UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE FISCAL YEAR ENDED DECEMBER | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE TRANSITION PERIOD FROM TO |
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 06-1397316 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
251 Ballardvale Street Wilmington, Massachusetts (Address of Principal Executive Offices) | 01887 (Zip Code) |
(Registrant's telephone number, including area code):(781) 222-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
---|---|---|
Common Stock, $0.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ýo
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noý
On June 28, 2008,27, 2009, the aggregate market value of the Registrant's voting common stock held by non-affiliates of the Registrant was approximately $4,303,090,433.$2,161,234,410.
As of February 13, 2009,12, 2010, there were outstanding 66,789,79965,887,522 shares of the Registrant's common stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 20092010 Annual Meeting of Stockholders scheduled to be held on May 7, 2009,6, 2010, which will be filed with the Securities and Exchange Commission not later than 120 days after December 27, 2008,26, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the 20092010 Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Form 10-K.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item | | Page | ||||
---|---|---|---|---|---|---|
PART I | ||||||
1 | Business | 1 | ||||
1A | Risk Factors | 16 | ||||
1B | Unresolved Staff Comments | 26 | ||||
2 | Properties | 26 | ||||
3 | Legal Proceedings | 27 | ||||
4 | Submission of Matters to a Vote of Security Holders | 27 | ||||
Supplementary Item. Executive Officers of the Registrant pursuant to Instruction 3 to Item 401 (b) of Regulation S-K | 27 | |||||
PART II | ||||||
5 | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 28 | ||||
6 | Selected Consolidated Financial Data | 32 | ||||
7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 33 | ||||
7A | Quantitative and Qualitative Disclosures About Market Risk | 47 | ||||
8 | Financial Statements and Supplementary Data | 49 | ||||
9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 103 | ||||
9A | Controls and Procedures | 103 | ||||
9B | Other Information | 103 | ||||
PART III | ||||||
10 | Directors and Executive Officers of the Registrant | 104 | ||||
11 | Executive Compensation | 104 | ||||
12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters | 105 | ||||
13 | Certain Relationships and Related Transactions | 105 | ||||
14 | Principal Accountant Fees and Services | 105 | ||||
PART IV | ||||||
15 | Exhibits | 105 |
Item | | Page | ||||
---|---|---|---|---|---|---|
PART I | ||||||
1 | Business | 1 | ||||
1A | Risk Factors | 18 | ||||
1B | Unresolved Staff Comments | 28 | ||||
2 | Properties | 28 | ||||
3 | Legal Proceedings | 28 | ||||
4 | Submission of Matters to a Vote of Security Holders | 28 | ||||
Supplementary Item. Executive Officers of the Registrant pursuant to Instruction 3 to Item 401 (b) of Regulation S-K | 28 | |||||
PART II | ||||||
5 | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 30 | ||||
6 | Selected Consolidated Financial Data | 33 | ||||
7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 34 | ||||
7A | Quantitative and Qualitative Disclosures About Market Risk | 48 | ||||
8 | Financial Statements and Supplementary Data | 49 | ||||
9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 103 | ||||
9A | Controls and Procedures | 103 | ||||
9B | Other Information | 103 | ||||
PART III | ||||||
10 | Directors and Executive Officers of the Registrant | 104 | ||||
11 | Executive Compensation | 104 | ||||
12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters | 105 | ||||
13 | Certain Relationships and Related Transactions | 105 | ||||
14 | Principal Accountant Fees and Services | 105 | ||||
PART IV | ||||||
15 | Exhibits | 105 |
General
This Annual Report on Form 10-K contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on current expectations, estimates, forecasts, and projections about the industries in which Charles River operates and the beliefs and assumptions of our management. Words such as "expect," "anticipate," "target," "goal," "project," "intend," "plan," "believe," "seek," "estimate," "will," "likely," "may," "designed," "would," "future," "can," "could" and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward-looking statements. These statements are based on current expectations and beliefs of Charles River and involve a number of risks, uncertainties, and assumptions that are difficult to predict. For example, we may use forward-looking statements when addressing topics such as: future demand for drug discovery and development products and services, including the outsourcing of these services; present spending trends and other cost reduction activities by our customers (particularly in light of the challenging economic environment); future actions by our management; the outcome of contingencies; changes in our business strategy; changes in our business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; the timing of the opening of new and expanded facilities; our expectations with respect to sales growth efficiency improvements and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (including without limitation our Lean Sigma Six program, our ERP project, our sales force realignment, and the restructuring of our PCS segment); changes in our expectations regarding future stock option, restricted stock, performance awards and other equity grants to employees and directors; changes in our expectations regarding our stock repurchases; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our cash flow and liquidity. In addition, these statements include the availability of funding for our customers and the impact of economic and market conditions on them generallyour customers; the effects of our first quarter 2009 and 2010 cost-saving actions and other actions designed to manage expenses, operating costs and capital spending and to streamline efficiency (including the expected impact of the suspension of our PCS Massachusetts operations); the timing of our repatriation of accumulated income earned outside the United States and the ability of Charles River to withstand the current market conditions. You should not rely on forward-looking statements because they are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K under the section entitled "Our Strategy," the section entitled "Risks Related to Our Business and Industry," the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in our press releases and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur.
Corporate History
Charles River has been operating since 1947 and during that time, we have undergone several changes to our business structure. Charles River Laboratories International, Inc. was incorporated in 1994. In 2000, we completed the initial public offering of Charles River Laboratories International, Inc. Our stock is traded on the New York Stock Exchange under the symbol "CRL "and"CRL" and is included in the
Standard & Poor's MidCap 400, 1000 and Composite 1500 Indices, the Dow Jones US Biotechnology Index, the NYSE Composite Index and the NYSE Healthcare Sector Index, among others. We are
headquartered in Wilmington, Massachusetts. Our headquarters mailing address is 251 Ballardvale Street, Wilmington, MA 01887, and the telephone number at that location is (781) 222-6000. Our Internet site iswww.criver.com. Material contained on our Internet site is not incorporated by reference into this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to "Charles River," "we," "us" or "our" refer to Charles River Laboratories International, Inc. and its subsidiaries.
This Form 10-K, as well as all other reports filed with the Securities and Exchange Commission are available free of charge through the Investor Relations section of our Internet site as soon as practicable after we electronically file such material with, or furnish it to, the SEC. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, you may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Overview
We are a leading global provider of solutions that accelerate the drug discovery and development process, including research models and associated services, and outsourced preclinical services. The drug development process continues to requirerequires the steadily increasing investment of time and money—various studies and reports estimate it takes between 10-1510-16 years, between $800 million and $1up to $1.65 billion, and exploration of more than 10,000 drug compounds to produce a single FDA approvedFDA-approved drug. Charles River is positioned to leverage our core competenciesin laboratory animal medicine and science,vivo biology and regulatory-compliant preclinical services in an efficient and cost-effective way to aid our customers in bringing their drugs to market faster.
We currently have two reporting segments: Research Models and Services (RMS) and Preclinical Services (PCS). We provide the animal research models required in research and development of new drugs, devices and therapies and have been in this business for over 60 years. We have built upon our core competencies to develop a diverse and growing portfolio of products and services. Our wide array of tools and services enables our customers to reduce costs, increase speed and enhance their productivity and effectiveness in drug discovery and development. Our customer base includes global pharmaceutical companies, biotechnology companies, as well as government agencies, and leading hospitals and academic institutions around the world. We currently operate approximately 70 facilities in 1716 countries worldwide. Our products and services, supported by our global infrastructure and deep scientific expertise, enable our customers to meet many of the challenges of early-stage life sciences research. In 2008,2009, our net sales from continuing operations were $1.34$1.20 billion and while we had a netour operating loss of $521.8 million, this included a $700.0 million goodwill impairment charge.income was $166.9 million.
In recent years, we have completed a number of acquisitions that have broadened our present portfolio of high-end services to include general toxicology, specialty toxicology, discovery and imaging services, biopharmaceutical services and Phase I clinical services. In addition, these acquisitions:
These acquisitions, which include the acquisitions of Piedmont Research Center LLC, Cerebricon Ltd. and Systems Pathology Company, LLC in 2009 and NewLab BioQuality AG and MIR Preclinical Services in 2008, have been critical in our continuing mission to support our key pharmaceutical and biotechnology customers, who are increasingly seeking full service, global partners to whom they can outsource more of their preclinical research and development efforts. By some estimates, the outsourcedin vivo discovery and drug development services market ismarkets in which we participate—ranging from research model production through Phase I clinical services—has a current
size of approximately $5.0$7.0-$7.5 billion annually. It is thought that this represents only 20-25%30-40% of all of the related in vivo discovery and drug development work currently performed (with wide variances among the different services) and in the aggregate is expected to increase over time as outsourcing trends continue.
In 2008,2009 much of our focus has beenwas dedicated towards our continuedongoing positioning of ourselves to take advantage of long-term opportunities to support our clients as they continue to outsource drug development services. TheOne element of this focus has manifested through realignments of our PCS organization and our sales and marketing group. In 2009, we also pushed forward process efficiency initiatives through strengthening of our Lean Six Sigma organization and, at the beginning of fiscal 2010, the initial rollout of our ERP (enterprise resource planning) system in the United States. In 2008, we completed the major stages of our three-year capacity expansion program, and in early 2009 we finished with the last few elements of the program with focus on facilities in China and Sherbrooke (Canada). We continually evaluate our capacity in light of our customer needs and demands. Accordingly, in January 2010 we announced that we had decided to suspend operations at our Shrewsbury, Massachusetts, facility by the middle of 2010, with the intention to resume operations when global preclinical market conditions improve and we require additional capacity. For additional discussion of the factors that were elements of our capacity expansion program, which has2009 focus, as well as the factors that we believe have recently been underway for three years andinfluencing outsourcing demand from our customers, please see the section entitled "Our Strategy" included the replacement of two of our larger existing PCS facilities with new, state-of-the-art facilities, are drawing to a close. We opened the first of the replacement sites in Massachusetts in 2007 and the second in Nevada in 2008. In addition, we opened a new PCS facility in China in late 2008, which we anticipate will be one of the first GLP-compliant facilities in China by the end of the first half of 2009, bolstering our efforts to become the partner of choice for our global pharmaceutical customers as they establish and expand research and development activities in China. We expect to open a new PCS facility in Sherbrooke (Canada)elsewhere in the first quarter of 2009 in order to relieve capacity constraints at our Montreal facility. However, as a result of certain market factors which emerged in the second half of 2008 and negatively affected our sales growth, we evaluated our expansion plans and determined that we have sufficient capacity to accommodate our clients' current demand. Accordingly, we have delayed the expansion of our Ohio facility until 2010 when the industry will be better positioned to absorb additional capacity. In addition to our PCS capacity expansions, in 2008 we opened a new RMS facility in Maryland, in part to support the 10-year agreement with the National Cancer Institute to manage its research model colonies.Form 10-K.
Research Models and Services (RMS). Charles River has been supplying research models to the drug development industry since 1947. With approximately 150 different strains, we continue to maintain our position as the global leader in the production and sale of the most widely used rodent research models,model strains, principally genetically and virally defined purpose-bred rats and mice. We also provide a variety of related services that are designed to assist our customers in supporting the use of research models in drug development. With multiple facilities located on three continents (North America, Europe and Asia (Japan)), we maintain production centers, including a total of approximately 180 barrier rooms or isolator facilities, strategically located near our customers. In 2008,2009, RMS accounted for 49%55% of our total net sales and approximately 41%45% of our employees, including approximately 128130 science professionals with advanced scientific degrees.
Our RMS segment is comprised of (1) Research Models, (2) Research Model Services and (3) other related products and services.
Research Models. A significant portion of this business is comprised of the commercial production and sale of research models, principally purpose-bred rats mice and other speciesmice for use by researchers. We provide our rodent models to numerous customers around the world, including most pharmaceutical companies, a broad range of biotechnology companies, many government agencies, and leading hospitals and academic institutions. We have approximately 23 production facilities located in 98 countries worldwide which are strategically located to be in close proximity to our customers. Our research models include both standard strains and disease models such as those with compromised immune systems, which are increasingly in demand as early-stage research tools. The United States Food and Drug Administration (FDA) and foreign regulatory bodies typically require that the safety and efficacy of new drug candidates be tested on research models like ours prior to testing in humans. As a result, our research models are an essential part of the drug discovery and development process.
Our rodent species have been and continue to be some of the most extensively used research models in the world, largely as a result of our continuous commitment to innovation and quality inassociated with the breeding process.products. Our research models are bred and maintained in controlled environments which are designed to ensure that the animalsmodels are free of specific viral and bacterial agents and other contaminants that can disrupt research operations and distort results. With our barrier room production capabilities, we are able to deliver consistently high-quality research models worldwide.
Our small research models include:
We also offer proprietary, disease-specific mouse and rat models used to find new treatments for diseases such as diabetes, obesity, and cardiovascular and kidney disease. We are presently focusing our disease model program on fourfive areas of research: cardiovascular, metabolic, renal, oncology and oncologycentral nervous system, which in addition to providingprovides overlapping disease modalities that support multiple uses of certain models, also permits us to concentrate on focused sales and marketing efforts.models.
In addition to our small research models, we also are a premier provider of high-quality purpose-bred, specific pathogen-free (SPF) or disease free, large research models to the biomedical research community, principally for use in their drug discovery and development studies.community.
Research Model Services. RMS also offers a variety of services, described below, designed to assist our customers in screening drug candidates faster. These services capitalize on the technologies and relationships developed through our research model business, and address the need among pharmaceutical and biotechnology companies to outsource the non-core aspects of their drug discovery activities. These services include those which are related to genetically definedthe maintenance and monitoring of research models, for in-house research, as well as those services designed to implement efficacy screening protocols to improve the customer's drug evaluation process. We currently offer four major categories of research models services—Genetically Engineered Models and Services, Consulting and Staffing Services, Research Animal Diagnostics,Diagnostic Services, and Discovery and Imaging Services.
Genetically Engineered Models and Services (GEMS). In this area of our business, we assist our customers in validating, maintaining, improving, breeding, maintenance and testingperforming health profile diagnostics of research models purchased or purposefully created by our customers for biomedical research activities. While the creation of a genetically engineered model (GEM) can be a critical scientific event, it is only the first step in the discovery process. Productive utilization of GEMs requires significant additional technical expertise. We provide breeding expertise model characterization (including genotyping and phenotyping) and colony development, quarantine, embryoand health monitoring, germplasm, cryopreservation, embryo transfer and healthrederivation including assisted reproduction and genetic monitoring. We provide these services to over 500 laboratories and customers around the world from pharmaceutical and biotechnology companies to hospitals and universities and maintain more than 1,000 different types of naturally occurring or genetically engineered models for our customers.universities.
Consulting and Staffing Services. Building upon our core capability as the leading provider of high-quality research models, we manage animalresearch model care operations (including recruitment, training, staffing and management services) on behalf of government and academic organizations, as well as commercial customers. Demand for our services results fromhas been driven by the growing trend by thesefor research institutions to outsource internal functions or activities that are not critical to thetheir core scientific innovation process, or for which they do not maintain the necessary resources in-house. In addition, we believe that our expertise in animalresearch model care and facility operations enhances the productivity and quality of our customers' animal care and useresearch model programs.
Research Animal Diagnostics.Diagnostic Services. We assist our customers in monitoring and analyzing the health and genetics of the research models used in their research protocols. We developed this capability internally by building upon the scientific foundation created by the diagnostic laboratory needs of our research model business. Depending upon a customer's needs, we may serve as its sole-source testing laboratory, or as an alternative source supporting its internal laboratory capabilities.
We believe that the continued growth in model development and characterization and utilization of specific disease models and GEMs will drive our future growth as the reference laboratory of choice for health and genetic testing of laboratory animals.
Table of Contentsresearch models.
Discovery and Imaging Services. Augmenting our traditional model production and GEMS described above, we believe there are emerging opportunities to assist our customers in a variety of discovery, research, development and imaging areas, such as by speedingareas. Expediting the development process of investigational agents by providing products and services that prepare models to be used customers extends their internal capabilities, complements their internal expertise and helps reduce product development timelines. In addition, ourin studies immediately upon arrival at the customer's facility, rather than requiring time and effort on the part of the customer to prepare the models. As a result of our veterinary medicinevivo biology expertise we are well positionedpositions us to provide suchcomplementary disease model services, which include surgical procedures, feedingpre-conditioning and aging,aging. We augmented our discovery and biologicalresearch and chemical modification.development capabilities substantially in 2009 via the acquisitions of Piedmont Research Center (focusing on therapeutic efficacy studies in oncology and other therapeutic areas) and Cerebricon Ltd. (focusing on therapeutic efficacy studies for the evaluation of investigational agents for the treatment of diseases of the central nervous system). In addition, through our 2008 acquisition of MIR Preclinical Services we nowallows us to offer extensivein vivo imaging capabilities in disease models (including MRI, PET, CT and bioluminescence/fluorescence imaging), as well as therapeutic efficacy expertise in oncologyinflammation, metabolic, cardiovascular and inflammationoncologic pharmacology. Imaging services have the potential to increase the efficiency of lead candidate selection by providing earlier and more highly predictive preclinical data, compared with traditional non-imaging methods, and in addition is well suited to facilitating translation between preclinical testing and clinical evaluation of investigational agents. The Discovery and Imaging Services that we offer through our RMS business are complimentarycomplementary to the Discovery Support services that we offer through our PCS business.
Other Related Research Model Products and Services. We also offer two other categories of products and services within RMS—endotoxin and microbial detectionin vitro products and avian vaccine support.services.
Endotoxin and Microbial Detection (EMD or In Vitro).Vitro. Our EMDIn Vitro business provides non-animal, orin vitro, methods for lot release testing of medical devices and injectable drugs for endotoxin contamination. We are committed to being the leader in providing our customers within vitro alternatives as these methods become scientifically validated and commercially feasible, and toward that goal we work with and support the European Center for Validation of Alternative Methods in these efforts. Endotoxin testing uses a processed extract from the blood of the horseshoe crab, known as limulus amebocyte lysate (LAL). The LAL test is the first and only majormost successful FDA-validatedin vitro alternative to an animal model test.test to date. The process of extracting blood is generally not harmful to the crabs, which are subsequently returned to their natural ocean environment. Ourin vitroIn Vitro technology business produces and distributes endotoxin testing kits, reagents, software, accessories, instruments and associated services to pharmaceutical and biotechnology companies worldwide. We are a market leader in endotoxin testing products and services, which isare used for FDA-required quality control testing of injectable drugs and medical devices, their components and the processes by which they are manufactured.
We have developed Our growth in theIn Vitro business is driven by our FDA approved line of next generation of the endotoxin testing platform, known asproducts, which are based on the Endosafe Portable Testing System (Endosafe®-PTS™). The PTS is a portable endotoxin testing platform which technology that allows rapid endotoxin testing in the central laboratory or in the field, affording researchers accurate and timely results. In 2006, we received FDA approval for the sale and marketing ofmanufacturing environment. We have recently expanded the PTS product portfolio to include a multiple sample testing system for FDA-required lot release endotoxin testing. The PTS can also be used for non-regulated applications, ranging from drug research and development to environmental monitoring. The PTS system has recently expanded into markets suchknown as cell transplant and dialysis clinics, and, especially, nuclear pharmacies, where PTS is being adopted for lot release testing of nuclear medicinesthe Endosafe-MCS (multi cartridge system) in response to pending FDA regulations.the demand of our higher testing volume customers. We are anticipating other opportunities developinganticipate continued adoption of rapid methods as our customers reactrespond to the FDA's Process Analytical Technology (PAT) Initiative. We also expect to see expanded use of this rapid endotoxin testing technology in non-traditional areas such as renal dialysis, nuclear and compounding pharmacies, and cellular therapy. In addition, over the next few years we look towardsare currently exploring other applications such as the environmental contaminant markets (pesticides and hazardous materials) andobtaining 510(K) medical device approval of this technology for clinical diagnostics (infectious disease at pointdiagnostic applications.
Avian Vaccine Support.Services. We are the global leader for the supply of specific pathogen-free, or SPF, chickens and fertile chicken eggs. SPF chicken embryos are used by animal health companies as self-contained "bioreactors" for the manufacture of live viruses. These viruses are used as a raw material primarily in poultry, as well as human, vaccine applications. The production of SPF eggs is doneperformed under biosecure conditions, similar in many ways to our research model production. We have a worldwide presence in North America with several SPF egg production facilities in the United States and contracted production capabilities in Hungary, and franchise operations in India China and Australia. We also operate a specialized avian laboratory in the United States, which provides in-house testing quality control testing of the SPF flocks, offers testing services to vaccine companies and commercial poultry operations, and manufactures poultry diagnostics and bulk antigens for poultry vaccines.
Preclinical Services (PCS). Our PCS customers are principally engaged in the discovery and development of new drugs, devices and therapies.
Discovery represents the earliest stages of research in the life sciences, directed at the identification, screening and selection of a lead compound for future drug development. Discovery activities typically last anywhere from 4-6 years in conventional pharmaceutical research and development timelines.
Development activities, which follow, and which can take up to seven7 years, are directed at demonstrating thesafety, tolerability andclinical efficacy of the selected drug candidates. During the preclinical stage of the development process, a drug candidate is testedin vitro (typically on a cellular or subcellular level in a test tube or multi-well petri plate) andin vivo (in research models) to support planned or on-going human trials. With our focus on early-stage drug development support, we view clinical Phase I (first-in-human assessment) studies as a strategic component of our preclinical service offerings.
The development services portion of our PCS business enables our customers to outsource their critical, regulatory-required drug and toxicology disposition activities to us. The demand for these services was historically driven by preclinical development programs of biotechnology companies, which traditionally have been outsourced, and also by the selective outsourcing strategy of larger global pharmaceutical companies. The necessary significant investments in personnel, facilities and other capital resources required in order to efficiently conduct and perform these activities means that global pharmaceutical companies and biotechnology companies are frequently choosing to outsource their development activities, allowing them to focus on their core competencies of innovation and early drug discovery and, particularly for pharmaceutical companies, promotion and market distribution.
We are one of the two largest providers of preclinical services worldwide and offer particular expertise in the design, execution and reporting of general and specialty toxicology studies, especially those dealing with innovative therapies and biologicals. We currently provide preclinical services at multiple facilities located in the United States, Canada, Europe and Asia (China). We have recently completed significant expansions at our preclinical facilities in Massachusetts and Nevada, and are nearing completion of an expansion of capacity in Canada. In recognition of the current market conditions, we are postponing the expansion of our Ohio facility until such time as our available capacity is filled, which we target as 2010. Our PCS segment represented 51%45% of our total net sales in 20082009 and employed 59%51% of our employees including approximately 450375 science professionals with advanced scientific degrees.
We currently offer the following preclinical services, in which we include bothin vivo andin vitro studies, supportive laboratory services, and strategic preclinical consulting and program management to support product development from inception to proof of concept.concept:
Toxicology. Toxicology is one of our core preclinical competencies and a competitive strength. Once a lead molecule is selected, the stage of preclinical development begins where appropriate toxicology studies are conducted to support initial clinical trials.trials in humans. These studies are performed on animalin laboratory models to understandelucidate the toxicpotential adverse effects that a compound has on an organism over a variety of doses and over various time periods, and focus on safety and potentialassessment of harmful effects. Our toxicology services feature:
Our toxicology facilities operate in compliance with Good Laboratory Practices (GLPs) as required by the FDA as well as other international regulatory bodies. Our facilities are regularly inspected by U.S. and other GLP compliance monitoring authorities, as well as our own and our customers' Quality Assurance departments.
Pathology Services. In the drug development process, the ability to identify and characterize clinical and anatomic pathologic change is critical in determining the safety of a new compound. We employ a large number of highly trained pathologists who use state-of-the-art techniques to identify potential compound-relatedtest article-related changes within tissues, fluids and cells, as well as at the molecular level. Pathology support is critical not only for regulatory drivenregulatory-driven safety studies, but also for specialized investigative studies, discovery support, and stand-alone immunohistochemistry evaluations for monoclonal antibodies. Key "go/no-go" decisions regarding continued product development are typically dependent on the identification, characterization and evaluation of gross and microscopic pathology findings we perform for our clients.
Bioanalysis, Pharmacokinetics, and Drug Metabolism. In support of preclinical drug safety testing, our customers are required to demonstrate ample drug exposure, stability in the collected sample, kinetics of their drug or compound in circulation, the presence of metabolites, and with recombinant proteins and peptides, the presence of anti-drug antibodies. We have scientific depth in the sophisticated analytical techniques required to satisfy these requirements for a number of drug classes (including oligonucleotide and inhibitory RNAs). In the event that theclasses. After performing sample analysis for preclinical study support, translates to opportunities to analyze clinical samples for the same drug once human testing begins, we have opportunitiesthe opportunity to capture the benefits of bridging the preclinical bioanalysis with latersubsequent clinical development. Once the analysis is complete, our scientists evaluate the data to provide information on the pharmacokinetics and/or toxicokinetics of the exposure to the drug, as well as complete evaluation of the distribution of the drug or metabolites by radio-labeled techniques. Pharmacokinetics refers to understanding what the body does to a drug or compound once administered, including the process by which the drug is absorbed, distributed in the body, metabolized, and excreted (ADME); toxicokinetics refers to the same understanding as applied to potential toxic substances.higher doses that may result in adverse effects. Our clients require these studies for the full preclinical assessment of the disposition of the drug, the results of which are used in the final preclinical safety evaluation of the compound.
Discovery Support. At the earliest stages of lead compound identification, our scientists are engaged in evaluating the activity and efficacy of drug candidates in several important therapeutic areas, including:
We also offer lead optimization strategies including early pharmacokinetic, metabolism, and toxicology support to help in early integrative drug selection criteria. The Discovery Support services that we offer through our PCS business are complimentarycomplementary to the Discovery and Imaging Services that we offer through our RMS business.
Biopharmaceutical Services.
We provide specialized characterization, identity and safety testing of biologicals and devices frequently outsourced by global pharmaceutical and biotechnology developers. Our laboratories in the United States, Germany, (acquired in 2008 through our purchase of NewLab BioQuality AG), Scotland and Ireland provide timely, compliant molecular biology, virology, bioanalytical, immunochemistry, microbiology and related services. Our services in this areaWe confirm that biological processes and the drug candidates produced are consistent, correctly defined, stable and essentially contaminant free. This type of testing is required by the FDA and other global regulatory authorities for our customers to obtain new drug approvals, to maintain government licensed manufacturing facilities and to release approved therapeutic products for patient treatment.
Our manufacturing services group grows and stores well-characterized early-stage client cell lines for later development or manufacture of therapeutic proteins and vaccines for clinical trials. We also collaborate with clients on process development, validation, and manufacturing scale-up and biological testing.scale-up.
Phase I Trials in Healthy, Normal and Special Populations
Phase I clinical trials are usually short duration studies conducted on a small number (20-100) of healthy human subjects (although special populations can be used) under highly controlled conditions. Testing is usually performed where trial participants can be closely monitored in a secure environment, such as at a clinic-type facility or hospital.
Our clinical services capabilities are centered aroundlocated at our premier Phase I clinic in Tacoma, Washington, with a capacity of 250 beds. We focus our clinical services business on high-end clinical pharmacology studies in healthy participants. From a strategic perspective, we believe that our clinical services business benefits from pull-through from ourcomplementary and consecutive services offerings of preclinical and laboratory services (particularly with our biotechnology customers). Correspondingly, our preclinical and laboratory services businesses benefit from the presence of our Phase I clinical offerings as we can take advantage of enhanced economies of scale as well as "pull-down" from existing clinical customers.research in our core early-stage development portfolio.
We offer a wide range of Phase I clinical research services designed to move lead pharmaceutical candidates rapidly from preclinical development through Phase I pharmacokinetic tolerability and pharmacodynamic assessment to explore human pharmacology. We can conduct studies across a wide range of therapeutic areas, and have demonstrated experience in complex dose tolerance, radio-labeled, cardiac safety, pharmacokinetics, pharmacodynamics and bioavailability studies. In addition, we provide customers with high-end "first-in-human" studies for novel compounds, and expertise in complex drug-drug interaction studies.
Participants at our clinics are evaluated through an intensive screening
process to ensure study suitability. We employ clinical regulatory compliance staff to monitor the conduct and reporting of Phase I trials and to assure management that these trials are conducted in compliance with appropriate regulatory requirements.
Our Strategy
Our objective is to be the preferred strategic global partner for our clients in accelerating the search for drugs, devices and therapies. Fromin vivo discovery through proof of concept,first-in-human testing, our goal is to deliver a full portfolio of products and services for drug discovery and development (which are almost entirely mandated by law) and to partner with our clients to createby providing the greatest value and strategic benefit to them.benefit. Our business is primarily driven by the trend towards virtualization of, and increase in outsourced services by, our customers, along with the continued growth of research and development spending by pharmaceutical and biotechnology companies, the federal government and academic institutions, and of outsourced services. According to reports by the Biomedical Industry Advisory Group, it takes 11 to 16 years and costs in the range of $180 million to $1.65 billion, with an average cost of approximately $900 million, to bring a new drug to market. Similarly, a separate report by the Pharmaceutical Research and Manufacturers of America estimate that it takes 10 to 15 years and costs in excess of $800 million to develop a drug ($1.2 billion for a biologic).
As the pressure to develop a strong pipeline of innovative new drugs increases, so does the pressure to contain costs, to implement research in multiple countries simultaneously and to identify, hire and retain a breadth of scientific and technical experts. These pressures are becoming more intense as patent expiries approach for many of our customers, leading them to increasingly rationalize their portfolios around therapeutic areas, streamline their operations, and look to outside partners to manage their non-core activities. In order to facilitate and speed their research (as well as to convert largely fixed costs into variable expenses), our pharmaceutical and biotechnology customers are increasingly making strategic decisions to outsource services which can be provided by high-quality full service providers like us. For instance, many of our larger customers—particularly those in the pharmaceutical industry—have announced plans to rationalize their workforce and facilities and/or increase outsourcing in order to concentrate on their core businesses and new product research and identification. These challenges are also leading to an increase in the role of procurement for cost control purposes, resulting in more bundled services and unique and deeper partnership arrangements from the perspective of both facility management and breadth of service. Over the past several years, we believe that the increase in these actions and the necessary growth of outsourcing is being driven by a unique confluence of events, including:
Table of Contentsinstitutions.
Outsourcing allows our customers to concentrate their internal expertise and resources on early drug discovery (and for more mature companies, marketing), while continuing to advance their most promising products through the development pipeline. This creates opportunities for companies such as ours who can help optimize our clients' programs and assist in accelerating thetheir drug discovery and development process. Our strategy is to capitalize on these opportunities by continuing to build our portfolio of premium, value-added products and services through internal development and investment, augmented by strategic "bolt-on" transactions.
Our customers have faced a challenging market environment toward the end of 2008 and start of 2009. Among the factors that have affected them, we have seen the following have the most material impact:
While the short term consequences of these actions have temporarily mitigated the outsourcing growth rate trends, we believe that in the mid-term there is no fundamental change in our clients' drug development activities and strategies, and in fact these changes will provide enhanced outsourcing opportunities going forward. In particular, we believe that as larger pharmaceutical companies become leaner and more efficient, they will also become more conservative in their staffing, lose experienced personnel, and generally focus on their core competencies of fundamental research and development and commercialization. This should lead to resumption of outsourcing as they assess their key internal priorities. Charles River is positioned to address our customers' future needs and improve the efficiency and speed of their drug development activities, as we can:provide a multi-faceted value proposition that enables us to:
In today's business environment, we believe there is a particular advantage in being a global, full service, high-quality provider of services throughout the drug discovery and development continuum. Many of our customers, especially large pharmaceutical companies, are attracted to Tier 1 contract research organizations with a full breadth of capabilities, and choose to establish preferred provider relationships with only a small number, which allows them to simplify their relationship management as well as access greater value from their outsourcing partner. Recent trends suggest that large pharmaceutical restructurings, with increased focus on key therapeutic areas, may favor larger contract research organizations who can present customers with the benefits of economies of scale and scope, extensive therapeutic area expertise, global footprint and simplified communications and coordination. Those companies with critical mass and financial stability are likely to have an advantage, as we expect that customers will gravitate towards placing long-term studies with providers they can rely upon. We are focused on being recognized as a premier preferred provider and building broader and deeper long-term strategic partnerships with our customers. Accordingly, with many of our largest customers, we enter into global preferred provider agreements that span both segments of our business. And as the role of the procurement department of our customers in selecting outsourcing partners increases, we expect that global reach and the availability of value-added services will become essential, which will aid Charles River in capitalizing on future opportunities. In addition, in response to individual customer needs, we have also beenremain flexible in entering intoand open to broad-based multi-year partnering arrangements which may take various and customized forms. Historically these
generally involvinginvolve financial commitments from the customer, which tap into the broad array of physical and/or service resources that we provide such as(e.g. reserving dedicated space within existing facilities,facilities; building out space to a particular specification,specification; working within our clients' infrastructure, or eveninfrastructure; and occasionally establishing a new facility.facility).
This strategy and focus has been developed in recognition of the needs and desires of our customers who are increasingly facing pressure to manage their research and development costs while at the same time maintaining or developing a strong pipeline of innovative new drugs, conduct research and development in multiple countries simultaneously and identify, hire and retain a breadth of scientific and technical experts. It is both risky and expensive to bring a new prescription drug to market. It is estimated that only 4 in 5,000 - 10,000 investigational drugs that begin preclinical testing will progress to human testing, and only one of those will be approved for human use. According to various reports, it takes 10 to 16 years and costs in the range of $180 million to $1.65 billion, with an average cost of over $900 million, to bring a new drug to market ($1.2 billion for a biologic). Furthermore, costs associated with developing new drugs and biologics are increasing due to a variety of factors, including:
In order to convert largely fixed costs into variable expenses and to facilitate and speed their research, our pharmaceutical and biotechnology customers are making strategic decisions to outsource a portfolio of services to high-quality full service providers like us. During the past decade, we believe that the growth of outsourcing by our customers has been driven by a unique confluence of events, including:
Over the most recent couple of years, our customers have faced a more challenging market environment. Among the factors that have affected them, we have seen the following have the most material impact and negatively affect outsourcing trends:
While the short-term consequences of these factors have temporarily mitigated the outsourcing growth rate trends, we believe that in the mid-term there is no fundamental change in our clients' drug development activities and strategies, and in fact these changes will provide enhanced outsourcing opportunities going forward. In fact, we remain optimistic that with the closing of the major mergers in 2009 and the stabilization of other of the factors addressed above, the pharmaceutical industry will return to focusing on driving drugs and therapies through the development pipeline. Also, we believe that as larger pharmaceutical companies become leaner and more efficient, generally focusing on their core competencies of fundamental research and development and commercialization, they will also continue to be conservative in their staffing and further reduce their in-house expertise. This should lead to reinvigoration of outsourcing as they assess their key internal priorities.
In 2009, we moderated our investment in capacity expansion in light of the heavy investments we made from 2006 through 2008. Nonetheless, the combination of reduced customer demand, cost containment initiatives pursued by our customers and excess capacity within our industry generally, has resulted in significant pricing pressure in 2009 and into 2010. In response, we have taken a number of steps to better support our customers in today's challenging environment, identify new strategies to enhance client satisfaction, improve operating efficiencies and generally strengthen our business model.
First, in the past year we closed or disposed of smaller, less efficient sites including PCS Arkansas and our Phase I facility in Scotland (as well as two small RMS sites in Hungary and Belgium), and reduced headcount by about 1,000 (primarily throughout our PCS segment). This includes our recent decision to suspend operations at our PCS Massachusetts site. In light of our completed facility expansions, our leaner infrastructure is intended to improve our operating margins while providing us with sufficient capacity and flexibility to accommodate increased demand in the future.
Second, we announced two internal organizational restructurings that affect our PCS business and our Sales and Marketing organization:
PCS Organizational Realignment: we restructured our Preclinical Services business to create a dual accountability structure with both global functional teams and site-level management. This new structure centralizes and integrates our global PCS portfolio and unites expertise from various facilities to support our client programs, regardless of the specific site at which the program was initiated. This structure allows team members to easily share information and best practices globally, standardize operations and improve efficiencies throughout Charles River. Most importantly, it further enables us to provide exceptional and consistent service at all levels and across all sites worldwide, which is particularly important to those clients who utilize multiple Charles River sites.
Sales and Marketing Realignment: we realigned our enterprise-wide sales and marketing team with changes fully implemented at the beginning of 2010. This enhances our client-centric focus and communications by segment through the establishment of a three-pronged sales organization with a focus on global biopharmaceutical companies, small and mid-sized pharmaceutical companies and biotechnology companies, and academic and government customers.
We have designated dedicated sales professionals for each segment, enhancing our ability to meet customer needs by offering customized, tailored solutions across our entire portfolio. Overall, this reorganization will allow us to provide more comprehensive coverage and support for all of the market segments among our diverse client population.
Finally, we have also remained focused on internal process improvement initiatives. Specifically, we have continued our investment in our information technology systems and resources in order to better serve our customers, harmonize our data, and streamline our processes. Our most visible effort has been the initial roll out of our integrated enterprise resource planning (ERP) system. The first stage, which included all of our United States sites as well as our RMS site in Canada, went live at the beginning of fiscal 2010, and other locations are expected to be added in later stages. In addition, we have continued to expand our Lean Six Sigma program to reduce process cycle times, eliminate non-value add steps and optimize our operating efficiencies. Based on the initial success of the program in our PCS business segment, we have recently expanded it to RMS to attain similar operational benefits and elevated the program director to a corporate vice president level.
We intend to continue to broaden the scope of the products and services we provide across the drug development continuum primarily through internal development, which will be augmented, as needed, through focused acquisitions and alliances. Our approach to acquisitions is a disciplined one that seeks to target businesses that are a sound strategic fit and that offer the prospect of enhancing stockholder value. This strategy may include geographic expansion of existing core services, strengthening of one of our core services or the addition of a new product or service in a related or adjacent business. In 2008,2009, we completed 64 acquisitions, ranging in size from $48.5$5.4 million to $1.4$45.6 million.
We believe that we are well positioned to exploit both existing and new outsourcing opportunities. As strategic outsourcing by our customers increases, we believe that our expertise in areas previously addressed by our customers' in-house capabilities allows us to provide a more flexible, efficient and cost-effective alternative for them. In short, because these products and services are the core of our business, we are able to build and maintain expertise and tap into economies of scale that are difficult for our customers to match withwithin their internal capabilities.infrastructure.
We intend to focus our marketing efforts on, among other things, stimulating demand for further outsourcing across our entire portfolio. We believe that our ability to provide solutions that address all aspects ofin vivo biology are increasingly attractive to our customers, and we are aligning our commercial activities to deliver flexible, customized programs designed to meet our client's global and site-specific needs, with an increasing emphasis on defining efficiency metrics and tangible value. In addition, as our customers narrow their focus toward specific therapeutic areas, we have increasingly aligned our services portfolio along therapeutic lines, particularly those subject to major research areas,funding or focus, such as oncology, metabolism and obesity, autoimmune/inflammation, cardiovascular, infectious disease and cardiovascular.central nervous system. We have also focused on adding expertise in the biologics development areas. As a result of these collective efforts, we expect to be better positioned to gain market share by taking advantage of these trends, as well as broader based collaboration across thein vivo discovery to first-in-human continuum. In 2007 and 2008 we invested heavily in expanding our facilities capacity, which we expect to normalize beginning in 2009. Similarly,
we are investing in our information technology systems and resources in order to better serve our customers, harmonize our data, and streamline our processes.
Customers
In 2010, we established a three-pronged sales organization with a focus on:
Our customers continue to consist primarily of all of the major pharmaceutical companies, many biotechnology companies, animal health, medical device, diagnostic and other life sciences companies, and leading hospitals, academic institutions, and government agencies. We have stable, long-term relationships with many of our customers. During 2008,2009, no single commercial customer accounted for more than 5%6% of our total net sales.
For information regarding net sales and long-lived assets attributable to both of our business segments for the last three fiscal years, please see Note 10 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. For information regarding net sales and long-lived assets attributable to operations in the United States, Europe, Canada, Japan and other countries for each of the last three fiscal years, please review Note 10 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
Sales, Marketing and Customer Support
As part of our recent sales organization realignment, we have designated dedicated sales people for each our three customer segments enhancing our ability to meet customer needs by offering customized, tailored solutions across our entire portfolio. In addition, our mid-market pharmaceutical and biotechnology customers will benefit by additional support from a combination of account managers with broad portfolio knowledge and specialists with specific scientific expertise. This allows us to provide comprehensive coverage of all of the market segments among our diverse client population.
We sell our products and services principally through our direct sales force and account management teams, the majority of whom work in North America, with the balance in Europe and the Asia-Pacific countries. Our primary promotional activities include organizing scientific symposia, publishing scientific papers and newsletters, making presentations and participating at scientific conferences and trade shows in North America, Europe and Asia. We supplement these scientifically based marketing activities with tradeinternet-based marketing, advertising and direct mail and newsletters.mail. In 2008, we launchedcertain locales, our newly designed website. The direct sales force is supplemented by international distributors and agents for our products and services, particularly with respect to our EMDIn Vitro and Biopharmaceutical Services business.businesses.
Our internal marketing/product management teams support the field sales staff and account management teams while developing and implementing programs to create close working relationships with customers in the biomedical research industry. We maintain client/customer service, technical assistance and consulting service departments, which address both our customers' routine and more specialized needs.needs and generally serve as a scientific resource for our clients. We frequently assist our customers in solving problems related to animal husbandry, health and genetics, biosecurity, preclinical and clinical study design, regulatory consulting, protocol development and other areas in which our expertise is widely recognized as a valuable resource by our customers.
Our marketing efforts are focused to stimulate demand for further outsourcing across our entire portfolio. We believe that our ability to provide solutions that address all aspects ofin vivo biology are increasingly attractive to our customers, and we continue to design and market our commercial activities to deliver flexible, customized programs designed by segment to meet our clients' global and site-specific needs.
Competition
Our strategy is to be a leader in each of the markets in which we participate. We compete in the marketplace on the basis of quality, reputation, responsiveness, pricing, innovation, breadth of therapeutic and scientific expertise, timeliness and availability, supported by our professional bench strength in animal sciencein vivo biology and toxicology, global capabilities and strategically located facilities worldwide. We are able to offer a unique portfolio to support most of the drug development continuum through our wide range of research models and research model services, discovery and imaging services and our broad array of both routine and specialized preclinical services as well as a wide range of research models and research model services.(through first-in-human Phase I clinical services).
The competitive landscape for our two business segments varies.
We believe that the barriers to entry in certaina majority of our business units are generally high and present a significant impediment for new market participants, particularly in those areas which require substantial capital expenditures, trained and specialized personnel, and mandate GLP compliant practices, are generally high and present a significant impediment for new market participants.GLP-compliant practices.
Industry Support and Animal Welfare
One of our core values is a concern for and commitment to animal welfare. We have been in the forefront of animal welfare improvements in our industry, and continue to show our commitment with special recognition programs for employees who demonstrate an extraordinary commitment in this critical areaaspect of our business. We created our own Humane Care Initiative, which is directed by our Animal Welfare and Training Group. The goal of the initiative is to assure that we continue as a worldwide leader in the humane care of laboratory animals. Laboratory animals are an important resource that further our knowledge of living systems and contribute to the discovery of life-saving drugs and procedures. We work hand-in-hand with the scientific community to understand how living conditions, handling procedures and stress play an important role in the quality and efficiency of research. As animal caregivers and researchers, we are responsible to our clients and the public for the health and well being of the animals in our care.
We support a wide variety of organizations and individuals working to further animal welfare as well as the interests of the biomedical research community. We fund scholarships to laboratory animal training programs, provide financial support to non-profit institutions that educate the public about the
benefits of animal research and provide awards and prizes to outstanding leaders in the laboratory animal medicine field.
Employees
As of December 27, 2008,26, 2009, we had approximately 9,0008,000 employees including approximately 577 science500 professionals with advanced degrees, including approximately 143Ph.D.s, D.V.M.s, 191 Ph.D.s and 13 M.D.s. Our employees are not unionized in the United States although employees are unionized at some of our European facilities, consistent with local customs for our industry. Our annual satisfaction surveys indicate that we have an excellent relationship with our employees.
Backlog
Our backlog for our PCS business segment was approximately$273.7 million at December 26, 2009 as compared to $310.7 million at December 27, 2008 as compared to $393 million at December 29, 2007.2008. Our preclinical services are performed over varying durations, from short to extended periods of time, which may be as long as several years. We maintain an order backlog to track anticipated revenue from studies and projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We only recognize a study or project in backlog after we have received written evidence of a customer's intention to proceed. We do not recognize verbal orders. Cancelled studies or projects are removed from backlog.
