UNITED STATES
SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------
FORM 10-Q
------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 24, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-92383
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its Charter)
DELAWARE 06-1397316
(State of Incorporation) (I.R.S. Employer Identification No.)
251 BALLARDVALE STREET, WILMINGTON, MASSACHUSETTS 01887
(Address of Principal Executive Offices)(Zip Code)
978-658-6000
(Registrant's Telephone Number, Including Area Code)
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 /X/ No / /
As of June 24, 2000 there were 19,820,369 shares of the registrant's
common stock outstanding
Charles River Laboratories International, Inc.
Form 10-Q
For the Quarterly Period Ended June 24, 2000
Table of Contents
Part I. Financial Information PAGE
----
Item 1. Financial Statements.................................................................... 3
Condensed Consolidated Statements of Income (Unaudited) for the six
months ended June 24, 2000 and June 26, 1999.......................................... 3
Condensed Consolidated Statements of Income (Unaudited) for the
three months ended June 24, 2000 and June 26, 1999.................................... 4
Condensed Consolidated Balance Sheet as of December 25, 1999 and June 24, 2000........ 5
Condensed Consolidated Statements of Cash Flows (Unaudited) as of
June 24, 2000 and June 26, 1999....................................................... 6
Notes to Unaudited Condensed Consolidated Interim Financial
Statements ........................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 12
Item 3. Qualitative and Quantitative Disclosure About Market Risk............................... 16
Part II. Other Information
Item 6. Exhibits ............................................................................... 17
Signatures.............................................................................. 18
-2-
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE SIX-MONTHS ENDED JUNE 26, 1999 AND JUNE 24, 2000
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED
-------------------------------------------
JUNE 26, JUNE 24,
1999 2000
---------------- ----------------
Net sales related to products .................................. $ 93,153 $ 106,970
Net sales related to services .................................. 15,013 36,429
------------ ------------
Total net sales ................................................ $ 108,166 $ 143,399
Costs and Expenses
Cost of products sold ....................................... 55,113 59,511
Cost of services provided ................................... 9,209 24,401
Selling, general and administrative ......................... 19,911 24,240
Amortization of goodwill and intangibles .................... 764 1,802
------------ ------------
Operating income ............................................... 23,169 33,445
Other income (expense)
Interest income ............................................. 359 291
Interest expense ............................................ (171) (25,821)
Loss from foreign currency, net ............................. (153) (160)
Other income (expense) ...................................... - 390
------------ ------------
Income before income taxes, minority interests and earnings from
equity investments .......................................... 23,204 8,145
Provision for income taxes ..................................... 10,011 (396)
------------ ------------
Income before minority interests and earnings from equity
investments ................................................. 13,193 8,541
Minority interests ............................................. (2) (679)
Earnings from equity investments ............................... 1,117 748
------------ ------------
Net Income ..................................................... $ 14,308 $ 8,610
============ ============
Earnings per common share
Basic ....................................................... $ .72 $ .43
Diluted ..................................................... $ .72 $ .37
Weighted average number of common shares outstanding
Basic ....................................................... 19,820,369 19,820,369
Diluted ..................................................... 19,820,369 23,571,555
See Notes to Condensed Consolidated Financial Statements
-3-
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE-MONTHS ENDED JUNE 26, 1999 AND
JUNE 24, 2000 (DOLLARS IN THOUSANDS EXCEPT
FOR PER SHARE DATA)
THREE MONTHS ENDED
------------------------------------
JUNE 26, JUNE 24,
1999 2000
---------------- ----------------
Net sales related to products .................................. $ 47,996 $ 56,154
Net sales related to services .................................. 7,890 17,943
------------ ------------
Total net sales ................................................ $ 55,886 $ 74,097
Costs and Expenses
Cost of products sold ....................................... 27,367 30,518
Cost of services provided ................................... 4,795 12,002
Selling, general and administrative ......................... 11,092 12,427
Amortization of goodwill and intangibles .................... 353 937
------------ ------------
Operating income ............................................... 12,279 18,213
Other income (expense)
Interest income ............................................. 134 149
Interest expense ............................................ (94) (13,157)
Loss from foreign currency, net ............................. (100) (130)
Other income (expense) ...................................... - 390
------------ ------------
Income before income taxes, minority interests and earnings from
equity investments .......................................... 12,219 5,465
Provision for income taxes ..................................... 5,485 (2,864)
------------ ------------
Income before minority interests and earnings from equity
investments ................................................. 6,734 8,329
Minority interests ............................................. (9) (462)
Earnings from equity investments ............................... 510 107
------------ ------------
Net Income ..................................................... $ 7,235 $ 7,974
============ ============
Earnings per common share
Basic ....................................................... $ .37 $ .40
Diluted ..................................................... $ .37 $ .34
Weighted average number of common shares outstanding
Basic ....................................................... 19,820,369 19,820,369
Diluted ..................................................... 19,820,369 23,571,555
See Notes to Consolidated Financial Statements
-4-
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 25, JUNE 24,
1999 2000
(UNAUDITED)
------------- -------------
ASSETS
Current assets
Cash and cash equivalents .............................................. $ 15,010 $ 18,993
Trade receivables, less allowances of $978 and $976, respectively ...... 36,293 50,930
Inventories ............................................................ 30,534 32,192
Deferred income taxes .................................................. 632 632
Due from affiliates .................................................... 1,233 99
Other current assets ................................................... 5,293 5,492
--------- ---------
Total current assets ................................................. 88,995 108,338
Property, plant and equipment, net ........................................ 85,413 117,741
Goodwill and other intangibles, less accumulated amortization of $6,073 and
$8,971, respectively .................................................. 36,958 41,658
Investments in affiliates ................................................. 21,722 2,166
Deferred tax asset ........................................................ 101,560 101,783
