UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| | | | | |
FORM 10-Q |
(Mark One) | |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 26, 2022April 1, 2023 | | | | | |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO |
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter) | | | | | | | | | | | | | | |
Delaware | | | | 06-1397316 |
(State or Other Jurisdiction of Incorporation or Organization) | | | | (I.R.S. Employer Identification No.) |
251 Ballardvale Street | Wilmington | Massachusetts | | 01887 |
(Address of Principal Executive Offices) | | (Zip Code) |
(Registrant’s telephone number, including area code): (781) 222-6000
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value | CRL | New York Stock Exchange |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files. Yes ☑ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 22, 2022,28, 2023, there were 50,804,86051,182,939 shares of the Registrant’s common stock outstanding.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 26, 2022APRIL 1, 2023
TABLE OF CONTENTS | Item | Item | | Page | Item | | Page |
PART I - FINANCIAL INFORMATION | PART I - FINANCIAL INFORMATION | PART I - FINANCIAL INFORMATION |
1 | 1 | Financial Statements | | 1 | Financial Statements | |
| | Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 26, 2022 and March 27, 2021 | | | Condensed Consolidated Statements of Income (Unaudited) for the three months ended April 1, 2023 and March 26, 2022 | |
| | Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 26, 2022 and March 27, 2021 | | | Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended April 1, 2023 and March 26, 2022 | |
| | Condensed Consolidated Balance Sheets (Unaudited) as of March 26, 2022 and December 25, 2021 | | | Condensed Consolidated Balance Sheets (Unaudited) as of April 1, 2023 and December 31, 2022 | |
| | Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 26, 2022 and March 27, 2021 | | | Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended April 1, 2023 and March 26, 2022 | |
| | Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three months ended March 26, 2022 and March 27, 2021 | | | Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three months ended April 1, 2023 and March 26, 2022 | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | | Notes to Unaudited Condensed Consolidated Financial Statements | |
2 | 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
3 | 3 | Quantitative and Qualitative Disclosure About Market Risk | | 3 | Quantitative and Qualitative Disclosure About Market Risk | |
4 | 4 | Controls and Procedures | | 4 | Controls and Procedures | |
PART II - OTHER INFORMATION | PART II - OTHER INFORMATION | PART II - OTHER INFORMATION |
1 | 1 | Legal Proceedings | | 1 | Legal Proceedings | |
1A | 1A | Risk Factors | | 1A | Risk Factors | |
2 | 2 | Unregistered Sales of Equity Securities and Use of Proceeds | | 2 | Unregistered Sales of Equity Securities and Use of Proceeds | |
| 6 | 6 | Exhibits | | 6 | Exhibits | |
| Signatures | Signatures | | Signatures | |
Special Note on Factors Affecting Future Results
This Quarterly Report on Form 10-Q 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 which are predictions of, 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: our expectations regarding the COVID-19 pandemic, its duration, its impact onavailability of non-human primates and our business, results of operations, financial condition, liquidity, use of our borrowings, business practices, operations, suppliers, inventory and supplies, third party service providers, customers, employees, industry, ability to meet future performance obligations, abilitydiversify our non-human primate supply chain; the outcome of the U.S. Department of Justice investigations related to timely account for assets on our balance sheet, abilityshipments of non-human primates from Cambodia received by the Company; the timing of the development and implementation of additional procedures to efficiently implement advisable safety precautions,reasonably ensure that non-human primates imported to the United States from Cambodia are purpose-bred; changes and internal controls over financial reporting; the COVID-19 pandemic’s impact on demand,uncertainties in the global economy and financial markets, including any changes in business, political, or economic conditions due to the November 16, 2022 announcement by the U.S. Department of Justice through the U.S. Attorney’s Office for the Southern District of Florida that a Cambodian non-human primate supplier and uncertaintiestwo Cambodian officials had been criminally charged in connection with illegally importing non-human primates into the global economy;United States; client demand, particularly future demand for drug discovery and development products and services, including the outsourcing of these services; our expectations with respect to our ability to meet financial targets; 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; our ability to successfully execute our business strategy; our ability to timely build infrastructure to satisfy capacity needs and support business growth, our ability to fund our operations for the foreseeable future, the impact of unauthorized access into our information systems, including the timing and effectiveness of any enhanced security and monitoring;monitoring 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, 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 leading pharmaceutical and biotechnology companies, venture capital investments, and opportunities for future similar arrangements; our cost structure; the impact of acquisitions and divestitures; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements)improvements, particularly with respect to our CDMO business); the impact of implementing newly issued accounting pronouncements; 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, divest or repurpose; 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 liquidity. In addition, these statements include the impact of economic and market conditions on us and our clients, the effects of our cost savingcost-saving actions and the steps to optimize returns to shareholders on an effective and timely basis; and our ability to withstand the current market conditions.
Forward-looking statements 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 our Annual Report on Form 10-K for the year ended December 25, 2021,31, 2022, under the sections entitled “Our Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in this Quarterly Report on Form 10-Q, under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” 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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts) | | | | Three Months Ended | | | Three Months Ended |
| | | March 26, 2022 | | March 27, 2021 | | | April 1, 2023 | | March 26, 2022 |
Service revenue | Service revenue | | $ | 720,485 | | | $ | 626,581 | | Service revenue | | $ | 857,366 | | | $ | 720,485 | |
Product revenue | Product revenue | | 193,444 | | | 197,985 | | Product revenue | | 172,007 | | | 193,444 | |
Total revenue | Total revenue | | 913,929 | | | 824,566 | | Total revenue | | 1,029,373 | | | 913,929 | |
Costs and expenses: | Costs and expenses: | | | Costs and expenses: | | |
Cost of services provided (excluding amortization of intangible assets) | Cost of services provided (excluding amortization of intangible assets) | | 486,864 | | | 423,975 | | Cost of services provided (excluding amortization of intangible assets) | | 565,477 | | | 486,864 | |
Cost of products sold (excluding amortization of intangible assets) | Cost of products sold (excluding amortization of intangible assets) | | 90,247 | | | 92,313 | | Cost of products sold (excluding amortization of intangible assets) | | 86,242 | | | 90,247 | |
Selling, general and administrative | Selling, general and administrative | | 150,033 | | | 155,733 | | Selling, general and administrative | | 174,846 | | | 150,033 | |
Amortization of intangible assets | Amortization of intangible assets | | 38,007 | | | 28,842 | | Amortization of intangible assets | | 34,916 | | | 38,007 | |
Operating income | Operating income | | 148,778 | | | 123,703 | | Operating income | | 167,892 | | | 148,778 | |
Other income (expense): | Other income (expense): | | | Other income (expense): | | |
Interest income | Interest income | | 127 | | | 35 | | Interest income | | 806 | | | 127 | |
Interest expense | Interest expense | | (9,434) | | | (29,719) | | Interest expense | | (34,380) | | | (9,434) | |
Other expense, net | Other expense, net | | (28,625) | | | (27,717) | | Other expense, net | | (3,277) | | | (28,625) | |
Income before income taxes | Income before income taxes | | 110,846 | | | 66,302 | | Income before income taxes | | 131,041 | | | 110,846 | |
Provision for income taxes | Provision for income taxes | | 15,620 | | | 2,367 | | Provision for income taxes | | 27,087 | | | 15,620 | |
Net income | Net income | | 95,226 | | | 63,935 | | Net income | | 103,954 | | | 95,226 | |
Less: Net income attributable to noncontrolling interests | Less: Net income attributable to noncontrolling interests | | 2,204 | | | 2,405 | | Less: Net income attributable to noncontrolling interests | | 823 | | | 2,204 | |
Net income attributable to common shareholders | Net income attributable to common shareholders | | $ | 93,022 | | | $ | 61,530 | | Net income attributable to common shareholders | | $ | 103,131 | | | $ | 93,022 | |
| Earnings per common share | Earnings per common share | | | Earnings per common share | | |
Net income attributable to common shareholders: | Net income attributable to common shareholders: | | | Net income attributable to common shareholders: | | |
Basic | Basic | | $ | 1.84 | | | $ | 1.23 | | Basic | | $ | 2.02 | | | $ | 1.84 | |
Diluted | Diluted | | $ | 1.81 | | | $ | 1.20 | | Diluted | | $ | 2.01 | | | $ | 1.81 | |
| Weighted-average number of common shares outstanding: | Weighted-average number of common shares outstanding: | | | Weighted-average number of common shares outstanding: | | |
Basic | Basic | | 50,640 | | | 49,980 | | Basic | | 51,097 | | | 50,640 | |
Diluted | Diluted | | 51,325 | | | 51,075 | | Diluted | | 51,428 | | | 51,325 | |
| See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
| | | | Three Months Ended | | | Three Months Ended |
| | | March 26, 2022 | | March 27, 2021 | | | April 1, 2023 | | March 26, 2022 |
Net income | Net income | | $ | 95,226 | | | $ | 63,935 | | Net income | | $ | 103,954 | | | $ | 95,226 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | Other comprehensive income (loss): | | |
Foreign currency translation adjustment | | (12,952) | | | 9,829 | | |
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans | | 746 | | | 988 | | |
Comprehensive income, before income taxes related to items of other comprehensive income | | 83,020 | | | 74,752 | | |
Foreign currency translation adjustment and other | | Foreign currency translation adjustment and other | | 23,313 | | | (12,952) | |
Amortization of net loss, settlement losses, and prior service benefit included in total cost for pension and other post-retirement benefit plans | | Amortization of net loss, settlement losses, and prior service benefit included in total cost for pension and other post-retirement benefit plans | | 170 | | | 746 | |
Unrealized gains (losses) on hedging instruments | | Unrealized gains (losses) on hedging instruments | | (1,402) | | | — | |
Comprehensive income, before income taxes | | Comprehensive income, before income taxes | | 126,035 | | | 83,020 | |
Less: Income tax benefit related to items of other comprehensive income | Less: Income tax benefit related to items of other comprehensive income | | (2,018) | | | (1,025) | | Less: Income tax benefit related to items of other comprehensive income | | (1,038) | | | (2,018) | |
Comprehensive income, net of income taxes | Comprehensive income, net of income taxes | | 85,038 | | | 75,777 | | Comprehensive income, net of income taxes | | 127,073 | | | 85,038 | |
Less: Comprehensive income related to noncontrolling interests, net of income taxes | Less: Comprehensive income related to noncontrolling interests, net of income taxes | | 2,209 | | | 2,390 | | Less: Comprehensive income related to noncontrolling interests, net of income taxes | | 1,009 | | | 2,209 | |
Comprehensive income attributable to common shareholders, net of income taxes | Comprehensive income attributable to common shareholders, net of income taxes | | $ | 82,829 | | | $ | 73,387 | | Comprehensive income attributable to common shareholders, net of income taxes | | $ | 126,064 | | | $ | 82,829 | |
| See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts) | | | March 26, 2022 | | December 25, 2021 | | | April 1, 2023 | | December 31, 2022 | |
Assets | Assets | | | | | Assets | | | | |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 241,869 | | | $ | 241,214 | | | Cash and cash equivalents | $ | 201,587 | | | $ | 233,912 | | |
Trade receivables and contract assets, net of allowances for credit losses of $6,154 and $7,180, respectively | 697,843 | | | 642,881 | | | |
Trade receivables and contract assets, net of allowances for credit losses of $16,694 and $11,278, respectively | | Trade receivables and contract assets, net of allowances for credit losses of $16,694 and $11,278, respectively | 788,309 | | | 752,390 | | |
Inventories | Inventories | 221,175 | | | 199,146 | | | Inventories | 262,584 | | | 255,809 | | |
Prepaid assets | Prepaid assets | 90,496 | | | 93,543 | | | Prepaid assets | 104,162 | | | 89,341 | | |
Other current assets | Other current assets | 81,703 | | | 97,311 | | | Other current assets | 91,713 | | | 107,580 | | |
Total current assets | Total current assets | 1,333,086 | | | 1,274,095 | | | Total current assets | 1,448,355 | | | 1,439,032 | | |
Property, plant and equipment, net | Property, plant and equipment, net | 1,321,618 | | | 1,291,068 | | | Property, plant and equipment, net | 1,494,080 | | | 1,465,655 | | |
Venture capital and strategic equity investments | | Venture capital and strategic equity investments | 293,787 | | | 311,602 | | |
Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 304,758 | | | 292,941 | | | Operating lease right-of-use assets, net | 408,464 | | | 391,762 | | |
Goodwill | Goodwill | 2,695,994 | | | 2,711,881 | | | Goodwill | 2,901,627 | | | 2,849,903 | | |
Client relationships, net | 948,830 | | | 981,398 | | | |
Other intangible assets, net | 70,707 | | | 79,794 | | | |
Intangible assets, net | | Intangible assets, net | 958,119 | | | 955,275 | | |
Deferred tax assets | Deferred tax assets | 43,404 | | | 40,226 | | | Deferred tax assets | 41,017 | | | 41,262 | | |
Other assets | Other assets | 356,652 | | | 352,889 | | | Other assets | 153,990 | | | 148,279 | | |
Total assets | Total assets | $ | 7,075,049 | | | $ | 7,024,292 | | | Total assets | $ | 7,699,439 | | | $ | 7,602,770 | | |
Liabilities, Redeemable Noncontrolling Interests and Equity | Liabilities, Redeemable Noncontrolling Interests and Equity | | | | | Liabilities, Redeemable Noncontrolling Interests and Equity | | | | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | | | |
Current portion of long-term debt and finance leases | $ | 2,642 | | | $ | 2,795 | | | |
Accounts payable | Accounts payable | 225,977 | | | 198,130 | | | Accounts payable | 120,004 | | | 205,915 | | |
Accrued compensation | Accrued compensation | 165,224 | | | 246,119 | | | Accrued compensation | 176,053 | | | 197,078 | | |
Deferred revenue | Deferred revenue | 228,260 | | | 219,703 | | | Deferred revenue | 262,226 | | | 264,259 | | |
Accrued liabilities | Accrued liabilities | 227,203 | | | 228,797 | | | Accrued liabilities | 221,370 | | | 219,758 | | |
Other current liabilities | Other current liabilities | 144,533 | | | 137,641 | | | Other current liabilities | 201,739 | | | 204,575 | | |
Total current liabilities | Total current liabilities | 993,839 | | | 1,033,185 | | | Total current liabilities | 981,392 | | | 1,091,585 | | |
Long-term debt, net and finance leases | Long-term debt, net and finance leases | 2,676,165 | | | 2,663,564 | | | Long-term debt, net and finance leases | 2,743,774 | | | 2,707,531 | | |
Operating lease right-of-use liabilities | Operating lease right-of-use liabilities | 264,356 | | | 252,972 | | | Operating lease right-of-use liabilities | 418,202 | | | 389,745 | | |
Deferred tax liabilities | Deferred tax liabilities | 230,949 | | | 239,720 | | | Deferred tax liabilities | 212,278 | | | 215,582 | | |
Other long-term liabilities | Other long-term liabilities | 239,015 | | | 242,859 | | | Other long-term liabilities | 186,975 | | | 174,822 | | |
Total liabilities | Total liabilities | 4,404,324 | | | 4,432,300 | | | Total liabilities | 4,542,621 | | | 4,579,265 | | |
Commitments and contingencies (Notes 2, 9, 11 and 13) | 0 | | 0 | | |
Redeemable noncontrolling interests | 55,819 | | | 53,010 | | | |
Commitments and contingencies (Notes 2, 8, 10, and 12) | | Commitments and contingencies (Notes 2, 8, 10, and 12) | | |
Redeemable noncontrolling interest | | Redeemable noncontrolling interest | 42,935 | | | 42,427 | | |
Equity: | Equity: | | | | | Equity: | | | | |
Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding | Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding | — | | | — | | | 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; 50,911 shares issued and 50,800 shares outstanding as of March 26, 2022, and 50,480 shares issued and outstanding as of December 25, 2021 | 509 | | | 505 | | | |
Common stock, $0.01 par value; 120,000 shares authorized; 51,260 shares issued and 51,182 shares outstanding as of April 1, 2023, and 50,944 shares issued and outstanding as of December 31, 2022 | | Common stock, $0.01 par value; 120,000 shares authorized; 51,260 shares issued and 51,182 shares outstanding as of April 1, 2023, and 50,944 shares issued and outstanding as of December 31, 2022 | 512 | | | 509 | | |
Additional paid-in capital | Additional paid-in capital | 1,744,829 | | | 1,718,304 | | | Additional paid-in capital | 1,830,189 | | | 1,804,940 | | |
Retained earnings | Retained earnings | 1,073,773 | | | 980,751 | | | Retained earnings | 1,536,032 | | | 1,432,901 | | |
Treasury stock, at cost, 111 and 0 shares, as of March 26, 2022 and December 25, 2021, respectively | (33,994) | | | — | | | |
Treasury stock, at cost, 78 and zero shares, as of April 1, 2023 and December 31, 2022, respectively | | Treasury stock, at cost, 78 and zero shares, as of April 1, 2023 and December 31, 2022, respectively | (19,012) | | | — | | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (174,933) | | | (164,740) | | | Accumulated other comprehensive loss | (239,124) | | | (262,057) | | |
Total equity attributable to common shareholders | Total equity attributable to common shareholders | 2,610,184 | | | 2,534,820 | | | Total equity attributable to common shareholders | 3,108,597 | | | 2,976,293 | | |
Noncontrolling interest | 4,722 | | | 4,162 | | | |
Noncontrolling interests (nonredeemable) | | Noncontrolling interests (nonredeemable) | 5,286 | | | 4,785 | | |
Total equity | Total equity | 2,614,906 | | | 2,538,982 | | | Total equity | 3,113,883 | | | 2,981,078 | | |
