UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 29, 201227, 2014 |
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| 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)
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| 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:
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| 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. ý
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.
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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). Yes o No ý
On June 30, 201228, 2014, the aggregate market value of the Registrant's voting common stock held by non-affiliates of the Registrant was approximately $1,558,792,7742,472,525,191. As of February 15, 2013January 30, 2015, there were 48,182,35247,326,257 shares of the Registrant's common stock outstanding, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitivedefinitive Proxy Statement for its 20132015 Annual Meeting of Shareholders scheduled to be held on May 7, 2013,5, 2015, which will be filed with the Securities and Exchange Commission not later than 120 days after December 29, 2012,27, 2014, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the 2013 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
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| | PART I | | PART I | |
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| 1A | | | | |
| 1B | | | | |
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| 3 | | | | |
| 4 | Mine Safety Disclosure | | Mine Safety Disclosures | |
| | | | Supplementary Item. Executive Officers of the Registrant (pursuant to Instruction 3 to Item 401(b) of Regulation S-K) | |
| | PART II | | PART II | |
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| 7 | | | | |
| 7A | | | | |
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| 9 | | | | |
| 9A | | | | |
| 9B | | | | |
| | PART III | | PART III | |
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| | PART IV | | PART IV | |
| 15 | | | | |
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| Signatures | | Signatures | |
| Exhibit Index | | Exhibit Index | |
PART I
Item 1. Business
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 our current expectations, estimates, forecasts, and projections about the industries in which we operate 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 our current expectations and beliefs 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: the pursuit of our initiatives to optimize returns for stockholders, including efforts to improve our operating margins, improve free cash flow, invest in growth businesses and return value to shareholders; goodwill and asset impairments still under review; future demand for drug discovery and development products and services, and in particular non-regulated discovery, including the outsourcing of these services and spending trends by our clients;services; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy; changes in ourstrategy, 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; our strategic relationships with venture capital limited partnerships and leading pharmaceutical companies and opportunities for future similar arrangements; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions (including Argenta and dispositions;BioFocus, VivoPath and ChanTest); our expectations with respect to salesrevenue growth 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 (and our ability to accommodate future demand with our infrastructure); including gains and losses attributable to businesses we plan to close, consolidate or divest; changes in our expectations regarding future stock option, restricted stock, performance share units and other equity grants to employees and directors; 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 impact of economic and market conditions on our clients; the effects of our cost-saving actions and the steps to optimize returns to shareholders on an effective and timely basis and theour 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 sectionsections entitled “Our Strategy,” the section entitled “Risks Related to Our Business and Industry,” the section entitled “Management's"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
We began operating in 1947 and since then, we have undergone several changes to our business structure. Charles River Laboratories International, Inc. was incorporated in 1994 and in 2000 we completed our initial public offering. Our stock is traded on the New York Stock Exchange under the symbol “CRL” and is included in the Standard & Poor's MidCap 400 and Composite 1500 indices, the Dow Jones US Biotechnology Index, the NYSE Arca Biotechnology Index, the NYSE Composite and Healthcare Sector indices, and many of the Russell indices, 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 is www.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 providerfull service, early-stage contract research organization. We have built upon our core competency of solutions that accelerate the early-stage druglaboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and development process. The focussafety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that are able to support our clients from target identification through preclinical development. We also provide a suite of our business is in vivo biology; our portfolio includes research modelsproducts and services required to enable support our clients’ manufacturing activities.in vivoUtilizing our broad portfolio of products and services enables our clients to create a more flexible drug discoverydevelopment model, which reduces their costs, enhances their productivity and development.effectiveness and increases speed to market.
Discovery represents the earliest stages of research in the life sciences, directed at the identification, screening and selection of a lead compoundmolecule for future drug development. Discovery activities typically extend anywhere from 4-6 years in conventional pharmaceutical research and development timelines.
Development activities, which follow, and which can take up to 7-10 years, are directed at demonstrating the safety, tolerability and clinical efficacy of the selected drug candidates. During the preclinical stage of the development process, a drug candidate is tested in vitro (typically on a cellular or sub-cellular level in a test tube or multi-well petri plate) and in vivo (in research models) to support planned or on-going human trials.
The development of new drugs requires the steadily increasing investment of time and money. Various studies and reports estimate that it takes between 10-15 years, up to $2.0 billion, and exploration of more than 10,000 drug compounds to produce a single FDA-approved drug. We are positioned to leverage our core competencyleading portfolio in early-stage drug researchin vivo biology in an efficient and cost-effective way to aid our clients in bringing their drugs to market faster. Our clients reduce their costs, increase their speed and improve their productivity and effectiveness in early-stage discovery and development by using our broad portfolio of products and services.
For over 65nearly 70 years, we have been in the business of providing the research models required in research and development of new drugs, devices and therapies. Over this time, we have built upon our core competency of in vivo biology to develop a diverse and expanding portfolio of products and services.services, which now encompasses the broader early-stage drug research process. Our client base includes global pharmaceutical companies, biotechnology companies, government agencies and leading hospitals and academic institutions around the world. We currently operate approximately 6560 facilities in 1517 countries worldwide.worldwide, which numbers exclude our Insourcing Solutions (IS) sites. Our products and services, supported by our global infrastructure and deep scientific expertise, enable our clients to meet many of the challenges of early-stage life sciences research. In 2012,2014, our net salestotal revenue from continuing operations were $1.1was $1.3 billion and our operating income from continuing operations was $166.5$177.7 million.
We have twothree reporting segments: Research Models and Services (RMS), Discovery and Preclinical Services (PCS)Safety Assessment (DSA), and Manufacturing Support (Manufacturing).
Through our RMS segment, we have been supplying research models to the drug development industry since 1947. With over 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 model strains, principally genetically and microbiologically defined purpose-bred rats and mice. We also provide a variety of related services that are designed to assist our clients in supporting the use of research models in drug discovery and development. With multiple facilities located on three continents (North America, Europe and Asia), we maintain production centers, including barrier rooms and/or isolator facilities, strategically located near our clients.facilities. In 2012,2014, RMS accounted for 61.5%39.1% of our total net salesrevenue from continuing operations and approximately 50%3,100 of our employees, including approximately 9070 science professionals with advanced scientific degrees.
Our PCSDSA business segment provides services that enable our clients to outsource their drug discovery research, their critical, regulatory-required safety assessment testing and related drug discovery and development activities to us. The demand for these services has historically been driven by preclinical development programsthe needs of large global pharmaceutical companies that exceeded their internal capacity and by the needs of biotechnology companies whichwho traditionally have been outsourced all of their discovery and also by the selective outsourcing strategy of larger global pharmaceutical companies.development programs. Global pharmaceutical and biotechnology companies choose to outsource their discovery and development activities because aoutsourcing reduces or eliminates the significant investment in personnel, facilities and other capital resources is requirednecessary to efficiently and effectively conduct these activities. Outsourcing allows them to focus on their core competencies of innovation and early drug discovery and, particularly for pharmaceutical companies, promotion and market distribution.required scientific studies.
We are one of the two largest providers of preclinical (including bothdrug discovery and development)preclinical development services worldwide and offer target discovery to Investigational New Drug submission drug discovery with particular expertise in the design, execution and reporting of safety assessment studies, especially those dealing with large molecule (biologics) and other innovative therapies.studies. We currently provide preclinicaldiscovery and safety assessment services at multiple facilities located in the United States, Canada, Europe and Europe.Japan. Our PCSDSA segment represented 38.5%41.5% of our total net salesrevenue from continuing operations in 2012 and employed 45% of our employees including approximately 430 science professionals with advanced scientific degrees.
We provide discovery servicescontinuing operations in both2014 and employed approximately 3,400 of our RMSemployees including approximately 590 science professionals with advanced degrees.
Through our Manufacturing segment, we help ensure the safe production and PCSrelease of products manufactured by our clients. Our Endotoxin and Microbial Detection business segments. The biopharmaceutical industry continues to reduce infrastructureprovides non-animal, or in vitro, methods for lot release testing of medical devices and searchinjectable drugs for more efficientendotoxin contamination. Our Avian Vaccine Services business provides specific pathogen free (SPF) fertile chicken eggs and cost-effective modelschickens for the manufacture of drug discoverylive viruses. Our Biologics Testing Services business provides specialized testing of biologics and development. In particular, largedevices frequently outsourced by global pharmaceutical and biotechnology companies are outsourcing biopharmaceutical discovery research, an area they historically considered a core competency. These services, which are generally non-regulated, are used by sponsors to screen moleculescompanies.
In 2014, Manufacturing accounted for 19.4% of our total revenue from continuing operations and make earlier “go-no go” decisions as to which molecules should be selected for continued investment.approximately 1,100 of our employees, including approximately 50 science professionals with advanced degrees.
In recent years, we have focused our efforts on unifying our businesses and improving the efficiency of our global operations to enhance our ability to support our key clients. Our key pharmaceutical and biotechnology clients are increasingly seeking full service, “one-stop” global partners to whom they can outsource more of their drug discovery and development efforts. By some estimates, the outsourced early-stagedrug discovery and development services markets in which we currently participate, ranging from research model production to discovery services to regulated safety assessment, is approximately $7.5 billion and in the aggregate is expected to increase over time as outsourcing trends continue. It is estimated that the market for regulated safety assessment services is approximately 40%45% to 50% outsourced, while emerging growth areas such as in vivo discovery and certain research model services are currently believed to be less outsourced.
Research Models and Services (RMS). Our RMS segment is comprised of (1) Research Models and (2) Research Model Services and (3) Endotoxin and Microbial Detection.Services.
Research Models. Our Research Models business is comprised of the production and sale of research models and avian vaccine services.models.
Research Models. A significant portion of this business is comprised of the commercial production and sale of research models, principally purpose-bred rats and mice for use by researchers. We provide our rodent models to numerous clients around the world, including most pharmaceutical companies, a broad range of biotechnology companies and many government agencies, and leading hospitals and academic institutions. We have 20a global footprint with production facilities strategically located in 78 countries, worldwide, which are strategically located in close proximity to our clients. Our research models include both standard stocks and strains and disease models such as those with compromised immune systems, which are 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. Our research models are bred and maintained in controlled environments which are designed to ensure that the models 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:
outbred, which are purposefully bred for heterogeneity;
inbred, which are bred to be genetically identical; hybrid, which are the offspring of two different inbred parents;
spontaneous mutant, which contain a naturally occurring genetic mutation (such as immune deficiency);
hybrid, which are the offspring of two different inbred parents; and
other genetically modified research models, including knock-out models with one or more disabled genes and transgenic models.
We also offer
Certain of our research models are proprietary, disease-specific mouse and rat models used to find new treatments for diseases such as diabetes, obesity, cardiovascular and kidney disease. We are presently focusing our disease model program on five areas of research: oncology, central nervous system, metabolic, cardiovascular and renal diseases.
We are also a premier provider of high quality, purpose bred, specific-pathogen-free (SPF) large research models to the biomedical research community.
We are the global leaderfor the supply of SPF fertile chicken eggs and chickens. 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 and veterinary vaccine applications. The production of SPF eggs is performed under biosecure conditions, similar in many ways to our research model production. We have a worldwide presence, with several SPF egg production facilities in the United States, contracted production capabilities in Hungary, and franchise
operations in India. We also operate a specialized avian laboratory in the United States, which provides in-house 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.
Research Model Services. RMS also offers a variety of services designed to support our clients' use of research models in screening drug candidates. 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 the maintenance and monitoring of research models, and those which are designed to implement efficacy screening protocols to improve the client's drug evaluation process.managing research operations for government entities, academic organizations and commercial clients. We
currently offer four major categories ofhave three service offerings in research models services-: Genetically Engineered Models and Services, Insourcing Solutions Discovery Research Services and Research Animal Diagnostic Services.
Genetically Engineered Models and Services (GEMS). We breed and maintain research models purchased or purposefully created by our clients for biomedical research activities. The creation of a genetically engineered model (GEM) is a critical scientific event, but it is only the first step in the discovery process. Productive utilization of GEMs requires significant additional technical expertise in order to properly support early discovery research. We also provide breeding expertise and colony development, quarantine, health and genetic monitoring, germplasm cryopreservation, and rederivation including assisted reproduction. Our team of project managers is supported by a technologically advanced internet based colony management system that allows for real time data exchange. We also provide breeding expertise and colony development, quarantine, health and genetic monitoring, germplasm cryopreservation, and rederivation including assisted reproduction. We provide these services to clients around the world from pharmaceutical and biotechnology companies to hospitals and universities.
Insourcing Solutions (IS). We manage research operations (including recruitment, training, staffing and management services) for government entities, academic organizations and commercial clients. Research institutions prefer to outsource staffing and management while retaining certain elements of their research in-house thus driving demand for our services. We believe that our expertise in in vivo biology,early-stage drug research, and in particular research model care, scientific and technical support, facility operations, and discovery and development services, enhances the productivity and quality of our clients' research model programs.
Discovery Research Services (DRS). DRS 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. DRS activities typically extend anywhere from 4-6 years in conventional pharmaceutical research and development timelines. We offer research and development expertise, capabilities, and services globally to accelerate our clients' drug discovery pipelines from lead generation to candidate selection. We complement clients' capabilities and expertise to improve their decision-making, increase their flexibility, and reduce their internal costs and product development timelines. We support a variety of therapeutic areas including oncology, bone and muscoskeletal, inflammation, metabolic, cardiovascular ophthalmology and CNS diseases. In addition, we provide non-therapeutic support in a non-regulated environment to support lead optimization to candidate selection activities. Examples of this include, early pharmacokinetic and pharmocodynamic studies and in vitro and in vivo assays to assess mechanism, bioavailability, metabolism, and safety pharmacology. As we look forward, we believe there are emerging opportunities to assist our clients in a variety of drug discovery applications and platforms from target validation to candidate selection. Services performed at sites dedicated to discovery services are considered part of our research model services and part of our RMS segment.
Research Animal Diagnostic Services (RADS). We monitor and analyze the health profiles of the research models and cell lines of our clients. We developed this capability internally by building upon the scientific foundation created by the diagnostic needs of our research model business. We are able to serve as our clients' sole-source testing laboratory, or as an alternative source supporting our clientsclients’ internal laboratory capabilities .capabilities. We believe we are the reference laboratory of choice for health testing of laboratory research models and an industry leader in the field of animal diagnostics. We can also offer non-GXPnon-GLP biomarker assay platforms and services to support early stageearly-stage discovery studies. Across these platforms, we can provide both standard as well as customized biomarker testing, including serum and urine chemistries.
EndotoxinDiscovery and Microbial Detection(EMD) (f/k/a In Vitro). Our EMD business provides non-animal, or in vitro, methods for lot release testing of medical devices and injectable drugs for endotoxin contamination. In addition, with our acquisition of Accugenix, we provide our clients with state-of-the-art microbial identification services for manufacturing in the biopharmaceutical, medical device, nutraceutical and consumer care industries.
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 most successful FDA-validated alternative to an animal model test to date. The extraction of blood does not harm the crabs, which are subsequently returned to their natural ocean environment. Our EMDbusiness 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 are used for FDA-required quality control testing of injectable drugs and medical devices, their components and the processes by which they are manufactured.
The growth in our EMDbusiness is driven by our FDA approved line of next-generation endotoxin testing products, which are based on the Endosafe Portable Testing System (Endosafe®-PTS™) technology that allows rapid endotoxin testing in the central laboratory or manufacturing environment. In recent years, we expanded the PTS product portfolio to include a multiple sample testing system known as the Endosafe®-MCS™ (multi cartridge system) to satisfy the demand of our clients who have higher volumes of tests to perform. We anticipate our clients' demand for rapid methods of testing will increase as they respond to the FDA's Process Analytical Technology (PAT) Initiative. In November 2012, we introduced the first fully automated robotic system developed specifically for high-volume endotoxin testing, Endosafe®-Nexus™. We expect to start shipping the Endosafe®-Nexus™ in 2013. We 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. We are currently exploring obtaining 510(k) medical device approval of this technology for clinical diagnostic applications.
In 2012, our EMD business acquired Accugenix, the premier global provider of cGMP- compliant contract microbial identification testing. Accugenix is an acknowledged industry leader in species-level identification and strain typing of bacteria and fungi that are recovered from manufacturing facilities. Utilizing state-of-the-art and proprietary in vitro technologies, coupled with scientific expertise and analysis, Accugenix excels in providing accurate, time-effective and cost-effective microbial identification services required to meet internal quality standards and government regulations.
Preclinical Services (PCS)Safety Assessment (DSA)
We currently offer preclinicaldiscovery and safety assessment services, both regulated and non-regulated, in which we include both in vivo and in vitro studies, supportivesupporting laboratory services, and strategic preclinical consulting and program management to support product development.
Discovery Services. We also provide DRS activities at certainoffer a full spectrum of discovery services from identification of a druggable target within a cell through delivery of clinical drug candidates. In 2014, we integrated our Early Discovery and In Vivo Discovery businesses into a single business line - Discovery Services - as part of our PCS sites,continued efforts to streamline and enhance the support we can provide for clients’ integrated drug discovery programs. One seamless discovery organization allows us to better engage with clients at the earliest stages of drug discovery and support complex scientific needs. We support a variety of therapeutic areas including non-GLP pharmacokinetics, metabolismoncology, CNS, bone and pharmacology supportmusculoskeletal, inflammation, metabolic diseases, respiratory, cardiovascular, gastrointestinal, genito-urinary and ophthalmology. As we look forward, we believe there are emerging opportunities to assist our clients in a variety of drug discovery applications and platforms from target discovery to candidate selection.
Early Discovery. We are a global leader in integrated drug discovery services, with a predominant focus on in vitro capabilities. We provide a full suite of drug discovery services from target discovery through the delivery of clinical candidates to a broad range of pharmaceutical and biotechnology companies and non-profit organizations. This allows us to support our clients at the earliest stages of their research, and to stay with them through the entire early-stage process. Primarily through our acquisition of Argenta and BioFocus in April 2014, our Early Discovery service capabilities include: target discovery and validation, hit identification, medicinal chemistry and ADME. Furthermore, our October 2014 acquisition of ChanTest, a leading provider of ion channel testing services, has further enhanced our ability to support our clients’ drug discovery efforts.
In Vivo Discovery Services. In Vivo Discovery Services represents the earliest in vivo stages of research in the processlife sciences, directed at the identification, screening and selection of integrativea lead compound for future drug development. In vivo activities typically extend anywhere from 4-6 years in conventional pharmaceutical research and development timelines. We offer research and development expertise, capabilities, and services globally to accelerate our clients' drug discovery pipelines from lead generation to candidate selection whichand on occasion, completing in vivo studies in support of clinical efforts or post-marketing work. We complement clients' capabilities and expertise to improve their decision-making, increase their flexibility, and reduce their internal costs and product development timelines. In addition, we reported provide in our PCS segment.vitro and in vivo assays in support of lead optimization to candidate selection activities. Examples of this include early pharmacokinetic and pharmacodynamic studies and in vitro and in vivo assays to assess mechanism, bioavailability, metabolism, efficacy, and safety pharmacology.
Safety Assessment. We offer a full range of preclinicaldiscovery and safety assessment studies required for regulatory submission on a global basis.
Bioanalysis, Pharmacokinetics, and Drug Metabolism. In support of preclinical drug safety testing, our clients are required to demonstrate ample drugappropriate exposure, stability in the collected sample, kinetics of their drug or compound in circulation, the presence of metabolites, and, with recombinant proteins and peptides,biologics, the presence or absence of anti-drug antibodies. We have scientific depth in the sophisticated bioanalytical techniques required to satisfy these requirements for a number of drug classes. After performing sample analysis forin support of preclinical study support,studies, we have the opportunity to capture the benefits of bridging the preclinical bioanalysis with subsequent clinical development. Once the analysis is complete, our scientists evaluate the data to provide information on the pharmacokinetics and/or toxicokinetics of the drug, and complete an evaluation of the distribution of the drug or metabolites. 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 at higher doses that may result in adverse effects. These studies are required for the full preclinical assessment of the disposition of the drug and the results are used in the final preclinical safety evaluation of the compound.
Toxicology. Toxicology is one of our core preclinicalnonclinical competencies and a competitive strength. We have expertise in the design and execution of development programs in support of both chemically-derived (small molecule) and biotechnology-derived (large molecule) pharmaceuticals. Once a lead molecule is selected, toxicology studies are conducted inrequired to support of clinical trials in humans.humans and new drug registrations. These toxicology studies focus on assessing the safety and assessof the molecule to determine if administration of the molecules to humans might cause any unintended harmful effects. TheyThese studies are typically performed in research models to elucidateidentify any potential adverse effects that a compound has on an organism over a variety of doses and over various time periods. Our toxicology services feature:
all the standard protocols forstudies in support of general toxicity testing (genotoxicity,toxicology(acute, sub-acute and chronic studies), genetic toxicology, safety pharmacology acute, sub-acute, chronic toxicity and carcinogenicity bioassays)bioassays that are required for regulatory submissions supporting “first-in-human” to “first-to-the-market” strategies;
expertise in standard and specialty routes of administration and modes of administration (e.g., infusion, intravitreal, intrathecal, and inhalation), which that are important not only for the testing of potential pharmaceuticals and biopharmaceuticals, but also for the safety testing of medical devices, industrial chemicals, food additives, agrochemicals, biocides, nutraceuticals, animal health products and other materials;
expertise in the conduct and assessment of reproductive and developmental toxicology studies (in support of larger scale and later-stage human clinical trials);
services in important specialty areas such as ocular, bone, juvenile/neonatal, immuno-toxicity,immune-toxicology, photobiology and dermal testing;
workexpertise in all major therapeutic areas;
study design and strategic advice to our clients based on our wealth of experience and scientific expertise in support of drug development; and
a strong history of assisting our clients in achieving their regulatory and/or internal milestones for the safety testing of numerous therapy types including studies addressing stem cell therapies, DNAcells, vaccines, proteinproteins, antibodies, drug conjugates, oligonucleotide biotherapeutics, small molecules and medical devices.
Our preclinicaldiscovery and safety assessment facilities comply with Good Laboratory Practices (GLPs) to the extent required by the FDA as well as other international regulatory bodies. Furthermore, our early-stage discovery work, which is not subject to GLP standards, is typically carried out under a quality management system such as ISO 9100. Our facilities are regularly inspected by U.S. and other regulatory compliance monitoring authorities, our clients' quality assurance departments and our own internal quality assessment program.
Pathology Services. The ability to identify and characterize clinical and anatomic pathologic changes is critical in determining the safety and efficacy of potential new therapeutics. Key “go/no-go” decisions regarding continued product development are typically dependent on the identification, characterization and evaluation of fluid, tissue and cellular changes that our experts identify and interpret for our clients. We employ a large number of highly trained veterinary anatomic and clinical pathologists and other scientists who use state-of-the-art techniques to identify potential test article-related changes within tissues, fluids and cells,cells. In addition to all standard anatomic and clinical pathology techniques, we provide specialized evaluations such as cytology, platelet function, assay development, immunohistochemistry in situ hybridization and electron microscopy services.
Manufacturing Support (Manufacturing)
Endotoxin and Microbial Detection(EMD). Our EMD business provides non-animal, or in vitro, methods for lot release testing of medical devices and injectable drugs for endotoxin contamination. Our Accugenix subsidiary provides state-of-the-art
microbial identification and genetic sequencing services for manufacturing in the biopharmaceutical, medical device, nutraceutical and consumer care industries.
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 most successful FDA-validated alternative to an animal model test to date. The extraction of blood does not harm the crabs, which are subsequently returned to their natural ocean environment. Our EMDbusiness 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 are used for FDA-required quality control testing of injectable drugs and medical devices, their components and the processes by which they are manufactured.
The growth in our EMDbusiness is driven by our FDA approved line of next-generation endotoxin testing products, which are based on the Endosafe Portable Testing System (Endosafe®-PTS™) technology that allows rapid endotoxin testing in the central laboratory or manufacturing environment. In recent years, we expanded the PTS product portfolio to include a multiple sample testing system known as the Endosafe®-MCS™ (multi cartridge system) to satisfy the demand of our clients who require higher sample throughput. We anticipate our clients' demand for rapid methods of testing will increase as they respond to the FDA's Process Analytical Technology (PAT) Initiative as well as atmove to faster, simpler testing methods for their technicians. In 2013, we launched the molecular level. Pathology support is critical not onlyfirst fully automated robotic system developed specifically for regulatory safety assessment studies, but also for specialized investigative studies, discovery support,high-volume endotoxin testing, Endosafe®-Nexus™ and stand-alone immunohistochemistry evaluations for monoclonal antibodies. Key “go/no-go” decisions regarding continued product development are typically dependent on the identification, characterizationin 2014 we introduced a rapid bacterial contamination (bioburden) product. We expect to see expanded use of this rapid endotoxin testing technology in non-traditional areas such as renal dialysis, nuclear and evaluation of grosscompounding pharmacies, and microscopic pathology findings we perform for our clients.cellular therapy.
Biopharmaceutical Services.Our Accugenix subsidiary is the premier global provider of cGMP- compliant contract microbial identification and genetic sequencing testing. Accugenix is an acknowledged industry leader in species-level identification and strain typing of bacteria and fungi that are recovered from manufacturing facilities. Utilizing state-of-the-art and proprietary in vitro technologies, coupled with scientific expertise and analysis, Accugenix excels in providing accurate, timely and cost-effective microbial identification services required to meet internal quality standards and government regulations.
Biologics Testing Solutions. We perform specialized testing of biologics and devices frequently outsourced by global pharmaceutical and biotechnology companies. Our laboratories in the United States, Germany, Scotland and Ireland provide timely and compliant molecular biology, virology, bioanalytical,bioanalysis, immunochemistry, microbiology and related services. We confirm that biological processes and the drug candidates produced are consistent, correctly defined, stable and essentially contaminant free. This testing is required by the FDA and other globalinternational regulatory authorities for our clients 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 further design and provide viral clearance projects for Phase I, II and III studies in our German and US facilities.
Avian Vaccine Services. We are the global leaderfor the supply of SPF fertile chicken eggs and chickens. 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 and veterinary vaccine applications. The production of SPF eggs is performed under biosecure conditions, similar in many ways to our research model production. We have a worldwide presence, with several SPF egg production facilities in the United States, contracted production capabilities in Hungary, and franchise operations in India. We also operate a specialized avian laboratory in the United States, which provides in-house 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.
Our Strategy
Our objective is to be the preferred strategic global partner for our clients. We drive our growth by providing our clients superior, flexible and tailored solutions to help them accelerate and enhance the efficiency of their drug research and development efforts. Our strategy is to deliver a comprehensive and integrated portfolio of early-stage/drug discovery and early-stage development products, services, and solutions to support our clients' goal to maintain the flexible infrastructure that they require to bring new and improved therapies to market faster and more cost effectively. In addition, we believe we can improve and augment drug discovery and development effectiveness by coordinating the dialog between large pharmaceutical, biotechnology, academic and non-governmental organizations and venture capitalists. As these groups increasingly rely and
interact with one another in this field, we assist them in working together by developing deeper strategic relationships with each of these constituencies.
We believe we have certain competitive advantages in executing this strategy, as a result of our continuing focus on the following:
Integrated Early-Stage Portfolio. We are the only large, global contract research organization (CRO) with a portfolio of products, services, and solutions that focuses almost exclusively on early-stage drug discovery and preclinicalearly-stage development. We provide research models and associated services, discovery research studies and services, and comprehensive safety assessment and toxicology studies in both regulated and non-regulated environments. As such, we are able to collaborate with clients from early lead generationtarget discovery through candidate selection. When critical decisions are made regarding which therapies will progress or remain infrom discovery to development, we continue to work alongside them as the drug candidates move downstream through the preclinical development process and post-candidate selection.downstream. Our recognized expertise in in vivo biologyearly-stage drug research and pharmacology provides us with a competitive advantage in understandingadvantage. We understand our clients' therapies, and the challenges facedthey face during the discovery and development process, including mechanism of action, efficacy, drug metabolism, and safety assessment and toxicological testing critical for making “go/no-go” decisions.
Deep Scientific Expertise. We provide a breadth and depth of scientific expertise which may be too costly for our clients to build and/or maintain in-house. We provide essential capabilities that our clients demand but are not perceived as strategic differentiators for their business.businesses. These include biomarkers, biology,biologics, pharmacology, immunology, pathology and other specialty areas that have high infrastructure costs or are cost-prohibitive for clients
to maintain in-house. We continue to increase our portfolio in key therapeutic and pharmacology areas to align with our clients' internal drug discovery and development areas of focus. These areas of focus and expertise include oncology, metabolism and obesity, immunology, respiratory, bone and musculoskeletal, diabetes, cardiovascular, infectious disease, and central nervous system.system, synthetic and medicinal chemistry, library design, cell line development, in vitro and in vivo screening, structural biology, process chemistry, scale up and formulation development.
Commitment to Animal Welfare. We are committed to being the worldwide leader in the humane care of laboratory animals. 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 work hand-in-hand with the scientific community to understand how living conditions, handling procedures and reduction of stress play an important role in the quality and efficiency of research.
Superior Quality and Client Support. We maintain scientific rigor and high quality standards through management of key performance indicators and an intense focus on biosecurity. These standards allow clients to access our global portfolio of products and services with the confidence that they will obtain consistent results no matter where they choose to obtain their products or conduct their research.
Flexible and Customized Environment to Provide the Right Solutions. AllEach of our clients are different. Each has individualis different with unique needs and specific requirements. We understand the importance of flexibility and we can deliver customized worksolutions based upon the breadth and depth of our capabilities, expertise and services. We help clients improve their workload and staffing requirements by drawing upon the higher utilization and streamlined efficiencies of our facilities. This allows our clients to reduce internal capacity and/or staff. We leverage the expertise embedded in our integrated early-stage portfolio to provide customized solutions tailored to fit the specific need or therapeutic area for a particular client. We provide enhanced value to clients who use us as a full servicefull-service integrated partner over several years.a longer period of time.
Large, Global Partner. We believe there is a particular advantage in being a full service, high-quality provider of research models and associated services, discovery and preclinical in vivo products and in vitroservices and manufacturing support on a global scale. Many of our clients, especially large biopharmaceutical companies, have decided to limit the number of suppliers with which they work, preferringwork. Their preference is to partner with large Tier 1 CROs who offer and can bring experience in project management to a portfolio of capabilities. Large CROs like Charles River, who can presentoffer clients with access to greater value through economieseconomics of scale and scope.scope as a result of broader portfolios and experience in project management. This includes extensive scientific, technical and therapeutic area expertise, real-time access to data through secure portals, a global footprint, and streamlined and simplified processes and communications including professional project and relationship management. We are focused on leveraging our competitive advantages to ensure we are recognized as the premier preferred provider by building and expanding broader and deeper long-term strategic relationships with our clients.
For example, in 2012 we entered into a strategic relationship with a leading global pharmaceutical company for outsourced regulatory safety assessment and development DMPK (drug metabolism and pharmacokinetics). Utilizing our capabilities will enable this client to create a flexible research platform to deliver innovative health solutions. And, in 2011, we expanded an existing preferred provider agreement with another leading global pharmaceutical company. We are now this client's primary in vivo biology partner, providing non-GLP pharmacology for multiple therapeutic areas, drug metabolism and DMPK, services, and GLP safety assessment.We believe we are at an inflection point when globalGlobal biopharmaceutical companies are makingcontinuing to make the decision to outsource more significant tranches of their drug discovery and development processes. For example, over the past few years we have entered into strategic relationships with
leading global pharmaceutical companies and we have expanded existing preferred provider agreements with other leading global pharmaceutical companies. For some of these partners, we provide a broad suite of our research models and discovery and safety assessment services and for others we provide a customized and select array of discovery and safety assessment services and /or research models. Utilizing our capabilities enables our clients to create a flexible research platform to deliver innovative health solutions.
We believe it is critical to participate in that process now, because thethese relationships that are formed now are likely to extend for lengthy periods of time, from three to five years. Furthermore, both the client and the CRO invest heavily in the the initial phases of the relationship to successfully transfer work streams and establish governance processes. Given this investment, clients are less likely to change CROs which means thatat the opportunity to compete forconclusion of the outsourced business may not be available again.initial relationship. Our goal is to prevail in the majority of these opportunities, so our strategy is focused onopportunities. To do this, we are positioning Charles Riverourselves as the preferred partner for outsourced early-stage drug discovery and early-stage development products and services. We differentiate ourselves by our broad, early-stage portfolio, which is unique in the CRO universe; our extensive scientific expertise; our attention to client service; our best-in-class data systems and portals; and our ability to structure creative, flexible solutions that support our clients' goals of reducing the cost and improving the productivity of drug development.
We developed this strategy and focus in recognition of our clients' needs. Biopharmaceutical companies continue to face increasing pressure to innovate and to better manage their pipelines. Accordingly, our clients have reduced their infrastructure while simultaneously they have been searchingsearch for improved ways to identify and develop innovative new therapies. Clients are reducing historical fixed costs in favor of a more flexible business model, with an aim to accelerate their discovery and development activities. As a consequence, our pharmaceutical and biotechnology clients have been looking to outsource these services to high quality, full-service providers like us. Our business prospects are driven primarily by this trend towards the virtualization and externalization of our clients through partnering and outsourcing. Client spending is not just influenced by the levels of research and development at these pharmaceutical and biotechnology companies, but also by spending of all the sponsors including federal and state governments and other non-profit organizations. By providing clients with an outsourced suite of robust services from drug discovery to post-IND, we allow them to concentrate their internal expertise and resources on
areas that provide true differentiation and advance their pipelines. This creates opportunities for us to help optimize our clients' pipelines and be a true partner in accelerating their drug discovery and development process.efforts.
In recent years, the pharmaceutical and biotechnology industries have faced a collection of challenges. This involves scientific, public-perception, economic and regulatory challenges that all have negatively affected demand (and pricing) for outsourced discovery and preclinical development services. These challenges included:
patent expirations of “blockbuster” therapiestherapies;
intensified actions designed to reduce costs and improve research and development innovation and productivity, including cost-cutting, workforce reductions, rationalization of capacity and other efficiency initiatives;
rationalization of drug pipelines to focus on a smaller number of programs and high-potential therapeutic areas;
changes to government healthcare policies and funding;
a stronger emphasis on delivering later-stage programs to accelerate drugs in clinical trials to market;
increased pharmaceutical merger activity and the associated integration issues;
fluctuations in the biotech funding environment; and
the uncertain and volatile global economy.
As a result, there have been fundamental changes in our clients' research and development needs, particularly with regard to the large pharmaceutical industry. First, these clients are increasingly emphasizing studies that have greater translation to the clinic so that they can make appropriate decisions regarding the progression of potential therapeutic entities earlier in the development process. This has reduced the number of compoundsmolecules moving into preclinical and clinical development and results in fewer molecules undergoing regulated safety assessment. The result is a greater focus on discovery research services, including in vivo pharmacology studies consisting of efficacy and non-regulatednon-GLP DMPK (drug metabolism and pharmacokinetics) studies. Second, these clients are choosing to outsource additional discovery researchand safety assessment services in order to increase the efficiency and effectiveness of their drug research decisionselection processes.
We believe that this changing environment will provide enhanced outsourcing opportunities for us in the future. We remain optimistic that our clients are increasingly receptive to moving towards increased outsourcingpartnering with CROs as a means of meeting their discovery services. and safety assessment needs. With the stabilization of factors addressed above, as well as the successful launch of new therapies and the need to advance early-stage pipelines, we believe outsourcing by the pharmaceutical industry will continue to be a positive driver.
We also believe that larger biopharmaceutical companies will increasingly focus on efficiencies and execution. They will continue to reassess what are core differentiators from research and development to commercialization. We expect they will also continue to be conservative in re-building infrastructure and expertise. This should lead to more opportunities for strategic outsourcing as clients choose to utilize external resources rather than invest in internal infrastructure. In the aggregate, we believe that the evolving large biopharmaceutical research and development business model will make our essential products
and services even more relevant to our clients, and allow them to leverage our integrated offerings and expertise to drive their research and development efficiency and cost effectiveness.
To address the challenging market conditions that have persisted, over the last few years we have taken significant steps to better support our clients, identify new strategies to enhance client satisfaction, improve operatingoperational efficiency and productivity, drive cost savings and generally strengthen our business model. Ourmodel:
We integrated our businesses by unifying them globally and streamlined our worldwide facility infrastructure. We did this to strengthen the linkage between the businesses, which enables us to offer clients more seamless access to our broad portfolio and scientific expertise.
We aligned our sales force is aligned to enhance our ability to support our clients and to focus on three particular client segments: global biopharmaceutical companies, mid-tier biopharmaceutical companies, and academic/government institutions. Our PCS
We aligned our DSA business is also aligned along functional lines to continue the process of standardizing and harmonizing our procedures. This has enabled clients to place work with us at multiple locations with the knowledge that procedures are consistently performed and data delivered in standard formats.
We have begun the implementationannounced a number of an ERP systemorganizational changes in order2013 designed to continue to improve availabilityour operating efficiency across our global portfolio and to enhance our ability to meet the needs of our clients, which resulted in operational enhancements and accessefficiencies for 2014 and beyond.
We created a project management office (PMO) to data. In October 2011, we took the next step to further integrate our businesses by unifying RMShelp identify and PCS globally. We did this to strengthen the linkage between the businesses, which enables us to offer clients more seamless accessmanage initiatives that contribute to our broad portfolioorganization’s productivity, efficiency and scientific expertise.risk management. This group participates globally across all businesses to support maximizing revenues, minimizing costs and reducing risks. PMO projects are prioritized through regular updates to both our Executive Committee and Board of Directors.
We are consolidating our procurement function through increased centralization and regionalization, reductions in the number of suppliers and increased use of automated procurement processes.
We also began to take decisive actions in 2009 to reduce costs and improve operating efficiency through a combination of Lean Six Sigma process improvement initiatives and cost-savings actions. The cost savings actions were intended to right-size our infrastructure and identify opportunities to operate more efficiently. In 2011, we initiated a program to identify and implement additional operating efficiencies. These actions were designed to streamline and optimize our operating processes and infrastructure to allow us to support our clients more efficiently and at a lower cost. In 2012, we continued these efforts
through the introduction of our Profit Improvement Program to further optimize our global footprint by identifying top and bottom-line drivers to improve efficiency and profitability.
In December 2010, we announcedmaintain an intensifiedintense focus on four key initiatives designed to allow us to drive profitable growth and maximize value for shareholders, and thus better positionpositioned ourselves to operate successfully in the current and future business environment. We continued to make progress in 2012 on these key initiatives:
|
| |
Initiative | 2012 Progress |
Improve our consolidated operating margin | Stable consolidated operating margin from continuing operations achieved due to: |
| Ÿ Stable Corporate costs, and
|
| Ÿ Six-sigma and other process improvement initiatives
|
Improve our free cash flow generation | Ÿ Free cash flow was stable and our per-share yieldAs a result, we believe was still the highest among public CROs.
|
Disciplined investment in growth businesses | Capital and MD&A projects invested in growth business: |
| Ÿ Diagnostic laboratories opened in 2012,
|
| Ÿ EMD production facility in China and acquisition of Accugenix,
|
| Ÿ Committed to acquire Vital River, which establishes research model presence in China, and
|
| Ÿ Capacity expansion in Finland DRS business.
|
Return value to shareholders | Ÿ Repurchased 1.7 million shares of common stock for $61.4 million.
|
We believe that we are well positioned to exploit both existing and new outsourcing opportunities in light of our actions and intensified focus.opportunities. As clients, particularly larger pharmaceutical companies, increase their outsourcing, we believe that our expertisebroad portfolio and global footprint allows us to provide a more flexible, efficient and cost-effective alternative for them. We are able to build and maintain expertise and achieve economies of scale that are difficult for our clients to match within their internal infrastructures because these products and services are the core of our business.
We intend to continue to broaden the scope of the products and services we provide across the early-stage drug discovery and early-stage development continuum primarily through internal development, and, as needed, through focused acquisitions and alliances. Acquisitions are an integral part of our growth strategy, but we are committed to a disciplined approach that seeks to target businesses that are a sound strategic fit and that offer the prospect of enhancing shareholder value, typically including the achievement of a hurdle rate on return on invested capital above our weighted cost of capital. For example, in 2014 we made two significant strategic acquisitions. First, in March 2014, we acquired Argenta and BioFocus, global leaders in integrated drug discovery services located in the United Kingdom and the Netherlands, with a predominant focus on in vitro capabilities. Second, in October 2014, we acquired ChanTest, a premier provider in ion channel testing.
ThisOur acquisition strategy may includealso takes into account geographic as well as strategic expansion of existing core services. For example, in October 2012,2013, we entered into an agreement to acquireacquired 75% ownership of Vital River, the premier commercial provider of research models and related services in China. For the last ten years, Vital River has been a licensee for production and distribution of our research models in China, with sites which reflect our facility design. The acquisition closed in the first quarter of 2013. As a result of this acquisition, we now provide more of our high-quality research models and associated services to the emerging China marketAsian markets for drug discovery and development. ThisOur strategy may also includeincludes strengthening the depth and expanding the breadth of our core capabilities and services in a related or adjacent business, such as the VivoPath and BRASS acquisitions in 2013 and the Accugenix acquisition.acquisition in 2012.
We are also partnering with a number of venture capital firms investing in life sciences, health care and technology companies with an emphasis on early-stage emerging growth companies. Through these partnerships and leveraging our core competencies, we are able to promote contract research services for discovery and safety assessment to these companies. This offers us the opportunity to establish ourselves as a provider of choice for a unique client group which has emerged as biopharmaceutical companies rationalize and prioritize their development pipelines.
Customers
We maintain 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 institutions.
Our clients continue to consist primarily of all of the major pharmaceutical companies, many biotechnology companies, contract research organizations, agricultural and chemical companies, life science companies, veterinary medicine companies, contract manufacturing organizations, medical device companies, diagnostic and other commercial entities, as well as leading
hospitals, academic institutions, and government agencies. We have stable, long-term relationships with many of our clients. During 2012,2014, no single commercial client accounted for more than 5% of our total net sales.revenue.
We continue to pursue a goal of expanding our relationships with our large biopharmaceutical clients, and with many of our larger mid-tier clients. These relationships take different forms, from preferred provider arrangements to strategic partnerships. These structured relationships incentivize clients to purchase more products and services across our early-stage portfolio, and in total, the strategic relationships in which we are now engaged represent approximatelymore than 25% of our total company revenues. This provides us with better visibility than we have had in the past, and because of the strength of these relationships, better insight into our clients' planning processes. For information regarding net salesrevenue and long-lived assets attributable to botheach of our business segments for the last three fiscal years, please see Note 1213 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. For information regarding net salesrevenue 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 1213 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
Sales, Marketing and Customer Support
We have designated dedicated sales people for each of our three client segments.segments (i.e. global biopharmaceutical, small and mid-sized pharmaceutical and biotechnology companies, and academic and government institutions). This enhances our ability to meet client needs by offering customized, tailored solutions across our entire portfolio. In addition, our mid-market pharmaceutical and biotechnology clients 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 also apply the use of dedicated sales specialists for certain technical product lines, such as in our Manufacturing Support business.
We sell our products and services principally through our direct sales force and account management teams the majority of whomwho work in North America, with the balance in Europe and the Asia-Pacific countries. In addition to interactions with our direct sales force, our primary promotional activities include organizing scientific symposia, publishing scientific papers and newsletters, webinars and making presentations at, and participating in, scientific conferences and trade shows in North America, Europe and Asia. We supplement these scientifically based marketing activities with internet-based marketing, advertising and direct mail. In certain areas, our direct sales force is supplemented by international distributors and agents, particularly with respect to our EMDand Biopharmaceutical Services businesses.agents.
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 clients in the biomedical research industry. We maintain customer service, technical assistance and consulting service departments (in addition to project managers for our service businesses), which address both our clients' routine and more specialized needs and generally serve as a scientific resource for them. We frequently assist our clients in solving problems related to animal husbandry, health and genetics, biosecurity, preclinical study design, regulatory consulting, protocol development and other areas in which our expertise is widely recognized as a valuable resource by our clients.
Our marketing efforts are focused on stimulating demand for further outsourcing across our entire portfolio. We believe that our ability to provide solutions that address all aspects of early-stage drug researchin vivo biology are increasingly attractive to our clients, 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 goal is to be a leader in each of the markets in which we participate. We compete in the marketplace on the basis of our therapeutic and scientific expertise in in vivo biology,early-stage drug research, quality, reputation, flexibility, responsiveness, pricing, innovation and global capabilities. We are able to offer a unique portfolio of early-stage products and services to support drug discovery and development.
The competitive landscape for our twothree business segments varies.
For RMS, our main competitors include three smaller companies in North America (each of whom has a global scope), and several smaller competitors in Europe and in Japan.Of our main U.S. competitors, two are privately held businesses and the third is a government funded, not-for-profit institution. We believe that none of these competitors compares to us in global reach, financial strength, breadth of product and services offerings, technical expertise or pharmaceutical and biotechnology industry relationships.
For PCS,DSA, we believe we are one of the two largest providers of preclinical services (inclusive of discovery and safety assessment services) in the world, based on net service revenue.Our commercial competitors for preclinical servicesdiscovery and safety assessment consist of both publicly held and privately owned companies, and it is estimated that the top ten participants (including us) account for a significant portion of the global outsourced preclinicaldiscovery and safety assessment market, with the rest of the market remaining highly fragmented. Our PCSDSA segment also competes with in-house departments of pharmaceutical and biotechnology companies, universities and teaching hospitals.
For Manufacturing, each of our underlying businesses has several competitors. Biologics has three main competitors all of which are public companies - one in the U.S., one in China and one in the EU. Avian has two main competitors both of which are privately held (one in the U.S. and one in the EU). EMD has five main competitors of which four are public companies in the EU and one is privately held in the U.S.
We believe that the barriers to entry in a 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.
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 aspect 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.animals and implementation of the 3Rs (Replacement, Reduction and Refinement). 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 a 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 beingwell-being of the animals in our care.
We are firmly committed to the 3Rs and help to reduce the number of animals used by emphasizing health and genetic integrity to decrease study data variability. Whenever possible, we use technological advances such as new diagnostic tests for screening pathogens in laboratory rodents, microsampling and in vitro assays. We also partner with customers to develop study designs decreasing the number of animals needed and suggesting pilot studies where appropriate.
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.field and the supporters of 3Rs.
Employees
As of December 29, 2012,27, 2014, we had approximately 7,2007,900 employees (including approximately 540700 science professionals with advanced scientific degrees, including Ph.D.s, D.V.M.s, and M.D.s). Our employees are not unionized in the United States, although employees are unionizedrepresented by unions or works councils at some of our European facilities consistent with local customs for our industry. We believe we have excellentgood relationships with our employees, based on a number of factors including employee retention and employee surveys.feedback.
Backlog
Our backlog for our PCS business segment from continuing operationsRMS, DSA and Manufacturing reportable segments was $213.9$115.7 million, $310.5 million and $27.5 million, respectively, at December 29, 2012,27, 2014, as compared to $202.5$138.7 million, $203.1 million and $28.1 million, respectively, at December 31, 2011. Our preclinical28, 2013. Related 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 client's intention to proceed. We do not recognize verbal orders as backlog. CancelledCanceled studies or projects are removed from backlog. We do not report backlog for our RMS business segment because turnaround time from order placement to fulfillment, both for products and services, is rapid.
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 or projects that are included in 20122014 backlog may be completed in 2013,2015, while others may be completed in later years). Second, the scope of studies or projects may change, which may either increase or decrease their value. Third, studies or projects included in backlog may be subject to bonus or penalty payments. Fourth, studies or projects 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.
The Animal Welfare Act (AWA) governs the care and use of certain species of animals used for research. Theresearch in the United States Congress has passed legislation which excludesother than laboratory rats, mice and chickens used for research from regulation under the AWA.chickens. As a result, most of our U.S. small animal research models activities and our avian vaccine services operations are not subject to regulation under the AWA. For regulated species, the AWA and attendantthe associated 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. Separately, facilities using live vertebrate animals in research funded by the U.S. Public Health Service (PHS) must also adhere to the PHS Policy on Humane Care and Use of Laboratory Animals and follow the Guide for the Care and Use of Laboratory Animals produced by the Institute for Laboratory Animal Research.
We comply with licensing and registration requirement standards set by the United States Department of Agriculture (USDA) and similar agencies in other countries such as the European Union, China, Japan and Canada for the care and use of regulated species. Our animal production facilities and preclinicalin the U.S., our DSA facilities in the U.S., Canada, and most of our DSA sites in the European Union 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 and our operations in foreign countries are subject to international agreements and conventions, as well as a variety of national, regional, and local laws and regulations, which establish the standards for the humane treatment, care, handling and handlingtransport 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 facilities.
Our PCS business conductsconduct nonclinical safety assessment studies to support the registrationsubmissions for approval or licensing of our clients' products throughout the world. A minor part of our RMS business also conducts similar studies for our clients. Many of these studies must comply with national statutory or regulatory requirements for Good Laboratory Practice (GLP). GLP regulations describe a quality system for the organizational process and the conditions under which nonclinical studies are planned, performed, monitored, recorded, reported and archived. GLP compliance is required by such regulatory agencies as the FDA, United States Environmental Protection Agency, European Medicines Agency, (EMA), Medicines and Healthcare Products Regulatory Agency (MHRA) in the United Kingdom, Health Canada and other similar agencies in the countries we operateoperate. GLP requirements are significantly harmonized throughout the world and our laboratories are capable of conducting studies in compliance with all necessary requirements. To assure our compliance obligations, we 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 ensure that the facilities, equipment, personnel, methods, practices, records, and controls comply with GLP. At each of our PCS sites, QAU provides testing facility management with reports that provide a written status on each study, noting any problems and the corrective actions taken. Our laboratory managers use the results of QAU monitoring as part of a continuous process improvement program to assure our nonclinical studies meet regulatory and client expectations for quality and data integrity.
