CRL 9.27.2014 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
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(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2014 |
OR |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO |
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| | |
Delaware | | 06-1397316 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
251 Ballardvale Street Wilmington, Massachusetts (Address of Principal Executive Offices) | | 01887 (Zip Code) |
____________________________________________________________________________
(Registrant's telephone number, including area code): (781) 222-6000
_________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive 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 ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer ý | | Accelerated filer o | | Non-accelerated filer o (Do not check if smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of October 16, 2014, there were 46,921,688 shares of the Registrant's common stock outstanding.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended September 27, 2014
TABLE OF CONTENTS
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| | | Page |
Part I. | Financial Information | |
| Item 1. | Financial Statements | |
| | Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 27, 2014 and September 28, 2013 | |
| | Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 27, 2014 and September 28, 2013 | |
| | Condensed Consolidated Balance Sheets (Unaudited) as of September 27, 2014 and December 28, 2013 | |
| | Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 27, 2014 and September 28, 2013 | |
| | Condensed Consolidated Statement of Changes in Equity and Noncontrolling Interests (Unaudited) for the nine months ended September 27, 2014 | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosure About Market Risk | |
| Item 4. | Controls and Procedures | |
Part II. | Other Information | |
| Item 1A. | Risk Factors | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 6. | Exhibits | |
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 venture capital limited partnerships and leading pharmaceutical companies and opportunities for future similar arrangements; our cost structure; the impact of acquisitions (including Argenta and BioFocus, and VivoPath see Note 2, "Business Acquisitions" and ChanTest, see Note 16, "Subsequent Events"); 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; 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 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 28, 2013 under the sections entitled “Our Strategy,” “Risks Related to Our Business and Industry,” "Management's Discussion and Analysis of Financial Condition and Results of Operations” and in our press releases and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur.
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 | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
Product revenue | $ | 122,816 |
| | $ | 116,732 |
| | $ | 380,015 |
| | $ | 364,877 |
|
Service revenue | 204,751 |
| | 175,397 |
| | 588,099 |
| | 511,423 |
|
Total revenue | 327,567 |
| | 292,129 |
| | 968,114 |
| | 876,300 |
|
Costs and expenses: | | | | | | | |
Cost of products sold | 65,246 |
| | 70,294 |
| | 199,423 |
| | 202,954 |
|
Cost of services provided | 144,053 |
| | 121,909 |
| | 415,976 |
| | 366,639 |
|
Selling, general and administrative | 64,476 |
| | 54,903 |
| | 196,999 |
| | 167,021 |
|
Amortization of intangible assets | 7,620 |
| | 4,180 |
| | 18,813 |
| | 12,892 |
|
Operating income | 46,172 |
| | 40,843 |
| | 136,903 |
| | 126,794 |
|
Other income (expense): | | | | | | | |
Interest income | 376 |
| | 143 |
| | 803 |
| | 476 |
|
Interest expense | (2,997 | ) | | (2,319 | ) | | (9,171 | ) | | (18,143 | ) |
Other income, net | 331 |
| | 4,059 |
| | 8,874 |
| | 6,094 |
|
Income from continuing operations, before income taxes | 43,882 |
| | 42,726 |
| | 137,409 |
| | 115,221 |
|
Provision for income taxes | 11,582 |
| | 11,390 |
| | 36,021 |
| | 29,331 |
|
Income from continuing operations, net of income taxes | 32,300 |
| | 31,336 |
| | 101,388 |
| | 85,890 |
|
Income (loss) from discontinued operations, net of income taxes | 52 |
| | (113 | ) | | (862 | ) | | (1,183 | ) |
Net income | 32,352 |
| | 31,223 |
| | 100,526 |
| | 84,707 |
|
Less: Net income attributable to noncontrolling interests | (316 | ) | | (356 | ) | | (994 | ) | | (978 | ) |
Net income attributable to common shareholders | $ | 32,036 |
| | $ | 30,867 |
| | $ | 99,532 |
| | $ | 83,729 |
|
Earnings per common share | | | | | | | |
Basic: | | | | | | | |
Continuing operations attributable to common shareholders | $ | 0.70 |
| | $ | 0.65 |
| | $ | 2.15 |
| | $ | 1.77 |
|
Discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) | | $ | (0.02 | ) |
Net income attributable to common shareholders | $ | 0.70 |
| | $ | 0.64 |
| | $ | 2.13 |
| | $ | 1.75 |
|
Diluted: | | | | | | | |
Continuing operations attributable to common shareholders | $ | 0.68 |