Deferred financing costs .................................................. 14,015 13,747
Other assets .............................................................. 14,393 13,467
--------- ---------
Total assets ......................................................... $ 363,056 $ 398,900
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt ...................................... $ 3,290 $ 6,442
Current portion of capital lease obligation ............................ 253 211
Accounts payable ....................................................... 9,291 8,693
Accrued compensation ................................................... 10,792 13,540
Deferred income ........................................................ 7,643 5,808
Accrued interest ....................................................... 8,935 8,363
Accrued liabilities .................................................... 18,479 20,444
Accrued income taxes ................................................... 2,738 3,577
--------- ---------
Total current liabilities ............................................ 61,421 67,078
Long-term debt ............................................................ 381,706 392,742
Deferred tax liability .................................................... 4,990 6,964
Capital lease obligations ................................................. 795 621
Accrued ESLIRP ............................................................ 8,315 8,638
Other long-term liabilities ............................................... 2,469 3,851
--------- ---------
Total liabilities .................................................... 459,696 479,894
--------- ---------
Commitments and contingencies (Note 3)
Minority interests ........................................................ 304 14,471
Redeemable common stock ................................................... 13,198 13,198
Shareholder's equity
Common stock ........................................................... 198 198
Capital in excess of par value ......................................... 206,940 202,403
Retained earnings ...................................................... (307,351) (298,741)
Loans to officers ...................................................... (920) (920)
Accumulated other comprehensive income ................................. (9,009) (11,603)
--------- ---------
Total shareholder's equity ........................................... (110,142) (108,663)
--------- ---------
Total liabilities and shareholder's equity ........................... $ 363,056 $ 398,900
========= =========
See Notes to Condensed Consolidated Financial Statements
-5-
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
------------------------------------
JUNE 26, JUNE 24,
1999 2000
------------- -------------
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income ...................................................................... $ 14,308 $ 8,610
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 5,816 8,012
Amortization of debt issuance costs and discounts ............................. - 1,366
Accretion of debenture and discount note ...................................... - 6,256
Provision for doubtful accounts ............................................... (13) 35
Earnings from equity investments .............................................. (1,117) (748)
Minority interests ............................................................ 2 679
Deferred income taxes ......................................................... 309 (5,147)
Stock compensation expense .................................................... 91 -
Property, plant, and equipment write-downs and disposals ...................... - 528
Other non-cash items .......................................................... - 11
Changes in assets and liabilities
Trade receivables ............................................................. (4,707) (4,832)
Inventories ................................................................... 589 (61)
Due from affiliates ........................................................... (779) 156
Deferred financing cost ....................................................... - (588)
Other current assets .......................................................... (694) (122)
Other assets .................................................................. (481) (1,740)
Accounts payable .............................................................. (1,210) (3,532)
Accrued compensation .......................................................... 368 3,050
Accrued ESLIRP ................................................................ 801 323
Deferred income ............................................................... 2,607 (1,835)
Accrued interest .............................................................. - (601)
Accrued liabilities ........................................................... (2,499) (2,339)
Accrued income taxes .......................................................... (4,569) (449)
Other long-term liabilities ................................................... (125) 10
-------- --------
Net cash provided by operating activities ................................. $ 8,697 $ 7,042
-------- --------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Capital expenditures ............................................................ (4,637) (6,107)
Contingent payments for prior year acquisitions ................................. (251) -
Acquisition of business, net of cash acquired of $3,163 ......................... - (6,011)
Proceeds from sale of animal colony ............................................. - 7,000
-------- --------
Net cash used in investing activities ..................................... $ (4,888) $ (5,118)
-------- --------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Proceeds from long-term debt .................................................... - 3,000
Payments on long-term debt ...................................................... (35) (600)
Payments on capital lease obligations ........................................... (124) (216)
Net activity with Bausch & Lomb ................................................. (6,147) -
-------- --------
Net cash provided by/used in financing activities ......................... $ (6,306) $ 2,184
-------- --------
Effect of exchange rate changes on cash and cash equivalents ....................... (745) (125)
-------- --------
Net change in cash and cash equivalents ............................................ (3,242) 3,983
Cash and cash equivalents, beginning of period ..................................... 24,811 15,010
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 21,569 $ 18,993
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest .......................................................... $ 172 $ 18,773
Cash paid for taxes ............................................................. 2,978 4,539
See Notes to Condensed Consolidated Financial Statements
-6-
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The condensed consolidated interim financial statements are unaudited, and
certain information and footnote disclosure related thereto normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States, have been omitted in accordance with Rule 10-01
of Regulation S-X. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements were prepared following the same
policies and procedures used in the preparation of the audited financial
statements and reflect all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the financial position of
Charles River Laboratories International, Inc. ("the Company"). The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year. These condensed consolidated financial statements
should be read in conjunction with the Company's annual report on Form 10-K for
the year ended December 25, 1999.