Our manufacturingManufacturing Support businesses produce endotoxin test kits, reagents, cell banks used in research and biopharmaceutical production, clinical trial vaccines and vaccine support products. Additionally, several of our laboratories conduct identity, stability, sterility 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 current Good Manufacturing Practice (cGMP) regulations. We are subject to inspection on a routine basis by national (FDA) and international monitoring authorities compliance with these regulations. These regulations require that we manufacture our products or perform testing in a prescribed manner with respect to cGMP compliance, and maintain records of our manufacturing, testing and control activities. We maintain a biological license withIn addition, the FDA's Center for Biologics Evaluation and Research that covers the manufacture and distributionspecific activities of diagnostic reagents. We also maintain an establishment license with the USDA's Center for Veterinary Biologics (CVB)some of our businesses require us to hold specialized licenses for the manufacture, distribution and/or marketing of USDA licensed antigens, antibodies and viruses. Our Avian business manufactures and markets three USDA licensedparticular products that are subject to regular inspection by the USDA and CVB.
All of our sites are subject to licensing and regulation under international treaties and conventions, including national, regional and local laws relating to
the surface and air transportation of chemicals, biological reagents and laboratory specimens, specimens;
the handling, use, storage and disposal of chemicals (including narcotics and psychotropic drugs). Biological reagents, laboratory specimens, hazardous waste and radioactive materials, and materials;
the safety and health of laboratory employees.employees and visitors to our facilities; and
protection of the environment and general public.
To ensure that all business sectors comply with applicable statutory and regulatory requirements and satisfy our client expectations for quality and regulatory compliance, we established a corporate regulatory affairs and compliance organization that oversees our corporate quality system and allconducts regular audits of our quality assurance functions.functions for all of our GLP, Good Clinical Practices and cGMP facilities. To assure these compliance obligations, we established quality assurance units (QAU) in each of our nonclinical laboratories. The QAUs operate independently from those individuals that direct and conduct studies or manufacturing studies.
Intellectual Property
We develop and implement 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 registrations. In addition, we in-license technology and products from other companies when it enhances both our product and services businesses. In the future, in-licensing may become a larger initiative to enhance our offerings, particularly as we focus on therapeutic area expertise. With the exception of technology related to our EMD testing business, including Accugenix and the Endosafe-PTS, we have no patents, trademarks, licenses, franchises or concessions which are material and upon which any of our products or services 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 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. NineEight of the tennine members of our Board of Directors are independent and have no significant financial, business or personal ties to us or management and all of our board committees (with the exception of our Executive Committee and our Strategic Planning and Capital Allocation Committee) are composed entirely of independent directors. The Board adheres to our Corporate Governance Guidelines and a Code of Business Conduct and Ethics (fully revised in 2012) 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.
Item 1A. Risk Factors
Set forth below, 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 (discovery and safety assessment) stages of drug discovery and development may decrease, which could impair our growth.
Over the past decade, pharmaceutical and biotechnology companies have generally increased their outsourcing of preclinical research support activities.activities, such as discovery and safety assessment. 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), decreases in preclinicalsuch outsourcing activity may result in a diminished growth rate in the sales of any one or more of our service lines and may adversely affect our financial condition and results of operations. For additional discussion of the factors that we believe have recently been influencing outsourcing demand from our clients, please see the section entitled “Our Strategy” included elsewhere in thethis Form 10-K. Furthermore, our client 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 clients 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 molecules in the preclinical phasephases of research and development (and in particular discovery and safety assessment) 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 clients, particularly those that are cash-negative, who may be highly focused on rationing their liquid assets in a challenging funding environment), general economic conditions and institutional budgetary policies. Our business could be adversely affected by any significant decrease in drug 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 years have indicated that a majority of academic researchers are anticipating reductions in their budgets. Similarly, economic factors and industry trends that affect our clients in these industries, including funding for biotechnology companies, which have suffered during the recent economic downturn, 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 spending by our global pharmaceutical clients has been directed towards their later-stage productstherapies in late-stage clinical rather than early-stage studiespreclinical development as they reprioritizework to replenish drug pipelines (focusingto offset the effect of patent expirations on the back-end of their pipelines in the near-term) and moderate their spending per drug candidate.sales. Furthermore, our clients (particularly larger biopharmaceutical companies) continue to search for ways to maximize the return on their investments with a focus on leaner research and development costs per drug candidate. For additional discussion of the factors that we believe have recently been influencing research and development budgets at our clients, please see the sections entitled “Our Strategy” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in thethis Form 10-K.
A reduction or delay in government funding of research and development may adversely affect our business.
A portion of net salesrevenue in our RMS segment is derived from clients 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, which can be difficult to forecast. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Our sales may be adversely affected if our clients 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. Other programs, such as homeland security or defense, or general efforts to reduce the federal budget deficit could be viewed by the U.S. government as a higher priority. These budgetary pressures may result in reduced allocations in the future to government agencies that fund research and development activities. Although the Obama administration's stimulus packages in 2009 and 2010 included increases in NIH funding, NIH funding had otherwise remained fairly flat in recent years (including into 2012 and 2013).years. 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. The significance
Several of our product and timingservice offerings are dependent on a limited source of any reductionssupply, which if interrupted could adversely affect our business.
We depend on a limited international source of supply for certain products, such as large research models. 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 NIH's budget from March 2013 may be significantly impacted byair travel system, commercial disputes, supplier insolvency, or other normal-course or unanticipated events. Any disruption of supply could harm our business if we cannot remove the sequestration provisions of the Budget Control Act of 2011 and by whether these provisions remain in effect.disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms.
Changes in government regulation or in practices relating to the pharmaceutical or biotechnology industries, including potential health care reform, could decrease the need for the services we provide .provide.
Governmental agencies throughout the world, but particularly in the U.S., 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 streamlined or expedited 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.
Although we believe we are currently in compliance in all material respects with national, regional and local laws as well as other accepted guidance used by oversight bodies (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, U.S. Fish and Wildlife Service, The Centers for Disease Control, the Department of Transportation, the office of Laboratory Animal Welfare of NIH as well as numerous other Canadian, European and Asian oversight agencies), failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. In addition, if regulatory authorities were to mandate a significant reduction in safety assessment
procedures which utilize laboratory animals (as has been advocated by certain groups), certain segments of our business could be materially adversely affected.
In March 2010, the U.S. Congress enacted health care reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. In June 2012, the U.S. Supreme Court upheld the constitutionality of this legislation. This legislation may significantly impactThe Court’s decision allows implementation of key provisions impacting drug manufacturers going forward including, but not limited to, (1) expansion of access to health insurance coverage, (2) expansion of the Medicaid program, (3) enactment of an industry fee on pharmaceutical companies, and biotechnology industries. In addition,(4) imposition of an excise tax on the U.S.sale of medical devices. Since the law and its implementation continue to face challenges in Congress variousand federal courts, and from certain state legislaturesgovernments, opposition advocacy groups, and European and Asian governments may consider various types of health care reform in order to control growing health care costs. Wesome small business organizations, we are presently uncertain as to the effects of this legislation on our business and are unable to predict what legislative proposals will be adopted in the future, if any.future.
Implementation of health care reform legislation may have certain benefits but also may contain costs that 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 U.S. 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 clients may spend less, or reduce their growth in spending on research and development.
The FDA is in the process of reviewing and updatingmodernizing the GLP regulations to reflect current industry standards. As this may change some of the GLP requirements, the regulatory impact will not be known until the final regulations are issued.
We are at risk that changes in U.S. Government practices may negatively affect our business since it is a significant customer of ours. For example, in 2014, the National Cancer Institute (NCI) canceled a 10-year, $112 million contract that was originally initiated in 2006, which had two years remaining. Under the contract, we produced NCI research models for academic and government researchers. In an effort to mitigate the effect of the cancellation, we launched an outreach program to inform researchers that they could continue to obtain the NCI models from us, with no change in initial pricing or logistics. From a revenue standpoint, we received between $10 and $11 million annually to produce the models, and expect that we will retain approximately half of that amount from direct sales to researchers.
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 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 client orders and credits for prior shipments. In addition to microbiological contaminations, the potential for genetic mix-ups or mismatingsmis-matings 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. Contaminations also expose us to risks that clients 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 client's facilities, with similar impact to them. In some cases, we may produce or import animals carrying infectious agents capable of causing disease in humans; and in the case of such a contamination or undiagnosed infection, there could be a possible risk of human exposure and infection.
We are also subject to similar contamination risks with respect to our large research models. While often we own these models, they may be maintained on our behalf at a site operated by the original provider. Accordingly, risk of contamination may be outside of our control, and we depend on the practices and protocols of third parties to ensure a contamination-free environment. Furthermore, while we often negotiate for contractual risk indemnification, we may be exposed in the event of such contaminations if the third party does not fulfill its indemnification obligation or is unable to as a result of insolvency or other impediments.
All such contaminations described above are unanticipated and difficult to predict and could adversely impact our financial results. Many of our operations are comprised of complex mechanical systems which are subject to periodic failure, including aging fatigue. Such failures are unpredictable, and while we have made significant capital expenditures designed to create redundancy within these mechanical systems, strengthen our biosecurity, improve our operating procedures to protect against such contaminations, and replace impaired systems and equipment in advance of such events, failures and/or contaminations may still occur.
Any failure by us to comply with applicable regulations and related guidance could harm our reputation and operating results, and compliance with new regulations and guidance may result in additional costs.
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, the issuance of a notice of objectionable observations or a warning from the FDA based
on a finding of a material violation by us for Good Laboratory Practice or current Good Manufacturing Practice requirements could materially and adversely affect us. In recent years, the FDA has significantly increased the number of warning letters regarding drug products. If our operations are found to violate any applicable law or other governmental regulations, we might be subject to civil and criminal penalties, damages and fines. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and damage our reputation.
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 and adoption of new guidance in Europe (Europeanthe European Directive 2010/63/EU)EU requires new standards for animal housing and accommodations that is being implemented over a period of several years on a country-by-country basis.Because of the complexities of the directiverequire implementation process, the transposition, adoption and final enactment of the new regulations in each European Union country will take three more years, but they will be fully implemented by 2016.2017. Some of thethese new guidance willstandards require additional operating and capital expenses that will impact not only us and our industry competitors, but clients in the biomedical research community who not only will bear the costs of thesethrough both changes in the pricing of goods and services but will need to make similarand changes in their own operations.
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, mandated contingency planning, euthanasia guidance, and import and export requirements of biological materials, health monitoring requirements and the use of disinfectants. In the U.S., guidance used by the NIH and by certain oversight agencies for the care and use of laboratory animals was revised in 2010 and is currently being implemented. Furthermore, we have begun implementation of some components of this new guidance in order to avoid additional costs in certain long-term contracts initiated or bid upon currently. Conforming to these new guidelines may cause us increased costs attributable to upgrading of existing or addition of new facilities, the need to add personnel to address new processes, as well as increased administrative burden.
Our revenue generating agreements contain termination and service reduction provisions or may otherwise terminate according to their term, which may result in less contract revenue than we anticipate.
Many of our agreements with both large and small clients, including those which underlie our strategic relationships with some of our more significant customers, provide for termination or reduction in scope with little or no notice. In addition, we sell our products and services to our competitors, and similarly they sell products and services to us. For instance, we have historically entered into, and currently are party to, contracts with certain of our competitors to distribute specialty research models in locations where our competitors may not have distribution capabilities.
Clients and/or competitors may elect to terminate their agreements with us for various reasons including:
the products being tested fail to satisfy safety requirements;
unexpected or undesired study results;
production problems resulting in shortages of the drug being tested;
a client's decision to forego or terminate a particular study;
establishment of alternative distribution channels by our competitors;
the loss of funding for the particular research study; or
general convenience/counterparty preference.
If a client or competitor terminates a contract with us, we are typically entitled under the terms of the contract to receive revenue earned to date as well as certain other costs and, in some cases, termination fees. Cancellation of a large contract or proximate delay, cancellation or conclusion of multiple contracts could materially adversely affect our business 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‑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 client. 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 and irrevocably committed costs/expenses.
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 client data. As a routine element of our business, we collect, analyze and retain substantial amounts of data pertaining to the preclinical studies we conduct for our clients. 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 adequateappropriate measures to protect them from intrusion, and we continue to improve and enhance our systems in this regard, but in the event that our efforts are unsuccessful we could suffer significant harm. Our contracts with our clients 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.
Impairment of goodwill or other intangible assets 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.
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 of goodwill.goodwill or other indefinite-lived intangibles. To the extent goodwill isor other indefinite-lived intangibles are impaired, itstheir carrying value will be written down to its implied fair value and a charge will be made to our income from continuing operations. Such an impairment charge could materially and adversely affect our operating results. As of December 29, 2012,27, 2014, the carrying amount of goodwill and other intangibles was $293.5$500.0 million in theon our consolidated balance sheet.
Our business is subject to risks relating to operating internationally.
A significant part of our net salesrevenue is derived from operations outside the U.S. Our international revenues, which include revenues from our non-U.S. subsidiaries, have represented approximately one-half of our total net salesrevenue 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:
foreign currencies we receive for sales and in which we record expenses outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar and reduce the amount of revenue and cash flow (and increase the amount of expenses) that we recognize and cause fluctuations in reported financial results;
certain contracts, particularly in Canada, are frequently denominated in currencies other than the currency in which we incur expenses related to those contracts and where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations;
general economic and political conditions in the markets in which we operate;
potential international conflicts, including terrorist acts;
potential trade restrictions, exchange controls, adverse tax consequences, and legal restrictions on the repatriation of funds into the U.S.;
difficulties and costs associated with staffing and managing foreign operations, including risks of work stoppages and/or strikes, as well as violations of local laws or anti-bribery laws such as the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and the OECDOrganization for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
unexpected changes in regulatory requirements;
the difficulties of compliance with a wide variety of foreign laws and regulations;
unfavorable labor regulations in foreign jurisdictions;
potentially negative consequences from changes in or interpretations of US and foreign tax laws;
exposure to business disruption or property damage due to geographically unique natural disasters;
longer accounts receivable cycles in certain foreign countries; and
import and export licensing requirements.
These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. For example, as mentioned above, we are subject to compliance with the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. While our employees, distributors and agents are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from violations of these laws despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
New technologies may be developed, validated and increasingly used in biomedical research that could reduce demand for some of our products and services.
The scientific and research communities continue to explore methods to develop improved models and systems that would replace or supplement the use of living animals as test platforms in biomedical research as well as improve the translation of cellular and animal models to human studies and vice-versa. Some companies have developed techniques in these areas that may have scientific merit. In addition, technological improvements to existing or new processes, such as imaging and other translational biomarker technologies, could result in the refinement and utility for the number of animal research models necessary to improve the translation from preclinical to human studies. There is an increasing push to focus on in vitro technologies such as human materials, stem cell technology and model creation technology. However, the increasing availability and utility of these in vitro models is partially offset by these technologies facilitating the creation of humanized, highly specialized and specific disease mimicking models we can produce.
It is our strategy to explore non-animal approaches to reduce the need for animal models as these new methods become validated. For example, ChanTest has a well-developed program to evaluate the cardiac properties of induced pluripotent stem cell-derived cardiomyocytes. We may not be successful in commercializing these methods, and, furthermore, revenues from these new models and approaches if successfully developed may not offset reduced sales or profits from research models. In addition, alternative research methods could decrease the need for future research models, and we may not be able to develop new products effectively or in a timely manner to replace any lost sales. Lastly, 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 some of our clients.
Negative attention from special interest groups may impair our business.
The products and services which we provide our clients are essential to the drug discovery, development and development process,manufacturing processes, 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, including shareholder proposals, impacting the industry. This has included demonstrations near facilities operated by us and at our annual meetings, as well as shareholder proposals we received for some of our 2012 and 2013past Annual Meetings.Meetings of Shareholders. In some instances, periodic demonstrations at our operating sites occur at regular intervals.occur. Any negative attention, threats or acts of vandalism directed against either our animal research activities or our third party service providers 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.18
We depend on a limited international source of supply of large research 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, commercial disputes, supplier insolvency, 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.
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 CROs, 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 for outsourced services. We compete on a variety of factors, including:
reputation for on-time quality performance;
reputation for regulatory compliance;
expertise and experience in multiple specialized areas;
scope and breadth of service and product offerings across the drug discovery and development spectrum;
ability to provide flexible and customized solutions to support our clients' drug discovery and development needs;
broad geographic availability (with consistent quality);
price/value;
technological expertise and efficient drug development processes;
quality of facilities;
financial stability;
size;
ability to acquire, process, analyze and report data in an accurate manner; and
accessibility of client data through secure portalsportals.
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 trends since 2008 also demonstrated increased merger activity between larger pharmaceutical companies themselves).companies. If this trend continues, it is likely to produce more competition among the larger companies and CROs 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 CRO industry will continue to find lower barriers to entry, and private equity firms may determine that there are opportunities to acquire and consolidate these companies, thus further increasing possible competition. Furthermore, between 2006 and 2008, both Charles River and our competitors, particularly in the preclinical services area, invested significantly in capital projects to increase capacity. An ongoing challenge for all participants is balancing existing (and sometimes excess) capacity and market demand. Where capacity has been increased too much, pressure to lower prices or to take on lower-margin studies and projects can occur. More generally, our competitors or others might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain competitive, our competitive position, and in turn our business, revenue and financial condition, would be materially and adversely affected. In the aggregate, these competitive pressures may affect the attractiveness of our technologies, services or products and could adversely affect our financial results.
Potential Changes in U.S. and International Tax Law.
In the U.S., there are several proposals to reform corporate tax law that are currently under consideration. These proposals include reducing the corporate statutory tax rate, broadening the corporate tax base through the elimination or reduction of deductions, exclusions and credits, implementing a territorial regime of taxation, limiting the ability of U.S. corporations to deduct interest expense associated with offshore earnings, modifying the foreign tax credit rules, and reducing the ability to defer U.S. tax on offshore earnings. These or other changes in the U.S. tax laws could increase our 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 enhanced deductions and accelerated tax depreciation allowances in the U.K.United Kingdom. Any reduction in the availability or amount of these tax credits or deductions due to tax law changes or outcomes of tax controversies would likelycould have a material adverse effect on our profits, cash flow and effective tax rate.
Currently, the OECD has developed an action plan to address concerns regarding base erosion and profit shifting (BEPS). This initiative has resulted in proposed and enacted changes to tax laws in various countries including France, Germany, and the United Kingdom. Future changes to tax laws or interpretation of tax laws resulting from the BEPS project could increase our effective tax rate.rate which would affect our profitability.
Contract research services create a risk of liability.
As a CRO, we face a range of potential liabilities which may include:
errors or omissions in reporting of study detail in preclinical studies that may lead to inaccurate reports, which may undermine the usefulness of a study or data from the study, or which may potentially advance studies absent the necessary support or inhibit studies from proceeding to the next level of testing;
risks associated with our possible failure to properly care for our clients' property, such as research models and samples, study compounds, records, work in progress, other archived materials, or goods and materials in transit, while in our possession;
risks that models in our breeding facilities or in facilities that we manage may be infected with diseases that may be harmful and even lethal to themselves or humans despite preventive measures contained in our policies for the quarantine and handling of imported animals; and
risks that we may have errors and omissions and/or product liabilities related to our products designed to conduct lot release testing of medical devices and injectable drugs (primarily through our EMD business) or in the testing of biologics and other services performed by our biopharmaceutical servicesBiologics business, which could result in us or our clients failing to identify unsafe or contaminated materials.
WeWhile we attempt to mitigate these risks through a variety of methods. Nonetheless,methods, 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 procedures, and veterinary staff vigilance, through which we seek to control the exposure of animal related disease or infections. In our PCS business,DSA and Manufacturing businesses, we attempt to reduce these risks by contractcontractual risk transfer provisions entitling us to be indemnified or entitling ussubject to a limitation of liability, by insurance maintained by our clients andand/or by us, and by various regulatory requirements we must follow in connection with our business.
In both our RMS and PCS businesses, contractualContractual risk transfer 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 wereare required to pay damages or bear the costs of defending any claim whichthat is not covered by aoutside any contractual indemnification provision, or in the event thatif a party who must indemnify us does not fulfill its indemnification obligations, or whichthe damage is beyond the scope or level of insurance coverage. We also often contractually indemnify our clients (subject to a limitation of liability), similar to the way they indemnify us, and we may be materially adversely affected if we have to fulfill our indemnity obligations. Furthermore, there can be no assurance that we ornor a party required to indemnify us will be able to maintain such insurance coverage (either at all or on terms acceptable to us.
New technologies may be developed, validated and increasingly used in biomedical research that could reduce demand for some of our products and services.
The scientific and research communities continue to explore methods to develop improved models and systems that would replace or supplement the use of living animals as test platforms in biomedical research as well as improve the translation of cellular and animal models to human studies and vice-versa. Some companies have developed techniques in these areas that may have scientific merit. In addition, technological improvements to existing or new processes, such as imaging and other translational biomarker technologies, could result in the refinement and utility for the number of animal research models necessary to improve the translation from preclinical to human studies. It is our strategy to explore non-animal approaches to reduce the need for animal models as these new methods become validated. We may not be successful in commercializing these methods, and, furthermore, revenues from these new models and approaches if successfully developed, may not offset reduced sales or profits from research models. In addition, alternative research methods could decrease the need for future research models, and we may not be able to develop new products effectively or in a timely manner to replace any lost sales. Lastly, 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 some of our clients.us).
Upgrading and integrating our business systems could result in implementation issues and business disruptions.
In recent years we implemented a project to replace many of our numerous legacy business systems at ourcertain different sites globallyworldwide with an enterprise wide, integrated enterprise resource planning (ERP) system. The expansion of the system to other international locations may occur at a future date based on value to the business. In general, the process of planning and preparing for these types of integrated, wide-scale implementations 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.
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 have identified a material weakness in our internal controls that, if not properly corrected, could result in material misstatements in our financial statements, which could adversely affect our operating results, and investor, supplier and client confidence in our reported financial information.
As described in “Item 9A. Controls and Procedures”, we have identified a material weakness in our system of internal control over financial reporting as of December 29, 2012. A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness was related to the design and operation of certain controls over information technology, business processes and financial reporting. Specifically, we identified deficiencies with respect to controls over segregation of duties,
restricted access, changes to vendor and customer master data, transaction level and financial close controls which aggregated to a material weakness in internal control over financial reporting.
In response to the identification of the material weakness, management (1) has established a cross functional team to review and address segregation of duties conflicts and restricted access within the information technology used in our core business and (2) will design new controls or improve existing controls related to vendor and customer master data changes, transaction level controls as well as financial close controls. In addition, we will evaluate staffing levels and responsibilities, and increase training to reinforce pre-established and new controls to improve our ability to detect potential misstatements in our internally prepared reports, analyses and financial records.
Although there can be no assurances, we believe these enhancements and improvements, when repeated in future periods, will remediate the control deficiencies described above. If we are not able to remedy the control deficiencies in a timely manner, we may be unable to provide holders of our securities with the required financial information in a timely and reliable manner and we may incorrectly report financial information, either of which could subject us to regulatory enforcement and other actions, and could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information and the trading price of our common stock.
We may not be able to successfully develop and market new services and products.
We may seek to develop and market new services and products that complement or expand our existing business or service offerings. We believe our ability to in-license new technologies from third-parties will be critical to our ability to offer new products and services to our customers. Our ability to gain access to technologies that we need for new products and services depends - in part - on our ability to convince inventors and their agents or assignees that we can successfully commercialize their inventions. We cannot guarantee that we will be able to identify new technologies of interest to our customers. Even if we are able to identify new technologies of interest, we may not be able to negotiate license agreements on acceptable terms, or
at all. If we are unable to develop new services and products and/or create demand for those newly developed services and products, 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 29, 2012,27, 2014, we had approximately $667$753.8 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 57 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, or in managing our current and future divestitures, our business may suffer.
During the past decade,fifteen years, we have steadily expanded our business through numerous 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.
Even if completed, acquisitions and alliances involve numerous risks which may include:
difficulties in achieving business and financial success;
difficulties and expenses incurred in assimilating and integrating operations, services, products technologies or technologies;pre-existing relationships with our customers, distributors and suppliers;
challenges with developing and operating new businesses, including those which are materially different from our existing businesses and which may require the development or acquisition of new internal capabilities and expertise;
diversion of management's attention from other business concerns;
potential losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain from the seller;
loss of key employees;
the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;
diversion of management's attention from other business concerns;
acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common stock to the shareholders of the acquired company, dilutive to the percentage of ownership of our existing stockholders;
loss of key employees;shareholders;
risks of not being able to overcome differences in foreign business practices, customs and importation regulations, language and other cultural barriers in connection with the acquisition of foreign companies;
21new technologies and products may be developed which cause businesses or assets we acquire to become less valuable; and
risks that disagreements or disputes with prior owners of an acquired business, technology, service or product may result in litigation expenses and distribution of our management's attention;attention.
integration and support of preexisting supplier, distribution and customer relationships;
the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;
difficulties in achieving business and financial success; and
new technologies and products may be developed which cause businesses or assets we acquire to become less valuable
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.
Some of the same risks exist when we decide to sell a business, site, or product line. In addition, divestitures could involve additional risks, including the following:
difficulties in the separation of operations, services, products and personnel; and
the need to agree to retain or assume certain current or future liabilities in order to complete the divestiture.
We continually evaluate the performance and strategic fit of our businesses. These and any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have an adverse effect on our results of operations and financial condition. In addition, we may encounter difficulty in finding buyers or alternative exit strategies at acceptable prices and terms and in a timely manner. We may not be successful in managing these or any other significant risks that we encounter in divesting a business, site or product line, and as a result, we may not achieve some or all of the expected benefits of the divestiture.
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 36 years.almost four decades. We have no employment agreement with Mr. Foster or other members of our non-European based senior management. If Mr. Foster or other members of senior 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 a strong record of employee retention, there is still significant 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:
changes in the general global economy;
the number and scope of ongoing client engagements;
the commencement, postponement, delay, progress, completion or cancellation of client contracts in the quarter;
changes in the mix of our products and services;
competitive pricing pressures;
the extent of cost overruns;
holiday buying patterns of our clients;
budget cycles of our clients;
changes in tax laws, rules, regulations and tax rates in the locations in which we operate;
the timing and charges associated with completed acquisitions and other events;
22the financial performance of the limited partnerships in which we invest;
the occasional extra “53rd week” that we recognize in a fiscal year (and 4th fiscal quarter thereof) due to our fiscal year ending on the last Saturday in December; and
exchange rate fluctuations.
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 stock.
Item 1B. Unresolved Staff Comments
There are no unresolved comments to be reported in response to Item 1B.
Item 2. Properties
We own or lease the land and buildings where we have facilities. We own large facilities (facilities over 50,000 square feet) for our PCSDSA businesses in Canada, Ireland, Scotland and the United States Canada, Scotland and Ireland, and lease large facilities in England and the United States. We own large RMS facilities in the United Kingdom,Canada, China, France, Germany, Japan, CanadaEngland and the United States. We own large Manufacturing segment facilities in the United States and China. None of our leases is individually material to our business operations. Many of our leases have an option to renew, 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 1012 to the Consolidated Financial Statements included elsewhere in this Form 10-K.
Capacity at our Safety Assessment businesses within our DSA segment is primarily based on physical room infrastructure designed towards meeting specific scientific and regulatory requirements. We do not anticipate further significant expansion requirements intrack room utilization on an ongoing basis and depending on the needs of our PCS business for the next few years due to available capacityclients at existing and suspended sites. However,given times, we may need to execute on contingent plans for expansion, which average between six and fifteen months to complete.
We may also expand at specific sites should we determine that it is not feasiblein order to utilize available capacity at existing or suspended sites. We have adequate capacity to meet the currentaccommodate needs of our RMS clients and do not currently envision the need for significant expansion of our RMS capacity.
resulting from any consolidation strategy. We continue to employ a master site planning strategy to proactivlyproactively evaluate our real estate needs. In certain circumstances, we dispose of or consolidate operations, which could result in impairment charges. In situations where the associated real estate is leased. Dependingleased, and depending on the resolution of these situations, we may be encumbered with the remaining real estate lease obligations.
Item 3. Legal Proceedings
We are not 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.
In early May 2013, with the assistance of the law firm of Davis Polk & Wardwell LLP, the Company commenced an investigation of inaccurate billing with respect to certain government contracts. This issue had been reported to the Company’s senior management by a Charles River employee. The Company promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services' Office of the Inspector General, and the Department of Justice, and is cooperating with these agencies to ensure the proper repayment and resolution of this matter.
The investigation to date has confirmed that the Company’s RMS business segment billed the Department of Health and Human Services for certain work that had not been performed with respect to a small subset of the Company’s government contracts. It has been determined that when employees regularly assigned to work in research model barrier rooms associated with these contracts were absent, other employees' names would be substituted on time-keeping records associated with the relevant contracts. The Company billed the government for the hours associated with these substitute employees, despite the fact that, in many cases, these employees did not perform any services in connection with the relevant government contracts. Based on the findings of the investigation to date, the Company believes that this conduct was limited to the Company’s research model facilities in Raleigh, North Carolina, and Kingston, New York. The Company has identified approximately $1.5 million in excess amounts billed on these contracts since January 1, 2007 and has reserved such amount at December 27, 2014. Given the current status of discussions with the government and the complex nature of this matter, the Company cannot at this time make a reasonable estimate of the potential range of loss beyond such reserve.
The Company has already taken appropriate steps to prevent this conduct from recurring, and will consider additional remedial measures following the conclusion of the investigation.
Item 4. Mine Safety Disclosures
Not Applicableapplicable.
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 of 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 58,60, 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.
James C. Foster, age 62,64, joined us in 1976 as General Counsel. Over the past 36 years,During his tenure, 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.
Jörg M. Geller, age 58,60, joined our German operation in 1986 as production manager. In 1994, he was promoted to Vice President and in 2007, he was named a Senior Vice President. In 2011, Dr. Geller was promoted to Corporate Executive Vice
President, European & Asian Operations.Operations and in December 2013, he was named Corporate Executive Vice President, Global Productivity and Efficiency. Prior to joining the Company,us, Dr. Geller was employed in private practice as a veterinarian. Dr. Geller has announced his intention to retire in March 2015.
Nancy A. Gillett, age 57,59, joined us in 1999 with the acquisition of Sierra Biomedical. Dr. Gillett has 2729 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 PCSDSA 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. Currently, Dr. Gillett serves as our
Corporate Executive Vice President, Chief Scientific Officer.
David P. Johst, age 51,53, 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 our General Counsel and Chief Administrative Officer and is responsible for overseeing our Corporate legal function, Human Resources department and several other corporate staff departments. Prior to joining the Company,us, Mr. Johst was in private practice at the law firm of Hale and Dorr (now WilmerHale). Mr. Johst currently serves as a trustee of Mt. Ida College.
Davide Molho, age 43,45, joined our Italian operations in 1999 and was promoted to Director of Operations for Research Models and Services (RMS) Italy in 2002. In 2005, his role was expanded to include French RMS operations and in 2007, he became Corporate Vice President, European Research Models and Services with responsibility for all European RMS operations. In July 2009, Dr. Molho was promoted to Corporate Senior Vice President, North American &and European Research Models and Services. He was subsequently promoted to Corporate Executive Vice President and President, Global Research Models and Services in December 2010. SinceIn 2011, Dr. Molho has served as ourwas named Corporate Executive Vice President, North America Operations and in December 2013, he was named Corporate Executive Vice President and President, Global RMS and DSA Operations.
PART II
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 belowshows the high and low sales prices for our common stock.
| | | 2013 | High | | Low | |
| First quarter (through February 15, 2013) | $ | 43.15 |
| | $ | 38.04 |
| |
| 2012 | High | | Low | |
| Fiscal 2015 | | High | | Low |
| First quarter (through January 30, 2015) | | $ | 70.73 |
| | $ | 63.22 |
|
| Fiscal 2014 | | High | | Low |
| First quarter | $ | 37.02 |
| | $ | 27.39 |
| $ | 62.50 |
| | $ | 52.41 |
|
| Second quarter | 36.75 |
| | 31.82 |
| 61.92 |
| | 49.60 |
|
| Third quarter | 39.60 |
| | 32.27 |
| 61.49 |
| | 52.02 |
|
| Fourth quarter | 41.24 |
| | 35.65 |
| 66.11 |
| | 55.47 |
|
| 2011 | High | | Low | |
| Fiscal 2013 | | High | | Low |
| First quarter | $ | 39.39 |
| | $ | 35.54 |
| $ | 46.90 |
| | $ | 36.50 |
|
| Second quarter | 42.47 |
| | 37.38 |
| 45.90 |
| | 40.28 |
|
| Third quarter | 42.05 |
| | 28.54 |
| 48.73 |
| | 41.05 |
|
| Fourth quarter | 33.57 |
| | 25.95 |
| 53.81 |
| | 44.12 |
|
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 29, 201227, 2014.
Shareholders
As of January 31, 2013,30, 2015, there were approximately 452451 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 our purchases of shares of our common stock during the quarter ended December 29, 201227, 2014.
|
| | | | | | | | | | | | | |
| | 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 |
| September 30, 2012 to October 27, 2012 | 124,326 |
| | $ | 39.37 |
| | 124,326 |
| | $ | 68,563 |
|
| October 28, 2012 to November 23, 2012 | 194,933 |
| | $ | 39.01 |
| | 194,933 |
| | $ | 60,958 |
|
| November 24, 2012 to December 29, 2012 | 163,994 |
| | $ | 37.49 |
| | 163,830 |
| | $ | 54,816 |
|
| Total: | 483,253 |
| | |
| | 483,089 |
| | |
|
|
| | | | | | | | | | | | | |
| 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 |
| September 28, 2014 to October 25, 2014 | 286 |
| | $ | 59.74 |
| | — |
| | $ | 178,455 |
|
| October 26, 2014 to November 22, 2014 | 252 |
| | 63.16 |
| | — |
| | 178,455 |
|
| November 23, 2014 to December 27, 2014 | — |
| | — |
| | — |
| | 178,455 |
|
| Total: | 538 |
| | |
| | — |
| | |
|
On July 29, 2010,, our Board of Directors authorized a $500.0$500.0 million stock repurchase program. Our Board of Directors increasedsubsequently approved increases to the stock repurchase program of $250.0 million in the fiscal year 2010, $250.0 million in the fiscal year 2013 and $150.0 million in the fiscal year 2014 for an aggregate authorization by $250.0 million to $750.0 million on October 20, 2010.
of $1,150.0 million. During the fourth quarter of 2012,the fiscal year 2014, we repurchased 483,089did not repurchase any shares of common stock for $18.6 million under our Rule 10b5-1 Purchase Plan and in open market trading. At December 27, 2014, we had $178.5 million remaining on the authorized stock repurchase program.
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. During the quarter ended December 29, 2012, the Company acquired 164 shares for a nominal amount as a result of such withholdings.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, as of December 29, 2012, 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 | 2,001,758 |
| | $ | 42.29 |
| | 1,151,987 |
| |
| Charles River 1999 Management Incentive Plan | 1,000 |
| | $ | 31.12 |
| | 6,000 |
| |
| Inveresk 2002 Stock Option Plan | 37,624 |
| | $ | 35.92 |
| | — |
| |
| 2007 Incentive Plan | 3,820,021 |
| | $ | 37.48 |
| | 3,014,945 |
| |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| |
| Total | 5,860,403 |
| (1) | |
| | 4,172,932 |
| (2) |
____________________________
| |
(1) | None of the options outstanding under any of our equity compensation plans include rights to any dividend equivalents (i.e., a right to receive from us a payment commensurate to dividend payments received by holders of our common stock or our other equity instruments). |
| |
(2) | On March 22, 2007, the Board of Directors determined that, upon approval of the 2007 Incentive Plan, no future awards would be granted under the preexisting equity compensation plans, including the Charles River 1999 Management Incentive Plan and the Charles River 2000 Incentive Plan. Shareholder approval was obtained on May 8, 2007. Previously, on February 28, 2005, the Board of Directors terminated the Inveresk 2002 Stock Option Plan to the extent that no further awards would be granted thereunder. |
The following table provides additional information regarding the aggregate issuances under our existing equity compensation plans as of December 29, 2012: |
| | | | | | | | | |
| Category | Number of securities outstanding | | Weighted average exercise price | | Weighted average term |
| | (a) | | (b) | | (c) |
| Total number of restricted shares outstanding(1) | 934,505 |
| | $ | — |
| | — |
|
| Total number of options outstanding | 5,860,403 |
| | $ | 39.11 |
| | 3.14 |
|
____________________________
| |
(1) | For purposes of this table, only unvested restricted stock as of December 29, 2012 is included. Also for purposes of this table only, the total includes 112,503 restricted stock units granted to certain of our employees outside of the United States.
|
Comparison of 5-Year Cumulative Total Return
The following stock performance graph below compares the annual percentage change in the Company'sfive-year cumulative total shareholderstockholder return on its Common Stock during a period commencing on December 29, 2007 and ending on December 29, 2012 (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 ofour common stock, the S&P 500 Index, and the NASDAQNasdaq Pharmaceutical Index during such period. The Company hasassuming the investment of $100.00 on December 26, 2009 with dividends being reinvested. We have not paid any dividends on the Common Stock,common stock, and no dividends are included in the representation of the Company'sour performance. The stock price performance onin 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. 29, 2007 | | Dec. 27, 2008 | | Dec. 26, 2009 | | Dec. 25, 2010 | | Dec. 31, 2011 | | Dec. 29, 2012 |
| Charles River Laboratories International, Inc. | 100 |
| | 37.84 |
| | 49.85 |
| | 53.99 |
| | 41.33 |
| | 55.78 |
|
| S&P 500 Index | 100 |
| | 63.00 |
| | 79.67 |
| | 91.67 |
| | 93.61 |
| | 108.59 |
|
| NASDAQ Pharmaceutical Index | 100 |
| | 97.45 |
| | 104.75 |
| | 111.47 |
| | 123.06 |
| | 164.89 |
|
|
| | | | | | | | | | | | | | | | | |
| | December 26, 2009 | | December 25, 2010 | | December 31, 2011 | | December 29, 2012 | | December 28, 2013 | | December 27, 2014 |
| Charles River Laboratories International, Inc. | 100.00 |
| | 108.31 |
| | 82.92 |
| | 111.89 |
| | 161.80 |
| | 195.05 |
|
| S&P 500 | 100.00 |
| | 115.06 |
| | 117.49 |
| | 136.30 |
| | 180.44 |
| | 205.14 |
|
| NASDAQ Pharmaceutical | 100.00 |
| | 104.24 |
| | 117.69 |
| | 161.80 |
| | 271.53 |
| | 349.75 |
|
Item 6. Selected Consolidated Financial Data
The following selected financial data arepresented below is derived from our Consolidated Financial Statements and notes theretoaudited consolidated financial statements and should be read in conjunction with Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 and our Consolidated Financial Statementsconsolidated financial statements and notes thereto contained in Item 8., "Financial Statements and Supplementary Data"8 of this report.Annual Report on Form 10-K. Our fiscal year consists of 12 months ending on the last Saturday on, or prior to, December 31.
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| | (dollars in thousands) |
| Statement of Income Data: | | | | | | | | | |
| Net sales | $ | 1,129,530 |
| | $ | 1,142,647 |
| | $ | 1,133,416 |
| | $ | 1,171,642 |
| | $ | 1,295,299 |
|
| Cost of products sold and services provided | 733,901 |
| | 740,405 |
| | 748,656 |
| | 748,650 |
| | 796,478 |
|
| Selling, general and administrative expenses | 208,248 |
| | 198,648 |
| | 232,489 |
| | 227,663 |
| | 223,935 |
|
| Goodwill impairment | — |
| | — |
| | 305,000 |
| | — |
| | 700,000 |
|
| Asset impairment | 3,548 |
| | 7,492 |
| | 91,378 |
| | — |
| | — |
|
| Termination fee | — |
| | — |
| | 30,000 |
| | — |
| | — |
|
| Amortization of intangibles | 18,068 |
| | 21,796 |
| | 24,405 |
| | 25,716 |
| | 26,725 |
|
| Operating income (loss) | 165,765 |
| | 174,306 |
| | (298,512 | ) | | 169,613 |
| | (451,839 | ) |
| Interest income | 589 |
| | 1,353 |
| | 1,186 |
| | 1,712 |
| | 7,882 |
|
| Interest expense | (33,342 | ) | | (42,586 | ) | | (35,279 | ) | | (21,682 | ) | | (22,335 | ) |
| Other, net | (3,266 | ) | | (411 | ) | | (1,477 | ) | | 1,914 |
| | (5,154 | ) |
| Income (loss) from continuing operations before income taxes | 129,746 |
| | 132,662 |
| | (334,082 | ) | | 151,557 |
| | (471,446 | ) |
| Provision for income taxes | 27,628 |
| | 17,140 |
| | 23 |
| | 40,354 |
| | 57,029 |
|
| Income (loss) from continuing operations net of income taxes | 102,118 |
| | 115,522 |
| | (334,105 | ) | | 111,203 |
| | (528,475 | ) |
| Income (loss) from discontinued businesses, net of tax | (4,252 | ) | | (5,545 | ) | | (8,012 | ) | | 1,399 |
| | 3,283 |
|
| Net income (loss) | 97,866 |
| | 109,977 |
| | (342,117 | ) | | 112,602 |
| | (525,192 | ) |
| Net income (loss) attributable to noncontrolling interests | (571 | ) | | (411 | ) | | 5,448 |
| | 1,839 |
| | 687 |
|
| Net income (loss) attributable to common shareowners | $ | 97,295 |
| | $ | 109,566 |
| | $ | (336,669 | ) | | $ | 114,441 |
| | $ | (524,505 | ) |
| Common Share Data: | | | | | | | | | |
| Earnings (loss) per common share | | | | | | | | | |
| Basic | | | | | | | | | |
| Continuing operations attributable to common shareowners | $ | 2.12 |
| | $ | 2.26 |
| | $ | (5.25 | ) | | $ | 1.73 |
| | $ | (7.85 | ) |
| Discontinued operations | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) | | $ | 0.02 |
| | $ | 0.05 |
|
| Net income (loss) attributable to common shareowners | $ | 2.03 |
| | $ | 2.16 |
| | $ | (5.38 | ) | | $ | 1.75 |
| | $ | (7.80 | ) |
| Diluted | | | | | | | | | |
| Continuing operations attributable to common shareowners | $ | 2.10 |
| | $ | 2.24 |
| | $ | (5.25 | ) | | $ | 1.72 |
| | $ | (7.85 | ) |
| Discontinued operations | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) | | $ | 0.02 |
| | $ | 0.05 |
|
| Net income (loss) attributable to common shareowners | $ | 2.01 |
| | $ | 2.14 |
| | $ | (5.38 | ) | | $ | 1.74 |
| | $ | (7.80 | ) |
| Other Data: | | | | | | | | | |
| Depreciation and amortization | $ | 81,275 |
| | $ | 85,230 |
| | $ | 93,649 |
| | $ | 89,962 |
| | $ | 86,851 |
|
| Capital expenditures | 47,534 |
| | 49,143 |
| | 42,860 |
| | 79,853 |
| | 198,642 |
|
| Balance Sheet Data (at end of period): | | | | | | | | | |
| Cash and cash equivalents | $ | 109,685 |
| | $ | 68,905 |
| | $ | 179,160 |
| | $ | 182,574 |
| | $ | 243,592 |
|
| Working capital | 143,005 |
| | 209,046 |
| | 293,114 |
| | 345,828 |
| | 317,141 |
|
| Goodwill, net | 208,609 |
| | 197,561 |
| | 198,438 |
| | 508,235 |
| | 457,578 |
|
| Total assets | 1,586,344 |
| | 1,558,320 |
| | 1,733,373 |
| | 2,204,093 |
| | 2,141,413 |
|
| Total debt and capital lease obligations | 666,520 |
| | 717,945 |
| | 700,852 |
| | 492,832 |
| | 515,332 |
|
| Total shareowners' equity | 600,805 |
| | 525,583 |
| | 687,423 |
| | 1,375,243 |
| | 1,241,286 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | 12/27/2014 | | 12/28/2013 | | 12/29/2012 | | 12/31/2011 | | 12/25/2010 |
| | (in thousands) |
| Statement of Income Data: | | | | | | | | | |
| Total revenue | $ | 1,297,662 |
| | $ | 1,165,528 |
| | $ | 1,129,530 |
| | $ | 1,142,647 |
| | $ | 1,133,416 |
|
Goodwill impairment (1) | — |
| | — |
| | — |
| | — |
| | 305,000 |
|
Asset impairment (1) | 312 |
| | 4,202 |
| | 3,548 |
| | 7,492 |
| | 91,378 |
|
Termination fee (2) | — |
| | — |
| | — |
| | — |
| | 30,000 |
|
| Income (loss) from continuing operations, net of income taxes | 129,924 |
| | 105,416 |
| | 102,118 |
| | 115,522 |
| | (334,105 | ) |
| Loss from discontinued operations, net of income taxes | (1,726 | ) | | (1,265 | ) | | (4,252 | ) | | (5,545 | ) | | (8,012 | ) |
| Common Share Data: | | | | | | | | | |
| Earnings (loss) per common share from continuing operations: | | | | | | | | | |
| Basic | $ | 2.76 |
| | $ | 2.18 |
| | $ | 2.12 |
| | $ | 2.26 |
| | $ | (5.25 | ) |
| Diluted | $ | 2.70 |
| | $ | 2.15 |
| | $ | 2.10 |
| | $ | 2.24 |
| | $ | (5.25 | ) |
| Other Data: | | | | | | | | | |
| Depreciation and amortization | $ | 96,445 |
| | $ | 96,636 |
| | $ | 81,275 |
| | $ | 85,230 |
| | $ | 93,649 |
|
| Capital expenditures | 56,925 |
| | 39,154 |
| | 47,534 |
| | 49,143 |
| | 42,860 |
|
| Balance Sheet Data (at end of period): | | | | | | | | | |
| Cash and cash equivalents | $ | 160,023 |
| | $ | 155,927 |
| | $ | 109,685 |
| | $ | 68,905 |
| | $ | 179,160 |
|
| Working capital | 310,728 |
| | 305,516 |
| | 143,005 |
| | 209,046 |
| | 293,114 |
|
| Goodwill | 321,077 |
| | 230,701 |
| | 208,609 |
| | 197,561 |
| | 198,438 |
|
| Total assets | 1,885,192 |
| | 1,632,756 |
| | 1,586,344 |
| | 1,558,320 |
| | 1,733,373 |
|
| Total debt and capital lease obligations | 777,862 |
| | 663,789 |
| | 666,520 |
| | 717,945 |
| | 700,852 |
|
| Total equity attributable to common shareholders | 672,203 |
| | 640,984 |
| | 600,805 |
| | 525,583 |
| | 687,423 |
|
____________________________
| |
| (1) | The 2010 impairment charges were primarily related to our then Preclinical Services business segment, which is now included in our DSA business segment. |
| |
| (2) | The fee was the result of the termination of the proposed WuXi Pharmatech (Cayman) Inc. acquisition. |
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 our financial condition and results of operations. The Management's Discussion and Analysis is a supplement to, anddiscussion should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the accompanying notesforward-looking statements. Factors that might cause future results to differ materially from those projected in the consolidated financial statements.forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Certain percentage changes from period over period may not recalculate due to rounding.
Overview
We are a leading global providerfull service, early-stage contract research organization (CRO). For nearly 70 years, we have been in the business of solutions that advanceproviding the drug discoveryresearch models required in research and development process, including research modelsof new drugs, devices, and associated services and outsourced preclinical services. We provide our products and services to global pharmaceutical companies and biotechnology companies, as well as government agencies, leading hospitals and academic institutions throughout the world in order to bring drugs to market faster and more efficiently. Wetherapies. Over this time, we have built upon our original core competency of in vivo biology, including laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of preclinicaldiscovery and safety assessment services, - both GLP (GoodGood Laboratory Practice)Practice (GLP) and non-GLP, - which address drug discoverythat are able to support our clients from target identification through preclinical development. We also provide a suite of products and development.services to support our clients’ manufacturing activities. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increaseincreases speed to market.
Our client base includes primarily of all of the major global pharmaceutical companies, many biotechnology companies, contract research organizations, agricultural and chemical companies, life science companies, veterinary medicine companies, contract manufacturing organizations, medical device companies, diagnostic and other commercial entities, as well as leading hospitals, academic institutions and government agencies around the world. We have been in business for over 65 years and currently operate approximately 6560 facilities in 1517 countries worldwide.worldwide, which numbers exclude our Insourcing Solutions (IS) sites.
Large
Business Trends
The demand for our outsourced services increased in the fiscal year 2014, as did demand for products and services to support our clients’ manufacturing activities. Our pharmaceutical and biotechnology clients continued to intensify their use of strategic outsourcing to improve their operating efficiency and access capabilities that they do not maintain internally. Many of our large biopharmaceutical clients are beginning to refocus on their drug discovery and early-stage development efforts after, a period of stronger emphasis on delivering late-stage programs to bring new drugs to market. In addition, mid-tier biopharmaceutical clients benefited from a resurgence in the biotechnology funding environment in the fiscal year 2014, from both capital markets and partnering with large biopharmaceutical companies. Academia has also benefited from partnering activities, as large biopharmaceutical companies have been undergoing significant change forincreasingly utilized academic research capabilities to broaden the last few years as they endeavor to improve the productivityscope of their drug development pipelines,research activities.
The primary result of these trends was improved demand for our discovery and atsafety assessment services in the same time, streamline their infrastructuresfiscal year 2014, particularly from mid-tier clients. This improvement led to capacity continuing to fill in our safety assessment business, in which utilization is beginning to approach optimal levels. Our targeted sales efforts also generated continued market shares gains. Price remained competitive, but trends are stable to slightly improving. We believe our scientific expertise, quality, and responsiveness remain key criteria when our clients make the decision to outsource to us. In order to improve efficiencyaccommodate this increased demand and reduce operating costs. Our clients' efforts have had an unfavorable impact on our operations as a result of: measured research and development spending by major pharmaceutical and biotechnology companies; delays in customer decisions and commitments; tight cost constraints and the resultant pricing pressure, particularly in viewmaintain responsiveness to clients’ needs, we opened small amounts of excessnew capacity in the contract research industry; afiscal year 2014 at existing facilities and continue to strategically evaluate further capacity additions.
Our clients’ intensified focus on late-stage clinical testing as customers acceleratethe earliest stages of their efforts to bring drugs to market in the face of expiration of patents on branded drugs; decreased funding for biopharmaceutical companies; and the impact of healthcare reform initiatives. In addition, consolidation in the pharmaceutical and biotechnology industrypipelines has affected demand for our products and services. All of these ongoing factors continue to contribute to demand uncertainty and are expected to impact future sales.
