CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
Cash flows relating to operating activities
|
|
|
|
Net income
|
$
|
154,516
|
|
|
$
|
111,139
|
|
Less: Income (loss) from discontinued operations, net of income taxes
|
(114
|
)
|
|
328
|
|
Income from continuing operations, net of income taxes
|
154,630
|
|
|
110,811
|
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
97,675
|
|
|
91,116
|
|
Stock-based compensation
|
32,902
|
|
|
32,647
|
|
Deferred income taxes
|
18,176
|
|
|
(270
|
)
|
Gain on divestiture
|
(10,577
|
)
|
|
—
|
|
Other, net
|
(3,579
|
)
|
|
92
|
|
Changes in assets and liabilities:
|
|
|
|
Trade receivables, net
|
(42,712
|
)
|
|
(43,260
|
)
|
Inventories
|
(9,500
|
)
|
|
(4,352
|
)
|
Accounts payable
|
(6,160
|
)
|
|
17,184
|
|
Accrued compensation
|
(10,548
|
)
|
|
8,163
|
|
Other assets and liabilities, net
|
(26,469
|
)
|
|
(13,879
|
)
|
Net cash provided by operating activities
|
193,838
|
|
|
198,252
|
|
Cash flows relating to investing activities
|
|
|
|
Acquisition of businesses and assets, net of cash acquired
|
(22,474
|
)
|
|
(597,607
|
)
|
Capital expenditures
|
(53,928
|
)
|
|
(29,609
|
)
|
Purchases of investments
|
(42,135
|
)
|
|
(20,278
|
)
|
Proceeds from sale of investments and distributions from venture capital investments
|
6,604
|
|
|
26,035
|
|
Proceeds from divestiture
|
72,462
|
|
|
—
|
|
Other, net
|
(288
|
)
|
|
3,790
|
|
Net cash used in investing activities
|
(39,759
|
)
|
|
(617,669
|
)
|
Cash flows relating to financing activities
|
|
|
|
Proceeds from long-term debt and revolving credit facility
|
229,255
|
|
|
926,781
|
|
Proceeds from exercises of stock options
|
35,089
|
|
|
21,643
|
|
Payments on long-term debt, revolving credit facility and capital lease obligations
|
(309,258
|
)
|
|
(526,983
|
)
|
Purchase of treasury stock
|
(106,902
|
)
|
|
(12,226
|
)
|
Other, net
|
(3,650
|
)
|
|
(4,533
|
)
|
Net cash (used in) provided by financing activities
|
(155,466
|
)
|
|
404,682
|
|
Discontinued operations
|
|
|
|
Net cash used in operating activities from discontinued operations
|
(1,489
|
)
|
|
(1,434
|
)
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
9,135
|
|
|
4,325
|
|
Net change in cash, cash equivalents, and restricted cash
|
6,259
|
|
|
(11,844
|
)
|
Cash, cash equivalents, and restricted cash, beginning of period
|
119,894
|
|
|
119,963
|
|
Cash, cash equivalents, and restricted cash, end of period
|
$
|
126,153
|
|
|
$
|
108,119
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
Cash and cash equivalents
|
$
|
123,618
|
|
|
$
|
105,722
|
|
Restricted cash included in Other current assets
|
591
|
|
|
572
|
|
Restricted cash included in Other assets
|
1,944
|
|
|
1,825
|
|
Cash, cash equivalents, and restricted cash, end of period
|
$
|
126,153
|
|
|
$
|
108,119
|
|
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant
to the rules and regulations of the Securities and Exchange Commission.
The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal year
2016
. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.
The Company has reclassified certain amounts in the unaudited condensed consolidated statements of cash flows for prior periods to conform to the current year presentation. See “Newly Adopted Accounting Pronouncements” below.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities,
redeemable noncontrolling interest,
revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Consolidation
The Company’s unaudited condensed consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.
The Company’s fiscal year is typically based on a 52-week year, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53
rd
week was included in the fourth quarter of fiscal year 2016, which is occasionally necessary to align with a December 31 calendar year end.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for fiscal year
2016
.
Newly Adopted Accounting Pronouncements
In November 2016, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-18, “Restricted Cash.” The standard addresses the classification and presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The Company elected to early adopt this standard in fiscal year 2017 and applied the changes retrospectively to all prior periods presented in its unaudited condensed consolidated statements of cash flows.
The Company historically excluded restricted cash balances, recorded in current and long-term other assets, from cash and cash equivalents within the unaudited condensed consolidated statements of cash flows, reflecting transfers between cash, cash equivalents, and restricted cash as a cash flow classified within cash flows relating to operating activities. As a result of the adoption of this standard, the Company combined restricted cash balances of
$2.4 million
and
$2.0 million
as of
September 24, 2016
, and December 26, 2015, respectively, with cash and cash equivalents when reconciling the beginning and ending balances within the unaudited condensed consolidated statements of cash flows for the
nine months ended September 24, 2016
.
In August 2016, the FASB issued ASU 2016-15, “
Classification of Certain Cash Receipts and Cash Payments.”
The standard addresses the classification of certain transactions within the statement of cash flows, including
cash payments for debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investments. The Company elected to early adopt this standard in fiscal year 2017 and applied the changes retrospectively to all prior periods presented within its unaudited condensed consolidated statements of cash flows. As a result of the adoption of this standard, the Company reclassified
$2.2 million
from investing activities to operating activities within the unaudited condensed consolidated statements of cash flows for the
nine months ended September 24, 2016
.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consequences, classification of awards as either equity or liabilities, and classification within the statement of cash flows. The Company adopted this standard in fiscal year
2017, and applied the changes as required by each amendment to its unaudited condensed consolidated financial statements and related disclosures.
Under ASU 2016-09, the Company adopted the amendment to recognize excess tax benefits and tax deficiencies in the consolidated statements of income on a prospective basis, to present excess tax benefits within operating activities within the unaudited condensed consolidated statements of cash flows on a retrospective basis, and elected to change its accounting policy to account for forfeitures as they occur on a modified retrospective basis.
The adoption to recognize excess tax benefits and tax deficiencies within the
unaudited condensed
consolidated statements of income on a prospective basis
could result in fluctuations in the effective tax rate period-over-period, depending on how many awards vest and the volatility of the Company’s stock price. During the
three months ended September 30, 2017
, the impact to the provision for income taxes within the unaudited condensed consolidated statements of income was an excess tax benefit of
$0.9 million
. During the
nine months ended September 30, 2017
, the impact on the provision for income taxes within the unaudited condensed consolidated statements of income was an excess tax benefit of
$9.7 million
. Further, for the
three and nine months ended September 30, 2017
, the Company excluded the effect of windfall tax benefits from the hypothetical proceeds used to calculate the repurchase of shares under the treasury stock method for the calculation of diluted earnings per share.