We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, studies vary in duration (i.e., some studies that are
included in 20082009 backlog may be completed in 2009,2010, while others may be completed in later years). Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus or penalty payments. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities for a number of reasons, including the failure of a drug to satisfy safety and efficacy requirements or a sponsor making a strategic decision that a study or service is no longer necessary. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.
Regulatory Matters
As our business operates in a number of distinct operating environments and in a variety of locations worldwide, we are subject to numerous, and sometimes overlapping, regulatory environments, as described below.
The Animal Welfare Act (AWA) governs the care and use of certain species of animals used for research. The United States Congress has passed legislation which excludes laboratory rats, mice and chickens used for research from regulation under the AWA. As a result, most of our United States small animal research model activities and our avian vaccine support services operations are not subject to regulation under the AWA. For regulated species, the AWA and attendant Animal Care regulations require producers and users of regulated species to provide veterinary care and to utilize specific husbandry practices such as cage size, shipping conditions, sanitation and, for certain species, environmental enrichment to assure the welfare of these animals. We comply with licensing and registration requirement standards set by the United States Department of Agriculture (USDA) for the care and use of regulated species. Our animal production facilities and preclinical facilities in the U.S. are accredited by the Association for Assessment and Accreditation of Laboratory Animal Care International (AAALAC), a private, nonprofit, international organization that promotes the humane treatment of animals in science through voluntary accreditation and assessment programs. AAALAC covers all species of laboratory animals, including rats, mice and birds. Our preclinical business is also generally regulated by the USDA.
Our import and export of animals in support of several of our business units as well as our operations in foreign countries are subject to a variety of national, regional, and local laws and regulations, which establish the standards for the humane treatment, care and handling of animals by dealers and research facilities. We maintain the necessary certificates, licenses, detailed standard operating procedures and other documentation required to comply with applicable regulations for the humane treatment of the animals in our custody at our locations.
Our PCS business conducts nonclinical laboratory safety studies intended to support the registration or licensing of our clients' products throughout the world. A minor part of our RMS business also conducts similar studies for our clients. The conduct of these studies must comply with national statutory or regulatory requirements for Good Laboratory Practice (GLP). GLP regulations describe a quality system concerned with the organizational process and the conditions under which nonclinical laboratory studies are planned, performed, monitored, recorded, archived and reported. GLP compliance is required by such regulatory agencies as the FDA, United States Environmental Protection Agency, European Agency for the Evaluation of Medicinal Products (EMEA), Medicines and Healthcare Products Regulatory Agency (MHRA) in the United Kingdom, Health Canada, State Food and Drug Administration of the Peoples' Republic of China, and the Japanese Ministry of Health and Welfare. GLP requirements are significantly harmonized throughout the world and our laboratories are capable of conducting studies in compliance with all appropriate requirements. To assure our compliance obligations, we have established quality assurance units (QAU) in each of our nonclinical laboratories. The QAUs operate independently from those individuals that direct and conduct studies and monitor each study to assure management that the facilities, equipment, personnel, methods, practices, records, and controls are in compliance with GLP. Our laboratory managers use the results of
QAU monitoring as part of a continuous process improvement program to assure our nonclinical studies meet client and regulatory expectations for quality and integrity.
Our PCS business also conducts human Phase I clinical trials and provides services in support of our clients' registration or licensing applications. Human clinical trials are conducted in a progressive fashion beginning with Phase I, and in the case of approved drugs, continued through Phase IV trials. Phase I studies are the initial human clinical trials and are conducted with a small number of subjects under highly controlled conditions. These clinical trials and services are performed in accordance with the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use Good Clinical Practice Consolidated Guidance and in compliance with regulations governing the conduct of clinical investigations and the protection of human clinical trial subjects. In the United States, these trials and services must comply with FDA regulations and in Europe our clinical trials and services must comply with the clinical trials directive of the European Union. Neither FDA regulations nor the clinical trials directive requiresdo not require a quality assurance program; however, our Phase I facilities havefacility has an established quality assurance unitsunit that monitormonitors the conduct and reporting of Phase I trials to assure that these trials are conducted in compliance with appropriate regulatory requirements.
Our manufacturing businessbusinesses produces endotoxin test kits, reagents, cell banks used in research and biopharmaceutical production and vaccine support products. Additionally, several of our laboratories conduct identity, stability and potency testing in support of our clients' manufacturing programs. These activities are subject to regulation by the FDA and other national regulatory agencies under their respective Good Manufacturing Practice (GMP) regulations. We are subject to inspection on a routine basis for compliance with these regulations. These regulations require that we manufacture our products or perform testing in a prescribed manner with respect to GMP compliance, and maintain records of our manufacturing, testing and control activities. We also maintain an Establishment License with USDA's Center for Veterinary Biologics (CVB) that covers certain of our sites which manufacture antigens used in a licensed diagnostic kit for rodents or—particular to our avian vaccine support business—services—which manufacturermanufacture USDA licensed antigens, antibodies, and viruses that are sold to clients for use in the manufacturing of their own USDA licensed products. Our vaccine support business also manufactures and markets twothree USDA licensed products that are considered final use products (Mycoplasma Gallisepticum Antigen, Mycoplasma Melegridis Antigen and Mycoplasma Synoviae Antigen), and sites involved in the manufacture of these articles are subject to regular inspection by USDA/CVB.
All of our sites are also subject to licensing and regulation under national, regional and local laws relating to the surface and air transportation of laboratory specimens, the handling, storage and disposal of laboratory specimens, hazardous waste and radioactive materials, and the safety and health of laboratory employees. Although we believe we are currently in compliance in all material respects with such national, regional and local laws (which include the USDA, the standards set by the International Air Transport Association, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), and European oversight agencies), failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
To ensure that all business sectors comply with applicable statutory and regulatory requirements and satisfy our client expectations for quality and regulatory compliance, we have established a corporate regulatory affairs and compliance organization that oversees our corporate quality system and all quality assurance functions within the Company, headed by our Corporate Vice President for Regulatory Affairs and Compliance.
Intellectual Property
We have developeddevelop and implementedimplement computer software and technically derived procedures and products intended to maximize the quality and effectiveness of our services. Although our intellectual property rights are valuable to our success, we believe that such factors as the technical expertise, proprietary know-how, ability and experience of our professionals are more important, and that, overall,
these technological capabilities provide significant benefits to our clients. Where we consider it appropriate, steps are taken to protect our know-how through confidentiality agreements and protection through registration of title or use. In addition, we in-license technology and products from other companies wherewhen it enhances both our product and services business. In the future, in-licensing may become a larger initiative to enhancing our offerings, particularly as we focus on therapeutic area expertise. With the exception of technology related to ourin vitro testing business, including the Endosafe-PTS, and our pathology based software development activities through our Systems Pathology Company subsidiary, we have no patents, trademarks, licenses, franchises or concessions which are material and upon which any of the products or services we offer are dependent.
Corporate Governance
We are committed to operating our business with integrity and accountability. We strive to meet or exceed all of the corporate governance standards established by the New York Stock Exchange, the Securities and Exchange Commission, and the Federal government as implemented by the Sarbanes-Oxley Act of 2002. Nine of the ten members of our Board of Directors are independent and have no significant financial, business or personal ties to the Company or management and all of our Board committees are composed entirely of independent directors. The Board adheres to Corporate Governance Guidelines and a Code of Business Conduct and Ethics which has been communicated to employees and posted on our website. We are diligent in complying with established accounting principles and are committed to providing financial information that is transparent, timely and accurate. We have a Related Person Transactions Policy designed to promote the timely identification of such transactions and to ensure we give appropriate consideration to any real or perceived conflicts in our commercial arrangements. We have a global process through which employees, either directly or anonymously, can notify management (and the Audit Committee of the Board of Directors) of alleged accounting and auditing concerns or violations including fraud. Our internal Disclosure Committee meets regularly and operates pursuant to formal disclosure procedures and guidelines which help to ensure that our public disclosures are accurate and timely. Copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Related Person Transactions Policy are available on our website at www.criver.com under the "Investor Relations—Corporate Governance" caption.
Risks Related to Our Business and Industry
Set forth below and elsewhere in this Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-K. We note that factors set forth below, individually or in the aggregate, may cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
The outsourcing trend in the preclinical and clinical stages of drug discovery and development may decrease, which could slow our growth.
Over the past several years, some areas ofdecade, our businesses have grown significantly as a result of the increase in pharmaceutical and biotechnology companies outsourcing their preclinical and clinical research support activities. While many industry analysts expect the outsourcing trend to continue to increase for the next several years (although with different growth rates for different phases of drug discovery and development) a decrease in preclinical and/or clinical outsourcing activity could result in a diminished growth rate in the sales of one or more of our expected higher-growth areas and adversely affect our financial condition and results of operations. In fact, in 2009 our revenues for our PCS segment declined 20.6% from 2008. For additional discussion of the factors that we believe have recently been influencing outsourcing demand from our customers, please see the section entitled "Our Strategy" included elsewhere in the Form 10-K. Furthermore, our customer contracts are generally terminable on little or no notice. Termination of a large contract or multiple contracts could adversely affect our sales and profitability. Our operations and financial results could be significantly affected by these risks.
A reduction in research and development budgets at pharmaceutical and biotechnology companies may adversely affect our business.
Our customers include researchers at pharmaceutical and biotechnology companies. Our ability to continue to grow and win new business is dependent in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on compounds in the preclinical phase of research and development and to outsource the products and services we provide. Fluctuations in the expenditure amounts in each phase of the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products and services. Research and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities (including available resources of our biotechnology customers, particularly those that are cash-negative, who may be highly focused on rationing their liquid assets in a challenging funding environment) and institutional budgetary policies. Our business could be adversely affected by any significant decrease in life sciences research and development expenditures by pharmaceutical and biotechnology companies, as well as by academic institutions, government laboratories or private foundations. In particular, studies in recent studiesyears have indicated that a majority of academic researchers are anticipating reductions in their budgets.budgets, although funds disbursed through the American Recovery and Reinvestment Act could provide some offset. Similarly, economic factors and industry trends that affect our clients in these industries, including funding for biotechnology companies, which have suffered during the 2008/2009 economic downturn, in 2008/2009, also affect their research and development budgets and, consequentially, our business as well. The economic downturn has also negatively affected us to the extent that the research and development budgets at our pharmaceutical customers have recently slowed down their preclinical and Phase I studies in favor of their later-stage products as they reprioritize compound pipelines (focusing on the back-end of their pipelines in the near-term) and moderate their spending per drug candidate. Furthermore, our customers (particularly larger bio/pharmaceutical companies) continue to search for ways to maintain the breadth of their compound
pipeline, but with leaner research and development costs per drug candidate. For additional discussion of the factors that we believe have recently been influencing outsourcing demand fromresearch and development budgets at our customers, please see the section entitled "Our Strategy" included elsewhere in the Form 10-K.
A reduction or delay in government funding of research and development may adversely affect our business.
A portion of net sales in our RMS segment is derived from customers at academic institutions and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources, such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies. Government funding of research and development is subject to the political process, which is inherently unpredictable. Our sales may be adversely affected if our customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities. Although recent reports indicate that the newObama administration's stimulus package includes a substantial increasepackages in 2009 and 2010 included increases in NIH funding, for 2009, NIH funding hashad otherwise remained fairly flat in recent years and a reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results. Also, there is no guarantee that NIH funding will be directed towards projects and studies that require use of our products and services.
Changes in government regulation or in practices relating to the pharmaceutical or biotechnologicalbiotechnology industries, including potential health care reform, could decrease the need for the services we provide.
Governmental agencies throughout the world, but particularly in the United States, strictly regulate the drug development process. Our business involves helping pharmaceutical and biotechnology companies, among others, navigate the regulatory drug approval process. Accordingly, many regulations, and often new regulations, are expected to result in higher regulatory standards and often additional revenues for companies that service these industries. However, some changes in regulations, such as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services. In addition, if regulatory authorities were to mandate a significant reduction in safety testing procedures which utilize laboratory animals (as has been advocated by certain groups), certain segments of our business could be materially adversely affected.
In recent years, the U.S. Congress and state legislatures have considered various types of health care reform in order to control growing health care costs. We are unable to predict what legislative proposals will be adopted in the future, if any.any, nor in what form they may ultimately be approved. Similar reform movements have occurred in Europe and Asia.
Implementation of health care reform legislation that contains costs could limit the profits that can be made from the development of new drugs. This could adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could in turn decrease the business opportunities available to us both in the United States and abroad. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings. Furthermore, if health insurers were to change their practices with respect to reimbursements for pharmaceutical products, our customers may spend less, or reduce their growth in spending on research and development.
Our standard customer agreements contain customer-determined termination and service reduction provisions, which may result in less contract revenue than we anticipate.
Generally, our agreements with our customers provide that the customers can terminate the agreements or reduce the scope of services under the agreements with little or no notice. Customers may elect to terminate their agreements with us for various reasons, including:
If a customer terminates a contract with us, we are entitled under the terms of the contract to receive revenue earned to date as well as certain other costs and, in some cases, penalties. Cancellation of a large contract or proximate cancellation of multiple contracts could materially adversely affect our business (particularly our PCS segment) and, therefore, may adversely affect our operating results.
Many of our contracts are fixed price and may be delayed or terminated or reduced in scope for reasons beyond our control, or we may under-price or overrun cost estimates with these contracts, potentially resulting in financial losses.
Many of our contracts provide for services on a fixed price or fee-for-service with a cap basis and, accordingly, we bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates. In addition, these contracts may be terminated or reduced in scope either immediately or upon notice. Cancellations may occur for a variety of reasons, and often at the discretion of the customer. The loss, reduction in scope or delay of a large contract or the loss or delay of multiple contracts could materially adversely affect our business, although our contracts frequently entitle us to receive the costs of winding down the terminated projects, as well as all fees earned by us up to the time of termination. Some contracts also entitle us to a predetermined termination fee.fee and irrevocably committed costs/expenses.
Contaminations in our animal populations can damage our inventory, harm our reputation for contaminant-free production, result in decreased sales and cause us to incur additional costs.
Our research models and fertile chicken eggs must be free of certain adventitious, infectious agents such as certain viruses and bacteria because the presence of these contaminants can distort or compromise the quality of research results and could adversely impact human or animal health. The presence of these infectious agents in our animal production facilities and certain service operations could disrupt our contaminant-free research model and fertile egg production as well as our animal services businesses including GEMS, harm our reputation for contaminant-free production and result in decreased sales.
Contaminations typically require cleaning up, renovating, disinfecting, retesting and restarting production or services. Such clean-ups result in inventory loss, clean-up and start-up costs, and reduced sales as a result of lost customer orders and credits for prior shipments. In addition to microbiological
contaminations, the potential for genetic mix-ups or mismatings also exists and may require the restarting of the applicable colonies. While this does not require the complete clean-up, renovation and disinfection of the barrier room, it would likely result in inventory loss, additional start-up costs and possibly reduced sales. In addition, contaminationsContaminations also expose us to risks that customers will request compensation for damages in excess of our contractual indemnification requirements. There also exists a risk that contaminations from models that we produce may affect our customer's facilities, with similar impact to
them. In some cases, we may produce or import animals carrying infectious agents capable of causing disease in man; and in the case of such a contamination or undiagnosed infection, there could be a possible risk of human exposure and infection.
All such contaminations described above are unanticipated and difficult to predict and could adversely impact our financial results. We have made significant capital expenditures designed to strengthen our biosecurity and have significantly improved our operating procedures to protect against such contaminations; however, contaminations may still occur.
Our business is subject to risks relating to operating internationally.
A significant part of our net sales is derived from operations outside the United States. Our international revenues, which include revenues from our non-U.S. subsidiaries, have represented approximately one-half our total net sales in recent years. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. There are a number of risks associated with our international business, including:
Upgrading and integrating our business systems could result in implementation issues and business disruptions.
We currently are engaged inrecently completed the initial implementation of a project to replace many of our numerous legacy business systems at our different sites globally with an enterprise wide, integrated enterprise resource planning (ERP)
Table system. The first stage, which included all of Contents
system.our United States sites as well as our RMS site in Canada, went live at the beginning of fiscal 2010, and other locations are expected to be added in later stages. The process of planning and preparing for such an integrated, wide-scale implementation is extremely complex and we are required to address a number of challenges including
data conversion, system cutover and user training. Problems in any of these areas could cause operational problems during implementation including delayed shipments, missed sales, billing and accounting errors and other operational issues. There have been numerous, well-publicized instances of companies experiencing difficulties with the implementation of ERP systems which resulted in negative business consequences.
Negative attention from special interest groups may impair our business.
The products and services which we provide our customers are essential to the drug discovery and development process, and are almost universally mandated by law. Notwithstanding, certain special interest groups categorically object to the use of animals for valid research purposes. Historically, our core research model activities with rats, mice and other rodents have not been the subject of significant animal rights media attention. However, research activities with animals have been the subject of adverse attention, impacting the industry. This has included on-site demonstrations near facilities operated by us. Any negative attention, threats or acts of vandalism directed against our animal research activities in the future could impair our ability to operate our business efficiently.
Several of our product and service offerings are dependent on a limited source of supply, which if interrupted could adversely affect our business.
We depend on a limited international source of supply of large animalresearch models required in our product and service offerings. Disruptions to their continued supply may arise from health problems, export or import laws/restrictions or embargoes, international trade regulations, foreign government or economic instability, severe weather conditions, increased competition amongst suppliers for models, disruptions to the air travel system or other normal-course or unanticipated events. Any disruption of supply could harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms.
Any failure by us to comply with applicable regulations and related guidance could harm our reputation and operating results.
Any failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. This could harm our reputation, our prospects for future work and our operating results. For example, if we were to fail to verify that informed consent is obtained from participants in connection with a particular Phase I clinical trial, the data collected from that trial could be disqualified and we might be required to redo the trial at no further cost to our customer, but at substantial cost to us. Furthermore, the issuance of a notice of observations or a warning from the FDA based on a finding of a material violation by us of good clinical practice, good laboratory practice or current good manufacturing practice requirements could materially and adversely affect us.
In addition, regulations and guidance worldwide concerning the production and use of laboratory animals for research purposes continues to be updated. Notably, there has been a recent updating of guidance in Europe that will be implemented over a period of several years on a country-by-country basis. Because of the complexities of the formal adoption process, the finalization and implementation of this guidance will likely take three or more years. Similarly, guidance has been and continues to be developed for other areas that impact the biomedical research community on both a national and international basis, including transportation, euthanasia guidance, import and export requirements of biological materials, health monitoring requirements and the use of disinfectants. In the United States, an updating of guidance used by the National Institutes of Health and by certain oversight agencies has been recently funded, and it is expected that over the next 3 years, standards will be updated for the care and use of laboratory animals in all aspects of our US business units.has been completed, and it is expected to be finalized and implemented over the next two years. These new guidelines could cause us increased costs attributable to additional facilities, the need to add personnel to address new processes, as well as increased administrative burden, and the upgrading of existing facilities.
The drug discovery and development services industry is highly competitive.
The drug discovery and development services industry is highly competitive. We often compete for business not only with other drug discovery and development companies, but also with internal discovery and development departments within our larger clients, who may have greater resources than ours. We also compete with universities and teaching hospitals.hospitals for our services. We compete on a variety of factors, including:
If we do not compete successfully, our business will suffer. Increased competition might lead to price and other concessions that might adversely affect our operating results. The drug discovery and development services industry has continued to see a trend towards consolidation, particularly among the biotechnology companies, who are targets for each other and for larger pharmaceutical companies (although recent trends in late 2008 and early 2009 may signalalso demonstrated increased merger activity between larger pharmaceutical companies themselves). If this trend continues, it is likely to produce more competition among the larger companies and contract research organizations generally, with respect to both clients and acquisition candidates. In addition, while there are substantial barriers to entry for large, global competitors with broad-based services, small, specialized entities considering entering the contract research organization industry will continue to find lower barriers to entry, and private equity firms may determine that there are opportunities in acquiring and rolling up these companies, thus further increasing possible competition. Furthermore, in recent years both Charles River and our competitors, particularly in the preclinical services area, have been investing in capital projects to increase capacity. An ongoing challenge for all participants is balancing capacity growth and market demand. If capacity has been increased too much, pressure to lower prices or to take on lower-margin studies and projects may occur. These competitive pressures may affect the attractiveness of our services and could adversely affect our financial results.
Potential Changes in U.S. Tax Law.
On February 1, 2010, President Obama and the U.S. Treasury Department proposed changing certain of the U.S. tax rules for U.S. corporations doing business outside the United States. The proposed changes include limiting the ability of U.S. corporations to deduct interest expense allocated and apportioned to offshore earnings, modifying the foreign tax credit rules and further restricting the ability of U.S. corporations to transfer funds between foreign subsidiaries without triggering U.S. income tax. Although the scope of the proposed changes remains unclear and the likelihood of
enactment is uncertain, it is possible that these or other changes in the U.S. tax laws could increase the Company's effective tax rate which would affect our profitability.
We could be adversely affected by tax law changes in Canada and the United Kingdom.
We have substantial operations in Canada and the United Kingdom which currently benefit from favorable corporate tax arrangements. We receive substantial tax credits in Canada from both the Canadian federal and Quebec governments and benefits from tax creditsenhanced deductions and accelerated tax depreciation allowances in the United Kingdom. Any reduction in the availability or amount of these tax credits or allowancesdeductions would be likely to have a material adverse effect on profits, cash flow and our effective tax rate.
Impairment of goodwill may adversely impact future results of operations.
We have intangible assets, including goodwill and other identifiable and indefinite-lived acquired intangibles on our balance sheet due to our acquisitions of businesses. The initial identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition involve use of management judgments and estimates. These estimates are based on, among other factors, input from accredited valuation consultants, reviews of projected future income cash flows and statutory regulations. The use of alternative estimates and assumptions might have increased or decreased the estimated fair value of our goodwill and other intangible assets that could potentially result in a different impact to our results of operations.
We perform an annual impairment analysis of goodwill to determine if impairment exists. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships.
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700 million.
Goodwill will not be amortized, but will be reviewed for impairment at least annually. The results of this year's impairment test are as of a point in time. If the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could
impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 27, 2008,26, 2009, we had recorded goodwill and other intangibles of $593.7$668.5 million in the consolidated balance sheet.
Contract research services create a risk of liability.
As a contract research organization we face a range of potential liabilities which may include:
We attempt to mitigate these risks through a variety of methods. Nonetheless, it is impossible to completely eradicate such risks.
In our RMS business, we mitigate these risks to the best of our abilities through our regimen of animal testing, quarantine, and veterinary staff vigilance, through which we seek to control the exposure of animal related disease or infections.
In our PCS business, we attempt to reduce these risks by contract provisions entitling us to be indemnified or entitling us to a limitation of liability; insurance maintained by our clients, investigators, and by us; and various regulatory requirements we must follow in connection with our business.
In both our RMS and PCS businesses, contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or in the event that a party who must indemnify us does not fulfill its indemnification obligations or which is beyond the level of our insurance coverage. Furthermore, there can be no assurance that we will be able to maintain such insurance coverage on terms acceptable to us.
We may be unable to build out our facilities as anticipated.
To support our customers' demand for drug discovery and development services, including increased strategic focus on outsourcing services and programs, we had engaged in a substantial capacity expansion program over the past two years with $227 million spent on capital expenditures in
2007 and $197 million in 2008. We estimated $100-$120 million allocated for capital expenditures in 2009, as major expansions complete and capacity comes on-line. Included in our 2009 capital plan are the following: continuing fit-out work at our new PCS facility in Nevada, dedicated space initiatives at our new PCS facility in Massachusetts, expansions at our Canada and Scotland PCS facilities, and the remaining work for completing the construction of our new PCS facility in China. We cannot assure you that any or all of these facilities, or any particular phase of such facilities, will be constructed on the anticipated timetable or on budget. Any material delay in bringing these facilities on-line, or substantial increase in costs to complete these facilities, could materially and adversely affect us. In addition, the costs of these capacity expansion programs may have an adverse impact on our operating margins, particularly within our PCS business.
If we are unable to attract suitable participants for our Phase I clinical trials, our business might suffer.
The Phase I clinical research studies we run rely upon the ready accessibility and willing participation of subjects. Participants generally include people from the communities in which the studies are conducted, which such communities to date have provided a substantial pool of potential subjects for research studies. Our Phase I clinical research activities could be adversely affected if we were unable to attract suitable and willing participants on a consistent basis.
New technologies may be developed, validated and increasingly used in biomedical research that could reduce demand for some of our products and services.
For many years, groups within the scientific and research communities have attempted to develop models, methods and systems that would replace or supplement the use of living animals as test subjects in biomedical research. Some companies have developed techniques in these areas including vaccine development, that may have scientific merit. In addition, technological improvements to existing or new processes, such as imaging technology, could result in a refinement in the number of animal research models necessary to conduct the required research. It is our strategy to participate in some fashion with any non-animal test method or other method that reduces the need for animal research models as it becomes validated as a research model alternative or adjunct in our markets. For instance, we acquired imaging capabilities in 2008 through our acquisition of MIR Preclinical.(and further augmented our imaging services in 2009 through the acquisition of Cerebricon). However, we generally may not be successful in commercializing these methods if developed, and sales or profits from these methods may not offset reduced sales or profits from research models. Alternative research methods could decrease the need for research models, and we may not be able to develop new products effectively or in a timely manner to replace any lost sales. In addition, other companies or entities may develop research models with characteristics different than the ones that we produce, and which may be viewed as more desirable by our customers.
The drug discovery and development industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.
The drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue. Accordingly, we face potential patent infringement suits by companies that have patents for similar products and methods used in business or other suits alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management's attention from other business concerns, whether we win or lose. If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, including treble damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.
We may not be able to successfully develop and market new services.
We may seek to develop and market new services that complement or expand our existing business or service offerings. If we are unable to develop new services and/or create demand for those newly developed services, our future business, results of operations, financial condition, and cash flows could be adversely affected.
Our debt level could adversely affect our business and growth prospects.
At December 27, 2008,26, 2009, we had approximately $575.8$492.6 million of debt. This debt could have significant adverse effects on our business, including making it more difficult for us to obtain additional financing on favorable terms; requiring us to dedicate a substantial portion of our cash flows from operations to the repayment of debt and the interest on this debt; limiting our ability to capitalize on significant business opportunities; and making us more vulnerable to rising interest rates. For additional information regarding our debt, please see Note 4 included in the Notes to Consolidated Financial Statements elsewhere in this Form 10-K.
If we are not successful in selecting and integrating the businesses and technologies we acquire, our business may suffer.
During the past seven years,decade, we have expanded our business through severalnumerous acquisitions. We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions. For instance, in 2008, we expensed over $1.3 million for costs incurred for potential deals that we decided to abandon prior to signing definitive agreements.
Even if completed, acquisitions and alliances involve numerous risks which may include:
In the event that an acquired business or technology or an alliance does not meet our expectations, our results of operations may be adversely affected.
We could experience a breach of the confidentiality of the information we hold or of the security of our computer systems.
We operate large and complex computer systems that contain significant amounts of customer data. As a routine element of our business, we collect, analyze and retain substantial amounts of data pertaining to the preclinical and the clinical studies we conduct for our customers. Unauthorized third parties could attempt to gain entry to such computer systems for the purpose of stealing data or disrupting the systems. We believe that we have taken adequate measures to protect them from intrusion, but in the event that our efforts are unsuccessful we could suffer significant harm. Our contracts with our customers typically contain provisions that require us to keep confidential the
information generated from these studies. In the event the confidentiality of such information was compromised, we could suffer significant harm.
We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our business.
Our success depends to a significant extent on the continued services of our senior management and other members of management. James C. Foster, our Chief Executive Officer since 1992 and Chairman since 2000, has held various positions with us for over 30 years. We have no employment agreement with Mr. Foster or other members of our management. If Mr. Foster or other members of management do not continue in their present positions, our business may suffer.
Because of the specialized scientific nature of our business, we are highly dependent upon attracting and retaining qualified scientific, technical and managerial personnel. While we have an excellent record of employee retention, there is still strong competition for qualified personnel in the veterinary, pharmaceutical and biotechnology fields. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, could harm our business.
Our quarterly operating results may vary, which could negatively affect the market price of our common stock.
Our results of operations in any quarter may vary from quarter to quarter and are influenced by such factors as:
We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results. Nonetheless, fluctuations in our quarterly operating results could negatively affect the market price of our common stockstock.
Item 1B. Unresolved Staff Comments
There are no unresolved comments to be reported in response to Item 1B.
We own or lease the land and buildings where we have facilities. We own large facilities (facilities over 50,000 square feet) for our PCS businesses in the United States, Canada, Scotland and Ireland, and lease large facilities in the United States, Canada and China. We own large RMS facilities in the United Kingdom, France, Germany, Japan, Canada and the United States. None of our leases areis individually material to our business operations and manyoperations. Many of our leases have an option to renew. Werenew, and we believe that we will be able to successfully renew expiring leases on terms satisfactory to us. We believe that our facilities are adequate for our operations and that suitable additional space will be available when
needed. For additional information see Note 9 to the Consolidated Financial Statements included elsewhere in this Form 10-K.
In 2008, we completed the major stages of our three year capacity expansion program, and in early 2009 we finished with the last few elements of the program with focus on facilities in China and Sherbrooke (Canada). We continually evaluate capacity in light of our customer needs and demands. Accordingly, in January 2010 we announced that we had decided to suspend operations at our Shrewsbury, Massachusetts, facility by the middle of 2010, with the intention to resume operations when global preclinical market conditions improve and we require additional capacity.
We are not a party to any material legal proceedings, other than ordinary routine litigation incidental to our business that is not material to our business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
Supplementary Item. Executive Officers of the Registrant(pursuant to Instruction 3 to Item 401(b) of Regulation S-K).
Below are the names, ages and principal occupations of each our current executive officers. All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal.
Thomas F. Ackerman, age 54,55, joined us in 1988 with over eleven years of combined public accounting and international finance experience. He was named Controller, North America in 1992 and became our Vice President and Chief Financial Officer in 1996. In 1999, he was named a Senior Vice President and in 2005 he was named a Corporate Executive Vice President. He is currently responsible for overseeing our Accounting and Finance Department and several other corporate staff departments. Prior to joining us, Mr. Ackerman was an accountant at Arthur Andersen & Co.
Christophe Berthoux, age 46,47, rejoined us in February 2005 as General Manager of our clinical services business. Following the sale of our Phase II-IV clinical services business in August 2006, Dr. Berthoux was named Corporate Senior Vice President, U.S. Research Models and Services and In Vitro Products and Services, and in 2008 he was named our Corporate Executive Vice President,
Global Sales and Marketing and Chief Commercial Officer. Previously, from 1990 to early 2004, Dr. Berthoux held a variety of managerial positions with the Company, including Corporate Vice President and head of European Research Models and Services.
James C. Foster, age 58,59, joined us in 1976 as General Counsel. Over the past 3034 years, Mr. Foster has held various staff and managerial positions, and was named our President in 1991, Chief Executive Officer in 1992 and our Chairman in 2000.
Nancy A. Gillett, age 53,54, joined us in 1999 with the acquisition of Sierra Biomedical. Dr. Gillett has 2224 years of experience as an ACVP board certified pathologist and scientific manager. In 1999, she became Senior Vice President and General Manager of our Sierra Biomedical division, and subsequently held a variety of managerial positions, including President and General Manager of Sierra Biomedical and Corporate Vice President and General Manager of Drug Discovery and Development (the predecessor to our Preclinical Services business segment). In 2004, Dr. Gillett was named Corporate Senior Vice President and President, Global Preclinical Services, and in 2006 she became a Corporate Executive Vice President.
David P. Johst, age 47,48, joined us in 1991 as Corporate Counsel and was named Vice President, Human Resources in 1995. He became Vice President, Human Resources and Administration in 1996, a Senior Vice President in 1999, and a Corporate Executive Vice President in 2005. He currently serves as the Company's General Counsel and Chief Administrative Officer and is responsible for overseeing our Human Resources department, our Consulting and Staffing Services business unit and several other corporate staff departments. Prior to joining the Company, Mr. Johst was an attorney in the Corporate Department at Hale and Dorr.
Real H. Renaud, age 62,63, joined us in 1964 and has over 4046 years of research models production and related management experience. In 1986, Mr. Renaud became Vice President of Production, with responsibility for overseeing the Company's North American small animal operations, and was named Vice President, Worldwide Production in 1990. Mr. Renaud became Vice President and General Manager, European and North American Animal Operations in 1996, following a two-year European assignment during which he provided direct oversight to our European operations. In 1999, he became a Senior Vice President and in 2003, Mr. Renaud became Corporate Executive Vice President and President Global Research Models and Services.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock began trading on the New York Stock Exchange on June 23, 2000 under the symbol "CRL." The following table sets forth for the periods indicated below the high and low sales prices for our common stock.
2009 | High | Low | |||||
---|---|---|---|---|---|---|---|
First quarter (through February 13, 2009) | $ | 29.87 | $ | 23.14 |
2008 | High | Low | |||||
---|---|---|---|---|---|---|---|
First quarter | $ | 69.04 | $ | 53.73 | |||
Second quarter | 65.95 | 55.14 | |||||
Third quarter | 69.19 | 57.84 | |||||
Fourth quarter | 58.00 | 19.92 |
2007 | High | Low | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | High | Low | ||||||||||||
First quarter (through February 12, 2010) | $ | 39.07 | $ | 32.74 | ||||||||||
2009 | High | Low | ||||||||||||
First quarter | $ | 47.64 | $ | 42.71 | $ | 29.87 | $ | 23.03 | ||||||
Second quarter | 54.04 | 45.30 | 33.28 | 23.29 | ||||||||||
Third quarter | 56.64 | 50.15 | 37.47 | 29.82 | ||||||||||
Fourth quarter | 68.00 | 55.11 | 40.14 | 30.95 | ||||||||||
2008 | High | Low | ||||||||||||
First quarter | $ | 69.04 | $ | 53.73 | ||||||||||
Second quarter | 65.95 | 55.14 | ||||||||||||
Third quarter | 69.19 | 57.84 | ||||||||||||
Fourth quarter | 58.00 | 19.92 |
There were no equity securities that were not registered under the Securities Act of 1933, as amended, sold by the Company during the fiscal year ended December 27, 2008.26, 2009.
Shareholders
As of February 13, 200912, 2010 there were approximately 572578 registered shareholders of the outstanding shares of common stock.
Dividends
We have not declared or paid any cash dividends on shares of our common stock in the past two years and we do not intend to pay cash dividends in the foreseeable future. We currently intend to retain any earnings to finance future operations and expansion. Some of the restrictive covenants contained in our revolving credit agreement and term loan agreements limit our ability to pay dividends.
Issuer Purchases of Equity Securities
The following table provides information relating to the Company's purchases of shares of its common stock during the quarter ended December 27, 2008.
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 28, 2008—Oct. 25, 2008 | 209,825 | $ | 46.91 | 209,308 | $ | 202,065,830 | |||||||
Oct. 26, 2008—Nov. 22, 2008 | 220,671 | $ | 28.49 | 220,000 | $ | 195,803,701 | |||||||
Nov. 23, 2008—Dec. 27, 2008 | 370,000 | $ | 23.42 | 370,000 | $ | 187,139,993 | |||||||
Total | 800,496 | 799,308 | |||||||||||
The Board of Directors of the Company has authorized a share repurchase program, originally authorized on July 27, 2005 and subsequently amended on October 26, 2005, May 9, 2006, August 1, 2007 and July 24, 2008 to acquire up to a total of $600.0 million of common stock. The program does not have a fixed expiration date.
As of December 26, 2009, approximately $144.8 million remains authorized for share repurchases. During the quarter ended December 27, 2008,26, 2009, the Company repurchased 799,308did not repurchase any shares of common stock for approximately $24.7 million.stock. The timing and amount of any future repurchases will depend on market conditions and corporate considerations.
Additionally, the Company's Incentive Plans permit the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. Accordingly, during the quarter ended December 27, 2008,26, 2009, the Company acquired 1,1883,420 shares as a result of such withholdings.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, as of December 27, 2008,26, 2009, the number of options issued under the Company's stock option plans and the number of options available for future issuance under these plans.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (a) | (b) | (c) | ||||||||
Equity compensation plan approved by security holders: | |||||||||||
Charles River 2000 Incentive Plan | 3,459,396 | $ | 41.28 | 174,618 | |||||||
Charles River 1999 Management Incentive Plan | 30,754 | $ | 14.52 | 15,617 | |||||||
Inveresk 2002 Stock Option Plan | 136,305 | $ | 28.00 | — | |||||||
2007 Incentive Plan | 915,765 | (1) | $ | 58.25 | 4,399,402 | ||||||
Equity compensation plans not approved by security holders | — | — | — | ||||||||
Total | 4,542,220 | (2) | $ | 43.93 | 4,589,637 | (3) | |||||
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (a) | (b) | (c) | ||||||||
Equity compensation plan approved by security holders: | |||||||||||
Charles River 2000 Incentive Plan | 3,203,404 | $ | 41.22 | 445,668 | |||||||
Charles River 1999 Management Incentive Plan | 9,000 | $ | 36.72 | 15,617 | |||||||
Inveresk 2002 Stock Option Plan | 97,020 | $ | 24.24 | — | |||||||
2007 Incentive Plan | 2,907,519 | $ | 34.22 | 3,801,315 | |||||||
Equity compensation plans not approved by security holders | — | — | — | ||||||||
Total | 6,216,943 | (1) | 4,262,600 | (2) | |||||||
The following table provides additional information regarding the aggregate issuances under the Company's existing equity compensation plans as of December 27, 2008:26, 2009:
Category | Number of securities outstanding | Weighted average exercise price | Weighted average term | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (a) | (b) | (c) | |||||||
Total number of restricted shares outstanding(1) | 716,394 | $ | — | — | ||||||
Total number of options outstanding(2) | 4,542,220 | $ | 43.93 | 5.02 |
Category | Number of securities outstanding | Weighted average exercise price | Weighted average term | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (a) | (b) | (c) | |||||||
Total number of restricted shares outstanding(1) | 896,393 | $ | — | — | ||||||
Total number of options outstanding | 6,216,943 | $ | 37.67 | 4.77 |
ComparisionComparison of 5-Year Cumulative Total Return
Among Charles River Laboratories International, Inc., The S&P 500 Index and The NASDAQ Pharmaceutical Index.
The following stock performance graph compares the annual percentage change in the Company's cumulative total shareholder return on its Common Stock during a period commencing on December 27, 200325, 2004 and ending on December 27, 200826, 2009 (as measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the Company's share price at the end and the beginning of the measurement period; by (2) the share price at the beginning of the measurement period) with the cumulative total return of the S&P 500 Index and the NASDAQ Pharmaceutical Index during such period. The Company has not paid any dividends on the Common Stock, and no dividends are included in the representation of the Company's performance. The stock price performance on the graph below is not necessarily indicative of future price performance. The graph is not "soliciting material," is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. Information used in the graph was obtained from Standards & Poor's Institutional Market Services, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Charles River Laboratories International, Inc., The S&P 500 Index
And The NASDAQ Pharmaceutical Index
| Dec. 27, 2003 | Dec. 25, 2004 | Dec. 31, 2005 | Dec. 30, 2006 | Dec. 29, 2007 | Dec. 27, 2008 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Charles River Laboratories International, Inc. | 100.00 | 138.50 | 126.06 | 128.68 | 196.73 | 74.44 | |||||||||||||
S&P 500 | 100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | |||||||||||||
NASDAQ Pharmaceutical | 100.00 | 110.22 | 111.87 | 114.89 | 106.37 | 97.32 |
| Dec. 25, 2004 | Dec. 31, 2005 | Dec. 30, 2006 | Dec. 29, 2007 | Dec. 27, 2008 | Dec. 26, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Charles River Laboratories International, Inc. | 100.00 | 91.02 | 92.91 | 142.04 | 53.75 | 70.81 | |||||||||||||
S&P 500 | 100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | |||||||||||||
NASDAQ Pharmaceutical | 100.00 | 102.23 | 105.16 | 99.56 | 91.99 | 98.21 |
Item 6. Selected Consolidated Financial Data
The following selected financial data are derived from our Consolidated Financial Statements and notes thereto and should be read in conjunction with Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and consolidated financial statementsour Consolidated Financial Statements and notes thereto contained in Item 8., "Financial Statements and Supplementary Data" of this report.
| Fiscal Year(1) | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||
| (dollars in thousands) | ||||||||||||||||
Statement of Income Data: | |||||||||||||||||
Net sales | $ | 1,343,493 | $ | 1,230,626 | $ | 1,058,385 | $ | 993,328 | $ | 724,221 | |||||||
Cost of products sold and services provided | 832,784 | 752,435 | 651,778 | 603,624 | 435,499 | ||||||||||||
Selling, general and administrative expenses | 230,159 | 217,491 | 180,795 | 157,999 | 116,879 | ||||||||||||
Goodwill impairment | 700,000 | — | — | — | — | ||||||||||||
Amortization of goodwill and intangibles | 30,312 | 33,509 | 37,639 | 47,011 | 13,857 | ||||||||||||
Operating income (loss) | (449,762 | ) | 227,191 | 188,173 | 184,694 | 157,986 | |||||||||||
Interest income | 8,691 | 9,683 | 6,836 | 3,695 | 3,262 | ||||||||||||
Interest expense | (14,009 | ) | (18,004 | ) | (19,426 | ) | (24,324 | ) | (11,718 | ) | |||||||
Other, net | (5,930 | ) | (1,448 | ) | 981 | (177 | ) | 937 | |||||||||
Income (loss) before income taxes, minority interests and earnings from equity investments | (461,010 | ) | 217,422 | 176,564 | 163,888 | 150,467 | |||||||||||
Provision for income taxes | 61,944 | 59,400 | 49,738 | 16,261 | 60,159 | ||||||||||||
Income (loss) before minority interests and earnings from equity investments | (522,954 | ) | 158,022 | 126,826 | 147,627 | 90,308 | |||||||||||
Minority interests | 687 | (470 | ) | (1,605 | ) | (1,838 | ) | (1,577 | ) | ||||||||
Income (loss) from continuing operations | (522,267 | ) | 157,552 | 125,221 | 145,789 | 88,731 | |||||||||||
Income (loss) from discontinued businesses, net of tax | 424 | (3,146 | ) | (181,004 | ) | (3,790 | ) | 1,061 | |||||||||
Net income (loss) | $ | (521,843 | ) | $ | 154,406 | $ | (55,783 | ) | $ | 141,999 | $ | 89,792 | |||||
Common Share Data: | |||||||||||||||||
Earnings (loss) per common share | |||||||||||||||||
Basic | |||||||||||||||||
Continuing operations | $ | (7.76 | ) | $ | 2.35 | $ | 1.82 | $ | 2.09 | $ | 1.79 | ||||||
Discontinued operations | $ | 0.01 | $ | (0.05 | ) | $ | (2.63 | ) | $ | (0.05 | ) | $ | 0.02 | ||||
Net income (loss) | $ | (7.76 | ) | $ | 2.31 | $ | (0.81 | ) | $ | 2.04 | $ | 1.81 | |||||
Diluted | |||||||||||||||||
Continuing operations | $ | (7.76 | ) | $ | 2.29 | $ | 1.79 | $ | 2.02 | $ | 1.65 | ||||||
Discontinued operations | $ | 0.01 | $ | (0.05 | ) | $ | (2.59 | ) | $ | (0.05 | ) | $ | 0.02 | ||||
Net income (loss) | $ | (7.76 | ) | $ | 2.25 | $ | (0.80 | ) | $ | 1.96 | $ | 1.68 | |||||
Other Data: | |||||||||||||||||
Depreciation and amortization | $ | 91,183 | $ | 86,379 | $ | 82,586 | $ | 87,935 | $ | 42,063 | |||||||
Capital expenditures | 197,081 | 227,036 | 181,747 | 94,520 | 44,735 | ||||||||||||
Balance Sheet Data (at end of period): | |||||||||||||||||
Cash and cash equivalents | $ | 243,592 | $ | 225,449 | $ | 175,380 | $ | 114,821 | $ | 207,566 | |||||||
Working capital | 317,141 | 305,336 | 241,762 | 107,910 | 161,191 | ||||||||||||
Goodwill, net | 457,578 | 1,120,540 | 1,119,309 | 1,097,590 | 1,102,511 | ||||||||||||
Total assets | 2,159,918 | 2,805,537 | 2,557,544 | 2,538,209 | 2,626,835 | ||||||||||||
Total debt | 576,098 | 510,049 | 572,054 | 296,090 | 686,844 | ||||||||||||
Total shareholders' equity | 1,199,025 | 1,860,467 | 1,595,211 | 1,827,013 | 1,472,505 |
| Fiscal Year(1) | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
| (dollars in thousands) | ||||||||||||||||
Statement of Income Data: | |||||||||||||||||
Net sales | $ | 1,202,551 | $ | 1,343,493 | $ | 1,230,626 | $ | 1,058,385 | $ | 993,328 | |||||||
Cost of products sold and services provided | 773,183 | 832,784 | 752,435 | 651,778 | 603,624 | ||||||||||||
Selling, general and administrative expenses | 233,995 | 230,266 | 217,523 | 180,795 | 157,999 | ||||||||||||
Goodwill impairment | — | 700,000 | — | — | — | ||||||||||||
Amortization of intangibles | 28,447 | 30,312 | 33,509 | 37,639 | 47,011 | ||||||||||||
Operating income (loss) | 166,926 | (449,869 | ) | 227,159 | 188,173 | 184,694 | |||||||||||
Interest income | 1,777 | 8,691 | 9,683 | 6,836 | 3,695 | ||||||||||||
Interest expense | (21,682 | ) | (22,334 | ) | (24,453 | ) | (23,200 | ) | (24,324 | ) | |||||||
Other, net | 2,086 | (5,930 | ) | (1,448 | ) | 981 | (177 | ) | |||||||||
Income (loss) from continuing operations before income taxes | 149,107 | (469,442 | ) | 210,941 | 172,790 | 163,888 | |||||||||||
Provision for income taxes | 39,725 | 56,174 | 56,677 | 48,164 | 16,261 | ||||||||||||
Income (loss) from continuing operations net of income taxes | 109,382 | (525,616 | ) | 154,264 | 124,626 | 147,627 | |||||||||||
Income (loss) from discontinued businesses, net of tax | 3,220 | 424 | (3,146 | ) | (181,004 | ) | (3,790 | ) | |||||||||
Net income (loss) | 112,602 | (525,192 | ) | 151,118 | (56,378 | ) | 143,837 | ||||||||||
Net income (loss) attributable to noncontrolling interests | 1,839 | 687 | (470 | ) | (1,605 | ) | (1,838 | ) | |||||||||
Net income (loss) attributable to common shareowners | $ | 114,441 | $ | (524,505 | ) | $ | 150,648 | $ | (57,983 | ) | $ | 141,999 | |||||
Common Share Data: | |||||||||||||||||
Earnings (loss) per common share | |||||||||||||||||
Basic | |||||||||||||||||
Continuing operations attributable to common shareowners | $ | 1.70 | $ | (7.80 | ) | $ | 2.30 | $ | 1.78 | $ | 2.09 | ||||||
Discontinued operations | $ | 0.05 | $ | 0.01 | $ | (0.05 | ) | $ | (2.63 | ) | $ | (0.05 | ) | ||||
Net income (loss) attributable to common shareowners | $ | 1.75 | $ | (7.80 | ) | $ | 2.25 | $ | (0.84 | ) | $ | 2.04 | |||||
Diluted | |||||||||||||||||
Continuing operations attributable to common shareowners | $ | 1.69 | $ | (7.80 | ) | $ | 2.24 | $ | 1.76 | $ | 2.02 | ||||||
Discontinued operations | $ | 0.05 | $ | 0.01 | $ | (0.05 | ) | $ | (2.59 | ) | $ | (0.05 | ) | ||||
Net income (loss) attributable to common shareowners | $ | 1.74 | $ | (7.80 | ) | $ | 2.19 | $ | (0.83 | ) | $ | 1.96 | |||||
Other Data: | |||||||||||||||||
Depreciation and amortization | $ | 93,553 | $ | 91,290 | $ | 86,411 | $ | 82,586 | $ | 87,935 | |||||||
Capital expenditures | 80,012 | 199,858 | 230,938 | 183,529 | 94,520 | ||||||||||||
Balance Sheet Data (at end of period): | |||||||||||||||||
Cash and cash equivalents | $ | 182,574 | $ | 243,592 | $ | 225,449 | $ | 175,380 | $ | 114,821 | |||||||
Working capital | 345,828 | 317,141 | 299,587 | 241,762 | 107,910 | ||||||||||||
Goodwill, net | 508,235 | 457,578 | 1,120,540 | 1,119,309 | 1,097,590 | ||||||||||||
Total assets | 2,204,093 | 2,141,413 | 2,778,313 | 2,523,449 | 2,538,209 | ||||||||||||
Total debt | 492,832 | 515,332 | 437,902 | 489,284 | 296,090 | ||||||||||||
Total shareowners' equity | 1,375,243 | 1,241,286 | 1,905,390 | 1,643,892 | 1,827,013 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis will help you understand the financial condition and results of operations. The Management's Discussion and Analysis is a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.