Over the last two years, our market for goods and services appears to have continued to stabilize. As part of our clients' efforts to improve pipeline productivity, pharmaceutical and biotechnology companies are emphasizing efficacy testing in order to eliminate molecules from the pipeline earlier in the drug development process. This trend isbeen visible in increasing demand for our non-GLP in vivo pharmacologydiscovery services, and drug metabolismthe willingness to outsource new areas of their research programs. To address these emerging needs and pharmacokinetics services. We continue to anticipate that our clients will reduce their internal capacity through closure of underutilized facilities and increase their use of these outsourced servicesmove further upstream in the future, because utilizing outsourced services enables them to create a flexible drug research and development modelcontinuum, we acquired the Early Discovery businesses of Argenta, BioFocus, ChanTest, and VivoPath in the fiscal year 2014, which improves operating efficiency and reduces costs.
As our clients increase focus on strategic outsourcing, our scientific expertise, operating efficiency, informational technology platforms and ability to meet each client's individual needs strongly positionshas enabled us to compete for business. We continuework with clients at the earliest stage of the discovery process. Our full service, early-stage portfolio has led to build momentum by formalizing the expansion of our strategic relationships with our clients. Last year, we signed a large, five-year agreement with a leading global pharmaceutical company to become the client's primary in vivo biology partner. During 2012, a large pharmaceutical company selected us as its preferred strategic partner for outsourced regulated safety assessment and development DMPK (drug metabolism and pharmacokinetics) for a three-year period. We won theseadditional client discussions regarding strategic relationships in a highly competitive marketplace becausethe fiscal year 2014, where clients seek to outsource larger portions of our broad portfolio of productstheir early-stage drug research programs to us.
While demand for research models and certain services scientific expertise and ability to develop a customized in vivo biology program to support our client's drug development efforts. Price was a factorremained constrained in the bid butfiscal year 2014 as clients’ continued to consolidate infrastructure and seek greater pipeline productivity, we believe our scientific expertise was a key criterion. Our ongoing discussions concerning additional strategic relationships continue as our clients focus on the logistics of outsourcing. Additionally, we continue to expand our relationships with our mid-tier and academic clients by focusing our sales and marketing efforts in order to achieve market share gains.
We believeremain confident that the long-term drivers forof our business as a whole will primarily emerge from our clients' continued demand for discovery and safety assessment services and research models and services, and both GLP and non-GLP in vivo biology services, which areremain essential to the early-stage drug development process. However, presently it is challenging to predict the timing associated with these drivers.research process, as well as our products and services that support our clients’ manufacturing activities, including endotoxin and microbial detection.
We continue to focus on our four key initiatives designed to allow us to drive profitable growth and to maximize value for shareholders, and thus better position ourselves to operate successfully in the current and future business environment. These four initiatives are:
Acquisitions
ImprovingDuring the consolidated operating margin. We continue to aggressively manage our cost structure and drive operating efficiencies, which are expected to generate improvement in our operating margins. We have already implemented significant actions to reduce costs during the last two years to manage challenging industry-wide preclinical market conditions. Wefiscal year 2014, we continued to selectively adjustmake a number of strategic acquisitions designed to expand our cost structure by headcount reductionsportfolio of services to support the drug discovery and other cost initiativesearly-stage development continuum and position us as a market leader in the outsourced discovery services market. The 2014 acquisitions include:
In April 2014, we acquired 100% of the shares of the United Kingdom (U.K.)-based entities Argenta and BioFocus, and certain related Dutch assets, to form the core of our Early Discovery business. Through this transaction, we enhanced our position as a full service, early-stage CRO, with integrated in vitro and in vivo capabilities from target discovery through preclinical development. The preliminary purchase price of the acquisition was $183.1 million, net of cash acquired, and included contingent consideration.
In June 2014, we acquired substantially all of the assets of VivoPath LLC (VivoPath), a discovery service company. The preliminary purchase price was $2.3 million, including contingent consideration that could become payable over the consolidationnext three years based on the achievement of certain RMS production facilities commencing duringrevenue growth targets.
In October 2014, we acquired ChanTest Corporation (ChanTest), a leading provider of ion channel testing services to the thirdpharmaceutical and biotech industry. The preliminary purchase price was $52.1 million, net of cash acquired, and included contingent consideration.
Segment Reporting
In the second quarter of 2012.2014, following our acquisition of Argenta and BioFocus, we revised our reportable segments to ensure alignment with our view of the business. We reviewed the new and existing markets addressed by the business, the recently revised go-to-market strategy, long-term operating margins, and the discrete financial information available to our Chief Operating Decision Maker, and considered how our businesses aggregated based on these qualitative and quantitative factors. Based on this review, we identified three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). We reported segment results on this basis for the current period and retrospectively for all comparable prior periods.
The revised reportable segments are as follows:
|
| | |
| Research Models and Services | Discovery and Safety Assessment | Manufacturing Support |
| Research Models | Discovery Services (2) | Endotoxin and Microbial Detection |
Research Model Services (1) | Safety Assessment | Avian Vaccine Services |
| | Biologics Testing Solutions |
Improving free cash flow generation. We believe we have adequate capacity to support revenue growth in both business segments without significant additional investment for expansion. Capital expenditures were $47.5 million(1) in the 2012 and we expect capital expenditures to be approximately $50.0 million for 2013.
Disciplined investment in growth businesses. We continue to maintain a disciplined focus on deployment of capital, investing in those areas of our existing business which will generate the greatest sales growth potential and profitability, such asResearch Model Services includes Genetically Engineered Models and Services (GEMS), Research Animal Diagnostic Services (RADS), and IS.
(2)Discovery Research Services (DRS) and Endotoxin and Microbial Detection (EMD, formerly In Vitro) products and services. Duringincludes both the third quarter of 2012 we acquired Accugenix, Inc., a global provider of cGMP-compliant contract microbial identification testing, which strengthens our EMD portfolio of products and services by providing clients with state-of-the-art microbial detection services for manufacturing in the biopharmaceutical, medical device, nutraceutical and consumer care industries. In January 2013, we completed our acquisition of 75% of Vital River, the premier commercial provider of research models and related services in China. Through this acquisition, we now provides high-quality research models and associated services to the emerging China market for drug discovery and development.
Also in 2012 we opened our new biomedical diagnostic testing facility in Wilmington, Massachusetts. The state-of-the-art, 60,000-square-foot R&D services facility expands our diagnostic capabilities for research model health monitoring, clinical chemistry, hematology, biomarker assay development and immunoassay services. In addition, in 2012 we moved to a larger DRS facility in Finland to support our growth.
Returning value to shareholders. We are repurchasing our stock with the intent to drive immediate shareholder value and earnings per share accretion. During 2012Early Discovery and 2011, we repurchased 1.7 millionIn Vivo Discovery businesses. Early Discovery includes Argenta, BioFocus, and 8.4 million shares, respectively. Our weighted average shares outstanding for year ending December 29, 2012 have decreased to 48.4 million shares compared to 51.3 million shares for year ending December 31, 2011. As of December 29, 2012, we had $54.8 million remaining on our $750 million stock repurchase program.
Total net sales in 2012 were $1,129.5 million, a decrease of 1.1% from $1,142.6 million in 2011. The sales decrease was due primarily to the effect of foreign currency translation which had a negative impact on sales of 2.0%. Due to the timing of our fiscal year end, we periodically recognize a "53rd week" in a fiscal year. The 53rd week in 2011 negatively impacted our 2012 sales growth by 1.1%. Our gross margin decreased to 35.0% of net sales in 2012 compared to 35.2% of net sales in 2011, due primarily to the impact of lower sales and costs associated with the consolidation of certain RMS Europe operations.ChanTest.
Our operating income was $165.8 million for 2012 compared to operating income of $174.3 million for 2011. Income from continuing operations, net of tax, was $102.1 million for 2012 compared to $115.5 million for 2011. The decrease in income from continuing operations was primarily due to a prior year life insurance gain and the prior year release of a valuation allowance on a tax loss related to the disposition of our Phase I clinical business. For 2012, diluted earnings per share attributable to common shareowners was $2.01 compared to a diluted loss per share of $2.14 in 2011. Net income attributable to common shareowners was $97.3 million in 2012, compared to $109.6 million in 2011.
We report two segments: Research Models and Services (RMS) and Preclinical Services (PCS), which reflects the manner in which our operating units are managed.
Our RMS segment which represented 61.5% of net sales in 2012, includes three categories:the Research Models and Research Model Services and EMD.businesses. Research Models includes the commercial production and sale of small and large research models, as well as avian products.the supply of large research models. Research Model Services include fourincludes three business units: GEMS, RADS, DRS,which performs contract breeding and Insourcing Solutions (IS). Net sales for the RMS segment decreased 1.5% compared to 2011, primarily driven by the effect of foreign currency translation which had a negative impact on sales of 2.5%. The RMS gross margin and operating margin were essentially flat at 42.2% and 29.1%, due mainly to the impact of cost savings offset by costsother services associated with the consolidationgenetically engineered research models; RADS, which provides health monitoring and diagnostics services related to research models; and IS, which provides management of certain RMS Europe operations.
our clients’ research operations (including recruitment, training, staffing and management services). Our PCSDSA segment which represented 38.5% of net sales in 2012, includes services required to take a drug through the early development process including DRS,discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated safety assessment services. Our Manufacturing segment includes Endotoxin and biopharmaceutical services. Sales for this segment decreased 0.6%Microbial Detection (EMD), which includes from 2011, driven by unfavorable foreign currency, which decreased sales growth by 1.1%. partially offset by increased demand for preclinical services. We experienced a decrease in the PCS gross margin to 23.6%vitro from 24.0%(non-animal) lot-release testing products and microbial detection and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics and devices; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free fertile chicken eggs and chickens.
Prior to recasting the reportable segments, the businesses were reported in 2011, due mainlytwo segments as follows:
|
| |
| Research Models and Services | Preclinical Services |
Research Models (3) | Discovery Services |
Research Model Services (4) | Safety Assessment |
| Endotoxin and Microbial Detection | Biologics Testing Solutions |
to impairments in 2011(3) Research Models included Avian Vaccine Services.
(4) Research Model Services included GEMS, RADS, IS and cost savings in 2012 partially offset byDiscovery Research Services. As part of the impact of sales mix and continued pricing pressure. The 2012 operating marginsegment revisions, the former Discovery Research Services was been folded into our Discovery Services business, previously located under the Preclinical Services segment.8.0% compared to 5.7% in 2011, mainly due to asset impairments in 2011.
Critical Accounting Policies and Estimates
PreparationOur discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S.). The preparation of these financial statements requires managementus to use judgment when makingmake certain estimates and assumptions that are involved in preparing estimates thatmay affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimatesreported periods 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 itsrelated disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and on various other factors that are believed to be reasonable under the circumstances, thecircumstances. Actual results of which form the basis for making judgments about the carrying values of assets and liabilitiesmay differ from our estimates under different assumptions or conditions.
We believe 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.
We considerour application of the following accounting policies, each of which require significant judgments and estimates importanton the part of management, are the most critical to aid in fully understanding and evaluating our operating results andreported financial condition. For additionalresults. Our significant accounting policies see Notes to Consolidated Financial Statements-Note 1. Descriptionare more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies.Policies”, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Valuation
We believe the following represent our critical accounting policies and Impairmentestimates used in the preparation of our financial statements:
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, our price to the customer is fixed or determinable, and collectibility is reasonably assured.
Service revenue is generally evidenced by client contracts, which range in duration from a few weeks to a few years and typically take the form of an agreed upon rate per unit or fixed fee arrangements. Such contracts typically do not contain acceptance provisions based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate per unit contracts is recognized as services are performed, based upon rates specified in the contract. In cases where performance spans reporting periods, revenue of fixed fee contracts is recognized as services are performed, measured on the ratio of outputs or performance obligations completed to the total contractual outputs or performance obligations to be provided. Changes in estimated effort to complete the fixed fee contract are reflected in the period in which the change becomes known. Changes in scope of work are common, especially under long-term contracts, and generally result in a change in contract value. Once the parties have agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and revenue is typically recognized as described above.
Most contracts are terminable by the client, either immediately or upon notice. These contracts often require payment to us of expenses to wind down the project, fees earned to date or, in some cases, a termination fee. Such payments are included in revenues when earned.
We recognize product revenue, net of allowances for estimated returns, rebates and discounts, when title and risk of loss pass to customers. When we sell equipment with specified acceptance criteria, we assess our ability to meet the acceptance criteria in order to determine the timing of revenue recognition. We would defer revenue until completion of customer acceptance testing if we are not able to demonstrate the ability to meet such acceptance criteria.
Income Taxes
We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and the effects of tax planning strategies. Our estimates of future taxable income include,
among other items, our estimates of future income tax deductions related to the exercise of stock options. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.
We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
As of December 27, 2014, our non-U.S. subsidiaries’ undistributed foreign earnings included in consolidated retained earnings aggregated $271.0 million. All undistributed foreign earnings of non-U.S. subsidiaries, exclusive of earnings that would result in little or no net income tax expense or which were previously taxed under current U.S. tax law, are reinvested indefinitely in operations outside the U.S. This determination is made on a jurisdiction by jurisdiction basis and takes into account the liquidity requirements in both the U.S. and within our foreign subsidiaries. If we decide to repatriate funds in the future to execute our growth initiatives or to fund any other liquidity needs, the resulting tax consequences would negatively impact our results of operations through a higher effective tax rate and dilution of our earnings.
Goodwill and Indefinite-Lived Intangible Assets
GoodwillWe use assumptions and other indefinite-lived intangibles are not amortized and are reviewed for impairment at least annually. Valuation of goodwill requires significant judgment. Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed in a business acquisition. Acombination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, is assigned to intangible assets and goodwill. Assigning value to intangible assets requires that wethe use of significant judgment in determiningwith regard to (i) the fair valuevalue; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible assetsasset 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-livedintangible assets. Typically, key assumptions include projected revenue and expense levels used in establishing the fair valueprojections of business acquisitionscash flows that arise from identifiable intangible assets of acquired businesses 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 lead to changes in amortization expense recorded in our future financial statements.
We performreview definite-lived intangible assets for impairment when indication of potential impairment exists, such as a testsignificant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset.
We evaluate goodwill and indefinite-lived intangible assets for goodwill impairment annually, during the fourth quarter, and wheneverwhen events occur or circumstances make it likelychange that may reduce the fair value of a reporting unit has fallenthe asset below its carrying amountamount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts. Estimates of future cash flows require assumptions related to determine if impairment exists. Our annualrevenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill impairment assessment has historically been completed in the fourth quarter.and indefinite-lived intangible assets for impairment.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, otherwise known as “Step 0”. Step 0 provides entities with
We have the option to perform afirst assess qualitative assessmentfactors to determine whether it is “more likely than not”necessary to perform the two-step goodwill impairment test. If we elect this option and believe, as a result of the qualitative assessment, that it is more-likely-than-not that the reporting unit'scarrying value of goodwill is not recoverable, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, we may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, we compare the fair value is less than its goodwill. The qualitative factors may include macroeconomic conditions, industry and market conditions, cost factors, overall financial performanceof our reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, events affectingthen the second step of the impairment test is performed in order to determine the implied fair value of our goodwill. If the carrying value of the reporting units, share price, etc.unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
As management considered whether applying purely qualitative assessment of goodwill would be sufficient (i.e. applying Step 0 without quantitative support31
In the fiscal years 2014, 2013 and bypassing Step 1), management reviewed2012, we performed the implied “cushion” for each reporting unit asfirst step of the prior year's goodwill assessment. For the PCS reporting unit, given the relatively low cushion of approximately 15% and the preliminary 5-year strategic plan, management concluded that a quantitative analysis would be required. Therefore, management decided to proceed to Step 1 for all reporting units.
Thetwo-step goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing eachtest for our reporting unit's estimated fair value to its carrying value, including goodwill.units. Fair value iswas determined by using a weighted combination of a market-based approach and an income approach, as this combination iswas deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilizeutilized information about our companyCompany 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 determinedetermined 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
Our 2014, 2013 and 2012 impairment test indicated that goodwill and other intangible assets were not impaired.
In 2014, we revised our reportable segments to align with our new view of the business following the Argenta and BioFocus acquisition. As a result of this reorganization, goodwill was allocated from our prior reportable segments to our new reportable segments based on the fair value of aeach business group within its original 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 our internal plans. 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 consideredrelative 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, if required, measures the goodwill impairment by calculating 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 the manner in which goodwill is calculated in a business combination: by measuring the excess of the estimated fair value of the reporting unit 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,that reporting unit. In addition, we utilize appraisalscompleted an assessment of any potential goodwill impairment for all reporting units immediately prior to the fair value of propertyreallocation and equipment and valuations of certain intangible assets, including client relationships. determined that no impairment existed.
Valuation and Impairment of Long-Lived Assets
We assess the carrying value ofLong-lived assets to be held and used, including property, plant and equipment, and definite-lived intangible assetsare reviewed for impairment whenever events or changes in circumstances indicate that the carrying valueamount of the assets or asset group may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following:
significant underperformance relative to expected historical or projected future operating results;
significant negative industry or economic trends; or
significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, net of any sublease income, if applicable, and its eventual disposition. Should we determineIn the event that such cash flows are not expected to be sufficient to recover the carrying valueamount of held-for-use long-livedthe assets, may not be recoverable, we willthe assets are written-down to their fair values. We 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 model. 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. We may also estimate fair value based on market prices for similar assets, as appropriate. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets. During the fiscal year 2014, we did not record any significant impairment charges to long-lived assets.
Long-lived asset groups may be classified as held-for-sale when the following conditions are met: we have committed to a plan to sell the asset group
Pension and it is unlikely that significant changes will be made to the plan; the asset group is available for immediate sale in its present conditionOther Retiree Benefit Plans
Several of our U.S. and it is probable that the sale will be completed within one year;non-U.S. subsidiaries sponsor defined benefit pension and an active program to locate a buyer has been initiated and the asset group is being marketed at a sale price that is reasonable in relation to its current fair value. Should we determine that the carrying value of held-for-sale long-lived assets exceeds its fair value, we will measure any impairment based on this difference. Subsequent adjustments to the carrying amount of held-for-sale assets based on changes in fair value are recorded but only to the extent of the carrying amount of the asset group when it entered the held-for-sale category.
Revenue Recognition
other retiree benefit plans. We recognize revenue related tothe funded status of our products, which include research models, EMD technologydefined benefit pension and vaccine support products, when persuasive evidence ofother postretirement benefit plans as an arrangement exists, generally in the form of client purchase orders, title and risk of loss have transferred, which occurs upon delivery of the products, the sales priceasset or liability. This amount is fixed or determinable and collectability is reasonably assured. These recognition criteria are met at the time the product is delivered to the client's site. Product sales are recorded net of returns upon delivery. For large models, in some cases clients pay in advance of delivery of the product. These advances are deferred and recognizeddefined as revenue upon delivery of the product.
Our service revenue is generally evidenced by client contracts. 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 that we are engaged to perform. These performance criteria are established by our clients and do not contain acceptance provisions based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate per unit 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 the total estimated costs to complete procedures specified by clients in the form of study protocols. In general, such amounts become billable in accordance with predetermined payment schedules, but are recognized as revenue as services are performed. Revisions in estimated effort to complete the contract are reflected in the period in which the change became known.
Deferred and unbilled revenue are 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. Conversely, in some cases, revenue is recorded based on the level of service performed in advance of billing the client and recognized as unbilled receivable. As of December 29, 2012, based on the difference between the estimated levelfair value of services performedplan assets and the billing arrangements defined bybenefit obligation. We measure plan assets and benefit obligations as of the date of our service contracts, we recorded unbilled revenuefiscal year end.
The cost and obligations of $32.5 million and deferred revenue of $56.4 million in our consolidated balance sheet.
Service revenue from our businesses can be categorized as follows:
Safety assessment services provide highly specialized toxicology studies to evaluate the safety and toxicity of new pharmaceutical molecules and materials used in medical devices. It also includes pathology services, which provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. The safety assessment services arrangements typically range from one to six months but can range up to approximately 24 months in length. These agreements are primarily negotiated for a fixed fee and also include unit-based pricing.
RADS services monitor and analyze the health and genetics of research models used in research protocols. These laboratory servicethese arrangements are generally completed within a one-month period and are also of a fixed fee nature.
GEMS services include validating, maintaining, breeding and testing research models for biomedical research activities. These services are long-term and are recognized as revenue monthly based on agree-upon fixed price per unit.
Discovery Research Services (DRS), which provides non-GLP efficacy studies and other services required as drugs progress through the development pipeline, range between one month and five years. Revenue for these services is recognized as the services are performed.
Insourcing Solutions (IS) services provides management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations. These services are billed and recognized as revenue at a fixed rate per hour.
EMD services provide contract microbial identification testing. These services are generally completed in less than 30 days and are billed, and recognized as revenue, upon completion and billing.
Pension Plan Accounting
Our defined benefit pension 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 ofmany assumptions to estimate the total benefits ultimately payable to employees and allocate this cost tothat the service periods. The keyemployee earns while working, the amount of which cannot be completely determined until the benefit payments cease. Major assumptions used to calculate pension costs are determined and reviewed annually by management after consulting with outside investment advisers and actuaries. The key assumptionsin the accounting for these employee benefit plans include the discount rate, the expected return on plan assets, discount rate, 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 assumed discount rate, which is intended to be the actual rate at which benefits could effectively be settled, is adjustedincrease in employee compensation levels. Assumptions are determined based on the change in the long-term bond yieldour data and appropriate market indicators, and are evaluated each year as of the plans’ measurement date. AsShould any of December 29, 2012,these assumptions change, they would have an effect on net periodic pension costs and the weighted‑average discount rate for our pension plans was 4.13%. As of December 29, 2012, we had a pension liability of $44.4 million.unfunded benefit obligation.
The assumed expected long-term rate of return on plan assets isreflects the average returnrate of earnings expected on the funds invested, or to be invested, to provide futurefor the benefits to pensionincluded in the projected benefit obligations. In determining the expected long-term rate of return on plan participants. This includes consideringassets, we consider the asset allocation and expected returns likely to be earned over the liferelative weighting of the plan. If the actual return is different from the assumed expected return in plan assets, the differencehistorical performance of total plan assets and individual asset classes and economic and other indicators of future performance.
The discount rate reflects the rate we would have to pay to purchase high-quality investments that would provide cash sufficient to settle our current pension obligations. In the fiscal year 2014, as part of our annual review of assumptions for our U.S. pension and retiree benefit plans, we selected the discount rate based on a cash-flow matching analysis using Towers Watson’s proprietary Bond:Link tool. Prior to the fiscal year 2014, we employed a cash-flow matching methodology, which
used the spot yield curve underlying the Citigroup Index. The refined estimation technique permits us to more closely match cash flows to the expected payments to participants than would be amortized overpossible with the previously used yield curve model. We believe such a periodrefinement results in an estimate of approximately 15the discount rate that more accurately reflects the settlement value for plan obligations than the yield curve methodology used in prior years, as it provides the ability to 20 years. review the quality and diversification of the portfolio to select the bond issues that would settle the obligation in an optimal manner. This refinement reduced our benefit obligations as of December 27, 2014 by $5.5 million.
The estimated effectrate of a 1.0% change incompensation increase reflects the expected rateannual salary increases for the plan participants based on historical experience and the current employee compensation strategy.
In the fiscal year 2014, for our U.S. plans, we adopted new mortality tables (RP-2014) and a new mortality improvement scale (MP-2014), which increased our benefit obligations by $6.0 million as of return would increase or decrease pension expenseDecember 27, 2014. We previously used the RP-2000 mortality tables with mortality improvements projected using Scale AA to 2021 for annuitants and to 2029 for non-annuitants. In addition, for our U.K. plans, the mortality table was updated to S2 Series (SAPS) using the CMI 2013 core projection with a 1.25% per annum long-term mortality improvement. This update increased our benefit obligations by $2.4 million.$1.9 million as of December 27, 2014. Prior to the fiscal year 2014, we used the S1 Series (SAPS) mortality table and the CMI 2009 core projection with a 1.25% per annum long-term improvement. The new mortality information reflects improved life expectancies and an expectation that the trend will continue.
Stock-based Compensation
We recognize compensation expense for all stock-based payment awards madegrant stock options, restricted stock, restricted stock units, and performance share units (PSUs) to employees, and directors including employee stock options and restricted stock awards based on estimated fair values. Accordingly,to non-employee directors under stock-based compensation costplans. We make certain assumptions in order to value and record expense associated with awards made under our stock-based compensation arrangements. Changes in these assumptions may lead to variability with respect to the timing and amount of expense we recognize in connection with share-based payments.
Determining the appropriate valuation model and related assumptions requires judgment. The fair value of stock options granted is measured at grant date,calculated using the Black-Scholes model and the fair value of PSUs is calculated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others.
Determining the appropriate amount to expense based on the estimated fair valueanticipated achievement of PSU’s performance targets requires judgment, including forecasting the award andachievement of future financial targets. The estimate of expense is recognized as expenserevised periodically based on a straight-line basisthe probability of achieving the required performance targets. The cumulative impact of any changes to our estimates is reflected in the period of change.
We also estimate forfeitures over the requisite service period which is generally the vesting period. During the year ended December 29, 2012, we recognized $21.9 million of stockwhen recognizing share-based 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 forfeituresrates and forward looking factors; these estimates are updated on a quarterly basisadjusted to reflectthe extent that actual 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 optionsdiffer, or are expected to be outstandingmaterially differ, from our estimates.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, refer to Note 1, “Description of Business and is estimated based on the historical exercise and post-vesting cancellation patternsSummary 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.
We record deferred tax assets for stock-based awards based on the amount of stock-based compensation recognized in our Consolidated Statements of Income at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assets and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reducedSignificant Accounting Policies” to zero, then subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits is computed in accordance with the long form method.
Income Taxes
As part of the process of preparing our consolidated financial statements we estimate our income taxesincluded 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 financial reporting purposes. We recognize deferred tax assets and liabilities for the temporary differences using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We assess the realizability of our deferred tax assets based upon the weight of available evidence both positive and negative. To the extent we believe that recovery is not likely, we establish a valuation allowance. In the event that actual results differ from our estimates or we adjust our estimates in the future, we may need to increase or decrease income tax expense which could impact our financial position and results of operations.this Annual Report on Form 10-K.
As of December 29, 2012, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $155.1 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 additional U.S. Federal and state income taxes and foreign income and withholding taxes, which could be material. It is our policy to indefinitely reinvest the earnings of our non-U.S. subsidiaries unless they can be repatriated in a manner that generates a tax benefit or an unforeseen cash need arises in the United States and the earnings can be repatriated in a manner that is substantially tax free. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable due to the complexities with the hypothetical calculation. Additionally, the amount of the liability is dependent upon the circumstances existing if and when the remittance occurs.
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 current and deferred tax provision is based upon enacted tax rates in effect for the current and future periods. Any significant fluctuation in tax rates or changes in tax laws and regulations or changes to interpretation of existing tax laws and regulations could cause our estimate of taxes to change resulting in either increases or decreases in our effective tax rate.
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 based upon 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. Resolutions 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 2014 Compared to Fiscal Year 2013
Revenue
|
| | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of products sold and services provided | 65.0 | % | | 64.8 | % | | 66.1 | % |
| Selling, general and administrative expenses | 18.4 | % | | 17.4 | % | | 20.5 | % |
| Goodwill impairment | — | % | | — | % | | 26.9 | % |
| Asset impairments | 0.3 | % | | 0.7 | % | | 8.1 | % |
| Termination fee | — | % | | — | % | | 2.6 | % |
| Amortization of other intangibles | 1.6 | % | | 1.9 | % | | 2.2 | % |
| Operating income (loss) | 14.7 | % | | 15.3 | % | | (26.3 | )% |
| Interest income | 0.1 | % | | 0.1 | % | | 0.1 | % |
| Interest expense | 3.0 | % | | 3.7 | % | | 3.1 | % |
| Provision for income taxes | 2.4 | % | | 1.5 | % | | — | % |
| Discontinued operations | (0.4 | )% | | (0.5 | )% | | (0.7 | )% |
| Noncontrolling interests | (0.1 | )% | | — | % | | 0.5 | % |
| Net income (loss) attributable to common shareowners | 8.6 | % | | 9.6 | % | | (29.7 | )% |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | | | |
| | December 27, 2014 | | December 28, 2013 | | $ Change | | % Change | | Impact of FX |
| | (in millions, except percentages) |
| Research models and services | $ | 507.4 |
| | $ | 511.3 |
| | $ | (3.9 | ) | | (0.8 | )% | | (0.7 | )% |
| Discovery and safety assessment | 538.2 |
| | 432.4 |
| | 105.8 |
| | 24.5 | % | | 0.3 | % |
| Manufacturing support | 252.1 |
| | 221.8 |
| | 30.3 |
| | 13.7 | % | | 0.2 | % |
| Total revenue | $ | 1,297.7 |
| | $ | 1,165.5 |
| | $ | 132.2 |
| | 11.3 | % | | (0.1 | )% |
Segment Operations
The following tables show the net sales and the percentage contribution of each of our reportable segmentsRevenue for the pastfiscal year 2014 increased $132.2 million, or 11.3%, compared with the fiscal year 2013. Reported revenue decreased due to foreign currency translation by $1.7 million, or 0.1%, when compared to the prior period.
RMS revenue decreased $3.9 million due to lower research models services and research models revenue, primarily in Japan and Europe. Additionally, the fiscal year 2013 includes a $1.5 million revenue adjustment related to inaccurate billings with respect to certain government contracts. See Note 12, "Commitments and Contingencies."
DSA revenue increased $105.8 million due to an increase in the Discovery Services business, which includes the Argenta and BioFocus acquisition that contributed $71.4 million to revenue growth, as well as higher revenue in the Safety Assessment business.
Manufacturing revenue increased $30.3 million, driven by broad-based growth across all three years. They also show costbusinesses, particularly the EMD business.
Cost of Products Sold and Services Provided
|
| | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | December 27, 2014 | | December 28, 2013 | | $ Change | | % Change |
| | (in millions, except percentages) |
| Research models and services | $ | 317.2 |
| | $ | 331.8 |
| | $ | (14.6 | ) | | (4.4 | )% |
| Discovery and safety assessment | 387.3 |
| | 325.6 |
| | 61.7 |
| | 18.9 | % |
| Manufacturing support | 120.5 |
| | 113.2 |
| | 7.3 |
| | 6.4 | % |
| Total cost of products sold and services provided | $ | 825.0 |
| | $ | 770.6 |
| | $ | 54.4 |
| | 7.1 | % |
Cost of products sold and services provided selling,(costs) for the fiscal year 2014 increased $54.4 million, or 7.1%, compared with the fiscal year 2013. Costs as a percentage of revenue for the fiscal year 2014 were 63.6%, a decrease of 2.5%, from 66.1% for the fiscal year 2013. The costs above include asset impairments, which were previously presented separately in our consolidated statement of income.
RMS costs decreased $14.6 million, primarily the result of lower accelerated depreciation expense associated with global efficiency initiatives in our research models business. RMS costs as a percentage of revenue for the fiscal year 2014 were 62.5%, a decrease of 2.4%, from 64.9% for the fiscal year 2013, the result of global efficiency initiatives in our research models business.
DSA costs increased $61.7 million due to a $49.1 million increase in Discovery Services costs, which includes a higher cost base due to the Argenta and BioFocus acquisition, and a $12.6 million increase in Safety Assessment costs, as a result of increased revenues. DSA costs as a percentage of revenue for the fiscal year 2014 were 72.0%, a decrease of 3.3%, from 75.3% for the fiscal year 2013 as a result of leverage of fixed costs from higher revenues.
Manufacturing costs increased $7.3 million, primarily as a result of higher revenue for each of our Manufacturing businesses. Manufacturing costs as a percentage of revenue for the fiscal year 2014 were 47.8%, a decrease of 3.2%, from 51.0% for the fiscal year 2013, as a result of leverage of fixed costs from higher revenue.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | December 27, 2014 | | December 28, 2013 | | $ Change | | % Change |
| | (in millions, except percentages) |
| Research models and services | $ | 66.2 |
| | $ | 60.0 |
| | $ | 6.2 |
| | 10.3 | % |
| Discovery and safety assessment | 63.1 |
| | 49.7 |
| | 13.4 |
| | 27.0 | % |
| Manufacturing support | 47.6 |
| | 42.0 |
| | 5.6 |
| | 13.3 | % |
| Unallocated corporate | 92.1 |
| | 74.0 |
| | 18.1 |
| | 24.5 | % |
| Total selling, general and administrative | $ | 269.0 |
| | $ | 225.7 |
| | $ | 43.3 |
| | 19.2 | % |
Selling, general and administrative expenses amortization(SG&A) for the fiscal year 2014 increased $43.3 million, or 19.2%, compared with the fiscal year 2013. SG&A as a percentage of goodwillrevenue for the fiscal year 2014 was 20.7%, an increase of 1.3%, from 19.4% for the fiscal year 2013.
The increase in RMS SG&A of $6.2 million was related to an increase of $2.5 million in compensation, benefits and other employee related expenses; the recording of $1.6 million in charges related to an arbitration award in favor of a large model supplier; an increase of $0.5 million in severance due to consolidation plans in the U.S. and Japan; and an increase of $2.6 million in other expenses; partially offset by a decrease of $1.0 million due to a gain on the sale of facility impacted by a consolidation plan. RMS SG&A as a percentage of revenue for the fiscal year 2014 was 13.0%, an increase of 1.3%, from 11.7% for the fiscal year 2013.
The increase in DSA SG&A of $13.4 million was related to an increase of $5.5 million in compensation, benefits and other employee related expenses; an increase of $1.9 million in severance; an increase of $1.2 million in operating expenses including information technology infrastructure and facility expenses; an increase of $0.8 million in stock-based compensation, primarily related to our new hire grants and our annual stock-based grants made in February 2014; and an increase of $4.0 million in other expenses; all of which were primarily due to the Argenta and BioFocus acquisition. DSA SG&A as a percentage of revenue for the fiscal year 2014 was 11.7%, an increase of 0.2%, from 11.5% for the fiscal year 2013.
The increase in Manufacturing SG&A of $5.6 million was related to an increase of $3.8 million in compensation, benefits and other employee related expenses; an increase of $1.8 million in operating expenses including information technology infrastructure and facility expenses; and an increase of $0.5 million in stock-based compensation, primarily related to our new hire grants and our annual stock-based grants made in February 2014; partially offset by a decrease of $0.5 million in other expenses. Manufacturing SG&A as a percentage of revenue for the fiscal year 2014 was 18.9%, consistent with the fiscal year 2013.
The increase in unallocated corporate SG&A of $18.1 million was related to an increase of $7.4 million in compensation, benefits and other employee related expenses; an increase of $5.1 million of stock-based compensation, primarily related to our new hire grants, our annual stock-based grants made in February 2014 and increased expense recognized for performance stock units whose payout is based upon our financial performance; an increase of $4.8 million in external consulting and other service expenses; an increase of $4.5 million of costs associated with the evaluation and integration of acquisitions; and an increase of $1.4 million in other expenses; partially offset by a reduction of $5.1 million in information technology related expenses.
Amortization of Intangible Assets Amortization of intangibles and operating income by segment andfor the fiscal year 2014 was $26.0 million, an increase of $8.2 million, or 46.1%, from $17.8 million for the fiscal year 2013, primarily as percentages of their respective segment net sales. 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 irrespectiveresult of the business segment fromArgenta and BioFocus acquisition.
Interest Income Interest income, which represents earnings on held cash, cash equivalents, and time deposits, was $1.2 million for the sales were generated.fiscal year 2014, an increase of $0.5 million, or 71.4%, compared to $0.7 million for the fiscal year 2013.
Interest Expense Interest expense for the fiscal year 2014 was $12.0 million, a decrease of $9.0 million, or 42.9%, compared to $21.0 million for the fiscal year 2013. The decrease was primarily the result of the retirement late in the second quarter of the fiscal year 2013 of our senior convertible debentures, which lowered our effective interest rate.
Other Income (Expense), Net Other income (expense), net was $10.7 million for the fiscal year 2014, an increase of $3.5 million, or 48.6%, compared to $7.2 million for the fiscal year 2013. The increase in other income (expense), net was driven by our investments in limited partnerships accounted for under the equity method, which increased $3.4 million, and a non-cash
gain of $2.1 million related to assets assumed at our Frederick, Maryland facility following the termination of a customer contract, partially offset by the impact of foreign exchange and other activity of $2.0 million. |
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| | (dollars in millions) |
| Net sales: | | | | | |
| Research models and services | $ | 695.1 |
| | $ | 705.4 |
| | $ | 667.0 |
|
| Preclinical services | 434.4 |
| | 437.2 |
| | 466.4 |
|
| Cost of products sold and services provided: | | | | | |
| Research models and services | 401.8 |
| | 408.1 |
| | 388.6 |
|
| Preclinical services | 332.1 |
| | 332.3 |
| | 360.0 |
|
| Goodwill impairment: | | | | | |
| Preclinical services | — |
| | — |
| | 305.0 |
|
| Termination fee | — |
| | — |
| | 30.0 |
|
| Asset impairment | | | | | |
| Research models and services | 3.5 |
| | 0.7 |
| | 0.8 |
|
| Preclinical services | — |
| | 6.8 |
| | 90.6 |
|
| Selling, general and administrative expenses: | | | | | |
| Research models and services | 81.0 |
| | 83.6 |
| | 85.8 |
|
| Preclinical services | 56.0 |
| | 58.1 |
| | 73.4 |
|
| Unallocated corporate overhead | 71.2 |
| | 56.9 |
| | 73.3 |
|
| Amortization of other intangibles: | | | | | |
| Research models and services | 6.4 |
| | 6.7 |
| | 7.3 |
|
| Preclinical services | 11.7 |
| | 15.0 |
| | 17.1 |
|
| Operating income (loss): | | | | | |
| Research models and services | $ | 202.4 |
| | $ | 206.3 |
| | $ | 184.5 |
|
| Preclinical services | $ | 34.6 |
| | $ | 24.9 |
| | (379.7 | ) |
| Unallocated corporate overhead | $ | (71.2 | ) | | $ | (56.9 | ) | | (103.3 | ) |
Fiscal Year 2013 Compared to Fiscal Year 2012
Revenue
|
| | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Net sales: | | | | | |
| Research models and services | 61.5 | % | | 61.7 | % | | 58.8 | % |
| Preclinical services | 38.5 | % | | 38.3 | % | | 41.2 | % |
| Cost of products sold and services provided: | | | | | |
| Research models and services | 57.8 | % | | 57.9 | % | | 58.3 | % |
| Preclinical services | 76.4 | % | | 76.0 | % | | 77.2 | % |
| Goodwill impairment: | | | | | |
| Preclinical services | — | % | | — | % | | 65.4 | % |
| Asset impairment: | | | | | |
| Research models and services | 0.5 | % | | 0.1 | % | | 0.1 | % |
| Preclinical services | — | % | | 1.6 | % | | 19.4 | % |
| Termination fee | — | % | | — | % | | — | % |
| Selling, general and administrative expenses: | | | | | |
| Research models and services | 11.6 | % | | 11.8 | % | | 12.9 | % |
| Preclinical services | 12.9 | % | | 13.3 | % | | 15.8 | % |
| Unallocated corporate overhead | — | % | | — | % | | — | % |
| Amortization of other intangibles: | | | | | |
| Research models and services | 0.9 | % | | 1.0 | % | | 1.1 | % |
| Preclinical services | 2.7 | % | | 3.4 | % | | 3.7 | % |
| Operating income: | | | | | |
| Research models and services | 29.1 | % | | 29.2 | % | | 27.7 | % |
| Preclinical services | 8.0 | % | | 5.7 | % | | (81.4 | )% |
| Unallocated corporate overhead | (6.3 | )% | | (5.0 | )% | | (9.1 | )% |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | | | |
| | December 28, 2013 | | December 29, 2012 | | $ Change | | % Change | | Impact of FX |
| | (in millions, except percentages) |
| Research models and services | $ | 511.3 |
| | $ | 521.6 |
| | $ | (10.3 | ) | | (2.0 | )% | | (1.7 | )% |
| Discovery and safety assessment | 432.4 |
| | 408.9 |
| | 23.5 |
| | 5.7 | % | | (0.6 | )% |
| Manufacturing support | 221.8 |
| | 199.0 |
| | 22.8 |
| | 11.5 | % | | 1.1 | % |
| Total revenue | $ | 1,165.5 |
| | $ | 1,129.5 |
| | $ | 36.0 |
| | 3.2 | % | | (0.8 | )% |
Revenue for the fiscal year 2013 increased $36.0 million, or 3.2%, compared with the fiscal year 2012. Reported revenue decreased due to foreign currency translation by $9.0 million, or 0.8%, when compared to the prior period.
RMS revenue decreased by $10.3 million due to lower research models revenue in the U.S., Europe and Japan due primarily to infrastructure reductions by our global biopharmaceutical clients, partially offset by the inclusion of Vital River, which was acquired in the fiscal year 2013. Additionally, the fiscal year 2013 included a $1.5 million revenue adjustment related to inaccurate billings with respect to certain government contracts. See Note 12, "Commitments and Contingencies."
DSA revenue increased $23.5 million due to higher demand from global pharmaceutical and mid-tier biotechnology clients as well as a more favorable mix of longer-term services.
Manufacturing revenue increased $22.8 million due to higher sales of legacy EMD products globally and the inclusion of a full year of Accugenix services (an EMD service provider acquired in 2012).
Cost of Products Sold and Services Provided
|
| | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | December 28, 2013 | | December 29, 2012 | | $ Change | | % Change |
| | (in millions, except percentages) |
| Research models and services | $ | 331.8 |
| | $ | 323.3 |
| | $ | 8.5 |
| | 2.6 | % |
| Discovery and safety assessment | 325.6 |
| | 311.0 |
| | 14.6 |
| | 4.7 | % |
| Manufacturing support | 113.2 |
| | 103.1 |
| | 10.1 |
| | 9.8 | % |
| Total cost of products sold and services provided | $ | 770.6 |
| | $ | 737.4 |
| | $ | 33.2 |
| | 4.5 | % |
Costs for the fiscal year 2013 increased $33.2 million, or 4.5%, compared with the fiscal year 2012. Costs as a percentage of revenue for the fiscal year 2013 were 66.1%, an increase of 0.8%, from 65.3% for the fiscal year 2012. The costs above include assets impairments which were previously presented separately in our consolidated statement of income.
RMS costs increased $8.5 million, primarily the result of accelerated depreciation expense at our California facility, which contributed $13.5 million to the increase and the inclusion of Vital River, acquired in January 2013, which contributed $10.5
Fiscal 2012 Comparedmillion to Fiscal 2011
Net Sales. Net salesthe increase, partially offset by declines in cost of products in our research models business due to lower volume. RMS costs as a percentage of revenue for the fiscal year ending 2013 were 64.9%, an increase of 2.9%, from 62.0% for the fiscal year 2012, the result of the lower revenue in our U.S., Europe and Japan research model business along with accelerated depreciation expense at our California facility.
DSA costs increased $14.6 million due to an increase in Safety Assessment costs as a result of increased revenues. DSA costs as a percentage of revenue for the fiscal year 2013 were 75.3%, a decrease of 0.8%, from 76.1% for the fiscal year 2012 due to higher volume of services provided and the benefit of efficiency initiatives.
Manufacturing costs increased $10.1 million, primarily as a result of higher EMD revenue. Manufacturing costs as a percentage of revenue for the fiscal year 2013 were 51.0%, a decrease of 0.8%, from 51.8% in the fiscal year 2012 as a result of leverage of fixed costs from higher revenue.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | December 28, 2013 | | December 29, 2012 | | $ Change | | % Change |
| | (in millions, except percentages) |
| Research models and services | $ | 60.0 |
| | $ | 53.5 |
| | $ | 6.5 |
| | 12.1 | % |
| Discovery and safety assessment | 49.7 |
| | 49.8 |
| | (0.1 | ) | | (0.2 | )% |
| Manufacturing support | 42.0 |
| | 33.7 |
| | 8.3 |
| | 24.6 | % |
| Unallocated corporate | 74.0 |
| | 71.2 |
| | 2.8 |
| | 3.9 | % |
| Total selling, general and administrative | $ | 225.7 |
| | $ | 208.2 |
| | $ | 17.5 |
| | 8.4 | % |
SG&A for the fiscal year 2013 increased $17.5 million, or 8.4%, compared with the fiscal year 2012. SG&A as a percentage of revenue for the fiscal year 2013 was 19.4%, an increase of 1.0%, from 18.4% for the fiscal year 2012.
The increase in RMS SG&A of $6.5 million was related to an increase of $2.2 million in compensation, benefits and other employee related expenses; an increase of $1.8 million in bad debt expense; an increase of $0.8 million in stock-based compensation expense; an increase of $0.8 million in severance charges; and an increase of $1.4 million in other expenses; partially offset by a decrease of $0.5 million in operating costs, including information technology and facility costs. RMS SG&A as a percentage of revenue for the fiscal year 2013 was 11.7%, an increase of 1.4%, from 10.3% for the fiscal year 2012.
DSA SG&A remained substantially flat year over year due to a decrease of $2.0 million in compensation, benefits and other employee related expenses and a decrease of $1.1 million in operating costs, including information technology and facilities costs; offset by an increase of $3.0 million in other expenses. DSA SG&A as a percentage of revenue for the fiscal year 2013 was 11.5%, a decrease of 0.7%, from 12.2% for the fiscal year 2012.
The increase in Manufacturing SG&A of $8.3 million was primarily related to an increase of $5.1 million in compensation, benefits and other employee related expenses; an increase of $1.0 million in bad debt expense; an increase of $0.9 million in operating costs, including information technology and facility expenses; and an increase of $1.3 million in other expenses. Manufacturing SG&A as a percentage of revenue for the fiscal year 2013 was 18.9%, an increase of 2.0%, from 16.9% for the fiscal year 2012.
The increase in unallocated corporate SG&A of $2.8 million was related to an increase of $3.1 million in compensation, benefits and other employee related expenses; an increase of $1.7 million in stock-based compensation; and an increase of $1.2 million in external consulting and other service expense; partially offset by a decrease of $2.0 million of costs associated with the evaluation and integration of acquisitions; a decrease of $1.0 million decrease in information technology related expenses; and a decrease of $0.2 million in other expenses.
December 29, 2012Amortization of Intangible Assets were $1,129.5Amortization of intangibles for the fiscal year 2013 was $17.8 million, a decrease of $13.1$0.3 million, or 1.1%1.7%, from $1,142.6$18.1 million for the fiscal year ending December 31, 2011, due primarily to unfavorable foreign currency translation of 2.0%.2012.
Research ModelsInterest Income Interest income, which represents earnings on held cash, cash equivalents, and Services. For the year ending December 29, 2012, net sales for our RMS segment were $695.1 million, a decrease of $10.3 million, or 1.5%, from $705.4time deposits, was $0.7 million for the fiscal year ending December 31, 2011. The decrease was due primarily to unfavorable foreign currency translation which decreased sales by 2.5% and lower sales2013, an increase of research models partially offset by increased sales for EMD and research model services.
Preclinical Services. For the year ending December 29, 2012, net sales for our PCS segment were $434.4 million, a decrease of $2.8$0.1 million, or 0.6%16.7%, from $437.2compared to $0.6 million for the fiscal year ending December 31, 2011. The sales decrease was driven by unfavorable foreign currency translation of 1.1% and reduced biopharmaceutial spending partially offset by increased demand for preclinical services.
Cost of Products Sold and Services Provided. Cost of products sold and services provided during 2012 was $733.9 million, a decrease of $6.5 million, or 0.9%, from $740.4 million during 2011. Cost of products sold and services provided during the year ending December 29, 2012 was 65.0% of net sales, compared to 64.8% during the year ending December 31, 2011.
Research Models and Services. Cost of products sold and services provided for RMS during 2012 was $401.8 million, a decrease of $6.3 million, or 1.5%, compared to $408.1 million in 2011. Cost of products sold and services provided for the year ending December 29, 2012 decreased to 57.8% of net sales compared to 57.9% of net sales for the year ending December 31, 2011. The decrease in cost as a percentage of sales was due primarily to the effect of our cost-savings actions partially offset by the effect of lower sales on our fixed cost base.
Preclinical Services. Cost of services provided for the PCS segment during 2012 was $332.1 million, a decrease of $0.2 million, compared to $332.3 million in 2011. Cost of services provided as a percentage of net sales was 76.4% during the year ending December 29, 2012, compared to 76.0% for the year ending December 31, 2011. The increase in cost of services provided as a percentage of net sales was primarily due to the impact of lower sales on our fixed cost base and the performance of client protocols under an expanded preferred provider agreement with a global pharmaceutical client partially offset by our cost-savings actions.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ending December 29, 2012 were $208.2 million, an increase of $9.6 million, or 4.8%, from $198.6 million for the year ending December 31, 2011. Selling, general and administrative expenses during 2012 were 18.4% of net sales compared to 17.4% for the year ending December 31, 2011. The increase in selling, general and administrative expenses as a percent of sales was primarily due to a prior year insurance gain of $7.7 million partially offset by the impact of our cost saving-actions.
Research Models and Services. Selling, general and administrative expenses for RMS for 2012 were $81.0 million, a decrease of $2.6 million, or 3.1%, compared to $83.6 million in 2011. Selling, general and administrative expenses decreased as a percentage of sales to 11.6% for the year ending December 29, 2012 from 11.8% for the year ending December 31, 2011. The decrease in selling, general and administrative expenses as a percent of sales was primarily due to cost-savings actions and the insurance settlement related related to our Japan operations.
Preclinical Services. Selling, general and administrative expenses for the PCS segment during 2012 were $56.0 million, a decrease of $2.1 million, or 3.6%, compared to $58.1 million during 2011. Selling, general and administrative expenses for the year ending December 29, 2012 decreased to 12.9% of net sales, compared to 13.3% of net sales for the year ending December 31, 2011, due mainly to the benefit of cost-savings actions.
Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various costs primarily associated with 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 $71.2 million during the year ending December 29, 2012, compared to $56.9 million during the year ending December 31, 2011. The increase was primarily due to a prior year life insurance gain of $7.7 million in 2011 and higher 2012 costs related to the evaluation of acquisitions partially offset by cost-savings actions and tight expense control.2012.