Total liabilities, redeemable noncontrolling interests and equity | Total liabilities, redeemable noncontrolling interests and equity | $ | 7,075,049 | | | $ | 7,024,292 | | | Total liabilities, redeemable noncontrolling interests and equity | $ | 7,699,439 | | | $ | 7,602,770 | | |
See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. | | See Notes to Unaudited Condensed Consolidated Financial Statements. | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) | | | Three Months Ended | | Three Months Ended |
| | March 26, 2022 | | March 27, 2021 | | April 1, 2023 | | March 26, 2022 |
Cash flows relating to operating activities | Cash flows relating to operating activities | | | | Cash flows relating to operating activities | | | |
Net income | Net income | $ | 95,226 | | | $ | 63,935 | | Net income | $ | 103,954 | | | $ | 95,226 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | Depreciation and amortization | 75,299 | | | 61,508 | | Depreciation and amortization | 77,069 | | | 75,299 | |
Stock-based compensation | Stock-based compensation | 14,619 | | | 13,189 | | Stock-based compensation | 13,460 | | | 14,619 | |
Loss on debt extinguishment and other financing costs | 1,028 | | | 26,907 | | |
| Deferred income taxes | Deferred income taxes | (7,563) | | | (9,125) | | Deferred income taxes | (11,584) | | | (7,563) | |
Loss on venture capital and strategic equity investments, net | Loss on venture capital and strategic equity investments, net | 13,903 | | | 16,719 | | Loss on venture capital and strategic equity investments, net | 3,282 | | | 13,903 | |
Contingent consideration, fair value changes | (3,450) | | | — | | |
| Gain on divestitures, net | | Gain on divestitures, net | (441) | | | — | |
Changes in fair value of contingent consideration arrangements | | Changes in fair value of contingent consideration arrangements | — | | | (3,450) | |
Other, net | Other, net | 5,211 | | | 496 | | Other, net | 15,587 | | | 6,239 | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | | | Changes in assets and liabilities: | | | |
Trade receivables and contract assets, net | Trade receivables and contract assets, net | (57,942) | | | 5,598 | | Trade receivables and contract assets, net | (33,831) | | | (57,942) | |
Inventories | Inventories | (23,164) | | | (11,404) | | Inventories | (8,587) | | | (23,164) | |
Accounts payable | Accounts payable | 40,932 | | | 9,622 | | Accounts payable | (41,313) | | | 40,932 | |
Accrued compensation | Accrued compensation | (79,795) | | | (37,360) | | Accrued compensation | (21,469) | | | (79,795) | |
Deferred revenue | Deferred revenue | 12,078 | | | 5,006 | | Deferred revenue | (481) | | | 12,078 | |
Customer contract deposits | Customer contract deposits | 4,750 | | | (5,446) | | Customer contract deposits | 1,509 | | | 4,750 | |
Other assets and liabilities, net | Other assets and liabilities, net | 11,498 | | | 30,584 | | Other assets and liabilities, net | 12,228 | | | 11,498 | |
Net cash provided by operating activities | Net cash provided by operating activities | 102,630 | | | 170,229 | | Net cash provided by operating activities | 109,383 | | | 102,630 | |
Cash flows relating to investing activities | Cash flows relating to investing activities | | | | Cash flows relating to investing activities | | | |
Acquisition of businesses and assets, net of cash acquired | Acquisition of businesses and assets, net of cash acquired | — | | | (94,197) | | Acquisition of businesses and assets, net of cash acquired | (50,166) | | | — | |
Capital expenditures | Capital expenditures | (80,464) | | | (28,030) | | Capital expenditures | (106,875) | | | (80,464) | |
Purchases of investments and contributions to venture capital investments | Purchases of investments and contributions to venture capital investments | (13,296) | | | (16,550) | | Purchases of investments and contributions to venture capital investments | (12,570) | | | (13,296) | |
Proceeds from sale of investments | Proceeds from sale of investments | 205 | | | — | | Proceeds from sale of investments | 1,953 | | | 205 | |
Other, net | Other, net | (4,450) | | | 781 | | Other, net | (960) | | | (4,450) | |
Net cash used in investing activities | Net cash used in investing activities | (98,005) | | | (137,996) | | Net cash used in investing activities | (168,618) | | | (98,005) | |
Cash flows relating to financing activities | Cash flows relating to financing activities | | | | Cash flows relating to financing activities | | | |
Proceeds from long-term debt and revolving credit facility | Proceeds from long-term debt and revolving credit facility | 962,005 | | | 1,954,011 | | Proceeds from long-term debt and revolving credit facility | 192,500 | | | 962,005 | |
Proceeds from exercises of stock options | Proceeds from exercises of stock options | 12,199 | | | 19,612 | | Proceeds from exercises of stock options | 11,792 | | | 12,199 | |
Payments on long-term debt, revolving credit facility, and finance lease obligations | Payments on long-term debt, revolving credit facility, and finance lease obligations | (948,267) | | | (1,714,195) | | Payments on long-term debt, revolving credit facility, and finance lease obligations | (157,328) | | | (948,267) | |
Purchase of treasury stock | Purchase of treasury stock | (33,994) | | | (36,028) | | Purchase of treasury stock | (19,012) | | | (33,994) | |
Payment of debt extinguishment and financing costs | — | | | (28,680) | | |
Payments of contingent consideration | | Payments of contingent consideration | (2,711) | | | (3,356) | |
| Other, net | Other, net | (5,226) | | | — | | Other, net | — | | | (1,870) | |
Net cash (used in) provided by financing activities | (13,283) | | | 194,720 | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 25,241 | | | (13,283) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 5,740 | | | 10,953 | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 1,671 | | | 5,740 | |
Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | (2,918) | | | 237,906 | | Net change in cash, cash equivalents, and restricted cash | (32,323) | | | (2,918) | |
Cash, cash equivalents, and restricted cash, beginning of period | Cash, cash equivalents, and restricted cash, beginning of period | 246,314 | | | 233,119 | | Cash, cash equivalents, and restricted cash, beginning of period | 241,214 | | | 246,314 | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | $ | 243,396 | | | $ | 471,025 | | Cash, cash equivalents, and restricted cash, end of period | $ | 208,891 | | | $ | 243,396 | |
| Supplemental cash flow information: | Supplemental cash flow information: | | Supplemental cash flow information: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 241,869 | | | $ | 465,411 | | Cash and cash equivalents | $ | 201,587 | | | $ | 241,869 | |
| Restricted cash included in Other current assets | Restricted cash included in Other current assets | 413 | | | 4,012 | | Restricted cash included in Other current assets | 6,162 | | | 413 | |
Restricted cash included in Other assets | Restricted cash included in Other assets | 1,114 | | | 1,602 | | Restricted cash included in Other assets | 1,142 | | | 1,114 | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | $ | 243,396 | | | $ | 471,025 | | Cash, cash equivalents, and restricted cash, end of period | $ | 208,891 | | | $ | 243,396 | |
| Non-cash investing activities: | | Non-cash investing activities: | |
Purchases of Property, plant and equipment included in Accounts payable and Accrued liabilities | | Purchases of Property, plant and equipment included in Accounts payable and Accrued liabilities | $ | 43,116 | | | $ | 58,993 | |
| See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(in thousands)
| | | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interest | | Total Equity |
| Shares | | Amount | | Shares | | Amount | |
December 31, 2022 | | December 31, 2022 | 50,944 | | | $ | 509 | | | $ | 1,804,940 | | | $ | 1,432,901 | | | $ | (262,057) | | | — | | | $ | — | | | $ | 2,976,293 | | | $ | 4,785 | | | $ | 2,981,078 | |
Net income | | Net income | — | | | — | | | — | | | 103,131 | | | — | | | — | | | — | | | 103,131 | | | 501 | | | 103,632 | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 22,933 | | | — | | | — | | | 22,933 | | | — | | | 22,933 | |
| Issuance of stock under employee compensation plans | | Issuance of stock under employee compensation plans | 316 | | | 3 | | | 11,789 | | | — | | | — | | | — | | | — | | | 11,792 | | | — | | | 11,792 | |
Purchase of treasury shares | | Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 78 | | | (19,012) | | | (19,012) | | | — | | | (19,012) | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 13,460 | | | — | | | — | | | — | | | — | | | 13,460 | | | — | | | 13,460 | |
April 1, 2023 | | April 1, 2023 | 51,260 | | | 512 | | | 1,830,189 | | | 1,536,032 | | | (239,124) | | | 78 | | | (19,012) | | | 3,108,597 | | | 5,286 | | | 3,113,883 | |
| | | | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interest | | Total Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interest | | Total Equity |
Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
December 25, 2021 | December 25, 2021 | 50,480 | | | $ | 505 | | | $ | 1,718,304 | | | $ | 980,751 | | | $ | (164,740) | | | — | | | $ | — | | | $ | 2,534,820 | | | $ | 4,162 | | | $ | 2,538,982 | | December 25, 2021 | 50,480 | | | $ | 505 | | | $ | 1,718,304 | | | $ | 980,751 | | | $ | (164,740) | | | — | | | $ | — | | | $ | 2,534,820 | | | $ | 4,162 | | | $ | 2,538,982 | |
Net income | Net income | — | | | — | | | — | | | 93,022 | | | — | | | — | | | — | | | 93,022 | | | 560 | | | 93,582 | | Net income | — | | | — | | | — | | | 93,022 | | | — | | | — | | | — | | | 93,022 | | | 560 | | | 93,582 | |
Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (10,193) | | | — | | | — | | | (10,193) | | | — | | | (10,193) | | Other comprehensive loss | — | | | — | | | — | | | — | | | (10,193) | | | — | | | — | | | (10,193) | | | — | | | (10,193) | |
Adjustment of redeemable noncontrolling interest to redemption value | Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | (1,161) | | | — | | | — | | | — | | | — | | | (1,161) | | | — | | | (1,161) | | Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | (1,161) | | | — | | | — | | | — | | | — | | | (1,161) | | | — | | | (1,161) | |
Issuance of stock under employee compensation plans | Issuance of stock under employee compensation plans | 431 | | | 4 | | | 13,067 | | | — | | | — | | | — | | | — | | | 13,071 | | | — | | | 13,071 | | Issuance of stock under employee compensation plans | 431 | | | 4 | | | 13,067 | | | — | | | — | | | — | | | — | | | 13,071 | | | — | | | 13,071 | |
Purchase of treasury shares | Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 111 | | | (33,994) | | | (33,994) | | | — | | | (33,994) | | Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 111 | | | (33,994) | | | (33,994) | | | — | | | (33,994) | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 14,619 | | | — | | | — | | | — | | | — | | | 14,619 | | | — | | | 14,619 | | Stock-based compensation | — | | | — | | | 14,619 | | | — | | | — | | | — | | | — | | | 14,619 | | | — | | | 14,619 | |
March 26, 2022 | March 26, 2022 | 50,911 | | | $ | 509 | | | $ | 1,744,829 | | | $ | 1,073,773 | | | $ | (174,933) | | | 111 | | | $ | (33,994) | | | $ | 2,610,184 | | | $ | 4,722 | | | $ | 2,614,906 | | March 26, 2022 | 50,911 | | | 509 | | | 1,744,829 | | | 1,073,773 | | | (174,933) | | | 111 | | | (33,994) | | | 2,610,184 | | | 4,722 | | | 2,614,906 | |
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interest | | Total Equity | |
Shares | | Amount | | Shares | | Amount | | |
December 26, 2020 | 49,767 | | | $ | 498 | | | $ | 1,627,564 | | | $ | 625,414 | | | $ | (138,874) | | | — | | | $ | — | | | $ | 2,114,602 | | | $ | 3,567 | | | $ | 2,118,169 | | |
Net income | — | | | — | | | — | | | 61,530 | | | — | | | — | | | — | | | 61,530 | | | 690 | | | 62,220 | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 11,857 | | | — | | | — | | | 11,857 | | | — | | | 11,857 | | |
Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | (835) | | | — | | | — | | | — | | | — | | | (835) | | | — | | | (835) | | |
Issuance of stock under employee compensation plans | 583 | | | 6 | | | 19,606 | | | — | | | — | | | — | | | — | | | 19,612 | | | — | | | 19,612 | | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 134 | | | (36,028) | | | (36,028) | | | — | | | (36,028) | | |
Stock-based compensation | — | | | — | | | 13,189 | | | — | | | — | | | — | | | — | | | 13,189 | | | — | | | 13,189 | | |
March 27, 2021 | 50,350 | | | $ | 504 | | | $ | 1,659,524 | | | $ | 686,944 | | | $ | (127,017) | | | 134 | | | $ | (36,028) | | | $ | 2,183,927 | | | $ | 4,257 | | | $ | 2,188,184 | | |
| | See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. | See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal year 2021.2022. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Newly IssuedAdopted Accounting Pronouncements
In November 2021,September 2022, the FASB issued ASU 2021-10, “Government Assistance (Topic 832)2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosures by Business Entities About Government Assistance.Disclosure of Supplier Finance Program Obligations.” ASU 2021-102022-04 requires quantitative and qualitative disclosures about transactions with a government that have been accounted for by a grant or contribution accounting model to increase transparency about the typesuse of transactions, the accounting for the transactions, and the effect on the financial statements.supplier finance programs. The ASU is an annual disclosure effective for fiscal years beginning after December 15, 20212022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years for selected disclosures, and will be applied on a prospective basis. The Company is currently evaluatingparticipates in certain supplier finance programs that are immaterial to the impact this new standard will have on theunaudited condensed consolidated financial statements and related disclosures, but does not believe there will be a material impact.disclosures.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for fiscal year 2021.2022.
Consolidation
The Company’s unaudited condensed consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its unaudited condensed consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Redeemable noncontrolling interests, where the noncontrolling interest holders have the ability to sell the remaining interests, are classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. Intercompany balances and transactions are eliminated in consolidation.
The Company’s fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which will occuroccurred in this fiscal year 2022.
Segment Reporting
The Company reports its results in 3three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing).
The Company’s RMS reportable segment includes the Research Models, Research Model Services, and Research and GMP-Compliant CellsCell Solutions businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services); within our clients’ facilities and Researchutilizing both our Charles River Accelerator and GMP-Compliant Cells,Development Lab (CRADL™) and our Explora BioLabs options, in which we provide vivarium space to our clients; and Cell Solutions, which
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood.
The Company’s DSA reportable segment includes services required to take a drug through the early development process including discovery services, which aretwo businesses: Discovery Services and Safety Assessment. The Company provides regulated and non-regulated DSA services to assist clients withsupport the identification, screening, and selection of a lead compound for drugresearch, development, and regulatedregulatory-required safety testing of potential new drugs, including therapeutic discovery and nonregulated (GLPoptimization plus in vitro and non-GLP) safety assessment services. in vivo studies, laboratory support services, and strategic non-clinical consulting and program management to support product development.
The Company’s Manufacturing reportable segment includes
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services;services and Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO);. In December of 2022, the Company sold the Avian Vaccine Services business (Avian), previously reported in the Manufacturing segment, which suppliessupplied specific-pathogen-free chicken eggs and chickens.
2. ACQUISITIONS AND DIVESTITURES
Fiscal 2023 Acquisition
SAMDI Tech, Inc.
On January 27, 2023, the Company acquired SAMDI Tech, Inc., (SAMDI), a leading provider of high-quality, label-free high-throughput screening (HTS) solutions for drug discovery research. The acquisition of SAMDI will provide clients with seamless access to the premier, label-free HTS MS platform and create a comprehensive, library of drug discovery solutions. The preliminary purchase price of SAMDI was $62.8 million, net of $0.4 million in cash, inclusive of a 20% strategic equity interest previously owned by the Company of $12.6 million. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment.
Fiscal 2022 Acquisition
Explora BioLabs Holdings, Inc.
On April 5, 2022, the Company acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements the Company’s existing Insourcing Solutions business, specifically the CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The preliminary purchase price of Explora BioLabs was approximately $295$284.5 million, net of $6.6 million in cash, subject to customary closing adjustments.cash. The acquisition was funded through proceeds from the Company’s credit facility (Credit Facility). This business will beis reported as part of the Company’s RMS segment. Due to the limited time between the acquisition date and the filing of this Quarterly Report on Form 10-Q, it is not practicable for the Company to disclose the preliminary allocation of the purchase price to assets acquired and liabilities assumed.
Fiscal 2021 Acquisitions
Vigene Biosciences, Inc.
On June 28, 2021, the Company acquired Vigene Biosciences, Inc. (Vigene), a gene therapy contract development and manufacturing organization (CDMO), providing viral vector-based gene delivery solutions. The acquisition enables clients to seamlessly conduct analytical testing, process development, and manufacturing for advanced modalities with the same scientific partner. The purchase price of Vigene was $323.9 million, net of $2.7 million in cash. Included in the purchase price are contingent payments fair valued at $34.5 million, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s Manufacturing reportable segment.
Retrogenix Limited
On March 30, 2021, the Company acquired Retrogenix Limited (Retrogenix), an early-stage contract research organization providing specialized bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances the Company’s scientific expertise with additional large molecule and cell therapy discovery capabilities. The purchase price of Retrogenix was $53.9 million, net of $8.5 million in cash. Included in the purchase price are contingent payments fair valued at $6.9 million, which is the maximum potential payout, and was based on a probability-weighted approach. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment.