The adoption of the amendment to present excess tax benefits within operating activities within the unaudited condensed consolidated statements of cash flows on a retrospective basis resulted in the reclassification of a cash inflow of
$9.5 million
from cash provided by financing activities to cash provided by operating activities for the
nine months ended September 24, 2016
. The Company had previously classified cash paid for tax withholding purposes as a financing activity within the unaudited condensed consolidated statements of cash flows; therefore, there was no change related to this requirement under the amendment.
The Company’s election to change its accounting policy to account for forfeitures when they occur on a modified retrospective basis resulted in an immaterial impact on its unaudited condensed consolidated financial statements and related disclosures.
Newly Issued Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. It also creates more transparency around how economic results are presented, both on the face of the financial statements and in the disclosures. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and requires the modified retrospective approach. Early adoption is permitted. This update applies to all existing hedging relationships on the date of adoption with the cumulative effect of adoption being reflected
as of the beginning of the fiscal year of adoption.
The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures
.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The standard requires an employer to disaggregate the service cost component from the other components of net benefit cost and provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the statements of income. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the statements of income. Early adoption is permitted within the first interim period of the fiscal year. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain transactions. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects for an intra-entity asset transfer other than inventory. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease.
This standard
is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the full impact this standard will have on its consolidated financial statements and related disclosures, but expects to recognize substantially all of its leases on the balance sheet by recording a right-to-use asset and a corresponding lease liability.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a modified retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. The Company formed an implementation team during fiscal year 2016 to oversee adoption of the new standard. The implementation team has completed its initial assessment of the new standard, including a detailed review of the Company’s contract portfolio, revenue streams to identify potential differences in accounting as a result of the new standard, and selected the modified retrospective transition method. The Company continues to assess the impact on the existing revenue accounting policies, newly required financial statement disclosures, and executing on the project plan. Currently, the Company is finalizing contract reviews, working through anticipated changes to systems and business processes, and internal controls to support the adoption of the new standard.
The Company preliminarily expects
certain changes in the timing of revenue recognition within the Manufacturing reportable segment, specifically within the Biologics business where revenue from certain studies will shift to recognition at a point in time instead of the current recognition over time. Other isolated changes to the timing of revenue recognition may be necessary in other businesses.
2. BUSINESS ACQUISITIONS AND DIVESTITURE
Brains On-Line
On
August 4, 2017
, the Company acquired Brains On-Line, a leading contract research organization (CRO) providing critical data that advances novel therapeutics for the treatment of central nervous system (CNS) diseases. Brains On-Line strategically expands the Company’s existing CNS capabilities and establishes the Company as a single-source provider for a broad portfolio of discovery CNS services. The purchase price for Brains On-Line was
$21.3 million
in cash, subject to certain post-closing adjustments that may change the purchase price, and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to
€6.7 million
(approximately
$7.9 million
based on current exchange rates), based on future performance. The Brains On-Line business is reported as part of the Company’s DSA reportable segment.
The contingent payments become payable based on the achievement of certain revenue and earnings targets. If achieved, the payments become due in the first quarter of fiscal year 2019. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The purchase price allocation of
$20.6 million
, net of $
0.7 million
of cash acquired, was as follows:
|
|
|
|
|
|
August 4, 2017
|
|
(in thousands)
|
Trade receivables (contractual amount of $1,146)
|
$
|
1,146
|
|
Other current assets (excluding cash)
|
670
|
|
Property, plant and equipment
|
664
|
|
Other long-term assets
|
13
|
|
Definite-lived intangible assets
|
9,300
|
|
Goodwill
|
12,324
|
|
Current liabilities
|
(863
|
)
|
Deferred revenue
|
(405
|
)
|
Long-term liabilities
|
(2,203
|
)
|
Total purchase price allocation
|
$
|
20,646
|
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The breakout of definite-lived intangible assets acquired was as follows:
|
|
|
|
|
|
|
|
Definite-Lived Intangible Assets
|
|
Weighted Average Amortization Life
|
|
(in thousands)
|
|
(in years)
|
Client relationships
|
$
|
7,000
|
|
|
13
|
Other intangible assets
|
2,300
|
|
|
10
|
Total definite-lived intangible assets
|
$
|
9,300
|
|
|
12
|
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers and technology introduced through Brains On-Line and the assembled workforce of the acquired business. The goodwill attributable to Brains On-Line is not deductible for tax purposes.
The Company incurred transaction and integration costs in connection with the acquisition of
$1.2 million
and
$2.1 million
for the
three and nine months ended September 30, 2017
, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.
Pro forma
financial information as well as actual revenue and operating income have not been included because Brains On-Line’s financial results are not significant when compared to the Company’s consolidated financial results.
Agilux
On
September 28, 2016
, the Company acquired Agilux Laboratories, Inc. (Agilux), a CRO that provides a suite of integrated discovery bioanalytical services for small and large molecules, drug metabolism and pharmacokinetic services, and pharmacology services. The acquisition supports the Company’s strategy to offer clients a broader, integrated portfolio that provides services continuously from the earliest stages of drug research through the non-clinical development process. The purchase price for Agilux was
$64.9 million
in cash and was funded by borrowings on the Company’s revolving credit facility. The business is reported as part of the Company’s DSA reportable segment.
The purchase price allocation of
$62.0 million
, net of
$2.9 million
of cash acquired, was as follows:
|
|
|
|
|
|
September 28, 2016
|
|
(in thousands)
|
Trade receivables (contractual amount of $4,799)
|
$
|
4,799
|
|
Other current assets (excluding cash)
|
794
|
|
Property, plant and equipment
|
3,907
|
|
Other long-term assets
|
11
|
|
Definite-lived intangible assets
|
21,900
|
|
Goodwill
|
44,517
|
|
Current liabilities
|
(3,812
|
)
|
Long-term liabilities
|
(10,091
|
)
|
Total purchase price allocation
|
$
|
62,025
|
|
From the date of the acquisition through
September 30, 2017
, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The breakout of definite-lived intangible assets acquired was as follows:
|
|
|
|
|
|
|
|
Definite-Lived Intangible Assets
|
|
Weighted Average Amortization Life
|
|
(in thousands)
|
|
(in years)
|
Client relationships
|
$
|
16,700
|
|
|
17
|
Other intangible assets
|
5,200
|
|
|
4
|
Total definite-lived intangible assets
|
$
|
21,900
|
|
|
14
|
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers and technology introduced through Agilux and the assembled workforce of the acquired business. The goodwill attributable to Agilux is not deductible for tax purposes.