Asset Impairment.Interest Expense For the year ending December 29, 2012, we recorded asset impairments of $3.5 million for RMS primarily associated with the consolidation of certain RMS Europe operations. For the year ending December 31, 2011, we recorded an asset impairment of $7.5 million composed of a $6.8 million impairment of our PCS in-process research and development cost and an $0.7 impairment of an RMS facility no longer in use.
Amortization of Other Intangibles. Amortization of other intangiblesInterest expense for the fiscal year ending December 29, 20122013 was $18.1$21.0 million, a decrease of $3.7$12.3 million, from $21.8or 36.9%, compared to $33.3 million for the fiscal year ending December 31, 2011. Amortization expense decreased as a percentage of sales to 1.6% for the year ending December 29, 2012, from 1.9% for the year ending December 31, 2011.
Research Models and Services. In 2012, amortization of other intangibles for our RMS segment was $6.4 million, a decrease of $0.3 million from $6.7 million in December 31, 2011.
Preclinical Services. For the year ending December 29, 2012, amortization of other intangibles for our PCS segment was $11.7 million, a decrease of $3.3 million from $15.0 million for the year ending December 31, 2011.
Operating Income. Operating income for the year ending December 29, 2012 was $165.8 million, an decrease of $8.5 million compared to $174.3 million for the year ending December 31, 2011. Operating income as a percentage of net sales for the year ending December 29, 2012 was14.7% compared to 15.3% the year ending December 31, 2011, due primarily to the impact of lower sales on our fixed cost base offset by cost savings actions.
Research Models and Services. For 2012, operating income for our RMS segment was $202.4 million, a decrease of $3.9 million, or 1.9%, from $206.3 million in 2011. Operating income as a percentage of net sales for the year ending December 29, 2012 remained essentially flat at 29.1%, compared to the year ending December 31, 2011, due primarily to the impact of lower sales on our fixed cost base offset by cost savings actions.
Preclinical Services. For the year ending December 29, 2012, operating income for our PCS segment was $34.6 million, an increase of $9.7 million compared to $24.9 million for the year ending December 31, 2011. Operating income as a percentage of net sales increased to 8.0% in 2012 compared to 5.7% of net sales in December 31, 2011. The increase in operating income as a percentage of net sales was primarily due to the cost savings actions and lower amortization.
Unallocated Corporate Overhead. Unallocated corporate overhead was $71.2 million during the year ending December 29, 2012, compared to $56.9 million during the year ending December 31, 2011. The increase was primarily due to a prior year life insurance gain of $7.7 million and costs related to the evaluation of acquisitions partially offset by cost-savings actions and tight expense control.
Interest Expense. Interest expense for 2012 was $33.3 million, compared to $42.6 million in 2011.2012. The decrease was due to decreased debt balances and lower interest rates.
Interest Income. Interest income for 2012 was $0.6 million, compared to $1.4 million for 2011 due to lower cash balances and lower interest rates on invested funds.our debt as a result of our debt refinancing in May 2013 and the associated retirement of our senior convertible debentures in fiscal year 2013.
Other Income (Expense), Net Other income (expense), net was $7.2 million for the fiscal year 2013, an increase of $10.5 million, or 318.2%, compared to $(3.3) million for the fiscal year 2012. The increase in other income (expense), net was driven by our investments in limited partnerships accounted for under the equity method.
Income Taxes.Taxes Income tax expense in 2012 was $27.6for the fiscal year 2013 increased $5.3 million, compared to $17.1 million in December 31, 2011.with the fiscal year 2012. Our effective tax rate was 23.8% in the fiscal year 2013, compared to 21.3% in the fiscal year 2012. The increase of 2.5% in the effective tax rate for the fiscal year 2013 was primarily attributable to a discrete tax detriment of $2.0 million due to an adjustment related to the ongoing transfer pricing controversy with the CRA, a reduction in research and development tax benefits by $1.8 million arising from the adoption of a new refundable research and development credit provided for in a U.K. tax law change that was enacted in the fiscal year 2013, $1.4 million of costs from a new French tax law enacted in the fiscal year 2013 that applied retroactively to the fiscal year 2012 comparedthat limits the deductibility of interest by our French affiliates, and a discrete tax cost of $0.5 million related to 12.9%nondeductible transaction costs incurred in 2011.2012 for the acquisition of Vital River, which closed in the first quarter of the fiscal year 2013. These costs were partially offset by increased benefits from the domestic production deduction of $0.6 million and reduced unbenefitted tax losses of $0.6 million. The fiscal year 2012 effective tax rate reflects a benefit from the settlement of the tax litigation related to the 2003 and 2004 Scientific Research and Experimental DevelopmentSR&ED credits (SR&ED) claimed by our PreclinicalSafety Assessment services facility in Montreal. The 2012 effective tax rate also reflects increased benefits due to earnings mix and current year SR&ED claims. The effective tax rate for 2011 reflects benefits due to releasing a valuation allowance on a tax loss incurred with the disposition of the our Phase I clinical business in the first quarter of 2011, a non-taxable gain on a settlement of a life insurance policy, a settlement of a German tax audit, and the impact of declines in statutory tax rates in the United Kingdom and Japan.
Net Income Attributable to Common Shareowners. Net income attributable to common shareowners for the year ending December 29, 2012 was $97.3 million compared to $109.6 million for the year ending December 31, 2011.
Fiscal 2011 Compared to Fiscal 2010
Net Sales. Net sales for the year ending December 31, 2011 were $1,142.6 million, an increase of $9.2 million, or 0.8%, from $1,133 million for the year ending December 25, 2010, due primarily to increased sales for RMS and favorable foreign currency translation of 2.2% partially offset by lower PCS sales.
Research Models and Services. For the year ending December 31, 2011, net sales for our RMS segment were $705.4 million, an increase of $38.4 million, or 5.8%, from $667.0 million for the year ending December 25, 2010, due primarily to higher EMD sales and increased Research Model Services. The effect of favorable foreign currency translation increased sales by 2.7%.
Preclinical Services. For the year ending December 31, 2011, net sales for our PCS segment were $437.2 million, a decrease of $29.2 million, or 6.3%, from $466.4 million for the year ending December 25, 2010. The sales decrease was driven by reduced biopharmaceutical spending, which resulted in lower demand for our services and a shift in study mix, offset by favorable foreign currency translation of 1.5%.
Cost of Products Sold and Services Provided. Cost of products sold and services provided during 2011 was $740.4 million, a decrease of $8.3 million, or 1.1%, from $748.7 million during 2010. Cost of products sold and services provided during the year ending December 31, 2011 was 64.8% of net sales, compared to 66.1% during the year ending December 25, 2010.
Research Models and Services. Cost of products sold and services provided for RMS during 2011 was $408.1 million, an increase of $19.5 million, or 5.0%, compared to $388.6 million in 2010. Cost of products sold and services provided for the year ending December 31, 2011 decreased to 57.9% of net sales compared to 58.3% of net sales for the year ending December 25, 2010. The decrease in cost as a percentage of sales was due primarily to the impact of our cost-savings actions partially offset by the large model inventory write-off.
Preclinical Services. Cost of services provided for the PCS segment during 2011 was $332.3 million, a decrease of $27.7 million, compared to $360.1 million in 2010. Cost of services provided as a percentage of net sales was 76.0% during the year ending December 31, 2011, compared to 77.2% for the year ending December 25, 2010. The decrease in cost of services provided as a percentage of net sales was primarily due to the impact of our cost-savings actions.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ending December 31, 2011 were $198.7 million, a decrease of $33.8 million, or 14.6%, from $232.5 million for the year ending December 25, 2010. Selling, general and administrative expenses during 2011 were 17.4% of net sales compared to 20.5% for the year ending December 25, 2010. The decrease in selling, general and administrative expenses as a percent of sales was primarily due to the cost saving-actions.
Research Models and Services. Selling, general and administrative expenses for RMS for 2011 were $83.6 million, a decrease of $2.1 million, or 2.5%, compared to $85.7 million in 2010. Selling, general and administrative expenses decreased as a percentage of sales to 11.8% for the year ending December 31, 2011 from 12.9% for the year ending December 25, 2010. The decrease in selling, general and administrative expenses as a percent of sales was primarily due to cost-savings actions.
Preclinical Services. Selling, general and administrative expenses for the PCS segment during 2011 were $58.1 million, a decrease of $15.4 million, or 20.9%, compared to $73.5 million during 2010. Selling, general and administrative expenses for the year ending December 31, 2011 decreased to 13.3% of net sales, compared to 15.8% of net sales for the year ending December 25, 2010, due mainly to the benefit of cost-savings actions.
Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various costs primarily associated with 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 $56.9 million during the year ending December 31, 2011, compared to $73.3 million during the year ending December 25, 2010. The decrease was primarily due to cost-savings actions and tight expense control, a life insurance gain of $7.7 million in 2011 and prior year costs related to the evaluation of a proposed acquisition of $6.6 million.
Goodwill Impairment. Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment for 2011, the fair value of our business units exceeded their carrying value: therefore, our goodwill was not impaired.
During the fourth quarter of 2010, based on our annual goodwill assessment, the fair value of our PCS business was less than its carrying value. The second step of the goodwill impairment test involved calculation of 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 $305.0 million.
Asset Impairment. We recorded an asset impairment of $7.5 million composed of a $6.8 million impairment of our PCS in-process research and development cost and an $0.7 impairment of an RMS facility no longer in use.
During the fourth quarter of 2010, based on our then most recent market outlook, we assessed our long-lived assets for impairment. The assessment included an evaluation of the ongoing cash flows of the long-lived assets. We determined, based upon our evaluation, that the long-lived assets associated with PCS-Massachusetts and PCS-China were no longer fully recoverable from the future cash flows. Based upon the assets no longer being fully recoverable, we determined the fair value of the long-lived assets based upon a valuation completed by an independent third party valuation firm. The valuation was based upon the estimated market value of the long-lived assets and the future cash flow expected to be generated from the long-lived assets. Accordingly, we recorded impairment charges of $64.6 million for PCS-Massachusetts, $17.2 million for PCS-China and $7.2 million for in-process research and development costs representing the excess of the carrying value of the SPC assets over their respective fair market values.
Termination fee. On July 29, 2010, in connection with a proposed acquisition, we signed a termination agreement and subsequently paid a $30.0 million termination fee for full satisfaction of the parties' obligations under the acquisition agreement.
Amortization of Other Intangibles. Amortization of other intangibles for the year ending December 31, 2011 was $21.8 million, a decrease of $2.6 million, from $24.4 million for the year ending December 25, 2010. Amortization expense decreased as a percentage of sales to 1.9% for the year ending December 31, 2011, from 2.2% for the year ending December 25, 2010.
Research Models and Services. In 2011, amortization of other intangibles for our RMS segment was $6.7 million, a decrease of $0.6 million from $7.3 million in 2010.
Preclinical Services. For the year ending December 31, 2011, amortization of other intangibles for our PCS segment was $15.0 million, a decrease of $2.1 million from $17.1 million for the year ending December 25, 2010.
Operating Income. Operating income for the year ending December 31, 2011was $174.3 million, an increase from a loss of $298.5 million for the year ending December 25, 2010. Operating income as a percentage of net sales for the year ending December 31, 2011 was 15.3% compared to (26.3)% for the year ending December 25, 2010, due primarily to the impact of the asset impairment, goodwill impairment and termination fee in 2010.
Research Models and Services. For 2011, operating income for our RMS segment was $206.3 million, an increase of $21.9 million, or 11.8%, from $184.5 million in 2010. Operating income as a percentage of net sales for the year ending December 31, 2011 was 29.2%, compared to 27.7% for the year ending December 25, 2010. The increase in operating income as a percentage of net sales was primarily due to cost-savings actions.
Preclinical Services. For the year ending December 31, 2011, operating income for our PCS segment was $24.9 million, an increase from a loss of $379.7 million for the year ending December 25, 2010. Operating income as a percentage of net sales increased to 5.7% in 2011 compared to (81.4)% of net sales in 2010. The increase in operating income as a percentage of net sales was primarily due to the asset impairment and goodwill impairment in 2010.
Unallocated Corporate Overhead. Unallocated corporate overhead was $56.9 million during the year ending December 31, 2011, compared to $103.3 million during the year ending December 25, 2010. The decrease was primarily due to the termination fee and costs related to the evaluation of a proposed acquisition of $6.6 million in 2010 as well as cost-savings actions and tight expense control and a life insurance gain of $7.7 million in 2011.
Interest Expense. Interest expense for 2011 was $42.6 million, compared to $35.3 million in 2010. The increase was due to increased debt balances.
Interest Income. Interest income for 2011 was $1.4 million, compared to $1.2 million for 2010.
Income Taxes. Income tax expense in 2011 was $17.1 million, compared to $23 thousand in 2010. Our effective tax rate was 12.9 % in 2011, compared to 0% in 2010. Changes in the effective tax rate result from benefits recognized in 2011 due to releasing a valuation allowance on a tax loss incurred with the disposition of the our Phase I clinical business in the first quarter of 2011, a non-taxable gain on a settlement of a life insurance policy, a settlement of a German tax audit, and the impact of declines in statutory tax rates in the United Kingdom and Japan. Additionally, in 2010, the effective tax rate reflected goodwill and fixed asset impairments and the termination fee for a proposed acquisition, which were unbenefitted for tax purposes and the cost of repatriating foreign earnings that were previously indefinitely reinvested.
Net Income Attributable to Common Shareowners. Net income attributable to common shareowners for the year ending December 31, 2011 was $109.6 million compared to a loss of $336.7 million for the year ending December 25, 2010.
Liquidity and Capital Resources
The following discussion analyzes liquidityWe currently require cash to fund our working capital needs, pension obligations, capital expansion, and capital resources by operating, investingacquisitions and financing activities as presented inpay our consolidated statements of cash flows.
debt obligations. Our principal sources of liquidity have been our cash flowflows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and proceeds from our long-term debtaccess to financing resources, are sufficient to fund our operations for the foreseeable future.
The following table presents our cash and revolving credit arrangements.cash equivalents and time deposits held in the U.S. and by foreign subsidiaries:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in millions) |
| Cash and cash equivalents | | | |
| Held in the U.S. | $ | 10.0 |
| | $ | 8.0 |
|
| Held by non-U.S. subsidiaries | 150.0 |
| | 147.9 |
|
| Total cash and cash equivalents | 160.0 |
| | 155.9 |
|
| Time deposits held in the U.S. | 2.8 |
| | — |
|
| Time deposits held by non-US subsidiaries | 13.4 |
| | 11.2 |
|
| Total cash and cash equivalents and time deposits | $ | 176.2 |
| | $ | 167.1 |
|
Borrowings
On May 29, 2013, we amended and restated our previous credit agreement dated September 23, 2011and entered into a $970.0 million agreement (the $970M Credit Facility). The $970M Credit Facility has a maturity date of May 2018 and provides for a $299.8$420.0 million term loan, a €69.4 million EuroU.S. term loan and a $350$550.0 million multi-currency revolving credit facility. The revolving credit facility may be drawn in U.S. Dollars, Euros, Pound Sterling, or Japanese Yen, subject to sub-limits by currency. Under specified circumstances, we have the ability to increaseexpand the term loansloan and/or revolving line of credit facility by up to $250 million in the aggregate.$350.0 million. The U.S. term loan facility matures in 20 quarterly installments with the last installment due September 23, 2016.through May 2018. The $350 million revolving credit facility also matures on September 23, 2016in May 2018 and requires no scheduled payment before thatthis date. The book value ofinterest rates on the $970M Credit Facility are variable and are based on an applicable published rate plus a spread determined by our term and revolving loans approximates fair value. We also had $5.0 millionleverage ratio.
Amounts outstanding under letters of creditthe $970M Credit Facility were as follows as of December 29, 2012.27, 2014 and December 28, 2013:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in millions) |
| Term loans | $ | 378.0 |
| | $ | 409.5 |
|
| Revolving credit facility | 375.5 |
| | 253.3 |
|
| Total | $ | 753.5 |
| | $ | 662.8 |
|
Repurchases of Common Stock
In 2006, we issued $350.0July 2010, our Board of Directors authorized a $500.0 million stock repurchase program, and subsequently approved increases for an aggregate authorization of 2.25% Convertible Senior Notes (the 2013 Notes) due June 2013. At December 29, 2012, the fair value of the 2013 Notes was approximately $351.7 million based on their quoted market value.$1,150.0 million. During the fourth quarter of 2012, no conversion triggers were met. Upon maturity in June 2013, we intend to settle the principal balance of the 2013 Notes in cash and any additional amount due to the conversion feature in cash or shares. To meet the cash requirements at maturity, we intend to use the existing capacity on our credit agreement, our existing cash and marketable securities or other financing alternatives, which could include increases to term loans and/or obtaining financing through other lenders.fiscal year
Cash and cash equivalents totaled $109.7 million at December 29, 2012, compared to $68.9 million at December 31, 2011. At December 29, 2012, cash and cash equivalents was comprised of $10.7 million held in the United States and $99.0 million held by non-U.S. subsidiaries. At December 31, 2011, cash and cash equivalents was comprised of $0.4 million held in the United States and $68.5 million held by non-U.S. subsidiaries. The decline in cash in the U.S. was primarily due to share repurchases and capital expenditures while the decline in cash outside the U.S. was primarily due to capital expenditures and prepayments on the Euro term loan. We were able to maintain liquidity by having the ability to borrow on our revolving line of credit. In addition to our cash and cash equivalents, as of December 29, 20122014, we repurchased approximately 2,093,000 shares at a cost of $110.6 million. At December 27, 2014, we had $6.8$178.5 million in marketable securities, which was held by non-U.S. subsidiaries. remaining on the authorized stock repurchase program.
In accordance with
Cash Flows
The following table presents our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested as of the end of 2012, as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax-free. During the third quarter of 2011, we restructured our international operations in a tax-free manner to allow us more flexibility in accessing our offshorenet cash to fund needs outside the U.S.provided by operating activities:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in millions) |
| Income from continuing operations | $ | 129.9 |
| | $ | 105.4 |
| | $ | 102.1 |
|
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities | 126.0 |
| | 129.0 |
| | 131.7 |
|
| Changes in assets and liabilities | (3.8 | ) | | (25.4 | ) | | (25.8 | ) |
| Net cash provided by operating activities | $ | 252.1 |
| | $ | 209.0 |
| | $ | 208.0 |
|
In October 2012, we entered into an agreement to acquire a 75% majority ownership interest of Vital River, a commercial provider of research models and related servicesThe increases in China, for approximately $26.8 million in cash, subject to certain closing adjustments. The acquisition closed in January 2013.
Net cash provided by operating activities forfrom the fiscal years ending2013 to December 29, 20122014 and December 31, 2011 was $208.0 million and $206.8 million, respectively. The increase in cash provided by operations was primarilyfrom the fiscal years 2012 to 2013 were due to taxes payable, deferred revenueincreases in our income from continuing operations with the net effect of changes in assets and accrued compensation partially offset byliabilities and adjustments to net income and trade receivables.from continuing operations. Our days sales outstanding, (DSO) increased to 51 days as of December 29, 2012 compared to 48 days as of December 31, 2011. Our DSOwhich includes deferred revenue as an offset to accounts receivable in the calculation. calculation, was 52 days as of December 27, 2014, compared to 56 days as of December 28, 2013 and 51 days as of December 29, 2012.
The increase infollowing table presents our DSO was primarily driven by slower collections and decreased deferred revenue. Our net cash provided by operatingused in investing activities:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in millions) |
| Acquisition of businesses and assets, net of cash acquired | $ | (234.3 | ) | | $ | (29.2 | ) | | $ | (16.9 | ) |
| Capital expenditures | (56.9 | ) | | (39.1 | ) | | (47.5 | ) |
| Investments, net | (5.6 | ) | | (6.0 | ) | | 6.6 |
|
| Other, net | (1.2 | ) | | 0.3 |
| | 2.8 |
|
| Net cash used in investing activities | $ | (298.0 | ) | | $ | (74.0 | ) | | $ | (55.0 | ) |
The primary use of cash in investing activities will be impacted by future timingin the fiscal year 2014 was our acquisition of client paymentsArgenta and BioFocus for $182.5 million, cash paid net of cash acquired, and of ChanTest for $51.1 million, cash paid net of cash acquired. The primary use of cash in the fiscal year 2013 was our acquisition of 75% of Vital River for $24.2 million, net of cash acquired, and of an EMD products and services as evidencedservice provider in Singapore for $4.9 million. During the fiscal year 2012, we acquired Accugenix, which is part of our DSO. A one-day increase or decrease in our DSO represents aEMD business, for $16.9 million, net of cash acquired.
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in millions) |
| Proceeds from long-term debt and revolving credit agreement | $ | 298.9 |
| | $ | 511.8 |
| | $ | 74.1 |
|
| Proceeds from exercises of stock options | 73.7 |
| | 93.8 |
| | 18.4 |
|
| Payments on long-term debt, capital lease obligation and revolving credit agreement | (194.5 | ) | | (523.3 | ) | | (140.3 | ) |
| Purchase of treasury stock | (122.0 | ) | | (165.9 | ) | | (64.2 | ) |
| Other, net | 5.3 |
| | (0.6 | ) | | 0.9 |
|
| Net cash provided by (used in) financing activities | $ | 61.4 |
| | $ | (84.2 | ) | | $ | (111.1 | ) |
change of approximatelyFor the fiscal year $3.12014 million of, cash provided by operating activities. Our allowance for doubtful accounts was $4.3financing activities reflected net borrowings of $104.4 million as and proceeds from exercises of December 29, 2012 comparedemployee stock options of $73.7 million, partially offset by treasury stock purchases of $122.0 million made pursuant to $4.0 million as of December 31, 2011.
Net cash used in investing activities forour authorized stock repurchase program. For the years ending December 29, 2012 and December 31, 2011 was $55.0 million and $36.6 million, respectively. During 2012, we acquired Accugenix Inc. for $16.9 million, net of cash acquired. During the fourth quarter of 2012, we announced our intended acquisition of Vital River for $26.8 million in cash, which closed in the first quarter of 2013. As part of the acquisition agreement, we acquired the right, but not the obligation, to purchase the remaining 25% of Vital River at fair value for cash in January 2016. In addition, the non-controlling interest holders have the right, but not the obligation, to sell their 25% interest to us at fair value for cash beginning in January 2016. Our capital expenditures during 2012 were $47.5 million, of which $36.9 million was related to RMS and $10.7 million to PCS. For 2012, we project capital expenditures to be approximately $50.0 million. We anticipate that future capital expenditures will be funded by operating activities, marketable securities and existing credit facilities. During 2012 and 2011, we had net marketable security sales (purchases) of $6.6 million and $7.1 million, respectively.
Netfiscal year 2013, cash used in financing activities for the years ending December 29, 2012reflected net debt repayments of $11.5 million and December 31, 2011 was $111.1treasury stock purchases of $165.9 million, and $271.8 million, respectively. partially offset by proceeds from exercises of employee stock options of $93.8 million. For the years ending December 29,fiscal year 2012, and December 31, 2011,cash used in financing activities reflected net payments from long-term borrowings weredebt repayments of $66.2 million and $2.2 million and we purchasedtreasury stock purchases of $64.2 million, and $283.8 millionpartially offset by proceeds from exercises of treasuryemployee stock respectively. Asoptions of December 29, 2012, we had $54.8 million remaining for approved open market treasury stock purchases.$18.4 million.
Contractual Commitments and Obligations
Minimum future payments of our contractual obligations at December 29, 201227, 2014 are as follows (in millions)follows:
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| | | | | | | | | | | | | | | | | | | |
| Contractual Obligations (in millions) | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | After 5 Years |
| Debt | $ | 673.2 |
| | $ | 141.4 |
| | $ | 104.9 |
| | $ | 426.9 |
| | $ | — |
|
| Interest payments | 78.1 |
| | 26.4 |
| | 42.3 |
| | 9.4 |
| | — |
|
| Operating leases | 64.5 |
| | 15.4 |
| | 21.7 |
| | 13.1 |
| | 14.3 |
|
| Pension and supplemental retirement benefits | 117.1 |
| | 7.9 |
| | 15.9 |
| | 30.3 |
| | 63.0 |
|
| Total contractual cash obligations | $ | 932.9 |
| | $ | 191.1 |
| | $ | 184.8 |
| | $ | 479.7 |
| | $ | 77.3 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less than
1 Year | | 1 - 3 Years | | 3 - 5 Years | | After
5 Years |
| | (in millions) |
Notes payable (1) | $ | 753.8 |
| | $ | 31.7 |
| | $ | 115.5 |
| | $ | 606.6 |
| | $ | — |
|
Operating leases (2) | 44.9 |
| | 12.1 |
| | 17.2 |
| | 7.8 |
| | 7.8 |
|
Build-to-suit leases (3) | 68.6 |
| | 2.0 |
| | 5.4 |
| | 5.4 |
| | 55.8 |
|
| Capital leases | 1.0 |
| | 0.2 |
| | 0.8 |
| | — |
| | — |
|
Pension and supplemental retirement benefits (4) | 128.8 |
| | 7.5 |
| | 27.9 |
| | 25.0 |
| | 68.4 |
|
Redeemable noncontrolling interest (5) | 28.4 |
| | — |
| | 28.4 |
| | — |
| | — |
|
Commitment to limited partnership investments accounted for under the equity method (6) | 45.4 |
| | 45.4 |
| | — |
| | — |
| | — |
|
Contingent consideration (7) | 10.5 |
| | 6.7 |
| | 3.8 |
| | — |
| | — |
|
| Total contractual cash obligations | $ | 1,081.4 |
| | $ | 105.6 |
| | $ | 199.0 |
| | $ | 644.8 |
| | $ | 132.0 |
|
The above table does not reflect unrecognized tax benefits. Refer
| |
| (1) | Notes payable includes the principal payments on our debt. |
| |
| (2) | We lease properties and equipment for use in our operations. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses. Amounts reflected within the table, detail future minimum rental commitments under non-cancellable operating leases for each of the periods presented. |
| |
| (3) | In the fiscal year 2014, we acquired a build-to-suit lease as part of our acquisition of Argenta and BioFocus. In accordance with accounting guidance applicable to entities involved with the construction of an asset that will be leased when the construction is completed, we are considered the owner of this property during the construction period. Accordingly, we recorded an asset and a corresponding financing obligation on our consolidated balance sheet for the amount of costs incurred related to the construction for this building. The construction is expected to be completed in the first half of the fiscal year 2015. Upon completion of the building, we will assess and determine if the assets and corresponding liability should be derecognized. As of December 27, 2014, the amount recorded within our consolidated balance sheet as property, plant and equipment and financing obligation totaled $23.1 million. The amounts in the above table represent future minimum rental commitments. |
| |
| (4) | We maintain defined benefit pension plans and other postretirement benefit plans as discussed in Note 10, "Employee Benefit Plans" included in this report. In the above table we have included the discounted estimated benefit payments we |
expect to Note 7make to fund our pension and other postretirement benefit plans. We note that actual payments to the Consolidated Financial Statementspension and other postretirement benefit plans are dependent on a number of factors that may change in future years; such as expected retirement age, rate of compensation increases, medical trend rates, mortality assumptions, etc. Our funding for additional discussion on unrecognizedpension plans is consistent with applicable laws and regulations.
| |
| (5) | The estimated cash obligation for redeemable noncontrolling interest, which is exercisable by the non-controlling interest holders in 2016 at fair value, is based on the estimated fair value of the interest as of December 27, 2014. |
| |
| (6) | The timing of the remaining capital commitment payments to limited partnership investments is subject to the procedures of the general partner and is therefore estimated by management. |
| |
| (7) | In connection with our purchase of Argenta and BioFocus, VivoPath and ChanTest, we agreed to make additional payments of up to $10.5 million based upon the achievement of certain financial targets. The contingent consideration obligation included in the table above has not been probability adjusted or discounted. |
Tax Related Obligations
We excluded liabilities pertaining to uncertain tax benefits.positions from our summary of contractual obligations presented above as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 27, 2014, we have $34.6 million of liabilities associated with uncertain tax positions.
Off-Balance Sheet Arrangements
The conversion featuresWe do not have any relationships with entities often referred to as structured finance or special purpose entities which would have been established for the purpose of our 2013 Notes are equity-linked derivatives.facilitating off-balance sheet arrangements, including "off-balance sheet arrangements" as described in SEC Regulation S-K Item 303. As such, we recognize these instruments as off-balance sheet arrangements. Because the conversion features associated with these notes are indexed to our common stock and classified in stockholders' equity, these instruments are not accounted for as derivatives.
Recent Accounting Pronouncements
In June 2011, the FASB issued an accounting standard updateexposed to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reportedany financing, liquidity, market or credit risk that could arise if we had engaged in other comprehensive income. The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The update also requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. This amendment became effective for us on January 1, 2012 and was applied retrospectively.
In September 2011, the FASB issued an accounting standard update related to the goodwill impairment test. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing companies with the option of performing a qualitative assessment to determine whether future impairment testing is necessary. The revised standard was effective for us on January 1, 2012 and was applied prospectively.
In February 2013, The FASB issued an accounting standard update related to Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The revised standard requires companies to present
information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. This amendment will become effective for us on January 1, 2013 and will be applied retrospectively.such relationships.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Certain of our financial instrumentsWe are subjectexposed to market risks, includingrisk from changes in interest rate riskrates and foreign currency exchange rates.rates, which could affect our future results of operations and financial condition. We generally do not use financial instruments for trading or other speculative purposes.manage our exposure to these risks through our regular operating and financing activities.
Interest Rate Risk
We entered intoare exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of December 27, 2014, our amended credit agreement on September 23, 2011. Our primarydebt portfolio was comprised primarily of floating interest rate exposure results from changesborrowings. A 100-basis point increase in LIBOR or the base rates which are used to determine the applicable interest rates underwould increase our term loans and revolving credit facility in the credit agreement.
Our potential additionalannual pre-tax interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate would beby approximately $6.4 million on a pre-tax basis. The book value of our debt approximates fair value.$9.3 million.
We issued $350.0 million of the 2013 Notes in a private placement in the second quarter of 2006. The 2013 Notes bear an interest rate of 2.25%. The fair market value of the outstanding notes was approximately $351.7 million on December 29, 2012 based on their quoted market value.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our earningsfinancial position, results of operations and cash flows. This risk is mitigated by
While the fact that variousfinancial results of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations are principally conducted in their respective local currencies. A portioncurrency. Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our operating results, often in ways that are difficult to predict. In particular, as the U.S. dollar strengthens against other currencies the value of our non-U.S. revenue from our foreign operations is denominatedwill decline when reported in U.S. dollars, withdollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the costs accounted forvalue of non-U.S. expense which will also decline when reported in their local currencies. Additionally, we have exposure on certain intercompany loans. U.S. dollars. As the U.S. dollar weakens versus other currencies the value of the non-U.S. revenue and expenses will increase when reported in U.S. dollars.
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 such transactions as hedges.We do not enter into speculative derivative agreements.
During 2012,2014, we utilized foreign exchange contracts, principally to hedge the impact of currency fluctuations on client transactions and certain balance sheet items, including intercompany loans. Theexposures resulting from currency fluctuations. No foreign currency contract outstanding as ofcontracts were open at December 29, 2012 is a non-designated hedge, and is marked to market with changes in fair value recorded to earnings.27, 2014.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| Consolidated Financial Statements: | |
| | | |
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| | | |
| Consolidated Statements of Comprehensive Income for the fiscal years ended December 27, 2014, December 28, 2013 and December 29, 2012 | |
| Consolidated Balance Sheets as of December 27, 2014 and December 28, 2013 | |
| Consolidated Statements of Cash Flows for the fiscal years ended December 27, 2014, December 28, 2013 and December 29, 2012 | |
| | | |
| | |
| | |
| 29, 2012 | |
| | | |
Supplementary Data: | |
| | |
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, as amended). 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 in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management concluded that the Company did not maintain effective internal control over financial reporting as of December 29, 2012 due to a material weakness related to the design and operation of certain controls over information technology, business processes and financial reporting. Specifically, the Company identified deficiencies with respect to the design and operation of controls over segregation of duties, restricted access, changes to vendor and customer master data, transaction level and financial close controls which aggregated to a material weakness in internal control over financial reporting as the deficiencies could result in a misstatement to the Company's annual or interim consolidated financial statements that would be material that would not be prevented or detected.
The effectiveness of our internal control over financial reporting as of December 29, 2012 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 ShareownersShareholders of Charles River Laboratories International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of Charles River Laboratories International, Inc. and its subsidiaries at December 29, 201227, 2014 and December 31, 2011,28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 201227, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain,maintained, in all material respects, effective internal control over financial reporting as of December 29, 201227, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the design and operation of certain controls over information technology,business processes and financial reporting existed at that date. Specifically, the company identified deficiencies with respect to controls over segregation of duties, restricted access, changes to vendor and customer master data, transaction level and financial close which aggregated to a material weakness in internal control over financial reporting.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 8. We considered the material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the December 29, 2012 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements.. 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 referred to above.Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. 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.
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 27, 201317, 2015
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29,
2012 | | December 31,
2011 | | December 25,
2010 |
| Net sales related to products | $ | 467,944 |
| | $ | 483,309 |
| | $ | 458,623 |
|
| Net sales related to services | 661,586 |
| | 659,338 |
| | 674,793 |
|
| Net sales | 1,129,530 |
| | 1,142,647 |
| | 1,133,416 |
|
| Costs and expenses | | | | | |
| Cost of products sold | 255,409 |
| | 267,966 |
| | 252,962 |
|
| Cost of services provided | 478,492 |
| | 472,439 |
| | 495,694 |
|
| Selling, general and administrative | 208,248 |
| | 198,648 |
| | 232,489 |
|
| Goodwill impairment | — |
| | — |
| | 305,000 |
|
| Asset impairments | 3,548 |
| | 7,492 |
| | 91,378 |
|
| Termination fee | — |
| | — |
| | 30,000 |
|
| Amortization of other intangibles | 18,068 |
| | 21,796 |
| | 24,405 |
|
| Operating income (loss) | 165,765 |
| | 174,306 |
| | (298,512 | ) |
| Other income (expense) | | | | | |
| Interest income | 589 |
| | 1,353 |
| | 1,186 |
|
| Interest expense | (33,342 | ) | | (42,586 | ) | | (35,279 | ) |
| Other, net | (3,266 | ) | | (411 | ) | | (1,477 | ) |
| Income (loss) from continuing operations, before income taxes | 129,746 |
| | 132,662 |
| | (334,082 | ) |
| Provision for income taxes | 27,628 |
| | 17,140 |
| | 23 |
|
| Income (loss) from continuing operations, net of income taxes | 102,118 |
| | 115,522 |
| | (334,105 | ) |
| (Loss) from discontinued operations, net of taxes | (4,252 | ) | | (5,545 | ) | | (8,012 | ) |
| Net income (loss) | 97,866 |
| | 109,977 |
| | (342,117 | ) |
| Less: Net loss (income) attributable to noncontrolling interests | (571 | ) | | (411 | ) | | 5,448 |
|
| Net income (loss) attributable to common shareowners | $ | 97,295 |
| | $ | 109,566 |
| | $ | (336,669 | ) |
| Earnings (loss) per common share | | | | | |
| Basic: | | | | | |
| Continuing operations attributable to common shareowners | $ | 2.12 |
| | $ | 2.26 |
| | $ | (5.25 | ) |
| Discontinued operations | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) |
| Net income (loss) attributable to common shareowners | $ | 2.03 |
| | $ | 2.16 |
| | $ | (5.38 | ) |
| Diluted: | | | | | |
| Continuing operations attributable to common shareowners | $ | 2.10 |
| | $ | 2.24 |
| | $ | (5.25 | ) |
| Discontinued operations | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) |
| Net income (loss) attributable to common shareowners | $ | 2.01 |
| | $ | 2.14 |
| | $ | (5.38 | ) |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27,
2014 | | December 28,
2013 | | December 29,
2012 |
| Service revenue | $ | 797,765 |
| | $ | 689,166 |
| | $ | 661,586 |
|
| Product revenue | 499,897 |
| | 476,362 |
| | 467,944 |
|
| Total revenue | 1,297,662 |
| | 1,165,528 |
| | 1,129,530 |
|
| Costs and expenses: | | | | | |
| Cost of services provided | 558,578 |
| | 497,876 |
| | 479,742 |
|
| Cost of products sold | 266,424 |
| | 272,750 |
| | 257,707 |
|
| Selling, general and administrative | 269,033 |
| | 225,695 |
| | 208,248 |
|
| Amortization of intangible assets | 25,957 |
| | 17,806 |
| | 18,068 |
|
| Operating income | 177,670 |
| | 151,401 |
| | 165,765 |
|
| Other income (expense): | | | | | |
| Interest income | 1,154 |
| | 730 |
| | 589 |
|
| Interest expense | (11,950 | ) | | (20,969 | ) | | (33,342 | ) |
| Other income (expense), net | 10,721 |
| | 7,165 |
| | (3,266 | ) |
| Income from continuing operations, before income taxes | 177,595 |
| | 138,327 |
| | 129,746 |
|
| Provision for income taxes | 47,671 |
| | 32,911 |
| | 27,628 |
|
| Income from continuing operations, net of income taxes | 129,924 |
| | 105,416 |
| | 102,118 |
|
| Loss from discontinued operations, net of income taxes | (1,726 | ) | | (1,265 | ) | | (4,252 | ) |
| Net income | 128,198 |
| | 104,151 |
| | 97,866 |
|
| Less: Net income attributable to noncontrolling interests | (1,500 | ) | | (1,323 | ) | | (571 | ) |
| Net income attributable to common shareholders | $ | 126,698 |
| | $ | 102,828 |
| | $ | 97,295 |
|
| Earnings (loss) per common share | | | | | |
| Basic: | | | | | |
| Continuing operations attributable to common shareholders | $ | 2.76 |
| | $ | 2.18 |
| | $ | 2.12 |
|
| Discontinued operations | $ | (0.04 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) |
| Net income attributable to common shareholders | $ | 2.72 |
| | $ | 2.15 |
| | $ | 2.03 |
|
| Diluted: | | | | | |
| Continuing operations attributable to common shareholders | $ | 2.70 |
| | $ | 2.15 |
| | $ | 2.10 |
|
| Discontinued operations | $ | (0.04 | ) | | $ | (0.03 | ) | | $ | (0.09 | ) |
| Net income attributable to common shareholders | $ | 2.66 |
| | $ | 2.12 |
| | $ | 2.01 |
|
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts)thousands)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Net income (loss) | $ | 97,866 |
| | $ | 109,977 |
| | $ | (342,117 | ) |
| Foreign currency translation adjustment | | | | | |
| Write-off of currency translation adjustment for liquidated entities | 636 |
| | — |
| | — |
|
| Foreign currency translation adjustment for the period | 4,682 |
| | (12,264 | ) | | (10,304 | ) |
| Unrealized gains (losses) on marketable securities: | | | | | |
| Unrealized gains (losses) for the period | 209 |
| | (325 | ) | | 853 |
|
| Add: reclassification adjustment for losses included in net income | 712 |
| | — |
| | — |
|
| Defined benefit plan gains (losses) and prior service costs not yet recognized as components of net periodic pension cost: | | | | | |
| Prior service cost and losses for the period | (8,634 | ) | | (23,728 | ) | | (11,579 | ) |
| Amortization of prior service costs and net gains and losses | 2,772 |
| | 1,068 |
| | 804 |
|
| Comprehensive income (loss), before tax | 98,243 |
| | 74,728 |
| | (362,343 | ) |
| Income tax (benefit) related to items of other comprehensive income | (1,677 | ) | | (6,272 | ) | | (8,642 | ) |
| Comprehensive income (loss), net of tax | 99,920 |
| | 81,000 |
| | (353,701 | ) |
| Less: comprehensive income (loss) related to noncontrolling interests | 615 |
| | 476 |
| | (5,630 | ) |
| Comprehensive income (loss) attributable to common shareholders | $ | 99,305 |
| | $ | 80,524 |
| | $ | (348,071 | ) |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| Net income | $ | 128,198 |
| | $ | 104,151 |
| | $ | 97,866 |
|
| Foreign currency translation adjustment | (48,955 | ) | | (15,322 | ) | | 5,318 |
|
| Unrealized gains on marketable securities | — |
| | — |
| | 921 |
|
| Defined benefit plan (losses) gains and prior service costs not yet recognized as components of net periodic pension cost (Note 10): | | | | | |
| Prior service cost and (losses) gains for the period | (42,236 | ) | | 19,293 |
| | (8,634 | ) |
| Amortization of prior service costs and net gains and losses | 1,234 |
| | 3,017 |
| | 2,772 |
|
| Comprehensive income, before income taxes | 38,241 |
| | 111,139 |
| | 98,243 |
|
| Income tax expense (benefit) related to items of other comprehensive income (Note 8) | (9,897 | ) | | 7,805 |
| | (1,677 | ) |
| Comprehensive income, net of income taxes | 48,138 |
| | 103,334 |
| | 99,920 |
|
| Less: Comprehensive income related to noncontrolling interests | 1,044 |
| | 1,752 |
| | 615 |
|
| Comprehensive income attributable to common shareholders | $ | 47,094 |
| | $ | 101,582 |
| | $ | 99,305 |
|
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
| | | | December 29,
2012 | | December 31,
2011 | December 27,
2014 | | December 28,
2013 |
| Assets | | | | | | |
| Current assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | $ | 109,685 |
| | $ | 68,905 |
| $ | 160,023 |
| | $ | 155,927 |
|
| Trade receivables, net | 203,001 |
| | 184,810 |
| 257,991 |
| | 220,630 |
|
| Inventories | 88,470 |
| | 92,969 |
| 89,043 |
| | 89,396 |
|
| Other current assets | 83,601 |
| | 79,052 |
| 99,841 |
| | 86,597 |
|
| Current assets of discontinued businesses | 495 |
| | 107 |
| |
| Total current assets | 485,252 |
| | 425,843 |
| 606,898 |
| | 552,550 |
|
| Property, plant and equipment, net | 717,020 |
| | 738,030 |
| 676,797 |
| | 676,182 |
|
| Goodwill, net | 208,609 |
| | 197,561 |
| |
| Goodwill | | 321,077 |
| | 230,701 |
|
| Other intangible assets, net | 84,922 |
| | 93,437 |
| 178,875 |
| | 84,537 |
|
| Deferred tax asset | 38,554 |
| | 44,804 |
| 23,193 |
| | 26,822 |
|
| Other assets | 48,659 |
| | 57,659 |
| 78,352 |
| | 61,964 |
|
| Long-term assets of discontinued businesses | 3,328 |
| | 986 |
| |
| Total assets | $ | 1,586,344 |
| | $ | 1,558,320 |
| $ | 1,885,192 |
| | $ | 1,632,756 |
|
| Liabilities and Equity | | | | | | |
| Current liabilities | | | | |
| Current liabilities: | | | | |
| Current portion of long-term debt and capital leases | $ | 139,384 |
| | $ | 14,758 |
| $ | 31,904 |
| | $ | 21,437 |
|
| Accounts payable | 31,218 |
| | 34,332 |
| 33,815 |
| | 31,770 |
|
| Accrued compensation | 46,951 |
| | 41,602 |
| 71,569 |
| | 58,461 |
|
| Deferred revenue | 56,422 |
| | 56,530 |
| 78,124 |
| | 54,177 |
|
| Accrued liabilities | 45,208 |
| | 54,377 |
| 67,380 |
| | 56,712 |
|
| Other current liabilities | 21,262 |
| | 14,033 |
| 11,079 |
| | 22,546 |
|
| Current liabilities of discontinued businesses | 1,802 |
| | 1,165 |
| |
| Current liabilities of discontinued operations | | 2,299 |
| | 1,931 |
|
| Total current liabilities | 342,247 |
| | 216,797 |
| 296,170 |
| | 247,034 |
|
| Long-term debt and capital leases | 527,136 |
| | 703,187 |
| 745,958 |
| | 642,352 |
|
| Other long-term liabilities | 104,966 |
| | 108,451 |
| 130,361 |
| | 70,632 |
|
| Long-term liabilities of discontinued businesses | 8,795 |
| | 2,522 |
| |
| Long-term liabilities of discontinued operations | | 8,357 |
| | 8,080 |
|
| Total liabilities | 983,144 |
| | 1,030,957 |
| 1,180,846 |
| | 968,098 |
|
| 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; 79,607,981 issued and 48,220,037 shares outstanding at December 29, 2012 and 78,473,888 issued and 48,875,715 shares outstanding at December 31, 2011 | 796 |
| | 785 |
| |
| Capital in excess of par value | 2,097,316 |
| | 2,056,921 |
| |
| Commitments and contingencies (Notes 2, 7, 9 and 12) | |
| |
|
| Redeemable noncontrolling interest | | 28,419 |
| | 20,581 |
|
| Equity: | | | | |
| Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding | | — |
| | — |
|
| Common stock, $0.01 par value; 120,000 shares authorized; 84,503 shares issued and 47,327 shares outstanding at December 27, 2014 and 82,523 shares issued and 47,554 shares outstanding at December 28, 2013 | | 845 |
| | 825 |
|
| Additional paid-in capital | | 2,307,640 |
| | 2,206,155 |
|
| Accumulated deficit | (368,301 | ) | | (465,596 | ) | (138,775 | ) | | (265,473 | ) |
| Treasury stock, at cost, 31,387,944 shares and 29,598,173 shares at December 29, 2012 and December 31, 2011, respectively | (1,135,609 | ) | | (1,071,120 | ) | |
| Accumulated other comprehensive income | 6,603 |
| | 4,593 |
| |
| Total shareowners' equity | 600,805 |
| | 525,583 |
| |
| Treasury stock, at cost, 37,176 shares and 34,969 shares at December 27, 2014 and December 28, 2013, respectively | | (1,423,260 | ) | | (1,305,880 | ) |
| Accumulated other comprehensive income (loss) | | (74,247 | ) | | 5,357 |
|
| Total equity attributable to common shareholders | | 672,203 |
| | 640,984 |
|
| Noncontrolling interests | 2,395 |
| | 1,780 |
| 3,724 |
| | 3,093 |
|
| Total equity | 603,200 |
| | 527,363 |
| |
| Total liabilities and equity | $ | 1,586,344 |
| | $ | 1,558,320 |
| |
| Total equity and redeemable noncontrolling interest | | 704,346 |
| | 664,658 |
|
| Total liabilities, equity and redeemable noncontrolling interest | | $ | 1,885,192 |
| | $ | 1,632,756 |
|
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27,
2014 | | December 28,
2013 | | December 29,
2012 |
| Cash flows relating to operating activities | | | | | |
| Net income | $ | 128,198 |
| | $ | 104,151 |
| | $ | 97,866 |
|
| Less: Loss from discontinued operations | (1,726 | ) | | (1,265 | ) | | (4,252 | ) |
| Income from continuing operations | 129,924 |
| | 105,416 |
| | 102,118 |
|
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 96,445 |
| | 96,636 |
| | 81,275 |
|
| Amortization of debt issuance costs and discounts | 1,725 |
| | 9,561 |
| | 17,622 |
|
| Impairment charges | 582 |
| | 4,202 |
| | 3,548 |
|
| Stock-based compensation | 31,035 |
| | 24,542 |
| | 21,855 |
|
| Deferred income taxes | 7,060 |
| | (846 | ) | | 1,311 |
|
| (Gain) loss on investments in limited partnerships | (9,301 | ) | | (5,864 | ) | | 618 |
|
| Other, net | (1,564 | ) | | 755 |
| | 5,519 |
|
| Changes in assets and liabilities: | | | | | |
| Trade receivables | (28,088 | ) | | (19,492 | ) | | (16,266 | ) |
| Inventories | (2,956 | ) | | (1,571 | ) | | 785 |
|
| Other assets | (5,145 | ) | | 2,421 |
| | (117 | ) |
| Accounts payable | 4,599 |
| | (7,080 | ) | | (3,257 | ) |
| Accrued compensation | 13,631 |
| | 11,926 |
| | 4,612 |
|
| Deferred revenue | 22,244 |
| | (3,297 | ) | | (915 | ) |
| Accrued liabilities | 8,284 |
| | 759 |
| | (7,050 | ) |
| Taxes payable and prepaid taxes | (7,090 | ) | | (3,054 | ) | | 2,331 |
|
| Other liabilities | (9,253 | ) | | (5,969 | ) | | (5,983 | ) |
| Net cash provided by operating activities | 252,132 |
| | 209,045 |
| | 208,006 |
|
| Cash flows relating to investing activities | | | | | |
| Acquisition of businesses and assets, net of cash acquired | (234,267 | ) | | (29,218 | ) | | (16,861 | ) |
| Capital expenditures | (56,925 | ) | | (39,154 | ) | | (47,534 | ) |
| Purchases of investments | (26,648 | ) | | (17,566 | ) | | (18,537 | ) |
| Proceeds from sale of investments and distributions from investments in limited partnerships | 21,000 |
| | 11,584 |
| | 25,156 |
|
| Other, net | (1,150 | ) | | 307 |
| | 2,786 |
|
| Net cash used in investing activities | (297,990 | ) | | (74,047 | ) | | (54,990 | ) |
| Cash flows relating to financing activities | | | | | |
| Proceeds from long-term debt and revolving credit agreement | 298,920 |
| | 511,804 |
| | 74,116 |
|
| Proceeds from exercises of stock options | 73,688 |
| | 93,789 |
| | 18,359 |
|
| Payments on long-term debt, capital lease obligations and revolving credit agreement | (194,536 | ) | | (523,304 | ) | | (140,347 | ) |
| Purchase of treasury stock | (122,018 | ) | | (165,932 | ) | | (64,189 | ) |
| Other, net | 5,360 |
| | (594 | ) | | 940 |
|
| Net cash provided by (used in) financing activities | 61,414 |
| | (84,237 | ) | | (111,121 | ) |
| Discontinued operations | | | | | |
| Net cash used in operating activities from discontinued operations | (1,081 | ) | | (1,906 | ) | | (106 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (10,379 | ) | | (2,613 | ) | | (1,009 | ) |
| Net change in cash and cash equivalents | 4,096 |
| | 46,242 |
| | 40,780 |
|
| Cash and cash equivalents, beginning of period | 155,927 |
| | 109,685 |
| | 68,905 |
|
| Cash and cash equivalents, end of period | $ | 160,023 |
| | $ | 155,927 |
| | $ | 109,685 |
|
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27,
2014 | | December 28,
2013 | | December 29,
2012 |
| Supplemental cash flow information: | | | | | |
| Cash paid for income taxes | $ | 29,704 |
| | $ | 19,139 |
| | $ | 17,032 |
|
| Cash paid for interest | $ | 10,199 |
| | $ | 12,029 |
| | $ | 15,145 |
|
| Non-cash investing and financing activities: | | | | | |
| Capitalized interest | $ | 1,032 |
| | $ | 243 |
| | $ | 467 |
|
| Additions to property, plant and equipment, net | $ | 4,355 |
| | 6,960 |
| | 2,778 |
|
| Assets acquired under capital lease | $ | 18,690 |
| | — |
|
| 69 |
|
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Redeemable
Noncontrolling
Interest | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interest | | Total Equity |
| | | Shares | | Amount | | | | | Shares | | Amount | | | |
| December 31, 2011 | $ | — |
| | | 78,474 |
| | $ | 785 |
| | $ | 2,056,921 |
| | $ | (465,596 | ) | | $ | 4,593 |
| | 29,598 |
| | $ | (1,071,120 | ) | | $ | 525,583 |
| | $ | 1,780 |
| | $ | 527,363 |
|
| Components of comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | |
| Net income | — |
| | | — |
| | — |
| | — |
| | 97,295 |
| | — |
| | — |
| | — |
| | 97,295 |
| | 571 |
| | 97,866 |
|
| Other comprehensive income | — |
| | | — |
| | — |
| | — |
| | — |
| | 2,010 |
| | — |
| | — |
| | 2,010 |
| | 44 |
| | 2,054 |
|
| Total comprehensive income | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | 99,305 |
| | 615 |
| | 99,920 |
|
| Tax benefit associated with stock issued under employee compensation plans | — |
| | | — |
| | — |
| | 125 |
| | — |
| | — |
| | — |
| | — |
| | 125 |
| | — |
| | 125 |
|
| Issuance of stock under employee compensation plans | — |
| | | 1,134 |
| | 11 |
| | 18,415 |
| | — |
| | — |
| | — |
| | — |
| | 18,426 |
| | — |
| | 18,426 |
|
| Acquisition of treasury shares | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,790 |
| | (64,489 | ) | | (64,489 | ) | | — |
| | (64,489 | ) |
| Stock-based compensation | — |
| | | — |
| | — |
| | 21,855 |
| | — |
| | — |
| | — |
| | — |
| | 21,855 |
| | — |
| | 21,855 |
|
| December 29, 2012 | — |
| | | 79,608 |
| | 796 |
| | 2,097,316 |
| | (368,301 | ) | | 6,603 |
| | 31,388 |