Overview
Continuing Operations
We are a leading global provider of solutions that advance the drug discovery and development process, including research models and associated services and outsourced preclinical services. We provide our products and services to global pharmaceutical companies, biotechnology companies, as well as government agencies, and leading hospitals and academic institutions throughout the world in order to bring drugs to market faster and more efficiently. Our broad portfolio of products and services enables our customers to reduce costs, increase speed to market and enhance their productivity and effectiveness in drug discovery and development. We have built upon our core competency of laboratory animal medicine and science (research model technologies) to develop a diverse and growing portfolio of regulatory compliant preclinical services which address drug discovery and development in the preclinical arena. We have been in business for over 60 years and currently operate approximately 70 facilities in 1716 countries worldwide.
Our sales growthThis was a challenging year for preclinical services. We believe business restructuring and reprioritization of pipelines by pharmaceutical and biotechnology clients in 2008 was drivenand early 2009 contributed towards reduced demand as we started the year. As 2009 progressed our operating results were further negatively impacted by an assortment of factors including: continued measured spending by major pharmaceuticals,pharmaceutical and biotechnology companies and academic institutions on our global products and services, which aid in their development of new drugs and products, partially offset bydue to the impact of the slower economy and world wide credit crisis.crisis; a period of accelerating consolidations; significant study slippage and delays in customer decisions and commitments; tight cost constraints and recognition of excess preclinical capacity within our industry which resulted in pricing pressure; a focus on late-stage (human) testing as customers endeavor to bring drugs to market; and pending healthcare reform initiatives. All of these factors contributed to demand uncertainty and impacted sales in 2009. As we look forward, we anticipate market demand, particularly for Preclinical Services will begin to ramp up slowly beginning in the second quarter of 2010. As our customers reinvigorate their drug development efforts and continue to employ methods to improve the effectiveness and cost efficiency of their drug development pipelines, as well as complete consolidations that have been announced, we believe they will increase their focus on strategic outsourcing, which will drive demand for the services we provide.
We expectbelieve that the long-term drivers for our business as a whole will primarily to emerge from our customers' continued demand for research models and services and regulatory compliant preclinical services, as well as increased strategic focus on outsourcing. Duringwhich are essential to the second half of 2008, demand for our services decelerated at a greater rate than products impacting our growth rate.drug development process. We believe this was primarily due to emerging factors which include: business restructuring and reprioritization of pipelines by pharmaceutical and biotechnology clients, which led to significant and accelerating study slippage and delays; lack of funding for biotechnology companies; and tight cost controls which resulted in more measured spending and some pricing pressure.
Our 2009 expectations reflect softer market demand, particularly for preclinical services which will continue at least until mid-year. We believe that our clients willalso continue to outsource drug development services as they strive to improve the efficiency of their drug pipelines. For additional discussion of the factors that we believe are influencing outsourcing demand from our customers, please see the section entitled "Our Strategy" included elsewhere in this Form 10-K.
We are using this period of market uncertainty to streamline our operations, and have implemented additional actions to improve our operating efficiency. These actions include initiating a hiring freeze, a salary freeze for a substantial percentage of our workforce, including all incentive-eligible employees, continued tight control of discretionary spending and implementing a headcount reduction affecting 3% of our total workforce (predominately in our PCS business segment) and the closure of our Arkansas facility. As a result of these cost-saving actions, the Company will take a one-time charge in 2009 of approximately $9.0 million. The Company expects that these actions will reduce costs by approximately $20.0 million in 2009, with an annual run-rate of approximately $25.0 million. We also are pursuing strategic alternatives for our clinical Phase I operation in Scotland, with an intention to divest these operations.
Our capital expenditures totaled $197.1 million in 2008 and our planned capital expenditures in 2009 are in the range of $100 million to $120 million. As a result of the factors which are affecting our sales growth, we evaluated our expansion plans and determined that we have sufficient capacity to accommodate our clients' current demand. We expect to open the Sherbrooke (Canada) facility in the first half of 2009, in order to relieve capacity constraints at our Montreal facility. We have delayed the expansion of our Ohio facility until 2010, when we believe the industry will be better positioned to absorb additional capacity.
In addition to internally generated organic growth, our business strategy includespursue strategic "bolt-on" acquisitions that complement our business, increase the rate of our growth or geographically
expand our existing services, as evidenced by our acquisitions of NewLab BioQuality AGSystems Pathology Company, Cerebricon and MIRPiedmont Research Center in 2009.
During this period of market uncertainty, we continue to align our organization to support market requirements. The actions we implemented in 2009 included restrictions on hiring, a salary freeze for a substantial percentage of our workforce, including almost all incentive-eligible employees (since lifted in 2010), continued tight control of discretionary spending, headcount reductions, predominately in our Preclinical Services (PCS) business segment, reduction in 2008.
Our annual goodwill impairment assessment has historically been completed attargeted bonus amounts and other benefits, and the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair valueclosure of our business units exceeded their carrying value thereforeArkansas facility. As a result of these actions, we recorded a charge for severance costs of $16.6 million. Additionally during 2009 we realigned our goodwill was not impaired. As economic conditions worsened late inPCS organization as well as our Sales and Marketing team to enhance our customer service and client focus. During 2010 and into the fourth quarterfuture we are continuing our process improvement initiatives including the ongoing roll out of our ERP system and our business performance and outlook were not as strong as anticipated, coupled with a decreaseLean Six Sigma program to drive further efficiencies in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test asorganization.
Table of December 27, 2008. Our analysis resulted in the determination that the fair valueContents
We have evaluated our capacity plans for our PCS business, was lesstaking into consideration the factors that are affecting our sales and determined that we have more than its carrying value. The second stepsufficient capacity to accommodate our clients' current demand. Accordingly, we will suspend operations at our PCS facility in Shrewsbury, Massachusetts during 2010. We intend to resume operations when global preclinical market conditions improve and we require additional capacity. In light of our completed facility expansions, our leaner infrastructure is intended to improve our operating margins while providing us with sufficient capacity and flexibility to accommodate increased demand in the goodwill impairment test involved us calculatingfuture. As a result of this decision, the implied goodwillCompany expects to record charges of approximately $7 million, primarily in the first quarter of 2010, for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill, resultingseverance and related costs. We expect in a goodwill impairment of $700 million.total these actions have reduced costs by approximately $40 million in 2009 and $70 million in 2010.
Total net sales in 20082009 were $1.3$1.2 billion, an increasea decrease of 9.2% over 2007 with demand decelerating during the second half of the year.10.5% from 2008. The sales increasedecrease was due primarily to increased customer demand and higher pricing in Research Models and Services (RMS), strong large model safety testing and certain specialty toxicology sales partially offset by slower demand for PCS due to significant study slippage and delays in customer decisions and commitments, lack of capital market funding for biotechnology companies, our clients' restructuringtight cost controls which resulted in more measured spending and reprioritization efforts, particularly in Europe.pricing pressure, and a focus on late-stage (human) testing as customers endeavor to bring drugs to market. The effect of foreign currency translation added 1.3% tohad a negative impact on sales growth.of 2.3%. Our gross margin decreased to 38.0%35.7% of net sales compared to 38.9%38.0% of net sales in 2007,2008, due primarily to lower sales growth.sales.
Our operating income for 2009 was $166.9 million compared to a loss for 2008 was $449.8of $449.9 million compared to income of $227.2 million for 2007 primarily due to theour goodwill impairment of $700 million in 2008.
Net Income from continuing operations attributable to common shareowners was $111.2 million in 2009 compared to a loss from continuing operations was $522.3attributable to common shareowners of $524.9 million in 2008 compared to2008. Diluted income of $157.6 million in 2007. Diluted loss per share from continuing operations attributable to common shareowners for 20082009 was $7.76$1.69 compared to earningsa loss per share of $2.29$7.80 in 2007.2008. Our capital expenditures totaled $80.0 million for 2009, compared to $199.9 million for 2008. Our planned capital expenditures in 2010 are in the range of $60 million to $70 million. Net income attributable to common shareowners for 2009 was $114.4 million compared to loss attributable to common shareowners for 2008 of $524.5 million.
We report two segments: RMS and PCS, which reflect the manner in which our operating units are managed.
Our RMS segment, which represented 49.1%54.9% of net sales in 2008,2009, includes sales of research models, genetically engineered models and services (GEMS), research animal diagnostics (RADS), discovery and imaging services, consulting and staffing services, vaccine support, andin vitro technology (primarily endotoxin testing). Although demand decelerated during the second half of the year, net business. Net sales for this segment increased 14.3%were flat compared to 2007 due to increased small model sales in the United States and Europe, increased consulting and staffing services and strong in vitro sales. Favorable2008, with unfavorable foreign currency translation increasedof 1.3% partially offset by the net sales gain by 3.7%.addition of Piedmont Research Center, Cerebricon and MIR Preclinical Services. We experienced decreases in both the RMS gross margin, from 43.1% to 42.2%, and operating margin from 30.1% to 29.3% compared to last year (to 43.1% from 43.2% and to 30.1% from 30.7%, respectively) due mainly to the impact of the greater proportion of services in theour fixed costs with flat sales mix and the second-quarter increase in operating expenses in Japan.partially offset by cost savings.
Our PCS segment, which represented 50.9%45.1% of net sales in 2008,2009, includes services required to take a drug through the development process including discovery support, toxicology, pathology, biopharmaceutical, bioanalysis, pharmacokinetics and drug metabolism services as well as Phase I clinical trials. Sales for this segment increased 4.6%decreased 20.6% over 2007, however, demand decelerated during the second half of the year. Sales were2008 driven by continuingslower demand for large model safety testingpreclinical services and certain specialty toxicology studies as well asunfavorable foreign currency, which decreased sales growth by 3.2%, partially offset by the acquisitionfull-year impact of NewLab BioQuality AG, partially offset by more measured pharmaceutical spending due to our clients' restructuring and reprioritization efforts, particularlywhich we acquired in Europe. Unfavorable foreign currency decreased sales growth by 0.9%.September of 2008. We experienced a decrease in the PCS gross margin duringfrom 33.1% in 2008 to 33.1% from 35.0%27.8% in 2007,2009, due mainly to lower capacity utilization due to the lower sales growthvolume, increased pricing pressure, and additional costs associated with the transition to thestart up of our new preclinical facilityfacilities in NevadaChina and start-up costs in China.Canada partially offset by expense management. As a result of theour goodwill impairment, the 2008 operating margin was a negative 87.3% compared to 15.8%6.8% in 2007.2009.
Net Income
Net loss for 2008 was $521.8 million compared to income of $154.4 million in 2007.
Critical Accounting Policies and Estimates
The preparationPreparation of these financial statements requires management to use judgment when making assumptions that are involved in preparing estimates that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Some of those estimates can be complex and require management to make estimates about the future and actual results could differ from those estimates. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For any given estimate or assumption made by management, there may also be other estimates or assumptions that are reasonable.
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the consolidated financial statements of Charles River Laboratories International, Inc. which have been prepared in accordance with accounting principles generally accepted in the United States. Management believes We consider the following criticalaccounting estimates important in understanding our operating results and financial condition. For additional accounting policies are most affected by significant judgments and estimates used in the preparation of our consolidated financial statements. The following summary should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-K. We believe the following critical accounting policies and estimates reflect our more significant judgments and estimates than usual in the preparation of our consolidated financial statement:see Notes to Consolidated Financial Statements—Note 1.Significant Accounting Policies.
Valuation and Impairment of Goodwill, Other Intangible Assets, and Other Long-Lived Assets We have intangible
Valuation of certain long-lived assets including goodwillproperty, plant and other identifiable and indefinite-lived acquired intangibles on our balance sheet due to our acquisitions of businesses. The initial identification and valuation of theseequipment, intangible assets, and the determination of the estimated useful lives at the time of acquisition involve use of management judgmentsgoodwill requires significant judgment. Assumptions and estimates. These estimates are based on, among other factors, input from accredited valuation consultants, reviews of projected future income cash flows and statutory regulations. The use of alternative estimates and assumptions might have increased or decreasedused in determining the estimated fair value of assets acquired and liabilities assumed in a business acquisition. A significant portion of the purchase price in our goodwill and otheracquisitions is assigned to intangible assets and goodwill. Assigning value to intangible assets requires that we use significant judgment in determining (i) the fair value and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible assets will be amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of long-lived assets. Typically, key assumptions include projected revenue and expense levels used in establishing the fair value of business acquisitions as well as discount rates based on an analysis of our weighted average cost of capital, adjusted for specific risks associated with the assets. Changes in the initial assumptions could potentially resultlead to changes in a different impact toamortization expense recorded in our results of operations.future financial statements.
We perform an annual impairment analysis of goodwill to determine if impairment exists. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Determining
the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review.projections. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned
to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships.
Our annual goodwill impairment assessment has historically been completed atas of the beginning of the fourth quarter. Based on our initial assessment (step one) for 2009, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. The results of this year's impairment test are as of a point in time. If the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 26, 2009, we had recorded goodwill and other intangibles of $668.5 million in the consolidated balance sheet.
At the beginning of the fourth quarter of 2008, based on our initial assessment (step one), the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700 million.
Goodwill willFor intangible assets, goodwill and property, plant and equipment, we assess the carrying value of these assets whenever events or changes in circumstances indicate that the carrying value may not be amortized,recoverable. Factors we consider important which could trigger an impairment review include but will be reviewed for impairment at least annually. The results of this year's impairment test are as of a pointnot limited to the following:
Should we determine that the carrying value of long-lived tangible assets may not be recoverable, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business are not as strong as anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating themodel. We may also estimate fair value based on market prices for similar assets, as appropriate. Significant judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. Changes in subsequent years. Tothese estimates and assumptions could materially affect the extent goodwill is impaired, its carrying value will be written down to its implieddetermination of fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 27, 2008, we had recorded goodwill and other intangibles of $593.7 million in the consolidated balance sheet.for these assets.
Revenue Recognition
We recognize revenue on productrelated to our products, which include research models, in vitro technology and services sales. We record product revenuevaccine support products, when persuasive evidence of an arrangement exists, generally in the form of customer purchase orders, title and risk of loss have transferred, which occurs upon delivery has occurred,of the price toproducts, the buyersales price is fixed orand determinable and collectability is reasonably assured. RecognitionThese recognition criteria are met at the time the product is delivered to the customer's site. Product sales are recorded net of returns upon delivery. For large models in some cases customers pay in advance of delivery of the product. These advances are deferred and recognized as revenue upon delivery of the product.
Our service revenue is primarily basedcomprised of toxicology, pathology, laboratory, clinical Phase I trials, GEMS and consulting and staffing services and is generally evidenced by customer contracts. Toxicology services provide highly specialized studies to evaluate the safety and toxicity of new pharmaceutical compounds and materials used in medical devices. Pathology services provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. Laboratory services monitor and analyze the health and genetics of research models used in research protocols. Clinical Phase I conducts tolerability assessments to explore human pharmacology. GEMS services include validating, maintaining, breeding and testing research models for biomedical research activities. Consulting and staffing services provide management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations.
The toxicology, pathology and clinical Phase I trials services arrangements typically range from one to six months but can range up to approximately 24 months in length. These agreements are negotiated for a fixed fee. Laboratory service arrangements are generally completed within a one-month period and are also of a fixed fee nature. GEMS and consulting and staffing services are of a longer-term nature, from six months to five years, and are billed at agreed upon rates as specified in the contract.
Our service revenue is recognized upon the completion of agreed-upon servicethe agreed upon performance criteria. These performance criteria are generally in the form of either study protocols or specified activities or procedures including rate specified contractswhich we are engaged to perform. These performance criteria are established by our customers and fixed fee contracts.do not contain acceptance provisions which are based upon the achievement of certain study or laboratory testing results. Revenue of agreed-uponagreed upon rate contracts is recognized as services are performed, based onupon rates specified in the contract. Revenue of fixed fee contracts is recognized as services are performed in relation to estimated costs to complete procedures specified by the customers in the form of study protocols. Our fixed fee service contracts, whichIn general, such amounts become billable in accordance with predetermined payment schedules, but are utilized mainly in our Preclinical segment, vary in term from a few days to greater than a year, with the majority of such contracts having a term of less than six months. Management reviews the costs incurred andrecognized as revenue as services provided to date on these contracts in relation to the total estimated effort to complete the contract.are performed. As a result of the reviews, revisions in estimated effort to complete the contract are reflected in the period in which the change became known. These judgments
Deferred and estimatesunbilled revenue are not expected to resultrecognized in a change that would materially affect our reported results.consolidated balance sheets. In some cases, a portion of the contract fee is paid at the time the study is initiated. These advances are recorded as deferred revenue and recognized as revenue as services are performed. Conversely, in some cases, revenue is recorded based on the level of service
performed in advance of billing the customer with the offset to unbilled receivable. As of December 27, 2008,26, 2009, we had recorded unbilled revenue of $51.8$32.6 million and deferred revenue of $86.7$72.4 million in our consolidated balance sheet based on the difference between the estimated level of services performed and the billing arrangements defined by our service contracts.
Pension Plan Accounting As of December 27, 2008, we had a
Our defined benefit pension liability of $32.2 million.plans' assets, liabilities and expenses are calculated by accredited independent actuaries using certain assumptions which are approved by management. The actuarial computations require the use of assumptions to estimate the total benefits ultimately payable to employees and allocate this cost to the service periods. The key assumptions used to calculate pension costs are determined and reviewed annually by management after consulting with outside investment advisors and actuaries. The key assumptions include the discount rate, the expected return on plan assets and expected future rate of salary increases. In addition, our actuaries determine the expense or liability of the plan using other assumptions for future experiences such as withdrawal and mortality rate. The key assumptions used to calculate pension costs are determined and reviewed annually by management after consulting with outside investment advisors and actuaries. The assumed discount rate, which is intended to be the actual rate at which benefits could effectively be settled, is adjusted based on the change in the long-term bond yield as of the measurement date. As of December 27, 2008,26, 2009, the weighted-average discount rate for our pension plans was 5.74%5.41%. As of December 26, 2009, we had a pension liability of $32.6 million.
The assumed expected return on plan assets is the average return expected on the funds invested or to be invested to provide future benefits to pension plan participants. This includes considering the assets
asset allocation and expected returns likely to be earned over the life of the plan. If the actual return is different from the assumed expected return in plan assets, the difference would be amortized over a period of approximately 15 to 20 years. The estimated effect of a 1.0% change in the expected rate of return would increase or decrease pension expense by $1.3$1.8 million.
During 2008, our Board of Directors voted to freeze the accrual of benefits under our U.S. pension plan effective April 30, 2008. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," we recorded a curtailment gain of $3.3 million in 2008.
Stock-based Compensation
We recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options and restricted stock awards based on estimated fair values. Accordingly, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award and is recognized as expense on a straight-line basis over the requisite service period which is generally the vesting period. During the year ended December 27, 2008,26, 2009, we recognized $24.3$23.8 million of stock compensation expense associated with stock options, restricted stock and performance based stock awards.
We estimate the fair value of stock options using the Black-Scholes option-pricing model and the fair value of our restricted stock awards and restricted stock units based on the quoted market price of our common stock. We recognize the associated compensation expense on a straight-line basis over the vesting periods of the awards, net of estimated forfeitures. Forfeiture rates are estimated based on historical pre-vesting forfeitures and are updated on vesting datea quarterly basis to reflect actual forfeitures.forfeitures of unvested awards.
Estimating the fair value for stock options requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free interest rates. The expected volatility rates are estimated based on historical volatilities of our common stock over a period of time that approximates the expected term of the options. The expected term represents the average time that options are expected to be outstanding and is estimated based on the historical exercise and post-vesting cancellation patterns of our stock options. Expected dividends are estimated based on our dividend history as well as our current projections. The risk-free interest rate is based on the market yield of U.S. Treasury securities for periods approximating the expected terms of the options in effect at the time of grant. These assumptions are updated on at least an annual basis or when there is a significant change in circumstances that could affect these assumptions.
The fair value of option based stock awards granted during 2008 was estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
| December 27, 2008 | |||
---|---|---|---|---|
Expected life (in years) | 4.5 | |||
Expected volatility | 24.0 | % | ||
Risk-free interest rate | 2.76 | % | ||
Expected dividend yield | 0.0 | % | ||
Weighted-average option grant date fair value | $ | 14.85 |
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax expense and assessing temporary and permanent differences resulting from differing treatment of items for tax and accountingfinancial reporting purposes. These differences result inWe recognize deferred tax assets and liabilities which are includedfor the temporary differences using the enacted tax rates and laws that will be in our consolidated balance sheet.effect when we expect the differences to reverse. We must assess the likelihood thatrealizability of our deferred tax assets will be recovered from future taxable incomebased upon the weight of available evidence both positive and tonegative. To the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that actual results differ from theseour estimates or we adjust theseour estimates in the future, periods, we may need to establish an additional valuation allowanceincrease or decrease income tax expense which could impact our financial position orand results of operations.
As of December 27, 2008,26, 2009, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $192.9$278 million. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. Federal and state taxes and withholding taxes payable to the various foreign countries. It is not practicable to estimate the amount of additional tax that might beincome taxes payable on this undistributedthe earnings that are indefinitely reinvested in foreign income.operations.
We are a worldwide business and operate in various tax jurisdictions where tax laws and tax rates are subject to change given the political and economic climate in these countries. We report and pay income taxes based upon operational results and applicable law. Our tax provision is based upon enacted tax rates in effect to determine both the current and deferred tax position. Any significant fluctuation in tax rates or changes in tax laws could cause our estimate of taxes to change resulting in either increases or decreases in our effective tax rate.
Effective December 31, 2006, we adopted the provisions of FIN 48 "Accountinga new accounting standard for Uncertaintyuncertainty in Income Taxes-an interpretation of FASB Statement No. 109,"income taxes which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48The guidance also provides guidance onfor the derecognition of previously recognized income tax items, measurement, classification, interest and penalties, accounting in interim periods and financial statement disclosure. Under FIN 48,Accordingly, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in our financial statements from such positions are measured on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Due to our size and the number of tax jurisdictions within which we conduct our global business operations, we are subject to income tax audits on a regular basis. As a result, we have tax reserves which are attributable to potential tax obligations around the world. We believe we have sufficiently provided for all audit exposures and assessments. SettlementsResolutions of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in an increase or decrease to our effective tax rate.
Results of Operations
The following table summarizes historical results of operations as a percentage of net sales for the periods shown:
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
Net sales | 100 | % | 100.0 | % | 100.0 | % | ||||
Cost of products sold and services provided | 64.3 | % | 62.0 | % | 61.1 | % | ||||
Selling, general and administrative expenses | 19.5 | % | 17.1 | % | 17.7 | % | ||||
Goodwill impairment | — | 52.1 | % | — | ||||||
Amortization of other intangibles | 2.4 | % | 2.3 | % | 2.7 | % | ||||
Operating income (loss) | 13.9 | % | (33.5 | )% | 18.5 | % | ||||
Interest income | 0.1 | % | 0.6 | % | 0.8 | % | ||||
Interest expense | 1.8 | % | 1.7 | % | 2.0 | % | ||||
Provision for income taxes | 3.3 | % | 4.2 | % | 4.6 | % | ||||
Noncontrolling interests | 0.2 | % | 0.1 | % | — | % | ||||
Income (loss) from continuing operations attributable to common shareowners | 9.2 | % | (39.1 | )% | 12.5 | % |
Segment Operations
The following tables show the net sales and the percentage contribution of each of our reportable segments for the past three years. They also show cost of products sold and services provided, selling,
general and administrative expenses, amortization of goodwill and intangibles and operating income by segment and as percentages of their respective segment net sales.
| Fiscal Year Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | ||||||||
| (dollars in millions) | ||||||||||
Net sales: | |||||||||||
Research models and services | $ | 659.9 | $ | 577.2 | $ | 515.0 | |||||
Preclinical services | 683.6 | 653.4 | 543.4 | ||||||||
Cost of products sold and services provided: | |||||||||||
Research models and services | $ | 375.3 | $ | 327.9 | $ | 300.9 | |||||
Preclinical services | 457.5 | 424.5 | 350.9 | ||||||||
Goodwill impairment | |||||||||||
Research models and services | $ | — | $ | — | $ | — | |||||
Preclinical services | 700.0 | — | — | ||||||||
Selling, general and administrative expenses: | |||||||||||
Research models and services | $ | 83.3 | $ | 70.3 | $ | 65.9 | |||||
Preclinical services | 94.8 | 93.7 | 73.0 | ||||||||
Unallocated corporate overhead | 52.1 | 53.5 | 41.9 | ||||||||
Amortization of other intangibles: | |||||||||||
Research models and services | $ | 2.6 | $ | 1.9 | $ | 0.4 | |||||
Preclinical services | 27.7 | 31.6 | 37.2 | ||||||||
Operating income (loss): | |||||||||||
Research models and services | $ | 198.7 | $ | 177.1 | $ | 147.8 | |||||
Preclinical services | (596.4 | ) | 103.6 | 82.3 | |||||||
Unallocated corporate overhead | (52.1 | ) | (53.5 | ) | (41.9 | ) |
| Fiscal Year Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||
| (dollars in millions) | ||||||||||
Net sales: | |||||||||||
Research models and services | $ | 659.9 | $ | 659.9 | $ | 577.2 | |||||
Preclinical services | 542.6 | 683.6 | 653.4 | ||||||||
Cost of products sold and services provided: | |||||||||||
Research models and services | $ | 381.3 | $ | 375.3 | $ | 327.9 | |||||
Preclinical services | 391.9 | 457.5 | 424.5 | ||||||||
Goodwill impairment: | |||||||||||
Preclinical services | — | 700.0 | — | ||||||||
Selling, general and administrative expenses: | |||||||||||
Research models and services | $ | 79.0 | $ | 83.3 | $ | 70.3 | |||||
Preclinical services | 91.5 | 94.8 | 93.7 | ||||||||
Unallocated corporate overhead | 63.5 | 52.2 | 53.5 | ||||||||
Amortization of other intangibles: | |||||||||||
Research models and services | $ | 6.4 | $ | 2.6 | $ | 1.9 | |||||
Preclinical services | 22.1 | 27.7 | 31.6 | ||||||||
Operating income (loss): | |||||||||||
Research models and services | $ | 193.3 | $ | 198.7 | $ | 177.1 | |||||
Preclinical services | 37.1 | (596.4 | ) | 103.6 | |||||||
Unallocated corporate overhead | (63.5 | ) | (52.2 | ) | (53.5 | ) |
| Fiscal Year Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | ||||||||
Net sales: | |||||||||||
Research models and services | 49.1 | % | 46.9 | % | 48.7 | % | |||||
Preclinical services | 50.9 | % | 53.1 | % | 51.3 | % | |||||
Cost of products sold and services provided: | |||||||||||
Research models and services | 56.9 | % | 56.8 | % | 58.4 | % | |||||
Preclinical services | 66.9 | % | 65.0 | % | 64.6 | % | |||||
Goodwill impairment | |||||||||||
Research models and services | — | — | — | ||||||||
Preclinical services | 102.4 | % | — | — | |||||||
Selling, general and administrative expenses: | |||||||||||
Research models and services | 12.6 | % | 12.2 | % | 12.8 | % | |||||
Preclinical services | 13.9 | % | 14.3 | % | 13.4 | % | |||||
Unallocated corporate overhead | — | — | — | ||||||||
Amortization of other intangibles: | |||||||||||
Research models and services | 0.4 | % | 0.3 | % | 0.1 | % | |||||
Preclinical services | 4.1 | % | 4.8 | % | 6.8 | % | |||||
Operating income: | |||||||||||
Research models and services | 30.1 | % | 30.7 | % | 28.7 | % | |||||
Preclinical services | (87.3 | )% | 15.9 | % | 15.2 | % | |||||
Unallocated corporate overhead | (3.9 | )% | (4.3 | )% | (4.0 | )% |
| Fiscal Year Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||
Net sales: | |||||||||||
Research models and services | 54.9 | % | 49.1 | % | 46.9 | % | |||||
Preclinical services | 45.1 | % | 50.9 | % | 53.1 | % | |||||
Cost of products sold and services provided: | |||||||||||
Research models and services | 57.8 | % | 56.9 | % | 56.8 | % | |||||
Preclinical services | 72.2 | % | 66.9 | % | 65.0 | % | |||||
Goodwill impairment: | |||||||||||
Preclinical services | — | 102.4 | % | — | |||||||
Selling, general and administrative expenses: | |||||||||||
Research models and services | 12.0 | % | 12.6 | % | 12.2 | % | |||||
Preclinical services | 16.8 | % | 13.9 | % | 14.3 | % | |||||
Unallocated corporate overhead | — | — | — | ||||||||
Amortization of other intangibles: | |||||||||||
Research models and services | 1.0 | % | 0.4 | % | 0.3 | % | |||||
Preclinical services | 4.1 | % | 4.1 | % | 4.8 | % | |||||
Operating income: | |||||||||||
Research models and services | 29.3 | % | 30.1 | % | 30.7 | % | |||||
Preclinical services | 6.8 | % | (87.3 | )% | 15.9 | % | |||||
Unallocated corporate overhead | (5.3 | )% | (3.9 | )% | (4.3 | )% |
In our consolidated statements of income, we provide a breakdown of net sales and cost of sales between net products and services. Such information is reported irrespective of the business segment from which the sales were generated.
ResultsFiscal 2009 Compared to Fiscal 2008
Net Sales. Net sales in 2009 were $1,202.6 million, a decrease of Operations$140.9 million, or 10.5%, from $1,343.5 million in 2008.
Research Models and Services. In 2009, net sales for our RMS segment were $659.9 million flat compared to 2008. Sales growth from the additions of Piedmont Research Center, MIR Preclinical Services and Cerebricon was offset by softer demand for products and services, a 1.3% negative impact from foreign currency translation and the divestiture of the vaccine business in Mexico.
Preclinical Services. In 2009, net sales for our PCS segment were $542.6 million, a decrease of $141.0 million, or 20.6%, compared to $683.6 million in 2008. The following table summarizes historical resultsdecrease in PCS sales was primarily due to slower demand for preclinical services and unfavorable foreign currency which decreased sales growth by 3.2% and the divestiture of operationsthe Phase I business in Scotland partially offset by full year impact of the acquisition of NewLab.
Cost of Products Sold and Services Provided. Cost of products sold and services provided in 2009 was $773.2 million, a decrease of $59.6 million, or 7.2%, from $832.8 million in 2008. Cost of products sold and services provided in 2009 was 64.3% of net sales, compared to 62.0% in 2008.
Research Models and Services. Cost of products sold and services provided for RMS in 2009 was $381.3 million, an increase of $6.0 million, or 1.6%, compared to $375.3 million in 2008. Cost of products sold and services provided as a percentage of net sales in 2009 was 57.8% compared to 56.9% in 2008. The increase in cost as a percentage of sales was due to the impact of increased fixed costs with flat sales.
Preclinical Services. Cost of services provided for the periods shown:PCS segment in 2009 was $391.9 million, a decrease of $65.6 million, or 14.3%, compared to $457.5 million in 2008. Cost of services provided as a percentage of net sales was 72.2% in 2009, compared to 66.9% in 2008. The increase in cost of products sold and services provided as a percentage of net sales was primarily due to lower capacity utilization, additional costs associated with the start up of the new preclinical facilities in Sherbrooke and China and severance costs partially offset by cost savings initiatives.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in 2009 were $234.0 million, an increase of $3.7 million, or 1.6%, from $230.3 million in 2008. Selling, general and administrative expenses in 2009 were 19.5% of net sales compared to 17.1% of net sales in 2008. The increase in selling, general and administrative expenses as a percent of sales was primarily due to the lower sales.
Research Models and Services. Selling, general and administrative expenses for RMS in 2009 were $79.0 million, a decrease of $4.3 million, or 5.2%, compared to $83.3 in 2008. Selling, general and administrative expenses decreased as a percentage of sales to 12.0% in 2009 from 12.6% in 2008, due mainly to tight control of discretionary costs and lower operating expenses in Japan.
Preclinical Services. Selling, general and administrative expenses for the PCS segment in 2009 were $91.5 million, a decrease of $3.3 million, or 3.6%, compared to $94.8 million in 2008 due mainly to tight control of discretionary costs, lower bonus expense and a gain on the sale of real estate. Selling, general and administrative expenses in 2009 increased to 16.8% of net sales compared 13.9% in 2008, due mainly to lower sales.
Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various costs primarily related to activities centered at our corporate headquarters, such as compensation (including
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of products sold and services provided | 62.0 | % | 61.1 | % | 61.6 | % | ||||
Selling, general and administrative expenses | 17.1 | % | 17.7 | % | 17.0 | % | ||||
Goodwill impairment | 52.1 | % | — | — | ||||||
Amortization of other intangibles | 2.3 | % | 2.7 | % | 3.6 | % | ||||
Operating income (loss) | (33.5 | )% | 18.5 | % | 17.8 | % | ||||
Interest income | 0.6 | % | 0.8 | % | 0.6 | % | ||||
Interest expense | 1.0 | % | 1.5 | % | 1.8 | % | ||||
Provision for income taxes | 4.6 | % | 4.8 | % | 4.7 | % | ||||
Minority interests | 0.1 | % | — | % | 0.2 | % | ||||
Income (loss) from continuing operations | (38.9 | )% | 12.8 | % | 11.8 | % |
stock-based compensation), information systems, compliance and facilities expenses associated with our corporate, administration and professional services functions was $63.5 million in 2009, compared to $52.2 million in 2008. The increase in unallocated corporate overhead during 2009 was due primarily to severance charges related to our cost-saving actions, growth in health care costs, increased costs associated with the evaluation of acquisition candidates and the impact of the 2008 pension curtailment gain.
Amortization of Other Intangibles. Amortization of other intangibles in 2009 was $28.5 million, a decrease of $1.8 million, from $30.3 million in 2008.
Research Models and Services. In 2009, amortization of other intangibles for our RMS segment was $6.4 million, an increase of $3.8 million from $2.6 million in 2008 due to acquisitions.
Preclinical Services. In 2009, amortization of other intangibles for our PCS segment was $22.1 million, a decrease of $5.6 million from $27.7 million in 2008.
Operating Income. Operating income in 2009 was $166.9 million, compared to a loss of $449.9 million in 2008.
Research Models and Services. In 2009, operating income for our RMS segment was $193.3 million, a decrease of $5.4 million, or 2.7%, from $198.7 million in 2008. Operating income as a percentage of net sales in 2009 was 29.3%, compared to 30.1% in 2008. The decrease in operating income as a percentage of sales was primarily due to the impact of our fixed cost with flat sales.
Preclinical Services. In 2009 operating income for our PCS segment was $37.1 million compared to a loss of $596.4 million in 2008. The increase in operating income was primarily due our $700 million goodwill impairment recorded in 2008, partially offset by the impact of lower sales and increased severance costs.
Interest Expense. Interest expense in 2009 was $21.7 million, compared to $22.3 million in 2008. The decrease was due to lower debt balances and lower interest rates on outstanding debt partially offset by increased interest expense on the convertible debt and reduced capitalized interest.
Interest Income. Interest income in 2009 was $1.8 million compared to $8.7 million in 2008 primarily due to lower cash balances and lower interest rates on invested funds.
Income Taxes. Income tax expense in 2009 was $39.7 million, a decrease of $16.5 million compared to $56.2 million in 2008. Our effective tax rate was 26.6% in 2009, compared to (12.0%) in 2008. The goodwill impairment adversely impacted our 2008 effective tax rate by (37.6%). Other changes in the effective tax rate resulted from earnings mix, increased unbenefitted losses in several jurisdictions and audit settlement benefits recorded in 2009. Additionally, the effective tax rate for 2008 included a one-time charge due to Massachusetts tax law change and one-time benefit due to repatriation of foreign earnings.
Income from discontinued operations. The net income from discontinued operations in 2009 of $3.2 million represented a decrease in the loss recognized from the sale of the Phase II—IV Clinical Services business of $5.6 million net of applicable income tax expense of $2.4 million. This adjustment resulted from a settlement with the IRS Appeals Division in the third quarter of 2009.
Net Income attributable to common shareowners. Net income attributable to common shareowners in 2009 was $114.4 million, compared to a loss of $524.5 million in 2008.
Fiscal 2008 Compared to Fiscal 2007
Net Sales. Net sales in 2008 were $1,343.5 million, an increase of $112.9 million, or 9.2%, from $1,230.6 million in 2007.
Research Models and Services. In 2008, net sales for our RMS segment were $659.9 million, an increase of $82.7 million, or 14.3%, from $577.2 million in 2007, due to increased small model sales in the United States and Europe, increased consulting and staffing services and strong in vitro sales. Favorable foreign currency translation increased sales growth by approximately 3.7%. RMS sales increased due to pricing and unit volume increases in both models, including large models, and services. The RMS sales growth was driven by increases in basic research and biotechnology spending, which drove greater demand for our products and services.
Preclinical Services. In 2008, net sales for our PCS segment were $683.6 million, an increase of $30.2 million, or 4.6%, compared to $653.4 million in 2007. Sales were driven by continuing demand for large model safety testing and certain specialty toxicology studies as well as the acquisition of NewLab BioQuality AG, partially offset by more measured pharmaceutical spending due to our clients' restructuring and reprioritization efforts, particularly in Europe. Unfavorable foreign currency had a negative impact on sales growth by 0.9%.
Cost of Products Sold and Services Provided. Cost of products sold and services provided in 2008 was $832.8 million, an increase of $80.4 million, or 10.7%, from $752.4 million in 2007. Cost of products sold and services provided in 2008 was 62.0% of net sales, compared to 61.1% in 2007.
Research Models and Services. Cost of products sold and services provided for RMS in 2008 was $375.3 million, an increase of $47.5 million, or 14.5%, compared to $327.8 million in 2007. Cost of products sold and services provided as a percentage of net sales in 2008 was 56.9% compared to 56.8% in 2007. The greater facility utilization was the result of the increased sales during the quarter, partially offset by an unfavorable product mix due to greater growth in the lower margin service area.
Preclinical Services. Cost of services provided for the PCS segment in 2008 was $457.5 million, an increase of $32.9 million, or 7.8%, compared to $424.6 million in 2007. Cost of services provided as a
percentage of net sales was 66.9% in 2008, compared to 65.0% in 2007. The increase in cost of services provided as a percentage of net sales was primarily due to the impact of lower sales growth and the start-up and transition costs of PCS Nevada facilities.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in 2008 were $230.2$230.3 million, an increase of $12.7$12.8 million, or 5.8%5.9%, from $217.5 million in 2007. Selling, general and administrative expenses in 2008 were 17.1% of net sales compared to 17.7% of net sales in 2007.
Research Models and Services. Selling, general and administrative expenses for RMS in 2008 were $83.3 million, an increase of $13.0 million, or 18.5%, compared to $70.3 million in 2007. Selling, general and administrative expenses increased as a percentage of sales to 12.6% in 2008 from 12.2% in 2007 due mainly to higher operating costs.
Preclinical Services. Selling, general and administrative expenses for the PCS segment in 2008 were $94.8 million, an increase of $1.1 million, or 1.2%, compared to $93.7 million in 2007. Selling, general and administrative expenses in 2008 decreased to 13.9% of net sales compared to 14.3% in 2007.
Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various costs primarily related to activities centered at our corporate headquarters, such as compensation (including stock-based compensation), information systems, compliance and facilities expenses associated with our corporate, administration and professional services functions was $52.1$52.2 million in 2008, compared to $53.5 million in 2007. The decrease in unallocated corporate overhead in 2008 was primarily due to the gain associated with the curtailment of the U.S. pension plan and slower growth in health care costs.
Amortization of Other Intangibles. Amortization of other intangibles in 2008 was $30.3 million, a decrease of $3.2 million, from $33.5 million in 2007.
Research Models and Services. In 2008, amortization of other intangibles for our RMS segment was $2.6 million, an increase of $0.7 million from $1.9 million in 2007.