On June 5, 2000, a 1.927 for 1 exchange of stock was aproved by the Board of
Directors of the Company. This exchange of stock was effective June 21, 2000.
All earnings per common share amounts, references to common stock and
shareholders' equity amounts have been restated as if the exchange of stock had
occurred as of the earliest period presented.
2. INITIAL PUBLIC OFFERING
The Company consummated an initial public offering ("the Offering") of
16,100,000 shares of its common stock at a price of $16 subsequent to June
24, 2000. The Company plans to use the net proceeds from the Offering of
$236,068 to redeem a portion of its outstanding senior subordinated notes,
and to repay its senior discount debentures, subordinated discount note and a
portion of its bank debt. The Offering was declared effective and trading
opened on the New York Stock Exchange on June 23, 2000, however the closing
did not occur until the third quarter of 2000. For this reason, the net
proceeds of the Offering, and the previously described use of these proceeds,
has not been recorded in the accompanying unaudited condensed consolidated
financial statements. See Note 4 for a discussion of the impact of the
Offering on the provision for income taxes.
The following proforma presentation of selected unaudited balance sheet
information gives effect to the Offering as if it had occurred on June 24,
2000.
Pro forma as of
June 24, 2000
-----------------
Total assets.......................................................................... $409,377
Total liabilities..................................................................... 283,504
Shareholders' equity ................................................................. 111,402
The Company will record an extraordinary loss, net of tax, of approximately $29
million in the third quarter of 2000. This extraordinary loss will be
attributable to premiums relating to the early repayment of a portion of the
senior subordinated notes and the senior discount debentures, and the write-off
of deferred financing costs and discounts associated with the debt repayment.
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of inventories is as follows:
DECEMBER 25, JUNE 24,
1999 2000
-------------- -------------
Raw materials and supplies ................................................ $ 4,196 $ 3,793
Work in process ........................................................... 1,608 1,374
Finished products ......................................................... 24,730 27,025
--------- ---------
Inventories ............................................................... $ 30,534 $ 32,192
========= =========
-7-
The composition of property, plant and equipment is as follows:
DECEMBER 25, JUNE 24,
1999 2000
-------------- -------------
Land ...................................................................... $ 7,022 $ 9,411
Buildings ................................................................. 90,730 143,809
Machinery and equipment ................................................... 82,131 93,340
Leasehold improvements .................................................... 4,668 5,145
Furniture and fixtures .................................................... 1,826 1,931
Vehicles .................................................................. 2,689 2,585
Construction in progress .................................................. 4,679 4,569
--------- ---------
193,745 260,790
Less accumulated depreciation ............................................. (108,332) (143,049)
--------- ---------
Net property, plant and equipment ......................................... $ 85,413 $ 117,741
========= =========
4. INCOME TAXES
EFFECT OF THE OFFERING
As further described in Note 2, the Company closed its initial public offering
in the third quarter of 2000. Although the net sources and uses of the proceeds
are not reflected in the accompanying condensed consolidated financial
statements, the Company has given effect to the impact of the Offering on its
estimated annual effective tax rate and reduced such rate to 53.6%. The 53.6%
effective tax rate has been reflected in the accompanying condensed consolidated
statements of income for the three and six month periods ended June 24, 2000.
In addition, the Company has reassessed the need for a valuation allowance
associated with the deferred tax asset balance discussed below. As a result
of the Offering, the Company expects to be significantly more profitable in
the future, due to reduced interest costs. The valuation allowance associated
with the deferred tax asset described below has been reduced by $4,762, to
$750. The reduction of the valuation allowance has been recorded as a tax
benefit in the second quarter of 2000. The net deferred tax asset balance of
$102,415 as of June 24, 2000 has been recorded at its estimated realizable
value as determined by management after considering all available evidence,
including historical operating results, projections of taxable income and tax
planning strategies.
FINALIZATION OF TAX PURCHASE PRICE ALLOCATION
In connection with the leveraged recapitalization transaction which occurred
effective September 29, 1999, CRL Acquisition LLC and Bausch & Lomb, the
Company's shareholders, made a joint election under Internal Revenue Code
338(h)(10) to treat the transaction as an asset purchase resulting in a
step-up in the tax basis of the underlying net assets. The election resulted
in the recording of a deferred tax asset, net of valuation allowance, of
$99,506 and a corresponding increase to capital in excess of par value. The
Company was, however, still in the process of finalizing the tax purchase
price allocation at December 25, 1999.
During the second quarter of 2000, the tax purchase price allocation related to
the election described above was finalized. An adjustment of $4,537 has been
recorded to reduce the net deferred tax asset balance and capital in excess of
par value in accordance with the final tax purchase price allocation.
