified charges (Non-GAAP) $ 0.64 $ 0.58 $ 1.28 $ 1.05       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.