Preclinical Services. In 2008, amortization of other intangibles for our PCS segment was $27.7 million, a decrease of $3.9 million from $31.6 million in 2007.
Goodwill Impairment. Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700 million.
Operating Income. Operating loss in 2008 was $449.8$449.9 million, compared to operating income of $227.2 million in 2007.
Research Models and Services. In 2008, operating income for our RMS segment was $198.7 million, an increase of $21.5 million, or 12.2%, from $177.2 million in 2007. Operating income as a percentage of net sales in 2008 was 30.1%, compared to 30.7% in 2007. The decrease in operating income as a percentage of sales was primarily due to increased operating expenses offset by improved utilization due to the higher sales volume.
Preclinical Services. In 2008, operating loss for our PCS segment was $596.4 million, compared to operating income of $103.5 million in 2007. The decrease in operating income as a percentage of net sales was primarily due to goodwill impairment as well as to the start-up and transition costs for our
PCS Nevada facilities, partially offset by improved operating efficiency as a result of higher sales and lower amortization costs.
Interest Expense. Interest expense in 2008 was $14.0$22.3 million, compared to $18.0$24.5 million in 2007, due primarily to lower outstanding debt and lower interest rates.
Interest Income. Interest income in 2008 was $8.7 million compared to $9.7 million in 2007.
Income Taxes. Income tax expense in 2008 was $61.9$56.2 million, an increasea decrease of $2.5$0.5 million compared to $59.4$56.7 million in 2007. Our effective tax rate in 2008 was (13.4)(12.0)% which was adversely impacted by the goodwill impairment by (40.5)(37.6)%. Our 2007 effective tax rate was 27.3%26.9%. The change from 2007 to 2008 effective tax rate was primarily due to the goodwill impairment.
Net Income(Loss).Income (Loss) attributable to common shareowners. Net loss attributable to common shareowners in 2008 was $521.8$524.5 million compared to net income attributable to common shareowners of $154.4$150.6 million in 2007.
Fiscal 2007 Compared to Fiscal 2006
Net Sales. Net sales in 2007 were $1,230.6 million, an increase of $172.2 million, or 16.3%, from $1,058.4 million in 2006.
Research Models and Services. In 2007, net sales from our RMS segment were $577.2 million, an increase of $62.2 million, or 12.1%, from $515.0 million in 2006. Favorable foreign currency translation increased our net sales gain by 2.9%. RMS sales increased due to pricing and unit volume increases in both models and services. The RMS sales growth was driven by increases in basic research and biotechnology spending, which drove greater demand for our products and services, partially offset by lower sales growth in research models in Japan.
Preclinical Services. In 2007, net sales from our Preclinical Services segment were $653.4 million, an increase of $110.0 million, or 20.2%, compared to $543.4 million in 2006. The increase was primarily due to the increased customer demand for toxicology and other specialty preclinical services, reflecting increased customer outsourcing along with the full year impact of the acquisition of Northwest Kinetics. Favorable foreign currency increased sales growth by 2.9%.
Cost of Products Sold and Services Provided. Cost of products sold and services provided in 2007 was $752.4 million, an increase of $100.6 million, or 15.4%, from $651.8 million in 2006. Cost of products sold and services provided in 2007 was 61.1% of net sales, compared to 61.6% in 2006.
Research Models and Services. Cost of products sold and services provided for RMS in 2007 was $327.9 million, an increase of $27.0 million, or 9.0%, compared to $300.9 million in 2006. Cost of products sold and services provided in 2007 decreased to 56.8% of net sales compared to 58.4% of net sales in 2006. The favorable cost of products sold and services provided as a percentage of sales was due to greater facility utilization as a result of increased sales.
Preclinical Services. Cost of services provided for the Preclinical Services segment in 2007 was $424.5 million, an increase of $73.6 million, or 21.0%, compared to $350.9 million in 2006. Cost of services provided as a percentage of net sales was 65.0% in 2007, compared to 64.6% in 2006. The increase in cost of services provided as a percentage of net sales was primarily due to the impact of increased costs related to the transition to our new Massachusetts facility and the foreign exchange impact of the strengthening Canadian dollar, partially offset by improved performance at certain PCS locations.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in 2007 were $217.5 million, an increase of $36.7 million, or 20.3%, from $180.8 million in 2006. Selling, general and administrative expenses in 2007 were 17.7% of net sales compared to 17.1% of net sales in 2006. The increase as a percentage of sales was due primarily to increases in unallocated corporate overhead and charges related to the accelerated exit of our Worcester facility.
Research Models and Services. Selling, general and administrative expenses for RMS in 2007 were $70.3 million, an increase of $4.4 million, or 6.8%, compared to $65.9 million in 2006. Selling, general and administrative expenses decreased as a percentage of sales to 12.2% in 2007 from 12.8% in 2006 due mainly to greater economies of scale.
Preclinical Services. Selling, general and administrative expenses for the Preclinical Services segment in 2007 were $93.7 million, an increase of $20.7 million, or 28.3%, compared to $73.0 million in 2006. Selling, general and administrative expenses in 2007 increased to 14.3% of net sales, compared to 13.4% of net sales in 2006 due to charges related to the accelerated exit of our Worcester facility.
Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various corporate expenses including those associated with stock based compensation, pension and departments such as senior executives, corporate accounting, legal, tax, treasury, global informational technology, human resources and investor relations, was $53.5 million in 2007, compared to $41.9 million in 2006. The increase in unallocated corporate overhead in 2007 was due to increased equity based compensation, higher information technology costs and higher bonus accruals.
Amortization of Other Intangibles. Amortization of other intangibles in 2007 was $33.5 million, a decrease of $4.1 million, from $37.6 million in 2006. The decreased amortization was primarily due to reduced amortization related to the acquisition of Inveresk.
Research Models and Services. In 2007, amortization of other intangibles for our RMS segment was $1.9 million, an increase of $1.5 million from $0.4 million in 2006. The increased amortization was primarily due to the acquisition of the remaining 15% of the equity of Charles River Laboratories Japan, Inc., from the minority interest partner in the first quarter of 2007.
Preclinical Services. In 2007, amortization of other intangibles for our Preclinical Services segment was $31.6 million, a decrease of $5.6 million from $37.2 million in 2006. The decrease in amortization of other intangibles was primarily due to reduced amortization related to the Inveresk acquisition.
Operating Income. Operating income in 2007 was $227.2 million, an increase of $39.0 million, or 20.7%, from $188.2 million in 2006. Operating income in 2007 was 18.5% of net sales, compared to 17.8% of net sales in 2006. The increase as a percentage of sales was due primarily to increased operating income margins in RMS along with lower amortization costs.
Research Models and Services. In 2007, operating income for our RMS segment was $177.2 million, an increase of $29.4 million, or 19.9%, from $147.8 million in 2006. Operating income as a percentage of net sales in 2007 was 30.7%, compared to 28.7% in 2006. The increase in operating income as a percentage of sales was primarily due to improved capacity utilization resulting from the higher sales volume.
Preclinical Services. In 2007, operating income for our Preclinical Services segment was $103.5 million, an increase of $21.2 million, or 25.8%, from $82.3 million in 2006. Operating income as a percentage of net sales increased to 15.8%, compared to 15.2% of net sales in 2006. The increase in operating income as a percentage of net sales was primarily due to higher sales which resulted in improved operating efficiency and lower amortization costs, partially offset by the start-up and transition costs for our PCS Massachusetts facilities and the foreign exchange impact of the strengthening Canadian dollar.
Interest Income. Interest income in 2007 was $9.7 million, compared to $6.8 million in 2006. The $2.9 million increase was primarily due to increased funds invested.
Interest Expense. Interest expense in 2007 was $18.0 million, compared to $19.4 million in 2006. The $1.4 million decrease was primarily due to debt repayment.
Income Taxes. Income tax expense for 2007 was $59.4 million, an increase of $9.7 million compared to $49.7 million in 2006. Our effective tax rate for 2007 was 27.3% compared to 28.2% for 2006. The decline in effective tax rate in 2007 was primarily due to benefits recorded in 2007 related to tax law changes in the United Kingdom and Germany and benefits generated due to mix of earnings.
Income from Continuing Operations. Income from continuing operations in 2007 was $157.6 million, an increase of $32.4 million from $125.2 million in 2006.
Loss from Discontinued Operations. The loss from discontinued operations in 2007 was $3.1 million. The loss from discontinued operations for 2006 was $181.0 million which included a goodwill impairment of $129.2 million, the tax expense of $37.8 million related to the sale of the Phase II-IV Clinical business, as well as results from our ISS business.
Net Income (Loss). Net income in 2007 was $154.4 million compared to a net loss of $55.8 million in 2006.
Liquidity and Capital Resources
The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in our condensed consolidated statements of cash flows.
Our principal sources of liquidity have been our cash flow from operations, the convertible debt offering, our marketable securities and our revolving line of credit arrangements.
We had marketable securities of $19.0$72.6 million and $63.4$19.0 million as of December 26, 2009 and December 27, 2008, and December 29, 2007, respectively. The declineincrease was primarily due to management's decision to move funds into cash equivalent type investments.invest in short term investments to increase yield. As of December 26, 2009 and December 27, 2008, and December 29, 2007, we had $19.0
$16.2 million and $38.2$19.0 million invested in auction rate securities rated AAA by a major credit rating agency. Our auction rate securities are guaranteed by U.S. federal agencies. These auction rate securities provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, usually every 7 or 35 days. The overall credit concerns in the capital markets as well as the failed auctions of these securities have impacted our ability to liquidate these investments. TheIf the auctions for the securities we own continue to fail, the investment may not be readily convertible to cash until a future auction of these investments is successful. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and other sources of cash, we do not anticipate the current lack of liquidity on these investments will affect our ability to operate our business as usual.
In 2006, we issued $350.0 million of 2.25% Convertible Senior Notes (the 2013 notes)Notes) due in 2013. At December 27, 2008,26, 2009, the fair value of our outstanding 2013 Notes was approximately $311.1$336.0 based on their quoted market value. During the fourth quarter of 20082009 no conversion triggers were met.
Concurrently with the sale of the 2013 Notes, we entered into convertible note hedge transactions with respect to our obligation to deliver common stock under the 2013 Notes. The convertible note hedges give us the right to receive, for no additional consideration, the numbers of shares of common stock that we are obligated to deliver upon conversion of the 2013 Notes (subject to antidilution adjustments substantially identical to those in the 2013 Notes), and expire on June 15, 2013. The aggregate cost of these convertible note hedges was $98.3 million.
Separately and concurrently with the pricing of the 2013 Notes, we issued warrants for approximately 7.2 million shares of our common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at our option) with a value equal to the appreciation in the price of our shares above $59.925, and expire between September 13, 2013 and
January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants were $65.4 million.
From our economic perspective, the cumulative impact of the purchase of the convertible note hedges and the sale of the warrants increases the effective conversion price of the 2013 Notes from $48.94 to $59.925 per share.
We currently have a $428 million credit agreement and a $50 million credit agreement. At December 27, 2008,26, 2009, we had term loans of $134.9$100.4 million and $90.0 million under our revolving credit facility under the $428 million credit agreement outstanding. As of December 27, 2008,26, 2009, we had $104.4$106.8 million available to borrow under our revolving credit agreements. As of December 27, 2008,26, 2009, we were compliant with all financial covenants specified in the credit agreements. For additional information regarding the 2013 Notes, the $428 million credit agreement andOn January 27, 2010, we executed our fourth amendment to the $50 million credit agreement please see Note 4 included into extend the Notesmaturity date to Consolidated Financial Statements included elsewhere in this Form 10-K.July 31, 2011.
During the first quarter of 2009, the Company plans to repatriate approximately $90.0we repatriated $120.0 million of the earnings of itsour non-U.S. subsidiaries. As such,subsidiaries pursuant to a plan established in the Company has changed its permanent reinvestment assertion with regards to these unremitted earnings.fourth quarter of 2008. As a result of the change in assertion, the Companyrepatriation, we recorded a tax benefitbenefits primarily due to foreign tax credits in the fourth quarter of 2008 of $7.2 million, of which $4.0 million was reflected in the effective tax rate and $3.2 million was reflected in the Cumulative Translation Account.Adjustment account, and in 2009 of $3.5 million of which $1.1 million was reflected in the effective tax rate and $2.4 million was reflected in the Cumulative Translation Adjustment account. The proceeds from the repatriation will bewere used for general corporate purposes. The Company continuesWe continue to maintain itsour permanent reinvestment assertion with regardsrespect to the remaining unremitted earnings of itsour non-U.S. subsidiaries.
Our Board of Directors has authorized a share repurchase program, originally authorized on July 27, 2005 and subsequently amended on October 26, 2005, May 9, 2006, August 1, 2007 and July 24, 2008 to acquire up to a total of $600.0 million of common stock. The program does not have a fixed expiration date. In order to facilitate these share repurchases, the Company haswe entered into Rule 10b5-1 Purchase Plans.Plans the last of which was terminated in May 2009. As of December 27, 2008,26, 2009, approximately $187.1$144.8 million remained authorized for share repurchases. The timing and amount of any future repurchases will depend on market conditions and corporate considerations.
Cash and cash equivalents totaled $182.6 million at December 26, 2009 compared to $243.6 million at December 27, 2008 compared to $225.4 million at December 29, 2007.2008.
Net cash provided by operating activities in 2009 and 2008 and 2007 was $279.5$217.4 million and $288.4$282.2 million, respectively. The decrease in cash provided by operations was primarily due to a decrease in deferred revenue.lower earnings. Our days sales outstanding (DSO) of 4043 days as of December 27, 200826, 2009 has increased from 3540 days at December 29, 2007.27, 2008. The increase in our DSO was primarily driven by decreased deferred revenue as a result of lower PCS sales volume. Our DSO includes deferred revenue as an offset to accounts receivable in the calculation.
Net cash used in investing activities in 2009 and 2008 and 2007 was $227.2$208.8 million and $200.8$230.0 million, respectively. Our capital expenditures in 20082009 were $197.1$80.0 million of which $60.5$31.9 million was related to RMS and $136.6$48.1 million to PCS. For 20092010 we project capital expenditures to be in the range of $100$60 million to $120$70 million. We anticipate that future capital expenditures will be funded by operating activities and existing credit facilities. We paid $83.3 million for acquisitions during 2009, primarily related to our purchase of Piedmont Research Center, Systems Pathology Company, LLC (SPC) and Cerebricon.
Net cash used in financing activities in 20082009 was $81.0 million and $17.3 million in 2008. During 2009, we purchased $45.9 million of treasury stock and $46.4repaid debt of $54.1 million in 2007.partially offset by proceeds from debt of $18.0 million. During 2008, we purchased $115.1 million of treasury stock and repaid debt$36.5 million of $36.5 milliondebt, partially offset by proceeds from exercises of employee stock options and warrants of $28.5 million and proceeds from debt of $102.0 million. During 2007, we purchased $41.6 million of treasury stock and repaid $64.5 million of debt, partially offset by proceeds from exercises of employee stock options of $54.0 million.
Minimum future payments of our contractual obligations at December 27, 200826, 2009 are as follows:
Contractual Obligations | Total | Less than 1 Year | 1—3 Years | 3—5 Years | After 5 Years | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Debt | $ | 575.8 | $ | 35.4 | $ | 190.4 | $ | 350.0 | $ | — | |||||||
Interest payments | 45.6 | 12.8 | 28.8 | 4.0 | — | ||||||||||||
Operating leases | 98.3 | 21.4 | 24.8 | 17.4 | 34.7 | ||||||||||||
Pension | 94.5 | 9.4 | 9.7 | 28.7 | 46.7 | ||||||||||||
Construction commitments | 27.4 | 27.4 | — | — | — | ||||||||||||
Total contractual cash obligations | $ | 841.6 | $ | 106.4 | $ | 253.7 | $ | 400.1 | $ | 81.4 | |||||||
Contractual Obligations | Total | Less than 1 Year | 1—3 Years | 3—5 Years | After 5 Years | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Debt | $ | 541.2 | $ | 35.3 | $ | 505.9 | $ | $ | — | ||||||||
Interest payments | 68.3 | 24.2 | 36.0 | 8.1 | — | ||||||||||||
Operating leases | 106.5 | 20.7 | 31.8 | 19.9 | 34.1 | ||||||||||||
Pension | 76.5 | 5.5 | 11.3 | 13.5 | 46.2 | ||||||||||||
Construction commitments | 2.6 | 2.6 | — | — | — | ||||||||||||
Total contractual cash obligations | $ | 795.1 | $ | 88.3 | $ | 585.0 | $ | 41.5 | $ | 80.3 | |||||||
The above table does not reflect unrecognized tax benefits of $28.7 million.benefits. Refer to Note 6 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.
Off-Balance Sheet Arrangements
The conversion features of our 2013 Notes are equity-linked derivatives. As such, we recognize these instruments as off-balance sheet arrangements. TheBecause the conversion features associated with these notes would be accounted for as derivative instruments, except that they areis indexed to our common stock and classified in stockholders' equity. Therefore,equity, these instruments meet the scope of exception of paragraph 11(a) of SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities," and are accordingly not accounted for as derivatives for purposes of SFAS No. 133.derivatives.
Recent Accounting Pronouncements
In June,October 2009, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (FSP EITF 03-6-1) which clarifies that share-based payment awards that entitle their holdersan accounting standard update to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included inaddress the calculationaccounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this update addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of basic earnings per share. FSP EITF 03-6-1 is effective for financial statements issued foraccounting. We will adopt the provision of this update on December 27, 2009, the beginning of our fiscal years beginning after December 15, 2008, as well as interim periods within those years. Once effective, all prior-period earnings per share data presented must be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of the FSP. Early application is not permitted. Uponyear 2010. The adoption of FSP EITF 03-6-1, we expect to revise prior period earning per share from continuing operations as follows: decrease 2008 basic and diluted loss per share by $0.08; reduce 2007 basic and diluted earning per share by $0.02 and reduce 2006 basic earning per share by $0.02 and diluted earning per share from continuing operations by $0.01.this update will not have an impact on our consolidated financial statements.
In May 2008,June 2009, the FASB issued FSP No. APB 14-1 "Accountinga new accounting standard to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This standard replaces the quantitative-based risks and rewards calculation for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP 14-1). This FSP specifies that issuers of such instruments should separately account for the liability and equity componentsdetermining which reporting entity, if any, has a controlling financial interest in a manner that will reflectvariable interest entity with an approach focused on identifying which reporting entity has the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectivelypower to all periods presented. We estimate that upon adoption of the provisions of FSP 14-1, $261,508 of the total proceeds from our debt will be allocated to the liability component, which represents the estimated fair value of similar debt instruments without the conversion option as of the date of issuance. The remaining $88,492 will be allocated to the equity component. The debt discount of $88,492 will be amortized to interest expense over the seven year period from June 2006 to June 2013, the expected life of the instrument. Additionally, upon adoption, approximately $1,903 of deferred financing costs capitalized at the time of issuance will be reclassified to equity as equity issuance costs and will not be amortized to interest expense.
direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this standard also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. This standard is effective for fiscal years starting after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. We are evaluating the impact this will have on our consolidated financial statements.
In March 2008,June 2009, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities" (FAS 161). FAS 161 changesa new accounting standard for transfers of financial assets to improve the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and whyinformation an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement 133 andprovides in its related interpretations, and (c) how derivative instruments and related hedged items affect an entity'sfinancial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows. FAS 161flows; and a transferor's continuing involvement in transferred financial assets. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this pronouncement is not expected to have an impact on our consolidated financial statements.
In February 2008, the FASB issued FSP 157-1 and 157-2 that (1) partially deferred the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain leasing transactions from the scope of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008 and will be applied prospectively. The provisions of SFAS 157 will not have a material impact on our consolidated financial statements.
In February 2008, the FASB issued FSP FAS 140-3: "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" (FSP 140-3). FSP 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing. This FSP presumes that an initial transfer for a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under Statement 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140. This FSP is not expected to have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS 141(R)) and No. 160, "Noncontrolling Interests in Consolidated Financial Statements" (SFAS 160). SFAS 141(R) and SFAS 160 introduce significant changes in the accounting for and reporting of business acquisitions and noncontrolling interests in a subsidiary. SFAS 141(R) continues the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. SFAS 141(R) changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. In addition, SFAS 141(R) will impact the annual goodwill impairment test associated with acquisitions that close both before and after its effective date. SFAS 141(R) amends SFAS 109 changing the accounting for adjustments to deferred tax asset valuation allowances and income tax uncertainties related to acquisitions that close both before and after its effective date, generally requiring adjustments to be reflected in income tax expense. SFAS 141(R) applies prospectively to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. An entity may not apply SFAS 141(R) before that date. The adoption of SFAS 141(R) and SFAS 160 will impact our consolidated financial statements.
Item 7A. Quantitative and Qualitative DisclosureDisclosures about Market Risk
Certain of our financial instruments are subject to market risks, including interest rate risk and foreign currency exchange rates. We generally do not use financial instruments for trading or other speculative purposes.
Interest Rate Risk
The fair value of our marketable securities is subject to interest rate risk and will fall in value if market interest rates increase. If market rates were to increase immediately and uniformly by 100 basis points from levels at December 27, 2008, then the fair value of the portfolio would decline by approximately $0.2 million.
We have entered into two credit agreements, the $428 million credit agreement and the $50 million credit agreement. Our primary interest rate exposure results from changes in LIBOR or the
base rates which are used to determine the applicable interest rates under our term loans and revolving credit facility in the $428 million credit agreement and in the $50 million agreement and our revolving credit facilities.agreement. Our potential additional interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate would be approximately $3.3$3.0 million on a pre-tax basis. The book value of our credit agreements approximates fair value.
We issued $350 million of the 2013 Notes in a private placement in the second quarter of 2006. The convertible senior debenture notes bear an interest rate of 2.25%. The fair market value of the outstanding notes was $311.1$336.0 million on December 27, 2008.26, 2009.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our earnings and cash flows. This risk is mitigated by the fact that various foreign operations are principally conducted in their respective local currencies. However, aA portion of the revenue from our foreign operations' revenueoperations is denominated in U.S. dollars, with the costs accounted for in their local currencies. We attempt to minimize this exposure by using certain financial instruments, for purposes other than trading, in accordance with our overall risk management and our hedge policy. In accordance with our hedge policy, we designate certainsuch transactions as hedges as set forth in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."hedges.
During 2008,2009, we utilized foreign exchange contracts, principally to hedge the impact of currency fluctuations on customer transactions and certain balance sheet items. NoThere were no foreign exchange contracts were outstanding onopen as of December 27, 2008.26, 2009.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: | |||||
Report of Management | 50 | ||||
Report of Independent Registered Public Accounting Firm | 51 | ||||
Consolidated Statements of Income for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 | 52 | ||||
Consolidated Balance Sheets as of December | 53 | ||||
Consolidated Statements of Cash Flows for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 | 54 | ||||
Consolidated Statements of Changes in | 55 | ||||
Notes to Consolidated Financial Statements | 56 | ||||
Supplementary Data: | |||||
Quarterly Information (Unaudited) |
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on thisour assessment ourand those criteria, management concluded that as of December 27, 2008, ourthe Company maintained effective internal control over financial reporting was effective based on those criteria.as of December 26, 2009.
The effectiveness of our internal control over financial reporting as of December 27, 200826, 2009 has been audited by PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and ShareholdersShareowners of Charles River Laboratories International, Inc:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Charles River Laboratories International, Inc and its subsidiaries at December 27, 200826, 2009 and December 29, 2007,27, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 200826, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2008,26, 2009, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 61 to the consolidated financial statements, the Company changed its method of accountingthe manner in which it accounts for uncertain tax positionsnoncontrolling interest in a subsidiary and the manner in which it accounts for convertible debt as of December 31, 2006.28, 2008. As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for business combinations as of December 28, 2008.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 200919, 2010
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
| Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||||
Net sales related to products | $ | 471,741 | $ | 415,247 | $ | 374,832 | ||||||
Net sales related to services | 871,752 | 815,379 | 683,553 | |||||||||
Net sales | 1,343,493 | 1,230,626 | 1,058,385 | |||||||||
Costs and expenses | ||||||||||||
Cost of products sold | 252,938 | 225,088 | 211,008 | |||||||||
Cost of services provided | 579,846 | 527,347 | 440,770 | |||||||||
Selling, general and administrative | 230,159 | 217,491 | 180,795 | |||||||||
Goodwill impairment | 700,000 | — | — | |||||||||
Amortization of other intangibles | 30,312 | 33,509 | 37,639 | |||||||||
Operating income (loss) | (449,762 | ) | 227,191 | 188,173 | ||||||||
Other income (expense) | ||||||||||||
Interest income | 8,691 | 9,683 | 6,836 | |||||||||
Interest expense | (14,009 | ) | (18,004 | ) | (19,426 | ) | ||||||
Other, net | (5,930 | ) | (1,448 | ) | 981 | |||||||
Income (loss) before income taxes and minority interests | (461,010 | ) | 217,422 | 176,564 | ||||||||
Provision for income taxes | 61,944 | 59,400 | 49,738 | |||||||||
Income (loss) before minority interests | (522,954 | ) | 158,022 | 126,826 | ||||||||
Minority interests | 687 | (470 | ) | (1,605 | ) | |||||||
Income (loss) from continuing operations | (522,267 | ) | 157,552 | 125,221 | ||||||||
Loss from discontinued operations, net of tax | 424 | (3,146 | ) | (181,004 | ) | |||||||
Net income (loss) | $ | (521,843 | ) | $ | 154,406 | $ | (55,783 | ) | ||||
Earnings (loss) per common share | ||||||||||||
Basic: | ||||||||||||
Continuing operations | $ | (7.76 | ) | $ | 2.35 | $ | 1.82 | |||||
Discontinued operations | $ | 0.01 | $ | (0.05 | ) | $ | (2.63 | ) | ||||
Net income (loss) | $ | (7.76 | ) | $ | 2.31 | $ | (0.81 | ) | ||||
Diluted: | ||||||||||||
Continuing operations | $ | (7.76 | ) | $ | 2.29 | $ | 1.79 | |||||
Discontinued operations | $ | 0.01 | $ | (0.05 | ) | $ | (2.59 | ) | ||||
Net income (loss) | $ | (7.76 | ) | $ | 2.25 | $ | (0.80 | ) |
| Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||||
Net sales related to products | $ | 465,268 | $ | 471,741 | $ | 415,247 | ||||||
Net sales related to services | 737,283 | 871,752 | 815,379 | |||||||||
Net sales | 1,202,551 | 1,343,493 | 1,230,626 | |||||||||
Costs and expenses | ||||||||||||
Cost of products sold | 255,682 | 252,938 | 225,088 | |||||||||
Cost of services provided | 517,501 | 579,846 | 527,347 | |||||||||
Selling, general and administrative | 233,995 | 230,266 | 217,523 | |||||||||
Goodwill impairment | — | 700,000 | — | |||||||||
Amortization of other intangibles | 28,447 | 30,312 | 33,509 | |||||||||
Operating income (loss) | 166,926 | (449,869 | ) | 227,159 | ||||||||
Other income (expense) | ||||||||||||
Interest income | 1,777 | 8,691 | 9,683 | |||||||||
Interest expense | (21,682 | ) | (22,334 | ) | (24,453 | ) | ||||||
Other, net | 2,086 | (5,930 | ) | (1,448 | ) | |||||||
Income (loss) from continuing operations, before income taxes | 149,107 | (469,442 | ) | 210,941 | ||||||||
Provision for income taxes | 39,725 | 56,174 | 56,677 | |||||||||
Income (loss) from continuing operations, net of income taxes | 109,382 | (525,616 | ) | 154,264 | ||||||||
Income (loss) from discontinued operations, net of tax | 3,220 | 424 | (3,146 | ) | ||||||||
Net income (loss) | 112,602 | (525,192 | ) | 151,118 | ||||||||
Less: Net loss (income) attributable to noncontrolling interests | 1,839 | 687 | (470 | ) | ||||||||
Net income (loss) attributable to common shareowners | $ | 114,441 | $ | (524,505 | ) | $ | 150,648 | |||||
Earnings (loss) per common share | ||||||||||||
Basic: | ||||||||||||
Continuing operations attributable to common shareowners | $ | 1.70 | $ | (7.80 | ) | $ | 2.30 | |||||
Discontinued operations attributable to common shareowners | $ | 0.05 | $ | 0.01 | $ | (0.05 | ) | |||||
Net income (loss) attributable to common shareowners | $ | 1.75 | $ | (7.80 | ) | $ | 2.25 | |||||
Diluted: | ||||||||||||
Continuing operations attributable to common shareowners | $ | 1.69 | $ | (7.80 | ) | $ | 2.24 | |||||
Discontinued operations attributable to common shareowners | $ | 0.05 | $ | 0.01 | $ | (0.05 | ) | |||||
Net income (loss) attributable to common shareowners | $ | 1.74 | $ | (7.80 | ) | $ | 2.19 |
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
| December 27, 2008 | December 29, 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 243,592 | $ | 225,449 | ||||||
Trade receivables, net | 210,214 | 213,908 | ||||||||
Inventories | 96,882 | 88,023 | ||||||||
Other current assets | 67,218 | 79,477 | ||||||||
Current assets of discontinued operations | 233 | 1,007 | ||||||||
Total current assets | 618,139 | 607,864 | ||||||||
Property, plant and equipment, net | 828,921 | 748,793 | ||||||||
Goodwill, net | 457,578 | 1,120,540 | ||||||||
Other intangibles, net | 136,100 | 148,905 | ||||||||
Deferred tax asset | 62,935 | 89,255 | ||||||||
Other assets | 52,058 | 85,993 | ||||||||
Long term assets of discontinued operations | 4,187 | 4,187 | ||||||||
Total assets | $ | 2,159,918 | $ | 2,805,537 | ||||||
Liabilities and Shareholders' Equity | ||||||||||
Current liabilities | ||||||||||
Current portion of long-term debt and capital leases | $ | 35,452 | $ | 25,051 | ||||||
Accounts payable | 40,517 | 36,715 | ||||||||
Accrued compensation | 54,870 | 53,359 | ||||||||
Deferred revenue | 86,707 | 102,021 | ||||||||
Accrued liabilities | 60,741 | 61,366 | ||||||||
Other current liabilities | 22,676 | 23,268 | ||||||||
Current liabilities of discontinued operations | 35 | 748 | ||||||||
Total current liabilities | 300,998 | 302,528 | ||||||||
Long-term debt and capital leases | 540,646 | 484,998 | ||||||||
Other long-term liabilities | 118,827 | 154,044 | ||||||||
Total liabilities | 960,471 | 941,570 | ||||||||
Commitments and contingencies | ||||||||||
Minority interests | 422 | 3,500 | ||||||||
Shareholders' equity | ||||||||||
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||||
Common stock, $0.01 par value; 120,000,000 shares authorized; 76,609,779 issued and 67,052,884 shares outstanding at December 27, 2008 and 75,427,649 issued and 68,135,324 shares outstanding at December 29, 2007 | 766 | 754 | ||||||||
Capital in excess of par value | 1,965,150 | 1,906,997 | ||||||||
Retained (deficit) earnings | (344,314 | ) | 177,529 | |||||||
Treasury stock, at cost, 9,556,895 shares and 7,292,325 shares at December 27, 2008 and December 29, 2007, respectively | (425,924 | ) | (310,372 | ) | ||||||
Accumulated other comprehensive income | 3,347 | 85,559 | ||||||||
Total shareholders' equity | 1,199,025 | 1,860,467 | ||||||||
Total liabilities and shareholders' equity | $ | 2,159,918 | $ | 2,805,537 | ||||||
| December 26, 2009 | December 27, 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 182,574 | $ | 243,592 | ||||||
Trade receivables, net | 196,947 | 210,214 | ||||||||
Inventories | 102,723 | 96,882 | ||||||||
Other current assets | 113,357 | 67,451 | ||||||||
Total current assets | 595,601 | 618,139 | ||||||||
Property, plant and equipment, net | 865,743 | 837,246 | ||||||||
Goodwill, net | 508,235 | 457,578 | ||||||||
Other intangibles, net | 160,292 | 136,100 | ||||||||
Deferred tax asset | 18,978 | 37,348 | ||||||||
Other assets | 55,244 | 55,002 | ||||||||
Total assets | $ | 2,204,093 | $ | 2,141,413 | ||||||
Liabilities and Equity | ||||||||||
Current liabilities | ||||||||||
Current portion of long-term debt and capital leases | $ | 35,413 | $ | 35,452 | ||||||
Accounts payable | 31,232 | 40,517 | ||||||||
Accrued compensation | 45,522 | 54,870 | ||||||||
Deferred revenue | 72,390 | 86,707 | ||||||||
Accrued liabilities | 49,997 | 60,741 | ||||||||
Other current liabilities | 15,219 | 22,711 | ||||||||
Total current liabilities | 249,773 | 300,998 | ||||||||
Long-term debt and capital leases | 457,419 | 479,880 | ||||||||
Other long-term liabilities | 123,077 | 118,827 | ||||||||
Total liabilities | 830,269 | 899,705 | ||||||||
Commitments and contingencies | ||||||||||
Shareowners' equity | ||||||||||
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||||
Common stock, $0.01 par value; 120,000,000 shares authorized; 77,106,847 issued and 65,877,218 shares outstanding at December 26, 2009 and 76,609,779 issued and 67,052,884 shares outstanding at December 27, 2008 | 771 | 766 | ||||||||
Capital in excess of par value | 2,038,455 | 2,016,031 | ||||||||
Accumulated deficit | (238,493 | ) | (352,934 | ) | ||||||
Treasury stock, at cost, 11,229,629 shares and 9,556,895 shares at December 26, 2009 and December 27, 2008, respectively | (470,527 | ) | (425,924 | ) | ||||||
Accumulated other comprehensive income | 45,037 | 3,347 | ||||||||
Total shareowners' equity | 1,375,243 | 1,241,286 | ||||||||
Noncontrolling interests | (1,419 | ) | 422 | |||||||
Total equity | 1,373,824 | 1,241,708 | ||||||||
Total liabilities and equity | $ | 2,204,093 | $ | 2,141,413 | ||||||
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||||
Cash flows relating to operating activities | ||||||||||||
Net income (loss) | $ | (521,843 | ) | $ | 154,406 | $ | (55,783 | ) | ||||
Less: Income (loss) from discontinued operations | 424 | (3,146 | ) | (181,004 | ) | |||||||
Income (loss) from continuing operations | (522,267 | ) | 157,552 | 125,221 | ||||||||
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 91,183 | 86,379 | 82,586 | |||||||||
Goodwill impairment | 700,000 | — | — | |||||||||
Gain on pension curtailment | (3,276 | ) | — | — | ||||||||
Non-cash compensation | 24,333 | 26,017 | 21,090 | |||||||||
Deferred income taxes | 12,671 | (9,786 | ) | 4,035 | ||||||||
Other, net | 9,019 | 9,056 | 1,659 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Trade receivables | (8,532 | ) | (492 | ) | (18,961 | ) | ||||||
Inventories | (9,670 | ) | (12,988 | ) | (6,475 | ) | ||||||
Other assets | 6,421 | (9,057 | ) | (19,139 | ) | |||||||
Accounts payable | 8,177 | 2,076 | (2,586 | ) | ||||||||
Accrued compensation | 1,248 | 9,445 | (414 | ) | ||||||||
Deferred revenue | (15,314 | ) | 8,736 | (2,967 | ) | |||||||
Accrued liabilities | 6,717 | 3,442 | (8,493 | ) | ||||||||
Other liabilities | (21,245 | ) | 18,045 | 417 | ||||||||
Net cash provided by operating activities | 279,465 | 288,425 | 175,973 | |||||||||
Cash flows relating to investing activities | ||||||||||||
Acquisition of businesses, net of cash acquired | (69,151 | ) | (11,584 | ) | (30,862 | ) | ||||||
Capital expenditures | (197,081 | ) | (227,036 | ) | (181,747 | ) | ||||||
Purchases of marketable securities | (6,439 | ) | (299,408 | ) | (207,900 | ) | ||||||
Proceeds from sale of marketable securities | 45,444 | 334,546 | 122,981 | |||||||||
Other, net | 51 | 2,668 | 130 | |||||||||
Net cash used in investing activities | (227,176 | ) | (200,814 | ) | (297,398 | ) | ||||||
Cash flows relating to financing activities | ||||||||||||
Proceeds from long-term debt and revolving credit agreement | 102,000 | — | 440,300 | |||||||||
Payments on long-term debt, capital lease obligation and revolving credit agreement | (36,540 | ) | (64,545 | ) | (170,842 | ) | ||||||
Purchase of call options | — | — | (98,110 | ) | ||||||||
Proceeds from exercises of stock options and warrants | 28,490 | 53,977 | 22,900 | |||||||||
Proceeds from issuance of warrants | — | — | 65,423 | |||||||||
Excess tax benefit from exercises of employee stock options | 3,788 | 7,150 | 6,540 | |||||||||
Purchase of treasury stock | (115,058 | ) | (41,617 | ) | (249,958 | ) | ||||||
Other, net | — | (1,392 | ) | (10,685 | ) | |||||||
Net cash provided by (used in) financing activities | (17,320 | ) | (46,427 | ) | 5,568 | |||||||
Discontinued operations | ||||||||||||
Net cash provided by (used in) operating activities | 484 | (4,177 | ) | (11,603 | ) | |||||||
Net cash provided by investing activities | — | 30 | 189,406 | |||||||||
Net cash used in financing activities | — | — | (182 | ) | ||||||||
Net cash provided by (used in) discontinued operations | 484 | (4,147 | ) | 177,621 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (17,310 | ) | 13,032 | (1,205 | ) | |||||||
Net change in cash and cash equivalents | 18,143 | 50,069 | 60,559 | |||||||||
Cash and cash equivalents, beginning of period | 225,449 | 175,380 | 114,821 | |||||||||
Cash and cash equivalents, end of period | $ | 243,592 | $ | 225,449 | $ | 175,380 | ||||||
Supplemental cash flow information | ||||||||||||
Cash paid for interest | $ | 14,186 | $ | 20,110 | $ | 22,992 | ||||||
Cash paid for taxes | $ | 43,157 | $ | 38,448 | $ | 93,109 | ||||||
Supplemental non-cash investing activities information | ||||||||||||
Capitalized interest | $ | 2,486 | $ | 4,716 | $ | 4,107 |
| Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||||
Cash flows relating to operating activities | ||||||||||||
Net income (loss) | $ | 112,602 | $ | (525,192 | ) | $ | 151,118 | |||||
Less: Income (loss) from discontinued operations | 3,220 | 424 | (3,146 | ) | ||||||||
Income (loss) from continuing operations | 109,382 | (525,616 | ) | 154,264 | ||||||||
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 93,553 | 91,290 | 86,411 | |||||||||
Goodwill impairment | — | 700,000 | — | |||||||||
Gain on pension curtailment | (674 | ) | (3,276 | ) | — | |||||||
Non-cash compensation | 23,813 | 24,333 | 26,017 | |||||||||
Deferred income taxes | 15,791 | 6,902 | (12,510 | ) | ||||||||
Other, net | 19,018 | 21,083 | 19,214 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Trade receivables | 21,768 | (8,532 | ) | (492 | ) | |||||||
Inventories | (4,379 | ) | (9,670 | ) | (12,988 | ) | ||||||
Other assets | 1,633 | 6,145 | (9,333 | ) | ||||||||
Accounts payable | (11,493 | ) | 8,177 | 2,076 | ||||||||
Accrued compensation | (10,631 | ) | 1,248 | 9,445 | ||||||||
Deferred revenue | (14,661 | ) | (15,314 | ) | 8,736 | |||||||
Accrued liabilities | (6,291 | ) | 6,717 | 3,442 | ||||||||
Other liabilities | (19,391 | ) | (21,245 | ) | 18,045 | |||||||
Net cash provided by operating activities | 217,438 | 282,242 | 292,327 | |||||||||
Cash flows relating to investing activities | ||||||||||||
Acquisition of businesses and assets, net of cash acquired | (83,347 | ) | (69,151 | ) | (11,584 | ) | ||||||
Capital expenditures | (80,012 | ) | (199,858 | ) | (230,938 | ) | ||||||
Purchases of investments | (102,275 | ) | (6,439 | ) | (299,408 | ) | ||||||
Proceeds from sale of investments | 52,785 | 45,444 | 334,546 | |||||||||
Other, net | 4,028 | 51 | 2,668 | |||||||||
Net cash used in investing activities | (208,821 | ) | (229,953 | ) | (204,716 | ) | ||||||
Cash flows relating to financing activities | ||||||||||||
Proceeds from long-term debt and revolving credit agreement | 18,000 | 102,000 | — | |||||||||
Payments on long-term debt, capital lease obligation and revolving credit agreement | (54,130 | ) | (36,540 | ) | (64,545 | ) | ||||||
Proceeds from exercises of stock options and warrants | 819 | 28,490 | 53,977 | |||||||||
Excess tax benefit from exercises of employee stock options | 231 | 3,788 | 7,150 | |||||||||
Purchase of treasury stock | (45,897 | ) | (115,058 | ) | (41,617 | ) | ||||||
Other, net | — | — | (1,392 | ) | ||||||||
Net cash used in financing activities | (80,977 | ) | (17,320 | ) | (46,427 | ) | ||||||
Discontinued operations | ||||||||||||
Net cash provided by (used in) operating activities | 7,606 | 484 | (4,177 | ) | ||||||||
Net cash provided by investing activities | — | — | 30 | |||||||||
Net cash provided by (used in) discontinued operations | 7,606 | 484 | (4,147 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 3,736 | (17,310 | ) | 13,032 | ||||||||
Net change in cash and cash equivalents | (61,018 | ) | 18,143 | 50,069 | ||||||||
Cash and cash equivalents, beginning of period | 243,592 | 225,449 | 175,380 | |||||||||
Cash and cash equivalents, end of period | $ | 182,574 | $ | 243,592 | $ | 225,449 | ||||||
Supplemental cash flow information | ||||||||||||
Cash paid for interest | $ | 14,170 | $ | 14,186 | $ | 20,110 | ||||||
Cash paid for taxes | 27,180 | 43,157 | 38,448 | |||||||||
Supplemental non-cash investing activities information | ||||||||||||
Capitalized interest | 2,496 | 5,263 | 8,619 |
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
| Total | Accumulated (Deficit) Earnings | Accumulated Other Comprehensive Income | Common Stock | Capital in Excess of Par | Treasury Stock | Unearned Compensation | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2005 | $ | 1,827,013 | $ | 78,906 | $ | 8,540 | $ | 724 | $ | 1,777,625 | $ | (17,997 | ) | $ | (20,785 | ) | |||||||||
Components of comprehensive income, net of tax: | |||||||||||||||||||||||||
Net (loss) | (55,783 | ) | (55,783 | ) | — | — | — | — | — | ||||||||||||||||
Foreign currency translation adjustment | 12,335 | — | 12,335 | — | — | — | — | ||||||||||||||||||
Minimum pension liability adjustment | (195 | ) | — | (195 | ) | — | — | — | — | ||||||||||||||||
Unrealized gain on marketable securities | 11 | — | 11 | — | — | — | — | ||||||||||||||||||
Total comprehensive income | (43,632 | ) | — | — | — | — | — | — | |||||||||||||||||
Adjustment to initially apply SFAS No. 158, net of tax | 480 | — | 480 | — | — | — | — | ||||||||||||||||||
Tax benefit associated with stock issued under employee compensation plans | 5,714 | — | — | — | 5,714 | — | — | ||||||||||||||||||
Exercise of warrants | 79 | — | — | — | 79 | — | — | ||||||||||||||||||
Issuance of stock under employee compensation plans | 22,821 | — | — | 10 | 22,811 | — | — | ||||||||||||||||||
Acquisition of treasury shares | (249,958 | ) | — | — | — | (249,958 | ) | — | |||||||||||||||||
Stock-based compensation | 21,866 | — | — | — | 21,866 | — | — | ||||||||||||||||||
Purchase of hedge on convertible debt | (98,110 | ) | — | — | — | (98,110 | ) | — | — | ||||||||||||||||
Issuance of warrants | 65,423 | — | — | — | 65,423 | — | — | ||||||||||||||||||
Deferred tax assets | 43,515 | — | — | — | 43,515 | — | — | ||||||||||||||||||
Reversal of unearned compensation upon adoption of SFAS No. 123(R) | — | — | — | (20,785 | ) | — | 20,785 | ||||||||||||||||||
Balance at December 30, 2006 | $ | 1,595,211 | $ | 23,123 | $ | 21,171 | $ | 734 | $ | 1,818,138 | $ | (267,955 | ) | $ | — | ||||||||||
Components of comprehensive income, net of tax: | |||||||||||||||||||||||||
Net income | 154,406 | 154,406 | — | — | — | — | — | ||||||||||||||||||
Foreign currency translation adjustment | 57,872 | — | 57,872 | — | — | — | — | ||||||||||||||||||
Net increase in unrecognized pension net gain/loss and prior service costs | 6,564 | — | 6,564 | — | — | — | — | ||||||||||||||||||
Unrealized loss on marketable securities | (48 | ) | — | (48 | ) | — | — | — | — | ||||||||||||||||
Total comprehensive income | 218,794 | — | — | — | — | — | — | ||||||||||||||||||
Tax benefit associated with stock issued under employee compensation plans | 8,727 | — | — | — | 8,727 | — | — | ||||||||||||||||||
Exercise of warrants | 14 | — | — | — | 14 | — | — | ||||||||||||||||||
Issuance of stock under employee compensation plans | 54,121 | — | — | 20 | 54,101 | — | — | ||||||||||||||||||
Acquisition of treasury shares | (42,417 | ) | — | — | — | — | (42,417 | ) | — | ||||||||||||||||
Stock-based compensation | 26,017 | — | — | — | 26,017 | — | — | ||||||||||||||||||
Balance at December 29, 2007 | $ | 1,860,467 | $ | 177,529 | $ | 85,559 | $ | 754 | $ | 1,906,997 | $ | (310,372 | ) | $ | — | ||||||||||
Components of comprehensive income, net of tax: | |||||||||||||||||||||||||
Net (loss) | (521,843 | ) | (521,843 | ) | — | — | — | — | — | ||||||||||||||||
Foreign currency translation adjustment | (72,588 | ) | — | (72,588 | ) | — | — | — | — | ||||||||||||||||
Net decrease in unrecognized pension net gain/loss and prior service costs | (7,457 | ) | — | (7,457 | ) | — | — | — | — | ||||||||||||||||
Unrealized loss on marketable securities | (2,167 | ) | — | (2,167 | ) | — | — | — | — | ||||||||||||||||
Total comprehensive income | (604,055 | ) | — | — | — | — | — | — | |||||||||||||||||
Tax benefit associated with stock issued under employee compensation plans | 4,769 | — | — | — | 4,769 | — | — | ||||||||||||||||||
Exercise of warrants | 741 | — | — | — | 741 | — | |||||||||||||||||||
Deferred taxes | 731 | — | — | — | 731 | — | — | ||||||||||||||||||
Issuance of stock under employee compensation plans | 27,591 | — | — | 12 | 27,579 | — | — | ||||||||||||||||||
Acquisition of treasury shares | (115,552 | ) | — | — | — | — | (115,552 | ) | — | ||||||||||||||||
Stock-based compensation | 24,333 | — | — | — | 24,333 | — | — | ||||||||||||||||||
Balance at December 27, 2008 | $ | 1,199,025 | $ | (344,314 | ) | $ | 3,347 | $ | 766 | $ | 1,965,150 | $ | (425,924 | ) | $ | — | |||||||||
| Total | Accumulated (Deficit) Earnings | Accumulated Other Comprehensive Income | Common Stock | Capital in Excess of Par | Treasury Stock | Noncontrolling Interest | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 30, 2006 | $ | 1,653,115 | $ | 20,923 | $ | 21,171 | $ | 734 | $ | 1,869,019 | $ | (267,955 | ) | $ | 9,223 | ||||||||||
Components of comprehensive income, net of tax: | |||||||||||||||||||||||||
Net income | 151,118 | 150,648 | — | — | — | — | 470 | ||||||||||||||||||
Foreign currency translation adjustment | 57,801 | — | 57,872 | — | — | — | (71 | ) | |||||||||||||||||
Net increase in unrecognized pension net gain/loss and prior service costs | 6,564 | — | 6,564 | — | — | — | |||||||||||||||||||
Unrealized loss on marketable securities | (48 | ) | — | (48 | ) | — | — | — | — | ||||||||||||||||
Total comprehensive income | 215,435 | — | — | — | — | — | 399 | ||||||||||||||||||
Decrease in noncontrolling interest for purchase of remaining interest in Japan | (5,624 | ) | — | — | — | — | — | (5,624 | ) | ||||||||||||||||
Dividend paid noncontrolling interest | (498 | ) | — | — | — | — | — | (498 | ) | ||||||||||||||||
Tax benefit associated with stock issued under employee compensation plans | 8,727 | — | — | — | 8,727 | — | — | ||||||||||||||||||
Exercise of warrants | 14 | — | — | — | 14 | — | — | ||||||||||||||||||
Issuance of stock under employee compensation plans | 54,121 | — | — | 20 | 54,101 | — | — | ||||||||||||||||||
Acquisition of treasury shares | (42,417 | ) | — | — | — | — | (42,417 | ) | — | ||||||||||||||||
Stock-based compensation | 26,017 | — | — | — | 26,017 | — | — | ||||||||||||||||||
Balance at December 29, 2007 | $ | 1,908,890 | $ | 171,571 | $ | 85,559 | $ | 754 | $ | 1,957,878 | $ | (310,372 | ) | $ | 3,500 | ||||||||||
Components of comprehensive income, net of tax: | |||||||||||||||||||||||||
Net (loss) | (525,192 | ) | (524,505 | ) | — | — | — | — | (687 | ) | |||||||||||||||
Foreign currency translation adjustment | (72,538 | ) | — | (72,588 | ) | — | — | — | 50 | ||||||||||||||||
Net decrease in unrecognized pension net gain/loss and prior service costs | (7,457 | ) | — | (7,457 | ) | — | — | — | — | ||||||||||||||||
Unrealized loss on marketable securities | (2,167 | ) | — | (2,167 | ) | — | — | — | — | ||||||||||||||||
Total comprehensive income | (607,354 | ) | — | — | — | — | — | (637 | ) | ||||||||||||||||
Decrease in noncontrolling interest for sale of Mexico | (2,441 | ) | — | — | — | — | — | (2,441 | ) | ||||||||||||||||
Tax benefit associated with stock issued under employee compensation plans | 4,769 | — | — | — | 4,769 | — | — | ||||||||||||||||||
Exercise of warrants | 741 | — | — | — | 741 | — | |||||||||||||||||||
Deferred taxes | 731 | — | — | — | 731 | — | — | ||||||||||||||||||
Issuance of stock under employee compensation plans | 27,591 | — | — | 12 | 27,579 | — | — | ||||||||||||||||||
Acquisition of treasury shares | (115,552 | ) | — | — | — | — | (115,552 | ) | — | ||||||||||||||||
Stock-based compensation | 24,333 | — | — | — | 24,333 | — | — | ||||||||||||||||||
Balance at December 27, 2008 | $ | 1,241,708 | $ | (352,934 | ) | $ | 3,347 | $ | 766 | $ | 2,016,031 | $ | (425,924 | ) | $ | 422 | |||||||||
Components of comprehensive income, net of tax: | |||||||||||||||||||||||||
Net income | 112,602 | 114,441 | — | — | — | — | (1,839 | ) | |||||||||||||||||
Foreign currency translation adjustment | 47,248 | — | 47,250 | — | — | — | (2 | ) | |||||||||||||||||
Net decrease in unrecognized pension net gain/loss and prior service costs | (6,328 | ) | — | (6,328 | ) | — | — | — | — | ||||||||||||||||
Unrealized gain on marketable securities | 768 | — | 768 | — | — | — | — | ||||||||||||||||||
Total comprehensive income | 154,290 | — | — | — | — | — | (1,841 | ) | |||||||||||||||||
Tax detriment associated with stock issued under employee compensation plans | (2,203 | ) | — | — | — | (2,203 | ) | — | — | ||||||||||||||||
Exercise of warrants | 22 | — | — | — | 22 | — | |||||||||||||||||||
Issuance of stock under employee compensation plans | 797 | — | — | 5 | 792 | — | — | ||||||||||||||||||
Acquisition of treasury shares | (44,603 | ) | — | — | — | — | (44,603 | ) | — | ||||||||||||||||
Stock-based compensation | 23,813 | — | — | — | 23,813 | — | — | ||||||||||||||||||
Balance at December 26, 2009 | $ | 1,373,824 | $ | (238,493 | ) | $ | 45,037 | $ | 771 | $ | 2,038,455 | $ | (470,527 | ) | $ | (1,419 | ) | ||||||||
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Charles River Laboratories International, Inc. together with its subsidiaries is a leading global provider of solutions that accelerate the drug discovery and development process including research models and associated services, and outsourced preclinical services. Our fiscal year is the twelve-month period ending the last Saturday in December.