The Company incurred
zero
and
$0.3 million
in transaction and integration costs in connection with the acquisition during the
three and nine months ended September 30, 2017
, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income. The Company incurred
$1.1 million
in transaction and integration costs in connection with the acquisition during the
three and nine months ended September 24, 2016
, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.
Blue Stream
On
June 27, 2016
, the Company acquired Blue Stream Laboratories, Inc. (Blue Stream), an analytical CRO supporting the development of complex biologics and biosimilars. Combining Blue Stream with the Company’s existing discovery, safety assessment, and biologics capabilities created a leading CRO that has the ability to support biologic and biosimilar development from characterization through clinical testing and commercialization. The purchase price for Blue Stream was
$11.7 million
, including
$3.0 million
in contingent consideration, and was subject to certain customary adjustments. The acquisition was funded by borrowings on the Company’s revolving credit facility. The business is reported in the Company’s Manufacturing reportable segment.
The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes. The contingent consideration is a one-time payment payable based on the achievement of a revenue target. The target was achieved and the Company paid the contingent consideration in the third quarter of fiscal year 2017.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation of
$11.7 million
, net of a non-significant amount of cash acquired, was as follows:
|
|
|
|
|
|
June 27, 2016
|
|
(in thousands)
|
Trade receivables (contractual amount of $1,104)
|
$
|
1,104
|
|
Other current assets (excluding cash)
|
15
|
|
Property, plant and equipment
|
912
|
|
Other long-term assets
|
187
|
|
Definite-lived intangible assets
|
1,230
|
|
Goodwill
|
10,334
|
|
Current liabilities
|
(1,132
|
)
|
Long-term liabilities
|
(901
|
)
|
Total purchase price allocation
|
$
|
11,749
|
|
The breakout of definite-lived intangible assets acquired was as follows:
|
|
|
|
|
|
|
|
Definite-Lived Intangible Assets
|
|
Weighted Average Amortization Life
|
|
(in thousands)
|
|
(in years)
|
Client relationships
|
$
|
650
|
|
|
10
|
Other intangible assets
|
580
|
|
|
5
|
Total definite-lived intangible assets
|
$
|
1,230
|
|
|
7
|
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s Manufacturing segment from customers and technology introduced through Blue Stream, the assembled workforce of the acquired business, expected synergies, and the development of future proprietary processes. The goodwill attributable to Blue Stream is not deductible for tax purposes.
The Company incurred non-significant transaction and integration costs in connection with the acquisition during the
three and nine months ended September 30, 2017
, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income. The Company incurred a non-significant amount and
$0.4 million
of transaction and integration costs during the
three and nine months ended September 24, 2016
, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.
WIL Research
On
April 4, 2016
,
the Company acquired WIL Research, a provider of safety assessment and CDMO services to biopharmaceutical, agricultural and industrial chemical companies worldwide. The acquisition enhanced the Company’s position as a leading, global, early-stage CRO by strengthening its ability to partner with clients across the drug discovery and development continuum. The purchase price for WIL Research was
$604.8 million
, including assumed liabilities of
$0.4 million
.
The purchase price included payment for actual working capital of the acquired business. The acquisition was funded by cash on hand and borrowings on the Company’s $
1.65B
Credit Facility. See Note 7, “Long-Term Debt and Capital Lease Obligations.”
WIL Research’s safety assessment and CDMO businesses are reported in the Company’s DSA and Manufacturing reportable segments, respectively.
On February 10, 2017, the Company divested the CDMO business.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation of
$577.4 million
, net of
$27.4 million
of cash acquired, was as follows:
|
|
|
|
|
|
April 4, 2016
|
|
(in thousands)
|
Trade receivables (contractual amount of $48,625)
|
$
|
48,157
|
|
Inventories
|
2,296
|
|
Other current assets (excluding cash)
|
3,814
|
|
Property, plant and equipment
|
129,066
|
|
Other long-term assets
|
1,060
|
|
Definite-lived intangible assets
|
164,800
|
|
Goodwill
|
330,175
|
|
Deferred revenue
|
(39,103
|
)
|
Other current liabilities
|
(27,386
|
)
|
Long-term liabilities
|
(35,488
|
)
|
Total purchase price allocation
|
$
|
577,391
|
|
The breakout of definite-lived intangible assets acquired was as follows:
|
|
|
|
|
|
|
|
Definite-Lived Intangible Assets
|
|
Weighted Average Amortization Life
|
|
(in thousands)
|
|
(in years)
|
Client relationships
|
$
|
137,500
|
|
|
15
|
Developed technology
|
20,700
|
|
|
3
|
Backlog
|
6,600
|
|
|
1
|
Total definite-lived intangible assets
|
$
|
164,800
|
|
|
13
|
The goodwill resulting from the transaction,
$19.0 million
of which was deductible for tax purposes due to a prior asset acquisition, was primarily attributed to the potential growth of the Company’s DSA and Manufacturing businesses from clients introduced through WIL Research, the assembled workforce of the acquired business, and expected cost synergies. Subsequent to the divestiture of the CDMO business on
February 10, 2017
,
$14.8 million
of the goodwill was deductible for tax purposes.
The Company incurred transaction and integration costs in connection with the acquisition of
$0.4 million
and
$1.3 million
for the
three months ended September 30, 2017 and September 24, 2016
, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income. The Company incurred transaction and integration costs in connection with the acquisition of
$1.6 million
and
$13.7 million
for the
nine months ended September 30, 2017 and September 24, 2016
, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.
WIL Research revenue and operating income for the
three months ended September 24, 2016
were
$57.4 million
and
$3.6 million
, respectively. WIL Research revenue and operating income for the
nine months ended September 24, 2016
were
$112.6 million
and
$4.6 million
, respectively.