| | $ | 0.64 |
| | $ | 2.11 |
| | $ | 1.75 |
|
Discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) | | $ | (0.02 | ) |
Net income attributable to common shareholders | $ | 0.68 |
| | $ | 0.64 |
| | $ | 2.09 |
| | $ | 1.72 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
Net income | $ | 32,352 |
| | $ | 31,223 |
| | $ | 100,526 |
| | $ | 84,707 |
|
Foreign currency translation adjustment | (31,635 | ) | | 16,371 |
| | (23,751 | ) | | (9,653 | ) |
Defined benefit plan gains and prior service costs not yet recognized as components of net periodic pension cost: | | | | | | | |
Amortization of prior service costs and net gains and losses (Note 11) | 291 |
| | 752 |
| | 871 |
| | 2,249 |
|
Comprehensive income, before tax | 1,008 |
| | 48,346 |
| | 77,646 |
| | 77,303 |
|
Income tax expense (benefit) related to items of other comprehensive income (Note 10) | $ | 125 |
| | $ | (326 | ) | | $ | 273 |
| | $ | 874 |
|
Comprehensive income, net of tax | 883 |
| | 48,672 |
| | 77,373 |
| | 76,429 |
|
Less: comprehensive income related to noncontrolling interests | (712 | ) | | (454 | ) | | (852 | ) | | (1,260 | ) |
Comprehensive income attributable to common shareholders | $ | 171 |
| | $ | 48,218 |
| | $ | 76,521 |
| | $ | 75,169 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
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| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 130,747 |
| | $ | 155,927 |
|
Trade receivables, net | 275,024 |
| | 220,630 |
|
Inventories | 92,695 |
| | 89,396 |
|
Other current assets | 106,718 |
| | 85,847 |
|
Current assets of discontinued businesses | 835 |
| | 750 |
|
Total current assets | 606,019 |
| | 552,550 |
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Property, plant and equipment, net | 671,244 |
| | 676,182 |
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Goodwill, net | 289,356 |
| | 230,701 |
|
Other intangibles, net | 167,545 |
| | 84,537 |
|
Deferred tax asset | 21,215 |
| | 23,671 |
|
Other assets | 83,873 |
| | 61,964 |
|
Long-term assets of discontinued businesses | 3,106 |
| | 3,151 |
|
Total assets | $ | 1,842,358 |
| | $ | 1,632,756 |
|
Liabilities and Equity | | | |
Current liabilities: | | | |
Current portion of long-term debt and capital leases | $ | 31,917 |
| | $ | 21,437 |
|
Accounts payable | 27,547 |
| | 31,770 |
|
Accrued compensation | 69,616 |
| | 58,461 |
|
Deferred revenue | 66,920 |
| | 54,177 |
|
Accrued liabilities | 69,516 |
| | 56,712 |
|
Other current liabilities | 15,508 |
| | 22,546 |
|
Current liabilities of discontinued businesses | 2,059 |
| | 1,931 |
|
Total current liabilities | 283,083 |
| | 247,034 |
|
Long-term debt and capital leases | 754,799 |
| | 642,352 |
|
Other long-term liabilities | 98,219 |
| | 70,632 |
|
Long-term liabilities of discontinued businesses | 7,876 |
| | 8,080 |
|
Total liabilities | 1,143,977 |
| | 968,098 |
|
Commitments and contingencies (Notes 8, 10, and 13) | | | |
Redeemable noncontrolling interest | 24,550 |
| | 20,581 |
|
Shareholders' equity: | | | |
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding | — |
| | — |
|
Common stock, $0.01 par value; 120,000,000 shares authorized; 83,942,118 issued and 46,766,227 shares outstanding at September 27, 2014 and 82,522,905 issued and 47,553,841 shares outstanding at December 28, 2013 | 839 |
| | 825 |
|
Additional paid-in capital | 2,276,279 |
| | 2,206,155 |
|
Accumulated deficit | (165,941 | ) | | (265,473 | ) |
Treasury stock, at cost, 37,175,891 shares and 34,969,064 shares at September 27, 2014 and December 28, 2013, respectively | (1,423,227 | ) | | (1,305,880 | ) |
Accumulated other comprehensive income | (17,654 | ) | | 5,357 |
|
Total shareholders' equity | 670,296 |
| | 640,984 |
|
Noncontrolling interests | 3,535 |
| | 3,093 |
|
Total shareholder's equity, including noncontrolling interests | 698,381 |
| | 664,658 |
|
Total liabilities and equity | $ | 1,842,358 |
| | $ | 1,632,756 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
| | | | | | | |
| Nine Months Ended |
| September 27, 2014 | | September 28, 2013 |
Cash flows relating to operating activities | | | |
Net income | $ | 100,526 |
| | $ | 84,707 |
|
Less: Loss from discontinued operations | (862 | ) | | (1,183 | ) |
Income from continuing operations | 101,388 |
| | 85,890 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | |
Depreciation and amortization | 70,435 |
| | 67,336 |
|
Amortization of debt issuance costs and discounts | 1,298 |
| | 9,124 |
|
Stock-based compensation | 23,132 |
| | 18,231 |
|
Deferred income taxes | 1,140 |
| | 8,675 |
|
Gain on investments in limited partnerships | (7,377 | ) | | (4,832 | ) |
Other, net | (1,546 | ) | | 2,336 |
|
Changes in assets and liabilities: | | | |
Trade receivables | (40,961 | ) | | (22,663 | ) |
Inventories | (4,573 | ) | | 1,445 |
|
Other assets | (15,055 | ) | | (7,917 | ) |
Accounts payable | (1,779 | ) | | (7,688 | ) |
Accrued compensation | 10,795 |