Cognate BioServices, Inc.
On March 29, 2021, the Company acquired Cognate BioServices, Inc. (Cognate), a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the production of plasmid DNA and other inputs in the CDMO value chain. The acquisition of Cognate establishes the Company as a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research and discovery through cGMP production. The purchase price of Cognate was $877.9 million, net of $70.5 million in cash, subject to certain post-closing adjustments and includes $15.7 million of consideration for an approximate 2% ownership interest not acquired, which was redeemed in April 2022 with the ultimate payout tied to performance in 2021. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility and senior notes (Senior Notes) issued in fiscal 2021. This business is reported as part of the Company’s Manufacturing reportable segment.
Distributed Bio, Inc.
On December 31, 2020, the Company acquired Distributed Bio, Inc. (Distributed Bio), a next-generation antibody discovery company with technologies specializing in enhancing the probability of success for delivering high-quality, readily formattable antibody fragments to support antibody and cell and gene therapy candidates to biopharmaceutical clients. The acquisition of Distributed Bio expands the Company’s capabilities with an innovative, large-molecule discovery platform, and creates an integrated, end-to-end platform for therapeutic antibody and cell and gene therapy discovery and development. The purchase price of Distributed Bio was $97.0 million, net of $0.8 million in cash. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously issued by the Company during prior fiscal years, and $14.1 million of contingent consideration, which was estimated using a Monte Carlo Simulation model (the maximum
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contingent contractual payments are up to $21.0 million based on future performance and milestone achievements over a one-year period). The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment.
Other Acquisition
On March 3, 2021, the Company acquired certain assets from a distributor that supports the Company’s DSA reportable segment. The purchase price was $35.4 million, which includes $19.5 million in cash paid ($5.5 million of which was paid in fiscal 2020), and $15.9 million of contingent consideration, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $17.5 million based on future performance over a three-year period). The fair value of the net assets acquired included $17.3 million of goodwill, $15.2 million attributed to supplier relationships (to be amortized over a 4-year period), and $3.0 million of property, plant, and equipment. The business is reported as part of the Company’s DSA reportable segment.
Purchase price information
The purchase price allocation was as follows:
| | | Vigene (3) | | Retrogenix | | Cognate | | Distributed Bio | | SAMDI (1) | | Explora BioLabs |
| | June 28, 2021 | | March 30, 2021 | | March 29, 2021 | | December 31, 2020 | | January 27, 2023 | | April 5, 2022 |
| | (in thousands) | | (in thousands) |
Trade receivables | Trade receivables | $ | 3,548 | | | $ | 2,266 | | | $ | 18,566 | | | $ | 2,722 | | Trade receivables | $ | 513 | | | $ | 7,679 | |
Other current assets (excluding cash) | Other current assets (excluding cash) | 1,657 | | | 209 | | | 14,128 | | | 221 | | Other current assets (excluding cash) | 75 | | | 1,067 | |
Property, plant and equipment | Property, plant and equipment | 7,649 | | | 400 | | | 52,082 | | | 2,382 | | Property, plant and equipment | 593 | | | 37,369 | |
Operating lease right-of-use asset, net | Operating lease right-of-use asset, net | 22,507 | | | 1,385 | | | 34,349 | | | 1,586 | | Operating lease right-of-use asset, net | — | | | 48,613 | |
Goodwill (1)(2) | Goodwill (1)(2) | 239,681 | | | 34,489 | | | 611,555 | | | 71,585 | | Goodwill (1)(2) | 37,129 | | | 215,752 | |
Definite-lived intangible assets | Definite-lived intangible assets | 93,900 | | | 22,126 | | | 270,900 | | | 24,540 | | Definite-lived intangible assets | 33,070 | | | 70,100 | |
Other long-term assets | Other long-term assets | 694 | | | — | | | 6,098 | | | 469 | | Other long-term assets | 6 | | | 556 | |
Deferred revenue | Deferred revenue | (4,260) | | | (434) | | | (20,539) | | | (1,319) | | Deferred revenue | (43) | | | (3,507) | |
Other current liabilities (2) | Other current liabilities (2) | (6,319) | | | (1,141) | | | (45,388) | | | (1,504) | | Other current liabilities (2) | (351) | | | (15,507) | |
Operating lease right-of-use liabilities (Long-term) | Operating lease right-of-use liabilities (Long-term) | (21,220) | | | (1,205) | | | (31,383) | | | (1,123) | | Operating lease right-of-use liabilities (Long-term) | — | | | (57,193) | |
Deferred tax liabilities | Deferred tax liabilities | (13,958) | | | (4,174) | | | (32,503) | | | (2,529) | | Deferred tax liabilities | (8,191) | | | (18,601) | |
| Other long-term liabilities | | Other long-term liabilities | — | | | (1,807) | |
Total purchase price allocation | Total purchase price allocation | $ | 323,879 | | | $ | 53,921 | | | $ | 877,865 | | | $ | 97,030 | | Total purchase price allocation | $ | 62,801 | | | $ | 284,521 | |
| (1) The goodwill resulting from these transactions is primarily attributable to the potential growth of the Company’s segments from new customers introduced to the acquired businesses and the assembled workforce of the acquirees. The goodwill attributable to these entities is not deductible for tax purposes. | |
(2) In connection with its acquisitions of businesses, the Company routinely records liabilities related to indirect state and local taxes for preacquisition periods when such liabilities are estimable and deemed probable. The Company may or may not be indemnified for such indirect tax liabilities under terms of the acquisitions. As these indirect tax contingencies are resolved, actual obligations, and any indemnifications, may differ from the recorded amounts and any differences are reflected in reported results in the period in which these are resolved. As of March 26, 2022, the Company estimates that it is reasonably possible that these recorded liabilities of $17 million may decrease over the next twelve month period as the Company seeks a favorable ruling from tax authorities on certain indirect tax positions. | |
(3) Purchase price allocation is preliminary and subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts and obligations. 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. | |
(1) Purchase price allocation is preliminary and subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts and obligations. 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. | | (1) Purchase price allocation is preliminary and subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts and obligations. 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. |
(2) The goodwill resulting from these transactions is primarily attributable to the potential growth of the Company’s segments from new customers introduced to the acquired businesses and the assembled workforce of the acquirees, thus is not deductible for tax purposes. Explora BioLabs had $5.0 million of goodwill due to a prior asset acquisition that is deductible for tax purposes. | | (2) The goodwill resulting from these transactions is primarily attributable to the potential growth of the Company’s segments from new customers introduced to the acquired businesses and the assembled workforce of the acquirees, thus is not deductible for tax purposes. Explora BioLabs had $5.0 million of goodwill due to a prior asset acquisition that is deductible for tax purposes. |
|
The definite-lived intangible assets acquired were as follows:
| | | | | | | | | | | | | | | | |
| SAMDI | Explora BioLabs | | | | | | | | |
Definite-Lived Intangible Assets | (in thousands) | | | | | | | | |
Client relationships | $ | 23,400 | | $ | 64,000 | | | | | | | | | |
Other intangible assets | 9,670 | | 6,100 | | | | | | | | | |
Total definite-lived intangible assets | $ | 33,070 | | $ | 70,100 | | | | | | | | | |
| | | | | | | | | | |
Weighted Average Amortization Life | (in years) | | | | | | | | |
Client relationships | 15 | 13 | | | | | | | | |
Other intangible assets | 7 | 4 | | | | | | | | |
Total definite-lived intangible assets | 12 | 12 | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | April 1, 2023 | | March 26, 2022 |
| | | | | (in thousands) |
Transaction and Integration Costs | | | | | | | |
Selling, general and administrative expenses | | | | | $ | 1,064 | | | $ | 7,113 | |
| | | | | | | |
Divestitures
The Company routinely evaluates the strategic fit and fundamental performance of its global businesses, divesting operations that do not meet key business criteria. As part of this ongoing assessment, the Company determined that certain capital could be better deployed in other long-term growth opportunities.
Avian Vaccine Services
On December 20, 2022, the Company sold its Avian Vaccine Services business (Avian) to a private investor group for a preliminary purchase price of $168.6 million in cash, subject to certain customary closing adjustments. The Company may also earn up to $30.0 million of contingent payments, which are tied to certain annual results of the Avian business from January 2024 through December 2027. The contingent payments have been fair valued at $10.3 million using a discounted probability
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
weighted model. The definite-lived intangible assets acquired were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Vigene | | Retrogenix | | Cognate | | Distributed Bio |
Definite-Lived Intangible Assets | (in thousands) |
Client relationships | $ | 87,500 | | | $ | 17,340 | | | $ | 257,200 | | | $ | 16,080 | |
Other intangible assets | 6,400 | | | 4,786 | | | 13,700 | | | 8,460 | |
Total definite-lived intangible assets | $ | 93,900 | | | $ | 22,126 | | | $ | 270,900 | | | $ | 24,540 | |
| | | | | | | |
Weighted Average Amortization Life | (in years) |
Client relationships | 12 | | 13 | | 13 | | 9 |
Other intangible assets | 2 | | 3 | | 2 | | 4 |
Total definite-lived intangible assets | 11 | | 11 | | 13 | | 7 |
The company incurred transaction and integration costs in connection with its acquisitions of $7.1 million and $8.7 million, which were included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income for the three months ended March 26, 2022 and March 27, 2021, respectively.
Pro forma information
The following selected unaudited pro forma consolidated results of operations are presented as if the Cognate and Vigene acquisitions had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 29, 2019, after giving effect to certain adjustments. For the three months ended March 26, 2021, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $9.2 million, additional interest expense on borrowing of $3.4 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. All other acquisitions have not been included because that information is not material to the consolidated financial statements.
| | | | | |
| Three Months Ended |
| March 27, 2021 |
| (in thousands) |
| (unaudited) |
Revenue | $ | 858,800 | |
Net income attributable to common shareholders | 37,575 | |
| |
These unaudited 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 dates indicated or that may result in the future. No effect has been given for synergies, if any, that may be realized through the acquisition.
RMS Japan Divestiture
On October 12, 2021, the Company sold its RMS Japan operations to The Jackson Laboratory for a preliminary purchase price of $73.1 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments.
The RMS JapanAvian business was reported in the Company’s RMS reportable segment. The Company determined that the RMS Japan business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.
CDMO Sweden Divestiture
On October 12, 2021, the Company sold its gene therapy CDMO site in Sweden to a private investor group for a preliminary purchase price of $59.6 million, net of $0.2 million in cash and other post-closing adjustments that may impact the purchase price. Included in the purchase price are contingent payments fair valued at $15.3 million, which were estimated using a probability weighted model (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10.0 million between the parties.
The CDMO Sweden business was acquired in March 2021 as part of the acquisition of Cognate and was reported in the Company’s Manufacturing reportable segment. The Company routinely evaluates the strategic fit and fundamental performance of our acquisitions integrated within our global infrastructure. As part of this assessment,During fiscal year 2022, the Company determined that this capital could be better deployed in other long-term growth opportunities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recorded a gain on the divestiture of Avian of $123.4 million within Other income (expense) on the Company’s condensed consolidated statements of income.The carrying amounts of the major classes of assets and liabilities associated with the divestitures of the businesses were as follows:
| | | | | | | | | | | |
| October 12, 2021 |
| RMS Japan | | CDMO Sweden |
| (in thousands) |
Assets | | | |
Current assets | $ | 26,524 | | | $ | 8,187 | |
Property, plant, and equipment, net | 17,379 | | | 14,339 | |
Operating lease right-of-use assets, net | — | | | 19,733 | |
Goodwill | 4,129 | | | 27,764 | |
Intangible assets, net | — | | | 14,089 | |
Other assets | 3,695 | | | — | |
Total assets | $ | 51,727 | | | $ | 84,112 | |
| | | |
Liabilities | | | |
Current liabilities | $ | 8,705 | | | $ | 6,386 | |
Operating lease right-of-use liabilities | — | | | 18,221 | |
Long-term liabilities | 94 | | | — | |
Total liabilities | $ | 8,799 | | | $ | 24,607 | |
| | | | | |
| December 19, 2022 |
| Avian |
| (in thousands) |
Assets | |
Current assets | $ | 30,545 | |
Property, plant, and equipment, net | 24,602 | |
Operating lease right-of-use assets, net | 611 | |
Goodwill | 3,168 | |
Intangible assets, net | 1,629 | |
Other assets | 10 | |
Total assets | $ | 60,565 | |
| |
Liabilities | |
Current liabilities | $ | 8,139 | |
Operating lease right-of-use liabilities | 331 | |
Total liabilities | $ | 8,470 | |
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major business line and timing of transfer of products or services:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 26, 2022 | | March 27, 2021 |
| | | | | (in thousands) |
Timing of Revenue Recognition: | | | | | | | |
RMS | | | | | | | |
Services and products transferred over time | | | | | $ | 69,924 | | | $ | 64,896 | |
Services and products transferred at a point in time | | | | | 106,618 | | | 112,014 | |
Total RMS revenue | | | | | 176,542 | | | 176,910 | |
DSA | | | | | | | |
Services and products transferred over time | | | | | 542,336 | | | 500,468 | |
Services and products transferred at a point in time | | | | | 1,923 | | | 710 | |
Total DSA revenue | | | | | 544,259 | | | 501,178 | |
Manufacturing | | | | | | | |
Services and products transferred over time | | | | | 95,009 | | | 50,568 | |
Services and products transferred at a point in time | | | | | 98,119 | | | 95,910 | |
Total Manufacturing revenue | | | | | 193,128 | | | 146,478 | |
Total revenue | | | | | $ | 913,929 | | | $ | 824,566 | |
RMS
The RMS business generates revenue through the commercial production and sale of research models, research and GMP-compliant cells (cell supply), and the provision of services related to the maintenance and monitoring of research models and management of clients’ research operations. Revenue from the sale of research models and cell supply is recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the shipping terms of a contract. Revenue generated from research models services is recognized over time and is typically based on a right-to-invoice measure of progress (output method) as invoiced amounts correspond directly to the value of the Company’s performance to date. | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | April 1, 2023 | | March 26, 2022 |
| | | | | (in thousands) |
Timing of Revenue Recognition: | | | | | | | |
RMS | | | | | | | |
Services and products transferred over time | | | | | $ | 93,639 | | | $ | 69,924 | |
Services and products transferred at a point in time | | | | | 106,127 | | | 106,618 | |
Total RMS revenue | | | | | 199,766 | | | 176,542 | |
DSA | | | | | | | |
Services and products transferred over time | | | | | 661,836 | | | 542,336 | |
Services and products transferred at a point in time | | | | | 517 | | | 1,923 | |
Total DSA revenue | | | | | 662,353 | | | 544,259 | |
Manufacturing | | | | | | | |
Services and products transferred over time | | | | | 86,086 | | | 95,009 | |
Services and products transferred at a point in time | | | | | 81,168 | | | 98,119 | |
Total Manufacturing revenue | | | | | 167,254 | | | 193,128 | |
Total revenue | | | | | $ | 1,029,373 | | | $ | 913,929 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DSA
The DSA business provides a full suite of integrated drug discovery services directed at the identification, screening and selection of a lead compound for drug development and offers a full range of safety assessment services including bioanalysis, drug metabolism, pharmacokinetics, toxicology and pathology. DSA services revenue is generally recognized over time using the cost-to-cost or right to invoice measures of progress, primarily representing fixed fee service contracts and per unit service contracts, respectively.
Manufacturing
The Manufacturing business includes Microbial Solutions, which provides invitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO); and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens. Species identification service revenue is generally recognized at a point in time as identifications are completed by the Company. Biologics service revenue is generally recognized over time using the cost-to-cost measure of progress. Microbial Solutions and Avian product sales are generally recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the contractual shipping terms of a contract.
Transaction Price Allocated to Future Performance Obligations
The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 26, 2022. Excluded from the disclosure is the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed and (iii) service revenue recognized in accordance with ASC 842, “Leases” (see additional disclosure for Other Performance Obligations).
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of March 26, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue Expected to be Recognized in Future Periods |
| Less than 1 Year | | 1 to 3 Years | | 4 to 5 Years | | Beyond 5 Years | | Total |
| (in thousands) |
DSA | $ | 404,549 | | | $ | 414,174 | | | $ | 36,670 | | | $ | 1,752 | | | $ | 857,145 | |
Manufacturing | 1,875 | | | — | | | — | | | — | | | 1,875 | |
Total | $ | 406,424 | | | $ | 414,174 | | | $ | 36,670 | | | $ | 1,752 | | | $ | 859,020 | |
Contract Balances from Contracts with Customers
The timing of revenue recognition, billings and cash collections results in billed receivables (client receivables), contract assets (unbilled revenue), and contract liabilities (current and long-term deferred revenue and customer contract deposits) on the unaudited condensed consolidated balance sheets. The Company’s payment terms are generally 30 days in the United States and consistent with prevailing practice in international markets. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a customer is conditioned other than the passage of time. Client receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.
