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(Exact Name of Registrant as Specified in Its Charter)
iDelaware
i06-1397316
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i251 Ballardvale Street
iWilmington
iMassachusetts
i01887
(Address
of Principal Executive Offices)
(Zip Code)
(Registrant’s telephone number, including area code): (i781) i222-6000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Ticker symbol(s)
Name of each exchange on which registered
iCommon stock, $0.01 par value
iCRL
iNew
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. iYes☑ 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. iYes☑ 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.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 i☐No ☑
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: the COVID-19 pandemic, its duration, its impact on 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, ability to timely account for assets on our balance sheet, ability to efficiently implement advisable safety precautions, and internal controls over financial reporting; the COVID-19 pandemic’s impact on demand, the global economy and financial markets, changes and uncertainties in the global economy; client demand, particularly future demand for drug discovery and development products and services, including the outsourcing of these services;
our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; 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; 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); 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 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, 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.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Trade
receivables and contract assets, net of allowances for credit losses of $i7,928 and $i7,180,
respectively
i747,605
i642,881
Inventories
i256,765
i199,146
Prepaid
assets
i80,939
i93,543
Other
current assets
i107,456
i97,311
Total
current assets
i1,393,086
i1,274,095
Property,
plant and equipment, net
i1,383,422
i1,291,068
Operating
lease right-of-use assets, net
i382,121
i292,941
Goodwill
i2,860,258
i2,711,881
Client
relationships, net
i965,206
i981,398
Other
intangible assets, net
i67,166
i79,794
Deferred
tax assets
i42,467
i40,226
Other
assets
i435,635
i352,889
Total
assets
$
i7,529,361
$
i7,024,292
Liabilities,
Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases
$
i2,364
$
i2,795
Accounts
payable
i211,381
i198,130
Accrued
compensation
i202,962
i246,119
Deferred
revenue
i242,084
i219,703
Accrued
liabilities
i199,234
i228,797
Other
current liabilities
i190,110
i137,641
Total
current liabilities
i1,048,135
i1,033,185
Long-term
debt, net and finance leases
i2,997,221
i2,663,564
Operating
lease right-of-use liabilities
i365,775
i252,972
Deferred
tax liabilities
i230,051
i239,720
Other
long-term liabilities
i195,075
i242,859
Total
liabilities
i4,836,257
i4,432,300
Commitments
and contingencies (Notes 2, 9, 11 and 13)
i
i
Redeemable noncontrolling interests
i40,177
i53,010
Equity:
Preferred
stock, $ii0.01/ par value; ii20,000/
shares authorized; iiiino///
shares issued and outstanding
i—
i—
Common
stock, $ii0.01/ par value; ii120,000/
shares authorized; i50,990 shares issued and i50,861 shares outstanding as of June 25, 2022, and ii50,480/
shares issued and outstanding as of December 25, 2021
See
Notes to Unaudited Condensed Consolidated Financial Statements.
7
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iBASIS
OF PRESENTATION
iThe 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. 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
iThe
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 Issued Accounting Pronouncements
i
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 sets disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The ASU also clarifies that contractual sale restrictions should not be considered
when measuring fair value of equity securities. The ASU is effective for fiscal years beginning after December 15, 2023 and will be applied on a prospective basis. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements and related disclosures, but does not believe there will be a material impact.
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance.” ASU 2021-10 requires disclosures about transactions with a government that have been accounted for by a grant or contribution accounting model to increase transparency about the types of transactions, the accounting for the transactions, and the effect on the financial statements. The ASU
is an annual disclosure effective for fiscal years beginning after December 15, 2021 and will be applied on a prospective basis. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements and related disclosures, but does not believe there will be a material impact.
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.
Consolidation
iThe Company’s unaudited condensed consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the
Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.
iThe 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 occur in this fiscal year 2022.
Segment Reporting
iThe Company reports its results in ithree
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 Cells 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 /
8
CHARLES
RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of its clients’ research operations (including recruitment, training, staffing, and management services); and Research and GMP-Compliant Cells, which 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 are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and nonregulated (GLP and non-GLP) safety assessment services. The
Company’s Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (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); Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.
2. iACQUISITIONS
AND DIVESTITURES
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 $i284.5 million, net of $i6.6
million in cash. The acquisition was funded through proceeds from the Company’s credit facility (Credit Facility). This business is reported as part of the Company’s RMS reportable segment.
Fiscal 2021 Acquisitions
Vigene Biosciences, Inc.
On June 28, 2021, the Company acquired Vigene Biosciences, Inc. (Vigene), a gene therapy 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 $i323.9 million, net of $i2.7 million in cash. Included in the purchase
price are contingent payments fair valued at $i34.5 million, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $i57.5
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. As of June 25, 2022, the fair value of the contingent consideration was izero as certain
financial targets have not and are not expected to be achieved.
