Charles River Laboratories International Inc. (CRL) posted third quarter fiscal 2010 earnings (excluding special items) of 45 cents per share, falling short of the Zacks Consensus Estimate of 49 cents and 30.8% below the year-ago earnings of 65 cents. The decrease in earnings was attributable to lower sales volume and higher costs incurred on Charles River’s enterprise resource planning (ERP) initiative.

Revenues

Quarterly revenues decreased 7.2% to $276.1 million, short of the Zacks Consensus Estimate of $291 million. Decline in the sales of both Preclinical Services (PCS) and Research Models and Services (RMS) affected the company’s revenues.

Sales in the RMS division for the reported quarter went down 2.5% to $163.3 million, mostly affected by unfavorable foreign exchange.

Sales in the PCS segment, at $116.8 million, declined by 12.9%. The decline was attributable to negative foreign currency impact, pricing pressure and low demand for Charles River’s preclinical services from its pharmaceutical and biotechnology clients.

Other Details

Gross profit for the third quarter stood at $90.9 million as opposed to $106.6 million in the year-ago quarter, down 17.3%. Selling, general and administrative expenses declined 9.1% to $49.2 million. Third-quarter operating profit came in at $43.6 million, down from $57.9 million in third-quarter 2009. Lower sales and higher costs related to the ERP initiative perpetrated the decline.

2010 Outlook Trimmed

Charles River toned down its expectations for 2010, primarily because of the longer-than-expected weakness in demand from its larger clients. The company now projects 2010 adjusted earnings in the range of $1.85 – $1.90 per share as opposed to the previous forecast of $1.90 – $2.00 per share. The Zacks Consensus EPS Estimate for 2010 is $1.87 per share.

Net sales are forecast to drop by 5% as against the earlier projection of a decline of 2% to 3%.

Charles River expects to see a reduction in ERP costs by about $4 million during 2011. The company will issue guidance for fiscal 2011 on December 14.

Headcount Reduced

On the third quarter conference call, Charles River announced its plans to cut its workforce by 4%, along with reducing its discretionary spending and closing a satellite preclinical services facility in Quebec.  Following these actions, Charles River expects to generate annual savings of about $40 million from 2011. The company will record a one-time charge of about $15 million in the fourth quarter of 2010.

Our View

We currently have a Neutral recommendation on Charles River, which is supported by a Zacks #3 Rank (short-term Hold rating). The company slashed its fiscal 2010 guidance for the second time in a row. We are primarily concerned about the weakness in demand for the company’s services from its large clients.

 
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