| | (1,135,609 | ) | | 600,805 |
| | 2,395 |
| | 603,200 |
|
| Components of comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | |
| Net income | 687 |
| | | — |
| | — |
| | — |
| | 102,828 |
| | — |
| | — |
| | — |
| | 102,828 |
| | 636 |
| | 103,464 |
|
| Other comprehensive income (loss) | 367 |
| | | — |
| | — |
| | — |
| | — |
| | (1,246 | ) | | — |
| | — |
| | (1,246 | ) | | 62 |
| | (1,184 | ) |
| Total comprehensive income | 1,054 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | 101,582 |
| | 698 |
| | 102,280 |
|
| Redeemable noncontrolling interest acquired in business acquisition | 8,963 |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Adjustment of redeemable noncontrolling interest to fair value | 10,564 |
| | | — |
| | — |
| | (10,564 | ) | | — |
| | — |
| | — |
| | — |
| | (10,564 | ) | | — |
| | (10,564 | ) |
| Tax benefit associated with stock issued under employee compensation plans | — |
| | | — |
| | — |
| | 1,069 |
| | — |
| | — |
| | — |
| | — |
| | 1,069 |
| | — |
| | 1,069 |
|
| Issuance of stock under employee compensation plans | — |
| | | 2,915 |
| | 29 |
| | 93,792 |
| | — |
| | — |
| | — |
| | — |
| | 93,821 |
| | — |
| | 93,821 |
|
| Acquisition of treasury shares | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,581 |
| | (170,271 | ) | | (170,271 | ) | | — |
| | (170,271 | ) |
| Stock-based compensation | — |
| | | — |
| | — |
| | 24,542 |
| | — |
| | — |
| | — |
| | — |
| | 24,542 |
| | — |
| | 24,542 |
|
| December 28, 2013 | 20,581 |
| | | 82,523 |
| | 825 |
| | 2,206,155 |
| | (265,473 | ) | | 5,357 |
| | 34,969 |
| | (1,305,880 | ) | | 640,984 |
| | 3,093 |
| | 644,077 |
|
| Components of comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | |
| Net income | 855 |
| | | — |
| | — |
| | — |
| | 126,698 |
| | — |
| | — |
| | — |
| | 126,698 |
| | 645 |
| | 127,343 |
|
| Other comprehensive loss | (442 | ) | | | — |
| | — |
| | — |
| | — |
| | (79,604 | ) | | — |
| | — |
| | (79,604 | ) | | (14 | ) | | (79,618 | ) |
| Total comprehensive income | 413 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | 47,094 |
| | 631 |
| | 47,725 |
|
| Adjustment of redeemable noncontrolling interest to fair value | 7,425 |
| | | — |
| | — |
| | (7,425 | ) | | — |
| | — |
| | — |
| | — |
| | (7,425 | ) | | — |
| | (7,425 | ) |
| Tax benefit associated with stock issued under employee compensation plans | — |
| | | — |
| | — |
| | 4,301 |
| | — |
| | — |
| | — |
| | — |
| | 4,301 |
| | — |
| | 4,301 |
|
| Issuance of stock under employee compensation plans | — |
| | | 1,980 |
| | 20 |
| | 73,574 |
| | — |
| | — |
| | — |
| | — |
| | 73,594 |
| | — |
| | 73,594 |
|
| Acquisition of treasury shares | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | 2,207 |
| | (117,380 | ) | | (117,380 | ) | | — |
| | (117,380 | ) |
| Stock-based compensation | — |
| | | — |
| | — |
| | 31,035 |
| | — |
| | — |
| | — |
| | — |
| | 31,035 |
| | — |
| | 31,035 |
|
| December 27, 2014 | $ | 28,419 |
| | | 84,503 |
| | $ | 845 |
| | $ | 2,307,640 |
| | $ | (138,775 | ) | | $ | (74,247 | ) | | 37,176 |
| | $ | (1,423,260 | ) | | $ | 672,203 |
| | $ | 3,724 |
| | $ | 675,927 |
|
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29,
2012 | | December 31,
2011 | | December 25,
2010 |
| Cash flows relating to operating activities | | | | | |
| Net income (loss) | $ | 97,866 |
| | $ | 109,977 |
| | $ | (342,117 | ) |
| Less: Loss from discontinued operations | (4,252 | ) | | (5,545 | ) | | (8,012 | ) |
| Income (loss) from continuing operations | 102,118 |
| | 115,522 |
| | (334,105 | ) |
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 81,275 |
| | 85,230 |
| | 93,649 |
|
| Amortization of debt issuance costs and discounts | 17,622 |
| | 20,010 |
| | 19,777 |
|
| Goodwill impairment | — |
| | — |
| | 305,000 |
|
| Impairment charges | 3,548 |
| | 7,492 |
| | 91,378 |
|
| Non-cash compensation | 21,855 |
| | 21,706 |
| | 25,526 |
|
| Deferred income taxes | 1,311 |
| | (8,668 | ) | | (42,342 | ) |
| Other, net | 6,316 |
| | (7,436 | ) | | 1,797 |
|
| Changes in assets and liabilities: | | | | | |
| Trade receivables | (16,266 | ) | | 7,669 |
| | (5,640 | ) |
| Inventories | 785 |
| | 3,766 |
| | 1,989 |
|
| Other assets | (296 | ) | | 505 |
| | (2,131 | ) |
| Accounts payable | (3,257 | ) | | 2,208 |
| | 71 |
|
| Accrued compensation | 4,612 |
| | (7,412 | ) | | 4,482 |
|
| Deferred revenue | (915 | ) | | (9,515 | ) | | (4,209 | ) |
| Accrued liabilities | (7,050 | ) | | (1,355 | ) | | 5,501 |
|
| Taxes payable and prepaid taxes | 2,331 |
| | (13,782 | ) | | 13,087 |
|
| Other liabilities | (5,983 | ) | | (9,098 | ) | | (5,594 | ) |
| Net cash provided by operating activities | 208,006 |
| | 206,842 |
| | 168,236 |
|
| Cash flows relating to investing activities | | | | | |
| Acquisition of businesses and assets, net of cash acquired | (16,861 | ) | | — |
| | — |
|
| Capital expenditures | (47,534 | ) | | (49,143 | ) | | (42,860 | ) |
| Purchases of investments | (18,537 | ) | | (24,556 | ) | | (27,600 | ) |
| Proceeds from sale of investments | 25,156 |
| | 31,607 |
| | 72,464 |
|
| Other, net | 2,786 |
| | 5,447 |
| | 950 |
|
| Net cash provided by (used in) investing activities | (54,990 | ) | | (36,645 | ) | | 2,954 |
|
| Cash flows relating to financing activities | | | | | |
| Proceeds from long-term debt and revolving credit agreement | 74,116 |
| | 250,708 |
| | 579,372 |
|
| Proceeds from exercises of stock options and warrants | 18,359 |
| | 20,625 |
| | 4,492 |
|
| Payments on long-term debt, capital lease obligation and revolving credit agreement | (140,347 | ) | | (252,965 | ) | | (381,535 | ) |
| Purchase of treasury stock and Accelerated Stock Repurchase Program | (64,189 | ) | | (283,795 | ) | | (356,527 | ) |
| Other, net | 940 |
| | (6,359 | ) | | (13,697 | ) |
| Net cash used in financing activities | (111,121 | ) | | (271,786 | ) | | (167,895 | ) |
| Discontinued operations | | | | | |
| Net cash provided by (used in) operating activities | (106 | ) | | (1,559 | ) | | 777 |
|
| Net cash provided by investing activities | — |
| | — |
| | 2,807 |
|
| Net cash provided by (used in) discontinued operations | (106 | ) | | (1,559 | ) | | 3,584 |
|
| Effect of exchange rate changes on cash and cash equivalents | (1,009 | ) | | (7,107 | ) | | (10,293 | ) |
| Net change in cash and cash equivalents | 40,780 |
| | (110,255 | ) | | (3,414 | ) |
| Cash and cash equivalents, beginning of period | 68,905 |
| | 179,160 |
| | 182,574 |
|
| Cash and cash equivalents, end of period | $ | 109,685 |
| | $ | 68,905 |
| | $ | 179,160 |
|
| Supplemental cash flow information | | | | | |
| Cash paid for interest | $ | 15,145 |
| | $ | 22,321 |
| | $ | 16,140 |
|
| Cash paid for taxes | $ | 17,032 |
| | $ | 29,124 |
| | $ | 22,068 |
|
| Capitalized interest | $ | 467 |
| | $ | 298 |
| | $ | 56 |
|
| Assets acquired under capital lease | $ | 69 |
| | $ | — |
| | $ | — |
|
| | | | | | |
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | |
| | Total | Accumulated (Deficit) Earnings | Accumulated Other Comprehensive Income | Common Stock | Capital in Excess of Par | Treasury Stock | Non-controlling Interest |
| Balance at December 26, 2009 | $ | 1,373,824 |
| $ | (238,493 | ) | $ | 45,037 |
| $ | 771 |
| $ | 2,038,455 |
| $ | (470,527 | ) | $ | (1,419 | ) |
| Components of comprehensive income, net of tax: | | | | | | | |
| Net income (loss) | (342,117 | ) | (336,669 | ) | | | | | (5,448 | ) |
| Other comprehensive income (loss) | (11,584 | ) | | (11,402 | ) | | | | (182 | ) |
| Total comprehensive income (loss) | (353,701 | ) | | | | | | (5,630 | ) |
| Tax detriment associated with stock issued under employee compensation plans | (926 | ) | | | | (926 | ) | | |
| Dividends paid noncontrolling interest | (270 | ) | | | | | | (270 | ) |
| Purchase of noncontrolling interest in PCS-China | (4,000 | ) | | | | (12,623 | ) | | 8,623 |
|
| Issuance of stock under employee compensation plans | 4,590 |
| | | 4 |
| 4,586 |
| | |
| Acquisition of treasury shares | (298,172 | ) | | | — |
| — |
| (298,172 | ) | |
| Accelerated Stock Repurchase equity instrument | (58,355 | ) | | | | (58,355 | ) | | |
| Stock-based compensation | 25,737 |
| | | | 25,737 |
| | |
| Balance at December 25, 2010 | $ | 688,727 |
| $ | (575,162 | ) | $ | 33,635 |
| $ | 775 |
| $ | 1,996,874 |
| $ | (768,699 | ) | $ | 1,304 |
|
| Components of comprehensive income, net of tax: | | | | | | | |
| Net income | 109,977 |
| 109,566 |
| | | | | 411 |
|
| Other comprehensive income (loss) | (28,977 | ) | | (29,042 | ) | | | | 65 |
|
| Total comprehensive income | 81,000 |
| | | | | | 476 |
|
| Tax detriment associated with stock issued under employee compensation plans | (802 | ) | | | | (802 | ) | | |
| Issuance of stock under employee compensation plans | 20,527 |
| | | 10 |
| 20,517 |
| | |
| Acquisition of treasury shares | (269,655 | ) | | | | 32,766 |
| (302,421 | ) | |
| Accelerated Stock Repurchase equity instrument | (14,140 | ) | | | | (14,140 | ) | | |
| Stock-based compensation | 21,706 |
| | | | 21,706 |
| | |
| Balance at December 31, 2011 | $ | 527,363 |
| $ | (465,596 | ) | $ | 4,593 |
| $ | 785 |
| $ | 2,056,921 |
| $ | (1,071,120 | ) | $ | 1,780 |
|
| Components of comprehensive income, net of tax: | | | | | | | |
| Net income | 97,866 |
| 97,295 |
| | | | | 571 |
|
| Other comprehensive income | 2,054 |
| | 2,010 |
| | | | 44 |
|
| Total comprehensive income | 99,920 |
| | | | | | 615 |
|
| Tax benefit associated with stock issued under employee compensation plans | 125 |
| | | | 125 |
| | |
| Issuance of stock under employee compensation plans | 18,426 |
| | | 11 |
| 18,415 |
| | |
| Acquisition of treasury shares | (64,489 | ) | | | | — |
| (64,489 | ) | |
| Stock-based compensation | 21,855 |
| | | | 21,855 |
| | |
| Balance at December 29, 2012 | $ | 603,200 |
| $ | (368,301 | ) | $ | 6,603 |
| $ | 796 |
| $ | 2,097,316 |
| $ | (1,135,609 | ) | $ | 2,395 |
|
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. (the Company), together with its subsidiaries, is a leading global providerfull service, early-stage contract research organization (CRO). The Company has built upon its core competency of solutions that accelerate the druglaboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and development process including research modelssafety assessment services, both Good Laboratory Practice (GLP) and associatednon-GLP, that are able to support its clients from target identification through preclinical development. The Company also provides a suite of products and services to support its clients’ manufacturing activities.
Principles of Consolidation
The Company's consolidated financial statements reflect its financial statements and outsourced preclinical services. Ourthose of its wholly-owned and majority-owned subsidiaries. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.
The Company's fiscal year is 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.
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.
Segment Reporting
During the quarter ended June 28, 2014, following its acquisition of the CRO services division of Galapagos N.V. (Argenta and BioFocus), the Company revised its reportable segments to ensure alignment with the Company's view of the business. The Company reviewed the new and existing markets addressed by the business, the recently revised go-to-market strategy, long-term operating margins, and the discrete financial information available to its Chief Operating Decision Maker, and considered how its businesses aggregate based on these qualitative and quantitative factors. Based on this review, the Company identified three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA) and Manufacturing Support (Manufacturing). The Company reported segment results on this basis for the current period and retrospectively for all comparable prior periods.
The revised reportable segments are as follows:
|
| | |
| Research Models and Services | Discovery and Safety Assessment | Manufacturing Support |
| Research Models | Discovery Services (2) | Endotoxin and Microbial Detection (EMD) |
Research Model Services (1) | Safety Assessment | Avian Vaccine Services |
| | Biologics Testing Solutions |
(1) Research Model Services includes Genetically Engineered Models and Services (GEMS), Research Animal Diagnostic Services (RADS), and Insourcing Solutions (IS).
(2) Discovery Services includes both the In Vivo Discovery business, and the Early Discovery business. Early Discovery includes Argenta and BioFocus, which were acquired in April 2014, and ChanTest Corporation (ChanTest), which was acquired in October 2014.
Prior to recasting the reportable segments, the businesses were reported in two segments as follows:
|
| |
| Research Models and Services | Preclinical Services |
Research Models (3) | Discovery Services |
Research Model Services (4) | Safety Assessment |
| Endotoxin and Microbial Detection | Biologics Testing Solutions |
(3) Research Models included Avian Vaccine Services.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Research Model Services included GEMS, RADS, IS and Discovery Research Services. As part of the segment revisions, the former Discovery Research Services was folded into the Company’s Discovery Services business, previously located under the Preclinical Services segment.
Use of Estimates
The preparation of consolidated financial statements have been prepared in conformityaccordance with generally accepted accounting principles and, as such, include amounts based on informedin the United States (U.S. GAAP) requires that the Company makes estimates and judgments that may affect the reported amounts of management with consideration givenassets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to materiality. Estimatesbe reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions are reviewedor conditions. Changes in an ongoing basis and the effect of revisions isestimates are reflected in the consolidated statementsreported results in the period in which they are determined to be necessary. Actual results could differ from those estimates.become known.
Cash and Cash Equivalents
Cash equivalents include money market funds and time deposits and highly liquid investments with originalremaining maturities at the purchase date of three months or less.
Trade Receivables, Net
We recordThe Company records trade receivables net of an allowance for doubtful accounts. We establish anAn 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 isestablished based on historical collection information, a review of major client accounts receivable balances and management's assessment of current economic conditions. We reassessconditions in the allowance for doubtful accounts each quarter. Ifgeographies in which it operates. Amounts determined to be uncollectible are charged or written off against the financial condition of our clients 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 $947 in 2012, $426 in 2011 and $1,536 in 2010. Write offs to the allowance for doubtful accounts amounted to $697 in 2012, $1,228 in 2011 and $1,541 in 2010.allowance.
The composition of net trade receivables is as follows:
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Client receivables | $ | 174,774 |
| | $ | 159,381 |
|
| Unbilled revenue | 32,494 |
| | 29,446 |
|
| Total | 207,268 |
| | 188,827 |
|
| Less allowance for doubtful accounts | (4,267 | ) | | (4,017 | ) |
| Net trade receivables | $ | 203,001 |
| | $ | 184,810 |
|
Concentrations of Credit Risk
Financial instruments that potentially subject usthe Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade receivables. We place ourThe Company places cash and cash equivalents and investments in various financial institutions with high credit rating and limitlimits the amount of credit exposure to any one financial institution. Our tradeTrade receivables are primarily from clients in the pharmaceutical and biotechnology industries.industries, as well as academic and government institutions. Concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the wide variety of customers using the Company's products and services as well as their dispersion across many geographic areas. No single client accounted for more than 5% of our net salesrevenue or trade receivables for any period presented.
Fair Value Measurements
The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy:
Level 1 - Fair values are determined utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access;
Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves and foreign currency spot rates;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The fair value hierarchy level is determined by asset or liability class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
Cash equivalents- Valued at quoted market prices determined through third party pricing services.
Life insurance policies- Valued at cash surrender value based on fair value of underlying investments.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Redeemable noncontrolling interest- Valued primarily using the income approach based on estimated future cash flows of the underlying business based on the Company's projected financial data discounted by a weighted average cost of capital.
Contingent consideration- Valued based on a probability-weighting of the future cash flows associated with the potential outcomes.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the average cost method for the small model business and first-in-first-out for the Company's large model and EMD businesses. For the small model business, cost includes direct materials such as feed and bedding, costs of personnel directly involved in the care of the models, and an allocation of facility overhead. For the large model business, cost is primarily the external cost paid to acquire the model. Certain businesses value inventory based on standard costs, which are periodically compared to and adjusted to actual costs. Inventory costs are charged to cost of revenue in the period the products are sold to an external party. The Company analyzes its inventory levels on a quarterly basis and writes down inventory that is determined to be damaged, obsolete or otherwise unmarketable, with a corresponding charge to cost of products sold.
Property, Plant and Equipment, Net
Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful life, are carried at cost and are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The cost of normal, recurring, or periodic repairs and maintenance activities related to property, plant and equipment is expensed as incurred. In addition, the Company capitalizes certain internal use computer software development costs.
Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset.
The Company generally depreciates the cost of its property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets as follows:
|
| |
| Estimated
useful lives |
| (in years) |
| Land | Indefinite |
| Buildings | 20 - 40 |
| Machinery and equipment | 3 - 20 |
| Furniture and fixtures | 5 - 10 |
| Computer hardware and software | 3 - 8 |
| Vehicles | 3 - 5 |
| Leasehold improvements | Lesser of useful life or lease term |
When the Company disposes of property, plant and equipment, it removes the associated cost and accumulated depreciation from the related accounts on its consolidated balance sheet and includes any resulting gain or loss in its consolidated statement of income.
Business Combinations
The Company accounts for acquisitions as business combinations under the acquisition method of accounting. The Company allocates the amounts that it pays for each acquisition to the assets it acquires and liabilities it assumes based on their fair values at the dates of acquisition, including identifiable intangible assets. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions determined by management and which consider management's best estimates of inputs and assumptions that a market participant would use.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Marketable SecuritiesContingent Consideration
Investments in marketable securitiesThe consideration for the Company’s acquisitions often includes future payments that are reportedcontingent upon the occurrence of a particular event. The Company records an obligation for such contingent payments at fair value and consist of 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.acquisition date. 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.
DuringCompany estimates the first quarter of 2012, we sold our auction rate securities for $11,260 in cash and recorded a realized loss of $712, which is included in other income (expense). We held no auction rate securities as of December 29, 2012. As of December 31, 2011, our marketable securities included auction rate securities, which are variable-rate debt instruments.
The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type wereof contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and thus likelihood of making related payments. The Company revalues these contingent consideration obligations each reporting period. Changes in the fair value of the contingent consideration obligations are recognized within our consolidated statements of income as follows:a component of selling, general and administrative expenses. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates and changed in the assumed probabilities of successful achievement of certain financial targets.
|
| | | | | | | | | | | | | | | |
| | December 29, 2012 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Time deposits | $ | 6,781 |
| | $ | — |
| | $ | — |
| | $ | 6,781 |
|
| Auction rate securities | — |
| | — |
| | — |
| | — |
|
| | $ | 6,781 |
| | $ | — |
| | $ | — |
| | $ | 6,781 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2011 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Time deposits | $ | 5,359 |
| | $ | — |
| | $ | — |
| | $ | 5,359 |
|
| Auction rate securities | 11,972 |
| | — |
| | (921 | ) | | 11,051 |
|
| | $ | 17,331 |
| | $ | — |
| | $ | (921 | ) | | $ | 16,410 |
|
MaturitiesDiscount rates in the Company’s valuation models represent a measure of debt securities were as follows:
|
| | | | | | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Due less than one year | $ | 6,781 |
| | $ | 6,781 |
| | $ | 5,359 |
| | $ | 5,359 |
|
| Due after one year through five years | — |
| | — |
| | — |
| | — |
|
| Due after ten years | — |
| | — |
| | 11,972 |
| | 11,051 |
|
| | $ | 6,781 |
| | $ | 6,781 |
| | $ | 17,331 |
| | $ | 16,410 |
|
Inventories
Inventories are stated at the lower of cost, determined principallycredit risk associated with settling the liability. The period over which the Company discounts its contingent obligations is typically based on when the average cost method, or market. The determination of marketcontingent payments would be triggered. These fair value involves assessment of numerous factors, including costs to dispose of inventory and estimated selling price. Inventory costs for small modelsmeasurements 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 saleson significant inputs not observable in the periodmarket. See Note 5, "Fair Value," in the models are sold. Reserves are recordedaccompanying notes to reduce the carrying valueconsolidated financial statements for inventory determined damaged, obsolete or otherwise unable to be sold. During 2012, we recorded an inventory write-off of $953 associated with a dispute concerning large model inventory held by a vendor which we believe to be non-recoverable.additional information.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
The composition of inventories is as follows:
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Raw materials and supplies | $ | 14,525 |
| | $ | 13,987 |
|
| Work in process | 11,082 |
| | 13,533 |
|
| Finished products | 62,863 |
| | 65,449 |
|
| Inventories | $ | 88,470 |
| | $ | 92,969 |
|
Other Current Assets
Other current assets consist of assets we intend to settle within the next twelve months.
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Prepaid assets | $ | 20,404 |
| | $ | 22,828 |
|
| Deferred tax asset | 30,018 |
| | 30,894 |
|
| Marketable securities | 6,781 |
| | 5,359 |
|
| Prepaid income tax | 26,169 |
| | 19,742 |
|
| Restricted cash | 229 |
| | 229 |
|
| Other current assets | $ | 83,601 |
| | $ | 79,052 |
|
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 on certain capital projects which amounted to $467 in 2012, $298 in 2011 and $56 in 2010, respectively. We also capitalize internal and external costs incurred during the application development stage of internal use software. 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; computer hardware and software 3 to 8 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.
The composition of net property, plant and equipment is as follows:
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Land | $ | 40,812 |
| | $ | 40,517 |
|
| Buildings | 697,547 |
| | 696,275 |
|
| Machinery and equipment | 356,960 |
| | 332,683 |
|
| Leasehold improvements | 34,916 |
| | 29,975 |
|
| Furniture and fixtures | 25,681 |
| | 26,775 |
|
| Vehicles | 3,736 |
| | 5,226 |
|
| Computer hardware and software | 107,171 |
| | 105,563 |
|
| Construction in progress | 46,186 |
| | 57,661 |
|
| Total | 1,313,009 |
| | 1,294,675 |
|
| Less accumulated depreciation | (595,989 | ) | | (556,645 | ) |
| Net property, plant and equipment | $ | 717,020 |
| | $ | 738,030 |
|
Depreciation expense for 2012, 2011 and 2010 was $63,207, $63,435 and $69,244, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Valuation and Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the difference between the purchase price and other indefinite-lived intangibles are not amortized and are reviewed for impairment at least annually. Valuation of goodwill requires significant judgment. Assumptions and estimates are used in determining the fair value of the identifiable tangible and intangible net assets acquired and liabilities assumed in a business acquisition. A significant portion ofwhen accounted for using the purchase price in our acquisitionsmethod of accounting. Goodwill is assigned to intangible assets and goodwill. Assigning value to intangible assets requiresnot amortized, but reviewed for impairment on an annual basis, during the fourth quarter, or more frequently if an event occurs or circumstances change 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 establishingwould more-likely-than-not reduce 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 lead to changes in amortization expense recorded in our future financial statements.Company's reporting units below their carrying amounts.
We perform a test for goodwill impairment annually and whenever events or circumstances make it likely the fair value of a reporting unit
The Company has fallen below its carrying amount to determine if impairment exists. Our annual goodwill impairment assessment has historically been completed in the fourth quarter.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, otherwise known as “Step 0”. Step 0 provides entities with the option to perform afirst assess qualitative assessmentfactors to determine whether it is “more likely than not”necessary to perform the two-step impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the reporting unit'scarrying value of goodwill is not recoverable, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, the Company compares the fair value is less thanof its goodwill. The qualitative factors may include macroeconomic conditions, industry and market conditions, cost factors, overall financial performancereporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, events affectingthen the reporting units, share price, etc.
As management considered whether applying a purely qualitative assessment of goodwill would be sufficient (i.e. applying Step 0 without quantitative support and bypassing Step 1), management reviewed the implied “cushion” for each reporting unit as of the prior year's goodwill assessment. For the PCS reporting unit, given the relatively low cushion of 15% and the preliminary 5 year strategic plan, management concluded that a quantitative analysis would be required. Therefore, management decided to proceed to Step 1 for all reporting units.
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 our 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.
If the first step of the impairment test indicates a potential impairment, we perform the second step of the goodwill impairment process. In the second step of the process, we calculate an implied fair value of goodwill for the applicable reporting unit by measuring the excess of the estimated fair value of the reporting unit as calculatedis performed 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 assignedorder to a reporting unit exceedsdetermine 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 client relationships.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Valuation and Impairment of Long-Lived Assets
We assessCompany’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
Long-Lived Assets
Long-lived assets to be held and used, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying valueamount of the assets or asset group may not be recoverable. Factors we consider important which could trigger an impairment review include but are not limited to the following:
significant underperformance relative to expected historical or projected future operating results;
significant negative industry or economic trends; or
significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Should we determineIn the event that the carrying value of held-for-use long-lived assets maysuch cash flows are not be recoverable, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by managementexpected to be commensurate with the risk inherent in our current business model. We may also estimate fair value based on market prices for similar assets, as appropriate. Significant judgments are requiredsufficient to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets.
Long-lived asset groups may be classified as held-for-sale when the following conditions are met: we have committed to a plan to sell the asset group and it is unlikely that significant changes will be made to the plan; the asset group is available for immediate sale in its present condition and it is probable that the sale will be completed within one year; and an active program to locate a buyer has been initiated and the asset group is being marketed at a sale price that is reasonable in relation to its current fair value. Should we determine that the carrying value of held-for-sale long-lived assets exceeds its fair value, we will measure any impairment based on this difference. Subsequent adjustments to the carrying amount of held-for-sale assets based on changes in fair value are recorded but only to the extent ofrecover the carrying amount of the asset group when it enteredassets, the held-for-sale category.
Other Assets, Noncurrent
Other assets consist of assets that we do not intendare written-down to settle within the next twelve months.
The composition of other assets is as follows:
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Deferred financing costs | $ | 6,424 |
| | $ | 9,239 |
|
| Cash surrender value of life insurance policies | 25,240 |
| | 25,057 |
|
| Long term marketable securities | — |
| | 11,051 |
|
| Equity-method affiliates | 8,492 |
| | 5,737 |
|
| Other assets | 8,503 |
| | 6,575 |
|
| Other assets, noncurrent | $ | 48,659 |
| | $ | 57,659 |
|
Equity Method AffiliatesLong-lived assets to be disposed of are carried at fair value less costs to sell.
In 2009, we entered into a limited partnership which
Limited Partnerships
The Company invests in biotechnology and medical device companies. We committed $20,000, or approximately 12%,several venture capital limited partnerships that invest in start-up companies primarily in the life sciences industry. Our ownership interest in these limited partnerships ranges from 3.8% to 12.0%. As of December 27, 2014, the total commitment to these entities was $65.0 million, of which $19.6 million has been funded. Due to the percentage of ownership, the Company accounts for such investments under the equity method of accounting, whereby its portion of the limited partnership's total committed capital. As of December 29, 2012, we have contributed $8,820 of our total committed capital of $20,000. We recognized equity income/(loss) of $(618), $869investment gains and $(579) for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 respectively. This income/(loss) islosses, as reported in Otherthe fund's financial statements on a quarterly lag each reporting period, is recorded in other income, (expense), net on our consolidated statements of income. As of December 29, 2012, Equity Method Affiliates had anet. In addition, the Company adjusts the carrying value of $8,492, which is reportedthese investments to reflect its estimate of changes to fair value since the fund's financial statements based information from the fund's management team, market prices of known public holdings of the fund and other information. During the fiscal years 2014, 2013 and 2012, the Company recognized gains (losses) related to these investments of $9.3 million, $5.9 million, $(0.6) million, respectively. The Company received distributions of $7.4 million in Other Assets on2014. No distributions were made to the consolidated balance sheets.Company in 2013 or 2012.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Accounting for Investment in Life Insurance Contracts
Our investmentInvestments in life insurance contracts are recorded at cash surrender value. Accordingly, we recognize theThe initial investment at the transaction price is recognized and remeasure the investment at cash surrender valueremeasured based on fair value of underlying investments or contractual value each reporting period. Investments in and redemptions of these life insurance contracts are reported as part of purchases of investmentscash flows from investing activities in the consolidated statement of cash flows. At December 29, 2012, we held 36 contracts with a carrying value of $25,24027, 2014 and December 28, 2013, the Company held 40 and 30 contracts, respectively, with a face value of $68.2 million and $67.5 million, respectively.$85,138.
Restructuring and Contract Termination Costs
We recognize obligations associated with restructuring activitiesThe Company makes estimates and contract termination costs by recording a liability at fair value forjudgments regarding the costs associated with an exit or disposal activity as well as costs to terminate a contract or an operating lease. The overall purposeamount and timing of our restructuring actions is to lower operatingexpense and liability, including current and future period termination benefits, lease termination costs, and improve profitability by reducing excess capacities. Restructuring charges are typically recorded 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 forother exit costs that will continue to be incurred under a contract for its remaining term without economic benefitwhen related actions take place. The Company also assesses the recoverability of certain long-lived assets employed in the business and, in certain instances, shortens the expected useful life of the assets based on changes in their expected use. When the Company determines that the useful lives of assets are shorter than we had originally estimated, it records additional depreciation to us is recognizedreflect the assets’ new shorter useful lives. Severance and measured at its fair value when we cease using the right conveyed by the contract. During 2012, 2011other related costs and 2010, we implemented staffing reductions to improve operating efficiency and profitability at various sites. As a result of these actions, for the years ended December 29, 2012, December 31, 2011 and December 25, 2010, we recorded severance and retentionasset-related charges as shown below. As of December 29, 2012, $1,885 was included in accrued compensation and $1,751 in other long-term liabilities on our consolidated balance sheet. As of December 31, 2011, $1,432 was included in accrued compensation and $1,942 in other long-term liabilities on our consolidated balance sheet.
The following table rolls forward our severance and retention cost liability:
|
| | | | | | | | | | | |
| | Severance and Retention Costs |
| | 2012 | | 2011 | | 2010 |
| Balance, beginning of period | $ | 3,374 |
| | $ | 10,658 |
| | $ | 4,332 |
|
| Expense | 2,576 |
| | 5,462 |
| | 16,504 |
|
| Payments/utilization | (2,314 | ) | | (12,746 | ) | | (10,178 | ) |
| Balance, end of period | $ | 3,636 |
| | $ | 3,374 |
| | $ | 10,658 |
|
The following table presents severance and retention costs by classification on the income statement:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | 2012 | | 2011 | | 2010 |
| Severance charges included in cost of sales | $ | 1,203 |
| | $ | 1,012 |
| | $ | 10,860 |
|
| Severance charges included in selling, general and administrative expense | 1,373 |
| | 4,450 |
| | 5,644 |
|
| Total expense | $ | 2,576 |
| | $ | 5,462 |
| | $ | 16,504 |
|
The following table presents severance and retention cost by segment:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | 2012 | | 2011 | | 2010 |
| Research models and services | $ | 1,068 |
| | $ | 1,196 |
| | $ | 4,429 |
|
| Preclinical services | 1,508 |
| | 4,372 |
| | 9,145 |
|
| Corporate | — |
| | (106 | ) | | 2,930 |
|
| Total expense | $ | 2,576 |
| | $ | 5,462 |
| | $ | 16,504 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Other Current Liabilities
Other current liabilities consist of liabilities we intend to settleare reflected within the next twelve months.
The compositionCompany’s consolidated statement of other current liabilities isincome as follows:
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Accrued income taxes | $ | 18,216 |
| | $ | 10,552 |
|
| Current deferred tax liability | 410 |
| | 1,379 |
|
| Accrued interest and other | 2,636 |
| | 2,102 |
|
| Other current liabilities | $ | 21,262 |
| | $ | 14,033 |
|
Other Long-Term Liabilities
Other long-term liabilities consista component of liabilities we do not intend to settle within the next twelve months.
The compositioncost of other long-term liabilities is as follows:
|
| | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| Deferred tax liability | $ | 13,147 |
| | $ | 16,074 |
|
| Long-term pension liability | 44,316 |
| | 49,223 |
|
| Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan | 26,663 |
| | 25,739 |
|
| Other long-term liabilities | 20,840 |
| | 17,415 |
|
| Other long-term liabilities | $ | 104,966 |
| | $ | 108,451 |
|
Stock-Based Compensation Plans
We grantThe Company grants stock options, restricted stock, restricted stock units and performance share units (PSUs) to employees and stock options and restricted stock to employees and non-employee directors under our stock-based compensation plans. Stock-based compensation cost is measured at grant date,recognized as an expense in the consolidated financial statements based on the grant date fair value, of the award and is recognized as expense on a straight-line basisadjusted for estimated forfeitures, over the requisite service period. We estimate
For stock options, restricted stock and restricted stock units that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. The Company records the expense for PSU grants subject to performance and/or market conditions using the accelerated attribution method over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.
The fair value of stock options granted is calculated using the Black-Scholes valuation model. Key inputsoption-pricing model and assumptions used to estimate the fair value of stock options includePSUs is estimated using a lattice model with a Monte Carlo simulation, both of which require the exercise priceuse of the award, the expected option term, the risk-free interest rate over the option'ssubjective assumptions including volatility and expected term, the expected annual dividend yield and the expected stock price volatility.among others. The expected stock price volatility assumption is typically determined using the historical volatility of ourthe Company's common stock over the expected life of the option. The risk-free interest rate is based on the market yield for the five year U.S. Treasury security.stock-based award. The expected life of optionsterm is determined using historical option exercise activity.
We record deferred tax assets for stock-based awards The fair value of restricted stock and restricted stock units is based on the amountmarket value of stock-based compensation recognized in our consolidated statementsthe Company’s common stock on the date of income at the statutory tax rate for the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assets and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits is computed in accordance with the long-form method.grant.
Revenue Recognition
We recognizeThe Company recognizes revenue related to our products, which include research models, endotoxin and microbial detection (EMD) technology and avian vaccine support products, when all of the following conditions are satisfied: persuasive evidence of an arrangement exists, generally indelivery has occurred or services have been provided, the form of client purchase orders, title and risk of loss have transferred, which occurs upon delivery ofprice to the products, the sales price
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
customer is fixed or determinable, and collectabilitycollectibility is reasonably assured. These recognition criteria are met at the time the product is delivered to the client's site. Product sales are recorded net of returns upon delivery. For large models, in some cases clients pay in advance of delivery of the product. These advances are deferred and recognized as revenue upon delivery of the product.
Our serviceService revenue is generally evidenced by client contracts, which range in duration from a few weeks to a few years and is recognized upon the completion of the agreed upon performance criteria. These performance criteria are generally intypically take the form of either study protocolsan agreed upon rate per unit or specified activities or procedures that we are engaged to perform. These performance criteria are established by our clients andfixed fee arrangements. Such contracts typically do not contain acceptance provisions based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate per unit contracts is recognized as services are performed, based upon rates specified in the contract. RevenueIn cases where performance spans reporting periods, revenue of fixed fee contracts is recognized as services are performed, in relationmeasured on the ratio of outputs or performance obligations completed to the total estimated costscontractual outputs or performance obligations to complete procedures specified by clients in the form of study protocols. In general, such amounts become billable in accordance with predetermined payment schedules, but are recognized as revenue as services are performed. Revisionsbe provided. Changes in estimated effort to complete the fixed fee contract are reflected in the period in which the change becamebecomes known.
Deferred Changes in scope of work are common, especially under long-term contracts, and unbilled revenue are recognizedgenerally result in our consolidated balance sheets. In some cases, a portion ofchange in contract value. Once the client has agreed to the changes in scope and renegotiated pricing terms, the contract feevalue is paid at the time the studyamended and revenue is initiated. These advancestypically recognized as described above.
Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are recorded as deferred revenue and recognized as revenue asrevenue. As the contracted services are performed. Conversely,subsequently performed and the associated revenue is recognized, the deferred revenue balance is reduced by the amount of revenue recognized during the period. In other
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cases, services may be provided and revenue is recognized before the client is invoiced. In these cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to the customer pursuant to contractual terms, is recorded as an unbilled receivable. Once the client is invoiced, the unbilled receivable is reduced for the amount billed, and a corresponding trade receivable is recorded.
Most contracts are terminable by the client, either immediately or upon notice. These contracts often require payment to the Company of expenses to wind down the project, fees earned to date or, in some cases, a termination fee. Such payments are included in revenues when earned.
The Company recognizes product revenue net of allowances for estimated returns, rebates and discounts when title and risk of loss pass to customers. When the Company sells equipment with specified acceptance criteria, it assesses its ability to meet the acceptance criteria in order to determine the timing of revenue recognition. The Company would defer revenue until completion of customer acceptance testing if it is recorded based onnot able to demonstrate the level of service performed in advance of billingability to meet such acceptance criteria.
Advertising Costs
Advertising costs are expensed as incurred. For the clientfiscal years 2014, 2013 and recognized as unbilled receivable.2012, advertising costs totaled $1.3 million, $1.1 million and $0.9 million, respectively.
GuaranteesIncome Taxes
We include standard indemnification provisions in client contracts, which include standard provisions limiting our liabilityThe provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under such contracts, including our indemnification obligations, with certain exceptions. In addition, we are the guarantor of certain facility leases for businesses that have been sold to other parties. When we sell the business, we recognize the retained lease guarantee as a liability on our books at fair value and we amortize the liability ratably as our obligation decreases. In addition, we record contingent losses onmethod. Deferred tax assets and liabilities are recognized for the guaranteeexpected future tax consequences of temporary differences between the financial statements carrying amounts and their respective tax basis. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to be in effect when the temporary differences are expected to be settled. The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is probablemore likely than not that weall or a portion of deferred tax assets will not be requiredrealized.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, make lease paymentschanges in excesstax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
Translation of Foreign Currencies
The functional currency for each foreign subsidiary is their local currency. For the Company’s non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign exchange rates for the period. Adjustments resulting from the translation of the remaining carryingfinancial statements of our foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income, a separate component of equity.
Pension and Other Retiree Benefit Plans
The Company recognizes the funded status of its defined benefit pension and other postretirement benefit plans as an asset or liability. This amount ofis defined as the guarantee liability anddifference between the additional payments are reasonably estimable. See Note 13 for discussion of guarantees related to our Phase I clinical business that we discontinued in 2011.
Derivatives and Hedging Activities
We enter into derivatives to hedge the foreign currency exchange risk in order to minimize the impact of market fluctuations of foreign currency rates on our financial statements. Throughout the year we entered into various contracts to manage this risk. During 2012 and 2011, we entered into forward foreign currency contracts in order to hedge the foreign exchange impact of an intercompany loan between our entities with different functional currencies. As of December 29, 2012, the outstanding forward contract had a fair value of $16. We recorded a hedge gain (loss) of $(1,260) in 2012, $(6,287) in 2011 and $713 in 2010.
Fair Value
We hold cash equivalents, investments and certain other assets that are carried at fair value. We generally determine fair value using a market 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 based on quoted market prices of similar instruments. As of December 29, 2012, we do not have any significant non-recurring measurements of non-financialplan assets and non-financial liabilities.the benefit obligation. The Company measures plan assets and benefit obligations as of the date of its fiscal year end.
The valuation hierarchy for disclosure of the inputs used to measure fair value prioritizes the inputs into three broad levels as follows. 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 are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our ownkey assumptions used to measurecalculate benefit obligations and related pension costs include expected long-term rate of return on plan assets, discount rate, and liabilities at fair value. A financial asset or liability's classification withinexpected future rate of compensation increases. In addition, the hierarchy isCompany's actuaries utilize other assumptions such as withdrawal and mortality rates. Assumptions are determined based on the lowest level inputCompany's data and appropriate market indicators, and evaluated each year as of the plan's measurement date.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The discount rate reflects the rate the Company would have to pay to purchase high-quality investments that would provide cash sufficient to settle its current pension obligations. In the fiscal year 2014, the Company selected the discount rate based on a cash-flow matching analysis using Towers Watson’s proprietary Bond:Link tool. Prior to the fiscal year 2014, the Company employed a cash-flow matching methodology, which used the spot yield curve underlying the Citigroup Index. The refined estimation technique permits the Company to more closely match cash flows to the expected payments to participants than would be possible with the previously used yield curve model. This refinement reduced the Company's benefit obligations as of December 27, 2014 by $5.5 million.
The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.
The Company is significantrequired to recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and prior service costs or credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive income is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.
In the fiscal year 2014, for the U.S. plans, the Company adopted new mortality tables (RP-2014) and a new mortality improvement scale (MP-2014), which increased the Company’s benefit obligations by $6.0 million as of December 27, 2014. The Company previously used the RP-2000 mortality tables with mortality improvements projected using Scale AA to 2021 for annuitants and to 2029 for non-annuitants. In addition, for the U.K. plans, the mortality table was updated to S2 Series (SAPS) using the CMI 2013 core projection with a 1.25% per annum long-term mortality improvement. This update increased the Company’s benefit obligations by $1.9 million as of December 27, 2014. Prior to the fiscal year 2014, the Company used the S1 Series (SAPS) mortality table and the CMI 2009 core projection with a 1.25% per annum long-term improvement. The new mortality information reflects improved life expectancies and an expectation that the trend will continue.
Earnings Per Share
Basic earnings per share are calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted earnings per share is computed using the treasury stock method, assuming the exercise of stock options and the vesting of restricted stock awards, restricted stock units, or PSUs, as well as their related income tax effects.
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Losses Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The ASU requires an entity to present an unrecognized tax benefit as a reduction of the deferred tax asset for a net operating loss, or similar loss or tax credit carryforward, as opposed to a liability, unless certain circumstances exist. The ASU became effective during the Company’s first fiscal quarter of 2014 and the Company adopted its provisions retrospectively. The adoption of the ASU decreased net non-current deferred tax assets and decreased the associated long-term tax liabilities related to unrecognized tax benefits by $16.2 million and $11.9 million as of December 27, 2014 and December 28, 2013, respectively.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The ASU is effective for annual and interim periods beginning after December 15, 2014. The Company does not expect the impact of the adoption of this standard to be material to its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The ASU is effective for annual and interim periods beginning after December 15, 2016. The Company has not yet selected a transition method and is evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. BUSINESS ACQUISITIONS
ChanTest
In October 2014, the Company acquired ChanTest, a leading provider of ion channel testing services to the pharmaceutical and biotech industry. The acquisition augments the Company's early discovery capabilities and enhances the Company's ability to support clients' target discovery and lead optimization efforts. The preliminary purchase price of the acquisition was $59.3 million, including $0.3 million in contingent consideration. The aggregate, undiscounted amount of contingent consideration that could become payable is a maximum of $2.0 million. The Company estimated the fair value measurement.of this contingent consideration based on a probability-weighted set of outcomes. The purchase price is subject to an adjustment based on the final determined net working capital as of the closing date. The business is reported in the Company's DSA reportable segment as part of the Company's Early Discovery business.
The preliminary purchase price allocation of $52.1 million, net of $7.2 million in cash acquired, is as follows:
|
| | | |
| | October 29, 2014 |
| | (in thousands) |
| Current assets (excluding cash) | 4,648 |
|
| Property, plant and equipment | 1,579 |
|
| Definite-lived intangible assets | 23,920 |
|
| Goodwill | 34,927 |
|
| Current liabilities | (3,515 | ) |
| Long-term liabilities | (9,486 | ) |
| Total purchase price allocation | $ | 52,073 |
|
The breakout of definite-lived intangible assets acquired is as follows:
|
| | | | | |
| | October 29, 2014 | | Weighted average amortization life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 19,000 |
| | 13 |
| Other intangible assets | 4,920 |
| | 9 |
| Total definite-lived intangible assets | $ | 23,920 |
| | |
The definite-lived intangibles are largely attributed to the expected cash flows related to client relationships existing at the acquisition closing date. The goodwill resulting from the transaction is primarily attributed to the potential growth of the business and is not deductible for tax purposes. The Company incurred transaction and integration costs in connection with the acquisition of $1.1 million during the fiscal year 2014, which are included in selling, general and administrative expenses.
VivoPath
In June 2014, the Company acquired substantially all of the assets of VivoPath LLC (VivoPath), a discovery service company specializing in the rapid, in vivo compound evaluation of molecules in the therapeutic areas of metabolism, inflammation and oncology. The preliminary purchase price was $2.3 million, including $1.6 million in contingent consideration, and was allocated primarily to the intangible assets acquired. The aggregate, undiscounted amount of contingent consideration that could become payable is a maximum of $2.4 million, payable over the next three years based on the achievement of revenue growth targets. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes. The business is reported in the Company's DSA reportable segment as part of the Company's In Vivo Discovery business.
Argenta and BioFocus
On April 1, 2014, the Company acquired (1) 100% of the shares of the United Kingdom (U.K.) based entities Argenta and BioFocus, and (2) certain Dutch assets. These businesses have formed the core of the Company's Early Discovery business. With this acquisition, the Company has enhanced its position as a full service, early-stage CRO, with integrated in vitro and in vivo capabilities from target discovery through preclinical development. The preliminary purchase price of the acquisition was
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$191.3 million, including $0.9 million in contingent consideration. The acquisition was funded by cash on hand and borrowings on the Company's revolving credit facility. The purchase price includes payment for estimated working capital, which is subject to final adjustment based on the actual working capital of the acquired business. The businesses are reported in the Company's DSA reportable segment as part of the Company's Early Discovery business.
