Charles River Laboratories International Inc. (CRL) reported fourth quarter 2010 earnings (excluding special items) of 60 cents per share, much above the Zacks Consensus Estimate and year-ago earnings of 49 cents.
Quarterly revenue of $281.7 million was, however, down 2.9% from the prior year period due to a decline in Preclinical Services (PCS) segment revenues. Earnings were boosted by lower taxes, share repurchases and cost control, which offset the decline in revenue. Revenue was, however, above the Zacks Consensus Estimate of $272 million.
For full year 2010, Charles River reported earnings of $1.99 per share, above the Zacks Consensus Estimate of $1.88 and the guidance range of $1.88-$1.93. Earnings, however, lagged the year-ago figure of $2.35 per share. Revenues, which were in line with the Zacks Consensus Estimate, declined 3.3% to $1.13 billion.
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 $168.4 million in the fourth quarter, up only 1.0% in constant currency over the prior-year period but up almost 6% sequentially.
Revenue in the segment was boosted by stability in demand for both research models and services as well as strong sales of In Vitro products and Discovery Services. Including the 1.6% negative impact of foreign exchange, RMS segment revenues were down 0.6% from the prior year.
Revenue from the PCS segment was $113.3 million in the fourth quarter, down 6.0% from the prior-year period (down 5.4% excluding negative impact of foreign exchange). Revenues were affected by slower demand for early stage services (especially toxicology) from large pharmaceutical clients and pressure on pricing due to increased capacity.
Revenue in the segment, however, benefited from a pick up in the number of study starts by clients. We would like to highlight that the rate of decline in PCS revenue was lower than the third quarter, suggesting that the business is somewhat improving. Demand and pricing environment is stabilizing.
Consolidated operating margin was 17.2% in the quarter, representing a sequential increase of 100 basis points, driven by cost savings.
Share Repurchase
Charles River announced a $300 million share repurchase program in August 2010. In December 2010, Charles River received an additional 1.25 million shares bringing the total number of shares received under the program to 8 million.
Charles River expects to complete the program on February 11. Following the completion of this program, the company will have $397 million remaining under its $750 million repurchase program. Charles River also anticipates repurchasing shares worth an additional $150 million in 2011.
2011 Guidance
Charles River maintained its revenue and adjusted earnings guidance provided in December 2010. For 2011, the company expects revenue growth to remain flat from 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 Zacks Consensus Estimate for 2011, at $2.30, is within the company’s guidance range.
For 2011, operating margins are expected to improve by approximately 100 basis points on a consolidated basis. Improvement in PCS operating margins is expected to be more than the RMS segment.
Free cash flow is expected to be $150 million-$170 million in 2011. Charles River aims to post cost savings of $75 billion in 2011.
Charles River maintained that it will not be able to post sequentially better results in the first quarter of 2011 as its client base will be in the process of determining the need to outsource projects to contract research organizations like Charles River or Pharmaceutical Product Development Inc. (PPDI).
As such, sales are expected to decline slightly and adjusted earnings are expected to decline 10% sequentially in the first quarter of 2011. Earnings are also expected to be negatively impacted by an incentive compensation expense and seasonally soft study starts in the quarter.
Our Recommendation
We currently have a Neutral recommendation on Charles River. The fourth quarter showed much better results with RMS performing well and PCS declines moderating. Earnings also benefited from cost cutting and aggressive share repurchases.
We , however, prefer to remain on the sidelines until we get better visibility on a substantial rebound in demand for preclinical services, which have started to show early signs of improvement.
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