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 $i53.9
million, net of $i8.5 million in cash. Included in the purchase price are contingent payments fair valued at $i6.9 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 $i877.9 million, net of $i70.5 million
in cash and includes $i15.7 million of consideration for an approximate i2% 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
9
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $i97.0
million, net of $i0.8 million in cash. The total consideration includes $i80.8 million cash paid, settlement of $i3.0
million in convertible promissory notes previously issued by the Company during prior fiscal years, and $i14.1 million of contingent consideration, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $i21.0
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. During the three months ended June 25, 2022, $i7.0
million of contingent consideration was paid as certain operational milestones were achieved. Other financial targets associated with the contingent consideration were not met and the fair value of the remaining contingent consideration is zero.
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 $i35.4
million, which includes $i19.5 million in cash paid ($i5.5 million of which was paid in fiscal 2020), and $i15.9
million of contingent consideration, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $i17.5 million based on future performance over a three-year period). The fair value of the net assets acquired included $i17.3
million of goodwill, $i15.2 million attributed to supplier relationships (to be amortized over a i4-year
period), and $i3.0 million of property, plant, and equipment. The business is reported as part of the Company’s DSA reportable segment. As of June 25, 2022, the fair value of the contingent consideration was izero
as certain operational targets were not achieved.
(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 $i5.0 million of goodwill due to a prior asset acquisition that is not deductible for tax purposes.
(3) 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. Specifically for Cognate, as of March 29, 2021, the Company recorded an estimated liability of $i17 million
pertaining to indirect state sales taxes. During the three months ended June 25, 2022, the Company received a favorable ruling from the applicable state in which the indirect state sales tax liability arose and, accordingly, this liability was reduced in full, resulting in a gain recorded through selling, general and administrative expenses in the period.
/
10
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
i
The
definite-lived intangible assets acquired were as follows:
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 and six months ended June 26, 2021, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $i4.0
million and $i13.3 million, additional interest expense on borrowing of $i2.2
million and $i5.6 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.
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 $i70.6 million,
which included $i7.9 million in cash, $i3.8 million
pension over funding, and certain post-closing adjustments.
The RMS Japan 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 $i59.6 million, net of $i0.2 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 $i15.3 million, which were estimated using a probability weighted model (the maximum contingent contractual payments are up to $i25.0 million
based on future performance), as well as a purchase obligation of approximately $i10.0 million between the parties.
11
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, the Company determined that this capital could be better deployed in other long-term growth opportunities.
i
The
carrying amounts of the major classes of assets and liabilities associated with the divestitures of the businesses were as follows:
Services
and products transferred at a point in time
i100,607
i110,360
i207,225
i222,374
Total
RMS revenue
i186,410
i176,694
i362,952
i353,604
DSA
Services
and products transferred over time
i589,371
i539,790
i1,131,707
i1,040,258
Services
and products transferred at a point in time
i2,546
i304
i4,469
i1,014
Total
DSA revenue
i591,917
i540,094
i1,136,176
i1,041,272
Manufacturing
Services
and products transferred over time
i92,811
i95,974
i187,820
i146,542
Services
and products transferred at a point in time
i101,993
i101,845
i200,112
i197,755
Total
Manufacturing revenue
i194,804
i197,819
i387,932
i344,297
Total
revenue
$
i973,131
$
i914,607
$
i1,887,060
$
i1,739,173
/
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
12
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 June 25, 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).
i
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 June 25, 2022:
Revenue Expected to be Recognized in
Future Periods
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 i30
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.
13
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
i
The following table provides information about client receivables, contract
assets, and contract liabilities from contracts with customers:
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 $i49 million and $i36
million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of June 25, 2022 and December 25, 2021, respectively. Advanced client payments of approximately $i77 million and $i60
million have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated balance sheets as of June 25, 2022 and December 25, 2021, respectively.
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 six months ended June
25, 2022 and June 26, 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):
Approximately i75% of unbilled revenue
as of December 25, 2021, which was $i161 million, was billed during the six months ended June 25, 2022. Approximately i80%
of unbilled revenue as of December 26, 2020, which was $i135 million, was billed during the six months ended June 26, 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):
Approximately
i75% of contract liabilities as of December 25, 2021, which was $i240 million,
were recognized as revenue during the six months ended June 25, 2022. Approximately i75% of contract liabilities as of December 26, 2020, which was $i227 million,
were recognized as revenue during the six months ended June 26, 2021.
Other Performance Obligations
As part of the Company’s service offerings, primarily in the Manufacturing and RMS segments, 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 June 25, 2022 and June 26, 2021, the Company recognized lease revenue of $i13.9 million and $i6.3
million, which is recorded within service revenue, which is transferred over time, within the unaudited condensed consolidated statements of income. For the six months ended June 25, 2022 and June 26, 2021, the Company recognized lease revenue of $i21.8 million and $i6.3 million
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.