Principles of Consolidation
The consolidated financial statements include all majority-owned subsidiaries. Intercompany accounts, transactions and profits are eliminated. Results
Adoption of Recent Accounting Standards and Revised Financial Statements
Effective December 28, 2008, we adopted two new accounting pronouncements; a newly issued accounting standard for majority-owned subsidiaries are recorded onour 2013 Notes and a one-month lag basis. There were no material transactions or eventsnewly issued accounting and reporting standard for noncontrolling interest in a subsidiary and for deconsolidation of a subsidiary; which require us to retrospectively adjust previously reported financial information. As such, certain prior period amounts have been adjusted in these subsidiaries between the reporting date and our fiscal year-end date.consolidated financial statements to reflect retrospective application of these accounting pronouncements.
Reclassifications
Certain reclassifications have been made to prior year statements to conform to the current year presentation. These reclassifications have no impact on period reported net income or cash flow.
Use of Estimates
The financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. Estimates and assumptions are reviewed in an ongoing basis and the effect of revisions is reflected in the consolidated statements in the period in which they are determined to be necessary. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include time deposits and highly liquid investments with remainingoriginal maturities at the purchase date of three months or less.
Trade Receivables and Concentrations of Credit Risk
We record trade receivables net of an allowance for doubtful accounts. We establish an allowance for doubtful accounts which we believe is adequate to cover anticipated losses on the collection of all outstanding trade receivable balances. The adequacy of the doubtful account allowance is based on historical information, a review of major customer accounts receivable balances and management's assessment of current economic conditions. We reassess the allowance for doubtful accounts each quarter. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Provisions to the allowance for doubtful accounts amount to $1,179 in 2008 and $494 in 2007. Write offs to the allowance for doubtful accounts amounted to $288 in 2008 and $421 in 2007.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
doubtful accounts amount to $405 in 2009, $1,179 in 2008 and $494 in 2007. Write offs to the allowance for doubtful accounts amounted to $243 in 2009, $288 in 2008 and $421 in 2007.
The composition of net trade receivables is as follows:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Customer receivables | $ | 162,518 | $ | 165,057 | ||||
Unbilled revenue | 51,798 | 52,033 | ||||||
Total | 214,316 | 217,090 | ||||||
Less allowance for doubtful accounts | (4,102 | ) | (3,182 | ) | ||||
Net trade receivables | $ | 210,214 | $ | 213,908 | ||||
| December 26, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Customer receivables | $ | 169,354 | $ | 162,518 | ||||
Unbilled revenue | 32,595 | 51,798 | ||||||
Total | 201,949 | 214,316 | ||||||
Less allowance for doubtful accounts | (5,002 | ) | (4,102 | ) | ||||
Net trade receivables | $ | 196,947 | $ | 210,214 | ||||
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. We place our cash and cash equivalents in various financial institutions with high credit rating and limit the amount of credit exposure to any one financial institution. Our trade receivables are from customers in the pharmaceutical and biotechnology industries. No single customer accounted for more than 5%6% of our net sales.sales or trade receivables for any period presented.
Marketable Securities
We account for our investment in marketable securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investments in marketable securities are reported at fair value and consist of corporate debt securities and government securities and obligations which are classified as securities available for sale and mutual funds, which are classified as actively traded.time deposits and auction rate securities.
Realized gains and losses on securities are included in earnings and are determined using the specific identification method. Unrealized holding gains and losses on securities classified as available for sale, are excluded from earnings and are reported in accumulated other comprehensive income, net of related tax effects. Unrealized gains and losses on actively traded securities are included in earnings. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income.
As of December 27, 2008,26, 2009, we held $18,958$16,212 in auction rate securities which are variable rate debt instruments, which bear interest rates that reset approximately every 7 or 35 days. The auction rate securities owned were rated AAA by a major credit rating agency and are either commercially insured or guaranteed by the Federal Family Education Loan Program (FFELP). The underlying securities have contractual maturities which are generally greater than ten years. The auction rate securities are classified as available for sale and are recorded at fair value. Typically, the carrying value of auction rate securities approximates fair value due to the frequent resetting of the interest rates. We have classified these investments as long-term consistent with the term of the underlying security which are structured with short term interest rate reset dates of generally 7 or 35 days but with contractual maturities that are long term. During the third quarter of 2009, we received a partial call on one of our auction rate securities at par value. As a result, we received $3,675.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:
| December 27, 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
Auction rate securities | $ | 21,175 | $ | — | $ | (2,217 | ) | $ | 18,958 | ||||
$ | 21,175 | $ | — | $ | (2,217 | ) | $ | 18,958 | |||||
| December 26, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
Time deposits | $ | 9,022 | $ | — | $ | — | $ | 9,022 | |||||
Mutual fund | $ | 47,615 | $ | — | $ | (201 | ) | $ | 47,414 | ||||
Auction rate securities | $ | 17,460 | $ | — | $ | (1,248 | ) | $ | 16,212 | ||||
$ | 74,097 | $ | — | $ | (1,449 | ) | $ | 72,648 | |||||
| December 29, 2007 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
Auction rate securities | $ | 38,175 | $ | — | $ | — | $ | 38,175 | |||||
Corporate debt securities | 13,620 | 21 | (91 | ) | 13,550 | ||||||||
Bank time deposits | 4,983 | — | — | 4,983 | |||||||||
Government securities and obligations | 4,339 | — | (4 | ) | 4,335 | ||||||||
Mutual funds | 2,372 | — | — | 2,372 | |||||||||
$ | 63,489 | $ | 21 | $ | (95 | ) | $ | 63,415 | |||||
| December 27, 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
Auction rate securities | $ | 21,175 | $ | — | $ | (2,217 | ) | $ | 18,958 | ||||
$ | 21,175 | $ | — | $ | (2,217 | ) | $ | 18,958 | |||||
Maturities of corporate debt securities and government securities and obligations classified as available for sale were as follows:
| December 27, 2008 | December 29, 2007 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||
Due less than one year | $ | $ | $ | 14,963 | $ | 14,958 | |||||||
Due after one year through five years | — | — | 48,526 | 48,457 | |||||||||
Due after ten years | 21,175 | 18,958 | — | — | |||||||||
$ | 21,175 | $ | 18,958 | $ | 63,489 | $ | 63,415 | ||||||
| December 26, 2009 | December 27, 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||
Due less than one year | $ | 9,022 | $ | 9,022 | $ | $ | |||||||
Due after one year through five years | — | — | — | — | |||||||||
Due after ten years | 17,460 | 16,212 | 21,175 | 18,958 | |||||||||
$ | 26,482 | $ | 25,234 | $ | 21,175 | $ | 18,958 | ||||||
Inventories
Inventories are stated at the lower of cost, determined principally on the average cost method, or market. The determination of market value involves assessment of numerous factors, including costs to dispose of inventory and estimated selling price. Inventory costs for small models are based upon the average cost to produce specific models and strains. Costs for large models are accumulated in inventory by specific model. Inventory costs for both small and large models are charged to cost of sales in the period the models are sold. Reserves are recorded to reduce the carrying value for inventory determined damaged, obsolete or otherwise unsellable.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
The composition of inventories is as follows:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Raw materials and supplies | $ | 14,202 | $ | 13,139 | ||||
Work in process | 12,091 | 9,794 | ||||||
Finished products | 70,589 | 65,090 | ||||||
Inventories | $ | 96,882 | $ | 88,023 | ||||
| December 26, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Raw materials and supplies | $ | 15,262 | $ | 14,202 | ||||
Work in process | 17,178 | 12,091 | ||||||
Finished products | 70,283 | 70,589 | ||||||
Inventories | $ | 102,723 | $ | 96,882 | ||||
Other Current Assets
Other current assets consist of assets we intend to settle within the next twelve months.
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Prepaid assets | $ | 25,354 | $ | 26,087 | ||||
Deferred tax asset | 31,748 | 25,506 | ||||||
Marketable securities | — | 14,958 | ||||||
Prepaid income tax | 7,391 | 7,214 | ||||||
Restricted cash | 2,725 | 3,493 | ||||||
Other | — | 2,219 | ||||||
Other current assets | $ | 67,218 | $ | 79,477 | ||||
| December 26, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Prepaid assets | $ | 21,182 | $ | 25,354 | ||||
Deferred tax asset | 21,654 | 31,748 | ||||||
Marketable securities | 56,436 | — | ||||||
Prepaid income tax | 13,846 | 7,391 | ||||||
Restricted cash | 239 | 2,725 | ||||||
Current assets of discontinued operations | — | 233 | ||||||
Other current assets | $ | 113,357 | $ | 67,451 | ||||
Property, Plant and Equipment
Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful life, are recorded at cost, while maintenance and repairs are expensed as incurred. We capitalize interest and period costs on certain capital projects which amounted to $2,486$2,496 and $5,023 in 2009, $5,263 and $6,363 in 2008 $4,716and $8,619 and $5,484 in 2007, and $4,107 and $2,904 in 2006, respectively. We also capitalize internal and external costs incurred during the application development stage of internal use software. As of December 26, 2009, we have recorded $43,853 related to our ERP software project which was classified as construction in process. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 20 to 40 years; machinery and equipment, 3 to 20 years; furniture and fixtures, 5 to 10 years; vehicles, 3 to 5 years; and leasehold improvements, the shorter of estimated useful life or the lease periods. We begin to depreciate capital projects in the first full month the asset is placed in service.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
The composition of net property, plant and equipment is as follows:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Land | $ | 38,696 | $ | 35,934 | ||||
Buildings | 680,405 | 518,090 | ||||||
Machinery and equipment | 337,687 | 337,215 | ||||||
Leasehold improvements | 16,850 | 17,139 | ||||||
Furniture and fixtures | 10,935 | 7,734 | ||||||
Vehicles | 5,514 | 5,042 | ||||||
Construction in progress | 112,326 | 199,399 | ||||||
Total | 1,202,413 | 1,120,553 | ||||||
Less accumulated depreciation | (373,492 | ) | (371,760 | ) | ||||
Net property, plant and equipment | $ | 828,921 | $ | 748,793 | ||||
| December 26, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Land | $ | 39,402 | $ | 38,696 | ||||
Buildings | 755,607 | 688,868 | ||||||
Machinery and equipment | 373,566 | 337,687 | ||||||
Leasehold improvements | 38,853 | 16,850 | ||||||
Furniture and fixtures | 11,455 | 10,935 | ||||||
Vehicles | 5,595 | 5,514 | ||||||
Construction in progress | 86,272 | 112,326 | ||||||
Total | 1,310,750 | 1,210,876 | ||||||
Less accumulated depreciation | (445,007 | ) | (373,630 | ) | ||||
Net property, plant and equipment | $ | 865,743 | $ | 837,246 | ||||
Depreciation expense for 2009, 2008 and 2007 was $65,106, $60,978 and 2006 was $60,871, $52,870 and $44,947,$52,902, respectively.
Valuation and Impairment of Goodwill, Other Intangibles and Other IntangibleLong-Lived Assets
We account for goodwillValuation of certain long-lived assets including property, plant and otherequipment, intangible assets, and goodwill requires significant judgment. Assumptions and estimates are used in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting standards for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separate intangible assets that have finite useful lives continue to be amortized over their estimated useful lives.
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment for 2008,determining the fair value of assets acquired and liabilities assumed in a business acquisition. A significant portion of the purchase price in our acquisitions is assigned to intangible assets and goodwill. Assigning value to intangible assets requires that we use significant judgment in determining (i) the fair value and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible assets will be amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of long-lived assets. Typically, key assumptions include projected revenue and expense levels used in establishing the fair value of business units exceeded their carrying value thereforeacquisitions as well as discount rates based on an analysis of our goodwill was not impaired. As economic conditions worsened lateweighted average cost of capital, adjusted for specific risks associated with the assets. Changes in the fourth quarter and our business performance was not as strong as anticipated coupled with a decreaseinitial assumptions could lead to changes in amortization expense recorded in our market capitalization, management determined that circumstances had changed enoughfuture financial statements.
We perform an annual impairment analysis of goodwill to trigger another goodwilldetermine if impairment test as of December 27, 2008.
exists. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. Our analysis resulted in the determination that the fair value of our PCS business was less than its carrying value.
The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for the PCS businesseach reporting unit for which step one indicated an impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships.
Our annual goodwill impairment assessment has historically been completed as of the beginning of the fourth quarter. Based on our assessment (step one) for 2009, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. The results of this year's impairment test are as of a point in time. If the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 26, 2009, we had recorded goodwill and other intangibles of $668.5 million in the consolidated balance sheet.
For intangible assets, goodwill and property, plant and equipment, we assess the carrying value of these assets whenever events or changes in circumstances indicate that the goodwill assignedcarrying value may not be recoverable. Factors we consider important which could trigger an impairment review include but are not limited to the PCSfollowing:
Should we determine that the carrying value of long-lived tangible assets may not be recoverable, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business exceeded the impliedmodel. We may also estimate fair value based on market prices for similar assets, as appropriate. Significant judgments are required to estimate future cash flows, including the selection of goodwill resultingappropriate discount rates and other assumptions. Changes in a goodwill impairmentthese estimates and assumptions could materially affect the determination of $700,000.
Intangible assets deemed to have an indefinite life are tested for impairment using a one-step process which compares the fair value to the carrying amountfor these assets.
Table of the asset. We completed the annual impairment testsContents
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in 2008thousands, except per share amounts)
1. Description of Business and 2007 and concluded there was no impairmentSummary of identifiable intangible assets with indefinite useful lives.Significant Accounting Policies (Continued)
Other Assets
Other assets consist of assets that we do not intend to settle within the next twelve months.
The composition of other assets is as follows:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred financing costs | $ | 6,550 | $ | 8,632 | ||||
Cash surrender value of life insurance policies | 19,652 | 22,027 | ||||||
Long term marketable securities | 18,958 | 48,457 | ||||||
Other assets | 6,898 | 6,877 | ||||||
Other assets | $ | 52,058 | $ | 85,993 | ||||
| December 26, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred financing costs | $ | 3,679 | $ | 5,307 | ||||
Cash surrender value of life insurance policies | 25,099 | 19,652 | ||||||
Long term marketable securities | 16,212 | 18,958 | ||||||
Other assets | 10,254 | 6,898 | ||||||
Long-term assets of discontinued operations | — | 4,187 | ||||||
Other assets | $ | 55,244 | $ | 55,002 | ||||
Accounting for Investment in Life Insurance Contracts
We account for our Our investment in life insurance contracts in accordance with FASB Staff Position No. FTB 85-4,Accounting for Life Settlement Contracts by Third-Party Investors using theare recorded at fair value method. Under the fair value method,value. Accordingly, we recognize the initial investment at the transaction price and remeasure the investment at fair value each reporting period. Investments in life insurance contracts are reported as part of purchases of marketable securitiesinvestments in the statement of cash flows. At December 27, 2008,26, 2009, we held 8476 contracts with a carrying value of $19,652$25,099 and a face value of $134,782.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposal are less than its carrying amount. In such instances, additional analysis is performed and the carrying value of long-lived assets is reduced to the estimated fair value, if this is lower, as determined using an appraisal or discounted cash flows, as appropriate.$136,374.
Restructuring and Contract Termination Costs
We recognize obligations associated with restructuring activities and contract termination costs in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requiresby recording a liability at fair value for the costs associated with an exit or disposal activity as well as costs to terminate a contract or an operating lease. The overall purpose of our restructuring actions is to lower overall operating costs and improve profitability by reducing excess capacities. Restructuring charges are typically recorded in selling, general and administrative expenses in the period in which the plan is approved by our senior management and, where material, our Board of Directors, and when the liability is incurred. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity is recognized and measured at its fair value when the entity ceases using the right conveyed by the contract. During 2007, the Company ceased using2009 we implemented staffing reductions to improve operating efficiency and profitability at various sites including our Arkansas facility which we closed this year. As a leased facilityresult of these actions, through December 26, 2009 we recorded severance charges of $16,636 including $5,275 in Worcester, MAcost of sales and recorded a charge$11,361 in selling, general and administrative expense. $10,014 relates to our Preclinical Services segment, $3,997 to Research Models and Services and $2,625 to Corporate. As of $2,793 for the cost to terminate this operating lease.
Other Current Liabilities
Other currentDecember 26, 2009, $2,757 was included in accrued compensation and $1,739 in other long term liabilities consist of liabilities we intend to settle within the next twelve months.
The composition of other current liabilities is as follows:on our consolidated balance sheet.
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Accrued income taxes | $ | 20,763 | $ | 21,438 | ||||
Current deferred tax liability | 1,269 | 1,347 | ||||||
Accrued interest and other | 644 | 483 | ||||||
Other current liabilities | $ | 22,676 | $ | 23,268 | ||||
Other Long-Term Liabilities
Other long-term liabilities consist of liabilities we do not intend to settle within the next twelve months.
| Severance and Retention Costs | ||||
---|---|---|---|---|---|
Balance December 27, 2008 | $ | 639 | |||
Expense | 16,636 | ||||
Payments/utilization | (12,779 | ) | |||
Balance at December 26, 2009 | $ | 4,496 | |||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Other Current Liabilities
Other current liabilities consist of liabilities we intend to settle within the next twelve months.
The composition of other current liabilities is as follows:
| December 29, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Accrued income taxes | $ | 13,623 | $ | 20,763 | ||||
Current deferred tax liability | 1,174 | 1,269 | ||||||
Accrued interest and other | 422 | 644 | ||||||
Current liabilities of discontinued operations | — | 35 | ||||||
Other current liabilities | $ | 15,219 | $ | 22,711 | ||||
Other Long-Term Liabilities
Other long-term liabilities consist of liabilities we do not intend to settle within the next twelve months.
The composition of other long-term liabilities is as follows:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred tax liability | $ | 47,538 | $ | 70,914 | ||||
Long-term pension liability | 32,175 | 35,729 | ||||||
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan | 25,954 | 29,293 | ||||||
Other long-term liabilities | 13,160 | 18,108 | ||||||
Other long-term liabilities | $ | 118,827 | $ | 154,044 | ||||
| December 29, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred tax liability | $ | 42,867 | $ | 47,538 | ||||
Long-term pension liability | 32,516 | 32,175 | ||||||
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan | 22,889 | 25,954 | ||||||
Other long-term liabilities | 24,805 | 13,160 | ||||||
Other long-term liabilities | $ | 123,077 | $ | 118,827 | ||||
Joint Ventures
We hold investments in joint ventures that are separate legal entities whose purpose is consistent with our overall operations and represent geographic and business segment expansions of our existing markets. The financial results of all joint ventures were consolidated in our results as we have the ability to exercise control over these entities. The interests of the outside joint venture partners have been recorded as minoritynoncontrolling interests totaling $(1,419) and $422 at December 26, 2009 and $3,500 at December 27, 2008, and December 29, 2007, respectively.
Stock-Based Compensation Plans
We adopted on a modified prospective basis, the provisions of SFAS No. 123(R), "Share-Based Payment (Revised 2004)," (SFAS No. 123(R)) and related guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employeegrant stock options and restricted stock awards based on estimated fair values. Accordingly, stock-basedto employees and non-employee directors under our share-based compensation plans. Stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period. We estimate the fair value of stock options using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the option's expected term, the expected annual dividend yield and the expected stock price volatility. The expected stock price
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
volatility assumption was determined using the historical volatility of our common stock over the expected life of the option. The risk-free interest rate was based on the market yield for the five year U.S. Treasury security. The expected life of options was determined using historical option exercise activity. Management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
Revenue Recognition
We recognize revenue related to our products and services in accordance with the SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition."
We recognize revenue related to our products, which include research models, in vitro technology and vaccine support products, when persuasive evidence of an arrangement exists, generally in the form of customer purchase orders, title and risk of loss have transferred, which occurs upon delivery of the products, the sales price is fixed and determinable and collectability is reasonably assured. These recognition criteria are met at the time the product is delivered to the customer's site. Product sales are recorded net of returns upon delivery. For large models in some cases customers pay in advance of delivery of the product. These advances are deferred and recognized as revenue upon delivery of the product.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Our service revenue is comprised of toxicology, pathology, laboratory, clinical Phase I trials, transgenicGEMS and contractconsulting and staffing services and is generally evidenced by customer contracts. Toxicology services provide highly specialized studies to evaluate the safety and toxicity of new pharmaceutical compounds and materials used in medical devices. Pathology services provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. Laboratory services monitor and analyze the health and genetics of research models used in research protocols. Clinical Phase I conducts tolerability assessments to explore human pharmacology. TransgenicGEMS services include validating, maintaining, breeding and testing research models for biomedical research activities. ContractConsulting and staffing services provide management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations.
The toxicology, pathology and clinical Phase I trials services arrangements typically range from one to six months but can range up to approximately 24 months in length. These agreements are negotiated for a fixed fee. Laboratory service arrangements are generally completed within a one-month period and are also of a fixed fee nature. TransgenicGEMS and contractconsulting and staffing services are of a longer-term nature, from six months to five years, and are billed at agreed upon rates as specified in the contract.
Our service revenue is recognized upon the completion of the agreed upon performance criteria. These performance criteria are generally in the form of either study protocols or specified activities or procedures which we are engaged to perform. These performance criteria are established by our customers and do not contain acceptance provisions which are based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate contracts is recognized as services are performed, based upon rates specified in the contract. Revenue of fixed fee contracts is recognized as services are performed in relation to estimated costs to complete procedures specified by customers in the form of study protocols.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Deferred and unbilled revenue isare recognized in our consolidated balance sheets. In some cases, a portion of the contract fee is paid at the time the study is initiated. These advances are recorded as deferred revenue and recognized as revenue as services are performed. Revenue is recognized on unbilled services and relate to amounts that are currently unbillable to the customer pursuant to contractual terms. In general, such amounts become billable in accordance with predetermined payment schedules, but are recognized as revenue as services are performed.
Guarantees
We include standard indemnification provisions in customer contracts, which include standard provisions limiting our liability under such contracts, including our indemnification obligations, with certain exceptions.
Derivatives and Hedging Activities
We follow the requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and used for hedging activities. Allrecord all derivatives, whether designed for hedging relationships or not, are required to be recorded on theour balance sheet at fair value. If the derivative is designated as a fair value hedge, all changes in the fair value of the derivative and changes in the fair value of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
the changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the statement of operations when the hedged item affects earnings. The ineffective portions of both fair value and cash flow hedges are immediately recognized as earnings. We recorded a hedge gain (loss) of $1,785 in 2009, $(3,977) in 2008 and $1,603 in 2007 and $(66) in 2006.2007.
Fair Value
Effective December 30, 2007, we adopted SFAS No. 157, "Fair Value Measurements" (SFAS 157)We hold cash equivalents, investments and SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159). SFAS 157 definescertain other assets that are carried at fair value. We generally determine fair value establishesusing a framework for measuringmarket approach based on quoted prices of identical instruments when available. When market quotes of identical instruments are not readily accessible or available, we determine fair value under GAAPbased on quoted market prices of similar instruments. Disclosure for assets and enhances disclosures aboutliabilities that are measured at fair value measurements. Fairbut recognized and disclosed at fair value is defined under SFAS 157on a nonrecurring basis are required prospectively beginning January 1, 2009. As of December 26, 2009, we do not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities.
The valuation hierarchy for disclosure of the inputs used to measure fair value prioritizes the inputs into three broad levels as the exchange pricefollows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous marketare not active, inputs other than quoted prices that are observable for the asset or liability, in an orderly transaction betweenincluding interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market participants on the measurement date. SFAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observabledata through correlation. Level 3 inputs and minimize the use ofare unobservable inputs when measuring fair value. The standard describes three levels of inputs that may bebased on our own assumptions used to measure fair value which are provided in the table below. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The adoption of both SFAS 157 and SFAS 159 had no impact on our financial statements other than the disclosures presented herein.
Assets measured at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value on a recurring basis are summarized below:measurement.
| Fair Value Measurements at December 27, 2008 using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Assets at Fair Value | |||||||||
Auction rate securities | $ | — | $ | — | $ | 18,958 | $ | 18,958 | |||||
Fair value of life policies | — | 14,062 | — | 14,062 | |||||||||
Total assets | $ | — | $ | 14,062 | $ | 18,958 | $ | 33,020 | |||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Assets measured at fair value on a recurring basis are summarized below:
| Fair Value Measurements at December 26, 2009 using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Assets at Fair Value | |||||||||
Time deposits | $ | — | $ | 9,022 | $ | — | $ | 9,022 | |||||
Mutual funds | 47,414 | — | — | 47,414 | |||||||||
Auction rate securities | — | — | 16,212 | 16,212 | |||||||||
Fair value of life policies | — | 20,032 | — | 20,032 | |||||||||
Total assets | $ | 47,414 | $ | 29,054 | $ | 16,212 | $ | 92,680 | |||||
| Fair Value Measurements at December 27, 2008 using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Assets at Fair Value | |||||||||
Auction rate securities | $ | — | $ | — | $ | 18,958 | $ | 18,958 | |||||
Fair value of life policies | — | 14,062 | — | 14,062 | |||||||||
Total assets | $ | — | $ | 14,062 | $ | 18,958 | $ | 33,020 | |||||
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the quarteryears ended December 26, 2009 and December 27, 2008. Our auction rate securities were valued at fair value by management in part utilizing an independent valuation reviewed by management which used pricing models and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use at December 27, 2008.26, 2009.
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
---|---|---|---|---|---|
| Auction rate securities | ||||
Balance, December 30, 2007 | $ | — | |||
Transfers in and/or (out) of Level 3 upon adoption of SFAS 157 | 21,175 | ||||
Total gains or losses (realized/unrealized): | |||||
Included in earnings | — | ||||
Included in other comprehensive income | (2,217 | ) | |||
Purchases, issuances and settlements | — | ||||
Balance, December 27, 2008 | $ | 18,958 | |||
Certain assets and liabilities are measured at fair value on a non-recurring basis. As of December 27, 2008, we have not applied the provisions of SFAS 157 to these assets and liabilities in accordance with FASB "Staff Position FAS 157-2: Effective Date of SFAS 157" (FSP 157-2). FSP 157-2 partially defers the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities and removes certain leasing transactions from the scope of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in the first quarter of 2009 and will be applied prospectively.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefits or that their future deductibility is uncertain.
Effective December 31, 2006, we adopted the provisions of FIN 48 "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109," which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on the derecognition of previously recognized income tax items, measurement, classification, interest and penalties, accounting in interim periods and financial statement disclosure. Under FIN 48, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||
---|---|---|---|---|---|---|---|---|
| Year ended | |||||||
Auction rate securities | December 26, 2009 | December 27, 2008 | ||||||
Beginning balance | $ | 18,958 | $ | — | ||||
Transfers in and/or out of Level 3 | — | 21,175 | ||||||
Total gains or losses (realized/unrealized): | ||||||||
Included in earnings (other expenses) | (40 | ) | — | |||||
Included in other comprehensive income | 969 | (2,217 | ) | |||||
Purchases, issuances and settlements | (3,675 | ) | — | |||||
Ending balance | $ | 16,212 | $ | 18,958 | ||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Income Taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. We measure deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence both positive and negative, it is more likely than not that we will not realize some or all of the deferred tax assets.
Effective December 31, 2006, we adopted a new accounting standard for uncertainty in income taxes which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The guidance also provides for the derecognition of previously recognized income tax items, measurement, classification, interest and penalties, accounting in interim periods and financial statement disclosure. Accordingly, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in our financial statements from such positions are measured on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Foreign Currency Translation
The functional currency of each of our operating foreign subsidiaries is local currency. In accordance with SFAS No. 52, "Foreign Currency Translation," theThe financial statements of these subsidiaries are translated into U.S. dollars as follows: assets and liabilities at year-end exchange rates; income, expenses and cash flows at average exchange rates; and shareholders' equity at historical exchange rates. The resulting translation adjustment is recorded as a component of accumulated other comprehensive income in the accompanying balance sheet. Exchange gains and losses on foreign currency transactions are recorded as other income or expense. We recorded an exchange gain (loss) of $(861) in 2009, $3,653 in 2008 and $(3,959) in 2007 and $170 in 2006.2007.
Comprehensive Income
We account forOur comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." As it relates to us, comprehensive income is defined asconsists of net income plus the sum of the changes in unrealized gains (losses) on available-for-sale marketable securities, unrealized gains (losses) on hedging activities, foreign currency translation adjustments and change in unrecognized pension gains and losses and prior service costs and credits (collectively, other comprehensive income) and is presented in the Consolidated Statements of Changes in Shareholders' Equity, net of tax.
Pension Obligations
We recognize obligations associated with ourOur defined benefit pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions." Assets,plans' assets, liabilities and expenses are calculated by accredited independent actuaries. As required by SFAS No. 87, we are required to makeusing certain assumptions to value the plan assets and liabilities.assumptions. These assumptions are reviewed annually, or whenever otherwise required, by SFAS No. 87, based on reviews of current plan information and consultations with independent investment advisors and actuaries. The selection of assumptions requires a high degree of judgment and may materially change from period to period. We do not offer other defined benefits associated with post-retirement benefit plans other than pensions.
We adopted the recognition and disclosure requirements of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)" as of December 30, 2006. This statement requires employers that sponsor defined benefit plans to recognize the funded status of aour benefit planplans on itsour balance sheet; recognize gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of accumulated other comprehensive income, net of tax; measure defined benefit plan assets and obligations as of the date of the employer's fiscal year-end balance sheet; and disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
During 2008, our Board of Directors voted to freeze the accrual of benefits under our U.S. pensionmeasure plan effective April 30, 2008. In accordance with SFAS No. 88, "Employers' Accounting for Settlementsassets and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," we recorded a curtailment gain of $3,276 in 2008. Based on a remeasurementobligations as of the U.S. pension plan's assetsdate of our fiscal year-end balance sheet. Additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and liabilities at April 30,transition asset or obligation are disclosed in the notes to our financial statements.
In December 2008, the FASB issued guidance on an employer's disclosures about plan assets of defined benefit accrual freeze reduced the projected benefit obligation by $8,298pension or other postretirement plan. The new disclosures required shall be provided for fiscal years ending after December 15, 2009 and resulted in a corresponding adjustment, net of tax, to accumulated other comprehensive income.are not required for earlier periods that are presented for comparative purposes. This new accounting standard increases our pension footnote disclosure but does not have an impact on our consolidated financial statements.
Earnings (Loss) Per Share
Basic earnings per share are calculated by dividing net income attributable to common shareowners by the weighted average number of common shares outstanding. Diluted earnings per common share are calculated by adjusting the weighted average number of common shares outstanding to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued, to the extent these additional shares are not anti-dilutive.
Discontinued Operations
In accordance with SFAS No. 144, theThe results of discontinued operations, less applicable income taxes (benefit) and assets and liabilities, are reported as a separate component in the accompanying statement of income and consolidated balance sheets for the current and prior periods. The statement of cash flows also reflects separate disclosure of cash flows pertaining to discontinued operations consistently for all periods presented.
New Accounting Pronouncements
In June 2008,October 2009, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Grantedan accounting standard update to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this update addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. We will adopt the provisions of this update on December 27, 2009, the beginning of our fiscal year 2010. The adoption of this update will not have an impact on our consolidated financial statements.
In June 2009, the FASB issued a new accounting standard to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This standard replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in Share-Based Payment Transactions Are Participating Securities" (FSP EITF 03-6-1)a variable interest entity with an approach focused on identifying which clarifiesreporting entity has the power to direct the activities of a variable interest entity that share-based payment awards that entitle their holdersmost significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive nonforfeitable dividends before vesting shouldbenefits from the entity. An approach that is expected to be considered participating securities. As participating securities, these instruments shouldprimarily qualitative will be includedmore effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this standard also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the calculationinformation provided to users of basic earnings per share. FSP EITF 03-6-1financial statements. This standard is effective for financial statements issued for fiscal years beginningstarting after DecemberNovember 15, 2008, as well as interim periods within those years. Once effective, all prior period earnings per share data presented must be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of the FSP. Early application is not permitted. Upon adoption of FSP EITF 03-6-1, we expect to revise prior period earning per share from continuing operations as follows: decrease 2008 basic and diluted loss per share by $0.08; reduce 2007 basic and diluted earning per share by $0.02 and reduce 2006 basic earning per share by $0.02 and diluted earning per share from continuing operations by $0.01.
In May 2008, the FASB issued FSP No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP 14-1). This FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectively to all periods presented. We estimate that upon adoption of the provisions of FSP 14-1, $261,508 of the total proceeds from our debt will be allocated to the liability component,2009, or January 1,
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
which represents2010 for companies reporting earnings on a calendar-year basis. We are evaluating the estimated fair value of similar debt instruments without the conversion option as of the date of issuance. The remaining $88,492impact this will be allocated to the equity component. The debt discount of $88,492 will be amortized to interest expense over the seven year period from June 2006 to June 2013, the expected life of the instrument. Additionally, upon adoption, approximately $1,903 of deferred financing costs capitalized at the time of issuance will be reclassified to equity as equity issuance costs and will not be amortized to interest expense.have on our consolidated financial statements.
In March 2008,June 2009, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities" (FAS 161). FAS 161 changesa new accounting standard for transfers of financial assets to improve the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and whyinformation an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement 133 andprovides in its related interpretations, and (c) how derivative instruments and related hedged items affect an entity'sfinancial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows. FAS 161flows; and a transferor's continuing involvement in transferred financial assets. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this pronouncement is not expected to have an impact on our consolidated financial statements.
In February 2008,2. Business Acquisitions
We acquired several businesses during the FASB issued FSP 157-1 and 157-2 that (1) partially deferredthree-year period ended December 26, 2009. The results of operations of the effectiveacquired businesses are included in the accompanying consolidated financial statements from the date of SFAS 157acquisition.
In August 2009, we acquired Systems Pathology Company, LLC (SPC) a pathology based software development company focused on developing state-of-the-art analytical imaging technologies to automate the labor intensive tissue evaluations process which is a significant component of standard preclinical studies for one year for$24,522 in cash and up to $14,000 (undiscounted) potential contingent consideration. The contingent consideration consists of payments based on certain nonfinancial assetsagreed upon revenue and nonfinancial liabilities and (2) removed certain leasing transactions fromtechnical milestones. The fair value of the scopecontingent consideration at the date of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008 and will be applied prospectively. The provisions of SFAS 157acquisition was $9,100 which was estimated using the income approach based on significant inputs that are not expected to haveobservable in the market. Key assumptions included a material impact on our consolidated financial statements.
In February 2008, the FASB issued FSP FAS 140-3: "Accounting for Transfersdiscount rate of Financial Assets and Repurchase Financing Transactions" (FSP 140-3). FSP 140-3 provides guidance on accounting for a transfer of a financial asset18% and a repurchase financing. This FSP presumes that an initial transferprobability adjustment as we believe the probability of each milestone payment being made ranges from 60% to 85%. No payments of contingent consideration have been made as of December 26, 2009. The amount recognized for a financial assetcontingent consideration was $9,300 at December 26, 2009 and a repurchase financing are considered partthe assumptions used to develop the estimate had not changed. SPC is included in our PCS segment.
The preliminary purchase price allocation net of the same arrangement (linked transaction) under Statement 140. However, if certain criteria are met, the initial transfer$9 of cash acquired is as follows:
Current assets (excluding cash) | $ | 49 | ||
Property, plant and equipment | 338 | |||
Current liabilities | (1,317 | ) | ||
Long term liabilities | (1,040 | ) | ||
Goodwill and other intangible asset | 35,592 | |||
Total purchase price allocation | $ | 33,622 | ||
The breakout of goodwill and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140. This FSP is not expected to have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS 141(R)) and No. 160, "Noncontrolling Interests in Consolidated Financial Statements" (SFAS 160). SFAS 141(R) and SFAS 160 introduce significant changes in the accounting for and reporting of business acquisitions and noncontrolling interests, formerly "minority interest," in a subsidiary. SFAS 141(R) continues the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. SFAS 141(R) changes how business acquisitions are accounted for and will impact financial statements atother intangibles acquired with the acquisition date and in subsequent periods. In addition, SFAS 141(R) will impact the annual goodwill impairment test associated with acquisitions that close both before and after its effective date. SFAS 141(R) amends SFAS 109 changing the accounting for adjustments to deferred tax asset valuation allowances and income tax uncertainties related to acquisitions that close both before and after its effective date, generally requiring adjustments to be reflected in income tax expense. SFAS 141(R) applies prospectively to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. An entity may not apply SFAS 141(R) before that date. The adoption of SFAS 141(R) and SFAS 160 will impact our consolidated financial statements.was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
In-process research and development | $ | 14,000 | 5.1 | ||||
Goodwill | 21,592 | — | |||||
Total goodwill and other intangibles | $ | 35,592 | |||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
2. Business Acquisitions (Continued)
We acquired several businesses during the three-year period ended December 27, 2008. The results of operations of the acquired businessesIn-process research and development is accounted for as an indefinite-lived intangible asset until its completion, after which it becomes an amortizable finite-lived asset (completion costs are included in the accompanying consolidated financial statements from the date of acquisition. Significant acquisitions include the following:expensed as incurred).