The contingent consideration is a one-time payment that could become payable based on the achievement of a revenue target for the twelve-month period following the acquisition. If achieved, the payment would become due in the second quarter of 2015. The aggregate, undiscounted amount of contingent consideration that the Company would pay is €5.0 million ($6.1 million as of December 27, 2014). The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The preliminary purchase price allocation of $183.1 million, net of $8.2 million of cash acquired, was as follows:
|
| | | |
| | April 1, 2014 |
| | (in thousands) |
| Current assets (excluding cash) | $ | 31,257 |
|
| Property, plant and equipment | 21,008 |
|
| Other long-term assets | 11,549 |
|
| Definite-lived intangible assets | 104,270 |
|
| Goodwill | 66,330 |
|
| Current liabilities | (14,299 | ) |
| Long-term liabilities | (36,973 | ) |
| Total purchase price allocation | $ | 183,142 |
|
The purchase price allocations were prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. During the fiscal year 2014, the Company recorded measurement period adjustments related to the Argenta and BioFocus acquisition that resulted in an immaterial change to the purchase price allocation. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The breakout of definite-lived intangible assets acquired was as follows:
|
| | | | | |
| | April 1, 2014 | | Weighted average
amortization life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 94,000 |
| | 18 |
| Backlog | 5,700 |
| | 1 |
| Trademark and trade names | 1,170 |
| | 3 |
| Leasehold interests | 1,000 |
| | 13 |
| Other intangible assets | 2,400 |
| | 19 |
| Total definite-lived intangible assets | $ | 104,270 |
| | |
The goodwill resulting from the transaction is primarily attributed to the potential growth in the Company's DSA businesses from customers introduced through Argenta and BioFocus, the assembled workforce of the acquired businesses and expected cost synergies. The goodwill attributable to Argenta and BioFocus is not deductible for tax purposes. The Company incurred transaction and integration costs in connection with the acquisition of $5.3 million during the fiscal year 2014 , which are included in selling, general and administrative expenses.
The following selected pro forma consolidated results of operations are presented as if the Argenta and BioFocus acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments, including amortization of intangible assets and depreciation of fixed assets of $3.7 million and other one-time costs. These pro forma consolidated results of operations are for informational purposes only and do not necessarily reflect the results of operations had the companies operated as one entity during the periods reported. No effect has been given for synergies, if any, that may have been realized through the acquisition.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands, except per share amounts) |
| Revenue | $ | 1,322,771 |
| | $ | 1,249,649 |
| | $ | 1,215,263 |
|
| Net income | $ | 128,195 |
| | 98,508 |
| | 85,902 |
|
| Earnings per common share: | | | | | |
| Basic | $ | 2.75 |
| | $ | 2.06 |
| | $ | 1.79 |
|
| Diluted | $ | 2.70 |
| | $ | 2.03 |
| | $ | 1.77 |
|
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future. Argenta and BioFocus revenue and operating income for the fiscal year 2014 are $71.4 million and $1.8 million, respectively.
EMD Singapore
In October 2013, the Company acquired 100% of an EMD products and service provider located in Singapore for $4.9 million in cash. The financial results of the acquired entity are included in the Manufacturing reportable segment as part of the Company's EMD business.
The purchase price allocation is as follows:
|
| | | |
| | October 4, 2013 |
| | (in thousands) |
| Current assets (excluding cash) | $ | 300 |
|
| Property, plant and equipment | 154 |
|
| Definite-lived intangible assets | 1,885 |
|
| Goodwill | 2,659 |
|
| Current liabilities | (64 | ) |
| Total purchase price allocation | $ | 4,934 |
|
The breakout of definite-lived intangible assets acquired is as follows:
|
| | | | | |
| | October 4, 2013 | | Weighted average amortization life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 1,870 |
| | 8 |
| Other intangible assets | 15 |
| | 2 |
| Total definite-lived intangible assets | $ | 1,885 |
| | |
The definite-lived intangibles are largely attributed to the expected cash flows related to client relationships existing at the acquisition closing date. The goodwill resulting from the transaction is primarily attributed to the potential growth of the business in Southeast Asia and is not deductible for tax purposes.
Vital River
In January 2013, the Company acquired a 75% ownership interest of Vital River, a commercial provider of research models and related services in China, for $24.2 million, net of $2.7 million of cash acquired. Vital River's financial results are included in the RMS reportable segment.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Descriptions of the valuation methodologies used for assets and liabilities measured at fair value areThe purchase price allocation is as follows:
|
| | | |
| | January 4, 2013 |
| | (in thousands) |
| Current assets (excluding cash) | $ | 3,092 |
|
| Property, plant and equipment | 10,468 |
|
| Other long-term assets | 2,242 |
|
| Definite-lived intangible assets | 16,954 |
|
| Goodwill | 16,989 |
|
| Current liabilities | (11,303 | ) |
| Long-term liabilities | (5,260 | ) |
| Redeemable noncontrolling interest | (8,963 | ) |
| Total purchase price allocation | $ | 24,219 |
|
The breakout of definite-lived intangible assets acquired is as follows:
|
| | | | | |
| | January 4, 2013 | | Weighted average amortization life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 14,741 |
| | 12 |
| Reacquired rights | 2,053 |
| | 1 |
| Other intangible assets | 160 |
| | 3 |
| Total definite-lived intangible assets | $ | 16,954 |
| | |
The definite-lived intangibles are largely attributed to the expected cash flows related to client relationships existing at their ending balances as reported by the financial institutionsacquisition closing date. In addition, the Company reacquired a right previously granted to the entity related to a royalty agreement for the distribution of products in China. The goodwill resulting from the transaction is primarily attributed to the potential growth of the business in China and is not deductible for tax purposes.
Concurrent with the acquisition, the Company entered into a joint venture agreement with the noncontrolling interest holders that hold our securities,provide the Company with the right to purchase the remaining 25% of the entity for cash at its then appraised value beginning in January 2016. Additionally, the noncontrolling interest holders were granted the right to require the Company to purchase the remaining 25% of the entity at its then appraised value beginning in January 2016 for cash. These rights are accelerated in certain events. As the noncontrolling interest holders can require the Company purchase the remaining 25% interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheet, which approximates fair value.
Auction rate securities—Valued at fair value by management in part utilizing an independent valuation reviewed by management which used pricing modelsis above the equity section and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use.
Life policies—Valued at cash surrender value based onbelow liabilities. The acquisition-date fair value of underlying investments.
Long-lived assets impaired during the period - valued at fair value at the date of the impairment based upon the income approach.
Contingent consideration—Consists of future acquisition-related paymentsnoncontrolling interest was determined based on certain agreed upon revenue and technical milestones valued using the income approach.
Long-Term debt - disclosed fair value based on current market pricing for similar debt.
Hedge contract—Valued at fair value by management based on our foreign exchange rates and forward points provided by banks.
Assets measured at fair value on a recurring basis are summarized below:
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 29, 2012 using |
| | Quoted Prices in Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 | | Assets and Liabilities at Fair Value |
| Time deposits | $ | — |
| | $ | 6,781 |
| | $ | — |
| | $ | 6,781 |
|
| Life policies | — |
| | 19,555 |
| | — |
| | 19,555 |
|
| Hedge contract | — |
| | 16 |
| | — |
| | 16 |
|
| Total assets measured at fair value | $ | — |
| | $ | 26,352 |
| | $ | — |
| | $ | 26,352 |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2011 using |
| | Quoted Prices in Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 | | Assets and Liabilities at Fair Value |
| Time deposits | $ | — |
| | $ | 5,359 |
| | $ | — |
| | $ | 5,359 |
|
| Auction rate securities | — |
| | — |
| | 11,051 |
| | 11,051 |
|
| Life policies | — |
| | 19,520 |
| | — |
| | 19,520 |
|
| Hedge contract | — |
| | 5 |
| | — |
| | 5 |
|
| Total assets measured at fair value | $ | — |
| | $ | 24,884 |
| | $ | 11,051 |
| | $ | 35,935 |
|
The book value of our term and revolving loans, which are variable rate loans carried at amortized cost, approximates fair value based current market pricing of similar debt. The fair value of our 2.25% Senior Convertible Debentures (2013 Notes), which are carried at cost less unamortized discount on our consolidated balance sheet, was $351,745 as of December 29, 2012. We determine the fair value of these 2013 Notes based on their most recent quoted market price and by reference to the market value of similar debt instruments. We classify the fair value of our debt as Level 2 on the valuation hierarchy.
The following table presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 29, 2012 and December 31, 2011. Our auction rate securities were valued at fair value by management in part utilizing an independent valuation reviewed by management which used
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
pricing models and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use at December 29, 2012.
|
| | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Year ended |
| Auction rate securities | December 29, 2012 |
| | December 31, 2011 |
|
| Beginning balance | $ | 11,051 |
| | $ | 11,377 |
|
| Transfers in and/or out of Level 3 | — |
| | — |
|
| Total gains or losses (realized/unrealized): | | | |
| Included in earnings (other expenses) | (712 | ) | | (1 | ) |
| Included in other comprehensive income | 921 |
| | (325 | ) |
| Purchases, issuances and settlements | (11,260 | ) | | — |
|
| Ending balance | $ | — |
| | $ | 11,051 |
|
|
| | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Year ended |
| Contingent Consideration | December 29, 2012 |
| | December 31, 2011 |
|
| Beginning balance | $ | — |
| | $ | 5,365 |
|
| Transfers in and/or out of Level 3 | — |
| | — |
|
| Total gains or losses (realized/unrealized): | | | |
| Included in selling, general and administrative expense | — |
| | (5,365 | ) |
| Included in other comprehensive income | — |
| | — |
|
| Purchases, issuances and settlements | — |
| | — |
|
| Ending balance | $ | — |
| | $ | — |
|
During the quarter ended September 29, 2012, we recorded an impairment charge for long-lived assets held and used (see Note 4). As a result, we adjusted the carrying amount of this asset group, consisting of land, buildings, and equipment, to fair value, which was based on the income approach. In applying the income approach, we estimated the future net cash flows associated with operating the asset group and the asset group's salvage value. During the third quarter, the fair value of the asset group was adjusted to $2,197 which we classified as Level 3, wherebyconsideration exchanged for the inputs are based on management's internal estimates and not corroborated with observable market data.75% of Vital River. Subsequent to the impairment,acquisition, the assets were carried atnoncontrolling interest carrying amount is adjusted cost and are thus not considered assets measured atto the fair value each quarter using an income approach. The income approach uses estimated future cash flows based on a recurring basis.
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 assetsprojected financial data discounted by a valuation allowance if, based uponrate which considers the weightCompany's weighted average cost 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.
As of December 29, 2012, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $155,087. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
otherwise, we would be subject to additional U.S. Federal and state income taxes and foreign income and withholding taxes, which could be material. It is our policy to indefinitely reinvest the earnings of our non-U.S. subsidiaries unless they can be repatriated in a manner that generates a tax benefit or an unforeseen cash need arises in the United Statescapital and the earnings can be repatriated in a manner that is substantially tax free. Determinationspecific risks of the amount of unrecognized deferred income tax liabilities onachieving these earnings is not practicable duecash flows. Adjustments to the complexities with the hypothetical calculation. Additionally, the amount of the liability is dependent upon the circumstances existing if and when the remittance occurs.
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 current and deferred tax provision is based upon enacted tax rates in effect for the current and future periods. Any significant fluctuation in tax rates or changes in tax laws and regulations or changes to interpretation of existing tax laws and regulations could cause our estimate of taxes to change resulting in either increases or decreases in our effective tax rate.
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 based upon 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. The 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 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 transactionsfair value are recorded as other income or expense. We recorded an exchange gain (loss) of $(892) in 2012, $6,237 in 2011 and $(1,299) in 2010.
Other Comprehensive Income
Our other comprehensive income (OCI) consists of unrealized gains (losses) on available-for-sale marketable securities, foreign currency translation adjustments and unrecognized pension gains and losses and prior service costs and credits. These items are presented, before tax effects, in the Consolidated Statements of Other Comprehensive Income. We disclose the tax effects on each item included in Note 6 Equity.
Pension Plans
Our defined benefit pension plans' assets, liabilities and expenses are calculated using certain assumptions. These assumptions are reviewed annually, or whenever otherwise required, based on reviews of current plan information and consultations with independent investment advisers 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 recognize the funded status of our benefit plans on our 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; and measure plan assets and obligations as of the date 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 transition asset or obligation are disclosed in the notes to our 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 ofthrough 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.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Discontinued Operations
The 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.
2. BUSINESS ACQUISITIONS
We completed a business acquisition during the year end December 29, 2012. The results of operations of the acquired business are included in the accompanying consolidated financial statements from the date of acquisition. During the years ended December 31, 2011 and December 25, 2010 no significant business acquisitions were completed.paid-in capital.
Accugenix
In August 2012,, we the Company acquired 100% of Accugenix Inc. (Accugenix), for $18,408$18.4 million in cash, subject to adjustments.cash. Accugenix is a global provider of cGMP-compliant contract microbial identification testing. The acquisition strengthens ourthe EMD portfolio of products and services by providing state-of-the-art microbial detection services for the biotechnology, pharmaceutical, and medical device manufacturing industries. Accugenix is based in the U.S. and is included in our RMSthe Manufacturing reportable business segment.segment as part of the Company's EMD business.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation of $16.9 million, net of $1,5471.5 million of cash acquired is as follows:
| | | | August 24, 2012 |
| | | | (in thousands) |
| Current assets (excluding cash) | $ | 2,162 |
| $ | 2,162 |
|
| Property, plant and equipment | 549 |
| 549 |
|
| Current liabilities | (911 | ) | |
| Long term liabilities | (3,700 | ) | |
| Definite-lived intangible assets | 8,400 |
| 8,400 |
|
| Goodwill | 10,361 |
| 10,361 |
|
| Current liabilities | | (911 | ) |
| Long-term liabilities | | (3,700 | ) |
| Total purchase price allocation | $ | 16,861 |
| $ | 16,861 |
|
The definite-lived intangible assets acquired are as follows:
| | | | | | | August 24, 2012 | | Weighted average amortization life |
| | | Weighted average amortization life (in years) | (in thousands) | | (in years) |
| Client relationships | $ | 1,500 |
| 13 |
| $ | 1,500 |
| | 13 |
| Proprietary database | 4,100 |
| 11 |
| |
| Propriety database | | 4,100 |
| | 11 |
| Standard operating procedures | 2,500 |
| 4 |
| 2,500 |
| | 4 |
| Trademarks | 300 |
| 12 |
| 300 |
| | 12 |
| | $ | 8,400 |
| | |
| Total definite-lived intangible assets | | $ | 8,400 |
| |
The definite-lived intangibles are largely attributed to a proprietary database of thousands of species of organisms and the methods and technology to provide accurate, timely and cost-effective microbial identification services. The goodwill resulting from the transaction of $10,361 is primarily attributed to the potential for growth of the Company's global EMD products and services business through the increased competitive advantage and market penetration provided by the services offered by Accugenix. The goodwill is not deductible for tax purposes.
3. RESTRUCTURING AND ASSET IMPAIRMENTS
Facilities
In the fiscal year 2014, the Company committed to plans to consolidate certain research model operations in the U.S., Japan, and Europe. As a result, the Company recorded $2.2 million of asset impairments and other charges and $4.3 million of accelerated depreciation related to certain facilities impacted by the consolidation plans. Also, in the fiscal year 2014, the Company recorded a gain of $1.0 million on the sale of a European facility.
In the fiscal year 2013, due to changes in real estate values in surrounding properties, the Company performed an impairment test on long-lived assets classified as held-for-use, which resulted in an asset impairment charge of $3.8 million, included in cost of revenue. The Company also implemented a plan to consolidate production in its U.S. research model facilities. As a result, the Company revised the useful lives of a research model building that was abandoned and recorded accelerated deprecation to cost of revenue of $13.5 million. The Company also implemented a plan to consolidate operations within a Biologics leased facility in the U.S. As a result, the Company revised the useful lives of certain leasehold improvements that were abandoned and recorded accelerated deprecation to cost of revenue of $1.9 million.
In the fiscal year 2012, the Company commenced a consolidation of certain research model operations in Europe. As a result, it recorded an impairment charge of $3.5 million to cost of revenue for the disposition of certain facilities. The Company continues to utilize some of the operations in a limited capacity. As a result, during the fiscal years 2014 and 2013, the Company recorded asset impairments of $0.3 million and $0.4 million, respectively, to cost of revenue related to the consolidation of the European operations.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Staff Reductions
The following table rolls forward the Company's severance and retention cost liability:
|
| | | | | | | | | | | |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Balance, beginning of period | $ | 2,782 |
| | $ | 3,636 |
| | $ | 3,374 |
|
| Expense | 7,792 |
| | 3,223 |
| | 2,576 |
|
| Payments/Utilization | (7,908 | ) | | (4,077 | ) | | (2,314 | ) |
| Balance, end of period | $ | 2,666 |
| | $ | 2,782 |
| | $ | 3,636 |
|
The following table presents severance and retention costs by classification on the income statement:
|
| | | | | | | | | | | |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Severance charges included in cost of sales | $ | 3,342 |
| | $ | 1,477 |
| | $ | 1,203 |
|
| Severance charges included in selling, general and administrative | 4,450 |
| | 1,746 |
| | 1,373 |
|
| Total expense | $ | 7,792 |
| | $ | 3,223 |
| | $ | 2,576 |
|
As of December 27, 2014 and December 28, 2013, $2.2 million and $1.5 million of severance and retention costs liability, respectively, was included in accrued compensation and $0.5 million and $1.3 million, respectively, was included in other long-term liabilities on the Company's consolidated balance sheets.
The following table presents severance and retention cost by reportable segment:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Research models and services | $ | 4,593 |
| | $ | 1,429 |
| | $ | 1,015 |
|
| Discovery and safety assessment | 2,912 |
| | 1,625 |
| | 1,494 |
|
| Manufacturing support | 166 |
| | 169 |
| | 67 |
|
| Corporate | 121 |
| | — |
| | — |
|
| Total expense | $ | 7,792 |
| | $ | 3,223 |
| | $ | 2,576 |
|
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Client receivables | $ | 219,118 |
| | $ | 190,423 |
|
| Unbilled revenue | 43,780 |
| | 35,184 |
|
| Total | 262,898 |
| | 225,607 |
|
| Less: Allowance for doubtful accounts | (4,907 | ) | | (4,977 | ) |
| Trade receivables, net | $ | 257,991 |
| | $ | 220,630 |
|
Provisions to the allowance for doubtful accounts in the fiscal years 2014, 2013 and 2012 were $0.5 million, $1.3 million, and $0.9 million, respectively. Write offs against the allowance for doubtful accounts were insignificant in all periods presented.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of inventories is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Raw materials and supplies | $ | 15,416 |
| | $ | 15,028 |
|
| Work in process | 11,802 |
| | 11,715 |
|
| Finished products | 61,825 |
| | 62,653 |
|
| Inventories | $ | 89,043 |
| | $ | 89,396 |
|
The composition of other current assets is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Prepaid assets | $ | 26,900 |
| | $ | 20,058 |
|
| Deferred tax asset | 27,644 |
| | 29,889 |
|
| Time deposits | 16,167 |
| | 11,158 |
|
| Prepaid income tax | 26,287 |
| | 25,247 |
|
| Restricted cash | 2,552 |
| | 245 |
|
| Other | 291 |
| | — |
|
| Other current assets | $ | 99,841 |
| | $ | 86,597 |
|
The composition of property, plant and equipment, net is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Land | $ | 40,314 |
| | $ | 40,157 |
|
| Buildings | 682,495 |
| | 694,074 |
|
| Machinery and equipment | 384,713 |
| | 367,244 |
|
| Leasehold improvements | 37,270 |
| | 37,959 |
|
| Furniture and fixtures | 22,577 |
| | 24,013 |
|
| Vehicles | 3,967 |
| | 3,859 |
|
| Computer hardware and software | 119,474 |
| | 112,328 |
|
Construction in progress (1) | 40,970 |
| | 42,075 |
|
| Total | 1,331,780 |
| | 1,321,709 |
|
| Less: Accumulated depreciation | (654,983 | ) | | (645,527 | ) |
| Property, plant and equipment, net | $ | 676,797 |
| | $ | 676,182 |
|
(1) Includes the leased facility under construction. See Note 7, "Long-Term Debt and Capital Lease Obligations."
Depreciation expense in the fiscal years 2014, 2013 and 2012 was $70.5 million, $78.8 million and $63.2 million, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Vital RiverThe composition of other assets is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Deferred financing costs | $ | 5,401 |
| | $ | 7,126 |
|
| Cash surrender value of life insurance policies | 27,603 |
| | 26,507 |
|
| Investment in limited partnerships | 27,047 |
| | 17,911 |
|
| Other assets | 18,301 |
| | 10,420 |
|
| Other assets | $ | 78,352 |
| | $ | 61,964 |
|
In October 2012, we entered into an agreementThe composition of other current liabilities is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Accrued income taxes | $ | 9,362 |
| | $ | 18,773 |
|
| Current deferred tax liability | 1,484 |
| | 1,960 |
|
| Accrued interest and other | 233 |
| | 1,813 |
|
| Other current liabilities | $ | 11,079 |
| | $ | 22,546 |
|
The composition of other long-term liabilities is as follows:
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Deferred tax liability | $ | 30,816 |
| | $ | 14,988 |
|
| Long-term pension liability | 45,135 |
| | 16,219 |
|
| Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan | 33,007 |
| | 28,708 |
|
| Other long-term liabilities | 21,403 |
| | 10,717 |
|
| Other long-term liabilities | $ | 130,361 |
| | $ | 70,632 |
|
5. FAIR VALUE
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
| | | | | | | | | | | | | | | |
| | December 27, 2014 |
| | Level 1 | |
Level 2 | |
Level 3 | | Total |
| | (in thousands) |
| Cash equivalents | $ | — |
| | $ | 1,934 |
| | $ | — |
| | $ | 1,934 |
|
| Life insurance policies | — |
| | 20,520 |
| | — |
| | 20,520 |
|
| Total assets measured at fair value | — |
| | 22,454 |
| | — |
| | 22,454 |
|
| | | | | | | | |
| Redeemable noncontrolling interest | — |
| | — |
| | 28,419 |
| | 28,419 |
|
| Contingent consideration | — |
| | — |
| | 2,828 |
| | 2,828 |
|
| Total liabilities measured at fair value | $ | — |
| | $ | — |
| | $ | 31,247 |
| | $ | 31,247 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | |
| | December 28, 2013 |
| |
Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) |
| Cash equivalents | $ | — |
| | $ | 1,851 |
| | $ | — |
| | $ | 1,851 |
|
| Life insurance policies | — |
| | 19,534 |
| | — |
| | 19,534 |
|
| Total assets measured at fair value | — |
| | 21,385 |
| | — |
| | 21,385 |
|
| | | | | | | | |
| Redeemable noncontrolling interest | — |
| | — |
| | 20,581 |
| | 20,581 |
|
| Total liabilities measured at fair value | $ | — |
| | $ | — |
| | $ | 20,581 |
| | $ | 20,581 |
|
During the fiscal years 2014 and 2013, there were no transfers between fair value levels.
Redeemable Noncontrolling Interest
The following table provides a rollforward of the fair value of the Company's redeemable noncontrolling interest related to acquire a 75% ownership interestthe acquisition of Vital River a commercial provider of research models and related services in China, for approximately $26,800 in cash, subject to certain closing adjustments. January 2013. See Note 2, "Business Acquisitions."
|
| | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Beginning balance | $ | 20,581 |
| | $ | — |
|
| Additions | — |
| | 8,963 |
|
| Total gains or losses (realized/unrealized): | | | |
| Net income attributable to noncontrolling interest | 855 |
| | 687 |
|
| Foreign currency translation | (442 | ) | | 367 |
|
| Change in fair value included in additional paid-in capital | 7,425 |
| | 10,564 |
|
| Ending balance | $ | 28,419 |
| | $ | 20,581 |
|
The acquisition closedsignificant unobservable inputs used in the first quarterfair value measurement of 2013.the Company’s redeemable noncontrolling interest are the estimated future cash flows based on projected financial data and discount rate of 18.5%. Significant changes in the timing or amounts of the estimated future cash flows would result in a significantly higher or lower fair value measurement. Significant increases or decreases in the discount rate would result in a significantly lower or higher fair value measurement, respectively.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to the acquisition of Argenta, BioFocus, VivoPath and ChanTest. See Note 2, "Business Acquisitions."
|
| | | |
| | December 27, 2014 |
| | (in thousands) |
| Beginning balance | $ | — |
|
| Additions | 2,678 |
|
| Total gains or losses (realized/unrealized): | |
| Change in fair value | 150 |
|
| Ending balance | $ | 2,828 |
|
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration are the probabilities of successful achievement of certain financial targets and a discount rate. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in the discount rate would result in a significantly lower or higher fair value measurement, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Debt Instruments
The book value of the Company's term and revolving loans, which are variable rate loans carried at amortized cost, approximates their fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2.
3.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 29, 2012Goodwill
The changes in the gross carrying amount and December 31, 2011, other intangible assets, net, consisted of $3,438 and $3,438 of indefinite-lived intangible assets, respectively.accumulated impairment loss are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Adjustments to Goodwill | | | | Adjustments to Goodwill | | |
| | December 29, 2012 | | Acquisitions | | Foreign Exchange | | December 28, 2013 | | Acquisitions | | Transfers | | Foreign Exchange | | December 27, 2014 |
| | (in thousands) |
| Research Models and Services | | | | | | | | | | | | | | | |
| Gross carrying amount | $ | 63,139 |
| | $ | 19,647 |
| | $ | 765 |
| | $ | 83,551 |
| | $ | — |
| | (23,172 | ) | | (1,183 | ) | | 59,196 |
|
| Discovery and Safety Assessment | | | | | | | | | | | | | | | |
| Gross carrying amount | 1,150,470 |
| | — |
| | 1,680 |
| | 1,152,150 |
| | 102,171 |
| | (9,196 | ) | | (10,823 | ) | | 1,234,302 |
|
| Accumulated impairment loss | (1,005,000 | ) | | — |
| | — |
| | (1,005,000 | ) | | — |
| | — |
| | — |
| | (1,005,000 | ) |
| Manufacturing Support | | | | | | | | | | | | | | | |
| Gross carrying amount | — |
| | — |
| | — |
| | — |
| |
|
| | 32,368 |
| | 211 |
| | 32,579 |
|
| Total | | | | | | | | | | | | | | | |
| Gross carrying amount | 1,213,609 |
| | | | | | 1,235,701 |
| | | | | | | | 1,326,077 |
|
| Accumulated impairment loss | (1,005,000 | ) | | | | | | (1,005,000 | ) | | | | | | | | (1,005,000 | ) |
| Goodwill | $ | 208,609 |
| | | | | | $ | 230,701 |
| | | | | | | | 321,077 |
|
In the second quarter of 2014, the Company revised its reportable segments to align with the view of the business following its acquisition of Argenta and BioFocus. See Note 1, "Description of Business and Summary of Significant Accounting Policies." As a result of this reorganization, goodwill was allocated from the Company's prior reportable segments to new reportable segments, as shown in the preceding table within "transfers." The allocation was based on the fair value of each business group within its original reporting unit relative to the fair value of that reporting unit. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.
Based on the Company's step one goodwill impairment test for the fiscal years 2014, 2013 and 2012, the fair value of each reporting unit exceeded the reporting unit's book value and, therefore, goodwill was not impaired.
Other Intangible Assets
The following table displays the gross carrying amount and accumulated amortization of definite-lived intangible assets by major class:
|
| | | | | | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 |
| | Gross carrying amount | | Accumulated amortization | | Gross carrying amount | | Accumulated amortization |
| Backlog | $ | 2,875 |
| | $ | (2,375 | ) | | $ | 2,856 |
| | $ | (2,253 | ) |
| Client relationships | 305,178 |
| | (231,902 | ) | | 298,813 |
| | (210,816 | ) |
| Client contracts | 15,366 |
| | (15,366 | ) | | 14,818 |
| | (14,818 | ) |
| Trademarks and trade names | 5,326 |
| | (4,821 | ) | | 5,022 |
| | (4,706 | ) |
| Standard operating procedures | 2,751 |
| | (863 | ) | | 650 |
| | (650 | ) |
| Other identifiable intangible assets | 10,033 |
| | (4,718 | ) | | 5,415 |
| | (4,332 | ) |
| Total finite-lived intangible assets | $ | 341,529 |
| | $ | (260,045 | ) | | $ | 327,574 |
| | $ | (237,575 | ) |
The following is a schedule of goodwill by reportable segment and changes in the gross carrying amount and accumulated amortization of goodwill:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Adjustments to Goodwill | | | | Adjustments to Goodwill | | |
| | Balance at December 25, 2010 | | Acquisitions | | Foreign Exchange/ Impairment | | Balance at December 31, 2011 | | Acquisitions | | Foreign Exchange/ Impairment | | Balance at December 29, 2012 |
| Research Models and Services | | | | | | | | | | | | | |
| Gross carrying amount | $ | 53,108 |
| | $ | — |
| | $ | (427 | ) | | $ | 52,681 |
| | $ | 10,361 |
| | $ | 97 |
| | $ | 63,139 |
|
| Preclinical Services | | | | | | | | | | | | | |
| Gross carrying amount | 1,150,330 |
| | — |
| | (450 | ) | | 1,149,880 |
| | — |
| | 590 |
| | 1,150,470 |
|
| Accumulated impairment loss | (1,005,000 | ) | | | | — |
| | (1,005,000 | ) | | | | — |
| | (1,005,000 | ) |
| Total | | | | | | | | | | | | | |
| Gross carrying amount | $ | 1,203,438 |
| | $ | — |
| | $ | (877 | ) | | $ | 1,202,561 |
| | $ | 10,361 |
| | $ | 687 |
| | $ | 1,213,609 |
|
| Accumulated impairment loss | (1,005,000 | ) | | | | — |
| | (1,005,000 | ) | | | | — |
| | (1,005,000 | ) |
| Goodwill, net | $ | 198,438 |
| | | | | | $ | 197,561 |
| | | | | | $ | 208,609 |
|
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment (step one) for 2012 and 2011, the fair value of our business units exceeded their carrying value and, therefore, our goodwill was not impaired. If the future growth and operating results of our businesses are not as strong as |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| | Gross | | Accumulated amortization | | Net | | Gross | | Accumulated amortization | | Net |
| | (in thousands) |
| Backlog | $ | 8,728 |
| | $ | (6,636 | ) | | $ | 2,092 |
| | $ | 2,916 |
| | $ | (2,507 | ) | | $ | 409 |
|
| Client relationships | 379,339 |
| | (217,938 | ) | | 161,401 |
| | 311,507 |
| | (238,002 | ) | | 73,505 |
|
| Trademarks and trade names | 6,603 |
| | (5,314 | ) | | 1,289 |
| | 5,399 |
| | (4,997 | ) | | 402 |
|
| Standard operating procedures | 2,309 |
| | (1,642 | ) | | 667 |
| | 2,754 |
| | (1,498 | ) | | 1,256 |
|
| Other identifiable intangible assets | 16,334 |
| | (6,346 | ) | | 9,988 |
| | 10,432 |
| | (4,905 | ) | | 5,527 |
|
| Total definite-lived intangible assets | $ | 413,313 |
| | $ | (237,876 | ) | | $ | 175,437 |
| | $ | 333,008 |
| | $ | (251,909 | ) | | $ | 81,099 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value
Additionally, as of our goodwill in the future. To the extent goodwill is impaired, its carrying value will be written down to its implied fair valueboth December 27, 2014 and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition.
Based on our assessment (step one) for 2010, the fair valueDecember 28, 2013, other intangible assets, net included $3.4 million 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 $305,000.indefinite-lived intangible assets.
Amortization expense of definite-lived intangible assets for the fiscal years 20122014, 20112013 and 20102012 was $18,068, $21,796$26.0 million, $17.8 million and $24,405,$18.1 million, respectively. Amortization of revenue-producing intangible assets is excluded from cost of services.
Estimated amortization expense for intangible assets for each of the next five fiscal years is expected to be as follows:
| | | 2013 | $ | 14,369 |
| |
| 2014 | 12,447 |
| |
| Fiscal Year | | | Amortization Expense |
| | | | (in thousands) |
| 2015 | 11,095 |
| | $ | 21,116 |
|
| 2016 | 9,986 |
| | 20,355 |
|
| 2017 | 8,987 |
| | 18,501 |
|
| 2018 | | | 17,312 |
|
| 2019 | | | 14,306 |
|
4. IMPAIRMENT OF LONG-LIVED ASSETS
For the years ended 2012, 2011 and 2010, based on our most recent market outlook, we assessed our long-lived assets for impairment. The assessment included an evaluation of the ongoing cash flows associated with the use of the long lived assets.
In September 2012, we commenced a consolidation of certain research model operations in Europe. As a result, we recorded an impairment charge of $3,548 under the held-for-use model for the disposition of facilities that we own. Following the impairment, the long-lived asset group was classified as held-for-use as we unwind operations over the next several months and will be classified as held-for-sale when the following conditions are met: we have committed to a plan to sell the asset group and it is unlikely that significant changes will be made to the plan; the asset group is available for immediate sale in its present condition and it is probable that the sale will be completed within one year; and an active program to locate a buyer has been initiated and the asset group is being marketed at a sale price that is reasonable in relation to its current fair value.
For the year ended 2011, we impaired $692 of long-lived assets in our RMS segment related to facilities no longer in use and not expected to be fully recoverable.
For the year ended December 25, 2010, we determined that the long-lived assets associated with our PCS-Massachusetts and PCS-China locations were no longer fully recoverable. We calculated the fair value of the long-lived assets based upon a valuation completed by an independent third party valuation firm., which utilized our estimates of future cash flows discounted using a rate commensurate with the risks inherent in our current business model and the estimated market value of the long lived assets. Accordingly, for the year ended 2010, we recorded an impairment charge of $64,631 for PCS-Massachusetts and $17,186 for PCS-China representing the excess of the carry value of those assets over their respective fair market values. During the fourth quarter of 2011, we sold the assets of our PCS-China facility for $4,593 and recognized a gain on the sale of $3,776. As of December 29, 2012, we continue to hold our PCS-Massachusetts site and are utilizing no production capacity at the site.
Additionally, for the years ended December 31, 2011 and December 25, 2010, we determined that the fair value of our in process research and development acquired in the acquisition of SPC exceeded its the carrying value. Based on our evaluation, we recorded an impairment charges of $6,800 and $7,200 for the period ended December 31, 2011 and December 25, 2010, respectively. As of December 31, 2011 we had impaired the entire carrying value of our in process research and development acquired in the acquisition of SPC.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
5.7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt consists of the following:
| | | | December 29, 2012 | | December 31, 2011 | December 27, 2014 | | December 28, 2013 |
| 2.25% Senior convertible debentures: | | | | |
| Principal | $ | 349,995 |
| | $ | 349,995 |
| |
| Unamortized debt discount | (6,726 | ) | | (21,533 | ) | |
| Net carrying amount of senior convertible debentures | 343,269 |
| | 328,462 |
| |
| Term loan facilities | 290,947 |
| | 356,322 |
| |
| | | (in thousands) |
| Term loans | | $ | 378,000 |
| | $ | 409,500 |
|
| Revolving credit facility | 32,000 |
| | 33,000 |
| 375,536 |
| | 253,308 |
|
| Other long-term debt | 232 |
| | 118 |
| 214 |
| | 241 |
|
| Total debt | 666,448 |
| | 717,902 |
| 753,750 |
| | 663,049 |
|
| Less: current portion of long-term debt | (139,373 | ) | | (14,732 | ) | (31,714 | ) | | (21,241 | ) |
| Long-term debt | $ | 527,075 |
| | $ | 703,170 |
| $ | 722,036 |
| | $ | 641,808 |
|
Minimum future principal payments of long-term debt at December 29, 2012 are as follows:
|
| | | |
| Fiscal Year | |
| 2013 | $ | 141,391 |
|
| 2014 | 44,963 |
|
| 2015 | 59,950 |
|
| 2016 | 426,870 |
|
| Thereafter | — |
|
| Total | $ | 673,174 |
|
On September 23, 2011, weIn 2013, the Company amended ourand restated its credit agreement to reduce the interest rate margin applicable to the term loans and the revolving loans based on our leverage ratio and extend the maturity date by approximately one year to September 2016. The current creditcreating a $970 million agreement ($970M Credit Facility) that provides for a $299,750$420 million U.S. term loan a €69,414 Euro term loanfacility and a $350,000$550 million multi-currency revolving credit facility. Under specified circumstances, we havethe Company has the ability to increaseexpand the term loansloan and/or revolving line of credit facility by up to $250,000$350 million in the aggregate.
The $420 million U.S. term loan facility matures in 20quarterly installments with the last installment due September 23, 2016.through maturity on May 29, 2018. The $350,000$550 million multi-currency revolving credit facility also matures on September 23, 2016May 29, 2018 and requires no scheduled payment before thatthis date. The book value of our term and revolving loans approximates fair value.
The interest rates applicable to our term loansthe $970M Credit Facility are variable and revolving loans under the credit agreement are at our option, equal to either the base rate (which is the higher of (1) the prime rate, (2) the federal fundsbased on an applicable rate plus 0.5% or (3)a spread determined by the one-month adjusted LIBOR rate plus 1%) plus an applicableCompany's leverage ratio. As of both December 27, 2014 and December 28, 2013, the weighted average interest rate margin based uponon the leverage ratio or the adjusted LIBOR rate plus an interest rate margin based upon our leverage ratio. Based on our leverage ratio, the margin range for base rate loans is 0% to 0.75% and the margin range for LIBOR based loans is 1% to 1.75%. As of December 29, 2012, the interest rate margin for base rate loansCompany's debt was 0.5% and for adjusted LIBOR loans was 1.50%1.42%.
Our obligations under the credit agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of our assets, including a pledge of 100% of the capital stock of our domestic subsidiaries (other than the capital stock of any domestic subsidiary that is treated as a disregarded entity for U.S. federal income tax purposes) and 65% of the capital stock of certain first-tier foreign subsidiaries and domestic disregarded entities, and mortgages on owned real property in the U.S. having a book value in excess of $10,000. In addition, the credit agreementThe $970M Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to ourthe Company's business and negative and affirmative covenants. As of December 27, 2014, the Company was compliant with all financial covenants. These covenants include (1) themaintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters,
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
of no less than 3.5 to 1.0 as well as (2) themaintenance of a ratio of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortizationEBITDA for any period of four consecutive fiscal quarters, of no more than 3.25 to 1.0. As of December 29, 2012, we were compliant with all financial covenants specified in1.0. The Company's obligations under the credit agreement. Weagreement are collateralized by substantially all of the Company's assets.
At December 27, 2014 and December 28, 2013, the Company had $5,030$5.0 million and $4.9 million, respectively, outstanding under letters of credit as of December 29, 2012.
Our $350,000 of 2.25% Senior Convertible Debentures (the 2013 Notes) are due in June 2013 with interest payable semi-annually and are convertible into cash for the principal amount and shares of our common stock for the conversion premium (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). The 2013 Notes are convertible 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 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 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. As of December 29, 2012, no conversion triggers were met.
As of December 29, 2012, our debt included $349,995 of 2013 Notes due June 2013, which has a fair value of approximately $351,745 based on their quoted market value. The long term portion of the 2013 Notes is $240,287, which is based upon our expected capacity on our existing credit facility. Upon maturity, we expect to settle the 2013 Notes utilizing the expected capacity on our existing credit facility, our existing cash and marketable securities or other financing alternatives.
As of December 29, 2012, the carrying amount of the remaining debt discount related to the 2013 Notes was $6,726, which will be amortized over 2 quarters. As of December 29, 2012 the equity component of the 2013 Notes was $88,492. Interest expense related to the 2013 Notes of $22,682 and $22,012, including $7,875 and $7,962 of contractual interest expense, was recognized during the years ended December 29, 2012 and December 31, 2011, respectively, yielding an effective interest rate of 6.93% on the liability component.
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 $72 and $43 at December 29, 2012 and December 31, 2011, respectively.
6. EQUITY
Earnings Per Share
Basic earnings per share for 2012, 2011 and 2010 was computed by dividing earnings available to common shareowners 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 2012 and 2011 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.credit.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars
Principal maturities of existing debt for the periods set forth in thousands, exceptthe table below, are as follows:
|
| | | | |
| Fiscal Year | | Principal |
| | | (in thousands) |
| 2015 | | $ | 31,714 |
|
| 2016 | | 47,250 |
|
| 2017 | | 68,250 |
|
| 2018 | | 606,536 |
|
| Total | | $ | 753,750 |
|
Build-to-suit Lease
The Company acquired a built-to-suit lease as part of its acquisition of Argenta and BioFocus. In accordance with accounting guidance applicable to entities involved with the construction of an asset that will be leased when the construction is completed, the Company is considered the owner, for accounting purposes, of this property during the construction period. Accordingly, the Company records an asset along with a corresponding financing obligation on its consolidated balance sheet for the amount of total project costs incurred related to the construction in progress for this building through completion of the construction period. Upon completion of the buildings, the Company will assess and determine if the assets and corresponding liabilities should be derecognized. As of December 27, 2014, cost incurred in relation to the construction of these buildings totaled $23.1 million. As of December 27, 2014, minimum rental commitments under this lease for each of the next five fiscal years and total thereafter are as follows:
|
| | | | |
| Fiscal Year | | Minimum lease payments |
| | | (in thousands) |
| 2015 | | $ | 2,031 |
|
| 2016 | | 2,707 |
|
| 2017 | | 2,707 |
|
| 2018 | | 2,707 |
|
| 2019 | | 2,707 |
|
| Thereafter | | 55,762 |
|
| Total | | $ | 68,621 |
|
Capital Lease Obligations
Capital lease obligations amounted to $1.0 million and $0.7 million at December 27, 2014 and December 28, 2013, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Earnings Per Share
The following table illustrates the numerator and denominator in the computations of the basic and diluted earnings per share amounts)share:
|
| | | | | | | | | | | |
| | | | Fiscal Year Ended | | |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Numerator: | | | | | |
| Net income from continuing operations attributable to common shareholders | $ | 128,424 |
| | $ | 104,093 |
| | $ | 101,547 |
|
| Loss from discontinued businesses, net of income taxes | (1,726 | ) | | (1,265 | ) | | (4,252 | ) |
| Net income attributable to common shareholders | $ | 126,698 |
| | $ | 102,828 |
| | $ | 97,295 |
|
| Denominator: | | | | | |
| Weighted-average shares outstanding—Basic | 46,627 |
| | 47,740 |
| | 47,912 |
|
| Effect of dilutive securities: | | | | | |
| Stock options and contingently issued restricted stock | 931 |
| | 749 |
| | 494 |
|
| Weighted-average shares outstanding—Diluted | 47,558 |
| | 48,489 |
| | 48,406 |
|
Options to purchase approximately 4,590,925645,000 shares, 4,249,5642,289,000 shares and 6,594,3134,591,000 shares were outstanding at December 29, 201227, 2014, December 31, 201128, 2013 and December 25, 201029, 2012, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.
In addition, Basic weighted average shares outstanding for the fiscal years 20122014, 20112013 and 20102012 excluded the weighted average impact of 5,255, 703,011approximately 1,188,000 shares, 1,097,000 shares, and 777,740935,000 shares, respectively, of non-vested fixed restricted stock and restricted stock unit awards.
The following table illustrates the reconciliation of the numerator and denominator in the computations of the basic and diluted earnings per share:
|
| | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Numerator: | | | | | |
| Income (loss) from continuing operations for purposes of calculating earnings per share | $ | 101,547 |
| | $ | 115,111 |
| | $ | (328,657 | ) |
| Income (loss) from discontinued businesses | $ | (4,252 | ) | | $ | (5,545 | ) | | $ | (8,012 | ) |
| Denominator: | | | | | |
| Weighted-average shares outstanding—Basic | 47,912,135 |
| | 50,823,063 |
| | 62,561,294 |
|
| Effect of dilutive securities: | | | | | |
| 2.25% senior convertible debentures | — |
| | — |
| | — |
|
| Stock options and contingently issued restricted stock | 494,185 |
| | 495,179 |
| | — |
|
| Warrants | — |
| | — |
| | — |
|
| Weighted-average shares outstanding—Diluted | 48,406,320 |
| | 51,318,242 |
| | 62,561,294 |
|
| Basic earnings (loss) per share from continuing operations attributable to common shareowners | $ | 2.12 |
| | $ | 2.26 |
| | $ | (5.25 | ) |
| Basic earnings (loss) per share from discontinued operations attributable to common shareowners | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) |
| Diluted earnings (loss) per share from continuing operations attributable to common shareowners | $ | 2.10 |
| | $ | 2.24 |
| | $ | (5.25 | ) |
| Diluted earnings (loss) per share from discontinued operations attributable to common shareowners | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) |
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.
Treasury Shares
On In July 29, 2010,, our the Company's Board of Directors authorized a $500.0 million stock repurchase program, and subsequently approved increases to the stock repurchase program of $250.0 million in 2010, $250.0 million in 2013 and $150 million in 2014 for an aggregate authorization of $1,150.0 million. The company repurchased approximately 2,093,000 shares for $110.6 million, approximately 3,468,000 shares for $165.7 million and approximately 1,706,000 shares for $61.4 million in the fiscal years $500,0002014, 2013 and 2012, respectively. As of December 27, 2014, the Company had $178.5 million remaining on the authorized stock repurchase program. Our Board of Directors increasedIn addition, the stock repurchase authorization by $250,000 to $750,000 on October 20, 2010. In order to enable us to facilitate, on a more timely and cost efficient basis, the repurchase of a substantial number of our shares pursuant to that stock repurchase authorization, we entered into a series of accelerated stock repurchase (ASR) programs. The ASR programs are recorded as two transactions allocated between the initial purchase of treasury stock and a forward contract indexed to our common stock. The treasury shares result in an immediate reduction of shares on our statement of financial position and in our EPS calculation.
On August 26, 2010, we entered into an agreement with a third party investment bank to implement an ASR program to repurchase $300,000 of common stock. Under this ASR, we paid $300,000 on August 27, 2010 from cash on hand and available liquidity, including funds borrowed by us under our $750,000 credit facility. The initial delivery of 6,000,000 treasury shares was recorded at $175,066, the market value at the date of the transaction. We received an additional 750,000 shares under the ASR on September 23, 2010, which were recorded at $23,511, which represented the market value on that date, and we received an additional 1,250,000 shares on December 21, 2010, which were recorded at $43,069, which also represented the market value on that date. During 2010, in total, we repurchased 8,000,000 shares under the ASR program. The ASR was settled on February 11, 2011 based on a discount to the daily volume weighted average price (VWAP) of our common
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
stock over the course of a calculation period. We received the final 871,829 shares based on the settlement of the ASR, which were recorded at $32,509.
On February 24, 2011, we entered into an ASR to repurchase $150,000 of common stock. Under the ASR, we paid $150,000 from cash on hand, including funds borrowed under our credit facility. Upon signing the ASR on February 24, 2011, we received the initial delivery of 3,759,398 shares, which was recorded at $135,860 based on the market value at the date of the transaction, and recorded $14,140 as a forward contract indexed to our common stock. The ASR was settled on May 16, 2011 based on a discount to the daily volume weighted average price (VWAP) of our common stock over the course of a calculation period. We received the final 6,505 shares based on the settlement of the ASR, which were recorded at $257.
During 2012, 2011 and 2010, we repurchased 1,705,521 shares of common stock for $61,442, 3,790,762 shares of common stock for $130,853 and 1,759,857 shares of common stock for $52,888, respectively, under our Rule 10b5-1 Purchase Plans and in open market trading. The timing and amount of any future repurchases will depend on market conditions and corporate considerations.
Share repurchases through ASR programs and open market purchases during 2012, 2011 and 2010 were as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Number of shares of common stock repurchased | 1,705,521 |
| | 8,428,494 |
| | 9,759,857 |
|
| Total cost of repurchase | $ | 61,442 |
| | $ | 299,479 |
| | $ | 294,534 |
|
Additionally, our 2000Company's 2007 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. DuringThe number of shares of common stock netted for taxes was insignificant in each of the fiscal year endedyears December 29, 20122014, December 31, 20112013 and December 25, 2010, we acquired 84,250 shares for $3,047, 79,704 shares for $2,942 and 100,489 shares for $3,638, respectively, as a result of such withholdings.
Accumulated Deficit
None of our accumulated deficit is restricted due to statutory requirements in the local jurisdiction of a foreign subsidiary as of December 29, 2012 and December 31, 2011.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
The compositionChanges to each component of accumulated other comprehensive income is(loss), net of income tax, are 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 25, 2010 | $ | 51,834 |
| | $ | (17,603 | ) | | $ | (596 | ) | | $ | 33,635 |
|
| Period change | (12,329 | ) | | (22,660 | ) | | (325 | ) | | (35,314 | ) |
| Tax | (820 | ) | | 7,092 |
| | — |
| | 6,272 |
|
| Balance at December 31, 2011 | $ | 38,685 |
| | $ | (33,171 | ) | | $ | (921 | ) | | $ | 4,593 |
|
| Period change | 5,274 |
| | (5,862 | ) | | 921 |
| | 333 |
|
| Tax | 98 |
| | 1,579 |
| | — |
| | 1,677 |
|
| Balance at December 29, 2012 | $ | 44,057 |
| | $ | (37,454 | ) | | $ | — |
| | $ | 6,603 |
|
|
| | | | | | | | | | | |
| |
Translation Adjustment | | Pension Gains(Losses) and Prior Service (Cost) Credit Not Yet Recognized as Components of Net Periodic Benefit Costs | | Total |
| | (in thousands) |
| December 29, 2012 | $ | 44,057 |
| | $ | (37,454 | ) | | $ | 6,603 |
|
| Other comprehensive income (loss) before reclassifications | (15,751 | ) | | 19,293 |
| | 3,542 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 3,017 |
| | 3,017 |
|
| Net current period other comprehensive income (loss) | (15,751 | ) | | 22,310 |
| | 6,559 |
|
| Income tax benefit (expense) | 197 |
| | (8,002 | ) | | (7,805 | ) |
| December 28, 2013 | 28,503 |
| | (23,146 | ) | | 5,357 |
|
| Other comprehensive loss before reclassifications | (48,499 | ) | | (42,236 | ) | | (90,735 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 1,234 |
| | 1,234 |
|
| Net current period other comprehensive loss | (48,499 | ) | | (41,002 | ) | | (89,501 | ) |
| Income tax benefit | 105 |
| | 9,792 |
| | 9,897 |
|
| December 27, 2014 | $ | (19,891 | ) | | $ | (54,356 | ) | | $ | (74,247 | ) |
Warrants
Separately and concurrently with the pricing of the 2013 Notessenior convertible debentures in June 2006, wethe Company issued warrants for approximately 7.27,200,000 million shares of ourits common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares, (at our option)at the Company's option, with a value equal to the appreciation in the price of ourits shares above $59.63 and expire between
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
September 13, 2013 and January 22, 2014 over 90 equal increments. The total proceeds from the issuanceAs of theDecember 28, 2013, warrants for approximately 1,271,000 shares were outstanding and none were subsequently exercised. As of December 27, 2014, no warrants were $65,423.outstanding.