-8-
5. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company maintains insurance for workers' compensation, auto liability,
employee medical and general liability. The per claim loss limits are $250, with
annual aggregate loss limits of $1,500. Related accruals were $2,813 and $2,861
on December 25, 1999 and June 24, 2000, respectively. Separately, the Company
has provided a letter of credit in favor of the insurance carriers in the amount
of $350.
SUPPLY AGREEMENT
The Company is currently engaged in distributing certain products under a
supply agreement. In the event certain minimum sales of $500 in 2000 and $1,000
in 2001 are not achieved, the Company at its option can pay the difference in
cash or terminate the agreement. In the event of such termination the Company
will not be required to make any payments.
LITIGATION
Various lawsuits, claims and proceedings of a nature considered normal to
its business are pending against the Company. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's condensed consolidated financial statements.
The Company is currently under a court order issued in June 1997 to
remove its large animal operations from two islands located in the Florida
Keys and to refoliate the islands. The Company removed its large animal
operations from the island in the first quarter of 2000. The Company
continues to hold discussions with the state of Florida and federal
authorities regarding the extent of refoliation required on the islands and
believes the reserves recorded in the accompanying condensed consolidated
financial statements are sufficient to provide for the estimated exposure in
connection with the refoliation. The Company has provided a letter of credit
in regards to the completion of the refoliation on the island for $350.
6. EARNINGS PER SHARE
As described in the notes to the Company's consolidated financial
statements as of, and for the fiscal year ended, December 25, 1999, pursuant
to a recapitalization agreement effective September 29, 1999, all of the
assets, liabilities, operations and cash flows relating to Charles River
Laboratories, Inc., were contributed to an existing dormant subsidiary which
was subsequently renamed Charles River Laboratories, Inc. Under the terms of
the recapitalization, Charles River Laboratories, Inc., became a wholly owned
subsidiary of Charles River Laboratories, International, Inc. The capital
structure in place for periods prior to September 29, 1999 was significantly
different than the capital structure of the Company after the
recapitalization. The condensed consolidated income statements for the three
month and six month periods ended June 26, 1999 also include operations of
certain Bausch and Lomb (the Company's 100% shareholder prior to the
recapitalization) entities which were not historically supported by the
combined capital structure of Charles River Laboratories International, Inc.
and Charles River Laboratories, Inc. As a result, the presentation of
historical earnings per share data determined using the combined historical
capital structure for the three month period and six month period ended June
26, 1999, would not be meaningful and has not been included in these
condensed consolidated interim financial statements. Rather, earnings per
share for the three months and six months ended June 26, 1999 have been
computed assuming that the shares outstanding after the recapitalization had
been outstanding for these periods.
-9-
As a result of the recapitalization DLJ Merchant Banking Partners II, L.P.
and affiliated funds, management and other investors indirectly owned 87.5% of
the capital stock of the Company, and subsidiaries of Bausch and Lomb owned the
remaining 12.5% as of June 24, 2000. Based upon the amounts invested, shares
outstanding of common stock in Charles River Laboratories, International, Inc.
at the date of the recapitalization totaled 19,820,369. Basic earnings per share
for the three month period ended and the six month period ended June 26, 1999
was computed by dividing earnings available to common shareholders for these
periods, by the weighted average number of common shares outstanding in the
period subsequent to the recapitalization. Basic earnings per share for the
three month and the six month periods ended June 24, 2000 was computed by
dividing earnings available to common shareholders for these periods by the
weighted average number of common shares outstanding in the respective periods.
For purposes of calculating diluted earnings per share for the three month
and the six month periods ended June 26, 1999, the weighted average number of
common shares used in the basic earnings per share computation described above
has not been adjusted to include common stock equivalents, as these common stock
equivalents were issued in connection with the recapitalization financing and
are not assumed to be outstanding for purposes of computing earnings per share
in these periods. The weighted average number of common shares outstanding in
the three month and six month periods ended June 24, 2000 has been adjusted to
include common stock equivalents for the purpose of calculating diluted earnings
per shares for these periods.
The following table illustrates the reconciliation of the numerator and
denominator of the basic and diluted earnings per share computations:
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 26, 1999 JUNE 24, 2000 JUNE 26, 1999 JUNE 24, 2000
-------------- -------------- -------------- --------------
Numerator - basic and diluted earnings per share
Income available to common stockholders $ 7,235 $ 7,974 $ 14,308 $ 8,610
Denominator:
Basic earnings per share - weighted
average shares outstanding 19,820,369 19,820,369 19,820,369 19,820,369
Effect of dilutive securities -
stock options and warrants - 3,751,186 - 3,751,186
----------- ----------- ----------- -----------
Diluted earnings per share - weighted
average shares outstanding 19,820,369 23,571,555 19,820,369 23,571,555
=========== =========== =========== ===========
Basic earnings per share $ .37 $ .40 $ .72 $ .43
Diluted earnings per share $ .37 $ .34 $ .72 $ .37
-10-
7. ACQUISITIONS AND DISPOSALS
On February 28, 2000, the Company acquired an additional 16% of the
equity (340,840 common shares) of its 50% equity joint venture company,
Charles River Japan, from Ajinomoto Co., Inc. The purchase price for the
equity was 1.4 billion yen, or $12,844. One billion yen, or $9,174, was paid
at closing, and the balance of 400 million yen, or $3,670, was deferred
pursuant to a three-year balloon promissory note secured by a pledge of the
16% shares. The note bears interest at the long-term prime rate in Japan,
2.15% at June 24, 2000. Effective with the acquisition of this additional
interest, the Company has control of, and is consolidating the operations of,
Charles River Japan. The estimated fair value of the incremental net assets
acquired is $6,207. Goodwill of $6,637 has been recorded in the accompanying
condensed consolidated interim financial statements and is being amortized
over its estimated useful life of 15 years.