14
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. iSEGMENT
INFORMATION
i
The following table presents revenue and other financial information by reportable segment:
The
following tables present reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts:
Compensation,
benefits, and other employee-related expenses
i20,507
i25,924
i49,143
i53,286
External
consulting and other service expenses
i4,727
i6,301
i9,046
i13,657
Information
technology
i3,079
i4,117
i5,553
i8,212
Depreciation
i567
i721
i1,126
i1,373
Acquisition
and integration
i3,014
i15,036
i8,840
i25,596
Other
general unallocated corporate
i2,986
i3,745
i3,127
i7,696
Total
unallocated corporate expense
$
i43,411
$
i66,261
$
i93,869
$
i127,879
/
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.
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. iSUPPLEMENTAL BALANCE SHEET INFORMATION
i
The
composition of trade receivables and contract assets, net is as follows:
Long-term
pension liability, accrued executive supplemental life insurance retirement plan and deferred compensation plans
i103,245
i104,944
Long-term
deferred revenue
i20,766
i20,578
Other
i38,740
i74,280
Other
long-term liabilities
$
i195,075
$
i242,859
/
6.
iVENTURE CAPITAL AND STRATEGIC EQUITY INVESTMENTS
Venture capital investments were $i127.9 million
and $i149.6 million as of June 25, 2022 and December 25, 2021, respectively. The Company’s total commitment to the venture capital funds as of June 25, 2022 was $i192.7 million,
of which the Company funded $i119.7 million through that date. The Company received distributions totaling $i2.7
million and $i18.2 million for the three months ended June 25, 2022 and June 26, 2021, respectively. The Company received distributions totaling $i4.0
million and $i27.5 million for the six months ended June 25, 2022 and June 26, 2021, respectively.
The Company recognized net losses on venture capital investments of $i9.7
million for the three months ended June 25, 2022 and net gains of $i11.1 million for the three months ended June 26, 2021, both of which were driven primarily by publicly-held investments. The Company recognized net losses on venture capital investments of $i23.1
million for the six months ended June
17
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
25, 2022, driven by the decrease in the fair value of publicly-held investments offset by increases from private investments, and net losses of $i5.3 million
for the six months ended June 26, 2021, which were driven by publicly-held and private investments.
The Company also invests, with minority positions, directly in equity of privately-held companies. Strategic equity investments were $i151.2 million and $i51.7
million as of June 25, 2022 and December 25, 2021, respectively. In April 2022, the Company acquired a i49% equity interest in a supplier supporting the DSA reportable segment (the Investee) for $i90.0 million
up front and an additional future contingent payment of up to $i5.0 million based upon the Investee’s future performance. The total allocable basis of the investment exceeds the proportional interest in the Investee’s underlying net assets by $i86.7 million,
which has been allocated primarily to goodwill, intangible assets (client relationships and backlog), and deferred tax liabilities in the amount of $i26.2 million and $i71.2 million,
and $i10.7 million respectively. The Company recognizes its proportional share of the Investee’s earnings, adjusted for the amortization of the intangible assets over their useful lives and any intra-entity eliminations, under the equity method of accounting on a three-month lag within other income (expense), net in the accompanying consolidated statements of income. Summarized financial information
for this equity method Investee is not presented as such information is not material to the Company’s financial statements. The Company purchased additional strategic equity investments of $i12.2 million during the six months ended June 25, 2022 and recognized
insignificant gains and losses for the three and six months ended June 25, 2022 and June 26, 2021.
Additionally, as of June 25, 2022the Company has a $i25 million commitment to purchase an additional interest
in an existing strategic equity investment.
7. iFAIR 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. iAssets
and liabilities measured at fair value on a recurring basis are summarized below:
The
Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the six months ended June 25, 2022, there were no transfers between levels.
Adjustment of previously recorded contingent liability
(i15,340)
i—
Foreign
currency translation
(i878)
(i115)
Ending
balance
$
i9,550
$
i37,307
/
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 $i53 million,
of which the value accrued as of June 25, 2022 is approximately $i10 million. The weighted average probability of achieving the maximum target is approximately i18%.
The average volatility and weighted average cost of capital are approximately i40% and i16%,
respectively. Increases or decreases in these assumptions may result in a higher or lower fair value measurement, respectively.
Debt Instruments
The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2 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:
The
increase in goodwill during the six months ended June 25, 2022 related primarily to the acquisition of Explora BioLabs in the RMS reportable segment.
19
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets, Net
i
The
following table displays intangible assets, net by major class:
The
increase in intangible assets, net during the six months ended June 25, 2022 related primarily to the acquisition of Explora BioLabs, offset by normal amortization over the useful lives.