Goodwill is deductible for tax purposes.
On November 19, 2008July 31, 2009, we acquired certain assets of an Indian distributor for $5,469Cerebricon Ltd. which areis included in our RMS segment.segment for $8,180 in cash. Based in Finland, Cerebricon provides discovery services for therapeutic products for treatment of diseases of the central nervous system supported by in vivo imaging capabilities.
The preliminary purchase price allocation including deal costsnet of $273 incurred by us$1,200 of acquired cash is as follows:
| ||||
| ||||
| ||||
| ||||
| ||||
Current assets (excluding cash) | $ | 1,754 | ||
Property, plant and equipment | 816 | |||
Other long-term assets | 41 | |||
Current liabilities | (1,485 | ) | ||
Long-term debt | (1,178 | ) | ||
Long-term deferred tax | (1,453 | ) | ||
Goodwill and other intangible asset | 9,685 | |||
Total purchase price allocation | $ | 8,180 | ||
The breakout of goodwill and other intangibles acquired with the acquisition was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 3,770 | 5 | ||||
Non-compete | 236 | 2 | |||||
Goodwill | 1,453 | — | |||||
Total goodwill and other intangibles | $ | 5,459 | |||||
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 5,597 | 4.2 | ||||
Goodwill | 4,088 | — | |||||
Total goodwill and other intangibles | $ | 9,685 | |||||
Goodwill is not deductible for tax purposes.
In May 2009, we acquired the assets of Piedmont Research Center (PRC) for $45,558 in cash. PRC, which is based in North Carolina, provides discovery services focused on efficacy studies in oncology and other therapeutic areas for pharmaceutical and biotechnology clients and is included in our RMS segment.
The preliminary purchase price allocation is as follows:
Current assets | $ | 1,414 | ||
Property, plant and equipment | 1,315 | |||
Current liabilities | (1,204 | ) | ||
Goodwill and other intangible asset | 44,033 | |||
Total purchase price allocation | $ | 45,558 | ||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
2. Business Acquisitions (Continued)
The breakout of goodwill and other intangibles acquired with the acquisition was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 18,400 | 6.3 | ||||
Backlog | 900 | .7 | |||||
Trademarks and trade names | 500 | 2.2 | |||||
Developed technology | 300 | 1.5 | |||||
Goodwill | 23,933 | — | |||||
Total goodwill and other intangibles | $ | 44,033 | |||||
Goodwill is deductible for tax purposes.
In April 2009, we acquired certain assets of Medical Supply Company, LTD, an Irish based provider of products and services for the purpose of endotoxin detection, testing and assessment for $5,386 in cash. Intangibles of $4,875 were recorded related to customer relationships with a 4.5 year weighted average amortization life. It is included in our RMS segment.
On November 19, 2008 we acquired certain assets of an Indian distributor for $5,469 which is included in our RMS segment. The purchase price allocation, including deal costs of $273 incurred by us is as follows:
Current assets (excluding cash) | $ | 53 | ||
Property, plant and equipment | 37 | |||
Deferred taxes | (80 | ) | ||
Goodwill and other intangible asset | 5,459 | |||
Total purchase price allocation | $ | 5,469 | ||
The breakout of goodwill and other intangibles acquired with the acquisition was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 3,770 | 5 | ||||
Non-compete | 236 | 2 | |||||
Goodwill | 1,453 | — | |||||
Total goodwill and other intangibles | $ | 5,459 | |||||
Goodwill is not deductible for tax purposes.
On September 15, 2008 we acquired privately-held Molecular Therapeutics, Inc., the parent entity of Molecular Imaging Research, Inc. (MIR) for $12,041$11,980 in cash. Ann Arbor, Michigan-based MIR provides discovery services utilizing extensive in-vivo imaging capabilities to pharmaceutical and
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
2. Business Acquisitions (Continued)
biotechnology clients and is included in our RMS segment. The preliminary purchase price allocation, including deal costs of $79 incurred by us and net of $368 of cash acquired, is as follows:
Current assets (excluding cash) | $ | 1,123 | ||
Property, plant and equipment | 848 | |||
Noncurrent assets | 223 | |||
Current liabilities | (1,271 | ) | ||
Noncurrent liabilities | (564 | ) | ||
Deferred taxes | (2,055 | ) | ||
Goodwill and other intangible asset | 13,448 | |||
Total purchase price allocation | $ | 11,752 | ||
Current assets (excluding cash) | $ | 1,123 | ||
Property, plant and equipment | 848 | |||
Noncurrent assets | 223 | |||
Current liabilities | (1,271 | ) | ||
Noncurrent liabilities | (564 | ) | ||
Deferred taxes | (1,678 | ) | ||
Goodwill and other intangible asset | 13,010 | |||
Total purchase price allocation | $ | 11,691 | ||
In conjunction with the purchase, we paid off $364 of acquired debt.
The breakout of goodwill and other intangibles acquired with the MIR acquisition was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 5,470 | 6.6 | ||||
Backlog | 200 | 0.4 | |||||
Non-compete | 10 | 2.1 | |||||
Goodwill | 7,768 | — | |||||
Total goodwill and other intangibles | $ | 13,448 | |||||
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 5,470 | 6.6 | ||||
Backlog | 200 | 0.4 | |||||
Non-compete | 10 | 2.1 | |||||
Goodwill | 7,330 | — | |||||
Total goodwill and other intangibles | $ | 13,010 | |||||
Goodwill is not deductible for tax purposes.
In addition, onOn September 9, 2008, we acquired all of the capital stock of privately held Dusseldorf, Germany-based NewLab BioQuality AG (NewLab) for $48,500 in cash. NewLab, a contract service organization, provides safety and quality control services to biopharmaceutical clients and enhances our existing capabilities of in process validation services, in consulting services, and assisting in designing International Conference on Harmonisation (ICH)-compliant stability testing programs and is included in our PCS segment.
The preliminary purchase price allocation associated with the NewLab acquisition, including transaction costs of $1,602 incurred by us and net of $3,363 of cash acquired, is as follows:
Current assets (excluding cash) | $ | 5,242 | ||
Property, plant and equipment | 3,198 | |||
Current liabilities | (3,324 | ) | ||
Deferred taxes | (6,012 | ) | ||
Goodwill and other intangibles acquired | 47,635 | |||
Total purchase price allocation | $ | 46,739 | ||
Current assets (excluding cash) | $ | 5,242 | ||
Property, plant and equipment | 3,198 | |||
Current liabilities | (3,324 | ) | ||
Deferred taxes | (6,069 | ) | ||
Goodwill and other intangibles acquired | 47,692 | |||
Total purchase price allocation | $ | 46,739 | ||
In conjunction with the purchase of NewLab, we utilized $87 of available cash to prepay NewLab's existing debt.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
2. Business Acquisitions (Continued)
In conjunction with the purchase of NewLab, we utilized $87 of available cash to prepay NewLab's existing debt.
The breakout of goodwill and other intangibles acquired with the NewLab acquisition was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 17,600 | 6.2 | ||||
Backlog | 800 | 0.7 | |||||
Non-compete covenants | 200 | 1.9 | |||||
Goodwill | 29,035 | — | |||||
Total goodwill and other intangibles | $ | 47,635 | |||||
Goodwill is not deductible for tax purposes.
On June 14, 2007, we entered into a joint venture with Shanghai BioExplorer Co., Ltd., a Shanghai, China-based provider of preclinical services, to form Charles River Laboratories Preclinical Services—China. We paid $2,400 in cash for a 75% ownership interest in the joint venture. Additionally, as part of the agreement, the joint venture purchased the net assets of Shanghai BioExplorer for a purchase price of $1,532 including transaction costs of $543. Intangible assets of $935 were recorded by the joint venture based on the preliminary purchase price allocation.
On January 4, 2007, we acquired the remaining 15% of the equity (319,199 common shares) of Charles River Laboratories Japan, Inc., ("Charles(Charles River Japan")Japan) from Ajinomoto Company Inc., the minoritynoncontrolling interest partner. As of the effective date of this transaction, we own 100% of Charles River Japan. The purchase price for the equity was 1.3 billion Yen, or approximately $10,899, which was paid in cash. The purchase price allocation is as follows:
Minority interest acquired | $ | 5,624 | ||
Property, plant and equipment | 2,224 | |||
Deferred tax liability | (4,187 | ) | ||
Intangible asset (customer relationships with 15 year estimated amortization life) | $ | 7,238 | ||
$ | 10,899 | |||
Noncontrolling interest acquired | $ | 5,624 | ||
Property, plant and equipment | 2,224 | |||
Deferred tax liability | (4,187 | ) | ||
Intangible asset (customer relationships with 15 year estimated amortization life) | 7,238 | |||
$ | 10,899 | |||
On October 30, 2006,For the Company acquired allyears ended 2009, 2008 and 2007 $43,818, $9,157 and $662 of the capital stockrevenue and $8,642, $3,427 and $1,106 of privately held Tacoma, Washington based Northwest Kinetics for $29,357operating loss are included in cash. Northwest Kinetics runs clinical trials, primarily in Phase I facility, with a focus on high end clinical pharmacology studies.
Tableour consolidated statements of Contents
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
2. Business Acquisitions (Continued)
The final purchase price allocation associated with the Northwest Kinetics acquisition, including transaction costs of $265 incurred by the Company and net of $812 of cash acquired, is as follows:
Current assets (excluding cash) | $ | 6,741 | ||
Property, plant and equipment | 2,983 | |||
Non-current assets | 100 | |||
Current liabilities | (6,378 | ) | ||
Non-current liabilities | (7,493 | ) | ||
Goodwill and other intangibles acquired | 32,857 | |||
Total purchase price allocation | $ | 28,810 | ||
In conjunction with the purchase of Northwest Kinetics, the Company utilized $2,076 of available cashincome related to pay off Northwest Kinetics' existing debt.these acquisitions.
The breakout of goodwill and other intangibles acquired with the Northwest Kinetics acquisition was as follows:
| | Weighted average amortization life (years) | |||||
---|---|---|---|---|---|---|---|
Customer relationships | $ | 13,700 | 12 | ||||
Participant list | 1,300 | 12 | |||||
Non-compete covenants | 200 | 5 | |||||
Trademarks and trade names | 40 | 1 | |||||
Goodwill | 17,617 | — | |||||
Total goodwill and other intangibles | $ | 32,857 | |||||
The following selected unaudited pro forma consolidated results of operations are presented as if each of the acquisitions had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments including the amortization of intangibles. The pro forma data is for informational purposes only and does not necessarily reflect the results of
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
2. Business Acquisitions (Continued)
operations had the companies operated as one during the periods reported. No effect has been given for synergies, if any, that may have been realized through the acquisitions.
| Fiscal Year Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | ||||||||
Net sales | $ | 1,363,670 | $ | 1,253,372 | $ | 1,073,215 | |||||
Operating income | (452,512 | ) | 226,386 | 186,918 | |||||||
Income from continuing operations | (522,931 | ) | 156,783 | 123,325 | |||||||
Earnings per common share | |||||||||||
Basic | $ | (7.77 | ) | $ | 2.34 | $ | 1.79 | ||||
Diluted | $ | (7.77 | ) | $ | 2.28 | $ | 1.76 |
| Fiscal Year Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||
Net sales | $ | 1,210,830 | $ | 1,363,670 | $ | 1,253,372 | |||||
Operating income | 163,199 | (452,619 | ) | 226,354 | |||||||
Income from continuing operations | 109,228 | (525,593 | ) | 153,025 | |||||||
Earnings per common share | |||||||||||
Basic | $ | 1.68 | $ | (7.81 | ) | $ | 2.29 | ||||
Diluted | $ | 1.67 | $ | (7.81 | ) | $ | 2.23 |
Refer to Note 5 for further discussion of the method of computation of earnings per share.
3. Goodwill and Other Intangible Assets
The following table displays goodwill and other intangible assets not subject to amortization and other intangible assets that continue to be subject to amortization:
| December 26, 2009 | December 27, 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization & Impairment loss | Gross Carrying Amount | Accumulated Amortization & Impairment loss | ||||||||||
Goodwill | $ | 1,221,100 | $ | (712,865 | ) | $ | 1,170,414 | $ | (712,836 | ) | ||||
Other intangible assets not subject to amortization: | ||||||||||||||
Research models | $ | 3,438 | $ | — | $ | 3,438 | $ | — | ||||||
PCS in process R&D | $ | 14,000 | — | — | — | |||||||||
Other intangible assets subject to amortization: | ||||||||||||||
Backlog | 16,575 | (15,625 | ) | 16,068 | (15,259 | ) | ||||||||
Customer relationships | 313,021 | (173,707 | ) | 262,519 | (132,980 | ) | ||||||||
Customer contracts | 1,645 | (1,645 | ) | 1,655 | (1,655 | ) | ||||||||
Trademarks and trade names | 5,081 | (4,338 | ) | 4,581 | (3,933 | ) | ||||||||
Standard operating procedures | 657 | (643 | ) | 657 | (651 | ) | ||||||||
Other identifiable intangible assets | 6,935 | (5,102 | ) | 6,188 | (4,528 | ) | ||||||||
Total other intangible assets | $ | 361,352 | $ | (201,060 | ) | $ | 295,106 | $ | (159,006 | ) | ||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
3. Goodwill and Other Intangible Assets (Continued)
The following table displays goodwill and other intangible assets not subject to amortization and other intangible assets that continue to be subject to amortization:
| December 27, 2008 | December 29, 2007 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||
Goodwill | $ | 470,414 | $ | (12,836 | ) | $ | 1,133,432 | $ | (12,892 | ) | ||||
Other intangible assets not subject to amortization: | ||||||||||||||
Research models | $ | 3,438 | $ | — | $ | 3,438 | $ | — | ||||||
Other intangible assets subject to amortization: | ||||||||||||||
Backlog | 16,068 | (15,259 | ) | 62,250 | (62,250 | ) | ||||||||
Customer relationships | 258,607 | (131,410 | ) | 224,871 | (85,000 | ) | ||||||||
Customer contracts | 1,655 | (1,655 | ) | 1,655 | (1,655 | ) | ||||||||
Trademarks and trade names | 4,581 | (3,933 | ) | 3,274 | (2,350 | ) | ||||||||
Standard operating procedures | 657 | (651 | ) | 1,356 | (1,310 | ) | ||||||||
Other identifiable intangible assets | 10,100 | (6,098 | ) | 10,819 | (6,193 | ) | ||||||||
Total other intangible assets | $ | 295,106 | $ | (159,006 | ) | $ | 307,663 | $ | (158,758 | ) | ||||
The changes in the gross carrying amount and accumulated amortization of goodwill are as follows:
| | Adjustments to Goodwill | | Adjustments to Goodwill | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 30, 2006 | Balance at December 29, 2007 | Balance at December 27, 2008 | ||||||||||||||||||||
| Acquisitions | Other | Acquisitions | Other | |||||||||||||||||||
Research Models and Services | |||||||||||||||||||||||
Gross carrying amount | $ | 21,372 | $ | — | $ | 634 | $ | 22,006 | $ | 9,221 | $ | (280 | ) | $ | 30,947 | ||||||||
Accumulated amortization | (4,775 | ) | — | (127 | ) | (4,902 | ) | — | 56 | (4,846 | ) | ||||||||||||
Preclinical Services | |||||||||||||||||||||||
Gross carrying amount | 1,110,702 | — | 724 | 1,111,426 | 29,035 | (700,994 | ) | 439,467 | |||||||||||||||
Accumulated amortization | (7,990 | ) | — | — | (7,990 | ) | — | — | (7,990 | ) | |||||||||||||
Total | |||||||||||||||||||||||
Gross carrying amount | $ | 1,132,074 | $ | — | $ | 1,358 | $ | 1,133,432 | $ | 38,256 | $ | (701,274 | ) | $ | 470,414 | ||||||||
Accumulated amortization | (12,765 | ) | — | (127 | ) | (12,892 | ) | — | 56 | (12,836 | ) |
| | Adjustments to Goodwill | | Adjustments to Goodwill | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 29, 2007 | Acquisitions | Foreign Exchange/ Other | Balance at December 27, 2008 | Acquisitions | Foreign Exchange/ Other | Balance at December 26, 2009 | ||||||||||||||||
Research Models and Services | |||||||||||||||||||||||
Gross carrying amount | $ | 22,006 | $ | 9,221 | $ | (280 | ) | $ | 30,947 | $ | 27,478 | $ | 309 | $ | 58,734 | ||||||||
Accumulated amortization | (4,902 | ) | — | 56 | (4,846 | ) | — | (29 | ) | (4,875 | ) | ||||||||||||
Preclinical Services | |||||||||||||||||||||||
Gross carrying amount | 1,111,426 | 29,035 | (994 | ) | 1,139,467 | 22,226 | 673 | 1,162,366 | |||||||||||||||
Accumulated impairment loss | — | — | (700,000 | ) | (700,000 | ) | — | — | (700,000 | ) | |||||||||||||
Accumulated amortization | (7,990 | ) | — | — | (7,990 | ) | — | — | (7,990 | ) | |||||||||||||
Total | |||||||||||||||||||||||
Gross carrying amount | $ | 1,133,432 | $ | 38,256 | $ | (1,274 | ) | $ | 1,170,414 | $ | 49,704 | $ | 982 | $ | 1,221,100 | ||||||||
Accumulated impairment loss | — | — | (700,000 | ) | (700,000 | ) | — | — | (700,000 | ) | |||||||||||||
Accumulated amortization | (12,892 | ) | — | 56 | (12,836 | ) | — | (29 | ) | (12,865 | ) |
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008.
The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
3. Goodwill and Other Intangible Assets (Continued)
value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value.
The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for the PCS businesseach reporting unit for which step one indicated an impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
3. Goodwill and Other Intangible Assets (Continued)
reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships.
Based on our assessment (step one) for 2009, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. At the beginning of the fourth quarter of 2008, based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value of our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700,000.
Amortization expense of intangible assets for 2009, 2008 and 2007 was $28,447, $30,312 and 2006 was $30,312, $33,509, and $37,639, respectively.
Estimated amortization expense for each of the next five fiscal years is expected to be as follows:
2009 | 25,801 | |||
2010 | 21,814 | |||
2011 | 18,105 | |||
2012 | 14,615 | |||
2013 | 11,331 |
2010 | 27,359 | |||
2011 | 22,811 | |||
2012 | 18,632 | |||
2013 | 14,801 | |||
2014 | 12,224 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
4. Long-Term Debt and Capital Lease Obligations
Long-Term Debt
Long-term debt consists of the following:
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Senior convertible debentures | $ | 350,000 | $ | 350,000 | $ | 350,000 | ||||
Term loan facilities | 134,967 | 159,200 | 221,274 | |||||||
Revolving credit facility | 90,000 | — | — | |||||||
Other long-term debt, represents secured and unsecured promissory notes, interest rates ranging from 0% to 3.7%, 0% to 11.6% and 0% to 11.6% at December 27, 2008, December 29, 2007 and December 30, 2006, respectively, maturing between 2008 and 2013 | 806 | 849 | 780 | |||||||
Total debt | 575,773 | 510,049 | 572,054 | |||||||
Less: current portion of long-term debt | (35,322 | ) | (25,051 | ) | (24,970 | ) | ||||
Long-term debt | $ | 540,451 | $ | 484,998 | $ | 547,084 | ||||
| December 26, 2009 | December 27, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
2.25% Senior convertible debentures: | ||||||||
Principal | $ | 349,995 | $ | 350,000 | ||||
Unamortized debt discount | (48,597 | ) | (60,767 | ) | ||||
Net carrying amount of senior convertible debentures | 301,398 | 289,233 | ||||||
Term loan facilities | 100,433 | 134,967 | ||||||
Revolving credit facility | 90,000 | 90,000 | ||||||
Other long-term debt, represents secured and unsecured promissory notes, interest rates ranging from 0% to 0.5%, 0% to 11.6% and 0% to 11.6% at December 26, 2009, December 27, 2008 and December 29, 2007, respectively, maturing between 2008 and 2013 | 792 | 806 | ||||||
Total debt | 492,623 | 515,006 | ||||||
Less: current portion of long-term debt | (35,310 | ) | (35,322 | ) | ||||
Long-term debt | $ | 457,313 | $ | 479,684 | ||||
Minimum future principal payments of long-term debt at December 27, 200826, 2009 are as follows:
Fiscal Year | | ||||
---|---|---|---|---|---|
2009 | $ | 35,322 | |||
2010 | 77,040 | ||||
2011 | 113,408 | ||||
2012 | 8 | ||||
2013 | 349,995 | ||||
Thereafter | — | ||||
Total | $ | 575,773 | |||
Fiscal Year | | ||||
---|---|---|---|---|---|
2010 | $ | 35,310 | |||
2011 | 155,907 | ||||
2012 | 8 | ||||
2013 | 349,995 | ||||
2014 | — | ||||
Thereafter | — | ||||
Total | $ | 541,220 | |||
On July 31, 2006, the Companywe amended and restated itsour $660,000 credit agreement to reduce the current interest rate, modify certain restrictive covenants and extend the term. The amount of debt outstanding under the original $660,000 credit agreement remained the same at the time of amendment. The now $428,000 credit agreement provided for a $156,000 U.S. term loan facility, a $200,000 U.S. revolving facility, a C$57,800 term loan facility and a C$12,000 revolving facility for a Canadian subsidiary, and a GBP 6,000 revolving facility for a U.K. subsidiary. The $156,000 term loan facility matures in 20 quarterly installments with the last installment due June 30, 2011. As of December 27, 2008, the Company26, 2009, we had $85,800$54,600 outstanding on the U.S. term loan. The $200,000 U.S. revolving facility matures on July 31, 2011 and requires no scheduled payment before that date. Under specified circumstances, the $200,000 U.S. revolving facility may be increased by $100,000. The Canadian term loan was repaid during 2007. The Canadian and U.K. revolving facilities were both terminated in the first quarter of 2008. The interest rate applicable to U.S. term loan and revolving loan under the credit agreement are, at the Company'sour option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) or the adjusted LIBOR rate plus an interest rate margin based upon the Company's leverage ratio. Based on the Company's leverage ratio, the margin range for LIBOR based loans is 0.625% to 0.875%. The interest rate margin was 0.625% as
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
4. Long-Term Debt and Capital Lease Obligations (Continued)
plus 0.50%) or the adjusted LIBOR rate plus an interest rate margin based upon our leverage ratio. Based on our leverage ratio, the margin range for LIBOR based loans is 0.625% to 0.875%. The interest rate margin was 0.75% as of December 27, 2008. The Company has26, 2009. We have pledged the stock of certain subsidiaries as well as certain U.S. assets for the $428,000 credit agreement. The $428,000 credit agreement includes certain customary representations and warranties, events of default, notice of material adverse change to our business and negative and affirmative covenants including the ratio of consolidated earnings before interest, taxes, depreciation and amortization to consolidated interest expense, for any period of four consecutive fiscal quarters, of no less than 3.5 to 1.0 as well as the ratio of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization for any period of four consecutive fiscal quarters, of no more than 3.0 to 1. As of December 27, 2008,26, 2009, we were compliant with all financial covenants specified in the credit agreement. The CompanyWe had $5,627$3,162 and $5,466$5,627 outstanding under letters of credit as of December 27, 200826, 2009 and December 29, 2007,27, 2008, respectively. As of December 27, 2008,26, 2009, $90,000 was outstanding on our U.S. revolving credit facility. The book value of our credit agreement approximates fair value.
On July 27, 2005 the Companywe entered into a $50,000 credit agreement ("$($50,000 credit agreement")agreement), which was subsequently amended on December 20, 2005 and again on July 31, 2006 to reflect substantially the same modifications made to the covenants in the $660,000 and $428,000 credit agreements, respectively. On June 15, 2007, the Companywe executed a third amendment to the $50,000 credit agreement to extend the maturity date and reduce the interest rate. The $50,000 credit agreement provides for a $50,000 term loan facility which matures on June 22, 2010. Prior to the June 15, 2007 amendment, the interest rate applicable to term loans under the $50,000 credit agreement was, at the Company'sour option, equal to either the base rate (which was the higher of the prime rate or the federal funds rate plus 0.50%) or the LIBOR rate plus 0.75%. From June 15, 2007 through June 21, 2008, the interest rates applicable to term loans under the credit agreement are,were, at the Company'sour option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) minus 2.25% or the LIBOR rate plus 0.50%. Commencing June 22, 2008 through June 22, 2010, the applicable interest rates are equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) or the adjusted LIBOR rate plus an interest rate margin based on the Company'sour leverage ratio. The Company hasWe have pledged certain U.S. assets for the $50,000 credit agreement. As of December 27, 2008,26, 2009, we were compliant with all financial covenants specified in the credit agreement. The $50,000 credit agreement includes certain customary representations and warranties, negative and affirmative covenants and events of default. As of December 27, 2008, $49,16726, 2009, $45,833 of the $50,000 credit agreement was outstanding. On January 27, 2010, we executed a fourth amendment to the credit agreement to extend the maturity date to July 31, 2011. The book value of our credit agreement approximates fair value.
In 2006, we issuedOur $350,000 of 2.25% Convertible Senior Notes (the 2013 Notes) due in June, 2013 with interest payable semi-annually. The 2013 Notessemi-annually are convertible into approximately 7.2 millioncash for the principal amount and shares of our common stock at an initialfor the conversion price of $48.94 per share of common stock. The 2013 Notes are convertible into cash and shares of our common stockpremium (or, at our election, cash in lieu of some or all of such common stock), if any, based on an initial conversion rate, subject to adjustment, of 20.4337 shares of our common stock per $1,000 principal amount of notes (which represents an initial conversion price of $48.94 per share), only in the following circumstances and to the following extent: (1) during any fiscal quarter beginning after July 1, 2006 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is more than 130% of the conversion price on the last day of such preceding fiscal quarter; (2) during the five business-day period after any five consecutive trading-day period, or the measurement period, in which the trading price
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
4. Long-Term Debt and Capital Lease Obligations (Continued)
per note for each day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (3) upon the occurrence of specified corporate transactions, as described in the indenture for the 2013
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
4. Long-Term Debt (Continued)
Notes; and (4) at the option of the holder at any time beginning on the date that is two months prior to the stated maturity date and ending on the close of business on the second trading-day immediately preceding the maturity date. Upon conversion, we will pay cash and shares of our common stock (or, at our election, cash in lieu of some or all of such common stock), if any. If we undergo a fundamental change as described in the indenture for the 2013 Notes, holders will have the option to require us to purchase all or any portion of their notes for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the purchase date.
During the second and third quarters of 2008, our stock traded at or above 130% of the conversion price for 20 trading days during the last 30 consecutive trading days of the quarter. Since the conversion trigger was met, the 2013 Notes were convertible at the discretion of the bond holders during the third and fourth quarters of 2008. As of December 27, 2008, 5 bonds had been presented for conversion to occur in early February. The conversion trigger tests are repeated each fiscal quarter and no conversion triggers were met in the fourth quarter.any quarter of 2009. At December 27, 2008,26, 2009, the fair value of our outstanding 2013 Notes was approximately $311.1$335,995 based on their quoted market value.
Effective December 28, 2008, we adopted a newly issued accounting standard for our 2013 Notes which specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that reflects the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Accordingly, $261,508 of the total proceeds from our $350,000 convertible debt was allocated to the liability component, which represents the estimated fair value of similar debt instruments without the conversion option as of June 12, 2006, the date of issuance. The remaining $88,492 was allocated to the equity component. The debt discount of $88,492 will be amortized to interest expense over the seven-year period from June 2006 to June 2013, the expected life of the instrument. In addition, $8,463 of capitalized interest expense was recorded retrospectively and will amortize over a weighted average life of 32 years. Additionally, approximately $1,903 of deferred financing costs capitalized at the time of issuance was reclassified to equity as equity issuance costs and will not be amortized to interest expense. As a result of the establishment of the debt discount as of the date of issuance, the non-current deferred tax asset relating to the original issue discount has been reduced by $36,437 as of the date of issuance by offsetting additional paid in capital.
As of December 26, 2009, $48,597 of debt discount remained and will be amortized over 14 quarters. As of December 26, 2009 and December 27, 2008, the equity component of our convertible debt was $88,492. Interest expense related to our convertible debt of $12,170 and $11,381 for the years ended December 26, 2009 and December 27, 2008 respectively yielding an effective interest rate of 6.93% on the liability component. In addition, $7,853 and $7,831 of contractual interest expense was recognized on our convertible debt during the years ended December 26, 2009 and December 27, 2008 respectively. Capitalized interest related to the new accounting treatment for our 2013 Notes was $989 and $2,777 for the years ended December 26, 2009 and December 27, 2008 respectively.
We have capital leases for equipment. These leases are capitalized using interest rates considered appropriate at the inception of each lease. Capital lease obligations amounted to $210 and $331 at December 26, 2009 and December 27, 2008, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
5. Shareholders' Equity
Earnings Per Share
Basic earnings per share for 2009, 2008 2007 and 20062007 was computed by dividing earnings available to common shareholdersshareowners for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for 20072009 and 20062007 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.
Options to purchase 4,272,647 shares, 4,481,120 shares 243,357 shares and 2,972,420243,357 shares were outstanding at December 26, 2009, December 27, 2008 and December 29, 2007, and December 30, 2006, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.
In addition, weighted average shares outstanding for 2009, 2008 2007 and 20062007 excluded the weighted average impact of 896,393, 777,494 711,896 and 653,780711,896 shares, respectively, of non-vested fixed restricted stock awards.
The following table illustrates the reconciliation of the numerator and denominator in the computations of the basic and diluted earnings per share:
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Numerator: | |||||||||||
Income (loss) from continuing operations for purposes of calculating earnings per share | $ | 111,221 | $ | (524,929 | ) | $ | 153,794 | ||||
Income (loss) from discontinued businesses | $ | 3,220 | $ | 424 | $ | (3,146 | ) | ||||
Denominator: | |||||||||||
Weighted-average shares outstanding—Basic | 65,366,319 | 67,273,748 | 66,960,515 | ||||||||
Effect of dilutive securities: | |||||||||||
2.25% senior convertible debentures | — | — | 481,136 | ||||||||
Stock options and contingently issued restricted stock | 267,650 | — | 1,160,369 | ||||||||
Warrants | 1,926 | — | 133,916 | ||||||||
Weighted-average shares outstanding—Diluted | 65,635,895 | 67,273,748 | 68,735,936 | ||||||||
Basic earnings (loss) per share from continuing operations attributable to common shareowners | $ | 1.70 | $ | (7.80 | ) | $ | 2.30 | ||||
Basic earnings (loss) per share from discontinued operations attributable to common shareowners | $ | 0.05 | $ | 0.01 | $ | (0.05 | ) | ||||
Diluted earnings (loss) per share from continuing operations attributable to common shareowners | $ | 1.69 | $ | (7.80 | ) | $ | 2.24 | ||||
Diluted earnings (loss) per share from discontinued operations attributable to common shareowners | $ | 0.05 | $ | 0.01 | $ | (0.05 | ) |
The sum of the earnings (loss) per share from continuing operations attributable to common shareowners and the earnings (loss) per share from discontinued operations attributable to common shareowners does not necessarily equal the earnings (loss) per share from net income attributable to common shareowners in the consolidated statements of operations due to rounding.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
5. Shareholders' Equity (Continued)
The following table illustrates the reconciliation of the numerator and denominator in the computations of the basic and diluted earnings per share:
| December 27, 2008 | December 29, 2007 | December 30, 2006 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Numerator: | |||||||||||
Income (loss) from continuing operations for purposes of calculating earnings per share | $ | (522,267 | ) | $ | 157,552 | $ | 125,221 | ||||
Income (loss) from discontinued businesses | $ | 424 | $ | (3,146 | ) | $ | (181,004 | ) | |||
Denominator: | |||||||||||
Weighted-average shares outstanding—Basic | 67,273,748 | 66,960,515 | 68,945,622 | ||||||||
Effect of dilutive securities: | |||||||||||
2.25% senior convertible debentures | — | 481,136 | — | ||||||||
Stock options and contingently issued restricted stock | — | 1,160,369 | 867,204 | ||||||||
Warrants | — | 133,916 | 135,206 | ||||||||
Weighted-average shares outstanding—Diluted | 67,273,748 | 68,735,936 | 69,948,032 | ||||||||
Basic earnings (loss) per share from continuing operations | $ | (7.76 | ) | $ | 2.35 | $ | 1.82 | ||||
Basic earnings (loss) per share from discontinued operations | $ | 0.01 | $ | (0.05 | ) | $ | (2.63 | ) | |||
Diluted earnings (loss) per share from continuing operations | $ | (7.76 | ) | $ | 2.29 | $ | 1.79 | ||||
Diluted earnings (loss) per share from discontinued operations | $ | 0.01 | $ | (0.05 | ) | $ | (2.59 | ) |
The sum of the earnings (loss) per share from continuing operations and the earnings (loss) per share from discontinued operations does not necessarily equal the earnings (loss) per share from net income in the consolidated statements of operations due to rounding.
Treasury Shares
The Board of Directors has authorized a share repurchase program, originally authorized on July 27, 2005 and subsequently amended on October 26, 2005, May 9, 2006, August 1, 2007 and July 24, 2008 to acquire up to a total of $600,000 of common stock. The program does not have a fixed expiration date. In order to facilitate theseAs of December 26, 2009, approximately $144,753 remains authorized for share repurchases, we entered into Rule 10b5-1 Purchase Plans.repurchases.
During 2009, 2008 2007 and 2006,2007, we repurchased 1,592,500 shares of common stock for $42,387, 2,159,908, shares of common stock for $109,260 and 724,200 shares of common stock for $38,911, and 518,800 shares of common stock for $23,322, respectively, under these plans.our Rule 10b5-1 Purchase Plans. In addition, concurrent with the saleMay 2009, we terminated our Rule 10b5-1 Purchase Plan. The timing and amount of the 2013 Notes, we used $148,866 of the net proceeds for the purchase of 3,726,300 shares of its common stock.
During 2006 we also entered into an Accelerated Stock Repurchase (ASR) program with a third-party investment bank. In connection with this ASR program, we purchased 1,787,706 shares of stock at a cost of $75,000. In conjunction with the ASR, we also entered into a cashless collar with a forward floor price of $37.9576 per share of our common stock (95% of the initial price of $39.9554, theany future repurchases will depend on market price of our common stock on August 23, 2006)conditions and a forward cap price of $41.9532 per share of our common stock (105% of the initial price). The final number of shares repurchased under the ASR program was determined by taking the average volume weighted average price of our common stock
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
5. Shareholders' Equity (Continued)
for 65 trading days starting on August 23, 2006. Since the final share price of $42.6503 was above the cap price of $41.9532, there was no adjustment to the final number of shares repurchased.
As of December 27, 2008, approximately $187,140 remains authorized for share repurchases.corporate considerations.
Share repurchases during 2009, 2008 2007 and 20062007 were as follows:
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
Number of shares of common stock repurchased | 2,159,908 | 724,200 | 6,032,806 | |||||||
Total cost of repurchase | $ | 109,260 | $ | 38,911 | $ | 247,203 |
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
Number of shares of common stock repurchased | 1,592,500 | 2,159,908 | 724,200 | |||||||
Total cost of repurchase | $ | 42,387 | $ | 109,260 | $ | 38,911 |
Additionally our 2000 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the fiscal year ended December 26, 2009, December 27, 2008 and December 29, 2007, and December 30, 2006, we acquired 80,234 shares for $2,216, 104,662 shares for $6,291,$6,292 and 71,456 shares for $3,506, and 57,688 shares for $2,755, respectively, as a result of such withholdings.
The timing and amount of any future repurchases will depend on market conditions and corporate considerations.
Retained EarningsAccumulated Deficit
Retained earningsAccumulated deficit includes approximately $2,000 which is restricted due to statutory requirements in the local jurisdiction of a foreign subsidiary as of December 27, 200826, 2009 and December 29, 2007.27, 2008.
Accumulated Other Comprehensive Income
The composition of accumulated other comprehensive income is as follows:
| Foreign Currency Translation Adjustment | Pension Gains/(Losses) and Prior Service (Cost)/Credit Not Yet Recognized as Components of Net Periodic Benefit Costs | Net Unrealized Gain on Marketable Securities | Accumulated Other Comprehensive Income | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 30, 2006 | $ | 24,103 | $ | (2,929 | ) | $ | (3 | ) | $ | 21,171 | ||||
Period change | 58,045 | 10,201 | (48 | ) | 68,198 | |||||||||
Tax | (173 | ) | (3,637 | ) | (3,810 | ) | ||||||||
Balance at December 29, 2007 | $ | 81,975 | $ | 3,635 | $ | (51 | ) | $ | 85,559 | |||||
Period change | (79,278 | ) | (12,023 | ) | (2,167 | ) | (93,468 | ) | ||||||
Tax | 6,690 | 4,566 | — | 11,256 | ||||||||||
Balance at December 27, 2008 | $ | 9,387 | $ | (3,822 | ) | $ | (2,218 | ) | $ | 3,347 | ||||
| Foreign Currency Translation Adjustment | Pension Gains/(Losses) and Prior Service (Cost)/Credit Not Yet Recognized as Components of Net Periodic Benefit Costs | Net Unrealized Gain on Marketable Securities | Accumulated Other Comprehensive Income | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 29, 2007 | $ | 81,975 | $ | 3,635 | $ | (51 | ) | $ | 85,559 | |||||
Period change | (79,278 | ) | (12,023 | ) | (2,167 | ) | (93,468 | ) | ||||||
Tax | 6,690 | 4,566 | — | 11,256 | ||||||||||
Balance at December 27, 2008 | $ | 9,387 | $ | (3,822 | ) | $ | (2,218 | ) | $ | 3,347 | ||||
Period change | 45,907 | (7,102 | ) | 768 | 39,573 | |||||||||
Tax | 1,343 | 774 | — | 2,117 | ||||||||||
Balance at December 26, 2009 | $ | 56,637 | $ | (10,150 | ) | $ | (1,450 | ) | $ | 45,037 | ||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
5. Shareholders' Equity (Continued)
Warrants
Separately and concurrently with the pricing of the 2013 Notes in June 2006, we issued warrants for approximately 7.2 million shares of our common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at our option) with a value equal to the appreciation in the price of our shares above $59.925, and expire between September 13, 2013 and January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants waswere $65,423.
As part of the recapitalization in 1999, we issued 150,000 units, each comprised of a $1 senior subordinated note and a warrant to purchase 7.6 shares of our common stock for total proceeds of $150,000. We allocated the $150,000 offering proceeds between the senior subordinated notes ($147,872) and the warrants ($2,128), based upon the estimated fair value. The portion of the proceeds allocated to the warrants is reflected as capital in excess of par in the accompanying consolidated financial statements. Each warrant entitles the holder, subject to certain conditions, to purchase 7.6 shares of common stock at an exercise price of $5.19 per share of common stock, subject to adjustment under some circumstances. Upon exercise, the holders ofAll warrants would be entitled to purchase 4,180 and 147,250 shares of our common stock as of December 27, 2008 and December 29, 2007, respectively. The warrants expirewere exercised before they expired on October 1, 2009.
6. Income Taxes
An analysis of the components of income (loss) from continuing operations before income taxes minority interests and earnings from equity investments and the related provision for income taxes is presented below:
| Fiscal Year Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | ||||||||||
Income before income taxes, minority interests and earnings from equity investments | |||||||||||||
U.S. | $ | 106,392 | $ | 94,286 | $ | 90,598 | |||||||
Non-U.S. | (567,402 | ) | 123,136 | 85,966 | |||||||||
$ | (461,010 | ) | $ | 217,422 | $ | 176,564 | |||||||
Income tax provision | |||||||||||||
Current: | |||||||||||||
Federal | $ | 21,922 | $ | 39,907 | $ | 22,626 | |||||||
Foreign | 28,355 | 21,547 | 10,895 | ||||||||||
State and local | 1,278 | 7,732 | 5,501 | ||||||||||
Total current | $ | 51,555 | $ | 69,186 | $ | 39,022 | |||||||
Deferred: | |||||||||||||
Federal | $ | 7,758 | $ | (3,469 | ) | $ | 10,595 | ||||||
Foreign | (5,136 | ) | (4,689 | ) | 121 | ||||||||
State and local | 7,767 | (1,628 | ) | 0 | |||||||||
Total deferred | $ | 10,389 | $ | (9,786 | ) | $ | 10,716 | ||||||
$ | 61,944 | $ | 59,400 | $ | 49,738 | ||||||||
| Fiscal Year Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||||
Income (loss) from continuing operations before income taxes | |||||||||||||
U.S. | $ | 37,490 | $ | 97,004 | $ | 87,369 | |||||||
Non-U.S. | 111,617 | (566,446 | ) | 123,572 | |||||||||
$ | 149,107 | $ | (469,442 | ) | $ | 210,941 | |||||||
Income tax provision | |||||||||||||
Current: | |||||||||||||
Federal | $ | (3,902 | ) | $ | 21,922 | $ | 39,907 | ||||||
Foreign | 26,719 | 28,355 | 21,547 | ||||||||||
State and local | 1,117 | 1,278 | 7,732 | ||||||||||
Total current | $ | 23,934 | $ | 51,555 | $ | 69,186 | |||||||
Deferred: | |||||||||||||
Federal | $ | 15,958 | $ | 4,472 | $ | (5,890 | ) | ||||||
Foreign | (1,657 | ) | (4,884 | ) | (4,564 | ) | |||||||
State and local | 1,490 | 5,031 | (2,055 | ) | |||||||||
Total deferred | $ | 15,791 | $ | 4,619 | $ | (12,509 | ) | ||||||
$ | 39,725 | $ | 56,174 | $ | 56,677 | ||||||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
6. Income Taxes (Continued)
Net deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws.
| December 27, 2008 | December 29, 2007 | |||||
---|---|---|---|---|---|---|---|
Compensation | $ | 38,973 | $ | 31,314 | |||
Accruals and reserves | 1,502 | 643 | |||||
Financing related | 25,129 | 31,301 | |||||
Goodwill and other intangibles | (5,805 | ) | (7,851 | ) | |||
Net operating loss and credit carryforwards | 27,446 | 17,609 | |||||
Depreciation related | (35,738 | ) | (28,948 | ) | |||
Non-indefinitely reinvested earnings | (2,039 | ) | 0 | ||||
Other | 606 | (1,007 | ) | ||||
50,074 | 43,061 | ||||||
Valuation allowance | (4,197 | ) | (561 | ) | |||
Total deferred taxes | $ | 45,877 | $ | 42,500 | |||
| December 26, 2009 | December 27, 2008 | |||||
---|---|---|---|---|---|---|---|
Compensation | $ | 38,334 | $ | 38,973 | |||
Accruals and reserves | 1,791 | 1,502 | |||||
Financing related | 2,228 | 2,308 | |||||
Goodwill and other intangibles | (9,370 | ) | (5,805 | ) | |||
Net operating loss and credit carryforwards | 26,064 | 27,446 | |||||
Depreciation related | (54,871 | ) | (38,950 | ) | |||
Non-indefinitely reinvested earnings | (704 | ) | (2,039 | ) | |||
Other | (755 | ) | 1,052 | ||||
2,717 | 24,487 | ||||||
Valuation allowance | (6,126 | ) | (4,197 | ) | |||
Total deferred taxes | $ | (3,409 | ) | $ | 20,290 | ||
Reconciliations of the statutory U.S. Federal income tax rate to effective tax rates are as follows:
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
U.S. statutory income tax rate | (35.0 | )% | 35.0 | % | 35.0 | % | ||||
Foreign tax rate differences | (2.6 | )% | (3.9 | )% | (3.4 | )% | ||||
State income taxes, net of Federal tax benefit | 1.5 | % | 1.7 | % | 1.9 | % | ||||
Unbenefitted losses and valuation allowance | 0.9 | % | 0.3 | % | (0.2 | )% | ||||
Net impact of change in APB23 assertion | (1.5 | )% | 0.0 | % | 0.0 | % | ||||
Research tax credits and enhanced deductions | (3.2 | )% | (6.0 | )% | (6.4 | )% | ||||
Enacted tax rate changes | 0.7 | % | (1.3 | )% | (1.0 | )% | ||||
Impact of tax uncertainties | 0.5 | % | 2.2 | % | 1.1 | % | ||||
Impact of goodwill impairment | 52.5 | % | 0.0 | % | 0.0 | % | ||||
Other | (0.4 | )% | (0.7 | )% | 1.2 | % | ||||
13.4 | % | 27.3 | % | 28.2 | % | |||||
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
U.S. statutory income tax rate | 35.0 | % | (35.0 | )% | 35.0 | % | ||||
Foreign tax rate differences | (5.3 | )% | (2.6 | )% | (4.0 | )% | ||||
State income taxes, net of Federal tax benefit | 1.3 | % | 1.3 | % | 1.5 | % | ||||
Unbenefitted losses and valuation allowance | 1.4 | % | 0.8 | % | 0.3 | % | ||||
Impact of repatriation of non-US earnings | (0.7 | )% | (1.5 | )% | 0.0 | % | ||||
Research tax credits and enhanced deductions | (6.8 | )% | (3.1 | )% | (6.2 | )% | ||||
Enacted tax rate changes | (0.1 | )% | 0.3 | % | (1.3 | )% | ||||
Impact of tax uncertainties | 1.3 | % | 0.5 | % | 2.3 | % | ||||
Impact of goodwill impairment | 0.0 | % | 51.6 | % | 0.0 | % | ||||
Other | 0.5 | % | (0.3 | )% | (0.7 | )% | ||||
26.6 | % | 12.0 | % | 26.9 | % | |||||
In the third quarter of 2008, the Company revalued certain of its deferred tax assets and liabilities due to the enactment of a Massachusetts state tax law change resulting in tax expense of $3,396. Additionally, the Company recorded a deferred tax liability of $1,897 inDuring the fourth quarter of 2008 resulting from2009, we recorded a newly promulgated Massachusetts regulation.detriment of $719 related to the reduction of tax benefits associated with the suspension of operations at our PCS facility in Massachusetts.