On March 10, 2000, the Company announced the closure of its Shamrock
primate import and conditioning business in Small Dole, England. This closure
was completed during the second quarter of 2000. The Company does not expect
that the animal sales previously made by Shamrock will be significantly affected
by the closure. A charge of $751 related to the closure was recorded in selling,
general and administrative expenses in the first quarter of 2000. This reserve
was fully utilized in the second quarter of 2000.
During January 2000, the Company sold a product line within its research
model business segment. The selling price of $7,000 approximated the net book
value of the underlying assets at the time of the sales. In addition the Company
had approximately $900 of deferred revenue which related to cash payments
received in advance of shipping the research models. Under the term of the sales
agreement, the Company is no longer obligated to ship research models and,
accordingly, recorded this amount as income in the first quarter of 2000. Fiscal
1999 sales associated with this product line approximated $2,800.
8. BUSINESS SEGMENT INFORMATION
The following table presents sales and other financial information by
product line segment for the three months ended and the six month period ended
June 26, 1999 and June 24, 2000. Sales to unaffiliated customers represent net
sales originating in entities primarily engaged in either animal services or
biomedical products and services.
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 26, 1999 JUNE 24, 2000 JUNE 26, 1999 JUNE 24, 2000
-----------------------------------------------------------------------
Research Models
Net sales $37,520 $46,129 $73,782 $87,176
Operating income 10,812 12,455 20,306 25,150
Depreciation and amortization 1,974 2,506 3,991 4,596
Capital expenditures 1,070 1,796 2,512 3,281
Biomedical Products and Services
Net sales 18,366 27,968 34,384 56,223
Operating income 4,104 5,793 7,417 11,056
Depreciation and amortization 915 1,742 1,825 3,416
Capital expenditures 1,604 1,525 2,125 2,826
Total assets atributable to the research models segment as of December 25, 1999
and June 24, 2000 were $268,381 and $305,489 respectively. Total assets
attributable to the biomedical products and services segment as of December 25,
1999 and June 24, 2000 were $94,022 and $92,758 respectively.
A reconciliation of segment operating income to consolidated operating income is
as follows:
-11-
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 26, 1999 JUNE 24, 2000 JUNE 26, 1999 JUNE 24, 2000
-------------------------------------------------------------------------
Total segment operating income $ 14,916 $ 18,248 $ 27,723 $ 36,206
Unallocated corporate overhead (2,637) (35) (4,554) (2,761)
-------- -------- -------- --------
Consolidated operating income 12,279 18,213 23,169 33,445
======== ======== ======== ========
9. COMPREHENSIVE INCOME
The components of comprehensive income for the six-month periods ended June
26, 1999 and June 26, 2000 are set forth below:
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 26, 1999 JUNE 24, 2000 JUNE 26, 1999 JUNE 24, 2000
-------------------------------------------------------------------------
Net income $ 7,235 $ 7,974 $ 14,308 $ 8,610
Foreign currency translation (2,203) (721) (4,768) (2,594)
-------- -------- -------- --------
Comprehensive income 5,032 7,253 9,540 6,016
======== ======== ======== ========
Item 2 Managements Discussion and Analysis of financial condition and
Results of Operations
SIX MONTHS ENDED JUNE 24, 2000 COMPARED TO SIX MONTHS ENDED JUNE 26, 1999
NET SALES. Net sales for the first six months of 2000 were $143.4 million,
an increase of $35.2 million, or 32.5%, from $108.2 million for the first six
months of 1999.
RESEARCH MODELS. Net sales of research models in the first six months of
2000 were $87.2 million, an increase of $13.4 million, or 18.2%, from $73.8
million for the first six months of 1999. The consolidation of Charles River
Japan in the first six months of 2000 increased sales by $14.8 million. Small
animal research model sales increased in North America by $3.0 million or
9.5% due to continued improved pricing, a shift to higher priced specialty
units and an increase in unit volume. Small animal research model sales
decreased in Europe by $3.1 million principally from the negative impact of
$3.4 million due to foreign currency translations. We also experienced a
decrease in the large animal breeding, import and conditioning area of $1.3
million principally due to the closure of a facility in the U.K. and the sale
of our large animal colony, in the first quarter of 2000.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services for the first six months in 2000 were $56.2 million, an increase of
$21.8 million, or 63.4%, from $34.4 million for the first six months of 1999. At
the beginning of the fourth quarter in 1999 we acquired SBI Holding Inc.
("Sierra") which had sales of $15.4 million for the first six months of 2000.