The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
Balances from contracts with customers: | | | |
Client receivables | $ | 526,736 | | | $ | 489,452 | |
Contract assets (unbilled revenue) | 177,261 | | | 160,609 | |
Contract liabilities (current and long-term deferred revenue) | 251,182 | | | 240,281 | |
Contract liabilities (customer contract deposits) | 63,985 | | | 59,512 | |
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| (in thousands) |
Assets from contracts with customers | | | |
Client receivables | $ | 587,706 | | | $ | 559,410 | |
Unbilled revenue | 217,297 | | | 204,258 | |
Total | 805,003 | | | 763,668 | |
Less: Allowance for credit losses | (16,694) | | | (11,278) | |
Trade receivables and contract assets, net | $ | 788,309 | | | $ | 752,390 | |
| | | |
Liabilities from contracts with customers | | | |
Current deferred revenue | 262,226 | | | 264,259 | |
Long-term deferred revenue (included in Other long-term liabilities) | 29,286 | | | 25,795 | |
Customer contract deposits (included in Other current-liabilities) | 93,362 | | | 91,640 | |
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
advanced client billings are excluded from deferredApproximately 70% of unbilled revenue with the advanced billings also being excluded from client receivables. The Company excluded approximately $44 million and $36 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of March 26,December 31, 2022, and December 25, 2021, respectively. Advanced client payments of approximately $64which was $204 million, and $60 million have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated balance sheets as of March 26, 2022 and December 25, 2021, respectively.
Other changes in the contract asset and the contract liability balanceswas billed during the three months ended March 26, 2022 and March 27, 2021 were as follows:
(i) Changes due to acquisitions and divestitures:
See Note 2. “Acquisitions and Divestitures” for the Company’s recent acquisitions.
(ii) Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification:
During the three months ended March 26, 2022 and March 27, 2021, immaterial cumulative catch-up adjustments to revenue were recorded.
(iii) A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be recorded as a client receivable):
April 1, 2023. Approximately 60% of unbilled revenue as of December 25, 2021, which was $161 million, was billed during the three months ended March 26, 2022.
Approximately 60%65% of unbilled revenuecontract liabilities as of December 26, 2020,31, 2022, which was $135$290 million, was billedwere recognized as revenue during the three months ended March 27, 2021.
(iv) A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability):
April 1, 2023. Approximately 65% of contract liabilities as of December 25, 2021, which was $240 million, were recognized as revenue during the three months ended March 26, 2022. Approximately 60%
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $45 million and $54 million of contract liabilitiesunpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of April 1, 2023 and December 26, 2020, which was $22731, 2022, respectively. Net provisions (recoveries) of $3.2 million and $(0.6) million were recognized as revenue duringrecorded to the allowance for credit losses for the three months ended April 1, 2023 and March 27, 2021.26, 2022, respectively.
Transaction Price Allocated to Future Performance Obligations
The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of April 1, 2023. Excluded from the disclosure is the value of unsatisfied performance obligations for contracts with an original expected length of one year or less, contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed and service revenue recognized in accordance with ASC 842, “Leases”.The aggregate amount of transaction price allocated to the remaining performance obligations for all open customer contracts as of April 1, 2023 was $1,113.5 million. The Company will recognize revenues for these performance obligations as they are satisfied, approximately 50% of which is expected to occur within the next twelve months and the remainder recognized thereafter during the remaining contract term.
Other Performance Obligations
As part of the Company’s service offerings, primarily in the Manufacturing segment, the Company has identified performance obligations related to leasing Company owned assets. In certain arrangements, customers obtain substantially all of the economic benefits of the identified assets, which may include manufacturing suites and related equipment, and have the right to direct the assets’ use over the term of the contract. The associated revenue is recognized on a straight-line basis over the term of the lease, which is generally less than one year. For the three months ended March 26, 2022, the Company recognized lease revenue of $7.9 million, which is recorded within service revenue, which is transferred over time, within the unaudited condensed consolidated statements of income. Due to the nature of these arrangements and timing of the contractual lease term, the remaining revenue to be recognized related to these lease performance obligations is not material to the unaudited condensed consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | |
| | April 1, 2023 | | March 26, 2022 | | |
| | (in thousands) | Affected Line Item in the Unaudited Condensed Consolidated Statements of Income |
Lease revenue | | $ | 24,090 | | | $ | 7,856 | | | Service revenue |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SEGMENT AND GEOGRAPHIC INFORMATION
The following table presents revenue and other financial information by reportable segment:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 26, 2022 | | March 27, 2021 |
| | | | (in thousands) |
RMS | | | | | | | |
Revenue | | | | | $ | 176,542 | | | $ | 176,910 | |
Operating income | | | | | 47,882 | | | 44,935 | |
Depreciation and amortization | | | | | 9,469 | | | 9,679 | |
Capital expenditures | | | | | 8,646 | | | 2,983 | |
DSA | | | | | | | |
Revenue | | | | | $ | 544,259 | | | $ | 501,178 | |
Operating income | | | | | 104,986 | | | 90,949 | |
Depreciation and amortization | | | | | 46,789 | | | 44,608 | |
Capital expenditures | | | | | 48,930 | | | 17,040 | |
Manufacturing | | | | | | | |
Revenue | | | | | $ | 193,128 | | | $ | 146,478 | |
Operating income | | | | | 46,368 | | | 49,437 | |
Depreciation and amortization | | | | | 18,482 | | | 6,569 | |
Capital expenditures | | | | | 22,828 | | | 7,110 | |
The following tables present reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Income | | Depreciation and Amortization | | Capital Expenditures |
| March 26, 2022 | | March 27, 2021 | | March 26, 2022 | | March 27, 2021 | | March 26, 2022 | | March 27, 2021 |
| (in thousands) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Three Months Ended: | | | | | | | | | | | |
Total reportable segments | $ | 199,236 | | | $ | 185,321 | | | $ | 74,740 | | | $ | 60,856 | | | $ | 80,404 | | | $ | 27,133 | |
Unallocated corporate | (50,458) | | | (61,618) | | | 559 | | | 652 | | | 60 | | | 897 | |
Total consolidated | $ | 148,778 | | | $ | 123,703 | | | $ | 75,299 | | | $ | 61,508 | | | $ | 80,464 | | | $ | 28,030 | |
Revenue for each significant product or service offering is as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 26, 2022 | | March 27, 2021 |
| | | | | (in thousands) |
RMS | | | | | $ | 176,542 | | | $ | 176,910 | |
DSA | | | | | 544,259 | | | 501,178 | |
Manufacturing | | | | | 193,128 | | | 146,478 | |
Total revenue | | | | | $ | 913,929 | | | $ | 824,566 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of unallocated corporate expense consists of the following:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 26, 2022 | | March 27, 2021 |
| | | | | (in thousands) |
Stock-based compensation | | | | | $ | 8,503 | | | $ | 7,642 | |
Compensation, benefits, and other employee-related expenses | | | | | 28,636 | | | 27,362 | |
External consulting and other service expenses | | | | | 4,319 | | | 7,356 | |
Information technology | | | | | 2,474 | | | 4,095 | |
Depreciation | | | | | 559 | | | 652 | |
Acquisition and integration | | | | | 5,826 | | | 10,560 | |
Other general unallocated corporate | | | | | 141 | | | 3,951 | |
Total unallocated corporate expense | | | | | $ | 50,458 | | | $ | 61,618 | |
Other general unallocated corporate expense consists of costs associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations. | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | April 1, 2023 | | March 26, 2022 |
| | | | | (in thousands) |
RMS | | | | | | | |
Revenue | | | | | $ | 199,766 | | | $ | 176,542 | |
Operating income | | | | | 40,409 | | | 47,882 | |
Depreciation and amortization | | | | | 13,489 | | | 9,469 | |
Capital expenditures | | | | | 19,084 | | | 8,646 | |
DSA | | | | | | | |
Revenue | | | | | $ | 662,353 | | | $ | 544,259 | |
Operating income | | | | | 171,431 | | | 104,986 | |
Depreciation and amortization | | | | | 42,450 | | | 46,789 | |
Capital expenditures | | | | | 65,184 | | | 48,930 | |
Manufacturing | | | | | | | |
Revenue | | | | | $ | 167,254 | | | $ | 193,128 | |
Operating income | | | | | 2,106 | | | 46,368 | |
Depreciation and amortization | | | | | 20,084 | | | 18,482 | |
Capital expenditures | | | | | 21,738 | | | 22,828 | |
Unallocated Corporate | | | | | | | |
Operating income (1) | | | | | $ | (46,054) | | | $ | (50,458) | |
Depreciation and amortization | | | | | 1,046 | | | 559 | |
Capital expenditures | | | | | 869 | | | 60 | |
Consolidated | | | | | | | |
Revenue | | | | | $ | 1,029,373 | | | $ | 913,929 | |
Operating income | | | | | 167,892 | | | 148,778 | |
Depreciation and amortization | | | | | 77,069 | | | 75,299 | |
Capital expenditures | | | | | 106,875 | | | 80,464 | |
| | | | | | | |
(1) Operating income for unallocated corporate expense consists of costs associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations. |
Revenue by geographic area is as follows:
| | | U.S. | | Europe | | Canada | | Asia Pacific | | Other | | Consolidated | | U.S. | | Europe | | Canada | | Asia Pacific | | Other | | Consolidated |
| | (in thousands) | | (in thousands) |
| Three Months Ended: | Three Months Ended: | | Three Months Ended: | |
April 1, 2023 | | April 1, 2023 | $ | 605,441 | | | $ | 267,703 | | | $ | 110,606 | | | $ | 42,813 | | | $ | 2,810 | | | $ | 1,029,373 | |
March 26, 2022 | March 26, 2022 | $ | 526,549 | | | $ | 251,087 | | | $ | 85,246 | | | $ | 48,946 | | | $ | 2,101 | | | $ | 913,929 | | March 26, 2022 | 526,549 | | | 251,087 | | | 85,246 | | | 48,946 | | | 2,101 | | | 913,929 | |
March 27, 2021 | 448,482 | | | 237,535 | | | 77,107 | | | 59,446 | | | 1,996 | | | 824,566 | | |
Included in the Other category above are operations located in Brazil and Israel. Revenue represents sales originating in entities physically located in the identified geographic area.
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables and contract assets, net is as follows:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
Client receivables | $ | 526,736 | | | $ | 489,452 | |
Unbilled revenue | 177,261 | | | 160,609 | |
Total | 703,997 | | | 650,061 | |
Less: Allowance for credit losses | (6,154) | | | (7,180) | |
Trade receivables and contract assets, net | $ | 697,843 | | | $ | 642,881 | |
The composition of inventories is as follows:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
Raw materials and supplies | $ | 34,763 | | | $ | 33,118 | |
Work in process | 35,651 | | | 40,268 | |
Finished products | 150,761 | | | 125,760 | |
Inventories | $ | 221,175 | | | $ | 199,146 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVENTORY
Inventories
The composition of other current assetsinventories is as follows:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
Prepaid income tax | $ | 71,272 | | | $ | 84,725 | |
Short-term investments | 1,065 | | | 1,063 | |
Restricted cash | 413 | | | 4,023 | |
Other receivables | 8,953 | | | 7,500 | |
Other current assets | $ | 81,703 | | | $ | 97,311 | |
The composition of other assets is as follows:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
Venture capital investments | $ | 137,689 | | | $ | 149,640 | |
Strategic equity investments | 60,576 | | | 51,712 | |
Life insurance policies | 47,262 | | | 51,048 | |
Other long-term income tax assets | 18,195 | | | 18,690 | |
Restricted cash | 1,114 | | | 1,077 | |
Long-term pension assets | 39,626 | | | 39,582 | |
Other | 52,190 | | | 41,140 | |
Other assets | $ | 356,652 | | | $ | 352,889 | |
The composition of other current liabilities is as follows:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
Current portion of operating lease right-of-use liabilities | $ | 37,758 | | | $ | 33,267 | |
Accrued income taxes | 29,838 | | | 26,161 | |
Customer contract deposits | 63,985 | | | 59,512 | |
Other | 12,952 | | | 18,701 | |
Other current liabilities | $ | 144,533 | | | $ | 137,641 | |
The composition of other long-term liabilities is as follows:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in thousands) |
U.S. Transition Tax | $ | 43,057 | | | $ | 43,057 | |
Long-term pension liability, accrued executive supplemental life insurance retirement plan and deferred compensation plans | 107,000 | | | 104,944 | |
Long-term deferred revenue | 22,922 | | | 20,578 | |
Other | 66,036 | | | 74,280 | |
Other long-term liabilities | $ | 239,015 | | | $ | 242,859 | |
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| (in thousands) |
Raw materials and supplies | $ | 42,770 | | | $ | 38,892 | |
Work in process | 34,830 | | | 48,367 | |
Finished products | 184,984 | | | 168,550 | |
Inventories | $ | 262,584 | | | $ | 255,809 | |
6. VENTURE CAPITAL AND STRATEGIC EQUITY INVESTMENTS
Venture capital investments were $137.7 million and $149.6 million as of March 26, 2022 and December 25, 2021, respectively. The Company’s total commitment to the venture capital funds as of March 26, 2022 was $173.9 million, of which the Company funded $116.6 million through that date. The Company received distributions totaling $1.3 million and $9.3 million for the three months ended March 26, 2022 and March 27, 2021, respectively.are summarized below:
The Company recognized net losses on venture capital investments of $13.4 million for the three months ended March 26, 2022, driven by the decrease in the fair value of publicly-held investments offset by increases from private investments, and net losses of $16.4 million for the three months ended March 27, 2021, driven by both publicly-held and private investments. | | | | | | | | | | | |
| April 1, 2023 | | March 26, 2022 |
| (in thousands) |
Beginning balance | $ | 129,012 | | | $ | 149,640 | |
Capital contributions | 3,214 | | | 3,265 | |
Distributions | (7,217) | | | (1,347) | |
Loss | (6,848) | | | (13,403) | |
Foreign currency translation | 260 | | | (463) | |
Ending balance | $ | 118,421 | | | $ | 137,692 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also invests, with minority positions, directly in equity of predominantly privately-heldprivately held companies. Strategic equity investments were $60.6 million and $51.7 million as of March 26, 2022 and December 25, 2021, respectively. The Company purchased $10 million of an interest in a strategic equity investment for the three months ended March 26, 2022 and recognized insignificant gains and losses for the three months ended March 26, 2022 and March 27, 2021. Additionally, the Company has a $25 million commitment to purchase an additional interest in an existing strategic equity investment.are summarized below:
In April 2022, the Company acquired a 49% equity interest in a supplier supporting the DSA reportable segment (the Investee) for approximately $90 million up front and an additional future contingent payment of up to $5 million based upon the Investee’s future performance. Due to the limited time between the acquisition date and the filing of this Quarterly Report on Form 10-Q, it is not practicable for the Company to disclose the preliminary allocation of purchase price between the fair value of the investment and the proportional interest in the Investee’s underlying net assets. | | | | | | | | | | | |
| April 1, 2023 | | March 26, 2022 |
| (in thousands) |
Beginning balance | $ | 182,590 | | | $ | 51,712 | |
Purchase of investments | 9,266 | | | 10,000 | |
Distributions | (4,146) | | | — | |
Gain (loss) | 3,566 | | | (500) | |
Reduction for acquisition of entity | (12,635) | | | — | |
Foreign currency translation | (3,275) | | | (636) | |
Ending balance | $ | 175,366 | | | $ | 60,576 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE
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. Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | March 26, 2022 | | April 1, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Current assets measured at fair value: | Current assets measured at fair value: | (in thousands) | Current assets measured at fair value: | (in thousands) |
Cash equivalents | Cash equivalents | $ | — | | | $ | 2,030 | | | $ | — | | | $ | 2,030 | | Cash equivalents | $ | — | | | $ | 78 | | | $ | — | | | $ | 78 | |
Other assets: | Other assets: | | Other assets: | |
Life insurance policies | Life insurance policies | — | | | 40,045 | | | — | | | 40,045 | | Life insurance policies | — | | | 36,202 | | | — | | | 36,202 | |
Total assets measured at fair value | Total assets measured at fair value | $ | — | | | $ | 42,075 | | | $ | — | | | $ | 42,075 | | Total assets measured at fair value | $ | — | | | $ | 36,280 | | | $ | — | | | $ | 36,280 | |
| Other current liabilities measured at fair value: | | |
Accrued liabilities measured at fair value: | | Accrued liabilities measured at fair value: | |
Contingent consideration | Contingent consideration | $ | — | | | $ | — | | | $ | 13,515 | | | $ | 13,515 | | Contingent consideration | $ | — | | | $ | — | | | $ | 10,543 | | | $ | 10,543 | |
Other long-term liabilities measured at fair value: | Other long-term liabilities measured at fair value: | | Other long-term liabilities measured at fair value: | |
Contingent consideration | — | | | — | | | 16,644 | | | 16,644 | | |
Interest rate swap | | Interest rate swap | — | | | 2,925 | | | — | | | 2,925 | |
Total liabilities measured at fair value | Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 30,159 | | | $ | 30,159 | | Total liabilities measured at fair value | $ | — | | | $ | 2,925 | | | $ | 10,543 | | | $ | 13,468 | |
The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the three months ended March 26,April 1, 2023, there were no transfers between levels.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Current assets measured at fair value: | (in thousands) |
Cash equivalents | $ | — | | | $ | 78 | | | $ | — | | | $ | 78 | |
Other assets: | | | | | | | |
Life insurance policies | — | | | 34,527 | | | — | | | 34,527 | |
Total assets measured at fair value | $ | — | | | $ | 34,605 | | | $ | — | | | $ | 34,605 | |
| | | | | | | |
Accrued liabilities measured at fair value: | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 13,431 | | | $ | 13,431 | |
Other long-term liabilities measured at fair value: | | | | | | | |
Interest rate swap | — | | | 1,523 | | | — | | | 1,523 | |
Total liabilities measured at fair value | $ | — | | | $ | 1,523 | | | $ | 13,431 | | | $ | 14,954 | |
During the year ended December 31, 2022, there were no transfers between levels.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 25, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Current assets measured at fair value: | (in thousands) |
Cash equivalents | $ | — | | | $ | 893 | | | $ | — | | | $ | 893 | |
Other assets: | | | | | | | |
Life insurance policies | — | | | 42,918 | | | — | | | 42,918 | |
Total assets measured at fair value | $ | — | | | $ | 43,811 | | | $ | — | | | $ | 43,811 | |
| | | | | | | |
Other current liabilities measured at fair value: | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 11,794 | | | $ | 11,794 | |
Other long-term liabilities measured at fair value: | | | | | | | |
Contingent consideration | — | | | — | | | 25,450 | | | 25,450 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 37,244 | | | $ | 37,244 | |
During the year ended December 25, 2021, there were no transfers between levels.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to the Company’s acquisitions.