During 2008, the Company2009, we recorded a reductiontax detriment of $2,203 to income taxes payable for $4,911 fromadditional paid-in-capital related to the exercise of stock options and vesting of restricted shares. The benefit of this reduction has been recorded to additional paid in capital for $4,769 and goodwill for $142.
As of December 27, 2008, the Company has26, 2009, we have non-U.S. net operating loss carryforwards, the tax effect of which is $10,064.$12,441. Of this amount, $816$1,083 will begin to expire in 2013.2013, $1,825 will expire in 2014 and $521 will expire in 2017. The remainder can be carried forward indefinitely. The Company hasWe have U.S. net operating loss carryforwards, the tax effect of which is $192. Of this amount, $22 will expire in 2018 and $170 will expire in 2028. We have U.S. foreign tax credit carryforwards of $10,665$11,196 which will begin to expire in 2019. The Company has state tax credit carryforwards of $1,843 which begin to expire in 2017. The Company hasWe have Canadian Investment Tax Credit carryforwards of $3,885$8,718 as a result of our research and
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
6. Income Taxes (Continued)
of its research and development activity in Montreal, which begin to expire in 2026. The Company has2028. We have unrealized capital loss carryforwardslosses in the US and Canada,U.S., the tax effect of which is $825 and $164, respectively.$464.
The Company hasWe have fully recognized itsour deferred tax assets on the belief that it is more likely than not that they will be realized. The only exceptions at December 27, 200826, 2009 relate to deferred tax assets primarily for net operating losses in China, Hong Kong, India, Luxembourg and Chinathe Netherlands and a capital loss in the U.S., which have resulted in an increase of $1,929 in the valuation allowance increasing from $561 at December 29, 2007 to $4,197 at December 27, 2008. The Company established a2008 to $6,126 at December 26, 2009. We increased the valuation allowance against these tax attributes due to the determination, after consideration of all evidence, both positive and negative, that it is more likely than not that these carryforwardsdeferred tax assets will not be realized.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" (FIN 48), which became effective for the Company onEffective December 31, 2006.2006, we adopted a new accounting standard for uncertainty in income taxes. The cumulative effect of adopting FIN 48the new accounting standard did not result in a change to the Company'sour opening retained earnings. At December 26, 2009, the amount recorded for unrecognized tax benefits was $21,389. At December 27, 2008 the amount recorded for unrecognized income tax benefits was $28,732. At December 29, 2007, the amount recorded for unrecognized tax benefits was $22,129. The increase$7,343 decrease during 20082009 is primarily due to concluded audits with the continuingIRS offset by increases due to ongoing evaluation of uncertain tax positions conducted in the current and prior periods.periods and foreign exchange movement. The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $12,500$17,313 as of December 29, 200726, 2009 and increased to $21,441 as of December 27, 2008. This increaseThe $4,128 decrease is primarily due to concluded audits with the amendmentIRS offset by an increase due to SFAS 109 by SFAS 141(R) with regards to accounting for adjustments to incomeongoing evaluation of uncertain tax uncertainties related to acquisitions, generally requiring that, on a prospective basis, such adjustments be reflectedpositions in the effective tax rate versus impacting goodwill.current and prior periods and foreign exchange movement.
The Company'sA reconciliation of our beginning and ending unrecognized income tax benefits areis as follows:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Beginning balance | $ | 22,129 | $ | 16,896 | ||||
Additions: | ||||||||
Tax positions for current year | 2,071 | 3,612 | ||||||
Tax positions for prior years | 8,041 | 2,413 | ||||||
Reductions: | ||||||||
Tax positions for current year | (252 | ) | (65 | ) | ||||
Tax positions for prior years | (3,011 | ) | (43 | ) | ||||
Settlements | — | (177 | ) | |||||
Expiration of statute of limitations | (246 | ) | (507 | ) | ||||
Ending balance | $ | 28,732 | $ | 22,129 | ||||
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Beginning balance | $ | 28,732 | $ | 22,129 | $ | 16,896 | |||||
Additions: | |||||||||||
Tax positions for current year | 1,515 | 2,071 | 3,612 | ||||||||
Tax positions for prior years | 2,367 | 8,041 | 2,413 | ||||||||
Reductions: | |||||||||||
Tax positions for current year | — | (252 | ) | (65 | ) | ||||||
Tax positions for prior years | (1,024 | ) | (3,011 | ) | (43 | ) | |||||
Settlements | (10,113 | ) | — | (177 | ) | ||||||
Expiration of statute of limitations | (88 | ) | (246 | ) | (507 | ) | |||||
Ending balance | $ | 21,389 | $ | 28,732 | $ | 22,129 | |||||
The Company continuesWe continue to recognize interest and penalties related to unrecognized income tax benefits in income tax expense. The total amount of accrued interest related to unrecognized income tax benefits as of December 29, 200726, 2009 and December 27, 2008 was $1,753$1,689 and $2,729, respectively. The Company has$1,040 decline is primarily due to concluded audits reached with the IRS offset by an increase due to ongoing evaluation of uncertain tax positions. We have not recorded a provision for penalties associated with uncertain tax positions.
The Company conductsWe conduct business operations in a number of tax jurisdictions. As a result, the Company iswe are subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the United States, the United Kingdom and Canada. With few exceptions, we are no longer subject to U.S. and international income tax examinations for years before 2002.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
6. Income Taxes (Continued)
Kingdom, Germany and Canada. With few exceptions, we are no longer subject to U.S. and international income tax examinations for years before 2003.
The CompanyWe and certain of itsour subsidiaries are currently under audit by the German Tax Office and various state and local tax authorities. Additionally, we are challenging the reassessments received by the Canada Revenue Agency ("CRA") with respect to the Internal Revenue ServiceScientific Research and Experimental Development credits claimed in 2003 and 2004 by our Canadian Preclinical Services Subsidiary in the United States,Tax Court of Canada.
In the second quarter of 2009, we received Notices of Reassessment from the CRA with respect to Scientific Research and Experimental Development credits claimed in 2003 and 2004 by our Canadian Preclinical Services subsidiary. In the Commonwealththird quarter of Massachusetts. It2009, we filed Notices of Objection with the CRA in connection with the Notices of Reassessment. In the fourth quarter of 2009, we filed Notices of Appeal with the Tax Court of Canada to contest the Notices of Reassessment. We disagree with the positions taken by the CRA with regard to the credits claimed in 2003 and 2004 by our Canadian Preclinical Services subsidiary. We believe that it is reasonably possible that this matter will be resolved within the Companynext twelve months. We do not believe that resolution of this matter in Tax Court will settlehave a material impact on our financial position or results of operations. However, pending resolution of the reassessments in Tax Court, it is possible that CRA will propose similar adjustments for later years.
During the third quarter of 2009, we concluded audits with the IRS Appeals division on proposed adjustmentsDivision related to the 2004 and 2005 tax filings for the Company and an acquired subsidiary and concludesubsidiary. As a result of these concluded audits, we recognized an examinationadditional tax benefit of the 2006 tax filings for the Company within the next twelve months. We do not anticipate that the settlement of the proposed audit adjustments, which relate primarily to issues associated with an acquisition, will have a material impact on our financial position or results of operations.$1,945. During the fourth quarter of 2008,2009, we concluded audits with the IRS Field Division for years 2006 and 2007 and with the Commonwealth of Massachusetts for years 2004 through 2006. An additional tax benefit of $297 was recognized during the fourth quarter as a result of these concluded audits plus an adjustment for the state tax impact relating to the conclusion of the IRS audit for years 2004 and 2005.
During the fourth quarter of 2009, there has been no change in the status of the ongoing examinationsexamination by the Canada Revenue Agency and Massachusetts Department of Revenue. The Company believes it hasGerman Tax Office.
We believe we have appropriately provided for all unrecognizeduncertain tax benefits.positions.
During the first quarter of 2009, the Company plans to repatriate approximately $90,000we repatriated $120,000 of the earnings of itsour non-U.S. subsidiaries. As such,subsidiaries pursuant to a plan established in the Company has changed its permanent reinvestment assertion with regards to these unremitted earnings.fourth quarter of 2008. As a result of the change in assertion, the Companyrepatriation, we recorded a tax benefitbenefits primarily due to foreign tax credits in the fourth quarter of 2008 of $7,227, of which $4,045 was reflected in the effective tax rate and $3,182 was reflected in the Cumulative Translation Account.Adjustment account, and in 2009 of $3,504, of which $1,084 was reflected in the effective tax rate and $2,420 was reflected in the Cumulative Translation Adjustment account. The proceeds from the repatriation will bewere used for general corporate purposes. The Company continuesWe continue to maintain itsour permanent reinvestment assertion with regardsrespect to the remaining unremitted earnings of itsour non-U.S. subsidiaries.
As of December 27, 2008,26, 2009, the earnings of the Company'sour non-U.S. subsidiaries considered to be indefinitely reinvested totaled $192,917.$278 million. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Companywe would be subject to both U.S. Federal and state income taxes and withholding taxes payable to the various foreign countries. It is not practicable to estimate the amount of additional tax that might be payable on this undistributed foreign income.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
6. Income Taxes (Continued)
On June 12, 2006, the Companywe issued $300,000 aggregate principal amount of convertible senior notes ("the 2013 Notes") in a private placement with net proceeds to the Companyus of approximately $294,000. On June 20, 2006, the initial purchasers associated with this convertible debt offering exercised an option to purchase an additional $50,000 of the 2013 Notes for additional net proceeds to the Company of approximately $49,000. The 2013 Notes bear stated interest at 2.25% per annum, payable semi-annually, and mature on June 15, 2013. In accordance with the applicable accounting rules, a debt discount of $88,492 was recorded upon issuance of the 2013 Notes. Concurrently with the saleissuance of the 2013 Notes, the Companywe entered into convertible note hedge transactions with respect to its obligation to deliver common stock under the notes. Separately and concurrently with the pricing of the 2013 Notes, the Companywe issued warrants for approximately 7.2 million shares of its common stock. The Company hasWe elected to apply the rules of the Integration Regulations under Treas. Reg. 1.1275-6 to treat the 2013 Notes and the associated hedge as synthetic debt instruments and accordingly is deductingwe deduct the option premium paid for the hedge as original issue discount ("OID") over the 7 year term. The cash tax benefit of this deduction is recorded to additional paid in capital. A deferred tax asset has beenwas recorded at issuance with an offset to reflectAdditional Paid in Capital for tax savings resulting from the future cash tax benefitexcess of the deductionsOID over the interest expense to be reported in our Statement of Income during the term of the 2013 Notes.notes. Also, pursuant to Internal Revenue Code Section 1032, the Companywe will not recognize any gain or loss for tax purpose with respect to the exercise or lapse of the warrants.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits
Charles River Laboratories Employee Savings Plan
Our defined contribution plan, the Charles River Laboratories Employee Savings Plan, qualifies under section 401(k) of the Internal Revenue Code. It covers substantially all U.S. employees and contains a provision whereby we match a percentage of employee contributions. The costs associated with this defined contribution plan totaled $6,253, $6,377 and $4,074, in 2009, 2008 and $3,439, in 2008, 2007, and 2006, respectively.
Charles River Laboratories Deferred Compensation Plan and Executive Supplemental Life Insurance Retirement Plan
The Charles River Laboratories Deferred Compensation Plan (Deferred Compensation Plan) is designed for select eligible employees, including our Named Executive Officers. Under the Deferred Compensation Plan, participants may elect to defer bonus and salary amounts, and may select the investment returns to be applied to deferred amounts from among a number of reference mutual funds as well as an interest crediting rate. The plan is not qualified under Section 401(a) of the Internal Revenue Code and is not subject to the Employee Retirement Income Security Act of 1974. At the present time, no contributions will be credited to the plan, except as set forth below. Participants must specify the distribution date for deferred amounts at the time of deferral, in accordance with applicable IRS regulations. Generally, amounts may be paid in lump sum or installments upon retirement or termination of employment, or later if the employee terminates employment after age 55 and before age 65. Amounts may also be distributed during employment, subject to a minimum deferral requirement of three years.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
In addition to the Deferred Compensation Plan, certain officers and key employees also participate, or in the past participated, in our amended and restated Executive Supplemental Life Insurance Retirement Plan (ESLIRP) which is a non-funded, non-qualified arrangement. Annual benefits under this plan will equal a percentage of the highest five consecutive years of compensation, offset by amounts payable under the Charles River Laboratories, Inc. Pension Plan and Social Security.
In connection with the establishment of the Deferred Compensation Plan, current active employees who agreed to convert their ESLIRP benefit to a comparable benefit in the deferred compensation plan discontinued their direct participation in the ESLIRP. Instead, the present value of the accrued benefits of ESLIRP participants was credited to their Deferred Compensation Plan accounts, and future ESLIRP accruals will now be converted to present values and credited to their Deferred Compensation Plan accounts annually. Upon the adoption of the Deferred Compensation Plan, the value of their accrued ESLIRP benefits, prior to adjustments for outstanding Medicare taxes, were credited to their Deferred Compensation Plan account. In addition, we provide certain active employees an annual contribution into their Deferred Compensation Plan account of 10% of the employee's base salary plus the lesser of their target annual bonus or actual annual bonus. The costs associated with these defined contribution plans totaled $2,309, $2,819 and $3,462 in 2009, 2008 and $4,029 in 2008, 2007, and 2006, respectively.
The Company hasWe have invested in several corporate-owned key-person life insurance policies as well as mutual funds and U.S. Treasury Securities with the intention of using these investments to fund the ESLIRP and the Deferred Compensation Plan. Participants have no interest in any such investments. At December 27, 200826, 2009 and December 29, 200727, 2008 the cash surrender value of these life insurance policies were $25,099 and $19,652, and $22,027, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
Pension Plans
The Charles River Pension Plan is a defined contribution plan and a defined benefit pension plan covering certain UK employees. Benefits are based on participants' final pensionable salary and years of service. Participants' rights vest immediately. Effective December 31, 2002, the plan was amended to exclude new participants from joining the defined benefit section of the plan and a defined contribution section was established for new entrants. Contributions under the defined contribution plan are determined as a percentage of gross salary. During 2009, the UK plan recorded a curtailment gain of $674 associated with the sale of our Phase I PCS business in the UK.
The Charles River Laboratories, Inc. Pension Plan is a qualified, non-contributory defined benefit plan that covers certain U.S. employees. Benefits are based on participants' final average monthly compensation and years of service. Participants' rights vest upon completion of five years of service. Effective January 1, 2002, this plan was amended to exclude new participants from joining. Benefit criteria offered to existing participants as of the amendment date did not change. During 2008, our Board of Directors voted to freeze the accrual of benefits under the Pension Plan effective April 30, 2008. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"Accordingly, we recorded a curtailment gain of $3,276 in 2008. Based on a remeasurement of the U.S. pension plan's assets and liabilities at April 30, 2008, the benefit accrual freeze reduced the projected benefit obligation by $8,298 and resulted in a corresponding adjustment, net of tax, to accumulated other comprehensive income. In addition during 2009 as a result of realigning our work force, we terminated approximately 11% of the participants in our U.S. Pension Plan resulting in a curtailment. Because the accrual of benefits under this plan was frozen effective April 30, 2008, there is no curtailment gain or loss or change in the projected benefit obligation in 2009.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
The defined benefit pension plans for Japan and our Canadian RMS operation are non-contributory plans that cover substantially all employees of those respective companies. Benefits are based upon length of service and final salary. In addition, our French RMS operation has a defined benefit statutory indemnity plan covering most of its employees.
The following tables summarize the funded status of our defined benefit plans and amounts reflected in our consolidated balance sheets.
Obligations and Funded Status
�� | Pension Benefits | Supplemental Retirement Benefits | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | ||||||||||
Change in benefit obligations | ||||||||||||||
Benefit obligation at beginning of year | $ | 232,852 | $ | 212,998 | $ | 29,925 | $ | 29,262 | ||||||
Service cost | 4,037 | 6,204 | 908 | 882 | ||||||||||
Interest cost | 12,014 | 11,663 | 1,718 | 1,580 | ||||||||||
Plan participants' contributions | 789 | 919 | — | — | ||||||||||
Curtailment | (14,483 | ) | — | — | — | |||||||||
Settlement gain | (3,454 | ) | (1,214 | ) | — | — | ||||||||
Benefit payments | (5,404 | ) | (4,857 | ) | (704 | ) | (605 | ) | ||||||
Actuarial loss (gain) | (24,564 | ) | (8,905 | ) | (734 | ) | (1,194 | ) | ||||||
Plan amendments | 137 | 24 | — | — | ||||||||||
Other | — | 1,353 | — | — | ||||||||||
Effect of foreign exchange | (35,663 | ) | 14,667 | — | — | |||||||||
Benefit obligation at end of year | $ | 166,261 | $ | 232,852 | $ | 31,113 | $ | 29,925 | ||||||
| Pension Benefits | Supplemental Retirement Benefits | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | ||||||||||
Change in benefit obligations | ||||||||||||||
Benefit obligation at beginning of year | $ | 166,261 | $ | 232,852 | $ | 31,113 | $ | 29,925 | ||||||
Service cost | 2,283 | 4,037 | 623 | 908 | ||||||||||
Interest cost | 9,771 | 12,014 | 1,485 | 1,718 | ||||||||||
Plan participants' contributions | 654 | 789 | — | — | ||||||||||
Curtailment | — | (14,483 | ) | — | — | |||||||||
Settlement gain | (613 | ) | (3,454 | ) | — | — | ||||||||
Benefit payments | (5,799 | ) | (5,404 | ) | (726 | ) | (704 | ) | ||||||
Actuarial loss (gain) | 23,425 | (24,564 | ) | (4,198 | ) | (734 | ) | |||||||
Plan amendments | — | 137 | — | — | ||||||||||
Other | (158 | ) | — | — | — | |||||||||
Effect of foreign exchange | 10,089 | (35,663 | ) | — | — | |||||||||
Benefit obligation at end of year | $ | 205,913 | $ | 166,261 | $ | 28,297 | $ | 31,113 | ||||||
Change in plan assets | ||||||||||||||
Fair value of plan assets at beginning of year | $ | 134,034 | $ | 196,214 | $ | — | $ | — | ||||||
Plan assets assumed | — | — | — | — | ||||||||||
Actual return on plan assets | 25,618 | (35,272 | ) | — | — | |||||||||
Settlement gain | (613 | ) | (3,454 | ) | — | — | ||||||||
Employer contributions | 10,889 | 14,169 | 726 | 704 | ||||||||||
Plan participants' contributions | 654 | 789 | — | — | ||||||||||
Benefit payments | (5,799 | ) | (5,404 | ) | (726 | ) | (704 | ) | ||||||
Premiums paid | — | — | — | — | ||||||||||
Other | (158 | ) | — | — | — | |||||||||
Effect of foreign exchange | 9,397 | (33,008 | ) | — | — | |||||||||
Fair value of plan assets at end of year | $ | 174,022 | $ | 134,034 | $ | — | $ | — | ||||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
| Pension Benefits | Supplemental Retirement Benefits | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | ||||||||||
Change in plan assets | ||||||||||||||
Fair value of plan assets at beginning of year | $ | 196,214 | $ | 163,446 | $ | — | $ | — | ||||||
Plan assets assumed | — | — | — | — | ||||||||||
Actual return on plan assets | (35,272 | ) | 11,598 | — | — | |||||||||
Settlement gain | (3,454 | ) | (1,214 | ) | — | — | ||||||||
Employer contributions | 14,169 | 12,364 | 704 | 605 | ||||||||||
Plan participants' contributions | 789 | 919 | — | — | ||||||||||
Benefit payments | (5,404 | ) | (4,857 | ) | (704 | ) | (605 | ) | ||||||
Premiums paid | — | — | — | — | ||||||||||
Other | — | 383 | — | — | ||||||||||
Effect of foreign exchange | (33,008 | ) | 13,575 | — | — | |||||||||
Fair value of plan assets at end of year | $ | 134,034 | $ | 196,214 | $ | — | $ | — | ||||||
Funded status | ||||||||||||||
Projected benefit obligation | $ | 166,261 | $ | 232,852 | $ | 31,113 | $ | 29,925 | ||||||
Fair value of plan assets | 134,034 | 196,214 | — | — | ||||||||||
Net balance sheet liability | $ | 32,227 | $ | 36,638 | $ | 31,113 | $ | 29,925 | ||||||
Classification of net balance sheet liability | ||||||||||||||
Current liabilities | $ | 52 | $ | 909 | $ | 5,159 | $ | 632 | ||||||
Non-current liabilities | 32,175 | 35,729 | $ | 25,954 | $ | 29,293 | ||||||||
The accumulated benefit obligation for all defined benefit plans | $ | 162,843 | $ | 214,564 | $ | 20,614 | $ | 23,308 |
| Pension Benefits | Supplemental Retirement Benefits | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | ||||||||||
Funded status | ||||||||||||||
Projected benefit obligation | $ | 205,913 | $ | 166,261 | $ | 28,297 | $ | 31,113 | ||||||
Fair value of plan assets | 174,022 | 134,034 | — | — | ||||||||||
Net balance sheet liability | $ | 31,891 | $ | 32,227 | $ | 28,297 | $ | 31,113 | ||||||
Classification of net balance sheet liability | ||||||||||||||
Non-current assets | $ | 688 | $ | — | $ | — | $ | — | ||||||
Current liabilities | 63 | 52 | 5,408 | 5,159 | ||||||||||
Non-current liabilities | $ | 32,516 | $ | 32,175 | $ | 22,889 | $ | 25,954 |
Amounts recognized in statement of financial position as part of accumulated other comprehensive income ("AOCI")
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | |||||||||
Net actuarial (gain)/loss | $ | 18,710 | $ | 14,309 | $ | 2,977 | $ | 6,365 | |||||
Net prior service cost/(credit) | (6,698 | ) | (9,124 | ) | 2,043 | 3,475 | |||||||
Total | $ | 12,012 | $ | 5,185 | $ | 5,020 | $ | 9,840 | |||||
The accumulated benefit obligation for all defined benefit plans | $ | 202,363 | $ | 162,843 | $ | 26,746 | $ | 20,614 | |||||
Information for defined benefit plans with accumulated benefit obligation in excess of plan assets
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||||||||
Projected benefit obligation | $ | 157,068 | $ | 165,080 | $ | 31,113 | $ | 29,925 | |||||
Accumulated benefit obligation | 156,017 | 163,741 | 20,614 | 23,308 | |||||||||
Fair value of plan assets | 125,143 | 142,131 | — | — |
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | |||||||||
Projected benefit obligation | $ | 195,239 | $ | 157,068 | $ | 28,297 | $ | 31,113 | |||||
Accumulated benefit obligation | 194,167 | 156,017 | 26,746 | 20,614 | |||||||||
Fair value of plan assets | 162,862 | 125,143 | — | — |
Information for defined benefit plans with projected benefit obligation in excess of plan assets
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||||||||
Projected benefit obligation | $ | 166,261 | $ | 232,852 | $ | 31,112 | $ | 29,925 | |||||
Accumulated benefit obligation | 162,843 | 214,564 | 20,614 | 23,308 | |||||||||
Fair value of plan assets | 134,034 | 196,214 | — | — |
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | |||||||||
Projected benefit obligation | $ | 200,056 | $ | 166,261 | $ | 28,297 | $ | 31,112 | |||||
Accumulated benefit obligation | 197,827 | 162,843 | 26,746 | 20,614 | |||||||||
Fair value of plan assets | 167,476 | 134,034 | — | — |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
Amounts recognized in statement of financial position as part of accumulated other comprehensive income ("AOCI")
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||||||||
Net actuarial (gain)/loss | $ | 14,309 | $ | (2,962 | ) | $ | 6,365 | $ | 7,512 | ||||
Net prior service cost/(credit) | (9,124 | ) | (11,023 | ) | 3,475 | 3,973 | |||||||
Effect of foreign exchange | (5,400 | ) | 103 | — | — | ||||||||
Total pre-tax | (215 | ) | (13,882 | ) | 9,840 | 11,485 | |||||||
Less: taxes | 1,908 | (3,305 | ) | 3,895 | 4,541 | ||||||||
Total | $ | (2,123 | ) | $ | (10,577 | ) | $ | 5,945 | $ | 6,944 | |||
Amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year
| Pension Benefits | Supplemental Retirement Benefits | |||||
---|---|---|---|---|---|---|---|
Amortization of net actuarial (gain)/loss | $ | 1,250 | $ | 291 | |||
Amortization of net prior service cost/(credit) | (607 | ) | 498 |
| Pension Benefits | Supplemental Retirement Benefits | |||||
---|---|---|---|---|---|---|---|
Amortization of net actuarial (gain)/loss | $ | 712 | $ | 153 | |||
Amortization of net prior service cost/(credit) | (618 | ) | 498 |
Components of net periodic benefit cost
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||
Service cost | $ | 4,037 | $ | 6,204 | $ | 6,426 | $ | 908 | $ | 882 | $ | 839 | |||||||
Interest cost | 12,014 | 11,663 | 9,921 | 1,718 | 1,581 | 1,527 | |||||||||||||
Expected return on plan assets | (13,499 | ) | (12,630 | ) | (10,013 | ) | — | — | — | ||||||||||
Amortization of prior service cost (credit) | (684 | ) | (526 | ) | (547 | ) | 498 | 498 | 498 | ||||||||||
Amortization of net loss | (31 | ) | 386 | 1,011 | 413 | 568 | 1,139 | ||||||||||||
Net periodic benefit cost | 1,837 | 5,097 | 6,798 | 3,537 | 3,529 | 4,003 | |||||||||||||
Curtailment gain | (3,345 | ) | 326 | (1,334 | ) | — | — | — | |||||||||||
Net pension cost | $ | (1,508 | ) | $ | 5,423 | $ | 5,464 | $ | 3,537 | $ | 3,529 | $ | 4,003 | ||||||
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||
Service cost | $ | 2,283 | $ | 4,037 | $ | 6,204 | $ | 623 | $ | 908 | $ | 882 | |||||||
Interest cost | 9,771 | 12,014 | 11,663 | 1,485 | 1,718 | 1,581 | |||||||||||||
Expected return on plan assets | (9,783 | ) | (13,499 | ) | (12,630 | ) | — | — | — | ||||||||||
Amortization of prior service cost (credit) | (618 | ) | (684 | ) | (526 | ) | 498 | 498 | 498 | ||||||||||
Amortization of net loss (gain) | 1,271 | (31 | ) | 386 | 125 | 413 | 568 | ||||||||||||
Net periodic benefit cost | 2,924 | 1,837 | 5,097 | 2,731 | 3,537 | 3,529 | |||||||||||||
Settlement | 43 | — | — | — | — | — | |||||||||||||
Curtailment gain | (674 | ) | (3,345 | ) | 326 | — | — | — | |||||||||||
Net pension cost | $ | 2,293 | $ | (1,508 | ) | $ | 5,423 | $ | 2,731 | $ | 3,537 | $ | 3,529 | ||||||
Assumptions
Weighted-average assumptions used to determine benefit obligations
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | |||||||||
Discount rate | 5.41 | % | 5.74 | % | 5.22 | % | 6.15 | % | |||||
Rate of compensation increase | 3.19 | % | 2.90 | % | 2.50 | % | 4.75 | % |
Weighted-average assumptions used to determine net periodic benefit cost
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||
Discount rate | 5.74 | % | 5.69 | % | 5.14 | % | 6.15 | % | 5.88 | % | 5.56 | % | |||||||
Expected long-term return on plan assets | 6.84 | % | 7.10 | % | 7.00 | % | — | — | — | ||||||||||
Rate of compensation increase | 3.24 | % | 4.07 | % | 3.94 | % | 4.75 | % | 4.75 | % | 4.75 | % |
The expected long-term rate of return on plan assets was made considering the pension plan's asset mix, historical returns and the expected yields on plan assets. The discount rates reflect the rates at which amounts that are invested in a portfolio of high-quality debt instruments would provide the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
Assumptions
Weighted-average assumptions usedfuture cash flows necessary to determine benefit obligations
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||||||||
Discount rate | 5.74 | % | 5.69 | % | 6.15 | % | 5.88 | % | |||||
Rate of compensation increase | 2.90 | % | 4.07 | % | 4.75 | % | 4.75 | % |
Weighted-average assumptions used to determine net periodic benefit cost
| Pension Benefits | Supplemental Retirement Benefits | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||
Discount rate | 5.69 | % | 5.14 | % | 4.95 | % | 5.88 | % | 5.56 | % | 5.50 | % | |||||||
Expected long-term return on plan assets | 7.10 | % | 7.00 | % | 6.58 | % | — | — | — | ||||||||||
Rate of compensation increase | 4.07 | % | 3.94 | % | 3.31 | % | 4.75 | % | 4.75 | % | 4.75 | % |
pay benefits when they become due. The expected long-term rate of return on plan assets was made considering the pension plan's asset mix, historical returns andcompensation increase reflects the expected yieldsannual salary increases for the plan participants based on plan assets.historical experience and our current employee compensation strategy.
Plan assets
The Company'sOur pension planplans' weighted-average asset allocations are as follows:
| Target Allocation | Pension Benefits | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | |||||||
Equity securities | 66 | % | 56 | % | 60 | % | ||||
Fixed income | 31 | % | 36 | % | 24 | % | ||||
Other | 3 | % | 8 | % | 16 | % | ||||
Total | 100 | % | 100 | % | 100 | % | ||||
| Target Allocation | Pension Benefits | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
Equity securities | 67 | % | 64 | % | 56 | % | ||||
Fixed income | 31 | % | 32 | % | 36 | % | ||||
Other | 2 | % | 4 | % | 8 | % | ||||
Total | 100 | % | 100 | % | 100 | % | ||||
Our investment objective is to obtain the highest possible return commensurate with the level of assumed risk. Fund performances are compared to benchmarks including the S&P 500 Index, Russell 1000 Index, Russell 30002000, BC Aggregate Index and Lehman Brothers Aggregate BondMSCI EAFE Index. The Company'sOur Investment Committee meets on a quarterly basis to review plan assets.
Plan assets did not include any of our common stock at December 27, 200826, 2009 and December 29, 2007.
Contributions27, 2008.
During 2008, we contributed $13,597 toThe fair value of our pension plans. We expect to contribute $8,907 to our pension plan in 2009.assets by asset category are as follows.
| Fair Value Measurements at December 26, 2009 using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Assets at Fair Value | |||||||||
Cash | $ | 641 | $ | — | $ | — | $ | 641 | |||||
Common stock(a) | 106,243 | — | — | 106,243 | |||||||||
Debt securities(a) | 36,519 | — | — | 36,519 | |||||||||
Mutual funds(b) | 12,013 | 16,921 | — | 28,934 | |||||||||
Life insurance policies(c) | — | 260 | — | 260 | |||||||||
Other | 259 | (e) | — | 1,166 | (d) | 1,425 | |||||||
Total | $ | 155,675 | $ | 17,181 | $ | 1,166 | $ | 174,022 | |||||
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
7. Employee Benefits (Continued)
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
---|---|---|---|---|---|
Balance, December 27, 2008 | $ | 1,103 | |||
Actual return on plan assets: | |||||
Relating to assets still held at December 26, 2009 | 157 | ||||
Relating to assets sold during the period | — | ||||
Purchases, sales and settlements | (94 | ) | |||
Transfers in and/or out of Level 3 | — | ||||
Balance, December 26, 2009 | $ | 1,166 | |||
Contributions
During 2009, we contributed $10,819 to our pension plans. We expect to contribute $7,711 to our pension plan in 2010.
Estimated future benefit payments
| Pension Benefits | Supplemental Retirement Benefits | |||||
---|---|---|---|---|---|---|---|
2009 | $ | 4,286 | $ | 5,159 | |||
2010 | 3,971 | 768 | |||||
2011 | 4,187 | 758 | |||||
2012 | 4,950 | 719 | |||||
2013 | 5,306 | 17,726 | |||||
2014-2018 | 35,931 | 10,783 |
| Pension Benefits | Supplemental Retirement Benefits | |||||
---|---|---|---|---|---|---|---|
2010 | $ | 5,556 | $ | 5,546 | |||
2011 | 5,311 | 714 | |||||
2012 | 6,014 | 684 | |||||
2013 | 6,349 | 12,582 | |||||
2014 | 7,139 | 702 | |||||
2015-2019 | 46,220 | 8,636 |
8. Stock Plans and Stock Based Compensation
We have share-based compensation plans under which employees and non-employee directors may be granted share based awards. During 2009, 2008 2007 and 2006,2007, the primary share-based awards and their general terms and conditions are as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
8. Stock Plans and Stock Based Compensation (Continued)
At the Annual Meeting of Shareholders held on May 8, 2007, our shareholders approved the 2007 Incentive Plan ("the 2007 Plan"). The 2007 Plan provides that effective upon approval, no further awards will be granted under preexisting stock option and incentive plans; provided, however, that any shares that have been forfeited or canceled in accordance with the terms of the applicable award under a preexisting plan may be subsequently awarded in accordance with the terms of the preexisting plan. The 2007 Plan allows a maximum of 6.3 million shares to be awarded of which restricted stock grants and performance based stock awards count as 2.3 shares and stock options count as one share. In the past, we had various employee stock and incentive plans under which stock options and other share-based awards were granted. Stock options and other share-based awards that were granted under prior plans and were outstanding on May 8, 2007, continue in accordance with the terms of the respective plans.
At December 27, 2008,26, 2009, approximately 4.54.3 million shares were authorized for future grants under our share-based compensation plans. We settle employee share-based compensation awards with newly issued shares.
The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards' vesting period on a straight-line basisbasis. The following table presents stock-based compensation included in accordanceour consolidated statement of income:
| December 26, 2009 | December 27, 2008 | December 29, 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Stock-based compensation expense in: | |||||||||||
Cost of sales | $ | 7,048 | $ | 6,406 | $ | 8,258 | |||||
Selling and administration | 16,765 | 17,927 | 17,759 | ||||||||
Income from continuing operations, before income taxes | 23,813 | 24,333 | 26,017 | ||||||||
Provision for income taxes | (8,445 | ) | (8,612 | ) | (8,423 | ) | |||||
Net income attributable to common shareowners | $ | 15,368 | $ | 15,721 | $ | 17,594 | |||||
We did not capitalize any stock-based compensation related costs for the years ended 2009, 2008 and 2007.
The fair value of stock-based awards granted during 2009, 2008 and 2007 was estimated on the grant date using the Black-Scholes option-pricing model with SFAS No. 123(R).the following weighted-average assumptions:
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected life (in years) | 4.5 | 4.5 | 5.0 | |||||||
Expected volatility | 25 | % | 24 | % | 30 | % | ||||
Risk-free interest rate | 1.87 | % | 2.8 | % | 4.6 | % | ||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||
Weighted—average grant date fair value | $ | 6.15 | $ | 14.85 | $ | 16.49 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
8. Stock Plans and Stock Based Compensation (Continued)
Stock Options
The effectfollowing table summarizes stock option activities under our plans:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Options outstanding as of December 30, 2006 | 5,392,613 | $ | 36.50 | |||||||||
Options granted | 934,690 | $ | 46.95 | |||||||||
Options exercised | (1,737,413 | ) | $ | 31.47 | ||||||||
Options canceled | (122,087 | ) | $ | 41.49 | ||||||||
Options outstanding as of December 29, 2007 | 4,467,803 | $ | 40.50 | |||||||||
Options granted | 820,200 | $ | 58.59 | |||||||||
Options exercised | (706,755 | ) | $ | 38.98 | ||||||||
Options canceled | (100,128 | ) | $ | 46.14 | ||||||||
Options outstanding as of December 27, 2008 | 4,481,120 | $ | 43.93 | |||||||||
Options granted | 2,252,704 | $ | 25.34 | |||||||||
Options exercised | (48,411 | ) | $ | 16.46 | ||||||||
Options canceled | (468,470 | ) | $ | 40.47 | ||||||||
Options outstanding as of December 26 2009 | 6,216,943 | $ | 37.67 | |||||||||
Options exercisable as of December 29, 2007 | 2,708,268 | $ | 37.92 | |||||||||
Options exercisable as of December 27, 2008 | 2,729,255 | $ | 39.65 | |||||||||
Options exercisable as of December 26, 2009 | 3,096,990 | $ | 41.69 | 3.68 years | $ | 1,961 |
As of December 26, 2009, the unrecognized compensation cost related to 2,932,756 unvested stock options expected to vest was $19,862. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 28 months.
The total intrinsic value of options exercised during the fiscal years ending December 26, 2009, December 27, 2008 and December 29, 2007 was $909, $17,197 and $37,342, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of options during 2009 was $797. The actual tax benefit realized for the tax deductions from option exercises totaled $316 for the year ended December 26, 2009.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
8. Stock Based Compensation (Continued)
recording stock-based compensation for the fiscal year ended December 27, 2008, December 29, 2007Plans and December 30, 2006 was as follows:
| December 27, 2008 | December 29, 2007 | December 30, 2006 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Stock-based compensation expense by type of award: | |||||||||||
Stock options | $ | 10,268 | $ | 11,042 | $ | 11,878 | |||||
Restricted stock | 14,065 | 14,976 | 9,271 | ||||||||
Share-based compensation expense before tax | 24,333 | 26,018 | 21,149 | ||||||||
Income tax benefit | (8,612 | ) | (8,424 | ) | (7,746 | ) | |||||
Reduction to income from continuing operations | 15,721 | 17,594 | 13,403 | ||||||||
Share-based compensation expense of discontinued businesses, net of tax | — | — | 980 | ||||||||
Reduction to net income | $ | 15,721 | $ | 17,594 | $ | 14,383 | |||||
Reduction to earnings per share: | |||||||||||
Basic | $ | 0.23 | $ | 0.26 | $ | 0.21 | |||||
Diluted | $ | 0.23 | $ | 0.26 | $ | 0.21 | |||||
Effect on income by line item: | |||||||||||
Cost of sales | $ | 6,406 | $ | 8,258 | $ | 7,033 | |||||
Selling and administration | 17,927 | 17,759 | 14,116 | ||||||||
Share based compensation expense before tax | 24,333 | 26,017 | 21,149 | ||||||||
Income tax benefit | (8,612 | ) | (8,423 | ) | (7,746 | ) | |||||
Operations of discontinued businesses, net of tax | — | — | 980 | ||||||||
Reduction to net income | $ | 15,721 | $ | 17,594 | $ | 14,383 | |||||
We estimate the fair value of stock options using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the option's expected term, the expected annual dividend yield and the expected stock price volatility. The expected stock price volatility assumption was determined using the historical volatility of our common stock over the expected life of the option. The risk-free interest rate was based on the market yield for the five year U.S. Treasury security. The expected life of options was determined using historical option exercise activity. Management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted during fiscal years 2008, 2007 and 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
8. Stock Based Compensation (Continued)
The fair value of stock-based awards granted during 2008, 2007 and 2006 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected life (in years) | 4.5 | 5.0 | 4.9 | |||||||
Expected volatility | 24 | % | 30 | % | 30 | % | ||||
Risk-free interest rate | 2.8 | % | 4.6 | % | 4.8 | % | ||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||
Weighted—average grant date fair value | $ | 14.85 | $ | 16.49 | $ | 13.91 |
Stock Options
The following table summarizes stock option activities under our plans:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Options outstanding as of December 31, 2005 | 5,554,340 | $ | 35.39 | ||||||||||
Options granted | 889,650 | $ | 39.62 | ||||||||||
Options exercised | (766,209 | ) | $ | 29.97 | |||||||||
Options canceled | (285,168 | ) | $ | 41.85 | |||||||||
Options outstanding as of December 30, 2006 | 5,392,613 | $ | 36.50 | ||||||||||
Options granted | 934,690 | $ | 46.95 | ||||||||||
Options exercised | (1,737,413 | ) | $ | 31.47 | |||||||||
Options canceled | (122,087 | ) | $ | 41.49 | |||||||||
Options outstanding as of December 29, 2007 | 4,467,803 | $ | 40.50 | ||||||||||
Options granted | 820,200 | $ | 58.59 | ||||||||||
Options exercised | (706,755 | ) | $ | 38.98 | |||||||||
Options canceled | (100,128 | ) | $ | 46.14 | |||||||||
Options outstanding as of December 27, 2008 | 4,481,120 | $ | 43.93 | 5.02 years | $ | 1,423 | |||||||
Options exercisable as of December 30, 2006 | 3,822,370 | $ | 34.04 | ||||||||||
Options exercisable as of December 29, 2007 | 2,708,268 | $ | 37.92 | ||||||||||
Options exercisable as of December 27, 2008 | 2,729,255 | $ | 39.65 | 4.67 years | $ | 1,423 |
As of December 27, 2008, the unrecognized compensation cost related to unvested stock options expected to vest was $19,352. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 30 months.