9. iDEBT AND OTHER FINANCING ARRANGEMENTS
i
Long-term
debt, net and finance leases consists of the following:
Current
portion of long-term debt and finance leases
i2,364
i2,795
Long-term
debt and finance leases
i3,017,923
i2,686,227
Debt
discount and debt issuance costs
(i20,702)
(i22,663)
Long-term
debt, net and finance leases
$
i2,997,221
$
i2,663,564
/
As
of June 25, 2022 and December 25, 2021, the weighted average interest rate on the Company’s debt was i3.15% and i2.78%,
respectively. During the six months ended June 26, 2021, the Company prepaid $i500 million of Senior Notes due in 2026 along with $i21 million
of related debt extinguishment costs and $i13 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 $i21 million
of debt extinguishment costs and $i5 million of deferred financing costs write-offs were recorded in Interest expense for the six months ended June 26, 2021.
Foreign currency transactions
During the three and six months ended June 25, 2022 and June 26, 2021the
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
20
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$ii400/ million
each. To limit this foreign currency exposure, the Company entered into foreign exchange forward contracts, which are not designated as hedging instruments. iThe gains and losses incurred on these transactions were as follows:
Less:
Net income attributable to noncontrolling interests
i1,343
i1,468
i3,547
i3,873
Net
income attributable to common shareholders
$
i109,321
$
i88,448
$
i202,343
$
i149,978
Denominator:
Weighted-average
shares outstanding - Basic
i50,823
i50,297
i50,732
i50,138
Effect
of dilutive securities:
Stock options, restricted stock units and performance share units
i460
i1,037
i561
i1,087
Weighted-average
shares outstanding - Diluted
i51,283
i51,334
i51,293
i51,225
Anti-dilutive
common stock equivalents(1)
i597
i159
i550
i159
(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 six months ended June 25, 2022 and June 26, 2021, the Company did iino/t
repurchase any shares under its authorized stock repurchase program. As of June 25, 2022, the Company had $i129.1 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. During the six months ended June 25, 2022 and June 26, 2021, the Company acquired i0.1 million shares for $i38.5
million and i0.1 million shares for $i40.3
million, respectively, from such netting.
21
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
iChanges
to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
The Company has an investment in an entity whose financial results are consolidated in the Company’s unaudited condensed consolidated financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest within Equity in the accompanying unaudited condensed consolidated balance sheets. The activity within the nonredeemable noncontrolling interest was not significant during the three and six months ended June 25, 2022 and June 26, 2021.
Redeemable Noncontrolling Interests
The
Company has a i92% equity interest in Vital River with an i8% redeemable noncontrolling interest. The
Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining i8% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($i24.3
million as of June 25, 2022) 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 i8% 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 i8% equity interest is not limited.
Prior to June 2022, the Company had an i80%
equity interest in a subsidiary with a i20% redeemable noncontrolling interest. In June 2022, the Company purchased an additional i10%
interest in the subsidiary for $i15.0 million. Beginning in 2024, the Company has the right to purchase, and the noncontrolling interest holders have the right to sell (Put/call option), the remaining i10%
equity interest at its appraised value ($i15.9 million as of June 25, 2022). 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 i10% 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 i10%
equity interest is not limited.
i
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:
Purchase
of a i10% redeemable noncontrolling interest
(i15,000)
i—
Adjustments
of noncontrolling interests to redemption values
i2,293
i2,341
Net
income attributable to noncontrolling interests
i2,487
i2,599
Foreign
currency translation
(i2,613)
i360
Ending
balance
$
i40,177
$
i30,799
/
22
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. iINCOME TAXES
The
Company’s effective tax rates for the three months ended June 25, 2022 and June 26, 2021 were i23.2% and i29.5%,
respectively. The Company’s effective tax rates for the six months ended June 25, 2022 and June 26, 2021 were i19.2% and i20.6%,
respectively. The decrease in the effective tax rates from the prior year period was primarily attributable to the deferred tax impact of tax law changes enacted during the three months ended June 26, 2021, partially offset by a decreased tax benefit from stock-based compensation deductions in thesix months ended June 25, 2022.
For the three months ended June 25, 2022, the Company’s unrecognized tax benefits increased by $i0.3
million to $i34.5 million, primarily due to increases in research & development tax credit reserves. For the three months ended June 25, 2022, the amount of unrecognized income tax benefits that would impact the effective tax rate increased by $i0.1
million to $i31.1 million for the same reasons discussed above. The accrued interest on unrecognized tax benefits was $i0.9
million as of June 25, 2022. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $i11.4 million over the next twelve-month period, primarily due to audit settlements and expiring statutes of limitations.
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.
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.
12. iRESTRUCTURING 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, and Europe. 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. iThe following table presents a summary of restructuring costs related to these initiatives
within the unaudited condensed consolidated statements of income:
As
of June 25, 2022 and June 26, 2021, $i3.3 million and $i2.8 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. iCOMMITMENTS AND CONTINGENCIES
Litigation
Various
lawsuits, claims and proceedings are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.
23
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. 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, non-clinical contract research organization (CRO). 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 support 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 flexible drug development model, which reduces their costs, enhances their productivity and
effectiveness, and increases speed to market.