| | | Three Months Ended | | Three Months Ended |
| | March 26, 2022 | | March 27, 2021 | | April 1, 2023 | | March 26, 2022 |
| | (in thousands) | | (in thousands) |
Beginning balance | Beginning balance | $ | 37,244 | | | $ | 2,328 | | Beginning balance | $ | 13,431 | | | $ | 37,244 | |
Additions | — | | | 29,990 | | |
| Payments | Payments | (3,301) | | | — | | Payments | (2,711) | | | (3,301) | |
Total gains or losses (realized/unrealized): | Total gains or losses (realized/unrealized): | | Total gains or losses (realized/unrealized): | |
Adjustment of previously recorded contingent liability | Adjustment of previously recorded contingent liability | (3,450) | | | 917 | | Adjustment of previously recorded contingent liability | — | | | (3,450) | |
Foreign currency translation | Foreign currency translation | (334) | | | (72) | | Foreign currency translation | (177) | | | (334) | |
Ending balance | Ending balance | $ | 30,159 | | | $ | 33,163 | | Ending balance | $ | 10,543 | | | $ | 30,159 | |
The Company estimates the fair value of contingent consideration obligations through valuation models, such as probability-weighted and option pricing models, that incorporate probability adjusted assumptions and simulations related to the achievement of the milestones and the likelihood of making related payments. The unobservable inputs used in the fair value measurements include the probabilities of successful achievement of certain financial targets, forecasted results or targets, volatility, and discount rates. The remaining maximum potential payments are approximately $73$54 million, of which the value
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accrued as of March 26, 2022April 1, 2023 is approximately $30$11 million. The weighted average probability of achieving the maximum target is approximately 42%20%. The average volatility and weighted average cost of capital are approximately 47%40% and 16%, respectively. Increases or decreases in these assumptions may result in a higher or lower fair value measurement, respectively.
Cash Flow Hedge
The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In November 2022, the Company entered into an interest rate swap with a notional amount of $500 million to manage interest rate fluctuation related to floating rate borrowings under the Credit Facility, at a fixed rate of 4.700%.
In March 2023 and in conjunction with an amendment of the Credit Agreement (Second Amendment), the Company modified the variable rate on its interest rate swap from 1-month LIBOR to 1-month adjusted term SOFR. Effective with the modification, the Company will pay a fixed rate of 4.65% on its swap maturing November 2, 2024. The Company elected to apply the optional expedient in ASC 848, Reference Rate Reform, in connection with modifying its interest rate swap from LIBOR to SOFR that enabled it to consider the modification a continuation of the existing contract. As a result, the transition did not have an impact on the Company’s hedge accounting or a material impact to the Company’s financial statements.
Debt Instruments
The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2 within the fair value hierarchy.
The book value of the Company’s Senior Notes are fixed rate obligations carried at amortized cost. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy. The book value and fair value of the Company’s Senior Notes is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | April 1, 2023 | | December 31, 2022 |
| | March 26, 2022 | | December 25, 2021 | | Book Value | | Fair Value | | Book Value | | Fair Value |
| | Book Value | | Fair Value | | Book Value | | Fair Value | | (in thousands) |
4.25% Senior Notes due 2028 | 4.25% Senior Notes due 2028 | $ | 500,000 | | | $ | 483,100 | | | $ | 500,000 | | | $ | 521,250 | | 4.25% Senior Notes due 2028 | $ | 500,000 | | | $ | 466,650 | | | $ | 500,000 | | | $ | 460,450 | |
3.75% Senior Notes due 2029 | 3.75% Senior Notes due 2029 | 500,000 | | | 466,250 | | | 500,000 | | | 506,700 | | 3.75% Senior Notes due 2029 | 500,000 | | | 443,750 | | | 500,000 | | | 442,200 | |
4.0% Senior Notes due 2031 | 500,000 | | | 466,850 | | | 500,000 | | | 507,500 | | |
4.00% Senior Notes due 2031 | | 4.00% Senior Notes due 2031 | 500,000 | | | 436,250 | | | 500,000 | | | 432,500 | |
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Adjustments to Goodwill | | |
| December 25, 2021 | | Acquisition Related | | Foreign Exchange | | | | March 26, 2022 |
| (in thousands) |
RMS | $ | 283,524 | | | $ | — | | | $ | (150) | | | | | $ | 283,374 | |
DSA | 1,472,506 | | | — | | | (9,505) | | | | | 1,463,001 | |
Manufacturing | 955,851 | | | (592) | | | (5,640) | | | | | 949,619 | |
Goodwill | $ | 2,711,881 | | | $ | (592) | | | $ | (15,295) | | | | | $ | 2,695,994 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| RMS | | DSA (1) | | Manufacturing | | Total |
| (in thousands) |
December 31, 2022 | $ | 497,710 | | | $ | 1,433,601 | | | $ | 918,592 | | | $ | 2,849,903 | |
Acquisitions | — | | | 37,129 | | | — | | | 37,129 | |
| | | | | | | |
Foreign exchange | 131 | | | 8,016 | | | 6,448 | | | 14,595 | |
April 1, 2023 | $ | 497,841 | | | $ | 1,478,746 | | | $ | 925,040 | | | $ | 2,901,627 | |
(1) DSA includes accumulated impairment losses of $1 billion, which were recognized in fiscal years 2008 and 2010. |
The increase in goodwill during the three months ended April 1, 2023 related primarily to the acquisition of SAMDI in the DSA reportable segment.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets, Net
The following table displays intangible assets, net by major class:
| | | March 26, 2022 | | December 25, 2021 | | April 1, 2023 | | December 31, 2022 |
| | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| | (in thousands) | | (in thousands) |
Client relationships | | Client relationships | $ | 1,523,373 | | | $ | (624,820) | | | $ | 898,553 | | | $ | 1,491,926 | | | $ | (591,417) | | | $ | 900,509 | |
Technology | | Technology | 140,448 | | | (104,438) | | | 36,010 | | | 129,626 | | | (101,655) | | | 27,971 | |
Backlog | Backlog | $ | 12,513 | | | $ | (10,712) | | | $ | 1,801 | | | $ | 12,577 | | | $ | (9,517) | | | $ | 3,060 | | Backlog | 15,320 | | | (13,474) | | | 1,846 | | | 15,236 | | | (12,512) | | | 2,724 | |
Technology | 134,544 | | | (98,281) | | | 36,263 | | | 135,764 | | | (95,454) | | | 40,310 | | |
Trademarks and trade names | Trademarks and trade names | 13,018 | | | (3,893) | | | 9,125 | | | 13,086 | | | (3,448) | | | 9,638 | | Trademarks and trade names | 12,707 | | | (4,704) | | | 8,003 | | | 12,617 | | | (4,410) | | | 8,207 | |
Other | Other | 35,319 | | | (11,801) | | | 23,518 | | | 35,231 | | | (8,445) | | | 26,786 | | Other | 38,007 | | | (24,300) | | | 13,707 | | | 37,985 | | | (22,121) | | | 15,864 | |
Other intangible assets | 195,394 | | | (124,687) | | | 70,707 | | | 196,658 | | | (116,864) | | | 79,794 | | |
Client relationships | 1,471,872 | | | (523,042) | | | 948,830 | | | 1,475,757 | | | (494,359) | | | 981,398 | | |
Intangible assets | Intangible assets | $ | 1,667,266 | | | $ | (647,729) | | | $ | 1,019,537 | | | $ | 1,672,415 | | | $ | (611,223) | | | $ | 1,061,192 | | Intangible assets | $ | 1,729,855 | | | $ | (771,736) | | | $ | 958,119 | | | $ | 1,687,390 | | | $ | (732,115) | | | $ | 955,275 | |
The decreaseincrease in intangible assets, net during the three months ended March 26, 2022April 1, 2023 related primarily to the acquisition of SAMDI, offset by normal amortization over the useful lives.
9. DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt, net and finance leases consists of the following:
| | | March 26, 2022 | | December 25, 2021 | | | | | | | | | | |
| | (in thousands) | | April 1, 2023 | | December 31, 2022 |
| | | (in thousands) |
Revolving facility | Revolving facility | $ | 1,174,169 | | | $ | 1,161,431 | | Revolving facility | $ | 1,233,453 | | | $ | 1,197,586 | |
4.25% Senior Notes due 2028 | 4.25% Senior Notes due 2028 | 500,000 | | | 500,000 | | 4.25% Senior Notes due 2028 | 500,000 | | | 500,000 | |
3.75% Senior Notes due 2029 | 3.75% Senior Notes due 2029 | 500,000 | | | 500,000 | | 3.75% Senior Notes due 2029 | 500,000 | | | 500,000 | |
4.00% Senior Notes due 2031 | 4.00% Senior Notes due 2031 | 500,000 | | | 500,000 | | 4.00% Senior Notes due 2031 | 500,000 | | | 500,000 | |
Other debt | Other debt | 366 | | | 368 | | Other debt | 4,245 | | | 1,594 | |
Finance leases | Finance leases | 25,955 | | | 27,223 | | Finance leases | 30,521 | | | 30,646 | |
Total debt and finance leases | Total debt and finance leases | 2,700,490 | | | 2,689,022 | | Total debt and finance leases | 2,768,219 | | | 2,729,826 | |
Less: | Less: | | Less: | |
Current portion of long-term debt | Current portion of long-term debt | 99 | | | 101 | | Current portion of long-term debt | 3,997 | | | 1,347 | |
Current portion of finance leases | Current portion of finance leases | 2,543 | | | 2,694 | | Current portion of finance leases | 2,822 | | | 2,330 | |
Current portion of long-term debt and finance leases | Current portion of long-term debt and finance leases | 2,642 | | | 2,795 | | Current portion of long-term debt and finance leases | 6,819 | | | 3,677 | |
Long-term debt and finance leases | Long-term debt and finance leases | 2,697,848 | | | 2,686,227 | | Long-term debt and finance leases | 2,761,400 | | | 2,726,149 | |
Debt discount and debt issuance costs | Debt discount and debt issuance costs | (21,683) | | | (22,663) | | Debt discount and debt issuance costs | (17,626) | | | (18,618) | |
Long-term debt, net and finance leases | Long-term debt, net and finance leases | $ | 2,676,165 | | | $ | 2,663,564 | | Long-term debt, net and finance leases | $ | 2,743,774 | | | $ | 2,707,531 | |
As of March 26, 2022April 1, 2023 and December 25, 2021,31, 2022, the weighted average interest rate on the Company’s debt was 2.87%4.78% and 2.78%4.58%, respectively. During the three months ended March 27, 2021, the Company prepaid $500 million of Senior Notes due in 2026 along with $21 million of related debt extinguishment costs and $13 million of accrued interest using proceeds from additional senior notes issued on the same day. The payment of the 2026 Senior Notes was accounted for as a debt extinguishment. Approximately $21 million of debt extinguishment costs and $5 million of deferred financing costs write-offs were recorded in Interest expense for the three months ended March 27, 2021.
Cross currency loans
During the three months ended March 26, 2022, and March 27, 2021, the Company had multiple U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility, which were approximately $400 million each. This resulted inTo limit this foreign currency losses recognized in Other (expense) income, net of $11.1 million and $13.4 million duringexposure, the three months ended March 26, 2022 and March 27, 2021, respectively, related to the remeasurement of the underlying debt. As of March 26, 2022, theCompany entered into foreign exchange forward contracts, which are not designated as hedging instruments. The Company did not have any outstanding borrowings in a currency different than its respective functional currency.
The Company periodically enters into foreign exchange forward contracts to limit its foreign currency exposure related to U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Company’s Credit Facility. TheseFacility during the three months ended April 1, 2023.
The gains and losses incurred on these transactions were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended | | |
| | | | | | | | March 26, 2022 | | Affected Line Item in the Unaudited Condensed Consolidated Statements of Income |
| | | | | | | | (in thousands) | | |
Loss on foreign debt remeasurement | | | | | | | | $ | (11,101) | | | Other expense, net |
Gain on foreign exchange forward contract | | | | | | | | 11,784 | | | Interest expense |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contracts are not designated as hedging instruments. This resulted in gains recognized within Interest expense of $11.8 million and $14.0 million during the three months ended March 26, 2022 and March 27, 2021, respectively, related to these forward contracts. The Company had no open forward contracts related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency at March 26, 2022 or December 25, 2021.
Letters of Credit
As of March 26, 2022April 1, 2023 and December 25, 2021,31, 2022, the Company had $17.7$21.6 million and $18.6 million, respectively, in outstanding letters of credit.
10. EQUITY AND NONCONTROLLING INTERESTS
Earnings Per Share
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 26, 2022 | | March 27, 2021 |
| | | | | (in thousands) |
Numerator: | | | | | | | |
Net income | | | | | $ | 95,226 | | | $ | 63,935 | |
Less: Net income attributable to noncontrolling interests | | | | | 2,204 | | | 2,405 | |
Net income attributable to common shareholders | | | | | $ | 93,022 | | | $ | 61,530 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares outstanding - Basic | | | | | 50,640 | | | 49,980 | |
Effect of dilutive securities: | | | | | | | |
Stock options, restricted stock units and performance share units | | | | | 685 | | | 1,095 | |
Weighted-average shares outstanding - Diluted | | | | | 51,325 | | | 51,075 | |
Options to purchase 0.2 million and less than 0.1 million shares for the three months ended March 26, 2022 and March 27, 2021, respectively, as well as a non-significant number of restricted stock units (RSUs) and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted-average shares outstanding for the three months ended March 26, 2022 and March 27, 2021 excluded the impact of 0.4 million and 0.6 million shares, respectively, of non-vested RSUs and PSUs. | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | April 1, 2023 | | March 26, 2022 |
| | | | | (in thousands) |
Numerator: | | | | | | | |
Net income | | | | | $ | 103,954 | | | $ | 95,226 | |
Less: Net income attributable to noncontrolling interests | | | | | 823 | | | 2,204 | |
Net income attributable to common shareholders | | | | | $ | 103,131 | | | $ | 93,022 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares outstanding - Basic | | | | | 51,097 | | | 50,640 | |
Effect of dilutive securities: | | | | | | | |
Stock options, restricted stock units and performance share units | | | | | 331 | | | 685 | |
Weighted-average shares outstanding - Diluted | | | | | 51,428 | | | 51,325 | |
| | | | | | | |
Anti-dilutive common stock equivalents (1) | | | | | 405 | | | 152 | |
| | | | | | | |
(1) These common stock equivalents were outstanding for the periods presented, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect. |
Treasury Shares
During the three months ended March 26, 2022 and March 27, 2021, the Company did not repurchase any shares under itsThe Company’s Board of Directors has authorized a $1.3 billion stock repurchase program. As of March 26, 2022,April 1, 2023, the Company had $129.1 million remaining on the authorized stock repurchase program.
The Company’s stock-based compensation plans permit the netting of common stock upon vesting of RSUs and PSUs in order to satisfy individual statutory tax withholding requirements. DuringThe Company acquired shares of 0.1 million in the three months ended April 1, 2023 and three months ended March 26, 2022, and March 27, 2021, the Company acquired 0.1 million shares for $34.0$19.0 million and 0.1 million shares for $36.0$34.0 million, respectively, from such netting.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment and Other | | Pension and Other Post-Retirement Benefit Plans | | Total |
| (in thousands) |
December 25, 2021 | $ | (98,173) | | | $ | (66,567) | | | $ | (164,740) | |
Other comprehensive loss before reclassifications | (12,957) | | | — | | | (12,957) | |
Amounts reclassified from accumulated other comprehensive income | — | | | 746 | | | 746 | |
Net current period other comprehensive (loss) income | (12,957) | | | 746 | | | (12,211) | |
Income tax (benefit) expense | (2,200) | | | 182 | | | (2,018) | |
March 26, 2022 | $ | (108,930) | | | $ | (66,003) | | | $ | (174,933) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment and Other | | Pension and Other Post-Retirement Benefit Plans | | Net Unrealized Loss on Cash Flow Hedge | | Total |
| (in thousands) |
December 31, 2022 | $ | (217,785) | | | $ | (43,114) | | | $ | (1,158) | | | $ | (262,057) | |
Other comprehensive loss before reclassifications | 23,127 | | | 170 | | | (1,402) | | | 21,895 | |
| | | | | | | |
Net current period other comprehensive income (loss) | 23,127 | | | 170 | | | (1,402) | | | 21,895 | |
Income tax (benefit) expense | (834) | | | 133 | | | (337) | | | (1,038) | |
April 1, 2023 | $ | (193,824) | | | $ | (43,077) | | | $ | (2,223) | | | $ | (239,124) | |
Nonredeemable Noncontrolling Interest
The Company has an investment in an entity whose financial results are consolidated in the Company’s unaudited condensed consolidated financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest within Equity in the accompanying unaudited condensed consolidated balance sheets. The activity within the nonredeemable noncontrolling interest was not significant during the three months ended April 1, 2023 and March 26, 2022 and March 27, 2021.2022.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Redeemable Noncontrolling Interests
The Company hasholds a 92% equityownership interest in Vital River, with an 8% redeemable noncontrolling interest.a commercial provider of research models and related services in China as of December 31, 2022. The Companycompany has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 8% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($24.3 million24.4 million) as of March 26, 2022)April 1, 2023 and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 8% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The amount that the Company could be required to pay to purchase the remaining 8% equity interest is not limited. During the fourth quarter of fiscal 2022, the Company exercised its option to acquire the remaining 8%; however, has not yet closed the purchase of the remaining equity interest.