The following selected
pro forma
consolidated results of operations are presented as if the WIL Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments. For the
nine months ended September 24, 2016
, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of
$1.4 million
, reversal of interest expense on borrowings of
$2.7 million
, elimination of intercompany activity, and other one-time costs, and the tax impacts of these adjustments.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
September 24, 2016
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
(in thousands, except per share amounts)
|
Revenue
|
$
|
425,720
|
|
|
$
|
1,275,175
|
|
Net income attributable to common shareholders
|
39,530
|
|
|
129,050
|
|
Earnings per common share
|
|
|
|
Basic
|
$
|
0.84
|
|
|
$
|
2.75
|
|
Diluted
|
$
|
0.82
|
|
|
$
|
2.70
|
|
These
pro forma
results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future. No effect has been given for synergies, if any, that may have been realized through the acquisition.
Contract Manufacturing
On
February 10, 2017
, the Company completed the divestiture of its CDMO business to Quotient Clinical Ltd., based in London, England, for
$75.0 million
in proceeds, net of
$0.6 million
in cash and cash equivalents transferred in conjunction with the sale and
$0.3 million
of working capital adjustments.
The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and was reported in the Company’s
Manufacturing reportable segment
. Following a strategic review that was finalized subsequent to December 31, 2016, the Company determined that the CDMO business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.
During the three months ended April 1, 2017, the Company recorded a gain on the divestiture of the CDMO business of
$10.6 million
, which was included in other income, net within the Company’s unaudited condensed consolidated statements of income. As of
February 10, 2017
, the carrying amounts of the major classes of assets and liabilities associated with the divestiture of the CDMO business were as follows (in thousands):
|
|
|
|
|
Assets
|
|
Current assets
|
$
|
5,505
|
|
Property, plant and equipment, net
|
11,174
|
|
Goodwill
|
35,857
|
|
Long-term assets
|
17,154
|
|
Total assets
|
$
|
69,690
|
|
Liabilities
|
|
Deferred revenue
|
$
|
4,878
|
|
Other current liabilities
|
1,158
|
|
Total liabilities
|
$
|
6,036
|
|
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Client receivables
|
$
|
321,472
|
|
|
$
|
283,997
|
|
Unbilled revenue
|
103,389
|
|
|
82,203
|
|
Total
|
424,861
|
|
|
366,200
|
|
Less: Allowance for doubtful accounts
|
(2,526
|
)
|
|
(2,150
|
)
|
Trade receivables, net
|
$
|
422,335
|
|
|
$
|
364,050
|
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of inventories is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Raw materials and supplies
|
$
|
19,256
|
|
|
$
|
18,893
|
|
Work in process
|
13,163
|
|
|
13,681
|
|
Finished products
|
74,953
|
|
|
63,259
|
|
Inventories
|
$
|
107,372
|
|
|
$
|
95,833
|
|
The composition of other current assets is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Investments
|
$
|
30,351
|
|
|
$
|
3,771
|
|
Prepaid income taxes
|
55,416
|
|
|
40,705
|
|
Restricted cash
|
591
|
|
|
532
|
|
Other current assets
|
$
|
86,358
|
|
|
$
|
45,008
|
|
The composition of other assets is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Life insurance policies
|
$
|
32,739
|
|
|
$
|
29,456
|
|
Venture capital investments
|
59,511
|
|
|
45,331
|
|
Restricted cash
|
1,944
|
|
|
1,736
|
|
Other
|
15,604
|
|
|
11,907
|
|
Other assets
|
$
|
109,798
|
|
|
$
|
88,430
|
|
The composition of other current liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Accrued income taxes
|
$
|
32,931
|
|
|
$
|
25,621
|
|
Other
|
683
|
|
|
879
|
|
Other current liabilities
|
$
|
33,614
|
|
|
$
|
26,500
|
|
The composition of other long-term liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Long-term pension liability
|
$
|
91,991
|
|
|
$
|
89,984
|
|
Accrued executive supplemental life insurance retirement plan and deferred compensation plan
|
33,926
|
|
|
32,880
|
|
Other
|
41,576
|
|
|
36,375
|
|
Other long-term liabilities
|
$
|
167,493
|
|
|
$
|
159,239
|
|
4. VENTURE CAPITAL INVESTMENTS
The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from
0.7%
to
12.1%
. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity or cost method of accounting. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LPs’ economic
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.
The Company’s total commitments to the venture capital funds as of
September 30, 2017
, were
$87.7 million
, of which the Company funded
$48.0 million
through that date. During the
three and nine months ended September 30, 2017
, the Company received dividends of
$3.3 million
and
$7.7 million
, respectively, from the funds. During each of the
three and nine months ended September 24, 2016
, the Company received dividends of
$2.3 million
from the funds. The Company recognized
gains
of
$5.8 million
and
$0.4 million
related to these investments for the
three months ended September 30, 2017 and September 24, 2016
, respectively. The Company recognized
gains
of
$12.5 million
and
$8.5 million
related to these investments for the
nine months ended September 30, 2017 and September 24, 2016
, respectively.
5. FAIR VALUE
The Company has certain assets and liabilities recorded at fair value, which have been classified as Level 1, 2, or 3 within the fair value hierarchy:
|
|
•
|
Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access,
|
|
|
•
|
Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, and foreign currency spot rates,
|
|
|
•
|
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
The fair value hierarchy level is determined by asset and liability class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the
nine months ended September 30, 2017 and September 24, 2016
, there were no transfers between levels.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
|
|
•
|
Cash equivalents - Valued at market prices determined through third-party pricing services;
|
|
|
•
|
Mutual funds - Valued at the unadjusted quoted net asset value of shares held by the Company;
|
|
|
•
|
Foreign currency forward contracts - Valued using market observable inputs, such as forward foreign exchange points and foreign exchanges rates;
|
|
|
•
|
Life insurance policies - Valued at cash surrender value based on the fair value of underlying investments; and
|
|
|
•
|
Contingent consideration - Valued based on a probability weighting of the future cash flows associated with the potential outcomes.
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Cash equivalents
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Other assets:
|
|
|
|
|
|
|
|
Life insurance policies
|
—
|
|
|
25,218
|
|
|
—
|
|
|
25,218
|
|
Total assets measured at fair value
|
$
|
—
|
|
|
$
|
25,239
|
|
|
$
|
—
|
|
|
$
|
25,239
|
|
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
296
|
|
|
$
|
296
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
296
|
|
|
$
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Cash equivalents
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Other assets:
|
|
|
|
|
|
|
|
Life insurance policies
|
—
|
|
|
22,121
|
|
|
—
|
|
|
22,121
|
|
Total assets measured at fair value
|
$
|
—
|
|
|
$
|
22,142
|
|
|
$
|
—
|
|
|
$
|
22,142
|
|
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
3,621
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
3,621
|
|
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to the business acquisitions. See Note 2, “Business Acquisitions and Divestiture.”