Non Redeemable Noncontrolling Interests
We holdThe Company has investments in several joint ventures. These joint ventures are separate legal entities, whose purpose is consistent with our overall operations and represent geographic and business segment expansions of existing markets. The financial results of all joint ventures wereare consolidated in our resultsthe Company's financial statements, as we haveit has the ability to exercise control over these entities. The interests of the outside joint venture partnersrespective noncontrolling parties in these joint venturesentities have been recorded as noncontrolling interests.
Reedemable Noncontrolling Interest
The Company's redeemable noncontrolling interest totaling $2,395 and $1,780 at December 29, 2012 and December 31, 2011, respectively.
Duringresulted from the fourth quarteracquisition of 2010, we purchased for $4,000 the remaininga 75% ownership interest in our Charles River—PCS-China joint venture. The transaction closed on December 24, 2010 with the cash transferred on the following business day. On the date of the purchase, we recorded the purchase price of $4,000 and the balance of the noncontrolling interests of $8,623 to equity.
7. INCOME TAXES
An analysis of the components of income (loss) from continuing operations before income taxes and the related provision for income taxes is presented below:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Income (loss) from continuing operations before income taxes | | | | | |
| U.S. | $ | 35,504 |
| | $ | 47,158 |
| | $ | (149,275 | ) |
| Non-U.S. | 94,242 |
| | 85,504 |
| | (184,807 | ) |
| | $ | 129,746 |
| | $ | 132,662 |
| | $ | (334,082 | ) |
| Income tax provision | | | | | |
| Current: | | | | | |
| Federal | $ | (1,447 | ) | | $ | 3,957 |
| | $ | 11,378 |
|
| Foreign | 26,411 |
| | 20,727 |
| | 23,782 |
|
| State and local | 1,353 |
| | 1,124 |
| | 2,416 |
|
| Total current | $ | 26,317 |
| | $ | 25,808 |
| | $ | 37,576 |
|
| Deferred: | | | | | |
| Federal | $ | 13,132 |
| | $ | 2,961 |
| | $ | (24,604 | ) |
| Foreign | (12,683 | ) | | (11,649 | ) | | (9,696 | ) |
| State and local | 862 |
| | 20 |
| | (3,253 | ) |
| Total deferred | $ | 1,311 |
| | $ | (8,668 | ) | | $ | (37,553 | ) |
| | $ | 27,628 |
| | $ | 17,140 |
| | $ | 23 |
|
Vital River. See Note 2, "Business Acquisitions."
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Net
9. INCOME TAXES
The components of income from continuing operations before income taxes and the related provision for income taxes are presented below:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Income from continuing operations before income taxes: | |
| | | | |
| U.S. | $ | 71,002 |
| | $ | 39,900 |
| | $ | 35,504 |
|
| Non-U.S. | 106,593 |
| | 98,427 |
| | 94,242 |
|
| | 177,595 |
| | 138,327 |
| | 129,746 |
|
| Income tax provision: | |
| | | | |
| Current: | |
| | | | |
| Federal | 13,733 |
| | 10,832 |
| | (1,447 | ) |
| Foreign | 20,364 |
| | 18,370 |
| | 26,411 |
|
| State | 4,746 |
| | 4,240 |
| | 1,353 |
|
| Total current | 38,843 |
| | 33,442 |
| | 26,317 |
|
| Deferred: | |
| | | | |
| Federal | 12,982 |
| | 5,468 |
| | 13,132 |
|
| Foreign | (4,672 | ) | | (6,431 | ) | | (12,683 | ) |
| State | 518 |
| | 432 |
| | 862 |
|
| Total deferred | 8,828 |
| | (531 | ) | | 1,311 |
|
| | $ | 47,671 |
| | $ | 32,911 |
| | $ | 27,628 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of deferred taxes, detailed below, recognize the impact of temporary differences between the amounts oftax assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws.are as follows:
| | | | December 29, 2012 | | December 31, 2011 | December 27, 2014 | | December 28, 2013 |
| | | (in thousands) |
| Deferred tax assets: | | | | |
| Compensation | $ | 52,664 |
| | $ | 49,178 |
| $ | 49,702 |
| | $ | 38,836 |
|
| Accruals and reserves | 5,827 |
| | 3,712 |
| 7,061 |
| | 2,356 |
|
| Inventory reserves and valuations | | 1,940 |
| | 1,696 |
|
| Financing related | 2,545 |
| | 3,193 |
| 993 |
| | 1,594 |
|
| Net operating loss and credit carryforwards | | 39,927 |
| | 47,026 |
|
| Other | | 4,426 |
| | 2,262 |
|
| Valuation allowance | | (5,866 | ) | | (7,071 | ) |
| Total deferred tax assets: | | 98,183 |
| | 86,699 |
|
| | | | | |
| Deferred tax liabilities: | | | | |
| Goodwill and other intangibles | (14,982 | ) | | (6,523 | ) | (52,029 | ) | | (21,826 | ) |
| Net operating loss and credit carryforwards | 55,480 |
| | 57,193 |
| |
| Depreciation related | (37,624 | ) | | (34,389 | ) | (23,549 | ) | | (22,389 | ) |
| Non-indefinitely reinvested earnings | (146 | ) | | (146 | ) | |
| Other | (1,245 | ) | | (1,795 | ) | |
| | 62,519 |
| | 70,423 |
| |
| Valuation allowance | (7,504 | ) | | (12,178 | ) | |
| Total deferred taxes | $ | 55,015 |
| | $ | 58,245 |
| |
| Investments in limited partnerships | | (4,067 | ) | | (2,720 | ) |
| Total deferred tax liabilities: | | (79,645 | ) | | (46,935 | ) |
| Net deferred taxes | | $ | 18,538 |
| | $ | 39,764 |
|
Reconciliations of the statutory U.S. Federal income tax rate to effective tax rates are as follows:
| | | | December 29, 2012 | | December 31, 2011 | | December 25, 2010 | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| U.S. statutory income tax rate | 35.0 | % | | 35.0 | % | | (35.0 | )% | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Foreign tax rate differences | (8.0 | )% | | (6.7 | )% | | (1.3 | )% | (9.4 | )% | | (8.0 | )% | | (8.0 | )% |
| State income taxes, net of Federal tax benefit | 1.5 | % | | 2.1 | % | | (0.7 | )% | 1.9 | % | | 1.6 | % | | 1.5 | % |
| Unbenefitted losses and changes in valuation allowance | 0.8 | % | | 0.6 | % | | 0.6 | % | 0.1 | % | | 0.4 | % | | 0.8 | % |
| Impact of repatriation of non-U.S.earnings | — | % | | 0.5 | % | | 4.6 | % | |
| Research tax credits and enhanced deductions | (8.2 | )% | | (7.6 | )% | | (3.6 | )% | (4.1 | )% | | (6.6 | )% | | (8.2 | )% |
| Enacted tax rate changes | (0.2 | )% | | (1.0 | )% | | — | % | — | % | | (0.4 | )% | | (0.2 | )% |
| Impact of tax uncertainties | (1.2 | )% | | (1.0 | )% | | 3.1 | % | (0.7 | )% | | 1.0 | % | | (1.2 | )% |
| Impact of goodwill and other impairments | — | % | | — | % | | 31.3 | % | |
| Releasing valuation allowance on loss from disposition of the Phase 1 Clinical business | — | % | | (8.4 | )% | | — | % | |
| Non taxable gain from settlement of life insurance policy | — | % | | (2.2 | )% | | — | % | |
| Impact of acquisitions and restructuring | | 1.6 | % | | 0.2 | % | | 0.1 | % |
| Other | 1.6 | % | | 1.6 | % | | 1.0 | % | 2.4 | % | | 0.6 | % | | 1.5 | % |
| | 21.3 | % | | 12.9 | % | | — | % | 26.8 | % | | 23.8 | % | | 21.3 | % |
As of December 29, 2012, we have non-U.S.27, 2014, the Company had foreign net operating loss and tax credit carryforwards the tax effect of which is $15,778.$39.8 million, as compared to $36.9 million as of December 28, 2013. Of this amount, $564$24.3 million will expire in 2013, $500 will expire in 2014,after 2015, and $188 will expire thereafter. Thethe remainder of $14,526$15.5 million can be carried forward indefinitely. We have U.S. net operating loss carryforwards atFrom a tax return basis, the state level, the tax effect of which is $85, which will expire between 2022 and 2023. We have U.S. foreignCompany has federal tax credit carryforwards of $20,251. Of this amount, $14,563$10.5 million that will expire in 2019, $5,368 will expire in 2020, and the remaining $320 thereafter. We have Canadian Scientific Research and Experimental Development (SR&ED) Credit carryforwards of $27,262, which begin to expire in 2029.2019, as compared to $21.7 million as of December 28, 2013. However, from a financial statement perspective, all of its federal tax credit carryforwards are shown net of unrecognized tax benefits. In accordance with Canadian Federal tax law, we claim SR&EDthe Company claims Scientific Research and Experimental Development (SR&ED) credits on qualified research and development costs incurred by our Preclinical servicein its Safety Assessment facility in Canada,Montreal, and currently maintains $24.6 million in credit carryforwards, which will begin to expire in 2030. Additionally, the performance of projectsCompany records a benefit to operating income for non-Canadian clients. Additionally, in accordance with the tax law of the United Kingdom, we claim enhanced deductions related to qualified research and development costs incurred by our Preclinical service facilitycredits in Scotland, in the performance of certain client contracts. We have realized capital losses in the U.S., the tax effect of which is $267, which will expire in 2017. We have realized and unrealized capital losses in Canada, the tax effect of which is $63 and $696, respectively. These losses can be carried forward indefinitely.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
We record deferred tax assets for stock-based awards based on the amount of stock-based compensation recognized in our Consolidated Statements of Income at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assetsboth Quebec and the actual tax benefit reported on our income tax returns are recorded in additional paid-in capital. If the tax benefit is less that the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, the subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits, which is computed in accordance with the long form method, was $9,558 as of December 29, 2012 and $10,580 as of December 31, 2011. During 2012, we recorded a tax benefit of $125 to additional paid-in-capitalU.K. related to the exercise of stock optionsits Safety Assessment and vesting of restricted shares.Early Discovery facilities.
We haveThe Company has fully recognized ourits deferred tax assets on the belief that it is more likely than not that they will be realized. The only exceptions at December 29, 2012relate to deferred tax assets primarily for net operating losses in Hong Kong, India, Luxembourg and the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Netherlands, capital losses in the U.S. and Canada, and fixed assets in the U.K. The valuation allowance decreased by $4,674$1.2 million from $12,178$7.1 million at December 31, 201128, 2013 to $7,504$5.9 million at December 29, 2012. The decrease in valuation allowance was primarily due to the liquidation of our former Chinese Preclinical services subsidiary resulting in the expiration of $5,380 of net operating losses and the reduction27, 2014.
A reconciliation of the related valuation allowance. Excluding this write off, we increased the valuation allowance by $706 due to the determination, after consideration of all evidence, both positiveCompany's beginning and negative, that it is more likely than not that these deferred tax assets will not be realized.
During the fourth quarter of 2010, we took actions to divest of our Phase 1 clinical business. We recorded in discontinued operations a deferred tax asset associated with the excess of the tax outside basis over the basis for financial reporting purposes of the Phase 1 clinical business. As of the fourth quarter of 2010, we determined that we did not meet the more-likely-than-not realization threshold for this deferred tax asset and we recorded a valuation allowance against it as part of discontinued operations. During the first quarter of 2011, we determined that the tax loss would more-likely-than-not be benefitted as a worthless stock deduction. As such, we released the valuation allowance recorded against the tax loss on the Phase 1 clinical business and recognized a $11,111 benefit in continuing operations during the first quarter of 2011.
At December 29, 2012, the amount recorded for unrecognized tax benefits was $30,996. At December 31, 2011 the amount recorded forending unrecognized income tax benefits was $27,976. is as follows:
|
| | | | | | | | | | | |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Beginning balance | $ | 18,475 |
| | $ | 30,996 |
| | $ | 27,976 |
|
| Additions to tax positions for current year | 1,700 |
| | 2,009 |
| | 1,907 |
|
| Additions to tax positions for prior years | 18,502 |
| | 1,709 |
| | 4,196 |
|
| Reductions to tax positions for current year | — |
| | — |
| | — |
|
| Reductions to tax positions for prior years | (3,722 | ) | | (732 | ) | | (28 | ) |
| Settlements | (308 | ) | | (15,246 | ) | | (3,055 | ) |
| Expiration of statute of limitations | (20 | ) | | (261 | ) | | — |
|
| Ending balance | $ | 34,627 |
| | $ | 18,475 |
| | $ | 30,996 |
|
The $3,020$16.2 million increase in unrecognized income tax benefits during 2012the fiscal year 2014 is primarily attributable to the ongoing evaluation of uncertainpre-acquisition tax positions intaken by the current and prior periods, settlement of tax controversies and foreign exchange movement. Significant increases during 2012 relate primarily to our Preclinical services subsidiary in Montreal and include an increase of $2,408 related to Canadian transfer pricing exposures for the years 2006 through 2012 resulting from headquarter service charges and $3,034 related to Canadian SR&ED and Quebec R&D benefits claimed in 2005 through 2012. Additionally, the unrecognized tax benefits were reduced by $2,954 related to the conclusion of the 2003 and 2004 SR&ED controversy that occurred in the third quarter of 2012.newly acquired Early Discovery businesses.
The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $24,386$32.3 million as of December 29, 201227, 2014 and $22,477$17.0 million as of December 31, 2011.28, 2013. The $1,909$15.3 million increase is primarily attributable to ongoing evaluationpre-acquisition tax positions taken by the newly acquired Early Discovery businesses. It is reasonably possible as of December 27, 2014 that the liability for unrecognized tax benefits for the uncertain tax positions in the current and prior periods and foreign exchange movement partially offsetposition associated with forgiveness of debt will decrease by a decrease$10.7 million due to the conclusionexpiration of statute of limitations and by $0.6 million due to the Canadian controversy.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
A reconciliationsettlement of our beginningGerman and ending unrecognized incomeFrench tax benefits is as follows:
|
| | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Beginning balance | $ | 27,976 |
| | $ | 33,427 |
| | $ | 21,389 |
|
| Additions: | | | | | |
| Tax positions for current year | 1,907 |
| | 1,714 |
| | 13,142 |
|
| Tax positions for prior years | 4,196 |
| | — |
| | 693 |
|
| Reductions: | | | | | |
| Tax positions for current year | — |
| | — |
| | — |
|
| Tax positions for prior years | (28 | ) | | (239 | ) | | (1,797 | ) |
| Settlements | (3,055 | ) | | (6,926 | ) | | — |
|
| Expiration of statute of limitations | — |
| | — |
| | — |
|
| Ending balance | $ | 30,996 |
| | $ | 27,976 |
| | $ | 33,427 |
|
We continueaudits. The Company continues 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, 201227, 2014 and December 31, 201128, 2013 was $1,964$1.4 million and $1,515,$0.7 million, respectively.
The $449 increase is primarily due to ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement partially offset by a decrease due to the conclusion of the Canadian SR&ED controversy. We have not recorded a provision for penalties associated with uncertain tax positions.
We conductCompany conducts business in a number of tax jurisdictions. As a result, we areit is subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the United States,U.S., the United Kingdom,U.K., France, Japan, Germany and Canada. With few exceptions, we arethe Company is no longer subject to U.S. and international income tax examinations for years before 2005.2010.
WeThe Company and certain of ourits subsidiaries are currently under audit by the Minister of Revenue Quebec provincialvarious tax authority (MRQ)authorities in Canada, Germany and various state tax authorities. We doFrance. The Company does not anticipate resolution of these audits towill have a material impact on ourits financial statements.
We are currently under audit byIn the first quarter of 2014, the Company settled with the Canadian Revenue Authority (CRA) for thetax years 2006 through 2009.2009 related to transfer pricing in our Safety Assessment operations in Montreal. In the fourth quarter of 2012, we2014, the Company received a draft reassessmentan assessment from the CRA related to the transfer pricing in our Preclinical servicesSafety Assessment operations in Montreal. The CRA proposes to disallowhas disallowed certain deductions related to headquarter service charges for the years 20062010 through 2009. We intend2012. The Company intends to file an objectionapply with the CRA upon receipt of the Notice of Reassessment and apply to the Internal Revenue Service (IRS) and the CRA for relief pursuant to the competent authority procedure provided in the tax treaty between the U.S. and Canada. We believeCanada for the tax years 2008 through 2012. The Company believes that the controversy will likely be ultimately settled via the competent authority process. In the fourth quarter of 2012, we establishedprocess and accordingly have recorded both a reserve for this uncertain tax position of $2,408 related to years 2006 through 2012 to reduce the tax benefit recognized for these deductions in Canada to the level that we believe will likely be realized upon the ultimate resolution of this controversy. Additionally, in the fourth quarter of 2012, we recognizedCanadian liability and a tax asset of $2,981, which is included in Other Assets, that represents the correlative relief that we believe will more likely than not be received in the U.S. via the competent authority process.US receivable. The actual amounts of the liability for Canadian taxes and the asset for the correlative relieverelief in the U.S. could be different based upon the agreement reached between the IRS and the CRA.
DuringOn December 2, 2014, the third quarter of 2012, we reachedQuebec government released Information Bulletin 2014-11, which elaborated on a settlement with the Canadian Department of Justice with respect to our appeal of the CRA's reassessments of our 2003 and 2004 SR&ED claims to the Tax Court of Canada. As agreed to in the settlement which applies only to our 2003 and 2004 claims, the CRA issued final reassessments in the third quarter of 2012 and we filed a Notice of Discontinuance with the Tax Court of Canada concluding the controversy. In the third quarter, we recorded a benefit due to the settlement of $586, of which $248 is recorded in pretax profit and $338 is recorded in tax expense. Our SR&ED claims in 2005 and forward remain open to audit. We believe that we have appropriately provided for these claims as well as all uncertain tax positions.
During 2012, the Canadian government enacted a reduction in theproposed law change on its SR&ED credit which is applicable for years 2014that, if passed, would provide a one-time retroactive benefit to operating income in the year of enactment and beyond. This change in law will reduce our SR&ED credits by 25% starting in 2014. Subsequentwould provide a corresponding increase to our December 29, 2012 year end, the French government enacted aCompany’s effective income tax law change that applies retroactively to 2012. We will record the 2012 impact
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
of this law change, which limits the deductibility of interest by our French affiliates for 2012 and beyond,rate. If passed as a discrete event in our financial statement for the first quarter ending March 30, 2013. The total 2012 impact fromproposed, the tax law change iswould also provide an ongoing reduction in benefit to operating income and an additional tax expense of $714. On February 25, 2013,corresponding increase to the German government enacted a law change that restricts the deductibility of losses in Germany. Application of these new rules may increase our tax liability in Germany and ourCompany's effective income tax rate in 2013the year of enactment and beyond. We are still assessing the impact of this new tax law on our tax liability and 2013 effective tax rate.
During 2010, we executed an agreement to implement an accelerated share repurchase (ASR) program to repurchase $300,000 of common stock. The ASR resulted in a cash need in the United States that was previously unforeseen. In accordance with ourthe Company's policy, with respect to the unremitted earnings of our non-U.S. subsidiaries, we evaluated whether a portion of the foreign earnings could be repatriated in order to fund the ASR. We determined that approximately $229,792 of earnings that were previously indefinitely reinvested and approximately $63,640 in basis in our non-U.S. subsidiaries could be repatriated in a substantially tax-free manner. As a result, in 2010, we changed our indefinite reinvestment assertion with respect to these earnings and accrued the cost to repatriate $10,334, of which $15,264 is reflected as Income Tax Expense, with an offsetting benefit of $4,930, which is recorded in the Cumulative Translation Adjustment account. During 2010, we repatriated approximately $293,432 to the U.S. to partially fund the ASR and the $30,000 termination fee for a proposed acquisition.
In accordance with our policy, the remaining undistributed earnings of ourthe Company's non-U.S. subsidiaries remain indefinitely reinvested as of the end of 20122014 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free. During the third quarter of 2011, we restructured our international operations in a tax-free manner to allow us more flexibility in accessing our offshore cash to fund needs outside the U.S. As of December 29, 2012,27, 2014, the earnings of our non-U.S. subsidiaries considered to be
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
indefinitely reinvested totaled $155,087. $271.0 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 additional U.S. Federal and state income taxes and foreign income and withholding taxes, which could be material.herein. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because of the complexities with the hypothetical calculation. Additionally, the amount of liability is dependent on circumstances existing if and when remittance occurs.
8.
10. EMPLOYEE BENEFIT PLANS
Charles River Laboratories Employee Savings Plan
Our defined contribution plan, theThe Charles River Laboratories Employee Savings Plan qualifies under sectionis a defined contribution plan in the form of a qualified 401(k) of the Internal Revenue Code. It coversplan in which substantially all U.S. employees andare eligible to participate upon employment. The plan contains a provision whereby we matchthe Company matches a percentage of employee contributions. TheDuring the fiscal years 2014, 2013 and 2012, the costs associated with this defined contribution plan totaled $4.9 million, $4,364, $4,1784.7 million and $4,694, in 2012, 2011 and 20104.4 million, respectively.
Charles River Laboratories Deferred Compensation Plan and Executive Supplemental Life Insurance Retirement Plan
The Company maintains a non-qualified deferred compensation plan, known as the Charles River Laboratories Deferred Compensation Plan (Deferred Compensation Plan) is designed for(DCP), which allows a select group of 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 numberportion 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.their compensation. At the present time, no contributions will beare credited to the plan,DCP, 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 65.65. Amounts may also be distributed during employment, subject to a minimum deferral requirement of three years.
The Company provides certain active employees an annual contribution into their DCP account of 10% of the employee's base salary plus the lesser of their target annual bonus or actual annual bonus.
In addition to the Deferred Compensation Plan,DCP, certain officers and key employees also participate, or in the past participated, in our amended and restatedthe Company's 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 (CRL Pension Plan) and Social Security.
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
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
with these defined contribution plans, including the ESLIRP, totaledfor the fiscal years $2,9302014, $2,0482013 and $3,0822012 in 2012, 2011totaled $3.3 million, $3.3 million and 2010,$2.9 million, respectively.
We have
The Company has 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.DCP. Participants have no interest in any such investments. At December 29, 201227, 2014 and December 31, 201128, 2013, the cash surrender value of these life insurance policies were $25,240$27.6 million and $25,057,$26.5 million, respectively.
Post-Retirement Health and Life Insurance Plans
OurThe Company's Montreal location offers post-retirement life insurance benefits to its employees and post-retirement medical &and dental insurance coverage to certain executives. The plan is non-contributory and unfunded. As of December 29, 2012,27, 2014 and December 28, 2013, the accumulated benefit obligation related to the plan was $1,344. In addition,$1.2 million and $1.1 million, respectively. The amounts included in other accumulated other comprehensive income includes $105 of deferred gains and losses, net of tax. Expensesas well as expenses related to the plan were $201, $188insignificant in the fiscal years 2014, 2013, and $177 for 2012, 2011 and 2010, respectively.2012.
Pension Plans
The Charles River Laboratories, Inc.CRL Pension Plan is a qualified, non-contributory defined benefit plan covering certain USU.S. employees. Effective 2002, the plan was amended to exclude new participants from joining and in 2008 the accrual of benefits was frozen.
The Charles River Pension Plan is a defined contribution and defined contributionbenefit pension plan covering certain UKU.K. 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.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, the Company has several defined benefit plans in certain other countries in which it maintains an operating presence, including Japan, Canada and France.
The following tables provide a reconciliation of benefit obligations and plan assets of the Company's 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 definedsupplemental post-retirement benefit statutory indemnity plan covering most of its employees.plans:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | December 27, 2014 | | December 28, 2013 | | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Change in projected benefit obligations: | |
| | |
| | |
| | |
|
| Benefit obligation at beginning of year | $ | 286,212 |
| | $ | 283,063 |
| | $ | 29,498 |
| | $ | 27,372 |
|
| Service cost | 3,397 |
| | 3,368 |
| | 758 |
| | 643 |
|
| Interest cost | 12,822 |
| | 11,273 |
| | 1,009 |
| | 708 |
|
| Benefit payments | (9,002 | ) | | (8,300 | ) | | (722 | ) | | (726 | ) |
| Actuarial loss (gain) | 50,550 |
| | (4,276 | ) | | 1,703 |
| | 1,501 |
|
| Administrative expenses paid | (459 | ) | | (308 | ) | | — |
| | — |
|
| Effect of foreign exchange | (16,636 | ) | | 1,392 |
| | — |
| | — |
|
| Benefit obligation at end of year | 326,884 |
| | 286,212 |
| | 32,246 |
| | 29,498 |
|
| Change in fair value of plan assets: | | | | | | | |
| Fair value of plan assets at beginning of year | 272,659 |
| | 238,672 |
| | — |
| | — |
|
| Actual return on plan assets | 25,630 |
| | 30,820 |
| | — |
| | — |
|
| Employer contributions | 6,874 |
| | 9,570 |
| | 722 |
| | 726 |
|
| Benefit payments | (9,002 | ) | | (8,300 | ) | | (722 | ) | | (726 | ) |
| Premiums paid | (459 | ) | | (308 | ) | | — |
| | — |
|
| Effect of foreign exchange | (14,412 | ) | | 2,205 |
| | — |
| | — |
|
| Fair value of plan assets at end of year | $ | 281,290 |
| | $ | 272,659 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
| Net balance sheet liability | $ | 45,594 |
| | $ | 13,553 |
| | $ | 32,246 |
| | $ | 29,498 |
|
| | | | | | | | |
| Amounts recognized in balance sheet: | | | | | | | |
| Non-current assets | $ | 61 |
| | $ | 2,738 |
| | $ | — |
| | $ | — |
|
| Current liabilities | 169 |
| | 72 |
| | 744 |
| | 789 |
|
| Non-current liabilities | 45,486 |
| | 16,219 |
| | 31,502 |
| | 28,709 |
|
Amounts recognized in accumulated other comprehensive income:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Net actuarial loss | $ | 73,433 |
| | $ | 35,481 |
| | $ | 5,761 |
| | $ | 4,307 |
|
| Net prior service cost (credit) | (5,388 | ) | | (6,338 | ) | | — |
| | 660 |
|
| Net amount recognized | $ | 68,045 |
| | $ | 29,143 |
| | $ | 5,761 |
| | $ | 4,967 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
The following tables summarizeaccumulated benefit obligation and fair value of plan assets for the funded statusCompany plans with accumulated benefit obligations in excess of our definedplan assets are as follows: |
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | December 27, 2014 | | December 28, 2013 | | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Accumulated benefit obligation | $ | 299,127 |
| | $ | 81,117 |
| | $ | 29,994 |
| | $ | 27,938 |
|
| Fair value of plan assets | 267,026 |
| | 68,430 |
| | — |
| | — |
|
The projected benefit obligation and fair value of plan assets for the Company plans andwith projected benefit obligations in excess of plan assets are as follows: |
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | December 27, 2014 | | December 28, 2013 | | December 27, 2014 | | December 28, 2013 |
| | (in thousands) |
| Projected benefit obligation | $ | 326,731 |
| | $ | 99,671 |
| | $ | 32,246 |
| | $ | 29,498 |
|
| Fair value of plan assets | 281,075 |
| | 83,379 |
| | — |
| | — |
|
The amounts reflected in our consolidated balance sheets.accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year are as follows: Obligations and Funded Status: |
| | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | (in thousands) |
| Amortization of net actuarial loss | $ | 3,227 |
| | $ | 269 |
|
| Amortization of net prior service credit | (602 | ) | | — |
|
Components of net periodic benefit cost:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Change in benefit obligations | | | | | | | |
| Benefit obligation at beginning of year | $ | 251,916 |
| | $ | 228,810 |
| | $ | 26,456 |
| | $ | 30,572 |
|
| Service cost | 3,729 |
| | 3,056 |
| | 640 |
| | 636 |
|
| Interest cost | 11,289 |
| | 12,107 |
| | 892 |
| | 1,201 |
|
| Plan participants' contributions | 53 |
| | 574 |
| | — |
| | — |
|
| Curtailment | — |
| | — |
| | — |
| | — |
|
| Settlements | — |
| | (158 | ) | | — |
| | (5,113 | ) |
| Benefit payments | (6,186 | ) | | (6,664 | ) | | (743 | ) | | (764 | ) |
| Actuarial loss (gain) | 16,699 |
| | 13,319 |
| | 127 |
| | (76 | ) |
| Plan amendments | — |
| | 53 |
| | — |
| | — |
|
| Administrative expenses paid | (266 | ) | | (272 | ) | | — |
| | — |
|
| Effect of foreign exchange | 5,829 |
| | 1,091 |
| | — |
| | — |
|
| Benefit obligation at end of year | $ | 283,063 |
| | $ | 251,916 |
| | $ | 27,372 |
| | $ | 26,456 |
|
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 202,652 |
| | $ | 192,429 |
| | $ | — |
| | $ | — |
|
| Plan assets assumed | — |
| | — |
| | — |
| | — |
|
| Actual return on plan assets | 22,467 |
| | 3,661 |
| | — |
| | — |
|
| Settlements | — |
| | (158 | ) | | — |
| | (5,113 | ) |
| Employer contributions | 14,222 |
| | 12,170 |
| | 743 |
| | 5,877 |
|
| Plan participants' contributions | 53 |
| | 574 |
| | — |
| | — |
|
| Benefit payments | (6,186 | ) | | (6,664 | ) | | (743 | ) | | (764 | ) |
| Premiums paid | (266 | ) | | (272 | ) | | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
|
| Effect of foreign exchange | 5,730 |
| | 912 |
| | — |
| | — |
|
| Fair value of plan assets at end of year | $ | 238,672 |
| | $ | 202,652 |
| | $ | — |
| | $ | — |
|
| Funded status | | | | | | | |
| Projected benefit obligation | $ | 283,063 |
| | $ | 251,916 |
| | $ | 27,372 |
| | $ | 26,456 |
|
| Fair value of plan assets | 238,672 |
| | 202,652 |
| | — |
| | — |
|
| Net balance sheet liability | $ | 44,391 |
| | $ | 49,264 |
| | $ | 27,372 |
| | $ | 26,456 |
|
| Classification of net balance sheet liability | | | | | | | |
| Non-current assets | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | — |
|
| Current liabilities | 75 |
| | 52 |
| | 709 |
| | 717 |
|
| Non-current liabilities | 44,316 |
| | 49,223 |
| | 26,663 |
| | 25,739 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 | | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Service cost | $ | 3,397 |
| | $ | 3,368 |
| | $ | 3,729 |
| | $ | 758 |
| | $ | 643 |
| | $ | 640 |
|
| Interest cost | 12,822 |
| | 11,273 |
| | 11,289 |
| | 1,009 |
| | 708 |
| | 892 |
|
| Expected return on plan assets | (17,444 | ) | | (14,672 | ) | | (13,799 | ) | | — |
| | — |
| | — |
|
| Amortization of prior service cost (credit) | 961 |
| | 2,711 |
| | 2,461 |
| | 250 |
| | 249 |
| | 260 |
|
| Amortization of net loss (gain) | (637 | ) | | (603 | ) | | (609 | ) | | 660 |
| | 660 |
| | 660 |
|
| Net periodic cost (benefit) | $ | (901 | ) | | $ | 2,077 |
| | $ | 3,071 |
| | $ | 2,677 |
| | $ | 2,260 |
| | $ | 2,452 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Amounts recognized in statement of financial position as part of accumulated other comprehensive income ("AOCI"):
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Net actuarial loss | $ | 58,594 |
| | $ | 52,384 |
| | $ | 3,056 |
| | $ | 3,190 |
|
| Net prior service cost/(credit) | (6,815 | ) | | (7,117 | ) | | 1,320 |
| | 1,981 |
|
| Total | $ | 51,779 |
| | $ | 45,267 |
| | $ | 4,376 |
| | $ | 5,171 |
|
| The accumulated benefit obligation for all defined benefit plans | $ | 275,162 |
| | $ | 245,705 |
| | $ | 26,495 |
| | $ | 24,663 |
|
Information for defined benefit plans with accumulated benefit obligation in excess of plan assets:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Projected benefit obligation | $ | 277,187 |
| | $ | 247,232 |
| | $ | 27,372 |
| | $ | 26,457 |
|
| Accumulated benefit obligation | 271,204 |
| | 242,467 |
| | 26,495 |
| | 24,663 |
|
| Fair value of plan assets | 233,182 |
| | 198,689 |
| | — |
| | — |
|
Information for defined benefit plans with projected benefit obligation in excess of plan assets:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Projected benefit obligation | $ | 283,063 |
| | $ | 251,723 |
| | $ | 27,372 |
| | $ | 26,457 |
|
| Accumulated benefit obligation | 275,162 |
| | 245,574 |
| | 26,495 |
| | 24,663 |
|
| Fair value of plan assets | 238,672 |
| | 202,448 |
| | — |
| | — |
|
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 | $ | 2,764 |
| | $ | 249 |
|
| Amortization of net prior service cost/(credit) | (622 | ) | | 660 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Components of net periodic benefit cost:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 |
| Service cost | $ | 3,729 |
| | $ | 3,056 |
| | $ | 2,617 |
| | $ | 640 |
| | $ | 636 |
| | $ | 597 |
|
| Interest cost | 11,289 |
| | 12,107 |
| | 11,214 |
| | 892 |
| | 1,201 |
| | 1,341 |
|
| Expected return on plan assets | (13,799 | ) | | (13,677 | ) | | (12,185 | ) | | — |
| | — |
| | — |
|
| Amortization of prior service cost (credit) | 2,461 |
| | (617 | ) | | (598 | ) | | 260 |
| | 498 |
| | 498 |
|
| Amortization of net loss (gain) | (609 | ) | | 978 |
| | 749 |
| | 660 |
| | 210 |
| | 155 |
|
| Net periodic benefit cost | 3,071 |
| | 1,847 |
| | 1,797 |
| | 2,452 |
| | 2,545 |
| | 2,591 |
|
| Settlement | — |
| | 23 |
| | 27 |
| | — |
| | (487 | ) | | — |
|
| Net pension cost | $ | 3,071 |
| | $ | 1,870 |
| | $ | 1,824 |
| | $ | 2,452 |
| | $ | 2,058 |
| | $ | 2,591 |
|
Rollforward of accumulated other comprehensive income:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Beginning balance | $ | 45,267 |
| | $ | 22,311 |
| | $ | 5,171 |
| | $ | 5,467 |
|
| Amortization of prior service cost | (2,461 | ) | | 617 |
| | (660 | ) | | (497 | ) |
| Amortization of net gain (loss) | 609 |
| | (978 | ) | | (260 | ) | | (210 | ) |
| Asset loss/(gain) | 8,030 |
| | 10,016 |
| | 125 |
| | — |
|
| Liability loss/(gain) | — |
| | 13,319 |
| | — |
| | (76 | ) |
| Recognized prior service (cost) credit due to curtailment | — |
| | 53 |
| | — |
| | — |
|
| Recognized (loss)/gain due to settlement | — |
| | (23 | ) | | — |
| | 487 |
|
| Currency impact | 334 |
| | (48 | ) | | — |
| | — |
|
| Ending balance | $ | 51,779 |
| | $ | 45,267 |
| | $ | 4,376 |
| | $ | 5,171 |
|
Assumptions
Weighted-average assumptions used to determine projected benefit obligations:
| | | | Pension Benefits | | Supplemental Retirement Benefits | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 | December 27, 2014 | | December 28, 2013 | | December 27, 2014 | | December 28, 2013 |
| Discount rate | 4.13 | % | | 4.47 | % | | 2.63 | % | | 3.42 | % | 3.79 | % | | 4.54 | % | | 3.34 | % | | 3.47 | % |
| Rate of compensation increase | 3.04 | % | | 3.12 | % | | 2.50 | % | | 2.50 | % | 3.19 | % | | 3.39 | % | | 3.00 | % | | 3.00 | % |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Weighted-average assumptions used to determine net periodic benefit cost:
| | | | Pension Benefits | | Supplemental Retirement Benefits | Pension Benefits | | Supplemental Retirement Benefits |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | December 27, 2014 | | December 28, 2013 | | December 29, 2012 | | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| Discount rate | 4.47 | % | | 5.20 | % | | 5.63 | % | | 3.42 | % | | 4.34 | % | | 5.22 | % | 4.54 | % | | 4.13 | % | | 4.47 | % | | 3.47 | % | | 2.63 | % | | 3.42 | % |
| Expected long-term return on plan assets | 6.55 | % | | 6.79 | % | | 7.11 | % | | — |
| | — |
| | — |
| 6.41 | % | | 6.27 | % | | 6.55 | % | | — |
| | — |
| | — |
|
| Rate of compensation increase | 3.12 | % | | 3.48 | % | | 2.50 | % | | 2.50 | % | | 2.50 | % | | 2.50 | % | 3.39 | % | | 3.04 | % | | 3.12 | % | | 3.00 | % | | 2.50 | % | | 2.50 | % |
A 0.5% decrease in the expected rate of return would increase annual pension expense by $1.4 million.
Plan assets
The expectedCompany invests its pension assets with the objective of achieving a total long-term rate of return on plan assets was made considering thesufficient to fund future pension plan's asset mix, historical returnsobligations and the expected yields on plan assets.to minimize future pension contributions. The discount rates reflect the rates at which amounts that are invested inCompany is willing to tolerate a commensurate level of risk to achieve this objective. The Company controls its risk by maintaining a diversified portfolio of high-quality debt instruments would provide the future cash flows necessary to pay benefits when they become due. The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and our current employee compensation strategy.
Plan assets:
Our pension plans' weighted-average asset allocations are as follows:
|
| | | | | | | | |
| | Target Allocation | | Pension Benefits |
| | 2013 | | 2012 | | 2011 |
| Equity securities | 67 | % | | 60 | % | | 59 | % |
| Fixed income | 31 | % | | 36 | % | | 37 | % |
| Other | 2 | % | | 4 | % | | 4 | % |
| 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 2000, BC Aggregate Index and MSCI EAFE Index. Our Investment Committee meets on a quarterly basis to review plan assets.
assets classes. Plan assets did not include any of ourthe Company's common stock at December 29, 201227, 2014 or December 28, 2013. The weighted-average target asset allocations are approximately 49.7% to equity securities, approximately 31.2% to fixed income securities and December 31, 2011, respectively.approximately 19.1% to other securities.
The fair value of ourthe Company's pension plan assets by asset category are as follows.
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 29, 2012 |
| 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 | $ | 1,336 |
| | $ | — |
| | $ | — |
| | $ | 1,336 |
|
| Common stock(a) | 100,864 |
| | 4,261 |
| | — |
| | 105,125 |
|
| Debt securities(a) | 63,283 |
| | 3,169 |
| | — |
| | 66,452 |
|
| Mutual funds(b) | 55,453 |
| | 8,551 |
| | — |
| | 64,004 |
|
| Life insurance policies(c) | — |
| | 43 |
| | — |
| | 43 |
|
| Other (d) | 224 |
| | — |
| | 1,488 |
| | 1,712 |
|
| Total | $ | 221,160 |
| | $ | 16,024 |
| | $ | 1,488 |
| | $ | 238,672 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 27, 2014 | | December 28, 2013 |
| |
Level 1 | |
Level 2 | |
Level 3 | | Total | |
Level 1 | |
Level 2 | |
Level 3 | | Total |
| | (in thousands) |
| Cash | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1,004 |
| | $ | — |
| | $ | — |
| | $ | 1,004 |
|
Equity securities(a) | 80,692 |
| | 5,126 |
| | — |
| | 85,818 |
| | 97,857 |
| | 5,059 |
| | — |
| | 102,916 |
|
Debt securities(b) | 69,716 |
| | 3,232 |
| | — |
| | 72,948 |
| | 62,717 |
| | 3,487 |
| | — |
| | 66,204 |
|
Mutual funds(c) | 67,079 |
| | 53,330 |
| | — |
| | 120,409 |
| | 65,152 |
| | 35,610 |
| | — |
| | 100,762 |
|
| Other | 297 |
| | 46 |
| | 1,771 |
| | 2,114 |
| | 299 |
| | 48 |
| | 1,426 |
| | 1,773 |
|
| Total | $ | 217,785 |
| | $ | 61,734 |
| | $ | 1,771 |
| | $ | 281,290 |
| | $ | 227,029 |
| | $ | 44,204 |
| | $ | 1,426 |
| | $ | 272,659 |
|
| |
| (a) | This category comprises investmentsequity securities held by non-U.S. pension plans valued at the quoted closing price, reported on the active market on which the individual securities are traded.and translated into U.S. dollars using a foreign currency exchange rate at year end. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
| |
| (b) | This category comprises debt securities held by non-U.S. pension plans valued at the quoted closing price, and translated into U.S. dollars using a foreign currency exchange rate at year end. |
| |
| (c) | This category comprises mutual funds valued at the net asset value of shares held at year end. |
| |
(c) | This category comprises life insurance policies valued at cash surrender value at year end. |
| |
(d) | This comprises annuity policies held with various insurance companies valued at face value. |
|
| | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Balance at December 31, 2011 | $ | 1,419 |
|
| Actual return on plan assets: | |
| Relating to assets still held at December 29, 2012 | 51 |
|
| Relating to assets sold during the period | |
| Purchases, sales and settlements | (78 | ) |
| Transfers in and/or out of Level 3 | 96 |
|
| Balance at December 29, 2012 | $ | 1,488 |
|
Contributions:The activity within the Level 3 pension plan assets was insignificant during the periods presented.
During 2012, wethe fiscal year ended 2014, the Company contributed $13,966$6.4 million to ourthe pension plans. We expectplans and expects to contribute $13,868$6.1 million to ourits pension plan in 20132015.
Expected benefit payments are estimated using the same assumptions used in determining the Company’s benefit obligation at December 27, 2014. Benefit payments will depend on future employment and compensation levels, among other factors, and
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
changes in any of these factors could significantly affect these estimated future benefit payments. Estimated future benefit payments:payments during the next five years and in the aggregate for the fiscal years thereafter, are as follows:
| | | | Pension Benefits | | Supplemental Retirement Benefits | Pension Benefits | | Supplemental Retirement Benefits |
| 2013 | $ | 7,180 |
| | $ | 721 |
| |
| 2014 | 6,773 |
| | 800 |
| |
| | | (in thousands) |
| 2015 | 7,559 |
| | 745 |
| $ | 6,811 |
| | $ | 759 |
|
| 2016 | 8,591 |
| | 12,379 |
| 6,832 |
| | 13,090 |
|
| 2017 | 8,657 |
| | 721 |
| 7,194 |
| | 740 |
|
| 2018-2022 | $ | 54,207 |
| | $ | 8,811 |
| |
| 2018 | | 8,384 |
| | 727 |
|
| 2019 | | 8,700 |
| | 7,147 |
|
| 2020-2024 | | 57,116 |
| | 11,286 |
|
9.11. STOCK PLANS AND STOCK BASED COMPENSATION
We have share-based
The Company has stock-based compensation plans under which employees and non-employee directors may be granted share based awards. stock-based awards such as stock options, restricted stock and PSUs.
During 20122014, 20112013 and 20102012, the primary share-based awards and their general terms and conditions are as follows:
Stock options, which entitle the holder to purchase a specified number of shares of common stock at an exercise price equal to the closing market price of our common stock on the date of grant; vest incrementally, typically over three3 to four4 years; and generally expire seven7 to ten10 years from date of grant.
Restricted stock, grants, which entitle the holder to receive at no cost, a specified number of shares of common stock that vests incrementally, typically over three3 to four4 years. RecipientsWith respect to restricted stock units, recipients are entitled to cash dividends and to vote their respective shares upon grant.
Performance based stock awards,PSUs, which entitle the holder to receive at no cost, a specified number of shares of common stock within a range of shares from zero to a specified maximum. Payout of this award is contingent upon achievement of individualized stretch goals as determined by our Compensation Committee ofcertain performance and market conditions.
In May 2007, the Board of Directors.
At the Annual Meeting of Shareholders held on May 8, 2007, ourCompany's shareholders approved the 2007 Incentive Plan, which was amended in 2009, 2011 and 2013 (2007 Plan). The 2007 Plan was subsequently amended in 2009 and 2011, and in each case the amendments were approved by our
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
shareholders at the respective annual meeting of shareholders. The 2007 Plan provides that effective upon approval,provided no further awards willto 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 12.218.7 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 one1.0 share. In the past, we had various employeeAny 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 onin May 8, 2007, continue in accordance with the terms of the respective plans.
At December 29, 201227, 2014, approximately 3.019.9 million shares were authorized for future grants under ourthe Company's share-based compensation plans. We settleThe Company settles 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 basis. The following table presentsprovides the financial statement line items in which stock-based compensation included in our consolidated statement of income:
|
| | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Stock-based compensation expense in: | | | | | |
| Cost of sales | $ | 5,470 |
| | $ | 5,983 |
| | $ | 7,186 |
|
| Selling and administration | 16,385 |
| | 15,723 |
| | 18,340 |
|
| Income from continuing operations, before income taxes | 21,855 |
| | 21,706 |
| | 25,526 |
|
| Provision for income taxes | (7,793 | ) | | (7,784 | ) | | (9,179 | ) |
| Net income attributable to common shareowners | $ | 14,062 |
| | $ | 13,922 |
| | $ | 16,347 |
|
We capitalized is reflected:no stock-based compensation related costs for the years ended 2012, 2011 and 2010.
The fair value of stock-based awards granted during 2012, 2011 and 2010 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
| | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Expected life (in years) | 4.5 |
| | 4.2 |
| | 4.5 |
|
| Expected volatility | 35 | % | | 33 | % | | 34 | % |
| Risk-free interest rate | 0.84 | % | | 2.21 | % | | 2.35 | % |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
| Weighted—average grant date fair value | $ | 10.94 |
| | $ | 11.32 |
| | $ | 11.96 |
|
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, 2011 | 6,081,263 |
| | $ | 38.25 |
| | | | |
|
| Options granted | 590,675 |
| | $ | 36.09 |
| | | | |
|
| Options exercised | (650,255 | ) | | $ | 28.34 |
| | | | |
|
| Options canceled | (161,280 | ) | | $ | 39.00 |
| | | | |
|
| Options outstanding as of December 29, 2012 | 5,860,403 |
| | $ | 39.11 |
| | | | |
|
| Options exercisable as of December 29, 2012 | 3,871,131 |
| | $ | 41.27 |
| | 2.25 years | | $ | 7,600 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 |
| | December 28, 2013 |
| | December 29, 2012 |
|
| | (in thousands) |
| Stock-based compensation expense included in: | | | | | |
| Cost of revenue | $ | 5,382 |
| | $ | 5,381 |
| | $ | 5,470 |
|
| Selling, general and administrative | 25,653 |
| | 19,161 |
| | 16,385 |
|
| Stock-based compensation expense, before income taxes | 31,035 |
| | 24,542 |
| | 21,855 |
|
| Provision for income taxes | (11,006 | ) | | (8,658 | ) | | (7,793 | ) |
| After-tax effect of stock-based compensation expense | $ | 20,029 |
| | $ | 15,884 |
| | $ | 14,062 |
|
The Company capitalized no stock-based compensation related costs for the fiscal years 2014, 2013 and 2012.
The Company's pool of excess tax benefits, which is computed in thousands, except per share amounts)accordance with the long form method, was $10.8 million as of December 27, 2014, $7.3 million as of December 28, 2013 and $9.6 million as of December 29, 2012. During the fiscal year 2014, the Company recorded a tax benefit of $4.3 million to additional paid-in capital related to the exercise of stock options and vesting of restricted shares and restricted stock units, compared to a tax benefit of $1.1 million in 2013. Additionally, in the fiscal year 2014, the windfall tax benefit was reduced by $1.6 million due to the utilization of foreign tax credits.
Stock Options
The following table summarizes stock option activities under the Company's stock-based compensation plans: |
| | | | | | | | | | | | |
| | Number of shares | | Weighted Average
Exercise Price | | Weighted Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| | (in thousands, except per share amounts) |
| Options outstanding as of December 28, 2013 | 3,768,733 |
| | $ | 40.81 |
| | | | |
|
| Options granted | 568,615 |
| | $ | 57.82 |
| | | | |
|
| Options exercised | (1,733,293 | ) | | $ | 42.46 |
| | | | |
|
| Options canceled | (50,820 | ) | | $ | 45.03 |
| | | | |
|
| Options outstanding as of December 27, 2014 | 2,553,235 |
| | $ | 43.39 |
| | 3.9 | | $ | 53,383 |
|
| Options exercisable as of December 27, 2014 | 1,149,763 |
| | $ | 39.92 |
| | 2.3 | | $ | 28,034 |
|
| Options expected to vest as of December 27, 2014 | 1,200,470 |
| | $ | 45.95 |
| | 5.1 | | $ | 22,016 |
|
The fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| Expected life (in years) | 4.2 |
| | 4.2 |
| | 4.5 |
|
| Expected volatility | 30 | % | | 33 | % | | 35 | % |
| Risk-free interest rate | 1.55 | % | | 0.80 | % | | 0.84 | % |
| Expected dividend yield | — |
| | — |
| | — |
|
The weighted-average grant date fair value of stock options granted was $15.19, $11.17 and $10.94 for the fiscal years 2014, 2013 and 2012, respectively.
As of December 29, 201227, 2014, the unrecognized compensation cost related to1,989,722 unvested stock options expected to vest was $12,92411.5 million. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 26 months.2.4 years.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total intrinsic value of options exercised during the fiscal years ending December 29, 201227, 2014, December 31, 201128, 2013 and December 25, 201029, 2012 was $5,13530.5 million, $7,95024.7 million and $1,767,$5.1 million, 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 2012 was $18,359. The actual tax benefit realized for the tax deductions from option exercises totaled $1,682 for the year ended December 29, 2012.