The remaining increase was due to significant sales increases of transgenic and
research support services of $2.0 million, endotoxin detection systems of $0.9
million, biosafety testing of $1.5 million and sales from our contract site
management contracts of $2.1 million, primarily due to better customer awareness
of our outsourcing solutions.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided for the first six months of 2000 was $83.9 million, an
increase of $19.6 million, or 30.5%, from $64.3 million for the first six months
of 1999.
RESEARCH MODELS. Cost of products sold and services provided for
research models for the first six months of 2000 was $50.0 million, an
increase of $6.5 million, or 14.9%, compared to $43.5 million for the first
six months of 1999. Cost of products sold and services provided for the first
six months of 2000 was 57.3% of net sales compared to 58.9% of net sales for
the first six months of 1999. Cost of products sold and services provided
increased at a lower rate than net sales due to the more favorable product
mix and better pricing, as well as improved capacity utilization.
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services for the first six months of
2000 was $35.8 million, an increase of $14.9 million, or 71.3%, compared to
$20.9 million for the first six months of 1999. Cost of products sold and
services provided as a percentage of net sales increased from 60.8% for the
first six months of 1999 to 63.7% for the first six months of 2000 due mainly
to the acquisition of Sierra which has slightly lower margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first six months of 2000 were $24.2 million, an
increase of $4.3 million, or 21.6%, from $19.9 million for the first six months
of 1999. Selling, general and administrative expenses for the first six months
of 2000 were 16.7% of net sales compared to 18.4% of net sales for the first six
months of 1999.
RESEARCH MODELS. Selling, general and administrative expenses for
research models for the first six months of 2000 were $12.0 million, an
increase of $2.0 million, or 20.0%, compared to $10.0 million for the first
six months of 1999. The $2.0 million increase is mainly due to the
consolidation of Charles River Japan. Selling, general and administrative
expenses for the first six months in 2000 were 13.8% of net sales, compared
to 13.6% for the first six months in 1999.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services for the first six months of 2000
were $9.4 million, an increase of $3.3 million, or 54.1%, compared to $6.1
million for the first six months of 1999. The acquisition of Sierra in the
fourth quarter of 1999 accounts for $2.9 million of the increase. Selling,
general and administrative expenses for the first six months of 2000 decreased
to 16.7% of net sales, compared to 17.7% of net sales for the first six months
of 1999, due to greater economies of scale.
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UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $2.8 million for the first six
months of 2000, a decrease of $1.7 million compared to $4.5 million for the
first six months of 1999. Pension income of $1.4 million due to favorable
investment returns primarily accounts for this decrease.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles for the first six months in 2000 was $1.8 million, an
increase of $1.0 million from $0.8 million for the first six months in 1999. The
increase was due to the effect of additional amortization of intangibles
resulting from our Sierra acquisition.
OPERATING INCOME. Operating income for the first six months of 2000 was
$33.4 million, an increase of $10.2 million, or 44.0%, from $23.2 million for
the first six months of 1999. Operating income for the first six months of 2000
was 23.3% of net sales, compared to 21.4% of net sales for the first six months
of 1999. Operating income increased in total and as a percentage of net sales
for the reasons described above.
RESEARCH MODELS. Operating income from sales of research models for the
first six months of 2000 was $25.2 million, an increase of $4.9 million, or
24.1%, from $20.3 million for the first six months of 1999. Operating income
from sales of research models for the first six months of 2000 was 28.9% of net
sales, compared to 27.5% for the first six months of 1999. The increase was
attributable to the factors described above.
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services for the first six months of 2000 was $11.0 million, an
increase of $3.6 million, or 48.6%, from $7.4 million for the first six months
of 1999. Operating income from sales of biomedical products and services for the
first six months of 2000 decreased to 19.6% of net sales, compared to 21.5% of
net sales for the first six months of 1999. This was primarily due to the
acquisition of Sierra, and the impact of the additional amortization of
intangibles.
INCOME TAXES. The effective tax rate for the first six months of 2000
excluding the reversal of the deferred tax valuation allowance of $4.8
million was 53.6% as compared to 43.1% for the first six months in 1999. The
$4.8 million reversal of the valuation allowance was recorded as a tax
benefit in the second quarter of 2000 due to a reassessment of the need for a
deferred tax valuation allowance following the company's initial public
offering of 16,100,000 shares of its common stock subsequent to the second
quarter of 2000.
INTEREST EXPENSE. Interest expense for the first six months of 2000 was
$25.8 million. The $25.6 million increase from the first six months of 1999 was
primarily due to the additional debt incurred as a result of the
recapitalization which occurred on September 29, 1999. The interest rate of the
senior subordinated notes as a result of meeting a financial ratio will remain
at 13.5%.
NET INCOME. Net income for the first six months of 2000 was $8.6 million, a
decrease of $5.7 million from $14.3 million for the first six months of 1999.
The decrease was attributable to the increased interest expense partially offset
by operating income from operations and the reversal of the deferred tax
valuation allowance.
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THREE MONTHS ENDED JUNE 24, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 26,
1999
NET SALES. Net sales for the three months ended June 24, 2000 were $74.1
million, an increase of $18.2 million, or 32.6%, from $55.9 million for the
three months ended June 26, 1999.