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Beginning balance
|
$
|
3,621
|
|
|
$
|
1,370
|
|
Additions
|
296
|
|
|
3,600
|
|
Payments
|
(3,606
|
)
|
|
(874
|
)
|
Total gains or losses (realized/unrealized):
|
|
|
|
Reversal of previously recorded contingent liability and change in fair value
|
(15
|
)
|
|
30
|
|
Ending balance
|
$
|
296
|
|
|
$
|
4,126
|
|
The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement of certain financial targets and a discount rate. Increases or decreases in any of the probabilities of success would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.
Debt Instruments
The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Goodwill
|
|
|
|
December 31, 2016
|
|
Acquisitions / (Divestitures)
|
|
Foreign Exchange
|
|
September 30, 2017
|
|
(in thousands)
|
RMS
|
$
|
56,397
|
|
|
$
|
—
|
|
|
$
|
1,262
|
|
|
$
|
57,659
|
|
DSA
|
563,476
|
|
|
12,523
|
|
|
26,072
|
|
|
602,071
|
|
Manufacturing
|
167,644
|
|
|
(36,000
|
)
|
|
8,873
|
|
|
140,517
|
|
Total
|
$
|
787,517
|
|
|
$
|
(23,477
|
)
|
|
$
|
36,207
|
|
|
$
|
800,247
|
|
The increase in goodwill during the
nine months ended September 30, 2017
related primarily to the acquisition of Brains On-Line in the DSA reportable segment, and the favorable impact of foreign exchange, partially offset by the divestiture of the CDMO business in the Manufacturing reportable segment
.
Intangible Assets, Net
The following table displays intangible assets, net by major class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
(in thousands)
|
Backlog
|
$
|
8,065
|
|
|
$
|
(7,751
|
)
|
|
$
|
314
|
|
|
$
|
8,370
|
|
|
$
|
(6,390
|
)
|
|
$
|
1,980
|
|
Technology
|
80,256
|
|
|
(23,865
|
)
|
|
56,391
|
|
|
71,425
|
|
|
(14,314
|
)
|
|
57,111
|
|
Trademarks and trade names
|
8,617
|
|
|
(4,417
|
)
|
|
4,200
|
|
|
8,177
|
|
|
(4,124
|
)
|
|
4,053
|
|
Other
|
17,404
|
|
|
(7,244
|
)
|
|
10,160
|
|
|
16,775
|
|
|
(5,628
|
)
|
|
11,147
|
|
Other intangible assets
|
114,342
|
|
|
(43,277
|
)
|
|
71,065
|
|
|
104,747
|
|
|
(30,456
|
)
|
|
74,291
|
|
Client relationships
|
535,814
|
|
|
(231,432
|
)
|
|
304,382
|
|
|
519,123
|
|
|
(198,966
|
)
|
|
320,157
|
|
Intangible assets
|
$
|
650,156
|
|
|
$
|
(274,709
|
)
|
|
$
|
375,447
|
|
|
$
|
623,870
|
|
|
$
|
(229,422
|
)
|
|
$
|
394,448
|
|
During the
nine months ended September 30, 2017
, the Company divested the CDMO business, which resulted in a net decrease of $
16.8 million
and $
0.3 million
to client relationships and backlog, respectively. During the three months ended March 26, 2016
, the Company determined that the carrying values of certain DSA intangible assets were not recoverable and recorded an impairment charge of $
1.9 million
, which was included in costs of services provided (excluding amortization of intangible assets) within the
unaudited
condensed consolidated statements of income.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt, net consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Term loans
|
$
|
609,375
|
|
|
$
|
633,750
|
|
Revolving credit facility
|
545,373
|
|
|
578,759
|
|
Other long-term debt
|
3,675
|
|
|
185
|
|
Total debt
|
1,158,423
|
|
|
1,212,694
|
|
Less: current portion of long-term debt
|
(24,481
|
)
|
|
(24,560
|
)
|
Long-term debt
|
1,133,942
|
|
|
1,188,134
|
|
Debt discount and debt issuance costs
|
(6,233
|
)
|
|
(7,633
|
)
|
Long-term debt, net
|
$
|
1,127,709
|
|
|
$
|
1,180,501
|
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
September 30, 2017
and
December 31, 2016
, the weighted average interest rate
on the Company’s debt was
2.26%
and
1.89%
, respectively.
On March 30, 2016, the Company amended and restated its
credit facility creating a $
1.65 billion
credit facility
($
1.65B
Credit Facility). In connection with the amendment and restatement, the Company expensed $
1.0 million
of debt issuance costs in the
nine months ended September 24, 2016
.
The
$
1.65B
Credit Facility
provides for a $
650.0 million
term loan and a $
1.0 billion
multi-currency revolving facility. The term loan facility matures in
19
quarterly installments with the last installment due March 30, 2021. The revolving facility matures on March 30, 2021, and requires no scheduled payment before that date. Under specified circumstances, the Company has the ability to increase the term loan and/or revolving facility by up to $
500.0 million
in the aggregate.
The interest rates applicable to the term loan and revolving facility under the $
1.65B
Credit Facility are, at the Company’s option, equal to either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus
0.50%
, or (3) the one-month adjusted LIBOR rate plus
1.0%
) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.
The $
1.65B
Credit
Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants.
These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than
3.50
to 1.0 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than
3.75
to 1.0 with step downs to
3.50
to 1.0 by the last day of the three months ended December 30, 2017. As of
September 30, 2017
, the Company was compliant with all covenants.
The obligations of the Company under the $
1.65B
Credit Facility are
collateralized
by substantially all of the assets of the Company.
Letters of Credit
As of
September 30, 2017
and
December 31, 2016
, the Company had
$4.9 million
in outstanding letters of credit.
