Charles River Laboratories International Inc. (CRL) reported first quarter 2011 earnings (excluding special items) of 61 cents per share, above the Zacks Consensus Estimate of 55 cents and year-ago earnings of 45 cents.
Quarterly revenue of $285.8 million was, however, down 2.2% from the prior-year period (down 3.0% excluding positive impact of foreign exchange) due to a decline in Preclinical Services (PCS) segment revenues. Earnings were boosted by lower taxes, share repurchases and improved operating margins, which offset the decline in revenue. Revenue was, however, above the Zacks Consensus Estimate of $279 million and also up approximately 1.5% from the sequentially prior quarter.
The Quarter in Detail
The company operates through two segments – Research Models and Services (RMS) and Preclinical Services (PCS).
Revenue from the RMS segment was $173.4 million in the first quarter, flat in constant currency over the prior-year period but up almost 3% sequentially. Including the 0.7% positive impact of foreign exchange, RMS segment revenues were up 0.7% from the prior year. Revenue in the segment was boosted by strong sales of In Vitro products and genetically engineered models and services, or GEMS. Sequentially, revenue growth also benefited from new prices, which were implemented at the beginning of 2011. Revenue was however slightly affected by the disaster in Japan as the company has five RMS facilities in that country that made up 6.5% of total 2010 sales.
Sales of research models were down in all geographic regions except for Europe. In the US, sales were down due to a higher proportion of sales to large pharma companies whose business is being significantly affected by mergers and acquisitions in the sector. These companies are also moving the development of their pipeline slowly. European sales however climbed due to sales to diverse entities like large pharma, private companies and government-funded academic research.
Revenue from the PCS segment was $112.5 million in the first quarter, down 6.3% from the prior-year period (down 7.2% excluding the positive impact of foreign exchange). Revenues were affected by an unfavorable sales mix comprising a greater proportion of shorter-term studies and general toxicology. Continued soft demand from large pharmaceutical clients also negatively impacted revenues.
However, revenue at the segment remained almost flat on a sequential basis. In fact, the business has remained static over the last three quarters. However, the timing of an improvement is still unclear though demand and pricing environment is somewhat stabilizing.
Consolidated operating margin was 18% in the quarter, expanding 80 basis points sequentially, driven by cost savings.
Share Repurchase
Charles River had announced a $150 million accelerated share repurchase (ASR) program in February 2011 following the completion of the earlier $300 million ASR in the same month. The company expects to complete the program in May 2011. Following the completion of this program, the company will have $225.5 million remaining under its $750 million repurchase program.
2011 Guidance
Despite the strong earnings beat, Charles River maintained its revenue and adjusted earnings guidance due to limited visibility regarding the timing of recovery at the PCS segment as well uncertainty surrounding Japan.
For 2011, the company expects revenue growth to remain flat with 2010 levels. The company aims to achieve adjusted earnings per share of $2.20–$2.40 in 2011. Earnings growth is expected to be driven by aggressive cost management and a lower share count. The current Zacks Consensus Estimate for 2011, at $2.39, is towards the higher end of the company’s guidance range. Charles River expects to improve operating margins from 2010 levels leading to an eventual growth in earnings and free cash flow. Free cash flow is expected to range from $150 million to $170 million and capital expenditure is estimated to approximate $50 million in 2011.
In the second quarter of 2011, Charles River expects sales growth to remain more or less flat sequentially. Though the company expects relative stability at its RMS and PCS businesses, sales are expected to be negatively impacted by the Japan disaster. Management apprehends more of an impact from Japan in the second quarter as the first quarter only bore two weeks of brunt from the ill-fated earthquake and tsunami. Earnings are expected to be flat or slightly below first quarter levels as the negative impact of the Japan disaster will be countered by the lower share count and favorable foreign exchange movements.
Our Recommendation
We currently have a Neutral recommendation on Charles River which is supported by a Zacks #3 Rank, tantamount to a short-term Hold rating.
We are encouraged by the performance of the first quarter with the RMS business performing well and the PCS business remaining stable. Earnings also benefited from cost cutting and aggressive share repurchases. We, however, prefer to remain on the sidelines until we get more definitive signs of a substantial rebound in demand for preclinical services.
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