| | 10,500 |
|
Deferred revenue | 8,826 |
| | (2,289 | ) |
Accrued liabilities | 13,355 |
| | 3,285 |
|
Taxes payable and prepaid taxes | (3,953 | ) | | (9,557 | ) |
Other liabilities | (2,842 | ) | | (5,326 | ) |
Net cash provided by operating activities | 152,283 |
| | 146,550 |
|
Cash flows relating to investing activities | | | |
Acquisition of businesses and assets, net of cash acquired | (183,151 | ) | | (24,218 | ) |
Capital expenditures | (29,907 | ) | | (25,319 | ) |
Purchases of investments | (18,171 | ) | | (15,341 | ) |
Proceeds from sale of investments and distributions from investments in limited partnerships | 15,964 |
| | 10,437 |
|
Other, net | (1,924 | ) | | 108 |
|
Net cash used in investing activities | (217,189 | ) | | (54,333 | ) |
Cash flows relating to financing activities | | | |
Proceeds from long-term debt and revolving credit agreement | 247,920 |
| | 467,804 |
|
Proceeds from exercises of stock options | 46,741 |
| | 58,986 |
|
Payments on long-term debt, capital lease obligations and revolving credit agreement | (132,431 | ) | | (502,241 | ) |
Purchase of treasury stock | (121,985 | ) | | (91,703 | ) |
Other, net | 4,051 |
| | (1,176 | ) |
Net cash provided by (used in) financing activities | 44,296 |
| | (68,330 | ) |
Discontinued operations | | | |
Net cash used in operating activities | (570 | ) | | (1,533 | ) |
Net cash used in discontinued operations | (570 | ) | | (1,533 | ) |
Effect of exchange rate changes on cash and cash equivalents | (4,000 | ) | | (1,585 | ) |
Net change in cash and cash equivalents | (25,180 | ) | | 20,769 |
|
Cash and cash equivalents, beginning of period | 155,927 |
| | 109,685 |
|
Cash and cash equivalents, end of period | $ | 130,747 |
| | $ | 130,454 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND NONCONTROLLING INTERESTS (UNAUDITED)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Non-controlling Interests |
December 28, 2013 | $ | 664,658 |
| | $ | (265,473 | ) | | $ | 5,357 |
| | $ | 825 |
| | $ | 2,206,155 |
| | $ | (1,305,880 | ) | | $ | 23,674 |
|
Components of comprehensive income, net of tax: | | | | | | | | | | | | | |
Net income | 100,526 |
| | 99,532 |
| | — |
| | — |
| | — |
| | — |
| | 994 |
|
Other comprehensive loss | (23,153 | ) | | — |
| | (23,011 | ) | | — |
| | — |
| | — |
| | (142 | ) |
Total comprehensive income | 77,373 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 852 |
|
Adjustment of redeemable noncontrolling interest to fair value | — |
| | — |
| | — |
| | — |
| | (3,559 | ) | | — |
| | 3,559 |
|
Tax benefit associated with stock issued under employee compensation plans | 3,751 |
| | — |
| | — |
| | — |
| | 3,751 |
| | — |
| | — |
|
Issuance of stock under employee compensation plans | 46,814 |
| | — |
| | — |
| | 14 |
| | 46,800 |
| | — |
| | — |
|
Acquisition of treasury shares | (117,347 | ) | | — |
| | — |
| | — |
| | — |
| | (117,347 | ) | | — |
|
Stock-based compensation | 23,132 |
| | — |
| | — |
| | — |
| | 23,132 |
| | — |
| | — |
|
September 27, 2014 | $ | 698,381 |
| | $ | (165,941 | ) | | $ | (17,654 | ) | | $ | 839 |
| | $ | 2,276,279 |
| | $ | (1,423,227 | ) | | $ | 28,085 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated interim financial statements of Charles River Laboratories International, Inc. (the Company) are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) considered necessary to state fairly the Company's financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 28, 2013. Certain reclassifications have been made to prior periods' financial statements to conform with the current period presentation.
During the quarter ended June 28, 2014, the Company revised its reportable segments to ensure alignment with the Company's view of the business following its acquisition of the contract research organization (CRO) services division of Galapagos N.V. (Early Discovery). The Company reviewed the new and existing markets addressed by the business, the recently revised go-to-market strategy, long-term operating margins, the discrete financial information available to its Chief Operating Decision Maker (CODM) and considered how its businesses aggregate based on these qualitative and quantitative factors. Based on this review, the Company identified three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA) and Manufacturing Support (Manufacturing). The Company reported segment results on this basis beginning in the quarter ended June 28, 2014 and retrospectively for all comparable prior periods.
The revised reportable segments are as follows:
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| | |
Research Models and Services | Discovery and Safety Assessment | Manufacturing Support |
Research Models | Discovery Services (1) | Endotoxin and Microbial Detection |
Research Model Services (2) | Safety Assessment | Avian Vaccine Services |
| | Biologics Testing Solutions |
(1) Discovery Services includes the Early Discovery businesses, which were acquired on April 1, 2014.