TheIn 2019, the Company hasacquired an 80% equity interest in a subsidiary withthat is fully consolidated under the voting interest model, which includes a 20% redeemable noncontrolling interest. In AugustJune 2022, the Company will havepurchased an additional 10% interest in the subsidiary for $15.0 million, resulting in a remaining noncontrolling interest of 10%. Beginning in 2024, the Company has the right to purchase, and the noncontrolling interest holders have the right to sell (Put/call option), the remaining 20%10% equity interest at its appraised value ($31.517.0 million as of March 26, 2022)April 1, 2023). The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the appraised value and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest or a predetermined floor value. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 20% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The amount that the Company could be required to pay to purchase the remaining 20%10% equity interest is not limited.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:
| | | Three Months Ended | | Three Months Ended |
| | March 26, 2022 | | March 27, 2021 | | April 1, 2023 | | March 26, 2022 |
| | (in thousands) | | (in thousands) |
Beginning balance | Beginning balance | $ | 53,010 | | | $ | 25,499 | | Beginning balance | $ | 42,427 | | | $ | 53,010 | |
Adjustment of noncontrolling interest to redemption value | 1,161 | | | 835 | | |
Net income attributable to noncontrolling interests | 1,644 | | | 1,716 | | |
Adjustments to redemption value | | Adjustments to redemption value | — | | | 1,161 | |
| Net income (loss) | | Net income (loss) | 322 | | | 1,644 | |
| Foreign currency translation | Foreign currency translation | 4 | | | (15) | | Foreign currency translation | 186 | | | 4 | |
Ending balance | Ending balance | $ | 55,819 | | | $ | 28,035 | | Ending balance | $ | 42,935 | | | $ | 55,819 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES
The Company’s effective tax rates for the three months ended April 1, 2023 and March 26, 2022 were 20.7% and March 27, 2021 were 14.1% and 3.6%, respectively. The increase in the three month effective tax raterates from the prior year period was primarily attributable to a decreased tax benefit from stock-based compensation deductions in thethree months ended March 26, 2022.April 1, 2023.
For the three months ended March 26, 2022,April 1, 2023, the Company’s unrecognized tax benefits increased by $1.6$1.3 million to $34.2$24.5 million, primarily due to increases in research &and development tax credit reserves. For the three months ended March 26, 2022,April 1, 2023, the amount of unrecognized income tax benefits that would impact the effective tax rate increaseddecreased by $1.1$0.9 million to $31.1$21.2 million for the same reasons discussed above. The accrued interest on unrecognized tax benefits was $1.7$1.6 million as of March 26, 2022.April 1, 2023. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $11.3$4 million over the next twelve-month period, primarily due to audit settlements and expiring statutes of limitations.
The Company’s prepaid and accrued tax positions are as follows:
| | | | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 | Affected Line Item in the Unaudited Condensed Consolidated Balance Sheets |
| (in thousands) | |
Prepaid income tax | $ | 71,382 | | | $ | 88,550 | | Other current assets |
Accrued income taxes | 38,420 | | | 39,854 | | Other current liabilities |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the U.S., the U.K., China, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2018.2019.
The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., Canada, France, the Netherlands, and India. The Company does not anticipate resolution of these audits will have a material impact on its consolidated financial statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. RESTRUCTURING AND ASSET IMPAIRMENTS
In recent fiscal years, the Company has undertaken productivity improvement initiatives within all reportable segments at various locations across the U.S., Canada, Europe, and China. This includes workforce right-sizing and scalability initiatives, resulting in severance and transition costs; and cost related to the consolidation of facilities, resulting in asset impairment and accelerated depreciation charges. The Company does not have any significant remaining lease obligations for facilities associated with restructuring activities. The following table presents a summary of restructuring costs related to these initiatives within the unaudited condensed consolidated statements of income:
| | | | | | | | | | | |
| Three Months Ended |
| March 26, 2022 | | March 27, 2021 |
| (in Thousands) |
Restructuring Costs: | | | |
RMS | $ | 674 | | | $ | 7 | |
DSA | 143 | | | 559 | |
Manufacturing | 107 | | | 334 | |
Unallocated corporate | 1,087 | | | (151) | |
Total | $ | 2,011 | | | $ | 749 | |
As of March 26, 2022 and March 27, 2021, $4.2 million and $2.2 million, respectively, of severance and other personnel related costs liabilities and lease obligation liabilities were included in accrued compensation and accrued liabilities within the Company’s unaudited condensed consolidated balance sheets.
13. COMMITMENTS AND CONTINGENCIES
Litigation
Various lawsuits, claimsOn February 16, 2023, the Company was informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and proceedingsWildlife Service (USFWS), it had commenced an investigation into the Company’s conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 the Company received a grand jury subpoena requesting certain documents related to such investigation. The Company is aware of a nature considered normalparallel civil investigation being undertaken by the DOJ and USFWS. The Company is cooperating with the DOJ and the USFWS and believes that the concerns raised with respect to its businessthe Company’s conduct are without merit. The Company maintains a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates it received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, the Company has voluntarily suspended future shipments of non-human primates from Cambodia to the United States until such time that the Company and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported from Cambodia are purpose-bred. The Company continues to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS or other governmental authorities as a result of the investigations. Neither the DOJ nor USFWS has provided the Company with any specific timeline or indication as to when these investigations or discussions regarding future processes and procedures will be concluded or resolved. Because it is in the early stages, the Company cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities.
Aside from the matter above, the Company believes there are no other matters 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 wouldthat could have a material adverse effectimpact on the Company’s business, financial condition, or financial condition.results of operations.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2021.2022. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” included elsewhere within this Form 10-Q. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, leading, non-clinical contractglobal drug development partner. For over 75 years, we have been in the business of providing the research organization (CRO). Wemodels required in the research and development of new drugs, devices, and therapies. Over this time, we have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, which is able to supportthat supports our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities, including our recently acquired contract development and manufacturing organization (CDMO) business. Utilizing our broad portfolio of products and services enables our clients to create a more efficient and flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.
Our client base includes major global biopharmaceuticalpharmaceutical companies, many biotechnology companies; agricultural and industrial chemical, life science, veterinary medicine, medical device, diagnostic and consumer product companies; contract research and contract manufacturing organizations; and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing).
Our RMS reportable segment includes the Research Models, Research Model Services, and Research and GMP-Compliant CellsCell Solutions businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of our clients’ research operations (including recruitment, training, staffing, and management services). Research within our clients’ facilities as well as our own vivarium space, utilizing both our Charles River Accelerator and GMP-Compliant Cells suppliesDevelopment Lab (CRADL) and our Explora BioLabs options. Cell Solutions provides controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood.
Our DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening,is comprised of two businesses: Discovery Services and selection of a lead compound for drug development, andSafety Assessment. We provide regulated and non-regulated (GLPDSA services to support the research, development, and non-GLP)regulatory-required safety assessment services. testing of potential new drugs, including therapeutic discovery and optimization plus in vitro and in vivo studies, laboratory support services, and strategic non-clinical consulting and program management to support product development.
Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services;services and Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO); and. In December of 2022, we sold the Avian Vaccine Services (Avian), business, reported in the Manufacturing segment, which suppliessupplied specific-pathogen-free chicken eggs and chickens.
Russia-Ukraine ConflictU.S. Department of Justice Investigation into Non-Human Primate Supply Chain
On February 16, 2023, we were informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into our conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 we received a grand jury subpoena requesting certain documents related to such investigation. We are aware of a parallel civil investigation being undertaken by the DOJ and USFWS. We are cooperating with the DOJ and the USFWS and believe that the concerns raised with respect to our conduct are without merit. We maintain a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates we received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, we have voluntarily suspended future shipments of non-human primates from Cambodia until such time that we and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported to the United States from Cambodia are purpose-bred. We continue to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS or other governmental authorities as a result of the investigations. Neither the DOJ nor USFWS has provided us with any specific timeline or indication as to when these investigations or discussions regarding future processes and procedures will be concluded or resolved. Because it is in the early stages, we cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities. For our assessment of risk factors surrounding the aforementioned matter refer to Item 1A, “Risk Factors” and Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for fiscal year 2022.
Global Economic Environment
In March 2023, the global economy experienced a series of banking crises, which sparked a period of widespread investor concerns regarding the U.S. and international financial systems, particularly access to capital. We do not hold cash deposits or securities at any of the impacted banks. Our banking relationships are assessed as we believe necessary and appropriate and our access to cash and funding is secure and diversified. We believe there are no material impacts to our Company as of April 1, 2023 based on the current situation. We will continue to monitor the global banking markets as they evolve for potential impacts to our operating and financial results such as increased interest rates, commercial financing terms or costs, and liquidity concerns in the broader market or business partners.
The biopharmaceutical end market is slightly less robust than last year with clients appearing to assess the timing and level of spending. Clients are not booking work as far in advance as in previous years and we believe this is the result of their evaluation of pipeline priorities and scheduling with nearer-term focus. We are seeing a normalization of demand trends towards pre-pandemic levels, with a modest decrease in DSA backlog to $3.0 billion as of April 1, 2023 from $3.15 billion as of December 31, 2022, but continue to see strength and stability in our client’s drug development activity as they are moving their promising drug candidates forward. We will continue to monitor the market trends carefully for potential impacts to our operating and financial results and there are no material impacts to our Company as of April 1, 2023.
In February 2022, the Russian Federation launched an invasion of the country of Ukraine resulting in conflict in the region and a variety of sanctions against the Russian Federation enacted by several governments, including the U.S, United Kingdom,U.K., Canada and European Union. The conflict has had and continues to have, direct and indirect adverse effects on financial markets and global supply chain disruptions. We do not have any direct operations in either Russia or Ukraine and there were no material impacts to our financial statements for the three months ended March 26,during fiscal year 2022 as a result of the situation. We will continue to monitor the situation as it evolves for potential impacts to our operating and financial results such as increased inflationary,inflation, supply chain, or cybersecurity risks in subsequent periods. Refer to Item 1A, Risk Factors disclosed herein and in“Risk Factors” of our Annual Report on Form 10-K for fiscal 2021year 2022 for our assessment of risk factors surrounding inflationary, supply chain and cybersecurity risks.
Recent Acquisitions
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.
Fiscal Year 2023 Acquisition
On January 27, 2023, we acquired SAMDI Tech, Inc., (SAMDI), a leading provider of high-quality, label-free high-throughput screening (HTS) solutions for drug discovery research. The acquisition of SAMDI will provide clients with seamless access to the premier, label-free HTS MS platform and create a comprehensive, library of drug discovery solutions. The preliminary purchase price of SAMDI was $62.8 million, inclusive of a 20% strategic equity interest previously owned by us. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.
Fiscal Year 2022 Acquisition
On April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements our existing IS business, specifically our CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The preliminary purchase price of Explora BioLabs was approximately $295$284.5 million, net of $6.6 million in cash, subject to customary closing adjustments.cash. The acquisition was funded through proceeds from our Credit Facility. This business will be reported as part of our RMS segment.
Fiscal Year 2021 Acquisitions
On June 28, 2021, we acquired Vigene Biosciences, Inc. (Vigene), a gene therapy contract development and manufacturing organization (CDMO), providing viral vector-based gene delivery solutions. The acquisition enables clients to seamlessly conduct analytical testing, process development, and manufacturing for advanced modalities with the same scientific partner. The purchase price of Vigene was $323.9 million, net of $2.7 million in cash, and includes $34.5 million of contingent consideration (maximum contingent payments of up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our ManufacturingRMS reportable segment.
On March 30, 2021, we acquired Retrogenix Limited (Retrogenix), an early-stage CRO providing specialized bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances our scientific expertise with additional large molecule and cell therapy discovery capabilities. The purchase price of Retrogenix was $53.9 million, net of $8.5 million in cash. Included in the purchase price are additional payments up to $6.9 million, which are contingent on future performance. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.
On March 29, 2021, we acquired Cognate BioServices, Inc. (Cognate), a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the production of plasmid DNA and other inputs in the CDMO value chain. The acquisition of Cognate establishes us as a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research and discovery through cGMP production. The purchase price of Cognate was $877.9 million, net of $70.5 million in cash, subject to certain post-closing adjustments and includes $15.7 million of consideration for an approximate 2% ownership interest not acquired. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility and Senior Notes issued in fiscal 2021. This business is reported as part of our Manufacturing reportable segment.CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
On March 3, 2021, we acquired certain assets from a distributor that supports our DSA reportable segment. The purchase price was $35.4 million, which includes $19.5 million in cash paid ($5.5 million of which was paid in fiscal 2020), and $15.9 million of contingent consideration (the maximum contingent contractual payments are up to $17.5 million). The business is reported as part of our DSA reportable segment.
On December 31, 2020, we acquired Distributed Bio, Inc. (Distributed Bio), a next-generation antibody discovery company with technologies specializing in enhancing the probability of success for delivering high-quality, readily formattable antibody fragments to support antibody and cell and gene therapy candidates to biopharmaceutical clients. The acquisition of Distributed Bio expands our capabilities with an innovative, large-molecule discovery platform, and creates an integrated, end-to-end platform for therapeutic antibody and cell and gene therapy discovery and development. The purchase price of Distributed Bio was $97.0 million, net of $0.8 million in cash. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously issued by us during prior fiscal years, and $14.1 million of contingent consideration (the maximum contingent contractual payments are up to $21.0 million). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.
Recent Divestitures
We routinely evaluate strategic fit and fundamental performance of our global infrastructure and divest operations that do not meet key business criteria or where we believe capital could be better deployed in long-term growth opportunities. On October 12, 2021,December 20, 2022, we completed two separate divestitures. We soldthe sale of our RMS Japan operations to The Jackson Laboratory for a preliminary purchase price of $73.1 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments. We also sold our gene therapy CDMO site in SwedenAvian Vaccine Services (Avian) business to a private investor group for a preliminary purchase price of $59.6 million, net of $0.2$169 million in cash, subject to certain customary closing adjustments, and certain post-closing adjustments. Included in the purchase price arefuture contingent payments fair valued at $15.3 million, (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10 million between the parties. We routinely evaluate the strategic fit and fundamental performance ofan additional $30 million. This business was reported in our acquisitions integrated within our global infrastructure. As part of this assessment, we determined that the above capital could be better deployed in other long-term growth opportunities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Manufacturing reportable segment.Fiscal Quarters
Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which will occuroccurred in this fiscal year 2022.
Overview of Results of Operations and Liquidity
Revenue for the three months ended March 26, 2022April 1, 2023 increased $89.3$115.4 million, or 10.8%12.6%, to $913.9$1,029.4 million compared to $824.6$913.9 million in the corresponding period in 2021.2022. The increase in revenue was primarily due to increases in our DSA segment, as well as the recent acquisitions, principallyincreased demand and pricing within our Manufacturing segment;Safety Assessment business and recent acquisition of Explora BioLabs; partially offset by the divestiture of RMS Japanour Avian business and the negative effect of changes in foreign currency exchange rates when compared to the corresponding three month period in 2021.2022.
In the three months ended March 26, 2022,April 1, 2023, our operating income and operating income margin were $148.8$167.9 million and 16.3%, respectively, compared with $123.7$148.8 million and 15.0%16.3%, respectively, in the corresponding period of 2021.2022. The increases in operating income and operating income margin for the three months ended March 26, 2022April 1, 2023 was primarily due to the contribution of higher revenue described above compared to the corresponding period in 2021.above; partially offset by higher operating costs associated with our Manufacturing segment, principally our Biologics Solutions businesses.
Net income attributable to common shareholders increased to $93.0$103.1 million in the three months ended March 26, 2022,April 1, 2023, from $61.5$93.0 million in the corresponding period of 2021.2022. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above, andpartially offset by higher provision for income taxes compared to the absencecorresponding period of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in 2021.2022, due to decreased tax benefits from stock-based compensation deductions.
During the first three months of 2022,ended April 1, 2023, our cash flows from operations was $102.6$109.4 million compared with $170.2$102.6 million for the same period in 2021.2022. The decreaseincrease was driven by timing and amount of our working capital balances, principally variable compensation payments, and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits); partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.2022.
Results of Operations
Three Months Ended March 26, 2022April 1, 2023 Compared to the Three Months Ended March 27, 202126, 2022
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | April 1, 2023 | | March 26, 2022 | | $ change | | % change |
| | (in millions, except percentages) | | (in thousands, except percentages) |
Service revenue | Service revenue | $ | 720.5 | | | $ | 626.6 | | | $ | 93.9 | | | 15.0 | % | Service revenue | $ | 857,366 | | | $ | 720,485 | | | $ | 136,881 | | | 19.0 | % |
Product revenue | Product revenue | 193.4 | | | 198.0 | | | (4.6) | | | (2.3) | % | Product revenue | 172,007 | | | 193,444 | | | (21,437) | | | (11.1) | % |
Total revenue | $ | 913.9 | | | $ | 824.6 | | | $ | 89.3 | | | 10.8 | % | |
| | | $ | 1,029,373 | | | $ | 913,929 | | | $ | 115,444 | | | 12.6 | % |
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | Impact of FX | | April 1, 2023 | | March 26, 2022 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) | | (in thousands, except percentages) |
RMS | RMS | $ | 176.5 | | | $ | 176.9 | | | $ | (0.4) | | | (0.2) | % | | (1.2) | % | RMS | $ | 199,766 | | | $ | 176,542 | | | $ | 23,224 | | | 13.2 | % | | (2.5) | % |
DSA | DSA | 544.3 | | | 501.2 | | | 43.1 | | | 8.6 | % | | (1.6) | % | DSA | 662,353 | | | 544,259 | | | 118,094 | | | 21.7 | % | | (2.1) | % |
Manufacturing | Manufacturing | 193.1 | | | 146.5 | | | 46.6 | | | 31.8 | % | | (2.7) | % | Manufacturing | 167,254 | | | 193,128 | | | (25,874) | | | (13.4) | % | | (1.9) | % |
Total revenue | Total revenue | $ | 913.9 | | | $ | 824.6 | | | $ | 89.3 | | | 10.8 | % | | (1.7) | % | Total revenue | $ | 1,029,373 | | | $ | 913,929 | | | $ | 115,444 | | | 12.6 | % | | (2.1) | % |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
The following table presents operating income by reportable segment:
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | April 1, 2023 | | March 26, 2022 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) | | (in thousands, except percentages) | | |
RMS | RMS | $ | 47.9 | | | $ | 44.9 | | | $ | 3.0 | | | 6.6 | % | RMS | $ | 40,409 | | | $ | 47,882 | | | $ | (7,473) | | | (15.6) | % | | (2.7) | % |
DSA | DSA | 105.0 | | | 91.0 | | | 14.0 | | | 15.4 | % | DSA | 171,431 | | | 104,986 | | | 66,445 | | | 63.3 | % | | 2.7 | % |
Manufacturing | Manufacturing | 46.4 | | | 49.4 | | | (3.0) | | | (6.2) | % | Manufacturing | 2,106 | | | 46,368 | | | (44,262) | | | (95.5) | % | | (2.0) | % |
Unallocated corporate | Unallocated corporate | (50.5) | | | (61.6) | | | 11.1 | | | (18.1) | % | Unallocated corporate | (46,054) | | | (50,458) | | | 4,404 | | | (8.7) | % | | (1.1) | % |
Total operating income | Total operating income | $ | 148.8 | | | $ | 123.7 | | | $ | 25.1 | | | 20.3 | % | Total operating income | $ | 167,892 | | | $ | 148,778 | | | $ | 19,114 | | | 12.8 | % | | 0.7 | % |
Operating income % of revenue | Operating income % of revenue | 16.3 | % | | 15.0 | % | | | | 130 bps | Operating income % of revenue | 16.3 | % | | 16.3 | % | | | | 0 bps | |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | Impact of FX | | April 1, 2023 | | March 26, 2022 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) | | (in thousands, except percentages) |
Revenue | Revenue | $ | 176.5 | | | $ | 176.9 | | | $ | (0.4) | | | (0.2) | % | | (1.2) | % | Revenue | $ | 199,766 | | | $ | 176,542 | | | $ | 23,224 | | | 13.2 | % | | (2.5) | % |
Cost of revenue (excluding amortization of intangible assets) | Cost of revenue (excluding amortization of intangible assets) | 102.4 | | | 105.3 | | | (2.9) | | | (2.7) | % | | Cost of revenue (excluding amortization of intangible assets) | 126,804 | | | 102,460 | | | 24,344 | | | 23.8 | % | |
Selling, general and administrative | Selling, general and administrative | 22.4 | | | 22.6 | | | (0.2) | | | (0.9) | % | | Selling, general and administrative | 27,058 | | | 22,363 | | | 4,695 | | | 21.0 | % | |
Amortization of intangible assets | Amortization of intangible assets | 3.8 | | | 4.1 | | | (0.3) | | | (5.7) | % | | Amortization of intangible assets | 5,495 | | | 3,837 | | | 1,658 | | | 43.2 | % | |
Operating income | Operating income | $ | 47.9 | | | $ | 44.9 | | | $ | 3.0 | | | 6.6 | % | | Operating income | $ | 40,409 | | | $ | 47,882 | | | $ | (7,473) | | | (15.6) | % | | (2.7) | % |
Operating income % of revenue | Operating income % of revenue | 27.1 | % | | 25.4 | % | | | | 170 bps | | Operating income % of revenue | 20.2 | % | | 27.1 | % | | | | (690) bps | |
RMS revenue decreased $0.4increased $23.2 million compared to the corresponding period in 2021. The reduction of revenue was due primarily to higher small research model services revenue, specifically the divestitureInsourcing Solutions business, which included the acquisition of RMS Japan, which decreasedExplora BioLabs contributing $15.6 million and higher research model product revenue in North America and Europe, higher revenue in the Cell Solutions business; partially offset by $12.7 millionthe lower sales of large research models in China, principally due to timing of shipments, and the effect of changes in foreign currency exchange rates; partially offset by higher research model product revenue in North America; and higher research model services revenue, principally our Insourcing Solutions business compared to the corresponding period in 2021.rates.
RMS operating income increased $3.0decreased $7.5 million compared to the corresponding period in 2021.2022. RMS operating income as a percentage of revenue for the three months ended March 26, 2022April 1, 2023 was 27.1%20.2%, an increasea decrease of 170690 bpsfrom 25.4%27.1% for the corresponding period in 2021.2022. Operating income and operating income as a percentage of revenue increaseddecreased primarily due to the contributiontiming of higherlarge research model revenue described above as well as lowersales in China and higher amortization, of intangible assets related to our acquisitions during the three months ended March 26, 2022 comparedoperating, and staffing costs due to the same period in 2021.recent acquisition of Explora BioLabs; partially offset by foreign exchange impact discussed above.
DSA
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | Impact of FX | | April 1, 2023 | | March 26, 2022 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) | | (in thousands, except percentages) |
Revenue | Revenue | $ | 544.3 | | | $ | 501.2 | | | $ | 43.1 | | | 8.6 | % | | (1.6) | % | Revenue | $ | 662,353 | | | $ | 544,259 | | | $ | 118,094 | | | 21.7 | % | | (2.1) | % |
Cost of revenue (excluding amortization of intangible assets) | Cost of revenue (excluding amortization of intangible assets) | 373.1 | | | 340.1 | | | 33.0 | | | 9.7 | % | | Cost of revenue (excluding amortization of intangible assets) | 411,523 | | | 373,141 | | | 38,382 | | | 10.3 | % | |
Selling, general and administrative | Selling, general and administrative | 43.9 | | | 47.6 | | | (3.7) | | | (7.9) | % | | Selling, general and administrative | 61,998 | | | 43,860 | | | 18,138 | | | 41.4 | % | |
Amortization of intangible assets | Amortization of intangible assets | 22.3 | | | 22.5 | | | (0.2) | | | (1.3) | % | | Amortization of intangible assets | 17,401 | | | 22,272 | | | (4,871) | | | (21.9) | % | |
Operating income | Operating income | $ | 105.0 | | | $ | 91.0 | | | $ | 14.0 | | | 15.4 | % | | Operating income | $ | 171,431 | | | $ | 104,986 | | | $ | 66,445 | | | 63.3 | % | | 2.7 | % |
Operating income % of revenue | Operating income % of revenue | 19.3 | % | | 18.1 | % | | | | 120 bps | | Operating income % of revenue | 25.9 | % | | 19.3 | % | | | | 660 bps | |
DSA revenue increased $43.1$118.1 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businessesbusiness due principally to increased demand, principally biotechnology clients, pricing of services; and the acquisition of Retrogenix which contributed $3.1 million to Discovery Services revenue; partially offset by the effect of changes in foreign currency exchange rates.
DSA operating income increased $14.0$66.4 million during the three months ended March 26, 2022 compared to the corresponding period in 2021.2022. DSA operating income as a percentage of revenue for the three months ended March 26, 2022April 1, 2023 was 19.3%25.9%, an increase of 660 bps from 19.3% for the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
increase of 120 bps from 18.1% for the corresponding period in 2021.2022. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as lower acquisition related costs and adjustments to contingent consideration arrangements related to certain acquisitions; offset by higher staffing costs compared to the same period in 2021.above.
Manufacturing
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | Impact of FX | | April 1, 2023 | | March 26, 2022 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) | | (in thousands, except percentages) |
Revenue | Revenue | $ | 193.1 | | | $ | 146.5 | | | $ | 46.6 | | | 31.8 | % | | (2.7) | % | Revenue | $ | 167,254 | | | $ | 193,128 | | | $ | (25,874) | | | (13.4) | % | | (1.9) | % |
Cost of revenue (excluding amortization of intangible assets) | Cost of revenue (excluding amortization of intangible assets) | 101.5 | | | 70.9 | | | 30.6 | | | 43.2 | % | | Cost of revenue (excluding amortization of intangible assets) | 113,392 | | | 101,512 | | | 11,880 | | | 11.7 | % | |
Selling, general and administrative | Selling, general and administrative | 33.3 | | | 24.0 | | | 9.3 | | | 38.8 | % | | Selling, general and administrative | 39,737 | | | 33,350 | | | 6,387 | | | 19.2 | % | |
Amortization of intangible assets | Amortization of intangible assets | 11.9 | | | 2.2 | | | 9.7 | | | 437.4 | % | | Amortization of intangible assets | 12,019 | | | 11,898 | | | 121 | | | 1.0 | % | |
Operating income | Operating income | $ | 46.4 | | | $ | 49.4 | | | $ | (3.0) | | | (6.2) | % | | Operating income | $ | 2,106 | | | $ | 46,368 | | | $ | (44,262) | | | (95.5) | % | | (2.0) | % |
Operating income % of revenue | Operating income % of revenue | 24.0 | % | | 33.8 | % | | | | (980) bps | | Operating income % of revenue | 1.3 | % | | 24.0 | % | | | | (2,270) bps | |
Manufacturing revenue increased $46.6decreased $25.9 million due primarily to the divestiture of our Avian business, which decreased revenue by $19.2 million, lower services revenue from our Biologics Solutions business, which includedincludes both the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $35.8 million, and higher service revenue within our Biologics Testing Solutions business, as well as Microbial Solutions revenue also increasing; partially offset byand CDMO businesses, and the effect of changes in foreign currency exchange rates.rates; partially offset by increased revenue in our Microbial Solutions business.
Manufacturing operating income decreased $3.0$44.3 million during the three months ended March 26, 2022 compared to the corresponding period in 2021.2022. Manufacturing operating income as a percentage of revenue for the three months ended March 26, 2022April 1, 2023 was 24.0%1.3%, a decrease of (980)2,270 bps from 33.8%24.0% for the corresponding period in 2021.2022. Operating income and operating income as a percentage of revenue decreased principally due to higher amortization of intangible assets and acquisition related costs during the three months ended March 26, 2022 compared to the corresponding period in 2021 andprimarily due to higher operating costs associated with our Biologics Solutions business, including both the Biologics Testing and CDMO acquisitions.businesses, the divestiture of our Avian business, an asset impairment, higher administrative costs, and the foreign exchange impact discussed above.
Unallocated Corporate
| | | Three Months Ended | | | Three Months Ended | |
| | March 26, 2022 | | March 27, 2021 | | $ change | | % change | | April 1, 2023 | | March 26, 2022 | | $ change | | % change |
| | (in millions, except percentages) | | (in thousands, except percentages) |
Unallocated corporate | Unallocated corporate | $ | 50.5 | | | $ | 61.6 | | | $ | (11.1) | | | (18.1) | % | Unallocated corporate | $ | 46,054 | | | $ | 50,458 | | | $ | (4,404) | | | (8.7) | % |
Unallocated corporate % of revenue | Unallocated corporate % of revenue | 5.5 | % | | 7.5 | % | | (200) bps | Unallocated corporate % of revenue | 4.5 | % | | 5.5 | % | | (100) bps |
Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $11.1$4.4 million, or (18.1)%8.7%, compared to the corresponding period in 20212022 is primarily related to decreased costs associated with the evaluation and integration of our recent acquisition activity. Costs as a percentage of revenue for the three months ended March 26, 2022April 1, 2023 was 5.5%4.5%, a decrease of (200)100 bps from 7.5%5.5% for the corresponding period in 2021.2022.
InterestOther Income (Expense)
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| April 1, 2023 | | March 26, 2022 | | $ change | | % change |
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Other income (expense): | | | | | | | |
Interest income | $ | 806 | | | $ | 127 | | | $ | 679 | | | 534.6 | % |
Interest expense | (34,380) | | | (9,434) | | | (24,946) | | | 264.4 | % |
Other income (expense), net | (3,277) | | | (28,625) | | | 25,348 | | | (88.6) | % |
Total other expense, net | $ | (36,851) | | | $ | (37,932) | | | $ | 1,081 | | | (2.8) | % |
Interest income, which represents earnings on cash, cash equivalents, and time deposits was approximately $0.1 millionexpense for both the three months ended March 26, 2022 andApril 1, 2023 was $34.4 million, an increase of $24.9 million, or 264.4%, compared to $9.4 million in the corresponding period in 2021.
Interest Expense
Interest expense for thethree months ended March 26, 2022 was $9.4 million, a decrease of $20.3 million, or 68.3%, compared to $29.7 million for the corresponding period in 2021.2022. The decreaseincrease was due primarily to $26higher interest rates, and the absence of $11.8 million of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in the three months ended March 27, 2021, partially offset by a lower foreign currency gaingains recognized in connection with a debt-related foreign exchange forward contract and higher interest rates on our variable debt in the corresponding period in 2022.
Other expense, net for the three months ended March 26, 2022April 1, 2023 was $3.3 million, a decrease of $25.3 million, or 88.6%, compared to Other expense, net of $28.6 million for the corresponding period in 2021.2022. The decrease was due primarily to the absence of
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Other Expense, Net
Other expense, net, was $28.6$11.1 million for the three months ended March 26, 2022, an increase of $0.9 million compared to $27.7 million for the corresponding period in 2021. The increase was due primarily to losses on our life insurance investments for the three months ended March 26, 2022 as compared to gains incurred during the corresponding period in 2021; partially offset by lower foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency, in the three months ended March 26, 2022and lower net losses incurred on our venture capital investments as compared to the corresponding period in 2021 and lower venture capital investment losses in the three months ended March 26, 2022 as compared to the corresponding period in 2021.fiscal year 2022.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| April 1, 2023 | | March 26, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Provision for income taxes | $ | 27,087 | | | $ | 15,620 | | | $ | 11,467 | | | 73.4 | % |
Effective tax rate | 20.7 | % | | 14.1 | % | | | | 660 bps |
Income tax expense for the three months ended March 26, 2022April 1, 2023 was $15.6$27.1 million, an increase of $13.2$11.5 million compared to $2.4$15.6 million for the corresponding period in 2021.2022. Our effective tax rate was 14.1%20.7% for the three months ended March 26, 2022April 1, 2023 compared to 3.6%14.1% for the corresponding period in 2021.2022. The increase in our effective tax rate in the 2022 periodthree months ended April 1, 2023 compared to the 2021corresponding period in 2022 was primarily attributable to a decreased tax benefit from stock-based compensation deductions in the three months ended March 26, 2022.April 1, 2023. Our global operations make the effective tax rate sensitive to significant tax law changes. Several countries have begun to enact legislation to implement the Organization for Economic Cooperation and Development’s (OECD) international tax framework, including the Pillar II global minimum tax regime with effect from January 1, 2024 or later. We are currently monitoring these developments and are in the process of evaluating the potential impact on our results of operations.
Liquidity and Capital Resources
Liquidity and Cash Flows
We currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows 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 our access to financing resources, are sufficient to fund our operations for the foreseeable future.
The following table presents our cash, cash equivalents and short-term investments:
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in millions) |
Cash and cash equivalents: | | | |
Held in U.S. entities | $ | 15.1 | | | $ | 28.2 | |
Held in non-U.S. entities | 226.8 | | | 213.0 | |
Total cash and cash equivalents | 241.9 | | | 241.2 | |
Short-term investments: | | | |
Held in non-U.S. entities | 1.1 | | | 1.1 | |
Total cash, cash equivalents and short-term investments | $ | 243.0 | | | $ | 242.3 | |
Borrowings
Amounts outstanding under our Credit Facility and our Senior Notes were as follows: | | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
| (in millions) |
Revolving facility | $ | 1,174.2 | | | $ | 1,161.4 | |
4.25% Senior Notes due 2028 | 500.0 | | | 500.0 | |
3.75% Senior Notes due 2029 | 500.0 | | | 500.0 | |
4.00% Senior Notes due 2031 | 500.0 | | | 500.0 | |
Total | $ | 2,674.2 | | | $ | 2,661.4 | |
The interest rates applicable to the Credit Facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio.