Our client base includes major global biopharmaceutical 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 Cells 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 and GMP-Compliant Cells supplies 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, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (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.
Russia-Ukraine Conflict
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, 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 and six months ended June 25, 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, supply chain, or cybersecurity
risks in subsequent periods. Refer to Item 1A, Risk Factors disclosed herein and in our Annual Report on Form 10-K for fiscal 2021 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 2022 Acquisition
On April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research
24
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 $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from our Credit Facility. This business is reported as part of our RMS reportable segment.
Fiscal Year 2021 Acquisitions
On June
28, 2021, we acquired Vigene Biosciences, Inc. (Vigene), a gene therapy 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 included $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 Manufacturing reportable segment. As of June 25, 2022, the fair value of the contingent consideration was zero as certain financial targets have not and are not expected to be achieved.
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, 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 our Credit Facility and Senior Notes issued in fiscal 2021. This business is reported as part of our Manufacturing reportable segment.
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. As of June 25, 2022, the fair value of the contingent consideration was zero as certain operational targets were not achieved.
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. During the three months ended June 25, 2022, $7 million of contingent consideration was paid as certain operational milestones were achieved. Other financial
targets associated with the contingent consideration were not met and the fair value of the remaining contingent consideration is zero as of June 25, 2022.
Recent Divestitures
On October 12, 2021, we completed two separate divestitures. We sold our RMS Japan operations to The Jackson Laboratory for a preliminary purchase price of $70.6 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 Sweden to a private investor group for a preliminary purchase price of $59.6 million, net of $0.2 million in cash and certain post-closing adjustments. Included in the purchase price are 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 of our businesses. As part of this assessment, we determined that the above capital could be better deployed in other long-term growth opportunities.
25
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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 occur in this fiscal year 2022.
Overview of Results of Operations and Liquidity
Revenue for the three months ended June 25, 2022 increased $58.5 million, or 6.4%, to $973.1 million compared to $914.6 million in the corresponding period in 2021. Revenue for the six months ended June 25, 2022 increased $147.9 million, or 8.5%, to $1,887.1 million compared to $1,739.2 million in the corresponding period in 2021. The increase in revenue in both periods was primarily due to increased demand within our DSA and RMS segments; partially offset by the divestitures of RMS Japan and CDMO Sweden and the negative effect of changes in foreign currency exchange rates when compared to the corresponding three and six month periods in 2021.
In the three months
ended June 25, 2022, our operating income and operating income margin were $187.4 million and 19.3%, respectively, compared with $137.6 million and 15.0%, respectively, in the corresponding period of 2021. In the six months ended June 25, 2022, our operating income and operating income margin were $336.2 million and 17.8%, respectively, compared with $261.3 million and 15.0%, respectively, in the corresponding period of 2021. The increases in operating income and operating income margin for the three and six months ended June 25, 2022 was primarily due to the contribution of higher revenue described above, lower acquisition related costs, changes in contingent consideration, and a favorable ruling from tax authorities on certain indirect tax positions.
Net income attributable
to common shareholders increased to $109.3 million in the three months ended June 25, 2022, from $88.4 million in the corresponding period of 2021. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above, partially offset by losses on our investments compared to gains in the corresponding period in 2021.
Net income attributable to common shareholders increased to $202.3 million in the six months ended June 25, 2022, from $150.0 million in the corresponding period of 2021. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above and by the absence of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs
incurred in 2021; partially offset by higher losses on our investments in the corresponding period in 2021.
During the six months ended June 25, 2022, our cash flows from operations was $252.1 million compared with $356.8 million for the same period in 2021. The decrease was driven by timing and amounts of our working capital balances, principally collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits), inventory purchases, and variable compensation payments; partially offset by favorable timing of our
vendor and supplier payments compared to the same period in 2021.
Cost
of revenue (excluding amortization of intangible assets)
114.8
106.0
8.8
8.3
%
Selling, general and administrative
26.6
24.0
2.6
10.8
%
Amortization
of intangible assets
5.5
4.1
1.4
34.3
%
Operating income
$
39.5
$
42.6
$
(3.1)
(7.2)
%
Operating
income % of revenue
21.2
%
24.1
%
(290) bps
RMS revenue increased $9.7 million due primarily to higher research model product revenue in North America and China, however China was negatively impacted by COVID-related restrictions that affected client order activity, higher research model services revenue, specifically Insourcing Solutions, which included the acquisition of Explora BioLabs contributing $12.7 million, and our GEMS business; partially offset by the divestiture of RMS Japan,
which decreased revenue by $11.7 million and the effect of changes in foreign currency exchange rates.
RMS operating income decreased $3.1 million compared to the corresponding period in 2021. RMS operating income as a percentage of revenue for the three months ended June 25, 2022 was 21.2%, a decrease of (290) bps from 24.1% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue decreased primarily due to the divestiture of RMS Japan and the COVID-related revenue impact in China.