Capital Lease Obligations
The Company’s capital lease obligations amounted to
$30.9 million
and
$29.9 million
as of
September 30, 2017
and
December 31, 2016
, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Earnings Per Share
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Numerator:
|
|
|
|
|
|
|
|
Income from continuing operations, net of income taxes
|
$
|
52,994
|
|
|
$
|
37,691
|
|
|
$
|
154,630
|
|
|
$
|
110,811
|
|
Income (loss) from discontinued operations, net of income taxes
|
(39
|
)
|
|
342
|
|
|
(114
|
)
|
|
328
|
|
Less: Net income attributable to noncontrolling interests
|
481
|
|
|
298
|
|
|
1,312
|
|
|
1,054
|
|
Net income attributable to common shareholders
|
$
|
52,474
|
|
|
$
|
37,735
|
|
|
$
|
153,204
|
|
|
$
|
110,085
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - Basic
|
47,451
|
|
|
47,160
|
|
|
47,530
|
|
|
46,954
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options, restricted stock units, performance share units and restricted stock
|
939
|
|
|
874
|
|
|
910
|
|
|
884
|
|
Weighted-average shares outstanding - Diluted
|
48,390
|
|
|
48,034
|
|
|
48,440
|
|
|
47,838
|
|
Options to purchase
0.4 million
and
0.6 million
shares for the
three months ended September 30, 2017
and
September 24, 2016
, respectively, as well as an insignificant number of restricted shares, restricted stock units (RSUs), and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase
0.6 million
and
0.9 million
shares for the
nine months ended September 30, 2017
and
September 24, 2016
, respectively, as well as an insignificant number of restricted shares, RSUs, and PSUs, were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted-average shares outstanding for both the
nine months ended September 30, 2017
and
September 24, 2016
excluded the impact of
1.1 million
shares of non-vested restricted stock and RSUs.
Treasury Shares
During the
nine months ended September 30, 2017
, the Company repurchased
1.0 million
shares totaling
$90.6 million
under its authorized stock repurchase program.
No
shares were repurchased in the
nine months ended September 24, 2016
.
On May 9, 2017, the Company’s Board of Directors increased the stock repurchase authorization by
$150 million
, to an aggregate amount of
$1.3 billion
.
As of
September 30, 2017
, the Company had
$129.1 million
remaining on the authorized stock repurchase program. The Company’s stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, RSUs, and PSUs in order to satisfy individual statutory tax withholding requirements. During the
nine months ended September 30, 2017
and
September 24, 2016
, the Company acquired
0.2 million
shares for
$16.3 million
and
0.2 million
shares for
$12.2 million
, respectively, from such netting.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income
Changes to each component of accumulated other comprehensive income, net of income taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
and Other
|
|
Pension and Other Post-Retirement Benefit Plans
|
|
Total
|
|
(in thousands)
|
December 31, 2016
|
$
|
(154,595
|
)
|
|
$
|
(99,169
|
)
|
|
$
|
(253,764
|
)
|
Other comprehensive loss before reclassifications
|
68,590
|
|
|
—
|
|
|
68,590
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
2,638
|
|
|
2,638
|
|
Net current period other comprehensive income
|
68,590
|
|
|
2,638
|
|
|
71,228
|
|
Income tax expense
|
—
|
|
|
776
|
|
|
776
|
|
September 30, 2017
|
$
|
(86,005
|
)
|
|
$
|
(97,307
|
)
|
|
$
|
(183,312
|
)
|
Nonredeemable Noncontrolling Interest
The Company has an investment in an entity whose financial results are consolidated in the Company’s financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest.
The activity within the nonredeemable noncontrolling interest during the
three months ended September 30, 2017
and
September 24, 2016
was
$0.3 million
and
$0.1 million
, respectively.
The activity within the nonredeemable noncontrolling interest during the
nine months ended September 30, 2017
and
September 24, 2016
was
$0.8 million
and
$0.4 million
, respectively
.
Redeemable Noncontrolling Interest
The Company’s redeemable noncontrolling interest resulted from an acquisition of a
75%
ownership interest in Vital River in January 2013 and a purchase of an additional
12%
equity interest in Vital River in July 2016, totaling an ownership of
87%
. Prior to the purchase of an additional
12%
equity interest on July 7, 2016, the redeemable noncontrolling interest was reported at fair value.
Concurrent with the purchase of an additional equity interest, the original agreement was amended providing the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining
13%
equity interest at a contractually defined redemption value, subject to a redemption floor (embedded derivative). These rights are exercisable beginning in 2019 and are accelerated in certain events. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value (
$15.0 million
as of
September 30, 2017
) and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining
13%
interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining
13%
equity interest.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Beginning balance
|
$
|
14,659
|
|
|
$
|
28,008
|
|
Purchase of 12% equity interest
|
—
|
|
|
(12,360
|
)
|
Total gains or losses (realized/unrealized):
|
|
|
|
Net income attributable to noncontrolling interest
|
474
|
|
|
462
|
|
Foreign currency translation
|
652
|
|
|
(875
|
)
|
Modification of 13% purchase option
|
—
|
|
|
1,495
|
|
Change in fair value, included in additional paid-in capital
|
—
|
|
|
(1,690
|
)
|
Ending balance
|
$
|
15,785
|
|
|
$
|
15,040
|
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. INCOME TAXES
The Company’s effective tax rate for the
three months ended September 30, 2017 and September 24, 2016
was
27.3%
and
29.2%
, respectively. The Company’s effective tax rate for the
nine months ended September 30, 2017 and September 24, 2016
was
32.2%
and
30.4%
, respectively. For the three months ended
September 30, 2017
, the decrease was primarily attributable to a tax benefit of
$1.2 million
related to the settlement of competent authority proceedings, and the excess tax benefit associated with stock compensation of
$0.9 million
as a result of the adoption of ASU 2016-09. For the
nine months ended September 30, 2017
, the increase was primarily attributable to the tax on the gain on the divestiture of the CDMO business of
$18.0 million
, offset by the excess tax benefit associated with stock compensation of
$9.7 million
as a result of the adoption of ASU 2016-09.
During the
three months ended September 30, 2017
, the Company’s unrecognized income tax benefits
decreased
by
$0.8 million
to
$25.2 million
, primarily due to the settlement of competent authority proceedings offset by unfavorable foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate
increased
by
$0.3 million
to
$23.2 million
. As of
September 30, 2017
, the amount of accrued interest and penalties on unrecognized tax benefits was
$2.6 million
. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by up to
$0.9 million
over the next twelve-month period, primarily as a result of the outcome of a pending tax ruling.
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits in jurisdictions including the U.S., U.K., China, Japan, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2013.
The Company and certain of its subsidiaries have ongoing tax controversies with various tax authorities in the U.S., Canada, Germany, and France. The Company does not believe that resolution of these controversies will have a material impact on its financial position or results of operations.
In accordance with the Company’s policy, the remaining undistributed earnings of its non-U.S. subsidiaries remain indefinitely reinvested as of
September 30, 2017
, as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.