(2) Research Model Services include Genetically Engineered Models and Services (GEMS), Research Animal Diagnostic Services (RADS), and Insourcing Solutions (IS).
Prior to recasting the reportable segments, the businesses were reported in two segments as follows:
|
| |
Research Models and Services | Preclinical Services |
Research Models (3) | Discovery Services |
Research Model Services (4) | Safety Assessment |
Endotoxin and Microbial Detection | Biologics Testing Solutions |
(3) Research Models included Avian Vaccine Services.
(4) Research Model Services included GEMS, RADS, IS and Discovery Research Services.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company makes estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, impairment of long-lived assets, purchase accounting for acquired businesses, equity investments, income taxes including the valuation allowance for deferred tax assets, defined benefit pension plans, contingencies and share-based compensation. 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.
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 2013 Annual Report on Form 10-K.
Consolidation
The Company's condensed consolidated financial statements reflect its financial statements, those of its wholly-owned subsidiaries and those of certain variable interest entities where the Company is the primary beneficiary. 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 condensed 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.
In determining whether the Company is the primary beneficiary of an entity and therefore required to consolidate, the Company applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the Company consolidating or deconsolidating certain of its variable interest entities.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The ASU is effective for annual and interim periods beginning after December 15, 2014. The Company does not expect the impact of the adoption of this standard to be material to its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The ASU is effective for annual and interim periods beginning after December 15, 2016. The Company has not yet selected a transition method and is evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.
2. BUSINESS ACQUISITIONS
Early Discovery
On April 1, 2014, the Company acquired Early Discovery consisting of (1) 100% of the shares of the United Kingdom (U.K.) based entities Argenta and BioFocus, and (2) certain Dutch assets. These businesses have formed the core of the Company's Early Discovery business. With this acquisition, the Company has enhanced its position as a full service, early-stage CRO, with integrated in vitro and in vivo capabilities from target discovery through preclinical development. The preliminary purchase price of the acquisition is $191.3 million, including $0.9 million in contingent consideration. The acquisition was funded by cash on hand and borrowings on the Company's revolving credit facility. The purchase price includes payment for estimated
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
working capital, which is subject to final adjustment based on the actual working capital of the acquired business. The businesses are reported in the Company's DSA segment.
The contingent consideration is a one-time payment that could become payable based on the achievement of a revenue target for the twelve-month period following the acquisition. If achieved, the payment would become due in the second quarter of 2015. The aggregate, undiscounted amount of contingent consideration that the Company would pay is €5.0 million ($6.3 million as of September 27, 2014). The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The preliminary purchase price allocation of $183.1 million, net of $8.2 million of cash acquired, is as follows:
|
| | | |
| April 1, 2014 |
| (in thousands) |
Current assets (excluding cash) | $ | 31,257 |
|
Property, plant and equipment | 21,008 |
|
Other long term assets | 11,549 |
|
Definite-lived intangible assets | 104,270 |
|
Goodwill | 66,330 |
|
Current liabilities | (14,299 | ) |
Long term liabilities | (36,973 | ) |
Total purchase price allocation | $ | 183,142 |
|
The purchase price allocations were prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. During the third quarter of 2014, we recorded measurement period adjustments related to the Early Discovery acquisition that resulted in an immaterial change to the purchase price allocation. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The breakout of definite-lived intangible assets acquired is as follows:
|
| | | | | |
|
April 1, 2014 | | Weighted average amortization life |
| (in thousands) | | |
Client relationships | $ | 94,000 |
| | 18 years |
Backlog | 5,700 |
| | 1 year |
Trademark and trade names | 1,170 |
| | 3 years |
Leasehold interests | 1,000 |
| | 13 years |
Other intangible assets | 2,400 |
| | 19 years |
Total definite-lived intangible assets | $ | 104,270 |
| | |
The goodwill resulting from the transaction is primarily attributed to the potential growth in the Company's DSA businesses from customers introduced through the Early Discovery business, the assembled workforce of the acquired businesses and expected cost synergies. The goodwill attributable to Argenta and BioFocus is not deductible for tax purposes. The Company incurred transaction and integration costs in connection with the acquisition of $0.5 million and $5.4 million during the three and nine months ended September 27, 2014, respectively, which are included in selling, general and administrative expenses.
The following selected unaudited pro forma consolidated results of operations are presented as if the Early Discovery acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments, including amortization of intangible assets and depreciation of fixed assets of $3.7 million and other one-time costs. These pro forma are for informational purposes only and do not necessarily reflect the results of operations had the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
companies operated as one entity during the periods reported. No effect has been given for synergies, if any, that may have been realized through the acquisition.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Revenue | $ | 327,567 |
| | $ | 313,460 |
| | $ | 993,223 |
| | $ | 935,693 |
|
Net income | 32,036 |
| | 29,098 |
| | 101,029 |
| | 76,705 |
|
Earnings per common share | | | | | | | |
Basic | $ | 0.70 |
| | $ | 0.61 |
| | $ | 2.16 |
| | $ | 1.60 |
|
Diluted | $ | 0.68 |
| | $ | 0.60 |
| | $ | 2.12 |
| | $ | 1.58 |
|
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future. Early Discovery revenue and operating loss for the three months ended September 27, 2014 are $23.3 million and $0.4 million, respectively. Early Discovery revenue and operating loss for the nine months ended September 27, 2014 are $46.8 million and $0.4 million, respectively.