Cost
of revenue (excluding amortization of intangible assets)
391.2
365.9
25.3
6.9
%
Selling, general and administrative
51.1
48.6
2.5
5.3
%
Amortization
of intangible assets
20.8
21.1
(0.3)
(1.5)
%
Operating income
$
128.8
$
104.5
$
24.3
23.2
%
Operating
income % of revenue
21.8
%
19.4
%
240 bps
27
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
DSA revenue increased $51.8 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased demand and pricing of services; partially offset by
the effect of changes in foreign currency exchange rates.
DSA operating income increased $24.3 million during the three months ended June 25, 2022 compared to the corresponding period in 2021. DSA operating income as a percentage of revenue for the three months ended June 25, 2022 was 21.8%, an increase of 240 bps from 19.4% for the corresponding period in 2021. 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; partially offset by higher staffing costs and modest inflationary pressures compared to the same period in 2021.
Cost
of revenue (excluding amortization of intangible assets)
110.4
100.6
9.8
9.7
%
Selling, general and administrative
10.5
32.7
(22.2)
(67.8)
%
Amortization
of intangible assets
11.4
7.8
3.6
45.6
%
Operating income
$
62.5
$
56.7
$
5.8
10.2
%
Operating
income % of revenue
32.1
%
28.7
%
340 bps
Manufacturing revenue decreased $3.0 million due primarily to the divestiture of the CDMO Sweden business, which decreased revenue by $4.8 million, a slight reduction within our CDMO business related to reduction in COVID-19 testing services, and the effect of changes in foreign currency exchange rates; partially offset by the acquisition of Vigene, which contributed $7.6 million, higher service revenue within our Biologics Testing Solutions business,
and increased demand for endotoxin products in our Microbial Solutions business.
Manufacturing operating income increased $5.8 million during the three months ended June 25, 2022 compared to the corresponding period in 2021. Manufacturing operating income as a percentage of revenue for the three months ended June 25, 2022 was 32.1%, an increase of 340 bps from 28.7% for the corresponding period in 2021. The increase in operating income and operating income as a percentage of revenue was due primarily to a favorable adjustment related to a contingent consideration arrangement and a favorable ruling from tax authorities on certain indirect tax positions recorded within selling, general and administrative expenses; partially offset by higher amortization of intangible assets costs as compared to the same period in 2021 and higher
operating costs associated with our CDMO business.
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 $22.9 million, or 34.5%, compared to the corresponding period in 2021 is primarily related to decreased costs associated with the evaluation and integration of our recent acquisition activity and lower variable compensation. Costs as a percentage of revenue for thethree
months ended June 25, 2022 was 4.5%, a decrease of 270 bps from 7.2% for the corresponding period in 2021.
28
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.2 million for both the three months ended June 25, 2022 and the corresponding period in 2021.
Interest Expense
Interest expense for thethree months ended June
25, 2022 was $3.7 million, a decrease of $12.5 million, or 77.1%, compared to $16.2 million for the corresponding period in 2021. The decrease was due primarily to a higher foreign currency gain recognized in connection with a debt-related foreign exchange forward contract in the three months ended June 25, 2022, partially offset by higher interest rates on our variable debt as compared to the corresponding period in 2021.
Other (Expense) Income, Net
Other expense, net, was $39.8 million for the three months ended June 25, 2022, a decrease of $45.8 million compared to Other income, net of $6.0 million for the corresponding period in 2021. The decrease in the three months ended June
25, 2022 was due primarily to venture capital and life insurance investment losses compared to gains incurred for the corresponding period in 2021, and higher 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 as compared to the corresponding period in 2021.
Income Taxes
Income tax expense for the three months ended June 25, 2022 was $33.4 million, a decrease of $4.2 million compared to $37.6 million for the corresponding period in 2021. Our effective tax rate was 23.2% for the three months ended June 25, 2022, compared to 29.5% for the corresponding period in 2021. The decrease in our effective tax rate in the 2022 period compared to the 2021 period was primarily attributable to the deferred
tax impact of tax law changes enacted during the three months ended June 26, 2021, partially offset by a decreased tax benefit from stock-based compensation deductions.
Cost
of revenue (excluding amortization of intangible assets)
217.2
211.4
5.8
2.8
%
Selling, general and administrative
49.0
46.6
2.4
5.1
%
Amortization
of intangible assets
9.4
8.1
1.3
14.3
%
Operating income
$
87.4
$
87.5
$
(0.1)
(0.1)
%
Operating
income % of revenue
24.1
%
24.7
%
(60) bps
RMS revenue increased $9.4 million due primarily to higher research model product revenue in North America and China, however China was negatively impacted by COVID-related restrictions that affected client order activity, higher research model services revenue, specifically Insourcing Solutions, which included the acquisition of Explora BioLabs contributing $12.7 million, and our GEMS business; partially offset by the divestiture of RMS Japan,
which decreased revenue by $24.4 million and the effect of changes in foreign currency exchange rates.