The following table summarizes significant ranges of outstandingRestricted Stock and exercisable options as of December 29, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| $20.01–$30.00 | 844,220 |
| | 3.12 |
| | 25.30 |
| | 9,775,196 |
| | 519,445 |
| | 3.08 |
| | 25.59 |
| | 5,864,633 |
|
| $30.01–$40.00 | 3,097,578 |
| | 3.97 |
| | 36.62 |
| | 2,334,531 |
| | 1,436,354 |
| | 2.53 |
| | 36.35 |
| | 1,734,878 |
|
| $40.01–$50.00 | 1,383,030 |
| | 1.71 |
| | 45.64 |
| | — |
| | 1,379,757 |
| | 1.70 |
| | 45.66 |
| | — |
|
| $50.01–$60.00 | 487,255 |
| | 2.10 |
| | 57.99 |
| | — |
| | 487,255 |
| | 2.10 |
| | 57.99 |
| | — |
|
| $60.01–$70.00 | 48,320 |
| | 2.30 |
| | 62.56 |
| | — |
| | 48,320 |
| | 2.30 |
| | 62.56 |
| | — |
|
| Totals | 5,860,403 |
| | 3.14 |
| | $ | 39.11 |
| | $ | 12,109,727 |
| | 3,871,131 |
| | 2.25 |
| | $ | 41.27 |
| | $ | 7,599,511 |
|
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on a closing stock price of $36.88 as of December 29, 2012, 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 29, 2012 was 1,854,088.Restricted Stock Units
The following table summarizes the non-vestedrestricted stock option activity in the equity incentive plans for the fiscal year ending December 29, 20122014:
|
| | | | | | |
| | Non-vested Stock Options | | Weighted Average
Exercise Price |
| December 31, 2011 | 2,487,889 |
| | $ | 34.89 |
|
| Granted | 590,675 |
| | 36.09 |
|
| Forfeited | (47,846 | ) | | 35.08 |
|
| Vested | (1,040,996 | ) | | 35.53 |
|
| December 29, 2012 | 1,989,722 |
| | $ | 34.91 |
|
|
| | | | | | |
| | Restricted Stock | | Weighted
Average
Grant Date
Fair Value |
| | (in thousands) | | |
| December 28, 2013 | 1,096,550 |
| | $ | 36.44 |
|
| Granted | 479,104 |
| | 58.87 |
|
| Vested | (362,770 | ) | | 38.21 |
|
| Canceled | (25,034 | ) | | 41.51 |
|
| December 27, 2014 | 1,187,850 |
| | $ | 46.83 |
|
RestrictedAs of December 27, 2014, the unrecognized compensation cost related to shares of unvested restricted stock and restricted stock units expected to vest was $40.0 million, which is expected to be recognized over an estimated weighted-average amortization period of 2.2 years. The total fair value of restricted stock and restricted stock unit grants that vested during the fiscal years 2014, 2013 and 2012 was $13.9 million, $15.1 million and $10.4 million, respectively.
Performance Based Stock Award Program
Stock compensation expense associated with restrictedIn the fiscal years 2014 and 2013, the Company issued PSUs to certain corporate officers. The number of shares of common stock issued for each PSU is charged foradjusted based on a performance condition linked to the Company's financial performance. Certain awards are further adjusted based on a market condition, which is calculated based on the Company's stock performance relative to a peer group over the three-year vesting period. The fair value of the market condition is reflected in the fair value of the award at grant date.
The Company utilizes a Monte Carlo simulation valuation model to value these awards. Information pertaining to the Company’s PSUs and the related estimated weighted-average assumptions used to calculate their fair value were as follows:
|
| | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 |
| | December 28, 2013 |
|
| PSUs granted | 214,823 |
| | 163,847 |
|
| Weighted average per share fair value | $67.82 | | $44.47 |
| Key Assumptions: | | | |
| Expected volatility | 29 | % | | 32 | % |
| Risk-free interest rate | 0.63 | % | | 0.38 | % |
| Expected dividend yield | — | % | | — | % |
| 20 trading day average stock price on grant date | 13.1 | % | | 6.9 | % |
In April 2014, the Company also issued 5,800 PSUs using a fair value per share of $61.25. These PSUs vest upon the achievement of certain revenue growth targets.
The maximum amount of common shares to be issued upon vesting of these PSUs is approximately 763,000. For the fiscal years 2014 and 2013, the Company recognized stock-based compensation related to these PSUs of $8.5 million and $2.2 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company rents laboratory and office space, land, vehicles and certain equipment under non-cancelable operating leases. These lease agreements contain various clauses for renewal at the Company's option and, in certain cases, rent escalation
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
clauses. Rental expense under these leases amounted to $14.2 million, $16.7 million and $18.2 million in the fiscal years 2014, 2013 and 2012, respectively. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other operating expenses.
As of December 27, 2014, minimum rental commitments under non-cancelable leases, net of income from subleases, for each of the next five years and total thereafter were as follows:
|
| | | |
| | Minimum lease payments |
| | (in thousands) |
| 2015 | $ | 12,102 |
|
| 2016 | 9,854 |
|
| 2017 | 7,331 |
|
| 2018 | 4,284 |
|
| 2019 | 3,577 |
|
| Thereafter | 7,769 |
|
| Total | $ | 44,917 |
|
Insurance
The Company maintains various insurance policies that maintain large deductibles up to $0.5 million, some with or without stop-loss limits, depending on market availability. Insurance policies at certain locations are based on a percentage of the insured assets, for which deductibles for certain property may exceed $0.5 million in the event of a catastrophic event.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the dateCompany’s business or financial condition.
In May 2013, the Company commenced an investigation into inaccurate billing with respect to certain government contracts. The Company promptly reported these matters to the relevant government contracting officers, the Department of grant, less estimated forfeitures,Health and Human Services' Office of the Inspector General, and the Department of Justice, and is amortized overcooperating with these agencies to ensure the awards' vesting periodproper repayment and resolution of this matter. The Company identified approximately $1.5 million in excess amounts billed on these contracts since January 1, 2007 and reserved such amount. Because of the early stage of discussions with the government and complex nature of this matter, the Company believes that it is reasonably possible that additional losses may be incurred. However, it cannot at this time estimate the potential range of loss beyond the current reserve of $1.5 million.
In July 2012, a straight-line basis.Mauritius supplier of large animal models submitted an Application for Arbitration with The Permanent Secretariat, The Permanent Court of Arbitration, The Mauritius Chamber of Commerce and Industry in Port Louis, Mauritius. The supplier asserted that the Company failed to pay certain invoices and the supplier was therefore permitted to terminate the supply agreement. The Company filed a counterclaim asserting that the supplier had failed to meet its contractual obligations under the supply agreement. The arbitration hearing relating to this contract dispute took place in Mauritius from August 2013 and final arguments were presented in March 2014. In May 2014 and August 2014, the arbitrator issued the final rulings, ordering the Company to pay the supplier (1) the sum of $1.2 million and (2) all of the supplier's arbitration costs, in each case with interest. In September 2014, the Company paid the supplier $1.6 million in accordance with the arbitration ruling.
Guarantees
The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically include agreements with directors and officers, business partners, contractors, landlords, and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. However, to date the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions other than guaranties related to the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Phase I clinical business. See Note 14, “Discontinued Operations.” As a result, the estimated fair value of these obligations, other than liabilities related to the Phase I clinical business, is minimal.
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company revised its reportable segments during 2014 to align with its view of the business following its acquisition of Argenta and BioFocus. See Note 1, "Description of Business and Summary of Significant Accounting Policies." The Company reported segment results on this basis retrospectively for all comparable prior periods.
The following table presents revenue and other financial information by reportable segment.
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Research Models and Services | | | | | |
| Revenue | $ | 507,327 |
| | $ | 511,350 |
| | $ | 521,633 |
|
| Gross margin | 190,092 |
| | 179,493 |
| | 198,291 |
|
| Operating income | 121,376 |
| | 116,737 |
| | 143,783 |
|
| Total assets | 375,415 |
| | 460,594 |
| | 411,874 |
|
| Long-lived assets | 138,021 |
| | 161,027 |
| | 172,641 |
|
| Depreciation and amortization | 27,512 |
| | 41,837 |
| | 26,725 |
|
| Capital expenditures | 18,749 |
| | 16,717 |
| | 27,077 |
|
| Discovery and Safety Assessment | | | |
| | |
|
| Revenue | $ | 538,218 |
| | $ | 432,378 |
| | $ | 408,908 |
|
| Gross margin | 150,970 |
| | 106,766 |
| | 97,908 |
|
| Operating income | 69,749 |
| | 47,413 |
| | 35,688 |
|
| Total assets | 1,088,171 |
| | 766,243 |
| | 760,370 |
|
| Long-lived assets | 408,280 |
| | 394,741 |
| | 414,584 |
|
| Depreciation and amortization | 47,138 |
| | 37,720 |
| | 41,001 |
|
| Capital expenditures | 19,759 |
| | 12,561 |
| | 10,051 |
|
| Manufacturing Support | | | | | |
| Revenue | $ | 252,117 |
| | $ | 221,800 |
| | $ | 198,989 |
|
| Gross margin | 131,598 |
| | 108,643 |
| | 95,882 |
|
| Operating income | 78,620 |
| | 61,227 |
| | 57,519 |
|
| Total assets | 274,952 |
| | 246,467 |
| | 228,804 |
|
| Long-lived assets | 71,367 |
| | 66,352 |
| | 64,254 |
|
| Depreciation and amortization | 14,092 |
| | 17,079 |
| | 13,549 |
|
| Capital expenditures | 15,541 |
| | 9,876 |
| | 10,407 |
|
A reconciliation of segment operating income to consolidated operating income is as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| (in thousands) |
| Total segment operating income | $ | 269,745 |
| | $ | 225,377 |
| | $ | 236,990 |
|
| Unallocated corporate overhead | (92,075 | ) | | (73,976 | ) | | (71,225 | ) |
| Consolidated operating income | $ | 177,670 |
| | $ | 151,401 |
| | $ | 165,765 |
|
The following table summarizes the restricted stock activityRevenue for 2012each significant product or service offering is as follows:
|
| | | | | | |
| | Restricted Stock | | Weighted
Average
Grant Date
Fair Value |
| Outstanding as of December 31, 2011 | 703,011 |
| | $ | 35.70 |
|
| Granted | 541,820 |
| | 36.10 |
|
| Vested | (288,549 | ) | | 35.99 |
|
| Canceled | (21,777 | ) | | 43.16 |
|
| Outstanding as of December 29, 2012 | 934,505 |
| | $ | 35.83 |
|
As of December 29, 2012, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $21,970. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 31 months. The total fair value of restricted stock grants that vested during the fiscal years ending December 29, 2012, December 31, 2011 and December 25, 2010 was $10,385, $10,989 and $13,072, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $3,720 for the year ended December 29, 2012.
Performance Based Stock Award Program
We made performance-based awards to our executives during 2007, 2008 and 2009. Payout of these awards was contingent upon achievement of individualized goals. Compensation expense associated with these awards of $(28), $188 and $496 has been recorded during 2012, 2011 and 2010, respectively.
10. 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 $18,246, $18,778 and $22,635 in 2012, 2011 and 2010, 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 29, 2012:
|
| | | |
| 2013 | $ | 15,440 |
|
| 2014 | 12,749 |
|
| 2015 | 8,953 |
|
| 2016 | 7,196 |
|
| 2017 | 5,889 |
|
| Thereafter | 14,257 |
|
Insurance
We maintain various insurance policies that maintain large deductibles up to $750, some with or without stop-loss limits, depending on market availability. Deductibles for certain property insurance policies in the event of a catastrophic event for certain locations based on a percentage of the insured assets, which may exceed $750. |
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Research Models and Services | $ | 507,327 |
| | $ | 511,350 |
| | $ | 521,633 |
|
| Discovery and Safety Assessment | 538,218 |
| | 432,378 |
| | 408,908 |
|
| Endotoxin and Microbial Detection | 132,208 |
| | 112,918 |
| | 93,622 |
|
| Other manufacturing support | 119,909 |
| | 108,882 |
| | 105,367 |
|
| Manufacturing Support | 252,117 |
| | 221,800 |
| | 198,989 |
|
| Total revenue | $ | 1,297,662 |
| | $ | 1,165,528 |
| | $ | 1,129,530 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to our 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. We expense as incurred legal costs expected to be incurred in connection with loss contingencies.
11. TERMINATION FEE—WuXi Pharma Tech
On July 29, 2010, we signed a termination agreement with WuXi to terminate the previously announced acquisition agreement. In accordance with the terms of the termination agreement, on July 29, 2010, we paid WuXi a $30,000termination fee for full satisfaction of the parties' obligations under the acquisition agreement. The termination agreement also included mutual releases of any claims and liabilities arising out of or relating to the acquisition agreement.
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
We report two business segments, Research Models and Services (RMS) and Preclinical Services (PCS). Our RMS segment includes sales of research models, genetically engineered models and services (GEMS), insourcing solutions (IS), research animal diagnostic services (RADS), discovery research services (DRS), Endotoxin and Microbial Detection (EMD) products and services ( formerly in vitro), and avian vaccine products and services. Our PCS segment includes services required to take a drug through the development process, which includes DRS, safety assessment and biopharmaceutical services.
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 and other long-lived assets.
|
| | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| Research Models and Services | | | | | |
| Net sales | $ | 695,083 |
| | $ | 705,419 |
| | $ | 666,986 |
|
| Gross margin | 289,750 |
| | 297,327 |
| | 278,391 |
|
| Operating income | 202,362 |
| | 206,319 |
| | 184,464 |
|
| Total assets | 698,134 |
| | 687,346 |
| | 711,824 |
|
| Long-lived assets | 272,559 |
| | 282,388 |
| | 277,193 |
|
| Depreciation and amortization | 37,541 |
| | 37,240 |
| | 37,657 |
|
| Capital expenditures | 36,856 |
| | 34,257 |
| | 27,694 |
|
| Preclinical Services | | | | | |
| Net sales | $ | 434,447 |
| | $ | 437,228 |
| | $ | 466,430 |
|
| Gross margin | 102,331 |
| | 104,915 |
| | 106,369 |
|
| Operating income | 34,628 |
| | 24,925 |
| | (379,726 | ) |
| Total assets | 888,210 |
| | 869,881 |
| | 1,016,864 |
|
| Long-lived assets | 493,120 |
| | 513,302 |
| | 537,786 |
|
| Depreciation and amortization | 43,734 |
| | 47,990 |
| | 55,992 |
|
| Capital expenditures | 10,678 |
| | 14,886 |
| | 15,166 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
A reconciliation of segment operating income to consolidated operating income is as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Total segment operating income | $ | 236,990 |
| | $ | 231,244 |
| | $ | (195,262 | ) |
| Unallocated corporate overhead | (71,225 | ) | | (56,938 | ) | | (73,250 | ) |
| Termination fee (Note 11) | — |
| | — |
| | (30,000 | ) |
| Consolidated operating income | $ | 165,765 |
| | $ | 174,306 |
| | $ | (298,512 | ) |
Net sales for each significant service area are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Research models | $ | 381,790 |
| | $ | 401,660 |
| | $ | 386,872 |
|
| Research model services | 219,671 |
| | 220,698 |
| | 208,363 |
|
| EMD | 93,622 |
| | 83,061 |
| | 71,751 |
|
| Total research models | 695,083 |
| | 705,419 |
| | 666,986 |
|
| Total preclinical services | 434,447 |
| | 437,228 |
| | 466,430 |
|
| Total sales | $ | 1,129,530 |
| | $ | 1,142,647 |
| | $ | 1,133,416 |
|
A summary of unallocated corporate overhead consists of the following:
|
| | | | | | | | | | | |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Stock-based compensation expense | $ | 11,724 |
| | $ | 11,159 |
| | $ | 11,893 |
|
| U.S. retirement plans | 4,831 |
| | 3,802 |
| | 3,921 |
|
| Audit, tax and related expense | 3,019 |
| | 3,069 |
| | 2,805 |
|
| Salary and bonus | 19,997 |
| | 18,486 |
| | 19,617 |
|
| Global IT | 12,622 |
| | 11,785 |
| | 12,793 |
|
| Employee health, LDP and fringe benefit expense | (4,569 | ) | | (2,952 | ) | | (2,231 | ) |
| Consulting and professional services | 4,434 |
| | 8,432 |
| | 7,686 |
|
| Depreciation expense | 6,260 |
| | 6,312 |
| | 5,796 |
|
| Severance expense | 53 |
| | (65 | ) | | 4,153 |
|
| Transaction (acquisition/disposition) costs | 3,772 |
| | 1,329 |
| | 6,669 |
|
| Contingent consideration write-down | — |
| | (5,598 | ) | | (4,335 | ) |
| Other general unallocated corporate expenses | 9,082 |
| | 1,179 |
| | 4,483 |
|
| Total unallocated corporate overhead costs | $ | 71,225 |
| | $ | 56,938 |
| | $ | 73,250 |
|
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Stock-based compensation expense | $ | 18,474 |
| | $ | 13,411 |
| | $ | 11,724 |
|
| Salary, bonus and fringe | 30,838 |
| | 23,446 |
| | 20,312 |
|
| Consulting, audit and professional services | 13,431 |
| | 8,666 |
| | 7,453 |
|
| IT related expenses | 6,528 |
| | 11,646 |
| | 12,622 |
|
| Depreciation expense | 7,703 |
| | 6,334 |
| | 6,260 |
|
| Costs associated with evaluation and integration of acquisitions | 6,285 |
| | 1,752 |
| | 3,772 |
|
| Other general unallocated corporate expenses | 8,816 |
| | 8,721 |
| | 9,082 |
|
| Total unallocated corporate overhead costs | $ | 92,075 |
| | $ | 73,976 |
| | $ | 71,225 |
|
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.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
The following table presents salesrevenues and other financial information by geographic regions.locations of our businesses. Included in the other non-U.S. category below are operations located in China, Korea, Australia, Singapore and India. Sales to unaffiliated clientsRevenues represent net sales originating in entities physically located in 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 |
| 2012 | | | | | | | | | | | |
| Sales to unaffiliated clients | $ | 534,817 |
| | $ | 341,550 |
| | $ | 160,004 |
| | $ | 77,707 |
| | $ | 15,452 |
| | $ | 1,129,530 |
|
| Long lived assets | 476,927 |
| | 122,351 |
| | 124,302 |
| | 39,642 |
| | 2,457 |
| | 765,679 |
|
| 2011 | | | | | | | | | | | |
| Sales to unaffiliated clients | $ | 545,185 |
| | $ | 348,455 |
| | $ | 158,997 |
| | $ | 75,992 |
| | $ | 14,018 |
| | $ | 1,142,647 |
|
| Long lived assets | 497,197 |
| | 123,634 |
| | 127,531 |
| | 45,857 |
| | 1,470 |
| | 795,689 |
|
| 2010 | | | | | | | | | | | |
| Sales to unaffiliated clients | $ | 535,790 |
| | $ | 327,492 |
| | $ | 181,028 |
| | $ | 73,852 |
| | $ | 15,254 |
| | $ | 1,133,416 |
|
| Long lived assets | 507,089 |
| | 124,428 |
| | 136,846 |
| | 44,818 |
| | 1,798 |
| | 814,979 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Canada | | Japan | | Other Non-U.S. | | Consolidated |
| | (in thousands) |
| 2014 | | | | | | | | | | | |
| Revenue | $ | 588,531 |
| | $ | 446,263 |
| | $ | 163,490 |
| | $ | 49,921 |
| | $ | 49,457 |
| | $ | 1,297,662 |
|
| Long lived assets | 386,624 |
| | 153,203 |
| | 95,272 |
| | 23,896 |
| | 17,802 |
| | 676,797 |
|
| 2013 | | | | | | | | | | | |
| Revenue | $ | 551,340 |
| | $ | 353,688 |
| | $ | 162,404 |
| | $ | 59,370 |
| | $ | 38,726 |
| | $ | 1,165,528 |
|
| Long lived assets | 447,829 |
| | 130,855 |
| | 109,811 |
| | 30,589 |
| | 19,062 |
| | 738,146 |
|
| 2012 | | | | | | | | | | | |
| Revenue | $ | 534,817 |
| | $ | 341,550 |
| | $ | 160,004 |
| | $ | 77,707 |
| | $ | 15,452 |
| | $ | 1,129,530 |
|
| Long lived assets | 476,927 |
| | 122,351 |
| | 124,302 |
| | 39,642 |
| | 2,457 |
| | 765,679 |
|
13.14. DISCONTINUED OPERATIONS
On March 28,In 2011,, we the Company disposed of ourits Phase I clinical business, for a nominal amount. As part ofthough the disposition weCompany remained the guarantor of a facility lease with a term through January 2021. The Company recorded a liability for the Phase I facility lease. DuringCompany's obligation under the second quarter of 2011, we recognized the value of the guaranteelease, net of estimated sublease income, and reflected the buyer's related indemnityliability on the consolidated balance sheet as a liability of $2,994, which we are amortizing ratably over the remaining term of the lease. The facility lease runs through January 2021 with remaining lease payments totaling $13,272 as of December 29,discontinued operations. In 2012,.
During the period ended December 29, 2012, we concluded due to an increased probability that the decreasing financial viability of the lessee increased the probability that we willCompany would be required to make future lease payments as guarantor. As a result, weguarantor, the Company recorded an additional contingent loss of $7,1587.2 million for. In 2013, the guarantee, reflecting our estimatebuyer of the total future lease payments less sublease income. UnderCompany's Phase I clinical business filed for Chapter 11 bankruptcy, resulting in an additional charge of $1.3 million. Effective July 2013, the terms of the lease, if we are required to honor the guarantee due to default by the lessee, we may obtainCompany assumed control of the leased property. The total carrying amount of the liability for our obligationproperty and assumed obligations under the guarantee islease consistent with the guarantee. As of $9,679December 27, 2014 as of December 29, 2012 and is reflected on, the consolidated balance sheet a liability of discontinued operations.remaining lease payments amounted to $10.0 million.
The consolidated financial statements have been reclassified to segregate, as discontinued operations, the assets and liabilities, operating results and cash flows, of the businesses being discontinued for all periods presented. Operating results from discontinued operations are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | December 25, 2010 |
| Net sales | $ | — |
| | $ | 2,112 |
| | $ | 17,508 |
|
| Asset impairment | — |
| | — |
| | 6,402 |
|
| Income (loss) from operations of discontinued businesses, before income taxes | (6,986 | ) | | (8,964 | ) | | (13,465 | ) |
| Provision (benefit) for income taxes | (2,734 | ) | | (3,419 | ) | | (5,453 | ) |
| Income (loss) from operations of discontinued businesses, net of taxes | $ | (4,252 | ) | | $ | (5,545 | ) | | $ | (8,012 | ) |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 27, 2014 | | December 28, 2013 | | December 29, 2012 |
| | (in thousands) |
| Loss from operations of discontinued businesses, before income taxes | $ | (2,712 | ) | | $ | (2,035 | ) | | $ | (6,986 | ) |
| Benefit for income taxes | (986 | ) | | (770 | ) | | (2,734 | ) |
| Loss from operations of discontinued businesses, net of income taxes | $ | (1,726 | ) | | $ | (1,265 | ) | | $ | (4,252 | ) |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)
15. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Assets and liabilities of discontinued operations atThe following table contains quarterly financial information for fiscal years December 20122014 and December 20112013 consisted. The operating results for any quarter are not necessarily indicative of the following:future period results.
|
| | | | | | | |
| | December 29,
2012 | | December 31,
2011 |
| Current assets | $ | 495 |
| | $ | 107 |
|
| Long-term assets | 3,328 |
| | 986 |
|
| Total assets | $ | 3,823 |
| | $ | 1,093 |
|
| Current liabilities | $ | 1,802 |
| | $ | 1,165 |
|
| Long-term liabilities | 8,795 |
| | 2,522 |
|
| Total liabilities | $ | 10,597 |
| | $ | 3,687 |
|
Current assets include a current deferred tax asset. Non-current assets include a long-term deferred tax asset. Current and long-term liabilities consist of a lease guarantee.
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal Year Ended December 27, 2014 | (in thousands) |
| Total revenue | $ | 299,368 |
| | $ | 341,179 |
| | $ | 327,567 |
| | $ | 329,548 |
|
| Gross profit | 108,813 |
| | 125,634 |
| | 118,268 |
| | 119,945 |
|
| Operating income | 39,706 |
| | 51,025 |
| | 46,172 |
| | 40,767 |
|
| Income from continuing operations, net of income tax | 32,628 |
| | 36,460 |
| | 32,300 |
| | 28,536 |
|
| Income (loss) from discontinued operations, net of income tax | (270 | ) | | (644 | ) | | 52 |
| | (864 | ) |
| Net income attributable to common shareholders | 32,232 |
| | 35,264 |
| | 32,036 |
| | $ | 27,166 |
|
| Earnings (loss) per common share: | | | | | | | |
| Basic: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.69 |
| | $ | 0.76 |
| | $ | 0.70 |
| | $ | 0.60 |
|
| Discontinued operations | (0.01 | ) | | (0.01 | ) | | — |
| | (0.02 | ) |
| Net income attributable to common shareholders | $ | 0.68 |
| | $ | 0.75 |
| | $ | 0.70 |
| | $ | 0.58 |
|
| Diluted: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.67 |
| | $ | 0.75 |
| | $ | 0.68 |
| | $ | 0.59 |
|
| Discontinued operations | (0.01 | ) | | (0.01 | ) | | — |
| | (0.02 | ) |
| Net income attributable to common shareholders | $ | 0.67 |
| | $ | 0.74 |
| | $ | 0.68 |
| | $ | 0.57 |
|
| Fiscal Year Ended December 28, 2013 | | | | | | | |
| Total revenue | $ | 291,238 |
| | $ | 292,933 |
| | $ | 292,129 |
| | $ | 289,228 |
|
| Gross profit | 104,211 |
| | 102,570 |
| | 99,926 |
| | 88,195 |
|
| Operating income | 42,763 |
| | 43,188 |
| | 40,843 |
| | 24,607 |
|
| Income from continuing operations, net of income tax | 25,926 |
| | 28,628 |
| | 31,336 |
| | 19,526 |
|
| Loss from discontinued operations, net of income tax | (155 | ) | | (915 | ) | | (113 | ) | | (82 | ) |
| Net income attributable to common shareholders | $ | 25,578 |
| | $ | 27,284 |
| | $ | 30,867 |
| | $ | 19,099 |
|
| Earnings (loss) per common share: | | | | | | | |
| Basic: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.54 |
| | $ | 0.58 |
| | $ | 0.65 |
| | $ | 0.41 |
|
| Discontinued operations | — |
| | (0.02 | ) | | — |
| | — |
|
| Net income attributable to common shareholders | $ | 0.54 |
| | $ | 0.57 |
| | $ | 0.64 |
| | $ | 0.41 |
|
| Diluted: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.53 |
| | $ | 0.58 |
| | $ | 0.64 |
| | $ | 0.40 |
|
| Discontinued operations | — |
| | (0.02 | ) | | — |
| | — |
|
| Net income attributable to common shareholders | $ | 0.53 |
| | $ | 0.56 |
| | $ | 0.64 |
| | $ | 0.40 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SUPPLEMENTARY DATA
Quarterly Information (Unaudited)
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal Year Ended December 29, 2012 | | | | | | | |
| Total net sales | $ | 285,981 |
| | $ | 284,723 |
| | $ | 278,686 |
| | $ | 280,140 |
|
| Gross profit | 104,212 |
| | 103,585 |
| | 93,259 |
| | 94,573 |
|
| Operating income | 43,740 |
| | 49,274 |
| | 37,682 |
| | 35,069 |
|
| Income from continuing operations, net of tax | 26,470 |
| | 30,547 |
| | 22,384 |
| | 22,717 |
|
| (Loss) income from discontinued businesses, net of tax | 77 |
| | 42 |
| | (182 | ) | | (4,189 | ) |
| Net income attributable to common shareowners | 26,439 |
| | 30,468 |
| | 21,972 |
| | $ | 18,416 |
|
| Earnings (loss) per common share | | | | | | | |
| Basic | | | | | | | |
| Continuing operations attributable to common shareowners | $ | 0.55 |
| | $ | 0.63 |
| | $ | 0.47 |
| | $ | 0.48 |
|
| Discontinued operations attributable to common shareowners | — |
| | — |
| | — |
| | (0.09 | ) |
| Net income attributable to common shareowners | $ | 0.55 |
| | $ | 0.63 |
| | $ | 0.46 |
| | $ | 0.4 |
|
| Diluted | | | | | | | |
| Continuing operations attributable to common shareowners | $ | 0.54 |
| | $ | 0.63 |
| | $ | 0.46 |
| | $ | 0.48 |
|
| Discontinued operations attributable to common shareowners | — |
| | — |
| | — |
| | (0.09 | ) |
| Net income attributable to common shareowners | $ | 0.54 |
| | $ | 0.63 |
| | $ | 0.46 |
| | $ | 0.39 |
|
| Fiscal Year Ended December 31, 2011 | | | | | | | |
| Total net sales | $ | 285,843 |
| | $ | 288,263 |
| | $ | 277,579 |
| | $ | 290,962 |
|
| Gross profit | 102,638 |
| | 106,320 |
| | 92,716 |
| | 100,568 |
|
| Operating income (loss) | 42,251 |
| | 53,314 |
| | 37,094 |
| | 41,647 |
|
| Income from continuing operations, net of tax | 35,377 |
| | 34,156 |
| | 18,911 |
| | 27,078 |
|
| Income (loss) from discontinued businesses, net of tax | (3,945 | ) | | (1,732 | ) | | (18 | ) | | 150 |
|
| Net income attributable to common shareowners | $ | 31,335 |
| | $ | 32,318 |
| | $ | 18,798 |
| | $ | 27,115 |
|
| Earnings (loss) per common share | | | | | | | |
| Basic | | | | | | | |
| Continuing operations attributable to common shareowners | $ | 0.65 |
| | $ | 0.67 |
| | $ | 0.38 |
| | $ | 0.55 |
|
| Discontinued operations attributable to common shareowners | (0.07 | ) | | (0.03 | ) | | — |
| | — |
|
| Net income attributable to common shareowners | $ | 0.58 |
| | $ | 0.63 |
| | $ | 0.38 |
| | $ | 0.56 |
|
| Diluted | | | | | | | |
| Continuing operations attributable to common shareowners | $ | 0.65 |
| | $ | 0.66 |
| | $ | 0.37 |
| | $ | 0.55 |
|
| Discontinued operations attributable to common shareowners | (0.07 | ) | | (0.03 | ) | | — |
| | — |
|
| Net income attributable to common shareowners | $ | 0.57 |
| | $ | 0.63 |
| | $ | 0.37 |
| | $ | 0.55 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SUPPLEMENTARY DATA
Quarterly Segment Information (Unaudited)
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal Year Ended December 29, 2012 | | | | | | | |
| Research Models and Services | | | | | | | |
| Sales | $ | 183,152 |
| | $ | 173,611 |
| | $ | 166,484 |
| | $ | 171,836 |
|
| Gross margin | 82,196 |
| | 76,266 |
| | 65,902 |
| | 65,386 |
|
| Operating income | 59,467 |
| | 55,542 |
| | 43,389 |
| | 43,964 |
|
| Depreciation and amortization | 8,942 |
| | 9,085 |
| | 9,670 |
| | 9,844 |
|
| Capital expenditures | 12,900 |
| | 7,569 |
| | 7,423 |
| | 8,964 |
|
| Preclinical Services | | | | | | | |
| Sales | $ | 102,829 |
| | $ | 111,112 |
| | $ | 112,202 |
| | $ | 108,304 |
|
| Gross margin | 22,016 |
| | 27,319 |
| | 27,358 |
| | 25,638 |
|
| Operating income | 4,174 |
| | 10,809 |
| | 10,975 |
| | 8,670 |
|
| Depreciation and amortization | 11,060 |
| | 10,980 |
| | 10,880 |
| | 10,814 |
|
| Capital expenditures | 1,211 |
| | 1,872 |
| | 2,819 |
| | 4,776 |
|
| Unallocated corporate overhead | $ | (19,901 | ) | | $ | (17,077 | ) | | $ | (16,682 | ) | | $ | (17,565 | ) |
| Total | | | | | | | |
| Sales | $ | 285,981 |
| | $ | 284,723 |
| | $ | 278,686 |
| | $ | 280,140 |
|
| Gross margin | 104,212 |
| | 103,585 |
| | 93,260 |
| | 91,024 |
|
| Operating income | 43,740 |
| | 49,274 |
| | 37,682 |
| | 35,069 |
|
| Depreciation and amortization | 20,002 |
| | 20,065 |
| | 20,550 |
| | 20,658 |
|
| Capital expenditures | 14,111 |
| | 9,441 |
| | 10,242 |
| | 13,740 |
|
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal Year Ended December 31, 2011 | | | | | | | |
| Research Models and Services | | | | | | | |
| Sales | $ | 173,371 |
| | $ | 178,163 |
| | $ | 171,471 |
| | $ | 182,414 |
|
| Gross margin | 73,839 |
| | 78,307 |
| | 70,514 |
| | 74,667 |
|
| Operating income | 51,742 |
| | 55,691 |
| | 48,534 |
| | 50,352 |
|
| Depreciation and amortization | 9,269 |
| | 9,318 |
| | 9,327 |
| | 9,326 |
|
| Capital expenditures | 4,403 |
| | 4,010 |
| | 5,789 |
| | 20,055 |
|
| Preclinical Services | | | | | | | |
| Sales | $ | 112,472 |
| | $ | 110,100 |
| | $ | 106,108 |
| | $ | 108,548 |
|
| Gross margin | 28,799 |
| | 28,013 |
| | 22,202 |
| | 25,902 |
|
| Operating income | 9,306 |
| | 7,875 |
| | 3,663 |
| | 4,082 |
|
| Depreciation and amortization | 11,996 |
| | 12,498 |
| | 11,840 |
| | 11,656 |
|
| Capital expenditures | 2,387 |
| | 2,650 |
| | 2,433 |
| | 7,416 |
|
| Unallocated corporate overhead | $ | (18,797 | ) | | $ | (10,252 | ) | | $ | (15,103 | ) | | $ | (12,786 | ) |
| Total | | | | | | | |
| Sales | $ | 285,843 |
| | $ | 288,263 |
| | $ | 277,579 |
| | $ | 290,962 |
|
| Gross margin | 102,638 |
| | 106,320 |
| | 92,716 |
| | 100,569 |
|
| Operating income | 42,251 |
| | 53,314 |
| | 37,094 |
| | 41,648 |
|
| Depreciation and amortization | 21,265 |
| | 21,816 |
| | 21,167 |
| | 20,982 |
|
| Capital expenditures | 6,790 |
| | 6,660 |
| | 8,222 |
| | 27,471 |
|
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, as amended (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 not effective, at a reasonable assurance level, as of December 29, 201227, 2014 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 the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company'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. Based upon their evaluation, our principal executive officer
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and principal accounting officer concluded that our disclosure controls and procedures were not effective because of the material weakness below relating to ourmaintaining adequate internal control over financial reporting.
A material weaknessreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is a deficiency, or a combinationprocess designed to provide reasonable assurance regarding the reliability of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatementand the preparation of the Company's annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.
Asfor external purposes in accordance with generally accepted accounting principles. Because of December 29, 2012 management determined that the Company did not maintain effective controls over information technology business processes and financial reporting. Specifically, the Company identified deficiencies with respect to design and operation of controls over segregation of duties, restricted access, changes to vendor and customer master data, transaction level and financial close controls which aggregated to a material weakness inits inherent limitations, internal control over financial reporting.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.
We have determined that this deficiency constitutes a "material weakness" in our internal control over financial reporting.
Based onUnder the performance of additional procedures by management designed to ensuresupervision and with the reliabilityparticipation of our financial reporting,management, including our CEO and CFO, we believeconducted an evaluation of the consolidated financial statement included in this report aseffectiveness of and for the periods ended December 29, 2012 are fairly stated in all material respects.
We continually are in the process of further reviewing and documenting our disclosure controls and procedures, and our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and accordingly may from time to time make changes aimed at enhancingthose criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 27, 2014.
The effectiveness of our internal control over financial reporting as of December 27, 2014 has been audited by PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their effectiveness and to ensure that our systems evolve with our business.report which is included herein.
| |
(b) | Changes in Internal Controls |
There were no changes in the Company's internal control 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 29, 201227, 2014 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.
Subsequent Remediation Efforts
The following remediation efforts, as outlined below, are designed to address the aforementioned material weakness identified by management and to strengthen our internal control over financial reporting.
In response to the identification of the material weakness, in the first quarter of 2013 management performed additional procedures designed to ensure the reliability of our financial reporting and based upon such performance we believe the consolidated financial statement included in this report as of and for the periods ended December 29, 2012 are fairly stated
in all material respects. Furthermore, in the first quarter of 2013 management (1) has established a cross functional team to review and address segregation of duties conflicts and restricted access within the information technology used in our core business and (2) will design new controls or improve existing controls related to vendor and customer master data changes, transaction level controls as well as financial close controls. In addition, we will evaluate staffing levels and responsibilities, and increase training to reinforce pre-established and new controls to improve our ability to detect potential misstatements in our internally prepared reports, analyses and financial records.
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 attestation report on the effectiveness of our internal control over financial reporting can also be found in Item 8 of this report.
Item 9B. Other Information
None.
PART III
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 our directors and compliance with Section 16(a) of the Exchange Act by our officers and directors will be included in the 20132015 Proxy Statement under the sections captioned “Nominees for Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference thereto. The information required by this Item regarding our corporate governance will be included in the 20132015 Proxy Statement under the section captioned “Corporate Governance” and is incorporated herein by reference thereto.
The information required by this Item regarding our executive officers 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 20132015 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.
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees and directors, including our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. Our Code of Business Conduct and Ethics is posted on our website by selecting the “Corporate Governance” link at http://ir.criver.com. We will provide to any person, without charge, a copy of our Code of Business Conduct and Ethics by requesting a copy from the Secretary, Charles River Laboratories, Inc., 251 Ballardvale Street, Wilmington, MA 01887. Information on our website is not incorporated by reference in this annual report.
| |
| E. | Changes to Board Nomination Procedures |
Since December 2008, there have been no material changes to the procedures by which security holders may recommend nominees to the our Board of Directors.
Item 11. Executive Compensation
The information required by this Item will be included in the 20132015 Proxy Statement under the sections captioned “2012“2014 Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation and Related Information,”
“Compensation “Compensation Committee Interlocks and Insider Participation” 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 20132015 Proxy Statement under the sections captioned “Beneficial Ownership of Securities” 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
Securities Authorized for Issuance Under Equity Compensation Plans” forPlans
The following table summarizes, as of December 27, 2014, the disclosure required by Item 201(d)number of Regulation S-K promulgatedoptions issued under the Securities Exchange ActCompany's stock option plans and the number of 1934,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 | 61,779 |
| | $ | 47.56 |
| | 1,196,405 |
| |
| Charles River 1999 Management Incentive Plan | — |
| | $ | — |
| | 6,000 |
| |
| 2007 Incentive Plan | 2,491,456 |
| | $ | 43.28 |
| | 18,664,000 |
| |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| |
| Total | 2,553,235 |
| (1) | |
| | 19,866,405 |
| (2) |
____________________________
| |
| (1) | None of the options outstanding under any of our equity compensation plans include rights to any dividend equivalents (i.e., a right to receive from us a payment commensurate to dividend payments received by holders of our common stock or our other equity instruments). |
| |
| (2) | On March 22, 2007, the Board of Directors determined that, upon approval of the 2007 Incentive Plan, no future awards would be granted under the preexisting equity compensation plans, including the Charles River 1999 Management Incentive Plan and the Charles River 2000 Incentive Plan. Shareholder approval was obtained on May 8, 2007. Previously, on February 28, 2005, the Board of Directors terminated the Inveresk 2002 Stock Option Plan to the extent that no further awards would be granted thereunder. |
The following table provides additional information regarding the aggregate issuances under our existing equity compensation plans as amended.of December 27, 2014:
|
| | | | | | | | |
| Category | Number of securities outstanding | | Weighted average exercise price | | Weighted average term |
| | (a) | | (b) | | (c) |
Total number of restricted shares outstanding(1) | 803,380 |
| | | | |
| Total number of options outstanding | 2,553,235 |
| | $ | 43.39 |
| | 3.9 |
| Total number of performance units outstanding | 384,470 |
| | | | |
____________________________
| |
| (1) | For purposes of this table, only unvested restricted stock as of December 27, 2014 is included. Also for purposes of this table only, the total includes 196,762 restricted stock units granted to certain of our employees outside of the U.S. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the 20132015 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 20132015 Proxy Statement under the section captioned “Statement of Fees Paid to Independent Registered Public Accounting Firm” and is incorporated herein by reference thereto.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 15(a)(1) and (2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Financial Statements Schedules" at Item 8 to this Annual Report on 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(b) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits. We have 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.
SIGNATURES
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.
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| | | |
| | | CHARLES RIVER LABORATORIES INTERNATIONAL, INC. |
| Date: | February 27, 201317, 2015 | 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.
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| | | |
| Signatures | Title | Date |
| By: | /s/ JAMES C. FOSTER | President, Chief Executive Officer and Chairman | February 27, 201317, 2015 |
| | James C. Foster | | |
| | | | |
| By: | /s/ THOMAS F. ACKERMAN | Corporate Executive Vice President and | February 27, 201317, 2015 |
| | Thomas F. Ackerman | Chief Financial Officer | |
| | | |
| By: | /s/ JOHN J. CROWLEY | Corporate Senior Vice President, Corporate Controller and PrincipalChief Accounting Officer | February 17, 2015 |
| John J. Crowley | | |
| | | | |
| By: | /s/ ROBERT J. BERTOLINI | Director | February 27, 201317, 2015 |
| | Robert J. Bertolini | | |
| | | | |
| By: | /s/ STEPHEN D. CHUBB | Director | February 27, 201317, 2015 |
| | Stephen D. Chubb | | |
| | | | |
| By: | /s/ GEORGE E. MASSARO | Director | February 27, 201317, 2015 |
| | George E. Massaro | | |
| | | | |
| By: | /s/ DEBORAH KOCHEVAR | Director | February 27, 201317, 2015 |
| | Deborah Kochevar | | |
| | | | |
| By: | /s/ GEORGE M. MILNE, JR. | Director | February 27, 201317, 2015 |
| | George M. Milne, Jr. | | |
| | | | |
| By: | /s/ C. RICHARD REESE | Director | February 27, 201317, 2015 |
| | C. Richard Reese | | |
| | | | |
| By: | /s/ SAMUEL O. THIERCRAIG B THOMPSON | Director | February 27, 201317, 2015 |
| | Samuel O. ThierCraig B. Thompson | | |
| | | | |
| By: | /s/ RICHARD F. WALLMAN | Director | February 27, 201317, 2015 |
| | Richard F. Wallman | | |
| | | |
By: | /s/ WILLIAM H. WALTRIP | Director | February 27, 2013 |
| William H. Waltrip | | |
EXHIBIT INDEX
| | | Exhibit No. | Description | Filed with this Form 10-K | Incorporated by Reference | Description | Filed with this Form 10-K | Incorporated by Reference |
| Form | Filing Date | Exhibit No. | Form | Filing Date | Exhibit No. |
| 3.1 | Second Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. dated June 5, 2000 | | S-1/A | June 23, 2000 | 3.1 | Second Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. dated June 5, 2000 | | S-1/A | June 23, 2000 | 3.1 |
| 3.2 | Second Amended and Restated By-laws of Charles River Laboratories International, Inc. | | 8-K | December 5, 2008 | 3.2 | Third Amended and Restated By-laws of Charles River Laboratories International, Inc. | | 8-K | December 2, 2014 | 3.2 |
| 4.1 | Form of common stock certificate, $0.01 par value, of Charles River Laboratories International, Inc. | | S-1 | June 23, 2000 | 4.1 | Form of common stock certificate, $0.01 par value, of Charles River Laboratories International, Inc. | | S-1 | June 23, 2000 | 4.1 |
| 4.2 | Charles River Laboratories International, Inc. as Issuer and U.S. Bank National Association as Trustee Indenture dated June 12, 2006 | | 8-K | June 12, 2006 | 4.1 | Charles River Laboratories International, Inc. Form of Performance Share Unit Granted Under 2007 Incentive Plan | | 10-K | February 27, 2013 | 4.4 |
| 4.3 | Charles River Laboratories International, Inc. Form of 2.25% Convertible Senior Note due 2013 | | 8-K | June 12, 2006 | 4.1 | |
| 4.4* | Charles River Laboratories International, Inc. Form of Performance Share Unit Granted Under 2007 Incentive Plan | X | | | |
| 10.1* | Charles River Corporate Officer Separation Plan dated April 30, 2010 | | 10-Q | August 3, 2010 | 10.1 | Charles River Corporate Officer Separation Plan dated April 30, 2010 | | 10-Q | August 3, 2010 | 10.1 |
| 10.2* | Charles River Laboratories Holdings 1999 Management Incentive Plan | | 10-K | March 14, 2006 | 10.6 | |
| 10.3* | Charles River Laboratories International, Inc. 2000 Incentive Plan amended May 9, 2005 | | 10-K | March 14, 2006 | 10.7 | Charles River Laboratories International, Inc. 2000 Incentive Plan amended May 9, 2005 | | 10-K | March 14, 2006 | 10.7 |
| 10.4* | Charles River Laboratories International, Inc. 2000 Incentive Plan Inland Revenue Approved Rules for UK Employees | | 10-Q | November 5, 2001 | 99.1 | |
| 10.5* | Form of change in control agreement | | 10-K | February 23, 2009 | 10.7 | Form of change in control agreement | | 10-K | February 23, 2009 | 10.7 |
| 10.6* | Executive Incentive Compensation Plan dated January 1, 2009 | | 10-K | February 23, 2009 | 10.8 | Executive Incentive Compensation Plan dated January 1, 2009 | | 10-K | February 23, 2009 | 10.8 |
| 10.7* | Charles River Laboratories International, Inc. Form of Stock Option Award letter granted under 2000 Incentive Plan | | 10-Q | November 1, 2004 | 10.3 | |
| 10.8* | Charles River Laboratories International. Inc. Form of Restricted Stock Award granted under 2000 Incentive Plan | | 10-Q | November 1, 2004 | 10.4 | |
| 10.9* | Inveresk Research Group, Inc. 2002 Stock Option and Incentive Compensation Plan amended and restated as of May 4, 2004 | | S-8 | October 20, 2004 | 99.1 | |
| 10.10* | Charles River Laboratories, Inc. Executive Life Insurance/Supplemental Retirement Income Plan | | 10-K | March 9, 2005 | 10.23 | Charles River Laboratories, Inc. Executive Life Insurance/Supplemental Retirement Income Plan | | 10-K | March 9, 2005 | 10.23 |
| 10.11* | Charles River Laboratories amended and restated Deferred Compensation Plan amended December 2, 2008, July 20, 2011 and October 27, 2011 | | 10-K | February 27, 2012 | 10.11 | Charles River Laboratories amended and restated Deferred Compensation Plan amended December 2, 2008, July 20, 2011 and October 27, 2011 | | 10-K | February 27, 2012 | 10.11 |
| 10.12 | Charles River Laboratories International, Inc. Fourth Amended and Restated Credit Agreement dated September 23, 2011 | | 8-K | September 23, 2011 | 10.1 | Charles River Laboratories International, Inc. Fifth Amended and Restated Credit Agreement dated May 29, 2013 | | 10-Q | July 31, 2013 | 10.1 |
| 10.13* | Charles River Laboratories International, Inc. 2007 Incentive Plan amended March 18, 2009 and March 22, 2011 | | 10-K | February 27, 2012 | 10.13 | Charles River Laboratories International, Inc. 2007 Incentive Plan, as amended | X | |
| 10.14* | Charles River Laboratories International, Inc. Form of Stock Option granted under 2007 Incentive Plan | | 10-K | February 20, 2008 | 10.17 | Charles River Laboratories International, Inc. Form of Stock Option granted under 2007 Incentive Plan | | 10-K | February 20, 2008 | 10.17 |
| 10.15* | Charles River Laboratories International, Inc. Form of Restricted Stock Award granted under 2007 Incentive Plan | | 10-K | February 20, 2008 | 10.18 | Charles River Laboratories International, Inc. Form of Restricted Stock Award granted under 2007 Incentive Plan | | 10-K | February 20, 2008 | 10.18 |
| 10.16* | | Letter Agreements with Dr. Davide Molho dated May 22, 2009 | | 10-K | February 23, 2011 | 10.17 |
| 10.17* | | Amended and Restated Deferred Compensation Plan Document dated July 17, 2012 | | 10-Q | August 7, 2012 | 10.1 |
| 10.18* | | Employment agreement between Dr. Jorg Geller and Charles River Germany GmbH & Co. | | 10-K | February 27, 2013 | 10.18 |
| 10.19* | | Certificate of Life Insurance for Dr. Jorg Geller dated February 8, 1988 | | 10-Q | July 31, 2013 | 10.19 |
| 10.20* | | Certificate of Life Insurance for Dr. Jorg Geller dated April 24, 1998 | | 10-Q | July 31, 2013 | 10.20 |
| 10.21* | | Provision Committed by Charles River Wiga Deutschland GmbH for Dr. Jorg Geller dated December 13, 1996 | | 10-Q | July 31, 2013 | 10.21 |
|
| | | | | | |
10.16*10.22* | Letter Agreements withAddendum to Provision Committed by Charles River Wiga Deutschland GmbH for Dr. Davide MolhoJorg Geller dated May 22, 2009 | | 10-K | February 23, 2011 | 10.17 |
10.17* | Amended and Restated Deferred Compensation Plan Document dated July 17, 2012March 25, 1997 | | 10-Q | August 7, 2012July 31, 2013 | 10.1 |
10.22 |
10.18*10.23* | Employment agreementAgreement between Dr. Jorg GellerNancy Gillett and Charles River Germany GmbH & Co.Laboratories, Inc. effective January 1, 2015 | X | | | |
| 21.1 | Subsidiaries of Charles River Laboratories International, Inc. | X | | | |
| 23.1 | Consent of PricewaterhouseCoopers LLP | X | | | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | X | | | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | X | | | |
| 32.1 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer | X | | | |
| 101.INS | XBRL Instance Document | X | | | |
| 101.SCH | XBRL Taxonomy Extension Schema | X | | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | | | |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase | X | | | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | | | |
* Management contract or compensatory plan, contract or arrangement.