Income tax expense related to changes in unrecognized pension gains, losses, and prior service costs was
$0.2 million
and
$0.1 million
for the
three months ended September 30, 2017 and September 24, 2016
, respectively. Income tax expense related to changes in unrecognized pension gains, losses, and prior service costs was
$0.8 million
and
$0.4 million
for the
nine months ended September 30, 2017 and September 24, 2016
, respectively.
10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The following table provides the
components of net periodic cost for the Company’s pension, deferred compensation and executive supplemental life insurance retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Service cost
|
$
|
749
|
|
|
$
|
655
|
|
|
$
|
2,277
|
|
|
$
|
1,848
|
|
Interest cost
|
2,663
|
|
|
2,773
|
|
|
8,428
|
|
|
9,357
|
|
Expected return on plan assets
|
(3,476
|
)
|
|
(3,038
|
)
|
|
(10,411
|
)
|
|
(11,028
|
)
|
Amortization of prior service credit
|
(134
|
)
|
|
(142
|
)
|
|
(392
|
)
|
|
(430
|
)
|
Amortization of net loss
|
1,017
|
|
|
503
|
|
|
3,030
|
|
|
1,594
|
|
Settlements
|
—
|
|
|
788
|
|
|
—
|
|
|
788
|
|
Net periodic cost
|
$
|
819
|
|
|
$
|
1,539
|
|
|
$
|
2,932
|
|
|
$
|
2,129
|
|
The net periodic cost for the Company’s post-retirement benefit plan for the
three and nine months ended September 30, 2017
and
September 24, 2016
was not significant.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. STOCK-BASED COMPENSATION
The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock, RSUs, and PSUs.
The following table provides stock-based compensation by the financial statement line item in which it is reflected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Cost of revenue
|
$
|
1,700
|
|
|
$
|
1,608
|
|
|
$
|
4,989
|
|
|
$
|
4,957
|
|
Selling, general and administrative
|
9,826
|
|
|
8,992
|
|
|
27,913
|
|
|
27,690
|
|
Stock-based compensation, before income taxes
|
11,526
|
|
|
10,600
|
|
|
32,902
|
|
|
32,647
|
|
Provision for income taxes
|
(4,099
|
)
|
|
(3,785
|
)
|
|
(11,683
|
)
|
|
(11,653
|
)
|
Stock-based compensation, net of income taxes
|
$
|
7,427
|
|
|
$
|
6,815
|
|
|
$
|
21,219
|
|
|
$
|
20,994
|
|
During the
nine months ended September 30, 2017
, the Company granted stock options representing
0.6 million
common shares with a per-share weighted-average grant date fair value of
$18.30
, RSUs representing
0.2 million
common shares with a per-share weighted-average grant date fair value of
$88.52
, and PSUs representing
0.2 million
common shares with a per-share weighted-average grant date fair value of
$99.24
. The maximum number of common shares to be issued upon vesting of PSUs granted during the
nine months ended September 30, 2017
is
0.4 million
.
12. FOREIGN CURRENCY CONTRACTS
The Company enters into foreign exchange forward contracts to limit its foreign currency exposure related to intercompany loans that are not of a long-term investment nature. These contracts are recorded at fair value in the Company’s unaudited condensed consolidated balance sheets and are not designated as hedging instruments. Any gains or losses on such contracts are immediately recognized in other income, net, and are largely offset by the remeasurement of the underlying intercompany loan balances.
The Company did not have any foreign currency contracts open as of
September 30, 2017
and
December 31, 2016
.
The following table summarizes gains recognized on foreign exchange forward contracts related to intercompany loans denominated in Euros on the Company’s unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Location of Gain
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
|
(in thousands)
|
Other income, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,373
|
|
13. COMMITMENTS AND CONTINGENCIES
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.
Lease Commitments
During the
nine months ended September 30, 2017
, the Company assumed or entered into new lease agreements or exercised options to extend the lease terms for certain existing leases. As a result, the Company’s lease obligations through
2032
increased by
$37.9 million
during the
nine months ended September 30, 2017
.
14. RESTRUCTURING AND ASSET IMPAIRMENTS
Workforce Reductions
In recent fiscal years, the Company has been undertaking productivity improvement initiatives at various facilities. The following table provides a rollforward of the Company’s severance and transition costs liabilities related to those initiatives:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Beginning balance
|
$
|
4,004
|
|
|
$
|
3,678
|
|
|
$
|
3,680
|
|
|
$
|
2,969
|
|
Expense
|
690
|
|
|
4,015
|
|
|
2,900
|
|
|
8,135
|
|
Payments / utilization
|
(991
|
)
|
|
(2,323
|
)
|
|
(3,084
|
)
|
|
(5,676
|
)
|
Foreign currency adjustments
|
103
|
|
|
2
|
|
|
310
|
|
|
(56
|
)
|
Ending balance
|
$
|
3,806
|
|
|
$
|
5,372
|
|
|
$
|
3,806
|
|
|
$
|
5,372
|
|
As of
September 30, 2017
,
$3.4 million
of severance and other personnel related costs liabilities were included in accrued compensation within the Company’s unaudited condensed consolidated balance sheets.
The following table presents severance and transition costs by classification within the unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Cost of services provided and products sold (excluding amortization of intangible assets)
|
$
|
240
|
|
|
$
|
3,985
|
|
|
$
|
1,717
|
|
|
$
|
4,478
|
|
Selling, general and administrative
|
450
|
|
|
30
|
|
|
1,183
|
|
|
3,657
|
|
Total severance and transition costs
|
$
|
690
|
|
|
$
|
4,015
|
|
|
$
|
2,900
|
|
|
$
|
8,135
|
|
The following presents severance and transition related costs by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
RMS
|
$
|
108
|
|
|
$
|
618
|
|
|
$
|
291
|
|
|
$
|
618
|
|
DSA
|
135
|
|
|
3,367
|
|
|
675
|
|
|
7,487
|
|
Manufacturing
|
472
|
|
|
30
|
|
|
1,799
|
|
|
30
|
|
Unallocated corporate
|
(25
|
)
|
|
—
|
|
|
135
|
|
|
—
|
|
Total severance and transition costs
|
$
|
690
|
|
|
$
|
4,015
|
|
|
$
|
2,900
|
|
|
$
|
8,135
|
|
Facilities
During the
three months ended September 30, 2017
, the Company continued the consolidation of certain DSA facilities in the U.S., Ireland, and the U.K. As a result, the Company recorded an asset impairment charge of
$0.1 million
and accelerated depreciation charges of
$0.1 million
related to the consolidation plans. During the
three months ended September 24, 2016
, the Company recorded an asset impairment charge of
$4.3 million
, other costs of
$0.8 million
, and accelerated depreciation charges of
$0.1 million
related to these activities. During the
nine months ended September 30, 2017
, the Company recorded other costs of
$0.4 million
, asset impairment charges of
$0.3 million
, and accelerated depreciation charges of
$0.2 million
related to the consolidation plans. During the
nine months ended September 24, 2016
, the Company recorded an asset impairment charge of
$4.3 million
, other costs of
$0.8 million
, and accelerated depreciation charges of
$0.5 million
related to these a
ctivities.