RESEARCH MODELS. Net sales of research models for the three months ended
June 24, 2000 were $46.1 million, an increase of $8.6 million, or 22.9%, from
$37.5 million for the three months ended June 26,1999. The consolidation of
Charles River Japan for the second quarter of 2000 increased sales by $10.6
million. Small animal research model sales increased in North America by $1.7
million or 10.6% due to improved pricing, a shift to higher priced specialty
units and an increase in unit volume. Small animal research model sales in
Europe decreased $1.5 million due to the negative impact of $1.7 million from
foreign currency translations. We also experienced a decrease in the large
animal breeding, import and conditioning of $2.7 million due to the closure
of a large animal facility in the U.K. and the sale of our large animal
breeding colony in the first quarter of 2000.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services for the three months ended June 24, 2000 were $28.0 million, an
increase of $9.6 million, or 52.2%, from $18.4 million for the three months
ended June 26, 1999. At the beginning of the fourth quarter in 1999 we acquired
Sierra which had sales of $7.3 million in the second quarter of 2000. The
remaining increase was due to significant sales increases of transgenic and
research support services of $0.9 million, endotoxin detection systems of $0.4
million, biosafety testing of $0.6 million and sales from our contract site
management contracts of $1.0 million, primarily due to better customer awareness
of our outsourcing solutions.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided for the three months ended June 24, 2000 was $42.5 million, an
increase of $10.3 million, or 32.0%, from $32.2 million for the three months
ended June 26, 1999.
RESEARCH MODELS. Cost of products sold and services provided for
research models for the three months ended June 24, 2000 was $26.9 million,
an increase of $5.2 million, or 24.0%, compared to $21.7 million for the
three months ended June 26, 1999. Cost of products sold and services provided
for the three months ended June 24, 2000 was 58.2% of net sales compared to
57.9% of net sales for the three months ended June 26, 1999. Cost of products
sold and services provided increased at a rate slightly higher than net sales
due to the closure of the large animal facility in the U.K. which was
completed in the second quarter of 2000.
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services for the three months ended June
24, 2000 was $17.6 million, an increase of $6.6 million, or 60.0%, compared to
$11.0 million for the three months ended June 26, 1999. Cost of products sold
and services provided as a percentage of net sales increased to 63.1% for the
three months ended June 24, 2000 from 59.8% for the three months ended June 26,
1999 due mainly to the impact of the acquisition of Sierra which has slightly
lower margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 24, 2000 were $12.4
million, an increase of $1.3 million, or 11.7%, from $11.1 million for the
three months ended June 26, 1999. Selling, general and administrative
expenses for the three months ended June 24, 2000 were 16.8% of net sales
compared to 19.8% of net sales for the three months ended June 26, 1999.
RESEARCH MODELS. Selling, general and administrative expenses for
research models for the three months ended June 24, 2000 were $6.8 million,
an increase of $1.8 million, or 36.0%, compared to $5.0 million for the three
months ended June 26, 1999. The consolidation of Charles River Japan
following our acquisition of an additional 16% of the equity in this entity
during the first quarter of 2000 is the main reason for the increase.
Selling, general and administrative expenses for the three months ended June
24, 2000 were 14.8% of net sales, compared to 13.3% for the three months
ended June 26, 1999.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services for the three months ended June
24, 2000 were $4.6 million, an increase of $1.3 million, or 39.4%, compared to
$3.3 million for the three months ended June 26, 1999. The acquisition of Sierra
in the fourth quarter of 1999 is the major factor in the increase. Selling,
general and administrative expenses for the three months ended June 24, 2000
decreased to 16.5% of net sales, compared to 17.9% of net sales for the three
months ended June 26, 1999, due to greater economies of scale.
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UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $0.1 million for the three months
ended June 24, 2000, a decrease of $2.5 million, compared to $2.6 million for
the three months ended June 26, 1999 due mainly to pension income of $1.4
million from favorable investment results.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles for the three months ended June 24, 2000 was $0.9 million,
an increase of $0.5 million from $0.4 million for the three months ended June
26, 1999. The increase was due to the effect of additional amortization of
intangibles resulting from our Sierra acquisition.
OPERATING INCOME. Operating income for the three months ended June 24, 2000
was $18.2 million, an increase of $5.9 million, or 48.0%, from $12.3 million for
the three months ended June 26, 1999. Operating income for the three months
ended June 24, 2000 was 24.6% of net sales, compared to 22.0% of net sales for
the three months ended June 26, 1999. Operating income increased in total and as
a percentage of net sales for the reasons described above.
RESEARCH MODELS. Operating income from sales of research models for the
three months ended June 24, 2000 was $12.5 million, an increase of $1.7 million,
or 15.7%, from $10.8 million for the three months ended June 26, 1999. Operating
income from sales of research models for the three months ended June 24, 2000
was 27.1% of net sales, compared to 28.8% for the three months ended June 26,
1999. The decrease was attributable to the factors described above.
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services for the three months ended June 24, 2000 was $5.7 million,
an increase of $1.6 million, or 39.0%, from $4.1 million for the three months
ended June 26, 1999. Operating income from sales of biomedical products and
services for the three months ended June 24, 2000 decreased to 20.4% of net
sales, compared to 22.3% of net sales for the three months ended June 26, 1999.
