Charles River Falls Short as Higher Costs Take Their Toll

| About: Charles River (CRL)

Charles River Laboratories International Inc.’s (NYSE:CRL) first quarter 2010 earnings (excluding special items) of 45 cents per share fell short of the Zacks Consensus Estimate of 47 cents. This was 22.4% below the year-ago earnings (excluding special items) of 58 cents. On a reported basis, the company earned 26 cents per share in the reported quarter as opposed to 38 cents in the year-ago quarter.

The decrease in earnings was attributable to lower sales volume and higher costs related to Charles River’s enterprise resource planning (ERP) initiative. The decline was partially offset by cost-savings initiatives undertaken in 2009 and in the first quarter of 2010.

Total net sales for the reported quarter came in at $297.4 million as against $301.5 million in the year-ago quarter, down approximately 1.4%. Segment-wise, sales in the Research Models and Services (RMS) division for the reported quarter climbed 6.6% year-over-year to $172.2 million. Foreign currency translation contributed 2.9% to the sales growth rate. Furthermore, growth was driven by the acquisitions of Piedmont and Cerebricon coupled with strong sales of In Vitro products.

Sales in the Preclinical Services (PCS) segment for the reported quarter declined 10.6% year-over-year to $125.1 million. The decline was attributable to continued measured demand for Charles River’s services from its pharmaceutical and biotechnology clients among other factors. The decline was partially offset by a 3.9% positive effect of foreign currency translation.

Gross profit for the reported quarter stood at $99.9 million as opposed to $108.2 million in the year-ago quarter, down 7.7%. Selling, general and administrative expenses for the reported quarter came in at $63.2 million as against $62.2 million in the year-ago quarter.

Charles River exited the quarter with cash and cash equivalents of approximately $222.2 million as opposed to $182.6 million at the end of fiscal 2009.

Chinese Firm Acquisition

Recently, Charles River announced that it will accquire Shanghai-based pharmaceutical outsourcing provider WuXi PharmaTech (Cayman) Inc. (NYSE:WX) through a cash and stock transaction worth approximately $1.6 billion.

The deal, expected to be completed by the fourth quarter of 2010, is aimed at expanding the scope of its contract research and drug development services. Charles River expects the acquisition to be neutral to slightly accretive to 2011 earnings per share (excluding special items) and increasingly accretive thereafter.