VivoPath
In June 2014, the Company acquired substantially all of the assets of VivoPath, LLC, a discovery service company specializing in the rapid, in vivo compound evaluation of molecules in the therapeutic areas of metabolism, inflammation and oncology. The preliminary purchase price was $2.3 million, including $1.6 million in contingent consideration, and was allocated primarily to the intangible assets acquired. The aggregate, undiscounted amount of contingent consideration that could become payable is a maximum of $2.4 million payable over the next three years based on the achievement of revenue growth targets. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes. The business is reported in the Company's DSA segment.
3. RESTRUCTURING AND ASSET IMPAIRMENTS
Facilities
RMS Japan
In the second quarter of 2014, the Company committed to a plan to consolidate certain research model operations in Japan. As a result, the Company adjusted the carrying value of certain facilities impacted by the consolidation plan. During the three and nine months ended September 27, 2014, the Company recorded $1.3 million and $1.7 million of accelerated depreciation, respectively. Additional accelerated depreciation for 2014 will amount to approximately $1.2 million.
RMS North America
In the first quarter of 2014, the Company committed to a plan to close its research model production facility located in Michigan by the end of 2014 and to reassign the sourcing of research models to other facilities in the United States (U.S.). As a result of these actions, the Company reviewed the long-lived assets of this asset group, consisting of land improvements, building and equipment, for potential impairment based on the undiscounted cash flows of the group and considered the potential redeployment and future utilization of the facility's machinery and equipment. During the three and nine months ended September 27, 2014, the Company recorded $0.3 million and $1.3 million of asset impairments and other charges, respectively, as well as $0.3 million and $0.9 million of accelerated depreciation, respectively. Additional accelerated depreciation for 2014 will amount to approximately $0.2 million.
RMS Europe
In 2012, the Company commenced a consolidation of certain research model operations in Europe. As a result, the Company adjusted the carrying value of certain facilities impacted by the consolidation plan to fair value through an asset impairment charge in 2012. During the second quarter of 2014, the Company recorded an additional impairment charge of $0.3 million related to certain facilities and also recorded a gain of $1.1 million on the sale of another facility.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Staffing Reductions
The Company has periodically implemented staffing reductions to improve operating efficiency and profitability at various sites. As a result of these actions, for the nine months ended September 27, 2014 and September 28, 2013, the Company recorded severance and retention charges as shown below. As of September 27, 2014, $2.4 million was included in accrued compensation and $0.9 million in other long-term liabilities on the Company's consolidated balance sheet.
The following table rolls forward the Company's severance and retention cost liability:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Balance, beginning of period | $ | 3,823 |
| | $ | 2,917 |
| | $ | 2,782 |
| | $ | 3,636 |
|
Expense | 574 |
| | 476 |
| | 5,363 |
| | 1,058 |
|
Payments/Utilization | (1,117 | ) | | (783 | ) | | (4,865 | ) | | (2,084 | ) |
Balance, end of period | $ | 3,280 |
| | $ | 2,610 |
| | $ | 3,280 |
| | $ | 2,610 |
|
The following table presents severance and retention costs by classification on the income statement:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Severance charges included in cost of revenue | $ | 367 |
| | $ | 476 |
| | $ | 3,121 |
| | $ | 989 |
|
Severance charges included in selling, general and administrative expense | 207 |
| | — |
| | 2,242 |
| | 69 |
|
Total expense | $ | 574 |
| | $ | 476 |
| | $ | 5,363 |
| | $ | 1,058 |
|
The following table presents severance and retention cost by segment:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Research models and services | $ | 379 |
| | $ | 32 |
| | $ | 3,974 |
| | $ | 301 |
|
Discovery and safety assessment | 69 |
| | 398 |
| | 1,118 |
| | 711 |
|
Manufacturing support | 126 |
| | 46 |
| | 150 |
| | 46 |
|
Corporate | — |
| | — |
| | 121 |
| | — |
|
Total expense | $ | 574 |
| | $ | 476 |
| | $ | 5,363 |
| | $ | 1,058 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Client receivables | $ | 229,366 |
| | $ | 190,423 |
|
Unbilled revenue | 50,670 |
| | 35,184 |
|
Total | 280,036 |
| | 225,607 |
|
Less allowance for doubtful accounts | (5,012 | ) | | (4,977 | ) |
Trade receivables, net | $ | 275,024 |
| | $ | 220,630 |
|
The composition of inventories is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Raw materials and supplies | $ | 15,583 |
| | $ | 15,028 |
|
Work in process | 12,053 |
| | 11,715 |
|
Finished products | 65,059 |
| | 62,653 |
|
Inventories | $ | 92,695 |
| | $ | 89,396 |
|
The composition of other current assets is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Prepaid assets | $ | 31,466 |
| | $ | 20,058 |
|
Deferred tax asset | 31,636 |
| | 29,139 |
|
Time deposits | 14,577 |
| | 11,158 |
|
Prepaid income tax | 25,747 |
| | 25,247 |
|
Restricted cash | 3,292 |
| | 245 |
|
Other current assets | $ | 106,718 |
| | $ | 85,847 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of property, plant and equipment, net is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Land | $ | 39,452 |
| | $ | 40,157 |
|
Buildings | 701,160 |
| | 694,074 |
|
Machinery and equipment | 385,222 |
| | 367,244 |
|
Leasehold improvements | 40,150 |
| | 37,959 |
|
Furniture and fixtures | 23,796 |
| | 24,013 |
|
Vehicles | 3,836 |
| | 3,859 |
|
Computer hardware and software | 117,889 |
| | 112,328 |
|
Construction in progress (1) | 31,862 |
| | 42,075 |
|
Total | 1,343,367 |
| | 1,321,709 |
|
Less accumulated depreciation | (672,123 | ) | | (645,527 | ) |
Property, plant and equipment, net | $ | 671,244 |
| | $ | 676,182 |
|
(1) Includes the leased facility under construction. See Note 8, "Long-Term Debt and Capital Lease Obligations."
Depreciation expense for the three months ended September 27, 2014 and September 28, 2013 was $18.4 million and $22.7 million, respectively. Depreciation expense for the nine months ended September 27, 2014 and September 28, 2013 was $51.6 million and $54.4 million, respectively.
The composition of other assets is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Deferred financing costs | $ | 5,828 |
| | $ | 7,126 |
|
Cash surrender value of life insurance policies | 27,267 |
| | 26,507 |
|
Investments in limited partnerships | 23,432 |
| | 17,911 |
|
Other assets | 27,346 |
| | 10,420 |
|
Other assets | $ | 83,873 |
| | $ | 61,964 |
|
The composition of other current liabilities is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Accrued income taxes | $ | 13,667 |
| | $ | 18,773 |
|
Current deferred tax liability | 1,652 |
| | 1,960 |
|
Accrued interest and other | 189 |
| | 1,813 |
|
Other current liabilities | $ | 15,508 |
| | $ | 22,546 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of other long-term liabilities is as follows:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Deferred tax liability | $ | 30,764 |
| | $ | 14,988 |
|
Long-term pension liability | 14,822 |
| | 16,219 |
|
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan | 30,559 |
| | 28,708 |
|
Other long-term liabilities | 22,074 |
| | 10,717 |
|
Other long-term liabilities | $ | 98,219 |
| | $ | 70,632 |
|
5. INVESTMENTS IN LIMITED PARTNERSHIPS
The Company has invested in several venture capital limited partnerships that invest in start-up companies in the life sciences industry. The Company's total commitment to these entities as of September 27, 2014 was $55.0 million, of which the Company has funded $18.0 million through the third quarter of 2014. During the three and nine months ended September 27, 2014, the Company received dividends in cash and in securities totaling $0 and $7.4 million, respectively. The Company's ownership interest in these limited partnerships ranges from 3.8% to 12.1%. These limited partnerships prepare quarterly financial statements following investment company accounting guidelines, whereby investments are adjusted to fair value with resulting gains and losses recorded in earnings. These entities estimate the fair value of non-publicly traded investments based on all available information, including value implied by the pricing of subsequent preferred share offerings and the net present value of future cash flows.
The Company accounts for these investments under the equity-method, whereby the Company records its portion of the investment gains and losses as reported in the fund's financial statements on a quarterly lag each reporting period. In addition, the Company adjusts the carrying value of these investments to reflect its estimate of changes to fair value since the fund's financial statements based information from the fund's management team, market prices of known public holdings of the fund and other information.
The Company's investments in these limited partnerships are subject to a high degree of volatility and are generally higher risk relative to other investments the Company may hold. The Company reports gains and losses from its limited partnership investments in other income, net. The Company recognized gains (losses) related to these investments of $(0.8) million and $3.5 million for the three months ended September 27, 2014 and September 28, 2013, respectively. The Company recognized gains related to these investments of $7.4 million and $4.8 million for the nine months ended September 27, 2014 and September 28, 2013, respectively. As of September 27, 2014 and December 28, 2013, these investments had a carrying value of $23.4 million and $17.9 million, respectively, which is reported in other assets on the condensed consolidated balance sheets.
6. FAIR VALUE
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
| |
• | Cash equivalents - Valued at quoted market prices determined through third party pricing services. |
| |
• | Investments in life insurance policies—Valued at cash surrender value based on fair value of underlying investments. |
| |
• | Redeemable noncontrolling interest—Valued primarily using the income approach based on estimated future cash flows of the underlying business based on the Company's projected financial data discounted by a weighted average cost of capital. Significant assumptions include a discount rate of 17.5% and a long-term pretax operating margin of 32%. |
| |
• | Contingent consideration—Valued based on a probability-weighting of the future cash flows associated with the potential outcomes. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. During the periods ended September 27, 2014, there were no transfers between levels.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at September 27, 2014 |
| Quoted Prices in Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 | | Assets and Liabilities at Fair Value |
| (in thousands) |
Cash equivalents | $ | — |
| | $ | 1,851 |
| | $ | — |
| | $ | 1,851 |
|
Life insurance policies | — |
| | 20,193 |
| | — |
| | 20,193 |
|
Total assets measured at fair value | $ | — |
| | $ | 22,044 |
| | $ | — |
| | $ | 22,044 |
|
| | | | | | | |
Redeemable noncontrolling interest | — |
| | — |
| | 24,550 |
| | 24,550 |
|
Contingent consideration | — |
| | — |
| | 2,548 |
| | 2,548 |
|
Total liabilities measured at fair value | $ | — |
| | $ | — |
| | $ | 27,098 |
| | $ | 27,098 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 28, 2013 |
| Quoted Prices in Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 | | Assets and Liabilities at Fair Value |
| (in thousands) |
Cash equivalents | $ | — |
| | $ | 1,851 |
| | $ | — |
| | $ | 1,851 |
|
Life insurance policies | — |
| | 19,534 |
| | — |
| | 19,534 |
|
Total assets measured at fair value | $ | — |
| | $ | 21,385 |
| | $ | — |
| | $ | 21,385 |
|
| | | | | | | |
Redeemable noncontrolling interest | — |
| | — |
| | 20,581 |
| | 20,581 |
|
Total liabilities measured at fair value | $ | — |
| | $ | — |
| | $ | 20,581 |
| | $ | 20,581 |
|
The book value of the Company's term and revolving loans, which are variable rate loans carried at amortized cost, approximates 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.
Concurrent with the acquisition of Vital River in 2013, the Company entered into a joint venture agreement with the noncontrolling interest holders that provides it with the right to purchase the remaining 25% of the entity for cash at its then appraised value beginning in January 2016. Additionally, the noncontrolling interest holders were granted the right to require the Company to purchase the remaining 25% of the entity at its then appraised value beginning in January 2016 for cash. These rights are accelerated in certain events. As the noncontrolling interest holders can require the Company to purchase for cash the remaining 25% interest, the Company classifies the carrying amount of the noncontrolling interest above the equity section and below liabilities on the consolidated balance sheet and adjusts the carrying amount to fair value each quarter end. Adjustments to fair value, which is deemed to be Level 3 as the fair value is based on unobservable inputs, are recorded through additional paid-in capital.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | |
| Redeemable Noncontrolling Interest (Liability) |
| Nine Months Ended |
| September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Beginning balance | $ | 20,581 |
| | $ | — |
|
Additions | — |
| | 8,963 |
|
Total gains or losses (realized/unrealized): | | | |
Net income attributable to noncontrolling interest | 523 |
| | 476 |
|
Foreign currency translation | (113 | ) | | 233 |
|
Change in fair value, included in additional paid-in capital | 3,559 |
| | 4,905 |
|
Ending balance | $ | 24,550 |
| | $ | 14,577 |
|
As part of the Company's acquisitions of Early Discovery and VivoPath, it agreed to make cash payments upon the satisfaction of certain future financial measures. The carrying amount of these obligations is adjusted to fair value each quarter end. As the fair value is based on unobservable inputs, it is deemed to be Level 3.
|
| | | | | | | |
| Contingent Consideration (Liability) |
| Nine Months Ended |
| September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Beginning balance | $ | — |
| | $ | — |
|
Additions | 2,428 |
| | — |
|
Total gains or losses (realized/unrealized): | | | |
Change in fair value | 120 |
| | — |
|
Ending balance | $ | 2,548 |
| | $ | — |
|
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration are the probabilities of successful achievement of certain revenue targets and a discount rate. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in the discount rate would result in a significantly lower or higher fair value measurement, respectively.
The Company enters into derivative instruments to hedge foreign currency exchange risk to reduce the impact of changes to foreign currency rates on its financial statements. During both three and nine months ended September 27, 2014, the Company recognized $0.7 million of net hedge losses associated with forward currency contracts. During the three and nine months ended September 28, 2013, the Company recognized $(0.5) million and $0.3 million of hedge (gains) losses associated with forward currency contracts, respectively. As of September 27, 2014 and September 28, 2013, there were no open forward currency contracts.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table displays the gross carrying amount and accumulated amortization of definite-lived intangible assets by major class:
|
| | | | | | | | | | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| Gross Carrying Amount | | Accumulated Amortization & Impairment Loss | | Gross Carrying Amount | | Accumulated Amortization & Impairment Loss |
| (in thousands) |
Backlog | $ | 8,391 |
| | $ | (5,309 | ) | | $ | 2,916 |
| | $ | (2,507 | ) |
Client relationships | 395,221 |
| | (243,004 | ) | | 311,507 |
| | (238,002 | ) |
Trademarks and trade names | 6,521 |
| | (5,214 | ) | | 5,399 |
| | (4,997 | ) |
Standard operating procedures | 2,748 |
| | (1,934 | ) | | 2,754 |
| | (1,498 | ) |
Other identifiable intangible assets | 13,675 |
| | (6,988 | ) | | 10,432 |
| | (4,905 | ) |
Total other intangible assets | $ | 426,556 |
| | $ | (262,449 | ) | | $ | 333,008 |
| | $ | (251,909 | ) |
Additionally, as of both September 27, 2014 and December 28, 2013, other intangible assets, net, included $3.4 million of indefinite-lived intangible assets.