The total intrinsic value of options exercised during the fiscal years ending December 27, 2008, December 29, 2007 and December 30, 2006 was $17,197, $37,342 and $12,557, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of these options was $27,589. The actual tax benefit realized for the tax deductions from option exercises totaled $5,888 for the year ended December 27, 2008.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
8. Stock Based Compensation (Continued)
The following table summarizes significant ranges of outstanding and exercisable options as of December 27, 2008:26, 2009:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (In years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | Options Exercisable | Weighted Average Remaining Contractual Life (In years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||||||
$0.00–$10.00 | 24,702 | 1.04 | $ | 4.74 | 501 | 24,702 | 1.04 | $ | 4.74 | 501 | |||||||||||||||
$10.01–$20.00 | 84,479 | 2.75 | 14.37 | 899 | 84,479 | 2.75 | 14.37 | 899 | |||||||||||||||||
$20.01–$30.00 | 39,074 | 4.53 | 27.71 | 23 | 39,074 | 4.53 | 27.71 | 23 | |||||||||||||||||
$30.01–$40.00 | 1,392,762 | 4.27 | 34.82 | — | 1,071,312 | 4.14 | 33.87 | — | |||||||||||||||||
$40.01–$50.00 | 2,090,888 | 5.21 | 46.07 | — | 1,461,194 | 5.20 | 45.86 | — | |||||||||||||||||
$50.01–$60.00 | 779,445 | 6.12 | 58.08 | — | 48,494 | 5.50 | 51.83 | — | |||||||||||||||||
$60.01–$70.00 | 69,770 | 6.34 | 62.63 | — | — | — | — | — | |||||||||||||||||
Totals | 4,481,120 | 5.02 years | $ | 43.93 | $ | 1,423 | 2,729,255 | 4.67 years | $ | 39.65 | $ | 1,423 | |||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (In years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | Optionsp Exercisable | Weighted Average Remaining Contractual Life (In years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||||||
$0.00–$10.00 | 2,291 | 2.12 | $ | 0.43 | $ | 75 | 2,291 | 2.12 | $ | 0.43 | $ | 75 | |||||||||||||
$10.01–$20.00 | 73,388 | 1.66 | 14.47 | 1,357 | 73,388 | 1.66 | 14.47 | 1,357 | |||||||||||||||||
$20.01–$30.00 | 2,064,727 | 6.13 | 25.11 | 16,204 | 35,697 | 3.51 | 27.67 | 189 | |||||||||||||||||
$30.01–$40.00 | 1,400,324 | 3.45 | 34.55 | 456 | 1,166,409 | 3.18 | 34.35 | 340 | |||||||||||||||||
$40.01–$50.00 | 1,899,471 | 4.27 | 46.08 | — | 1,542,263 | 4.29 | 45.98 | — | |||||||||||||||||
$50.01–$60.00 | 712,652 | 5.09 | 58.04 | — | 218,546 | 4.90 | 57.01 | — | |||||||||||||||||
$60.01–$70.00 | 64,090 | 5.33 | 62.51 | — | 58,396 | 5.32 | 62.31 | — | |||||||||||||||||
Totals | 6,216,943 | 4.77 years | $ | 37.67 | $ | 18,092 | 3,096,990 | 3.86 years | $ | 41.69 | $ | 1,961 | |||||||||||||
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on a closing stock price of $25.02$32.96 as of December 27, 2008,26, 2009, that would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of December 27, 200826, 2009 was 118,948.893,768.
The following table summarizes the non-vested stock option activity in the equity incentive plans for the fiscal year ending December 27, 2008:26, 2009:
| Stock Options | Weighted Average Exercise Price | |||||
---|---|---|---|---|---|---|---|
Non-vested at December 29, 2007 | 1,759,535 | $ | 44.47 | ||||
Granted | 820,200 | 58.59 | |||||
Forfeited | (92,606 | ) | 46.93 | ||||
Vested | (735,264 | ) | 45.43 | ||||
Non-vested at December 27, 2008 | 1,751,865 | $ | 50.60 | ||||
| Stock Options | Weighted Average Exercise Price | |||||
---|---|---|---|---|---|---|---|
Non-vested at December 27, 2008 | 1,751,865 | $ | 50.60 | ||||
Granted | 2,252,704 | 25.34 | |||||
Forfeited | (268,482 | ) | 37.92 | ||||
Vested | (616,134 | ) | 15.14 | ||||
Non-vested at December 26, 2009 | 3,119,953 | $ | 33.68 | ||||
Restricted Stock
Stock compensation expense associated with restricted common stock is charged for the market value on the date of grant, less estimated forfeitures, and is amortized over the awards' vesting period on a straight-line basis.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
8. Stock Plans and Stock Based Compensation (Continued)
The following table summarizes the restricted stock activity for 2008:2009:
| Restricted Stock | Weighted Average Grant Date Fair Value | ||||||
---|---|---|---|---|---|---|---|---|
Outstanding December 29, 2007 | 711,896 | $ | 44.25 | |||||
Granted | 383,388 | 58.39 | ||||||
Vested | (344,272 | ) | 46.61 | |||||
Canceled | (34,618 | ) | 46.33 | |||||
Outstanding December 27, 2008 | 716,394 | $ | 50.58 | |||||
| Restricted Stock | Weighted Average Grant Date Fair Value | ||||||
---|---|---|---|---|---|---|---|---|
Outstanding December 27, 2008 | 716,394 | $ | 50.58 | |||||
Granted | 539,440 | 25.15 | ||||||
Vested | (273,660 | ) | 50.09 | |||||
Canceled | (85,781 | ) | 39.96 | |||||
Outstanding December 26, 2009 | 896,393 | $ | 36.45 | |||||
As of December 27, 2008,26, 2009, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $24,895.$23,672. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 3128 months. The total fair value of restricted stock grants that vested during the fiscal years ending December 26, 2009, December 27, 2008 and December 29, 2007 was $13,707, $16,049 and December 30, 2006 was $16,049, $10,661, and $9,231, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $7,574$2,936 for the year ended December 27, 2008.26, 2009.
During 2008 and 2007, we made performance-based awards to our executives. Payout of these awards iswas contingent upon achievement of individualized stretch goals as determined by the Compensation Committee of the Board of Directors. These grants are accounted for in accordance with FAS 123(R), accordingly, compensationCompensation expense associated with these awards of $2,360$412 and $1,883$2,360 has been recorded during 20082009 and 2007,2008, respectively.
9. Commitments and Contingencies
Operating Leases
We have commitments for various operating leases for machinery and equipment, vehicles, office equipment, land and office space. As a matter of ordinary business course, we occasionally guarantee certain lease commitments to landlords. Rent expense for all operating leases was $24,777, $23,781 and $25,548 in 2009, 2008 and $18,134 in 2008, 2007, and 2006, respectively. Future minimum payments by year and in the aggregate, under noncancellable operating leases with initial or remaining terms of one year or more, consist of the following at December 27, 2008:26, 2009:
2009 | 21,410 | |||
2010 | 13,790 | |||
2011 | 11,051 | |||
2012 | 8,937 | |||
2013 | 8,417 | |||
Thereafter | 34,676 |
2010 | $ | 20,712 | ||
2011 | 18,472 | |||
2012 | 13,338 | |||
2013 | 10,902 | |||
2014 | 8,951 | |||
Thereafter | $ | 34,125 |
Insurance
We maintain various insurances which maintain large deductibles up to $500, some with or without stop-loss limits, depending on market availability. Aggregate loss limits for workers compensation and auto liability are projected at $5,200.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
9. Commitments and Contingencies (Continued)
Insurance
We maintain various insurances which maintain large deductibles up to $500, some with or without stop-loss limits, depending on market availability. Aggregate loss limits for workers compensation and auto liability are projected at $5,200.
Construction
We have certain purchase commitments related to the completion of our ongoing construction projects which amounted to approximately $27,406$2,592 as of December 27, 2008.26, 2009.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to itsour business are pending against us. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect our consolidated financial statements.
10. Business Segment and Geographic Information
In accordance with SFAS No. 131, "Disclosures about Segments of an EnterpriseWe report two segments, called Research Models and Related Information," we disclose financialServices (RMS) and descriptive information about its reportable operating segments.Preclinical Services (PCS). Operating segments are components of an enterprise for which separate financial information is available and is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
We report two segments, called Research Models and Services (RMS) and Preclinical Services (PCS).
Our RMS segment includes sales of research models, genetically engineered models and services (GEMS), consulting and staffing services, research animal diagnostics, discovery and imaging services, consultingin vitro and staffing services,avian vaccine support and in vitro technology (primarily endotoxin testing).services. Our PCS segment includes services required to take a drug through the development process including discovery support, toxicology, pathology biopharmaceutical,services, bioanalysis, pharmacokinetics and drug metabolism, discovery support, biopharmaceutical services as well as Phase I clinical trials.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
10. Business Segment and Geographic Information (Continued)
The following table presents sales and other financial information by business segment. Net sales represent sales originating in entities primarily engaged in either provision of RMS or PCS. Long-lived assets include property, plant and equipment goodwill, other intangibles and other long-lived assets.
| 2008 | 2007 | 2006 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Research Models and Services | |||||||||||
Net sales | $ | 659,941 | $ | 577,231 | $ | 514,999 | |||||
Gross margin | 284,639 | 249,348 | 214,125 | ||||||||
Operating income | 198,696 | 177,151 | 147,789 | ||||||||
Total assets | 684,824 | 630,029 | 674,963 | ||||||||
Long-lived assets | 327,568 | 287,058 | 306,267 | ||||||||
Depreciation and amortization | 28,186 | 23,378 | 20,804 | ||||||||
Capital expenditures | 60,490 | 51,086 | 27,018 | ||||||||
Preclinical Services | |||||||||||
Net sales | $ | 683,552 | $ | 653,395 | $ | 543,386 | |||||
Gross margin | 226,070 | 228,843 | 192,482 | ||||||||
Operating income | (596,437 | ) | 103,541 | 82,323 | |||||||
Total assets | 1,470,674 | 2,170,313 | 1,875,487 | ||||||||
Long-lived assets | 1,147,089 | 1,817,173 | 1,641,935 | ||||||||
Depreciation and amortization | 62,997 | 63,001 | 61,779 | ||||||||
Capital expenditures | 136,591 | 175,950 | 154,728 |
A reconciliation of segment operating income to consolidated operating income is as follows:
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
Total segment operating income | $ | (397,741 | ) | $ | 280,692 | $ | 230,112 | |||
Unallocated corporate overhead | (52,021 | ) | (53,501 | ) | (41,939 | ) | ||||
Consolidated operating income | $ | (449,762 | ) | $ | 227,191 | $ | 188,173 | |||
| 2009 | 2008 | 2007 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Research Models and Services | |||||||||||
Net sales | $ | 659,929 | $ | 659,941 | $ | 577,231 | |||||
Gross margin | 278,670 | 284,639 | 249,348 | ||||||||
Operating income | 193,349 | 198,696 | 177,151 | ||||||||
Total assets | 717,975 | 675,571 | 616,417 | ||||||||
Long-lived assets | 284,809 | 276,370 | 256,288 | ||||||||
Depreciation and amortization | 33,501 | 28,239 | 23,394 | ||||||||
Capital expenditures | 31,859 | 61,878 | 53,037 | ||||||||
Preclinical Services | |||||||||||
Net sales | $ | 542,622 | $ | 683,552 | $ | 653,395 | |||||
Gross margin | 150,698 | 226,070 | 228,843 | ||||||||
Operating income | 37,127 | (596,437 | ) | 103,541 | |||||||
Total assets | 1,486,118 | 1,461,422 | 2,156,702 | ||||||||
Long-lived assets | 636,178 | 611,692 | 582,630 | ||||||||
Depreciation and amortization | 60,052 | 63,051 | 63,017 | ||||||||
Capital expenditures | 48,153 | 137,980 | 177,901 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
10. Business Segment and Geographic Information (Continued)
A reconciliation of segment operating income to consolidated operating income is as follows:
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
Total segment operating income | $ | 230,476 | $ | (397,741 | ) | $ | 280,692 | |||
Unallocated corporate overhead | (63,550 | ) | (52,128 | ) | (53,533 | ) | ||||
Consolidated operating income | $ | 166,926 | $ | (449,869 | ) | $ | 227,159 | |||
A summary of unallocated corporate overhead consists of the following:
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Stock-based compensation expense | $ | 11,968 | $ | 11,902 | $ | 8,624 | ||||
U.S. retirement plans | (161 | ) | 7,074 | 8,377 | ||||||
Audit, tax and related expense | 2,727 | 3,455 | 3,924 | |||||||
Salary and bonus | 18,943 | 15,652 | 11,271 | |||||||
Global IT | 8,282 | 5,004 | — | |||||||
Employee health LDP and fringe benefit expense | (2,774 | ) | (908 | ) | 2,885 | |||||
Consulting and outside services | 1,822 | 1,675 | 1,477 | |||||||
Other general unallocated corporate expenses | 11,214 | 9,647 | 5,381 | |||||||
$ | 52,021 | $ | 53,501 | $ | 41,939 | |||||
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Stock-based compensation expense | $ | 10,757 | $ | 11,968 | $ | 11,902 | ||||
U.S. retirement plans | 5,336 | (161 | ) | 7,074 | ||||||
Audit, tax and related expense | 2,609 | 2,727 | 3,455 | |||||||
Salary and bonus | 17,239 | 18,943 | 15,652 | |||||||
Global IT | 9,309 | 8,282 | 5,004 | |||||||
Employee health LDP and fringe benefit expense | 1,622 | (2,774 | ) | (908 | ) | |||||
Consulting and outside services | 3,329 | 1,822 | 1,675 | |||||||
Severance expense | 2,625 | — | — | |||||||
Costs associated with evaluation of acquisitions | 3,445 | 1,313 | — | |||||||
Other general unallocated corporate expenses | 7,279 | 10,008 | 9,679 | |||||||
$ | 63,550 | $ | 52,128 | $ | 53,533 | |||||
Other general unallocated corporate expenses consist of various departmental costs including those associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury and investor relations.
The following table presents sales and other financial information by geographic regions. Included in the other non-U.S. category below are operations located in China, Korea, Australia, India and Mexico. Sales to unaffiliated customers represent net sales originating in entities physically located in the identified geographic area. Long-lived assets include property, plant and equipment, goodwill, other intangibles, and other long-lived assets.
| U.S. | Europe | Canada | Japan | Other Non-U.S. | Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | ||||||||||||||||||||
Sales to unaffiliated customers | $ | 697,227 | $ | 362,751 | $ | 204,252 | $ | 66,749 | $ | 12,514 | $ | 1,343,493 | ||||||||
Long-lived assets | 11,582 | 608,839 | 768,882 | 58,081 | 27,273 | 1,474,657 | ||||||||||||||
2007 | ||||||||||||||||||||
Sales to unaffiliated customers | $ | 620,915 | $ | 339,347 | $ | 201,936 | $ | 56,435 | $ | 11,993 | $ | 1,230,626 | ||||||||
Long-lived assets | 638,219 | 596,730 | 809,773 | 50,844 | 8,665 | 2,104,231 | ||||||||||||||
2006 | ||||||||||||||||||||
Sales to unaffiliated customers | $ | 527,432 | $ | 289,072 | $ | 173,853 | $ | 56,387 | $ | 11,641 | $ | 1,058,385 | ||||||||
Long-lived assets | 537,534 | 580,143 | 785,420 | 41,385 | 3,721 | 1,948,203 |
11. Discontinued Operations
During the first quarter of fiscal 2006, the Company initiated actions to sell Phase II-IV of the Clinical business. On May 9, 2006, the Company announced that it entered into a definitive agreement to sell Phase II-IV of the Clinical Services business for $215,000 in cash as part of a portfolio realignment which would allow the Company to capitalize on core competencies. Accordingly, management performed a goodwill impairment test for the Clinical business segment assuming sale of the Phase II-IV business. To determine the fair value of this segment, the Company used a combination of discounted cash flow methodology for the Phase I Clinical business and expected selling price for the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
10. Business Segment and Geographic Information (Continued)
the identified geographic area. Long-lived assets include property, plant and equipment and other long-lived assets.
| U.S. | Europe | Canada | Japan | Other Non-U.S. | Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 | ||||||||||||||||||||
Sales to unaffiliated customers | $ | 605,280 | $ | 328,447 | $ | 188,206 | $ | 70,848 | $ | 9,770 | $ | 1,202,551 | ||||||||
Long-lived assets | 579,906 | 137,281 | 141,687 | 42,084 | 20,029 | 920,987 | ||||||||||||||
2008 | ||||||||||||||||||||
Sales to unaffiliated customers | $ | 697,227 | $ | 362,751 | $ | 204,252 | $ | 66,749 | $ | 12,514 | $ | 1,343,493 | ||||||||
Long-lived assets | 570,253 | 129,340 | 123,492 | 45,035 | 19,942 | 888,062 | ||||||||||||||
2007 | ||||||||||||||||||||
Sales to unaffiliated customers | $ | 620,915 | $ | 339,347 | $ | 201,936 | $ | 56,435 | $ | 11,993 | $ | 1,230,626 | ||||||||
Long-lived assets | 506,277 | 145,048 | 143,561 | 37,420 | 6,612 | 838,918 |
11. Discontinued Operations (Continued)
Phase II-IV Clinical business. Based on this analysis, it was determined that the book carrying value of goodwill assigned to the Clinical business reporting unit exceeded its implied fair value and therefore a $129,187 charge was recorded in 2006 to write-down the value of this goodwill. No additional goodwill impairment was recorded during 2006.
In addition, taking into account the planned divestiture of the Phase II-IV Clinical business, the Company performed an impairment test on the long-lived assets of the Clinical Phase II-IV business. Based on this analysis, the Company determined that the book value of assets assigned to the Clinical Phase II-IV business exceeded its future cash flows, which included the proceeds from the sale of the business, and therefore recorded an impairment of the assets of $3,900 during 2006.
During 2006, the Company also made a decision to close itswe sold Phase II-IV of our Clinical business and closed our Interventional and Surgical Services (ISS) business, which waswere formerly included in the Preclinical ServicesPCS segment. The Company performed an impairment test on the long-lived assets of the ISS business and based on that analysis, it was determined that the book value of the ISS assets exceeded the future cash flows of the business. Accordingly, the Company recorded an impairment charge of $1,070 during 2006.
For the year end December 30, 2006, the discontinued businesses recorded a loss from operations of $181,004 which included a $546 loss from the sale of the Phase II-IV Clinical business. As a direct result of the sale, the Company realized a significant tax gain resulting in additional tax expense of $37,835, all of which has been paid by the end of fiscal year 2006.
The consolidated financial statements have been reclassified to segregate, as discontinued operations, the assets and liabilities, operating results and cash flows, of thethese businesses beingare reported as discontinued operations for all periods presented.
Operating results from discontinued operations are as follows:
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 27, 2008 | December 29, 2007 | December 30, 2006 | |||||||
Net sales | $ | — | $ | 599 | $ | 73,658 | ||||
Income (loss) from operations of discontinued businesses, before income taxes | 122 | 267 | (145,613 | ) | ||||||
Provision for income taxes | (302 | ) | 3,413 | 35,391 | ||||||
Income (loss) from operations of discontinued businesses, net of taxes | $ | 424 | $ | (3,146 | ) | $ | (181,004 | ) | ||
| Fiscal Year Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| December 26, 2009 | December 27, 2008 | December 29, 2007 | |||||||
Net sales | $ | — | $ | — | $ | 599 | ||||
Income (loss) from operations of discontinued businesses, before income taxes | 5,655 | 122 | 267 | |||||||
Provision for income taxes | 2,435 | (302 | ) | 3,413 | ||||||
Income (loss) from operations of discontinued businesses, net of taxes | $ | 3,220 | $ | 424 | $ | (3,146 | ) | |||
The net income from discontinued operations in 2009 of $3,220 represents a decrease in the loss recognized in 2006 from the sale of Phase II—IV of the Clinical Services business, net of applicable income tax. This resulted from our tax settlement with the IRS Appeals Division in the third quarter of 2009.
12. Subsequent Event
In January 2010, we announced our decision to suspend operations at our PCS facility in Shrewsbury, Massachusetts, by the middle of 2010 when ongoing in-life studies will have been completed. We intend to resume operations when global preclinical market conditions improve and we require additional capacity. Suspension of operations at the facility is expected to reduce operating costs by approximately $20,000 in 2010, with an annualized run-rate of approximately $25,000. As a
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
11. Discontinued Operations (Continued)
Assets and liabilities of discontinued operations at December 27, 2008 and December 29, 2007 consisted of the following:
| December 27, 2008 | December 29, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Current assets | $ | 233 | $ | 1,007 | ||||
Long-term assets | 4,187 | 4,187 | ||||||
Total assets | $ | 4,420 | $ | 5,194 | ||||
Current liabilities | $ | 35 | $ | 748 | ||||
Total liabilities | $ | 35 | $ | 748 | ||||
Current assets included accounts receivable and prepaid income taxes. Non-current assets included a long-term tax receivable. Current liabilities consisted of accounts payable, deferred income and accrued expenses.
12. Subsequent Event (Continued)
During the first quarter of 2009, we implemented actions to improve our operating efficiency. As a result of these actions,this decision, we willexpect to record a one time charge, primarily in the first quarter of 2009charges of approximately $9.0 million, mainly$6,000, in 2010, for severance and related costs. We anticipate that suspension of operations will likely result in some loss of revenue in 2010, but expects to retain the majority of the business and provide the services at other PCS segment,sites. At this time we do not anticipate an asset impairment on the facility.
On January 27, 2010, we executed a fourth amendment to our $50,000 credit agreement to extend the maturity date to July 31, 2011.
In accordance with applicable accounting standards relevant for the closureaccounting and severancedisclosure of our Arkansas facility as well as other headcount reductions.events that occur after the balance sheet date but before financial statements are issued or are available to be issued, we have evaluated subsequent events through the date these financial statements were issued, February 19, 2010.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SUPPLEMENTARY DATA
Quarterly Information (Unaudited)
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended December 27, 2008 | |||||||||||||||
Total net sales | $ | 337,685 | $ | 352,134 | $ | 342,227 | $ | 311,447 | |||||||
Gross profit | 130,377 | 137,987 | 130,270 | 112,075 | |||||||||||
Operating income (loss) | 63,500 | 69,323 | 68,211 | (650,796 | ) | ||||||||||
Income from continuing operations | 45,154 | 50,187 | 44,700 | (662,308 | ) | ||||||||||
Income (loss) from discontinued businesses, net of tax | — | — | — | 424 | |||||||||||
Net income | $ | 45,154 | $ | 50,187 | $ | 44,700 | $ | (661,884 | ) | ||||||
Earnings (loss) per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing operations | $ | 0.67 | $ | 0.75 | $ | 0.67 | $ | (9.91 | ) | ||||||
Discontinued operations | — | — | — | 0.01 | |||||||||||
Net income | $ | 0.67 | $ | 0.75 | $ | 0.67 | $ | (9.91 | ) | ||||||
Diluted | |||||||||||||||
Continuing operations | $ | 0.64 | $ | 0.71 | $ | 0.63 | $ | (9.91 | ) | ||||||
Discontinued operations | — | — | — | 0.01 | |||||||||||
Net income | $ | 0.64 | $ | 0.71 | $ | 0.63 | $ | (9.91 | ) | ||||||
Fiscal Year Ended December 29, 2007 | |||||||||||||||
Total net sales | $ | 291,199 | $ | 307,435 | $ | 313.964 | $ | 318,028 | |||||||
Gross profit | 115,573 | 120,596 | 123,899 | 117,763 | |||||||||||
Operating income (loss) | 54,701 | 56,725 | 63,631 | 52,134 | |||||||||||
Income from continuing operations | 37,227 | 37,841 | 43,536 | 38,948 | |||||||||||
Income (loss) from discontinued businesses, net of tax | (464 | ) | 115 | (759 | ) | (2,038 | ) | ||||||||
Net income | $ | 36,763 | $ | 37,956 | $ | 42,777 | $ | 36,910 | |||||||
Earnings (loss) per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing operations | $ | 0.56 | $ | 0.57 | $ | 0.65 | $ | 0.58 | |||||||
Discontinued operations | (0.01 | ) | — | (0.01 | ) | (0.03 | ) | ||||||||
Net income | $ | 0.55 | $ | 0.57 | $ | 0.64 | $ | 0.55 | |||||||
Diluted | |||||||||||||||
Continuing operations | $ | 0.55 | $ | 0.55 | $ | 0.63 | $ | 0.55 | |||||||
Discontinued operations | (0.01 | ) | — | (0.01 | ) | (0.03 | ) | ||||||||
Net income | $ | 0.54 | $ | 0.55 | $ | 0.62 | $ | 0.52 | |||||||
Fiscal Year Ended December 30, 2006 | |||||||||||||||
Total net sales | $ | 254,141 | $ | 267,859 | $ | 264,660 | $ | 271,725 | |||||||
Gross profit | 95,505 | 107,110 | 102,262 | 101,730 | |||||||||||
Operating income (loss) | 43,696 | 47,702 | 51,621 | 45,154 | |||||||||||
Income from continuing operations | 28,515 | 32,781 | 32,133 | 31,792 | |||||||||||
Income (loss) from discontinued businesses, net of tax | (128,630 | ) | (7,032 | ) | (48,739 | ) | 3,397 | ||||||||
Net income | $ | (100,115 | ) | $ | 25,749 | $ | (16,606 | ) | $ | 35,189 | |||||
Earnings (loss) per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing operations | $ | 0.40 | $ | 0.46 | $ | 0.48 | $ | 0.48 | |||||||
Discontinued operations | (1.80 | ) | (0.10 | ) | (0.73 | ) | 0.05 | ||||||||
Net income | $ | (1.40 | ) | $ | 0.36 | $ | (0.25 | ) | $ | 0.53 | |||||
Diluted | |||||||||||||||
Continuing operations | $ | 0.39 | $ | 0.46 | $ | 0.47 | $ | 0.47 | |||||||
Discontinued operations | (1.76 | ) | (0.10 | ) | (0.72 | ) | 0.05 | ||||||||
Net income | $ | (1.37 | ) | $ | 0.36 | $ | (0.24 | ) | $ | 0.52 |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended December 26, 2009 | |||||||||||||||
Total net sales | $ | 301,526 | $ | 308,159 | $ | 297,485 | $ | 295,381 | |||||||
Gross profit | 108,220 | 114,463 | 106,564 | 100,121 | |||||||||||
Operating income (loss) | 39,893 | 50,662 | 44,447 | 31,924 | |||||||||||
Income from continuing operations, net of tax | 24,869 | 33,655 | 33,540 | 17,318 | |||||||||||
Income (loss) from discontinued businesses, net of tax | — | — | 3,451 | (231 | ) | ||||||||||
Net income attributable to common shareowners | $ | 25,405 | $ | 34,154 | $ | 37,313 | $ | 17,569 | |||||||
Earnings (loss) per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing operations attributable to common shareowners | $ | 0.39 | $ | 0.53 | $ | 0.52 | $ | 0.27 | |||||||
Discontinued operations attributable to common shareowners | — | — | 0.05 | — | |||||||||||
Net income attributable to common shareowners | $ | 0.39 | $ | 0.53 | $ | 0.57 | $ | 0.27 | |||||||
Diluted | |||||||||||||||
Continuing operations attributable to common shareowners | $ | 0.38 | $ | 0.52 | $ | 0.52 | $ | 0.27 | |||||||
Discontinued operations attributable to common shareowners | — | — | 0.05 | — | |||||||||||
Net income attributable to common shareowners | $ | 0.38 | $ | 0.52 | $ | 0.57 | $ | 0.27 | |||||||
Fiscal Year Ended December 27, 2008 | |||||||||||||||
Total net sales | $ | 337,685 | $ | 352,134 | $ | 342,227 | $ | 311,447 | |||||||
Gross profit | 130,377 | 137,987 | 130,270 | 112,075 | |||||||||||
Operating income (loss) | 63,486 | 69,308 | 68,173 | (650,836 | ) | ||||||||||
Income from continuing operations, net of tax | 44,056 | 48,808 | 45,493 | (663,973 | ) | ||||||||||
Income (loss) from discontinued businesses, net of tax | — | — | — | 424 | |||||||||||
Net income attributable to common shareowners | $ | 44,139 | $ | 49,066 | $ | 45,488 | $ | (663,198 | ) | ||||||
Earnings (loss) per common share | |||||||||||||||
Basic | |||||||||||||||
Continuing operations attributable to common shareowners | $ | 0.65 | $ | 0.73 | $ | 0.68 | $ | (9.93 | ) | ||||||
Discontinued operations attributable to common shareowners | — | — | — | 0.01 | |||||||||||
Net income attributable to common shareowners | $ | 0.65 | $ | 0.73 | $ | 0.68 | $ | (9.93 | ) | ||||||
Diluted | |||||||||||||||
Continuing operations attributable to common shareowners | $ | 0.63 | $ | 0.70 | $ | 0.64 | $ | (9.93 | ) | ||||||
Discontinued operations attributable to common shareowners | — | — | — | 0.01 | |||||||||||
Net income attributable to common shareowners | $ | 0.63 | $ | 0.70 | $ | 0.64 | $ | (9.93 | ) |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SUPPLEMENTARY DATA
Quarterly Segment Information (Unaudited)
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended December 27, 2008 | ||||||||||||||
Research Models and Services | ||||||||||||||
Sales | $ | 168,596 | $ | 172,848 | $ | 165,656 | $ | 152,841 | ||||||
Gross margin | 76,256 | 76,429 | 70,813 | 61,141 | ||||||||||
Operating income | 55,813 | 52,199 | 50,673 | 40,011 | ||||||||||
Depreciation and amortization | 6,659 | 7,016 | 7,043 | 7,468 | ||||||||||
Capital expenditures | 10,146 | 23,510 | 12,572 | 14,262 | ||||||||||
Preclinical Services | ||||||||||||||
Sales | $ | 169,089 | $ | 179,286 | $ | 176,571 | $ | 158,606 | ||||||
Gross margin | 54,121 | 61,558 | 59,457 | 50,934 | ||||||||||
Operating income | 23,268 | 28,849 | 30,390 | (678,944 | ) | |||||||||
Depreciation and amortization | 15,674 | 16,004 | 15,894 | 15,425 | ||||||||||
Capital expenditures | 29,558 | 40,667 | 33,577 | 32,789 | ||||||||||
Unallocated corporate overhead | $ | (15,581 | ) | $ | (11,725 | ) | $ | (12,852 | ) | $ | (11,863 | ) | ||
Total | ||||||||||||||
Sales | $ | 337,685 | $ | 352,134 | $ | 342,227 | $ | 311,447 | ||||||
Gross margin | 130,377 | 137,987 | 130,270 | 112,075 | ||||||||||
Operating income | 63,500 | 69,323 | 68,211 | (650,796 | ) | |||||||||
Depreciation and amortization | 22,333 | 23,020 | 22,937 | 22,893 | ||||||||||
Capital expenditures | 39,704 | 64,177 | 46,149 | 47,051 |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended December 29, 2007 | ||||||||||||||
Research Models and Services | ||||||||||||||
Sales | $ | 143,068 | $ | 143,803 | $ | 145,207 | $ | 145,153 | ||||||
Gross margin | 63,654 | 63,109 | 63,408 | 59,177 | ||||||||||
Operating income | 47,021 | 45,268 | 45,574 | 39,288 | ||||||||||
Depreciation and amortization | 5,569 | 5,663 | 5,780 | 6,366 | ||||||||||
Capital expenditures | 7,084 | 10,688 | 12,643 | 20,671 | ||||||||||
Preclinical Services | ||||||||||||||
Sales | $ | 148,131 | $ | 163,632 | $ | 168,757 | $ | 172,875 | ||||||
Gross margin | 51,919 | 57,847 | 60,491 | 58,586 | ||||||||||
Operating income | 23,444 | 27,426 | 29,993 | 22,678 | ||||||||||
Depreciation and amortization | 14,344 | 15,569 | 16,180 | 16,908 | ||||||||||
Capital expenditures | 30,840 | 38,724 | 37,692 | 68,694 | ||||||||||
Unallocated corporate overhead | $ | (15,764 | ) | $ | (15,969 | ) | $ | (11,936 | ) | $ | (9,832 | ) | ||
Total | ||||||||||||||
Sales | $ | 291,199 | $ | 307,435 | $ | 313,964 | $ | 318,028 | ||||||
Gross margin | 115,573 | 120,956 | 123,899 | 117,763 | ||||||||||
Operating income | 54,701 | 56,725 | 63,631 | 52,134 | ||||||||||
Depreciation and amortization | 19,913 | 21,232 | 21,960 | 23,274 | ||||||||||
Capital expenditures | 37,924 | 49,412 | 50,335 | 89,365 |
| | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended December 30, 2006 | ||||||||||||||||||||||||||||
Fiscal Year Ended December 26, 2009 | Fiscal Year Ended December 26, 2009 | |||||||||||||||||||||||||||
Research Models and Services | Research Models and Services | Research Models and Services | ||||||||||||||||||||||||||
Sales | $ | 128,972 | $ | 130,816 | $ | 127,560 | $ | 127,651 | Sales | $ | 161,490 | $ | 165,682 | $ | 163,313 | $ | 169,444 | |||||||||||
Gross margin | 55,866 | 55,478 | 52,423 | 50,358 | Gross margin | 68,313 | 71,206 | 68,623 | 70,528 | |||||||||||||||||||
Operating income | 40,476 | 38,003 | 36,691 | 32,619 | Operating income | 47,444 | 50,894 | 46,131 | 48,880 | |||||||||||||||||||
Depreciation and amortization | 5,035 | 5,237 | 5,185 | 5,345 | Depreciation and amortization | 7,673 | 8,049 | 9,346 | 8,433 | |||||||||||||||||||
Capital expenditures | 3,566 | 4,783 | 3,932 | 14,737 | Capital expenditures | 7,624 | 6,307 | 8,933 | 8,995 | |||||||||||||||||||
Preclinical Services | Preclinical Services | Preclinical Services | ||||||||||||||||||||||||||
Sales | $ | 125,169 | $ | 137,043 | $ | 137,100 | $ | 144,074 | Sales | $ | 140,036 | $ | 142,477 | $ | 134,172 | $ | 125,937 | |||||||||||
Gross margin | 39,639 | 51,632 | 49,839 | 51,372 | Gross margin | 39,907 | 43,257 | 37,941 | 29,593 | |||||||||||||||||||
Operating income | 13,788 | 22,530 | 22,971 | 23,034 | Operating income | 10,546 | 16,336 | 10,044 | 201 | |||||||||||||||||||
Depreciation and amortization | 14,625 | 15,288 | 15,389 | 16,482 | Depreciation and amortization | 14,297 | 14,851 | 15,492 | 15,412 | |||||||||||||||||||
Capital expenditures | 35,821 | 12,620 | 39,038 | 67,249 | Capital expenditures | 17,001 | 14,130 | 9,532 | 7,490 | |||||||||||||||||||
Unallocated corporate overhead | Unallocated corporate overhead | $ | (10,568 | ) | $ | (12,831 | ) | $ | (8,041 | ) | $ | (10,499 | ) | Unallocated corporate overhead | $ | (18,097 | ) | $ | (16,568 | ) | $ | (11,728 | ) | $ | (17,157 | ) | ||
Total | Total | Total | ||||||||||||||||||||||||||
Sales | $ | 254,141 | $ | 267,859 | $ | 264,660 | $ | 271,725 | Sales | $ | 301,526 | $ | 308,159 | $ | 297,485 | $ | 295,381 | |||||||||||
Gross margin | 95,505 | 107,110 | 102,262 | 101,730 | Gross margin | 108,220 | 114,463 | 106,564 | 100,121 | |||||||||||||||||||
Operating income | 43,696 | 47,702 | 51,621 | 45,154 | Operating income | 39,893 | 50,662 | 44,447 | 31,924 | |||||||||||||||||||
Depreciation and amortization | 19,660 | 20,525 | 20,574 | 21,827 | Depreciation and amortization | 21,970 | 22,900 | 24,838 | 23,845 | |||||||||||||||||||
Capital expenditures | 39,387 | 17,403 | 42,970 | 81,986 | Capital expenditures | 24,625 | 20,437 | 18,465 | 16,485 | |||||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||||
Fiscal Year Ended December 27, 2008 | Fiscal Year Ended December 27, 2008 | |||||||||||||||||||||||||||
Research Models and Services | Research Models and Services | |||||||||||||||||||||||||||
Sales | $ | 168,596 | $ | 172,848 | $ | 165,656 | $ | 152,841 | ||||||||||||||||||||
Gross margin | 76,256 | 76,429 | 70,813 | 61,141 | ||||||||||||||||||||||||
Operating income | 55,813 | 52,199 | 50,673 | 40,011 | ||||||||||||||||||||||||
Depreciation and amortization | 6,666 | 7,023 | 7,062 | 7,488 | ||||||||||||||||||||||||
Capital expenditures | 10,609 | 23,898 | 12,819 | 14,552 | ||||||||||||||||||||||||
Preclinical Services | Preclinical Services | |||||||||||||||||||||||||||
Sales | $ | 169,089 | $ | 179,286 | $ | 176,571 | $ | 158,606 | ||||||||||||||||||||
Gross margin | 54,121 | 61,558 | 59,457 | 50,934 | ||||||||||||||||||||||||
Operating income | 23,268 | 28,849 | 30,390 | (678,944 | ) | |||||||||||||||||||||||
Depreciation and amortization | 15,681 | 16,012 | 15,913 | 15,445 | ||||||||||||||||||||||||
Capital expenditures | 30,021 | 41,055 | 33,824 | 33,080 | ||||||||||||||||||||||||
Unallocated corporate overhead | Unallocated corporate overhead | $ | (15,595 | ) | $ | (11,740 | ) | $ | (12,890 | ) | $ | (11,903 | ) | |||||||||||||||
Total | Total | |||||||||||||||||||||||||||
Sales | $ | 337,685 | $ | 352,134 | $ | 342,227 | $ | 311,447 | ||||||||||||||||||||
Gross margin | 130,377 | 137,987 | 130,270 | 112,075 | ||||||||||||||||||||||||
Operating income | 63,486 | 69,308 | 68,173 | (650,836 | ) | |||||||||||||||||||||||
Depreciation and amortization | 22,347 | 23,035 | 22,975 | 22,933 | ||||||||||||||||||||||||
Capital expenditures | 40,630 | 64,953 | 46,643 | 47,632 |
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation, required by paragraph (b) of Rules 13a-15 or 15d-15, promulgated by the Securities Exchange Act of 1934 (Exchange Act), the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective as of December 27, 200826, 2009 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. We continually are in the process of further reviewing and documenting our disclosure controls and procedures, and our internal control over financial reporting, and accordingly may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 27, 200826, 2009 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's report on our internal controls over financial reporting can be found in Item 8 of this report. The Independent Registered Public Accounting Firm's report on the effectiveness of our internal control over financial reporting can also be found in Item 8 of this report.
None.
Item 10. Directors, Executive Officers, and Corporate Governance
A. Directors and Compliance with Section 16(a) of the Exchange Act
The information required by this Item regarding the directors of the Company and compliance with Section 16(a) of the Exchange Act by the Company's officers and directors will be included in the 20092010 Proxy Statement under the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference thereto. The information required by this Item regarding the Company's corporate governance will be included in the 20092010 Proxy Statement under the section captioned "Corporate Governance" and is incorporated herein by reference thereto.
B. Executive Officers of the Company
The information required by this Item regarding the executive officers of the Company is reported in Part I of this Form 10-K under the heading "Supplementary Item. Executive Officers of the Registrant pursuant to Instruction 3 to Item 401(b) of Regulation S-K."
C. Audit Committee Financial Expert
The information required by this Item regarding the audit committee of the Board of Directors and financial experts will be included in the 20092010 Proxy Statement under the section captioned "The Board of Directors and its Committees—Audit Committee and Financial Experts" and is incorporated herein by reference thereto.
D. Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies to all of its employees and directors, including the principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. The Company's Code of Business Conduct and Ethics is posted on our website by selecting the "Corporate Governance" link athttp://ir.criver.com. The Company will provide to any person, without charge, a copy of its Code of Business Conduct and Ethics by requesting a copy from the Secretary, Charles River Laboratories, Inc., 251 Ballardvale Street, Wilmington, MA 01887.
E. Changes to Board Nomination Procedures
EffectiveSince December 2, 2008, there have been no material changes to the procedures by which security holders may recommend nominees to the Company's Board of Directors amended the Company's amended and restated bylaws. The amendments replaced sections 1.12 and 1.13 of the second amended and restated bylaws with entirely new sections 1.12 and 1.13, which relate primarily to the requirements for advance notice and additional information that a shareholder must provide when making a director nomination or proposal at the Company's annual meeting of shareholders. A copy of the amended bylaws is attached as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed on December 5, 2008.Directors.
Item 11. Executive Compensation
The information required by this Item will be included in the 20092010 Proxy Statement under the sections captioned "Compensation Discussion and Analysis," "2008"2009 Director Compensation," "Compensation Committee Interlocks and Insider Participation," "Executive Compensation and Related Information" and "Report of Compensation Committee" and is incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be included in the 20092010 Proxy Statement under the sections captioned "Beneficial Ownership of Securities" and "Equity Compensation Plan Information" and is incorporated herein by reference thereto. See also Item 5. "Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Securities Authorized for Issuance Under Equity Compensation Plans" for the disclosure required by Item 201(d) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the 20092010 Proxy Statement under the sections captioned "Related Person Transaction Policy" and "Corporate Governance—Director Qualification Standards; Director Independence" and is incorporated herein by reference thereto.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be included in the 20092010 Proxy Statement under the section captioned "Statement of Fees Paid to Independent Registered Public Accounting Firm" and is incorporated herein by reference thereto.
Item 15(a)(1) and (2) and Item 15(d) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Financial Statements Schedules" at Item 8 to this Form 10-K. Other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto.
Item 15(a)(3) and Item 15(c) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits. The Company has identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(c) of Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC. | ||||
Date: February | By: | /s/ THOMAS F. ACKERMAN Thomas F. Ackerman Corporate Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated below and on the dates indicated.
Signatures | Title | Date | ||||
---|---|---|---|---|---|---|
By: | /s/ JAMES C. FOSTER James C. Foster | President, Chief Executive Officer and Chairman | February | |||
By: | /s/ THOMAS F. ACKERMAN Thomas F. Ackerman | Corporate Executive Vice President and Chief Financial Officer | February | |||
By: | /s/ NANCY T. CHANG Nancy T. Chang | Director | February | |||
By: | /s/ STEPHEN D. CHUBB Stephen D. Chubb | Director | February | |||
By: | /s/ GEORGE E. MASSARO George E. Massaro | Director | February | |||
By: | /s/ DEBORAH KOCHEVAR Deborah Kochevar | Director | February | |||
By: | /s/ GEORGE M. MILNE, JR. George M. Milne, Jr. | Director | February |
Signatures | Title | Date | ||||
---|---|---|---|---|---|---|
By: | /s/ C. RICHARD REESE C. Richard Reese | Director | February | |||
By: | /s/ DOUGLAS E. ROGERS Douglas E. Rogers | Director | February | |||
By: | /s/ SAMUEL O. THIER Samuel O. Thier | Director | February | |||
By: | /s/ WILLIAM H. WALTRIP William H. Waltrip | Director | February |
Exhibit No. | Description | ||
---|---|---|---|
3.1 | Second Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. | ||
3.2 | Second Amended and Restated By-laws of Charles River Laboratories International, Inc. (Filed as Exhibit 3.2) | ||
4.1 | Form of certificate representing shares of common stock, $0.01 | ||
4.2 | Indenture dated June | ||
4.3 | Form of 2.25% Convertible Senior Note due 2013. (Filed as Exhibit 4.2)(3) | ||
Severance Agreement between Charles River Laboratories, Inc. and Real H. Renaud, dated January 20, 1992, amended December 15, 2008. (Filed as Exhibit 10.1)(4)+ | |||
1999 Charles River Laboratories Corporate Officer Separation Plan. (Filed as Exhibit 10.2)(4)+ | |||
10.3 | Charles River Laboratories 1999 Management | ||
10.4 | Charles River Laboratories 2000 Incentive Plan, as amended May | ||
10.5 | Charles River Laboratories 2000 Incentive Plan Inland Revenue Approved Rules for UK | ||
Form of Change in Control Agreement. (Filed as Exhibit 10.7)(7)+ | |||
Executive Incentive Compensation Plan, as amended. (Filed as Exhibit 10.8)(7)+ | |||
10.9 | Form of Stock Option Award Agreement under 2000 Incentive Plan. (Filed as Exhibit 10.3)(8)+ | ||
10.10 | Form of Restricted Stock Award Agreement under 2000 Incentive Plan. (Filed as Exhibit 10.4)(8)+ | ||
10.11 | Inveresk Research Group, Inc. 2002 Stock Option and Incentive Compensation Plan, as amended and restated as of May 4, 2004. (Filed as Exhibit 99.1)(9)+ | ||
10.12 | Charles River Laboratories Executive Life Insurance/Supplemental Retirement Income Plan. | ||
Deferred Compensation Plan. (Filed as Exhibit 10.3)(7)+ | |||
10.14 | Second Amended and Restated Credit Agreement, dated as of July 31, 2006, among Charles River Laboratories International, Inc., the Subsidiary Borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. as administrative agent, Credit Suisse Securities (USA) LLC, as syndication agent, and Bank of America, N.A., Citizens Bank of Massachusetts and Wachovia Bank, National Association, as co-documentation agents. | ||
10.15 | Charles River Laboratories International, Inc. 2007 Incentive | ||
10.16 | Form of Performance Award |
Exhibit No. | Description | ||
---|---|---|---|
10.17 | Form of Stock Option Award Agreement Under 2007 Incentive | ||
10.18 | Form of Restricted Stock Award Agreement Under 2007 Incentive | ||
21.1* | Subsidiaries of Charles River Laboratories International, Inc. | ||
23.1* | Consent of PricewaterhouseCoopers LLP. |
31.1* | |||
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer. | |||
31.2* | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer. | ||
32.1* | Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer. |