RMS operating income decreased $0.1 million compared to the corresponding period in 2021. RMS operating income as a percentage of revenue for the six months ended June 25, 2022 was 24.1%, a decrease of 60 bpsfrom 24.7% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue decreased primarily due to the divestiture of RMS Japan and the COVID-related revenue impact in China.
Cost
of revenue (excluding amortization of intangible assets)
764.4
706.0
58.4
8.3
%
Selling, general and administrative
95.0
96.2
(1.2)
(1.2)
%
Amortization
of intangible assets
43.0
43.6
(0.6)
(1.4)
%
Operating income
$
233.8
$
195.5
$
38.3
19.6
%
Operating
income % of revenue
20.6
%
18.8
%
180 bps
DSA revenue increased $94.9 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased demand and pricing of services; and the acquisition of Retrogenix which contributed $3.3 million to Discovery Services revenue; partially offset by the effect of changes in foreign currency exchange rates.
DSA operating income
increased $38.3 million during the six months ended June 25, 2022 compared to the corresponding period in 2021. DSA operating income as a percentage of revenue for the six months ended June 25, 2022 was 20.6%, an increase of 180 bps from 18.8% for the corresponding period in 2021. 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; partially offset by higher staffing costs and modest inflationary pressures compared to the same period in 2021.
Cost
of revenue (excluding amortization of intangible assets)
211.9
171.3
40.6
23.5
%
Selling, general and administrative
43.8
56.8
(13.0)
(22.7)
%
Amortization
of intangible assets
23.3
10.0
13.3
132.1
%
Operating income
$
108.9
$
106.2
$
2.7
2.6
%
Operating
income % of revenue
28.1
%
30.8
%
(270) bps
Manufacturing revenue increased $43.6 million due primarily to our Biologics Solutions business, which includes the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $43.8 million prior to the one year anniversaries of the acquisitions, and higher service revenue within our Biologics Testing Solutions business, as well as increased revenue in our Microbial Solutions business; partially offset by the divestiture of
the CDMO Sweden business, which decreased revenue by $4.8 million, and the effect of changes in foreign currency exchange rates.
Manufacturing operating income increased $2.7 million during the six months ended June 25, 2022 compared to the corresponding period in 2021, which was primarily due to a favorable adjustment related to a contingent consideration arrangement and a favorable ruling from tax authorities on certain indirect tax positions recorded within selling, general and administrative expense; partially offset by higher amortization of intangible assets costs. Manufacturing operating income as a percentage of revenue for the six months ended June 25, 2022 was 28.1%, a decrease of 270 bps from 30.8% for the corresponding period in 2021, primarily due to higher operating costs associated with our CDMO acquisitions.
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 $34.0 million, or 26.6%, compared to the corresponding period in 2021 is primarily related to decreased costs associated with the evaluation and integration of our acquisition activity and lower variable compensation costs. Costs as a percentage of revenue for the six months ended June
25, 2022 was 5.0%, a decrease of 230 bps from 7.3% for the corresponding period in 2021.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.3 million and $0.2 million for the six months ended June 25, 2022 and the corresponding period in 2021, respectively.
Interest Expense
Interest expense for thesix months ended June 25, 2022 was $13.1 million, a decrease of $32.8 million, or 71.4%, compared to $45.9 million for the corresponding period in 2021. The decrease was due primarily to the absence of $26 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 six months ended June 26, 2021, higher foreign currency gains recognized in connection with a debt-related foreign exchange forward contract, partially offset by higher interest rates on our variable debt in the six months ended June 25, 2022 compared to the corresponding period in 2021.
Other Expense, Net
Other expense, net, was $68.4 million for the six months ended June 25, 2022, an increase of $46.6 million compared to $21.8 million for the corresponding period in 2021. The increase was due primarily to increased net losses on our venture capital investments,
strategic equity investments, and life insurance investments for the six months ended June 25, 2022 as compared to the corresponding period in 2021 and higher 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 six months ended June 25, 2022 as compared to the corresponding period in 2021.
31
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Income Taxes
Income tax expense for the six months ended June 25, 2022 was $49.1 million, an increase of $9.2 million compared
to $39.9 million for the corresponding period in 2021. Our effective tax rate was 19.2% for the six months ended June 25, 2022 compared to 20.6% for the corresponding period in 2021. The decrease in our effective tax rate in the 2022 period compared to the 2021 period was primarily attributable to the deferred tax impact of tax law changes enacted during the six months ended June 26, 2021, partially offset by a decreased tax benefit from stock-based compensation deductions in the six months ended June 25, 2022.
Liquidity and Capital Resources
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:
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 June 25, 2022 were $17.7 million.
Repurchases of Common Stock
During the six months ended June 25, 2022, we did not repurchase
any shares under our authorized stock repurchase program. As of June 25, 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 six months ended June 25, 2022, we acquired 0.1 million shares for $38.5 million through such netting.
32
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Cash Flows
The
following table presents our net cash provided by operating activities:
Adjustments
to reconcile net income to net cash provided by operating activities
190.2
203.2
Changes in assets and liabilities
(144.0)
(0.3)
Net cash provided by operating activities
$
252.1
$
356.8
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 operations. For the six months ended June 25, 2022, compared to the six months ended June 26, 2021, the decrease in net cash
provided by operating activities was driven by timing and amount of our working capital balances, principally collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits), inventory purchases, and variable compensation payments; partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.
The following table presents our net cash used in investing activities:
Acquisition of businesses and assets, net of cash acquired
$
(283.4)
$
(1,000.5)
Capital expenditures
(163.3)
(74.5)
Investments,
net
(108.6)
(18.1)
Other, net
(4.8)
0.9
Net cash used in investing activities
$
(560.1)
$
(1,092.2)
For the six months ended June 25, 2022, the primary
use of cash used in investing activities related to the acquisition of Explora BioLabs, capital expenditures to support the growth of the business and investments in certain venture capital and strategic equity investments. For the six months ended June 26, 2021, the primary use of cash used in investing activities related to the acquisitions of Cognate, Distributed Bio, Retrogenix, 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.
The following table presents our net cash provided by financing activities:
Proceeds from long-term debt and revolving credit facility
$
2,180.5
$
4,999.9
Payments on long-term debt, revolving credit facility, and finance lease obligations
(1,856.3)
(4,241.8)
Proceeds
from exercises of stock options
15.6
35.3
Purchase of treasury stock
(38.5)
(40.3)
Payment of debt extinguishment and financing costs
—
(38.2)
Payment of contingent considerations
(10.4)
—
Other,
net
(32.7)
(2.2)
Net cash provided by financing activities
$
258.2
$
712.7
33
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
For the six months ended June 25, 2022, net cash provided by financing activities reflected
the net proceeds of $324.2 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
•Borrowings under our Credit Facility of $300 million, which were used primarily for the acquisition of Explora BioLabs;
•Net borrowings of $153 million made to our Credit Facility throughout the six months ended June 25, 2022;
•Payments of $1.5 billion partially offset by $1.4 billion 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 $38.5 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, approximately $15 million payment to purchase an additional 10% interest in a subsidiary, $15.7 million payment to acquire the remaining 2% ownership interest in Cognate, and $10.4 million of contingent consideration payments; partially offset by proceeds from exercises of employee stock options of $15.6 million.
For the six months ended June 26, 2021, net cash provided by financing activities reflected the net proceeds of
$758.1 million our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
•Payments of approximately $147 million on our term loan;
•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;
•Borrowings under our Credit Facility of $0.9 billion, which were used primarily for the acquisitions of Cognate, Distributed Bio, Retrogenix and certain assets from a distributor;
•Payments of $439 million made to our Credit Facility throughout the six months ended June 26, 2021;
•Gross
proceeds and borrowings of $1.5 billion, but having a net impact of zero, were incurred as part of amending and restating our Credit Facility;
•Gross proceeds and payments of approximately $1.5 billion 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 provided by financing activities also reflected proceeds from exercises of employee stock options of $35.3 million, offset by treasury stock purchases of $40.3 million made due to the netting of common stock
upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. Additionally we paid $21 million of debt extinguishment costs associated with the 2026 Senior Notes repayment and $17 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-K 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 June 25, 2022 was $192.7 million, of which we funded $119.7 million through June 25, 2022. Refer to Note 6, “Venture Capital and Strategic Equity Investments” in this Quarterly Report on Form 10-Q for additional information.
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
34
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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, “Description of Business and Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for fiscal year 2021.
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 six months ended June 25, 2022 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 exposed 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 our exposure to these risks through our regular operating and financing activities.
Interest Rate
Risk
We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of June 25, 2022, our debt portfolio was comprised primarily of floating interest rate borrowings. A 100-basis point increase in interest rates would increase our annual pre-tax interest expense by $14.9 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, 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 six months ended June 25, 2022, the most significant drivers of foreign currency translation adjustment the Company recorded as part of Other comprehensive income (loss) were the Euro, British Pound, Hungarian Forint, and Chinese Yuan.
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 six months ended June 25, 2022, our revenue would have decreased by $58.5 million and our operating income would have decreased by $1.0 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 six months ended June 25, 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 Quarterly Report on Form 10-Q for additional information regarding these types of forward contracts.
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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 June 25, 2022, 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 June 25, 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 June 25, 2022 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please
refer to Note 13 “Commitments and Contingencies” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
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, 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.
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 June 25, 2022.
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
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 June 25, 2022, we did not repurchase any shares of common stock under our stock repurchase program or in open market trading. As of June 25, 2022, 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.
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.
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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.