Our off-balance sheet commitments related to our outstanding letters of credit as of March 26, 2022 were $17.7 million.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Repurchases of Common Stock
During the three months ended March 26, 2022, we did not repurchase any shares under our authorized stock repurchase program. As of March 26, 2022, we had $129.1 million remaining on the authorized $1.3 billion stock repurchase program and we do not intend to repurchase shares for the remainder of 2022. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During the three months ended March 26, 2022, we acquired 0.1 million shares for $34.0 million through such netting.
Cash Flows | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| (in thousands) |
Cash and cash equivalents: | | | |
Held in U.S. entities | $ | 1,488 | | | $ | 15,813 | |
Held in non-U.S. entities | 200,099 | | | 218,099 | |
Total cash and cash equivalents | 201,587 | | | 233,912 | |
Short-term investments: | | | |
Held in non-U.S. entities | 1,001 | | | 998 | |
Total cash, cash equivalents and short-term investments | $ | 202,588 | | | $ | 234,910 | |
The following table presents our net cash provided by operating activities:
| | | Three Months Ended | | Three Months Ended |
| | March 26, 2022 | | March 27, 2021 | | April 1, 2023 | | March 26, 2022 |
| | (in millions) | | (in thousands) |
Net income | Net income | $ | 95.2 | | | $ | 63.9 | | Net income | $ | 103,954 | | | $ | 95,226 | |
Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | 99.0 | | | 109.7 | | Adjustments to reconcile net income to net cash provided by operating activities | 97,373 | | | 99,047 | |
Changes in assets and liabilities | Changes in assets and liabilities | (91.6) | | | (3.4) | | Changes in assets and liabilities | (91,944) | | | (91,643) | |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 102.6 | | | $ | 170.2 | | Net cash provided by operating activities | $ | 109,383 | | | $ | 102,630 | |
Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, contingent consideration, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
operations. For the three months ended April 1, 2023, compared to the three months ended March 26, 2022, compared to the three months ended March 27, 2021, the decreaseincrease in net cash provided by operating activities was driven by timing and amount of our working capital balances, principally variable compensation payments, and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits); partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.2022.
The following tabletable presents our net cash used in investing activities:
| | | Three Months Ended | | Three Months Ended |
| | March 26, 2022 | | March 27, 2021 | | April 1, 2023 | | March 26, 2022 |
| | (in millions) | | (in thousands) |
Acquisition of businesses and assets, net of cash acquired | Acquisition of businesses and assets, net of cash acquired | $ | — | | | $ | (94.2) | | Acquisition of businesses and assets, net of cash acquired | $ | (50,166) | | | $ | — | |
Capital expenditures | Capital expenditures | (80.5) | | | (28.0) | | Capital expenditures | (106,875) | | | (80,464) | |
Investments, net | Investments, net | (13.1) | | | (16.6) | | Investments, net | (10,617) | | | (13,091) | |
Other, net | Other, net | (4.4) | | | 0.8 | | Other, net | (960) | | | (4,450) | |
Net cash used in investing activities | Net cash used in investing activities | $ | (98.0) | | | $ | (138.0) | | Net cash used in investing activities | $ | (168,618) | | | $ | (98,005) | |
For the three months ended April 1, 2023, the primary use of cash used in investing activities related to capital expenditures to support the growth of the business, the acquisition of SAMDI, and investments in certain venture capital and strategic equity investments. For the three months ended March 26, 2022, the primary use of cash used in investing activities related to capital expenditures to support the growth of the business and investments in certain venture capital and strategic equity investments.
The following table presents our net cash provided by financing activities:
| | | | | | | | | | | |
| Three Months Ended |
| April 1, 2023 | | March 26, 2022 |
| (in thousands) |
Proceeds from long-term debt and revolving credit facility | $ | 192,500 | | | $ | 962,005 | |
Payments on long-term debt, revolving credit facility, and finance lease obligations | (157,328) | | | (948,267) | |
Proceeds from exercises of stock options | 11,792 | | | 12,199 | |
Purchase of treasury stock | (19,012) | | | (33,994) | |
| | | |
| | | |
Payment of contingent considerations | (2,711) | | | (3,356) | |
Other, net | — | | | (1,870) | |
Net cash provided by (used in) financing activities | $ | 25,241 | | | $ | (13,283) | |
For the three months ended March 27, 2021, the primary use of cash used in investing activities related to the acquisition of Distributed Bio and certain assets from a distributor, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
The following table presents ourApril 1, 2023, net cash (used in) provided by financing activities:activities reflected the net proceeds of $35.2 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are net borrowings of $33 million from our Credit Facility throughout the three months ended April 1, 2023.
| | | | | | | | | | | |
| Three Months Ended |
| March 26, 2022 | | March 27, 2021 |
| (in millions) |
Proceeds from long-term debt and revolving credit facility | $ | 962.0 | | | $ | 1,954.0 | |
Payments on long-term debt, revolving credit facility, and finance lease obligations | (948.3) | | | (1,714.2) | |
Proceeds from exercises of stock options | 12.2 | | | 19.6 | |
Purchase of treasury stock | (34.0) | | | (36.0) | |
Payment of debt extinguishment and financing costs | — | | | (28.7) | |
Other, net | (5.2) | | | — | |
Net cash (used in) provided by financing activities | $ | (13.3) | | | $ | 194.7 | |
Net cash provided by financing activities also reflected treasury stock purchases of $19.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, and $2.7 million of contingent consideration payments; partially offset by proceeds from exercises of employee stock options of $11.8 million.For the three months ended March 26, 2022, net cash used in financing activities reflected the net proceeds of $13.7 million on our Credit Facility, Senior Notes, andand finance lease obligations. Included in the net proceeds are the following amounts:
•Net borrowings of $52 million made to our Credit Facility throughout the three months ended March 26, 2022;
•Payments of $796 million partially offset by $759 million of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash used in financing activities also reflected treasury stock purchases of $34.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, partially offset by proceeds from exercises of employee stock options of $12.2 million.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Financing and Market Risk
We are exposed to market risk from changes in interest rates and currency exchange rates, which could affect our future result of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.
Amounts outstanding under our Credit Facility and our Senior Notes were as follows: | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| (in thousands) |
Revolving facility | $ | 1,233,453 | | | $ | 1,197,586 | |
4.25% Senior Notes due 2028 | 500,000 | | | 500,000 | |
3.75% Senior Notes due 2029 | 500,000 | | | 500,000 | |
4.00% Senior Notes due 2031 | 500,000 | | | 500,000 | |
Total | $ | 2,733,453 | | | $ | 2,697,586 | |
The interest rates applicable to the Credit Facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted term SOFR rate plus 1%) or the adjusted term SOFR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio. In March 2023 and in conjunction with the Second Amendment we modified the variable rate on our Credit Facility from adjusted LIBOR to adjusted term SOFR. All outstanding U.S. dollar borrowings remained at adjusted LIBOR through their respective interest reset periods in April 2023 and were then set to term SOFR.
During the fourth fiscal quarter of 2022, we entered into an interest rate swap with a notional amount of $500 million to manage interest rate fluctuation related to our floating rate borrowings under the Credit Facility, at a fixed rate of 4.700%. In March 2023 and in conjunction with the Second Amendment, we modified the variable rate on our interest rate swap from 1-month LIBOR to 1-month term SOFR. Effective with the modification we will pay a fixed rate of 4.65% on our swap maturing November 2, 2024. The transition did not have an impact on our hedge accounting or a material impact to our financial statements.
Our off-balance sheet commitments related to our outstanding letters of credit as of April 1, 2023 and December 31, 2022 were $21.6 million and $18.6 million, respectively.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our financial position, results of operations, and cash flows.
While the financial results of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations in their respective local currency. The principal functional currencies of the Company’s foreign subsidiaries are the Euro, British Pound and Canadian Dollar. During the three months ended April 1, 2023, the most significant drivers of foreign currency translation adjustment the Company recorded as part of Other comprehensive income (loss) were the British Pound, Euro, Hungarian Forint, and Canadian Dollar.
Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our financial position, results of operations, and cash flows. As the U.S. dollar strengthens against other currencies, the value of our non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expenses, which will decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally increase when reported in U.S. dollars. For the three months ended March 27, 2021, net cash providedApril 1, 2023, our revenue would have decreased by financing activities reflected$30.8 million and our operating income would have decreased by $1.1 million, if the net proceeds of $239.8 million onU.S. dollar exchange rate had strengthened by 10%, with all other variables held constant.
We attempt to minimize this exposure by using certain financial instruments in accordance with our Credit Facility, Senior Notes,overall risk management and finance lease obligations. Included in the net proceeds are the following amounts:our hedge policy. We do not enter into speculative derivative agreements.
•Proceeds of $1 billion from the issuance of the 2029 and 2031 Senior Notes, which were used to prepay our $500 million 2026 Senior Notes;
•Payments of approximately $147 million on our term loan and net payments of $85 million to our revolving credit facility throughoutDuring the three months ended March 27, 2021;
•Payments of $766 million partially offset26, 2022, we entered into foreign exchange forward contracts to limit our foreign currency exposure related to both intercompany loans and a U.S. dollar denominated loan borrowed by $739 million of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loansunder our Credit Facility. Refer to Note 9, “Debt and replacing the Euro loans with U.S. dollar denominated loans. A seriesOther Financing Arrangements” in this Quarterly Report on Form 10-Q for additional information regarding these types of forward currency contracts were executed to mitigatecontracts.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Repurchases of Common Stock
During the three months ended April 1, 2023, we did not repurchase any foreign currency gains or lossesshares under our authorized stock repurchase program. As of April 1, 2023, we had $129.1 million remaining on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected proceeds from exercises of employeeauthorized $1.3 billion stock options of $19.6 million, offset by treasury stock purchases of $36.0 million made due torepurchase program. Our stock-based compensation plans permit the netting of common stock upon vesting of stock-based awardsrestricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. AdditionallyDuring the three months ended April 1, 2023, we paid $21acquired 0.1 million of debt extinguishment costs associated with the 2026 Senior Notes repayment and $8 million of debt financing costs associated with the 2029 and 2031 Senior Notes issuances.
Off-Balance Sheet and Other Arrangements
There have been no material changes from the off-balance sheet and other arrangements previously disclosed in our Annual Report on Form 10-Kshares for fiscal 2021 other than the changes described in Note 2, “Acquisitions and Divestitures,” Note 7, “Fair Value,” Note 9, “Debt and Other Financing Arrangements,”, and Note 13, “Commitments and Contingencies,” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Venture Capital Investments
We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to the funds as of March 26, 2022 was $173.9 million, of which we funded $116.6$19.0 million through March 26, 2022. Refer to Note 6, “Venture Capital and Strategic Equity Investments” in this Quarterly Report on Form 10-Q for additional information.such netting.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Critical Accounting Policies and Estimates
Our 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 U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related 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 various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 1, “DescriptionItem 7, “Management’s Discussion and Analysis of BusinessFinancial Condition and SummaryResults of Significant Accounting Policies” toOperations” of our Annual Report on Form 10-K for fiscal year 2021.2022.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements please refer to Note 1, “Basis of Presentation,” in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, “Basis of Presentation,” we did not adopt any other new accounting pronouncements during the three months ended March 26, 2022April 1, 2023 that had a significant effect on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposedThe Company’s exposure to market risk from changes in interest rates and currency exchange rates which could affect our future results of operations and financial condition. We manage ourhas not changed materially from its exposure to these risks through our regular operating and financing activities.
Interest Rate Risk
We are exposed to changesdiscussed in interest rates while conducting normal business operations as a result of ongoing financing activities. As of March 26, 2022, our debt portfolio was comprised primarily of floatingthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our interest rate borrowings. A 100-basis point increase in interest rates would increase our annual pre-tax interest expense by $11.7 million.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our financial position, resultsrisks are fully described in Item 7, “Management’s Discussion and Analysis of operations,Financial Condition and cash flows.
While the financial resultsResults of Operations - Liquidity and Capital Resources” of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations in their respective local currency. The principal functional currencies of the Company’s foreign subsidiaries are the Euro, British Pound and Canadian Dollar. During the three months ended March 26, 2022, the most significant drivers of foreign currency translation adjustment the Company recorded as part of Other comprehensive income (loss) were the Euro, Canadian Dollar, British Pound, and Hungarian Forint.
Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our financial position, results of operations, and cash flows. As the U.S. dollar strengthens against other currencies, the value of our non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expenses, which will decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally increase when reported in U.S. dollars. For the three months ended March 26, 2022, our revenue would have decreased by $28.7 million and our operating income would have decreased by $0.3 million, if the U.S. dollar exchange rate had strengthened by 10%, with all other variables held constant.
We attempt to minimize this exposure by using certain financial instruments in accordance with our overall risk management and our hedge policy. We do not enter into speculative derivative agreements.
During the three months ended March 26, 2022, we entered into foreign exchange forward contracts to limit our foreign currency exposure related to both intercompany loans and a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under our Credit Facility. Refer to Note 9, “Debt and Other Financing Arrangements” in this QuarterlyAnnual Report on Form 10-Q10-K for additional information regarding these typesfiscal year 2022 and in Item 2, “Management’s Discussion and Analysis of forward contracts.
Financial Condition and Results of Operations - Liquidity and Capital Resources” herein.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Item 4. 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 effective, at a reasonable assurance level, as of March 26, 2022,April 1, 2023, 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 recognizes 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.
(b) Changes in Internal Controls Over Financial Reporting
The Company continued to execute a plan to centralize certain accounting transaction processing functions to internal shared service centers during the three months ended March 26, 2022. There were no other material 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 March 26, 2022April 1, 2023 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please referOn February 16, 2023, the Company was informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into the Company’s conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 the Company received a grand jury subpoena requesting certain documents related to Note 13, “Commitmentssuch investigation. The Company is aware of a parallel civil investigation being undertaken by the DOJ and Contingencies” in our notesUSFWS. The Company is cooperating with the DOJ and the USFWS and believes that the concerns raised with respect to the unaudited condensed consolidated financial statementsCompany’s conduct are without merit. The Company maintains a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates it received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in this Quarterly Report on Form 10-Q.Endangered Species of Wild Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, the Company has voluntarily suspended future shipments of non-human primates from Cambodia to the United States until such time that the Company and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported from Cambodia are purpose-bred. The Company continues to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS or other governmental authorities as a result of the investigations. Neither the DOJ nor USFWS has provided the Company with any specific timeline or indication as to when these investigations or discussions regarding future processes and procedures will be concluded or resolved. Because it is in the early stages, the Company cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for fiscal year 2021,2022, which could materially affect our business, financial condition, and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for fiscal year 2021, except as disclosed below.
Our business, results of operations, or financial condition could be adversely affected by disruptions in the global economy caused by the ongoing conflict between the Russian Federation and Ukraine.
In February 2022, the Russian Federation launched an invasion of the country of Ukraine, resulting in negative impacts to the global economy. Furthermore, governments in the U.S., Canada, the United Kingdom, and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. Although we have no operations in Russia or Ukraine, we have ceased doing business with our Russian customers and distributors. Additional risks to our business that may emerge as a result of the armed conflict include, among others, shortages in materials; increased costs for transportation, energy, and raw materials; increased trade barriers or restrictions on global trade; cyberattacks; supply disruptions; lower consumer demand; and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information relating to the purchases of shares of our common stock during the three months ended March 26, 2022.April 1, 2023. | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | (in thousands) |
December 26, 2021 to January 22, 2022 | — | | | $ | — | | | — | | | $ | 129,105 | |
January 23, 2022 to February 19, 2022 | 84,127 | | | 312.35 | | | — | | | 129,105 | |
February 20, 2022 to March 26, 2022 | 26,720 | | | 291.68 | | | — | | | 129,105 | |
Total | 110,847 | | | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | (in thousands) |
January 1, 2023 to January 28, 2023 | 62 | | | $ | 244.29 | | | — | | | $ | 129,105 | |
January 29, 2023 to February 25, 2023 | 14 | | | 243.79 | | | — | | | 129,105 | |
February 26, 2023 to April 1, 2023 | 2 | | | 221.52 | | | — | | | 129,105 | |
Total | 78 | | | | | — | | | |
Our Board of Directors have authorized up to an aggregate amount of $1.3 billion for our stock repurchase program. During the three months ended March 26, 2022,April 1, 2023, we did not repurchase any shares of common stock under our stock repurchase program or in open market trading. As of March 26, 2022,April 1, 2023, we had $129.1 million remaining on the authorized stock repurchase program.
Additionally, our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Item 6. Exhibits | | | | | |
(a) Exhibits | Description of Exhibits |
10.1+ | Employment Offer Letter betweenSecond Amendment to the Ninth Amended and Restated Credit Agreement, dated March 30, 2023, among Charles River Laboratories International, Inc., the Subsidiary Borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Flavia Pease, dated as of March 4, 2022the other agents party thereto |
31.1+ | |
31.2+ | |
32.1+ | |
101.INS | eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Definition Linkbase Document |
101.LAB | XBRL Taxonomy Label Linkbase Document |
101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| |
+ Furnished herein. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | CHARLES RIVER LABORATORIES INTERNATIONAL, INC. |
| | |
| May 4, 202211, 2023 | /s/ JAMES C. FOSTER |
| | James C. Foster Chairman, President and Chief Executive Officer |
| | |
| May 4, 202211, 2023 | /s/ DAVID R. SMITHFLAVIA H. PEASE |
| | David R. SmithFlavia H. Pease
Corporate Executive Vice President and Chief Financial Officer |