On November 8, 2017, as part of the Company’s efficiency initiatives, the Company committed to a plan to clos
e its RMS production facility in Maryland before the end of 2018 and consolidate production in other facilities.
The plan will result in costs incurred in the range of
$18 million
to
$24 million
in the fourth quarter of 2017 through fiscal 2018, primarily related to asset impairments (up to approximately
$17 million
), accelerated lease obligations (up to approximately
$5 million
), as well as severance, accelerated depreciation, and
site consolidation costs
. The majority of the costs are non-cash and are expected to be incurred in the fourth quarter of 2017. The cash portion of the costs are not expected to exceed
$6 million
.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SEGMENT INFORMATION
The Company’s
three
reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing).
The following table presents revenue and other financial information by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
RMS
|
|
|
|
|
|
|
|
Revenue
|
$
|
122,020
|
|
|
$
|
120,928
|
|
|
$
|
373,183
|
|
|
$
|
369,325
|
|
Operating income
|
30,726
|
|
|
31,224
|
|
|
102,016
|
|
|
103,055
|
|
Depreciation and amortization
|
5,272
|
|
|
5,245
|
|
|
15,309
|
|
|
15,613
|
|
Capital expenditures
|
6,762
|
|
|
2,532
|
|
|
13,769
|
|
|
5,966
|
|
DSA
|
|
|
|
|
|
|
|
Revenue
|
$
|
246,946
|
|
|
$
|
215,817
|
|
|
$
|
726,796
|
|
|
$
|
594,859
|
|
Operating income
|
46,616
|
|
|
31,303
|
|
|
136,966
|
|
|
94,514
|
|
Depreciation and amortization
|
20,333
|
|
|
20,671
|
|
|
58,667
|
|
|
51,228
|
|
Capital expenditures
|
10,127
|
|
|
4,509
|
|
|
25,552
|
|
|
13,860
|
|
Manufacturing
|
|
|
|
|
|
|
|
Revenue
|
$
|
95,266
|
|
|
$
|
88,975
|
|
|
$
|
279,145
|
|
|
$
|
250,459
|
|
Operating income
|
31,923
|
|
|
26,711
|
|
|
87,565
|
|
|
73,447
|
|
Depreciation and amortization
|
5,572
|
|
|
6,181
|
|
|
17,321
|
|
|
18,682
|
|
Capital expenditures
|
2,879
|
|
|
1,862
|
|
|
7,111
|
|
|
8,247
|
|
For the
three months ended September 30, 2017 and September 24, 2016
, reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
Depreciation and Amortization
|
|
Capital Expenditures
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Total reportable segments
|
$
|
109,265
|
|
|
$
|
89,238
|
|
|
$
|
31,177
|
|
|
$
|
32,097
|
|
|
$
|
19,768
|
|
|
$
|
8,903
|
|
Unallocated corporate
|
(35,281
|
)
|
|
(30,443
|
)
|
|
2,288
|
|
|
2,011
|
|
|
2,243
|
|
|
665
|
|
Total consolidated
|
$
|
73,984
|
|
|
$
|
58,795
|
|
|
$
|
33,465
|
|
|
$
|
34,108
|
|
|
$
|
22,011
|
|
|
$
|
9,568
|
|
For the
nine months ended September 30, 2017 and September 24, 2016
, reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
Depreciation and Amortization
|
|
Capital Expenditures
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Total reportable segments
|
$
|
326,547
|
|
|
$
|
271,016
|
|
|
$
|
91,297
|
|
|
$
|
85,523
|
|
|
$
|
46,432
|
|
|
$
|
28,073
|
|
Unallocated corporate
|
(101,781
|
)
|
|
(102,688
|
)
|
|
6,378
|
|
|
5,593
|
|
|
7,496
|
|
|
1,536
|
|
Total consolidated
|
$
|
224,766
|
|
|
$
|
168,328
|
|
|
$
|
97,675
|
|
|
$
|
91,116
|
|
|
$
|
53,928
|
|
|
$
|
29,609
|
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue for each significant product or service offering is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
RMS
|
$
|
122,020
|
|
|
$
|
120,928
|
|
|
$
|
373,183
|
|
|
$
|
369,325
|
|
DSA
|
246,946
|
|
|
215,817
|
|
|
726,796
|
|
|
594,859
|
|
Manufacturing
|
95,266
|
|
|
88,975
|
|
|
279,145
|
|
|
250,459
|
|
Total revenue
|
$
|
464,232
|
|
|
$
|
425,720
|
|
|
$
|
1,379,124
|
|
|
$
|
1,214,643
|
|
A summary of unallocated corporate expense consists of the following
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 24, 2016
|
|
September 30, 2017
|
|
September 24, 2016
|
|
(in thousands)
|
Stock-based compensation
|
$
|
7,255
|
|
|
$
|
6,739
|
|
|
$
|
20,259
|
|
|
$
|
20,593
|
|
Compensation, benefits, and other employee-related expenses
|
11,771
|
|
|
9,048
|
|
|
37,812
|
|
|
29,327
|
|
External consulting and other service expenses
|
6,729
|
|
|
4,545
|
|
|
16,581
|
|
|
16,377
|
|
Information technology
|
3,237
|
|
|
2,903
|
|
|
9,247
|
|
|
8,399
|
|
Depreciation
|
2,287
|
|
|
2,011
|
|
|
6,378
|
|
|
5,593
|
|
Acquisition and integration
|
1,327
|
|
|
2,033
|
|
|
2,539
|
|
|
13,056
|
|
Other general unallocated corporate
|
2,675
|
|
|
3,164
|
|
|
8,965
|
|
|
9,343
|
|
Total unallocated corporate expense
|
$
|
35,281
|
|
|
$
|
30,443
|
|
|
$
|
101,781
|
|
|
$
|
102,688
|
|
Other general unallocated corporate expense consists of various departmental costs including those associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations.