Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                                   TO                                   
Commission File No. 001-15943
charlesriverlogo2a09.gif
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
06-1397316
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
251 Ballardvale Street
Wilmington, Massachusetts
(Address of Principal Executive Offices)
 
01887
(Zip Code)
 
(Registrant’s telephone number, including area code): (781) 222-6000
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes þ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if smaller
reporting company)
Smaller reporting company ¨
Emerging growth company ¨
 
 
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of April 27, 2018, there were 47,911,809 shares of the Registrant’s common stock outstanding.



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

TABLE OF CONTENTS
Item
 
Page
PART I - FINANCIAL INFORMATION

1
Financial Statements
 
 
Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2018 and April 1, 2017
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2018 and April 1, 2017
 
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2018 and April 1, 2017
 
Notes to Unaudited Condensed Consolidated Financial Statements
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Quantitative and Qualitative Disclosure About Market Risk
4
Controls and Procedures
PART II - OTHER INFORMATION
1
Legal Proceedings
1A
Risk Factors
2
Unregistered Sales of Equity Securities and Use of Proceeds
6
Exhibits
 
 
 
Signatures

1


Special Note on Factors Affecting Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could,” and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties and assumptions that are difficult to predict. For example, we may use forward-looking statements when addressing topics such as: goodwill and asset impairments still under review; 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; 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 companies and venture capital investments and opportunities for future similar arrangements; our cost structure; the impact of acquisitions; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure), including gains and losses attributable to businesses we plan to close, consolidate, or divest (including our Maryland research model production site); 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. You should not rely on forward-looking statements because they are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document, or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 30, 2017, under the sections entitled “Our Strategy,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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)
(in thousands, except per share amounts)
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Service revenue
$
345,454

 
$
304,531

Product revenue
148,516

 
141,232

Total revenue
493,970

 
445,763

Costs and expenses:
 
 
 
Cost of services provided (excluding amortization of intangible assets)
243,808

 
207,167

Cost of products sold (excluding amortization of intangible assets)
68,693

 
67,244

Selling, general and administrative
103,372

 
90,909

Amortization of intangible assets
10,268

 
10,737

Operating income
67,829

 
69,706

Other income (expense):
 
 
 
Interest income
282

 
202

Interest expense
(11,191
)
 
(6,983
)
Other income, net
6,120

 
15,122

Income from continuing operations, before income taxes
63,040

 
78,047

Provision for income taxes
9,772

 
31,084

Income from continuing operations, net of income taxes
53,268

 
46,963

Loss from discontinued operations, net of income taxes
(23
)
 
(4
)
Net income
53,245

 
46,959

Less: Net income attributable to noncontrolling interests
614

 
181

Net income attributable to common shareholders
$
52,631


$
46,778

Earnings per common share
 
 
 
Basic:
 
 
 
Continuing operations attributable to common shareholders
$
1.10

 
$
0.98

Discontinued operations
$

 
$

Net income attributable to common shareholders
$
1.10

 
$
0.98

Diluted:
 
 
 
Continuing operations attributable to common shareholders
$
1.08

 
$
0.97

Discontinued operations
$

 
$

Net income attributable to common shareholders
$
1.08

 
$
0.97

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

3


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Net income
$
53,245

 
$
46,959

Other comprehensive income:
 
 
 
Foreign currency translation adjustment and other
25,431

 
11,221

Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans
459

 
854

Comprehensive income, before income taxes
79,135

 
59,034

Less: Income tax expense related to items of other comprehensive income
1,722

 
226

Comprehensive income, net of income taxes
77,413

 
58,808

Less: Comprehensive income related to noncontrolling interest, net of income taxes
1,178

 
298

Comprehensive income attributable to common shareholders
$
76,235


$
58,510

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts)
 
March 31, 2018
 
December 30, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
187,774


$
163,794

Trade receivables, net
440,109


430,016

Inventories
119,046


114,956

Prepaid assets
43,340

 
36,544

Other current assets
53,079


81,315

Total current assets
843,348


826,625

Property, plant and equipment, net
788,554


781,973

Goodwill
835,936


804,906

Client relationships, net
304,420

 
301,891

Other intangible assets, net
65,876


67,871

Deferred tax assets
26,237


22,654

Other assets
136,632


124,002

Total assets
$
3,001,003


$
2,929,922

Liabilities, Redeemable Noncontrolling Interest and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital leases
$
3,137

 
$
30,998

Accounts payable
73,479

 
77,838

Accrued compensation
71,136

 
101,044

Deferred revenue
98,473

 
117,569

Accrued liabilities
96,630

 
89,780

Other current liabilities
62,572

 
44,460

Current liabilities of discontinued operations
1,671

 
1,815

Total current liabilities
407,098

 
463,504

Long-term debt, net and capital leases
1,129,581

 
1,114,105

Deferred tax liabilities
96,037

 
89,540

Other long-term liabilities
204,871

 
194,815

Long-term liabilities of discontinued operations
3,476

 
3,942

Total liabilities
1,841,063

 
1,865,906

Commitments and contingencies (Note 15)

 

Redeemable noncontrolling interest
17,323

 
16,609

Equity:
 
 
 
Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value; 120,000 shares authorized; 88,125 shares issued and 47,905 shares outstanding as of March 31, 2018, and 87,495 shares issued and 47,402 shares outstanding as of December 30, 2017
881

 
875

Additional paid-in capital
2,590,821

 
2,560,192

Retained earnings
346,044

 
288,658

Treasury stock, at cost, 40,220 shares and 40,093 shares as of March 31, 2018 and December 30, 2017, respectively
(1,673,463
)
 
(1,659,914
)
Accumulated other comprehensive loss
(124,457
)
 
(144,731
)
Total equity attributable to common shareholders
1,139,826

 
1,045,080

Noncontrolling interest
2,791

 
2,327

Total equity
1,142,617

 
1,047,407

Total liabilities, redeemable noncontrolling interest and equity
$
3,001,003

 
$
2,929,922

 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

5


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Cash flows relating to operating activities
 
 
 
Net income
$
53,245

 
$
46,959

Less: Loss from discontinued operations, net of income taxes
(23
)
 
(4
)
Income from continuing operations, net of income taxes
53,268

 
46,963

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,210

 
32,411

Stock-based compensation
10,541

 
9,486

Deferred income taxes
(782
)
 
26,273

Gain on venture capital investments
(6,451
)
 
(4,103
)
Gain on divestiture

 
(10,577
)
Other, net
3,932

 
594

Changes in assets and liabilities:
 
 
 
Trade receivables, net
(3,780
)
 
(21,062
)
Inventories
(3,501
)
 
(2,593
)
Accounts payable
(1,076
)
 
(6,258
)
Accrued compensation
(30,991
)
 
(30,399
)
Deferred revenue
(18,292
)
 
4,094

Customer contract deposits
23,566

 

Other assets and liabilities, net
407

 
(10,800
)
Net cash provided by operating activities
60,051

 
34,029

Cash flows relating to investing activities
 
 
 
Acquisitions of businesses and assets, net of cash acquired
(20,216
)
 

Capital expenditures
(27,726
)
 
(15,920
)
Purchases of investments and contributions to venture capital investments
(5,268
)
 
(6,698
)
Proceeds from sale of investments
28,596

 
3,135

Proceeds from divestiture

 
72,462

Other, net
(50
)
 
17

Net cash (used in) provided by investing activities
(24,664
)
 
52,996

Cash flows relating to financing activities
 
 
 
Proceeds from long-term debt and revolving credit facility
1,080,299

 
112,724

Proceeds from exercises of stock options
20,041

 
19,723

Payments on long-term debt, revolving credit facility, and capital lease obligations
(1,096,795
)
 
(158,140
)
Payments on debt financing costs
(4,932
)
 

Purchase of treasury stock
(13,549
)
 
(48,180
)
Other, net

 
(451
)
Net cash used in financing activities
(14,936
)
 
(74,324
)
Discontinued operations
 
 
 
Net cash used in operating activities from discontinued operations
(636
)
 
(473
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
4,254

 
1,705

Net change in cash, cash equivalents, and restricted cash
24,069

 
13,933

Cash, cash equivalents, and restricted cash, beginning of period
166,331

 
119,894

Cash, cash equivalents, and restricted cash, end of period
$
190,400

 
$
133,827

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Supplemental cash flow information:
 
 
 
Cash and cash equivalents
$
187,774

 
$
131,524

Restricted cash included in Other current assets
605

 
538

Restricted cash included in Other assets
2,021

 
1,765

Cash, cash equivalents, and restricted cash, end of period
$
190,400

 
$
133,827

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.


7

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal year 2017. 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.
The Company has reclassified certain amounts in the unaudited condensed consolidated statements of income for prior periods to conform to the current year presentation. See “Newly Adopted Accounting Pronouncements” below for further discussion and impact on the condensed consolidated financial statements.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, redeemable noncontrolling interest, 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.
Consolidation
The Company’s unaudited condensed consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.
The Company’s fiscal year is 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.
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 2017.
Newly Adopted Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-05, “Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118).” This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of U.S. Tax Reform pursuant to SAB 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the enactment date of U.S. Tax Reform. This standard is effective upon issuance and the Company has complied with the amendments. See Note 11, “Income Taxes” for further discussion.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The standard allows for reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects arising from the change in the reduction of the U.S. federal statutory income tax rate to 21% from 35%. During the three months ended March 31, 2018, the Company elected to early adopt this standard as permitted on a prospective basis, resulting in a reclassification of $3.3 million from accumulated other comprehensive income to retained earnings as a result of remeasuring the Company’s deferred tax liabilities related to its pension and other post-retirement benefit plan gains and losses. The Company’s policy is to release material stranded tax effects on a specific identification basis.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The standard requires an employer to disaggregate the service cost component from the other components of net benefit cost and provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the statements of income. This standard became effective for the Company in the three months ended March 31, 2018. The Company applied the changes retrospectively to the presentation of the service cost component and the other components of net periodic pension cost in the statements of income for all periods presented as required. The adoption of this standard increased operating income by $0.2 million during the three months ended April 1,

8

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2017. In connection with the impact of operating income to the Company’s reportable segments, Research Models and Services (RMS) decreased by less than $0.1 million, Discovery and Safety Assessment (DSA) decreased by $0.3 million, Manufacturing Support (Manufacturing) decreased by less than $0.1 million, and Unallocated corporate increased by $0.6 million during the three months ended April 1, 2017.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. This standard became effective for the Company in the three months ended March 31, 2018 and did not have a significant impact on the consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects for an intra-entity asset transfer other than inventory. This standard became effective for the Company in the three months ended March 31, 2018 and did not have a significant impact on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.” This standard, including a subsequently issued amendment under ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities”, requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income, simplifies the impairment assessment of certain equity investments, and updates certain presentation and disclosure requirements. This standard became effective for the Company in the three months ended March 31, 2018, resulting in an increase of $1.9 million to other assets with a corresponding increase to retained earnings and deferred taxes of $1.4 million and $0.5 million, respectively.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The standard, including subsequently issued amendments, replaced most existing revenue recognition guidance in U.S. GAAP and permits the use of either a modified retrospective or cumulative effect transition method. The Company elected the modified retrospective transition method. The standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard became effective for the Company in the three months ended March 31, 2018. See Note 3, “Revenue From Contracts With Customers” for a discussion of the Company’s adoption of this standard and its impact on the consolidated financial statements and related disclosures.
Newly Issued Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. It also creates more transparency around how economic results are presented, both on the face of the financial statements and in the disclosures. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and requires the modified retrospective approach. Early adoption is permitted. This update applies to all existing hedging relationships on the date of adoption with the cumulative effect of adoption being reflected as of the beginning of the fiscal year of adoption. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the full impact this standard will have on its consolidated financial statements and related disclosures, but expects to recognize substantially all of its leases on the balance sheet by recording a right-to-use asset and a corresponding lease liability.
2. BUSINESS ACQUISITIONS AND DIVESTITURE
MPI Research
On April 3, 2018, the Company acquired MPI Research, a non-clinical contract research organization (CRO) providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. The acquisition enhances the Company’s position as a leading global early-stage CRO by strengthening its ability to partner with clients across the drug

9

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


discovery and development continuum. The purchase price for MPI Research was approximately $800 million in cash, subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded by borrowings on the Company’s $2.3B Credit Facility as well as the offering of the Company’s Senior Notes. See Note 9, “Long-Term Debt and Capital Lease Obligations.” This business will be reported as part of the Company’s DSA reportable segment. Due to the limited time between the acquisition date and the filing of this Quarterly Report on Form 10-Q, it is not practicable for the Company to disclose either the preliminary allocation of purchase price to assets acquired and liabilities assumed or the pro forma consolidated results of operations as if the MPI Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments. The Company incurred transaction and integration costs in connection with the acquisition of $2.7 million for the three months ended March 31, 2018, which were included in selling, general and administrative expenses.
KWS BioTest Limited
On January 11, 2018, the Company acquired KWS BioTest Limited (KWS BioTest), a CRO specializing in in vitro and in vivo discovery testing services for immuno-oncology, inflammatory and infectious diseases. The acquisition enhances the Company’s discovery expertise, with complementary offerings that provide the Company’s customers with additional tools in the active therapeutic research areas of oncology and immunology. The purchase price for KWS BioTest was $20.3 million in cash, subject to certain post-closing adjustments that may change the purchase price, and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to £3.0 million (approximately $4.2 million based on recent exchange rates), based on future performance. The KWS BioTest business is reported as part of the Company’s DSA reportable segment.
The contingent payments become payable based on the achievement of certain revenue and earnings targets. If achieved, the payments become due in the first quarter of fiscal year 2019. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The preliminary purchase price allocation of $22.0 million, net of $1.0 million of cash acquired, was as follows:
 
January 11, 2018
 
(in thousands)
Trade receivables (contractual amount of $1,309)
$
1,309

Other current assets (excluding cash)
99

Property, plant and equipment
1,136

Definite-lived intangible assets - client relationships
3,647

Goodwill
18,165

Current liabilities
(1,575
)
Deferred revenue
(151
)
Long-term liabilities
(596
)
Total purchase price allocation
$
22,034

The purchase price allocation is 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.
The only definite-lived intangible asset relates to client relationships, which will be amortized over a weighted average life of 12 years.
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers introduced through KWS BioTest and the assembled workforce of the acquired business. The goodwill attributable to KWS BioTest is not deductible for tax purposes.
The Company incurred transaction and integration costs of $0.4 million in connection with the acquisition for the three months ended March 31, 2018, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.
Pro forma financial information as well as actual revenue and operating income have not been included because KWS BioTest’s financial results are not significant when compared to the Company’s consolidated financial results.
Brains On-Line
On August 4, 2017, the Company acquired Brains On-Line, a CRO providing critical data that advances novel therapeutics for the treatment of central nervous system (CNS) diseases. Brains On-Line strategically expands the Company’s existing CNS capabilities and establishes the Company as a single-source provider for a broad portfolio of discovery CNS services. The

10

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


purchase price for Brains On-Line was $21.3 million in cash, subject to certain post-closing adjustments that may change the purchase price, and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to €6.7 million (approximately $8.3 million based on recent exchange rates), based on future performance. The Brains On-Line business is reported as part of the Company’s DSA reportable segment.
The contingent payments become payable based on the achievement of certain revenue and earnings targets. If achieved, the payments become due in the first quarter of fiscal year 2019. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The purchase price allocation of $20.1 million, net of $0.6 million of cash acquired, was as follows:
 
August 4, 2017
 
(in thousands)
Trade receivables (contractual amount of $1,146)
$
1,146

Other current assets (excluding cash)
640

Property, plant and equipment
664

Other long-term assets
29

Definite-lived intangible assets
9,300

Goodwill
11,762

Current liabilities
(863
)
Deferred revenue
(405
)
Long-term liabilities
(2,151
)
Total purchase price allocation
$
20,122

The purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. 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. From the date of acquisition through March 31, 2018, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis.
The breakout of definite-lived intangible assets acquired was as follows:
 
Definite-Lived Intangible Assets
 
Weighted Average Amortization Life
 
(in thousands)
 
(in years)
Client relationships
$
7,000

 
13
Other intangible assets
2,300

 
10
Total definite-lived intangible assets
$
9,300

 
12
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers and technology introduced through Brains On-Line and the assembled workforce of the acquired business. The goodwill attributable to Brains On-Line is not deductible for tax purposes.
The Company incurred integration costs of $0.1 million in connection with the acquisition for the three months ended March 31, 2018, which were included in selling, general and administrative expenses within the unaudited condensed consolidated statements of income.
Pro forma financial information as well as actual revenue and operating income have not been included because Brains On-Line’s financial results are not significant when compared to the Company’s consolidated financial results.
Contract Manufacturing
On February 10, 2017, the Company sold its CDMO business to Quotient Clinical Ltd., based in London, England, for $75.0 million in proceeds, net of $0.6 million in cash and cash equivalents transferred in conjunction with the sale and $0.3 million of working capital adjustments.
The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and was reported in the Company’s Manufacturing reportable segment. The Company determined that the CDMO 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.

11

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


During the three months ended April 1, 2017, the Company recorded a gain on the divestiture of the CDMO business of $10.6 million, which was included in other income, net within the Company’s unaudited condensed consolidated statements of income. As of February 10, 2017, the carrying amounts of the major classes of assets and liabilities associated with the divestiture of the CDMO business were as follows (in thousands):
Assets
 
Current assets
$
5,505

Property, plant and equipment, net
11,174

Goodwill
35,857

Long-term assets
17,154

Total assets
$
69,690

Liabilities
 
Deferred revenue
$
4,878

Other current liabilities
1,158

Total liabilities
$
6,036


12

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Adoption of ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606)
ASC 606 became effective for the Company on December 31, 2017 and was adopted using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the practical expedient, which did not have a material effect on the cumulative impact of adopting ASC 606. The reported results for 2018 reflect the application of ASC 606 guidance while the historical results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition” (ASC 605).
The cumulative effect of applying ASC 606 to all contracts with customers that were not completed as of December 30, 2017 was immaterial. There is no material difference in the reporting of revenue for the 2018 period in accordance with ASC 606 when compared to ASC 605.
Revenue Recognition
Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”).
To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component for the 2018 period presented.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the existing transaction price and measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, the Company generally measures its progress using either cost-to-cost (input method) or right-to-invoice (output method). The Company uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right to invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hour incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.

13

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Disaggregation of Revenue
The following tables disaggregate the Company’s revenue by major business line and timing of transfer of products or services for the three months ended March 31, 2018 (in thousands):
Major Products/Service Lines:
 
RMS
$
133,958

DSA
259,992

Manufacturing
100,020

Total revenue
$
493,970

Timing of Revenue Recognition:
 
RMS
 
Services and products transferred over time
$
48,726

Services and products transferred at a point in time
85,232

DSA
 
Services and products transferred over time
259,744

Services and products transferred at a point in time
248

Manufacturing
 
Services and products transferred over time
28,571

Services and products transferred at a point in time
71,449

Total revenue
$
493,970

RMS
The RMS business generates revenue through the commercial production and sale of research models 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 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 contractual shipping terms of a contract. Revenue generated from research models services is recognized over time and is typically based on a right-to-invoice measure of progress (output method) as invoiced amounts correspond directly to the value of the Company’s performance to date.
DSA
The Discovery and Safety Assessment 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. Discovery and Safety Assessment 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 in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; 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
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2018. The guidance provides certain practical expedients that limit this requirement and, therefore, the Company does not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of March 31, 2018:

14

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Revenues Expected to be Recognized in Future Periods
 
Less than 1 Year
 
1 to 3 Years
 
Total
 
(in thousands)
DSA
$
72,872

 
$
55,029

 
$
127,901

Manufacturing
132

 
255

 
387

Total
$
73,004

 
$
55,284

 
$
128,288

Contract Balances from Contracts with Customers
The timing of revenue recognition, billings and cash collections results in billed receivables (client receivables), contract assets (unbilled revenue), contract liabilities (current and non-current deferred revenue), and customer deposits on the unaudited condensed consolidated balance sheets. The Company’s payment terms are generally 30 days in the United States and consistent with prevailing practice in international markets. 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, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:
 
March 31, 2018
 
December 30, 2017 (1)
 
(in thousands)
Balances from contracts with customers only:
 
 
 
Client receivables
$
343,546

 
$
335,839

Contract assets (unbilled revenue)
98,801

 
96,297

Contract liabilities (current and long-term deferred revenue)
108,786

 
125,882

Contract liabilities (customer contract deposits)
23,566

 

 
 
 
 
(1) The beginning balance as of December 30, 2017 is presented under the guidance of ASC 605.
Under ASC 606, 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. As of March 31, 2018, the Company excluded approximately $14 million of unpaid advanced client billings from both client receivables and deferred revenue and approximately $24 million of advanced client payments have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated financial statements.
Other changes in the contract asset and the contract liability balances during the three months ended March 31, 2018:
(i) Changes due to business combinations:
See Note 2. “Business Acquisitions and Divestiture” for client receivables and deferred revenue that were acquired as part of the KWS BioTest acquisition occurring on January 11, 2018.
(ii) Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification:
During the three month period ended March 31, 2018 an immaterial cumulative catch-up adjustment to revenue was 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 $63 million of unbilled revenue as of December 30, 2017 was billed during the three month period ended March 31, 2018.
(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 $98 million of contract liabilities as of December 30, 2017 were recognized as revenue during the three month period ended March 31, 2018.

15

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


4. SEGMENT INFORMATION
The Company retrospectively adopted ASU 2017-07 during the three months ended March 31, 2018, which impacted segment information. Service cost is reflected in operating income within the unaudited condensed consolidated statements of income while all other components of net periodic cost are recorded in Other income, net within the unaudited condensed consolidated statements of income. See Note 1, “Basis of Presentation.” The Company’s three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing).
The following table presents revenue and other financial information by reportable segment:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
RMS
 
 
 
Revenue
$
133,958

 
$
127,161

Operating income
38,527

 
37,690

Depreciation and amortization
4,853

 
5,092

Capital expenditures
4,625

 
2,603

DSA
 
 
 
Revenue
$
259,992

 
$
227,758

Operating income
40,859

 
38,335

Depreciation and amortization
20,787

 
19,369

Capital expenditures
12,802

 
8,323

Manufacturing
 
 
 
Revenue
$
100,020

 
$
90,844

Operating income
28,523

 
26,600

Depreciation and amortization
5,736

 
5,962

Capital expenditures
6,834

 
2,292

For the three months ended March 31, 2018 and April 1, 2017, reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts are as follows:
 
Operating Income
 
Depreciation and Amortization
 
Capital Expenditures
 
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Total reportable segments
$
107,909

 
$
102,625

 
$
31,376

 
$
30,423

 
$
24,261

 
$
13,218

Unallocated corporate
(40,080
)
 
(32,919
)
 
1,834

 
1,988

 
3,465

 
2,702

Total consolidated
$
67,829

 
$
69,706

 
$
33,210

 
$
32,411

 
$
27,726

 
$
15,920

Revenue for each significant product or service offering is as follows:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
RMS
$
133,958

 
$
127,161

DSA
259,992

 
227,758

Manufacturing
100,020

 
90,844

Total revenue
$
493,970

 
$
445,763


16

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


A summary of unallocated corporate expense consists of the following:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Stock-based compensation
$
6,991

 
$
5,583

Compensation, benefits, and other employee-related expenses
20,596

 
14,381

External consulting and other service expenses
2,934

 
5,767

Information technology
2,465

 
2,393

Depreciation
1,834

 
1,987

Acquisition and integration
2,864

 
21

Other general unallocated corporate
2,396

 
2,787

Total unallocated corporate expense
$
40,080

 
$
32,919

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.
Revenue by geographic area is as follows:
 
U.S.
 
Europe
 
Canada
 
Asia Pacific
 
Other
 
Consolidated
 
(in thousands)
Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
$
248,980

 
$
160,826

 
$
48,578

 
$
34,520

 
$
1,066

 
$
493,970

April 1, 2017
231,311

 
136,881

 
47,187

 
30,095

 
289

 
445,763

Included in the Asia Pacific category above are operations located in China, Japan, Korea, Australia, Singapore, and India. 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.

17

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
Client receivables
$
343,546

 
$
335,839

Unbilled revenue
98,801

 
96,297

Total
442,347

 
432,136

Less: Allowance for doubtful accounts
(2,238
)
 
(2,120
)
Trade receivables, net
$
440,109

 
$
430,016


The composition of inventories is as follows:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
Raw materials and supplies
$
20,353

 
$
19,858

Work in process
19,080

 
18,200

Finished products
79,613

 
76,898

Inventories
$
119,046

 
$
114,956

The composition of other current assets is as follows:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
Investments
$
2,542

 
$
28,489

Prepaid income taxes
49,932

 
52,234

Restricted cash
605

 
592

Other current assets
$
53,079

 
$
81,315

The composition of other assets is as follows:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
Life insurance policies
$
33,943

 
$
34,008

Venture capital investments
76,076

 
71,101

Restricted cash
2,021

 
1,945

Other
24,592

 
16,948

Other assets
$
136,632

 
$
124,002

The composition of other current liabilities is as follows:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
Accrued income taxes
$
34,532

 
$
43,250

Customer contract deposits
23,566

 

Other
4,474

 
1,210

Other current liabilities
$
62,572

 
$
44,460


18

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The composition of other long-term liabilities is as follows:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
U.S. Transition Tax
$
66,851

 
$
61,038

Long-term pension liability
51,607

 
52,364

Accrued executive supplemental life insurance retirement plan and deferred compensation plan
37,935

 
37,582

Other
48,478

 
43,831

Other long-term liabilities
$
204,871

 
$
194,815

6. VENTURE CAPITAL INVESTMENTS
The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from 0.6% to 12.0%. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity method of accounting. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LPs’ economic performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.
The Company’s total commitment to the venture capital funds as of March 31, 2018 was $108.4 million, of which the Company funded $54.9 million through that date. During the three months ended March 31, 2018 and April 1, 2017, the Company received dividends totaling $7.1 million and $4.4 million, respectively. The Company recognized gains of $6.5 million and $4.1 million related to the venture capital investments for the three months ended March 31, 2018 and April 1, 2017, respectively.
7. FAIR VALUE
The Company has certain assets and liabilities recorded at fair value, which have been classified as Level 1, 2, or 3 within the fair value hierarchy:
Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access,
Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, and foreign currency spot rates,
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The fair value hierarchy level is determined by asset and liability class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the three months ended March 31, 2018 and April 1, 2017, there were no transfers between levels.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
Cash equivalents - Valued at market prices determined through third-party pricing services;
Mutual funds - Valued at the unadjusted quoted net asset value of shares held by the Company;
Foreign currency forward contracts - Valued using market observable inputs, such as forward foreign exchange points and foreign exchanges rates;
Life insurance policies - Valued at cash surrender value based on the fair value of underlying investments;
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; and
Contingent consideration - Valued based on a probability weighting of the future cash flows associated with the potential outcomes.

19

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
$

 
$
21

 
$

 
$
21

Other assets:
 
 
 
 
 
 
 
Life insurance policies

 
26,240

 

 
26,240

Total assets measured at fair value
$

 
$
26,261

 
$

 
$
26,261

 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
3,053

 
$
3,053

Total liabilities measured at fair value
$

 
$

 
$
3,053

 
$
3,053

 
December 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
$

 
$
21

 
$

 
$
21

Other assets:
 
 
 
 
 
 
 
Life insurance policies

 
26,358

 

 
26,358

Total assets measured at fair value
$

 
$
26,379

 
$

 
$
26,379

 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
298

 
$
298

Total liabilities measured at fair value
$

 
$

 
$
298

 
$
298

Contingent Consideration
The following table provides a rollforward of the contingent consideration related to previous business acquisitions. See Note 2, “Business Acquisitions and Divestiture.”
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Beginning balance
$
298

 
$
3,621

Additions
2,746

 

Payments

 
(406
)
Change in fair value
9

 

Reversal of previously recorded contingent liability

 
(14
)
Ending balance
$
3,053

 
$
3,201

The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement of certain financial targets and a discount rate. Increases or decreases in any of the probabilities of success would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher 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.

20

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
 
 
 
Adjustments to Goodwill
 
 
 
December 30, 2017
 
Acquisitions
 
Foreign Exchange
 
March 31, 2018
 
(in thousands)
RMS
$
58,122

 
$

 
$
706

 
$
58,828

DSA
605,176

 
18,165

 
8,854

 
632,195

Manufacturing
141,608

 

 
3,305

 
144,913

Total
$
804,906

 
$
18,165

 
$
12,865

 
$
835,936

The increase in goodwill during the three months ended March 31, 2018 related primarily to the acquisition of KWS BioTest in the DSA reportable segment, and the impact of foreign exchange.
Intangible Assets, Net
The following table displays intangible assets, net by major class:
 
March 31, 2018
 
December 30, 2017
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
(in thousands)
Backlog
$

 
$

 
$

 
$
8,111

 
$
(8,111
)
 
$

Technology
83,428

 
(30,893
)
 
52,535

 
81,309

 
(27,157
)
 
54,152

Trademarks and trade names
8,873

 
(4,609
)
 
4,264

 
8,661

 
(4,562
)
 
4,099

Other
17,533

 
(8,456
)
 
9,077

 
17,465

 
(7,845
)
 
9,620

Other intangible assets
109,834

 
(43,958
)
 
65,876

 
115,546

 
(47,675
)
 
67,871

Client relationships
551,326

 
(246,906
)
 
304,420

 
540,425

 
(238,534
)
 
301,891

Intangible assets
$
661,160

 
$
(290,864
)
 
$
370,296

 
$
655,971

 
$
(286,209
)
 
$
369,762

9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt, net consists of the following:
 
March 31, 2018
 
December 30, 2017
 
(in thousands)
Term loans
$

 
$
601,250

Revolving facility
1,091,304

 
500,997

Other long-term debt
18,420

 
18,292

Total debt
1,109,724

 
1,120,539

Less: Current portion of long-term debt
(111
)
 
(28,546
)
Long-term debt
1,109,613

 
1,091,993

Debt discount and debt issuance costs
(8,346
)
 
(5,770
)
Long-term debt, net
$
1,101,267

 
$
1,086,223

As of March 31, 2018 and December 30, 2017, the weighted average interest rate on the Company’s debt was 2.13% and 2.45%, respectively.
On March 26, 2018, the Company amended and restated its credit facility creating a $2.3 billion credit facility ($2.3B Credit Facility) which extends the maturity date for the credit facility. The $2.3B Credit Facility provides for a $750.0 million term loan and a $1.55 billion multi-currency revolving facility. The amendment was accounted for as a debt modification. In connection with the transaction, the Company capitalized approximately $6.2 million on the balance sheet as of March 31,

21

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2018 and expensed approximately $1.0 million of debt issuance costs recorded in Interest expense for the three month period ended March 31, 2018.
The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. The revolving facility matures on March 26, 2023, and requires no scheduled payment before that date. Under specified circumstances, the Company has the ability to increase the term loan and/or revolving facility by up to $1.0 billion in the aggregate.
The interest rates applicable to the term loan and revolving facility under the $2.3B Credit Facility are, at the Company’s option, equal to 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 1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.
The $2.3B Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants. These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than 3.50 to 1.0 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than 4.50 to 1.0 with step downs to 3.50 to 1.0 by the last day of the first quarter of 2020. As of March 31, 2018, the Company was compliant with all covenants.
The obligations of the Company under the $2.3B Credit Facility are collateralized by substantially all of the assets of the Company.
Upon the execution of the $2.3B Credit Facility, the Company paid the remaining $601.3 million balance on the previously drawn term loan with proceeds from the new revolving facility. As of March 31, 2018, the Company had no outstanding term loans. On April 3, 2018, in conjunction with the purchase of MPI Research, the Company drew $750.0 million of term loan from the $2.3B Credit Facility.
Senior Notes Offering
On April 3, 2018, the Company entered into an indenture (Indenture) with MUFG Union Bank, N.A., (Trustee) in connection with the offering of $500.0 million in aggregate principal amount of the Company’s 5.5% Senior Notes (Senior Notes) due 2026 in an unregistered offering. Under the terms of the Indenture, interest on the Senior Notes is payable semi-annually on April 1 and October 1 of each year, beginning on October 1, 2018. The Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis (Note Guarantees) by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred approximately $7.4 million of debt issuance costs, of which $6.3 million was capitalized upon the issuance of the Senior Notes on April 3, 2018.
The Company may redeem all or part of the Senior Notes at any time prior to April 1, 2021, at its option, at a redemption price equal to 100% of the principal amount of such Senior Notes plus the Applicable Premium (as defined in the Indenture). The Company may also redeem up to 40% of the Senior Notes with the proceeds of certain equity offerings completed before April 1, 2021, at a redemption price equal to 105.5% of the principal amount of such Senior Notes. On or after April 1, 2021, the Company may on any one or more occasions redeem all or a part of the Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the Senior Notes at a purchase price equal to 101% of the aggregate principal amount of such Senior Notes. Any redemption of the Senior Notes would also require settlement of accrued and unpaid interest, if any, to but excluding the redemption date.
The Indenture contains certain covenants, including but not limited to, limitations and restrictions on the ability of the Company and its U.S. subsidiaries to (i) create certain liens, (ii) enter into any Sale and Leaseback Transaction (as defined in the Indenture) with respect to any property, and (iii) merge, consolidate, sell or otherwise dispose of all or substantially all of their assets. These covenants are subject to a number of conditions, qualifications, exceptions and limitations. Any event of default, as defined, could result in the acceleration of the repayment of the obligations.
Net proceeds from the Senior Notes of $493.8 million were used to partially repay the outstanding revolving credit facility on April 3, 2018.
Commitment Letter
On February 12, 2018, the Company secured a $830 million commitment under a 364-day senior unsecured bridge loan facility (the “Bridge Facility”) for the purpose of financing the acquisition of MPI Research. The Bridge Facility was terminated as of April 3, 2018 in connection upon the successful acquisition of MPI Research. Debt issuance costs of $1.8 million incurred in connection with the Bridge Facility were capitalized as of March 31, 2018 and expensed upon termination of the agreement on April 3, 2018. In addition, in the three months ended March 31, 2018, the Company incurred and expensed $2.0 million of fees pertaining to a temporary backstop facility related to the negotiation of the Credit Facility. These costs were included in Interest expense in the accompanying unaudited condensed consolidated statements of income.

22

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Letters of Credit
As of March 31, 2018 and December 30, 2017, the Company had $4.9 million in outstanding letters of credit.
Capital Lease Obligations
The Company’s capital lease obligations amounted to $31.3 million and $30.3 million as of March 31, 2018 and December 30, 2017, respectively.
10. EQUITY AND NONCONTROLLING INTERESTS
Earnings Per Share
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Numerator:
 
 
 
Income from continuing operations, net of income taxes
$
53,268

 
$
46,963

Loss from discontinued operations, net of income taxes
(23
)
 
(4
)
Less: Net income attributable to noncontrolling interests
614

 
181

Net income attributable to common shareholders
$
52,631

 
$
46,778

 
 
 
 
Denominator:
 
 
 
Weighted-average shares outstanding - Basic
47,785

 
47,546

Effect of dilutive securities:
 
 
 
Stock options, restricted stock units, performance share units and restricted stock
1,043

 
875

Weighted-average shares outstanding - Diluted
48,828

 
48,421

Options to purchase 0.5 million and 1.1 million shares for the three months ended March 31, 2018 and April 1, 2017, respectively, as well as a non-significant number of restricted shares, restricted stock units (RSUs), and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted-average shares outstanding for both the three months ended March 31, 2018 and April 1, 2017 excluded the impact of 1.1 million shares of non-vested restricted stock and RSUs.
Treasury Shares
During the three months ended March 31, 2018, the Company did not repurchase any shares under its authorized stock repurchase program. During the three months ended April 1, 2017, the Company repurchased 0.4 million shares totaling $32.1 million under its $1.3 billion authorized stock repurchase program. As of March 31, 2018, the Company had $115.5 million remaining on the authorized stock repurchase program.
The Company’s stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, RSUs, and PSUs in order to satisfy individual statutory tax withholding requirements. During the three months ended March 31, 2018 and April 1, 2017, the Company acquired 0.1 million shares for $13.5 million and 0.2 million shares for $16.1 million, respectively, from such netting.

23

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Accumulated Other Comprehensive Income (Loss)
Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
 
Foreign Currency Translation Adjustment
and Other
 
Pension and Other Post-Retirement Benefit Plans
 
Total
 
(in thousands)
December 30, 2017
$
(77,545
)
 
$
(67,186
)
 
$
(144,731
)
Other comprehensive income before reclassifications
24,867

 

 
24,867

Amounts reclassified from accumulated other comprehensive loss

 
459

 
459

Net current period other comprehensive income
24,867

 
459

 
25,326

Amount reclassified from accumulated other comprehensive loss due to adoption of ASU 2018-02 (See Note 1)

 
3,330

 
3,330

Income tax expense (benefit)
1,840

 
(118
)
 
1,722

March 31, 2018
$
(54,518
)
 
$
(69,939
)
 
$
(124,457
)
Nonredeemable Noncontrolling Interest
The Company has an investment in an entity whose financial results are consolidated in the Company’s 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. The activity within the nonredeemable noncontrolling interest was immaterial during the three months ended March 31, 2018 and April 1, 2017.
Redeemable Noncontrolling Interest
The Company’s redeemable noncontrolling interest in Vital River is 13%.
The Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 13% equity interest at a contractually defined redemption value, subject to a redemption floor (embedded derivative). These rights are exercisable beginning in 2019 and are accelerated in certain events. 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 ($16.9 million as of March 31, 2018) and its 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 13% 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 agreement does not limit the amount that the Company could be required to pay to purchase the remaining 13% equity interest.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interest:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Beginning balance
$
16,609

 
$
14,659

Total gains or losses (realized/unrealized):
 
 
 
Net income (loss) attributable to noncontrolling interest
150

 
(78
)
Foreign currency translation
564

 
117

Ending balance
$
17,323

 
$
14,698

11. INCOME TAXES
The Company’s effective tax rate for the three months ended March 31, 2018 and April 1, 2017 was 15.5% and 39.8%, respectively. For the three months ended March 31, 2018, the decrease was primarily attributable to the tax on the gain on the divestiture of the CDMO business of $18.0 million in the first quarter of 2017 and tax benefits from favorable taxing authority rulings for the three months ended March 31, 2018 of $2.7 million.
During the three months ended March 31, 2018, the Company’s unrecognized tax benefits decreased by $3.7 million to $21.0 million, primarily due to benefits from a favorable tax ruling, offset with an additional quarter of Canadian Scientific Research

24

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


and Experimental Development Credit reserves. The amount of unrecognized income tax benefits that would impact the effective tax rate decreased by $3.5 million to $19.3 million, for the same reasons listed above. The amount of accrued interest on unrecognized tax benefits was $2.6 million at March 31, 2018. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by up to $1.9 million over the next twelve-month period, primarily as a result of the outcome of pending tax audits.
The Company continues to monitor its accounting for the elements of U.S. Tax Reform enacted in December 2017. The Company has made reasonable estimates of the effects of U.S. Tax Reform to its consolidated financial statements based on guidance and regulations released by the Internal Revenue Service. The SEC has issued SAB 118, which allows for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts. The Company has not recorded any measurement period adjustments during the quarter ended March 31, 2018 to the provisional amounts recorded in the fourth quarter of 2017. The Company anticipates finalizing and recording any adjustments resulting from the release of any additional guidance and interpretations by the end of its fiscal year ending December 29, 2018.
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits in jurisdictions including the U.S., 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 2015.
The Company and certain of its subsidiaries have ongoing tax controversies with various tax authorities in the U.S., Canada, Germany, and France. The Company does not believe that resolution of these controversies will have a material impact on its financial position or results of operations
Income tax (benefit) expense recorded to Other comprehensive income related to change in unrecognized pension gains, losses, and prior service costs was $(0.1) million and $0.2 million for the three months ended March 31, 2018 and April 1, 2017, respectively. Income tax expense recorded to foreign currency translation adjustment was $1.8 million for the three months ended March 31, 2018.
12. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company retrospectively adopted ASU 2017-07 during the three months ended March 31, 2018. Service cost is reflected in Cost of services provided (excluding amortization of intangible assets) and Selling, general and administrative within the unaudited condensed consolidated statements of income. All other components of net periodic cost is recorded in Other income, net within the unaudited condensed consolidated statements of income. See Note 1, “Basis of Presentation.” The following table provides the components of net periodic cost for the Company’s pension, deferred compensation and executive supplemental life insurance retirement plans:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Service cost
$
846


$
754

Interest cost
2,833


2,826

Expected return on plan assets
(3,877
)

(3,450
)
Amortization of prior service credit
(181
)

(119
)
Amortization of net loss
645


966

Net periodic cost
$
266

 
$
977

The net periodic cost for the Company’s other post-retirement benefit plan for the three months ended March 31, 2018 and April 1, 2017 was not significant.

25

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


13. STOCK-BASED COMPENSATION
The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock, RSUs, and PSUs.
The following table provides stock-based compensation by the financial statement line item in which it is reflected:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Cost of revenue
$
1,413

 
$
1,546

Selling, general and administrative
9,128

 
7,940

Stock-based compensation
$
10,541

 
$
9,486

During the three months ended March 31, 2018, the Company granted stock options representing 0.5 million common shares with a per-share weighted-average grant date fair value of $24.81, RSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $109.34, and PSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $117.28. The maximum number of common shares to be issued upon vesting of PSUs granted during the three months ended March 31, 2018 is 0.4 million.
14. FOREIGN CURRENCY CONTRACTS
The Company enters into foreign exchange forward contracts to limit its foreign currency exposure related to intercompany loans that are not of a long-term investment nature. These contracts are recorded at fair value in the Company’s unaudited condensed consolidated balance sheets and are not designated as hedging instruments. Any gains or losses on such contracts are immediately recognized in Other income, net, and are largely offset by the remeasurement of the underlying intercompany loan balances.
The Company did not have any foreign currency contracts open as of March 31, 2018 and December 30, 2017.
15. COMMITMENTS AND CONTINGENCIES
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.
Lease Commitments
During the three months ended March 31, 2018, the Company assumed or entered into new lease agreements or exercised options to extend the lease terms for certain existing leases. As a result, the Company’s lease obligations through 2032 increased by $2.3 million during the three months ended March 31, 2018.

26

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


16. RESTRUCTURING AND ASSET IMPAIRMENTS
Global RMS Restructuring Initiatives
In the fourth quarter of fiscal year 2017, the Company committed to a plan to further reduce costs and improve operating efficiencies in its RMS reportable segment. The Company plans to cease use of its production facility in Maryland for RMS before the end of 2018 and consolidate production in other facilities. Additionally, the Company will reduce its workforce at various other global RMS facilities during 2018.
The following table presents a summary of severance and transition costs, and asset impairments (referred to as restructuring costs) related to this initiative within the unaudited condensed consolidated statements of income for the three months ended March 31, 2018.
 
March 31, 2018
 
Severance and Transition Costs
 
Asset Impairments
 
Total
 
(in thousands)
Cost of services provided and products sold (excluding amortization of intangible assets)
$
353

 
$
515

 
$
868

Selling, general and administrative
170

 

 
170

Total
$
523

 
$
515

 
$
1,038

Restructuring costs incurred during the fourth quarter of 2017 were $18.1 million, which primarily related to non-cash asset impairments and accelerated depreciation charges of $17.7 million. In addition to the costs incurred during the three months ended March 31, 2018, remaining restructuring costs related to this initiative in 2018 are expected to be between $5.5 million and $6.0 million, of which approximately $5.0 million relate to employee separation and facility exit costs, including accelerated lease obligations. All of the costs are recorded in the RMS reportable segment. The cash portion of the total costs are not expected to exceed $8 million. The Company’s existing lease obligation continues through 2028.
Other Restructuring Initiatives
In recent fiscal years, the Company has undertaken productivity improvement initiatives within all reportable segments at various locations across the U.S., Europe, and Japan. This includes workforce reductions, resulting in severance and transition costs; and cost related to the consolidation of facilities, resulting in asset impairment and accelerated depreciation charges. The Company’s existing lease obligations for certain facilities continue through various dates, the latest being March 2028.
The following table presents a summary of restructuring costs related to these initiatives within the unaudited condensed consolidated statements of income for the three months ended March 31, 2018 and April 1, 2017.
 
March 31, 2018
 
April 1, 2017
 
Severance and Transition Costs
 
Asset Impairments
 
Total
 
Severance and Transition Costs
 
Asset Impairments
 
Total
 
(in thousands)
Cost of services provided and products sold (excluding amortization of intangible assets)
$
563

 
$
22

 
$
585

 
$
923

 
$
60

 
$
983

Selling, general and administrative
53

 

 
53

 
94

 

 
94

Total
$
616

 
$
22

 
$
638

 
$
1,017

 
$
60

 
$
1,077

The following table presents restructuring costs by reportable segment for these productivity improvement initiatives:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
DSA
$
(232
)
 
$
256

Manufacturing
870

 
821

Total
$
638

 
$
1,077


27

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table provides a rollforward for all of the Company’s severance and transition costs, and lease obligation liabilities related to all restructuring activities:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
 
(in thousands)
Beginning balance
$
6,856

 
$
8,102

Expense
1,139

 
1,017

Payments / utilization
(1,149
)
 
(2,690
)
Foreign currency adjustments
207

 
102

Ending balance
$
7,053

 
$
6,531

As of March 31, 2018 and April 1, 2017, $3.1 million and $2.6 million of severance and other personnel related costs liabilities and lease obligation liabilities, respectively, were included in accrued compensation and accrued liabilities within the Company’s unaudited condensed consolidated balance sheets and $3.9 million and $4.0 million, respectively, were included in other long-term liabilities within the Company’s unaudited condensed consolidated balance sheets.
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 2017. 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” in our Annual Report on Form 10-K for fiscal year 2017. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, early-stage contract research organization (CRO). For over 70 years, we have been in the business of providing the research models required in research and development of new drugs, devices, and therapies. Over this time, we have built upon our 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, that enable us 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. 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 all major global biopharmaceutical companies, many biotechnology companies, CROs, agricultural and industrial chemical companies, life science companies, veterinary medicine companies, contract manufacturing companies, medical device companies, and diagnostic 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 Support (Manufacturing). Our RMS reportable segment includes the Research Models and Research Model Services 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). 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 Testing Services (Biologics), which performs specialized testing of biologics; Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens; and contract development and manufacturing (CDMO) services, which, until

28


we divested this business on February 10, 2017, allowed us to provide formulation design and development, manufacturing, and analytical and stability testing for small molecules.
Recent Acquisitions and Divestiture
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions and divestiture are described below.
On April 3, 2018, we acquired MPI Research, a non-clinical CRO providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. The acquisition enhances our position as a leading global early-stage CRO by strengthening our ability to partner with clients across the drug discovery and development continuum. The purchase price for MPI Research was approximately $800 million in cash, subject to certain post-closing adjustments. The acquisition was funded by borrowings on our $2.3 billion credit facility ($2.3B Credit Facility) as well as the offering of $500.0 million of our senior notes. MPI Research will be reported as part of our DSA reportable segment.
On January 11, 2018, we acquired KWS BioTest Limited (KWS BioTest), a CRO specializing in in vitro and in vivo discovery testing services for immuno-oncology, inflammatory and infectious diseases. The acquisition enhances our discovery expertise, with complementary offerings that provide our customers with additional tools in the active therapeutic research areas of oncology and immunology. The purchase price for KWS BioTest was $20.3 million in cash, subject to certain post-closing adjustments. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to £3.0 million (approximately $4.2 million based on recent exchange rates), based on future performance. The KWS BioTest business is reported as part of our DSA reportable segment.
On August 4, 2017, we acquired Brains On-Line, a CRO providing critical data that advances novel therapeutics for the treatment of central nervous system (CNS) diseases. Brains On-Line strategically expands our existing CNS capabilities and establishes us as a single-source provider for a broad portfolio of discovery CNS services. The purchase price for Brains On-Line was $21.3 million in cash, subject to certain post-closing adjustments. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to €6.7 million (approximately $8.3 million based on recent exchange rates), based on future performance. The Brains On-Line business is reported as part of our DSA reportable segment.
On February 10, 2017, we completed the divestiture of our CDMO business to Quotient Clinical Ltd., based in London, England, for $75.0 million in proceeds, net of cash, cash equivalents, and working capital adjustments. The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and was reported in our Manufacturing reportable segment.
Overview of Results of Operations and Liquidity
Revenue for the three months ended March 31, 2018 was $494.0 million compared to $445.8 million in the corresponding period in 2017. This increase of $48.2 million, or 10.8%, was primarily due to growth in our DSA and Manufacturing segments. The positive effect of changes in foreign currency exchange rates increased revenue by $20.8 million, or 4.6%, when compared to the corresponding period in 2017.
In the three months ended March 31, 2018, our operating income and operating income margin were $67.8 million and 13.7%, respectively, compared with $69.7 million and 15.6%, respectively, in the corresponding period of 2017. The decrease in operating income and operating income margin was primarily due to continued investments in the business to support future growth of the Company.
Net income attributable to common shareholders increased to $52.6 million in the three months ended March 31, 2018, from $46.8 million in the corresponding period of 2017. The increase in net income attributable to common shareholders was primarily due to a reduction of $21.3 million in the provision for income taxes resulting from the tax on the gain on the divestiture of the CDMO business of $18.0 million in the first quarter of 2017 and tax benefits from favorable taxing authority rulings for the three months ended March 31, 2018 of $2.7 million; partially offset by the absence of a $10.6 million gain recorded in other income, net on the CDMO divestiture in 2017.
During the first three months of 2018, our cash flows from operations was $60.1 million compared with $34.0 million for 2017. The increase was primarily driven by an increase in income from continuing operations and favorable timing of cash flows related to our operating assets and liabilities compared to the prior year.
On March 26, 2018, we amended and restated our credit facility creating a $2.3B Credit Facility. The $2.3B Credit Facility provides for a $750.0 million term loan and a $1.55 billion multi-currency revolving facility. The term loan facility matures in