This was primarily due to the acquisition of Sierra, and the impact of
additional amortization of intangibles.
INCOME TAXES. The effective tax rate for the three months ended June 24,
2000 excluding the reversal of the deferred tax valuation allowance of 35.4%
compares favorably to the effective tax rate of 44.9% for the three months ended
June 26, 1999.
INTEREST EXPENSE. Interest expense for the three months ended June 24, 2000
was $13.1 million. The $13.0 million increase for the second quarter was
primarily due to the additional debt incurred as a result of the
recapitalization which occurred on September 29, 1999.
NET INCOME. Net income for the three months ended June 24, 2000 was $8.0
million, an increase of $0.8 million from $7.2 million for the three months
ended June 26, 1999. The increase was attributable to increased operating
income from operations and the reversal of the deferred tax valuation
allowance which was partially offset by the increased interest expense.
-15-
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $19.0 million at June 24, 2000
compared with $15.0 million at December 25, 1999. Our principal sources of
liquidity are cash flow from operations and borrowings under our credit
facility.
Net cash provided by operating activities during the six months ending June
24, 2000 was $7.0 million compared to $8.7 million for the six months ending
June 26, 1999. Net income for the six month period ending June 24, 2000 was $8.6
million compared to $14.3 for the first six months of 1999. Net income was
impacted by the non-cash accretion of the senior discount debentures and the
subordinated discount note of $6.3 million. This was partially offset by the
decrease in the deferred tax valuation allowance of $4.8 million.
Net cash used in investing activities during the six months ending June 24,
2000 was $5.1 million compared to $4.9 million for the six months ending June
26, 1999. On February 28, 2000, the company acquired an additional 16% of the
equity ( 340,840 common shares ) of its 50% equity joint venture company,
Charles River Japan, from Ajinomoto Co., Inc. The purchase price for the equity
was 1.4 billion yen or $12.8 million. One billion yen, or $9.2 million was paid
at closing and the balance of 400 million yen, or $3.7 million was deferred
pursuant to a three year balloon promissory note. We acquired $3.2 million in
cash as a result of the acquisition. In January we sold an operation in Florida
for $7.0 million. Capital expenditures for the first six months ending June 24,
2000 were $6.1 million compared to $4.6 million for the six months ending June
26, 1999.
Net cash provided from financing activities during the six months ending
June 24, 2000 was $2.2 million compared to cash used of $6.3 for the first
six months in 1999. We increased our borrowings under the revolving loan by
an additional $3.0 million during the first six months of 2000. During the
first six months of 1999 we had net outflow activity with Bausch & Lomb, our
100% shareholder prior to the recapitalization, of $6.1 million.
We anticipate that our operating cash flow, together with borrowings under
our credit facility, will be sufficient to meet our anticipated future
operating expenses, capital expenditures and debt service obligations as they
become due. However, Charles River Laboratories International, Inc. is a
holding company with no operations or assets other than its ownership of 100%
of the common stock of its subsidiary, Charles River Laboratories, Inc. We
have no source of liquidity other than dividends from our subsidiary. Its
ability to pay dividends is subject to limitations contained in the indenture
governing the senior subordinated notes and the credit facility.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates and
foreign currency exchange rates. Our primary interest rate exposure results from
changes in LIBOR or the base rate which are used to determine the applicable
interest rates under our term loans and revolving credit facility. We have
entered into an interest rate protection agreement designed to protect us
against fluctuations in interest rates with respect to at least 50% of the
aggregate principal amount of the term loans and the senior subordinated notes.
Interest rate swaps have the effect of converting variable rate obligations to
fixed or other interest rate obligations. Our potential loss over one year that
would result from a hypothetical, instantaneous and unfavorable change of 10
basis points in the interest rate on all of our variable rate obligations would
be approximately $1.7 million. Fluctuations in interest rates will not affect
the interest payable on the senior subordinated notes, senior discount
debentures or subordinated discount note, which is fixed.
We do not use financial instruments for trading or other speculative
purposes.
We also have exposure to some foreign currency exchange-rate fluctuations
for the cash flows received from our foreign affiliates. This risk is mitigated
by the fact that their operations are conducted in their respective local
currencies, and it is not our intention to repatriate earnings prospectively.
Currently, we do not engage in any foreign currency hedging activities as we do
not believe that our foreign currency exchange-rate risk is material.
-16-
Charles River Laboratories International, Inc.
Form 10-Q
For the Quarterly Period Ended June 24, 2000
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed during the quarter
-- Amended and Restated Certificate of Incorporation of
Charles River Laboratories International, Inc. *
-- By-law of Charles River Laboratories International, Inc. *
* Previously filed as an exhibit in the Registration
Statement on Form S-1 of Charles River Laboratories
International, Inc. (File No. 333-35524) filed June 23,
2000.
27.1 Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter ended March
25, 2000
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SIGNATURE
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.
---------------------------------------
August 4, 2000 /s/ Thomas F. Ackerman
---------------------------
Thomas F. Ackerman
Sr. Vice President and Chief Financial Officer
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