Charles River reported its results for the second quarter of 2018. For the quarter, revenue from continuing operations was $585.3 million, an increase of 24.8% from $469.1 million in the second quarter of 2017. Revenue growth was driven by all three business segments, particularly the Discovery and Safety Assessment segment.
The acquisitions of MPI Research, Brains On-Line, and KWS BioTest contributed 15.1% to consolidated second-quarter revenue growth. The impact of foreign currency translation benefited reported revenue growth by 2.6%. Excluding the effect of these items, organic revenue growth was 7.1%.
On a GAAP basis, second-quarter net income from continuing operations attributable to common shareholders was $52.2 million, a decrease of 3.4% from net income of $54.0 million for the same period in 2017. Second-quarter diluted earnings per share on a GAAP basis were $1.06, a decrease of 5.4% from $1.12 for the second quarter of 2017. The lower GAAP net income and earnings per share were driven primarily by acquisition and integration costs, including amortization of intangible assets, primarily related to MPI Research.
On a non-GAAP basis, net income from continuing operations was $79.3 million for the second quarter of 2018, an increase of 27.2% from $62.4 million for the same period in 2017. Second-quarter diluted earnings per share on a non-GAAP basis were $1.62, an increase of 25.6% from $1.29 per share for the second quarter of 2017. The non-GAAP net income and earnings per share increases were driven primarily by the contribution from the MPI acquisition, as well as gains on the Company’s venture capital investments and a lower tax rate. The gains on the company’s venture capital investments were $0.17 per share in the second quarter of 2018, compared to gains of $0.03 for the same period in 2017.
“We believe our robust second-quarter revenue growth is indicative of an extremely healthy market environment, and our position as the premier, early-stage CRO with a unique ability to support our clients from target discovery through non-clinical development,” James C. Foster, Chairman, President and Chief Executive Officer, said. “Our clients, both large and small, are intensifying investments in their pipelines, which is creating new business opportunities for Charles River. At this critical time, we believe that it is incumbent upon us to invest in our portfolio, our people, and our infrastructure to solidify our position as our clients’ early-stage partner of choice, and to enhance shareholder value. We are pleased with our second-quarter performance, and optimistic about the opportunities for growth in 2018 and beyond. As a result, we are increasing our revenue and earnings per share guidance for the year.”
Second-Quarter Segment Results
Research Models and Services (RMS)
Revenue for the RMS segment was $130.4 million in the second quarter of 2018, an increase of 5.2% from $124.0 million in the second quarter of 2017. Organic revenue growth was 2.0%, driven primarily by increased demand for research models in China, as well as higher revenue for research model services.
In the second quarter of 2018, the RMS segment’s GAAP operating margin decreased to 26.3% from 27.1% in the second quarter of 2017. On a non-GAAP basis, the operating margin decreased to 26.8% from 27.4% in the second quarter of 2017. The non-GAAP operating margin decline was driven primarily by research model services.
Discovery and Safety Assessment (DSA)
Revenue from continuing operations for the DSA segment was $346.4 million in the second quarter of 2018, an increase of 37.4% from $252.1 million in the second quarter of 2017. Acquisitions contributed 28.1% to DSA revenue growth, due primarily to the revenue contribution from MPI Research. Organic revenue growth of 7.3% was driven by both the Safety Assessment and Discovery Services businesses. By client segment, the DSA revenue increase was driven primarily by robust demand from both biotechnology and global biopharmaceutical clients.
In the second quarter of 2018, the DSA segment’s GAAP operating margin decreased to 16.3% from 20.4% in the second quarter of 2017. The GAAP operating margin decline was driven primarily by acquisition and integration costs, principally amortization of intangible assets related to MPI Research. On a non-GAAP basis, the operating margin decreased to 21.5% from 23.5% in the second quarter of 2017. The GAAP and non-GAAP operating margin declines were driven primarily by study mix and foreign exchange. Foreign exchange reduced the DSA operating margin by approximately 60 basis points.
Manufacturing Support
Revenue for the Manufacturing segment was $108.5 million in the second quarter of 2018, an increase of 16.6% from $93.0 million in the second quarter of 2017. Organic revenue growth was 13.1%, driven primarily by robust demand across all businesses: Microbial Solutions, Biologics Testing Solutions, and Avian Vaccine Services.
In the second quarter of 2018, the Manufacturing segment’s GAAP operating margin increased to 31.5% from 31.2% in the second quarter of 2017. On a non-GAAP basis, the operating margin decreased to 33.6% from 34.2% in the second quarter of 2017. The non-GAAP operating margin decline was driven primarily by cost associated with capacity expansions, principally in the Biologics Testing Solutions business.
Increases 2018 Guidance
The company is updating its 2018 financial guidance, which was previously provided on May 10, 2018.
The company is increasing its guidance for both reported and organic revenue growth, due primarily to its belief that the strong demand trends in the second quarter are expected to continue in the second half of the year. Foreign exchange is now expected to contribute approximately 2% to reported revenue growth, compared to the Company’s prior outlook of an approximate 3% benefit.
The company is increasing its guidance for GAAP and non-GAAP earnings per share, due primarily to higher-than-expected gains from venture capital investments. The company has not included any venture capital investment gains in its outlook for the remainder of the year, since its initial, full-year estimate of $0.14 per share was exceeded during the first half of the year.