The changes in the gross carrying amount and accumulated impairment loss of goodwill are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Adjustments to Goodwill | | |
| | December 28, 2013 | | Acquisitions | | Transfers | | Foreign Exchange | | September 27, 2014 |
| | (in thousands) |
Research Models and Services | | | | | | | | | | |
Gross carrying amount | | $ | 83,551 |
| | $ | — |
| | $ | (23,172 | ) | | $ | (650 | ) | | $ | 59,729 |
|
Discovery and Safety Assessment | | | | | | | | | | |
Gross carrying amount | | 1,152,150 |
| | 67,244 |
| | (8,131 | ) | | (8,160 | ) | | 1,203,103 |
|
Accumulated impairment loss | | (1,005,000 | ) | | — |
| | — |
| | — |
| | (1,005,000 | ) |
Manufacturing Support | | | | | | | | | | |
Gross carrying amount | | — |
| | — |
| | 31,303 |
| | 221 |
| | 31,524 |
|
Total | | | | | | | | | | |
Gross carrying amount | | 1,235,701 |
| | 67,244 |
| | — |
| | (8,589 | ) | | 1,294,356 |
|
Accumulated impairment loss | | (1,005,000 | ) | | — |
| | — |
| | — |
| | (1,005,000 | ) |
Goodwill, net | | $ | 230,701 |
| | | | | | | | $ | 289,356 |
|
In the second quarter of 2014, the Company revised its reportable segments to align with the view of the business following its Early Discovery acquisition. See Note 1, "Basis of Presentation." As a result of this reorganization, goodwill was allocated from the Company's prior reporting segments to new reporting segments, as shown in the preceding table within "transfers." The allocation was based on the fair value of each business group within its original reporting segment relative to the fair value of that reporting segment. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt consists of the following:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Term loans | $ | 388,500 |
| | $ | 409,500 |
|
Revolving credit facility | 380,914 |
| | 253,308 |
|
Other long-term debt | 223 |
| | 241 |
|
Total debt | 769,637 |
| | 663,049 |
|
Less: current portion of long-term debt | (31,723 | ) | | (21,241 | ) |
Long-term debt | $ | 737,914 |
| | $ | 641,808 |
|
In 2013, the Company amended and restated its credit agreement creating a $970.0 million agreement ($970M Credit Facility) that provides for a $420.0 million U.S. term loan facility and a $550.0 million multi-currency revolving credit facility. The revolving credit facility may be drawn in U.S. Dollars, Euros, Pound Sterling, or Japanese Yen, subject to sub-limits by currency. Under specified circumstances, the Company has the ability to expand the term loan and/or revolving credit facility by up to $350.0 million in the aggregate.
The interest rates applicable to the $970M Credit Facility are variable and are based on an applicable rate plus a spread determined by the Company's leverage ratio. As of September 27, 2014, the interest rate spread for the adjusted LIBOR was 1.250%.
The $970M 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. As of September 27, 2014, the Company was compliant with all financial covenants specified in the credit agreement.
At September 27, 2014, the Company had $5.0 million outstanding under letters of credit.
Principal maturities of existing debt for the periods set forth in the table below, are as follows:
|
| | | | |
Twelve Months Ending | | September 27, 2014 |
| | (in thousands) |
September 2015 | | $ | 31,723 |
|
September 2016 | | 42,000 |
|
September 2017 | | 63,000 |
|
September 2018 | | 632,914 |
|
September 2019 and beyond | | — |
|
Total | | $ | 769,637 |
|
Capital Lease Obligations
The Company acquired a build-to-suit lease as part of its acquisition of Early Discovery. The Company is the deemed owner of the asset during the construction period for accounting purposes due to its involvement during the construction period. The Company capitalized $16.0 million related to this construction at September 27, 2014 along with a corresponding financing obligation of the same amount. See Note 13, "Commitments and Contingencies."
Capital lease obligations amounted to $17.1 million and $0.7 million at September 27, 2014 and December 28, 2013, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. EQUITY
Earnings Per Share
Basic earnings per share for the three and nine months ended September 27, 2014 and September 28, 2013 was computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares, such as unvested restricted stock. The weighted average number of common shares outstanding for the three and nine months ended September 27, 2014 and September 28, 2013 has been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.
Options to purchase 931,626 and 2,652,660 shares were outstanding in each of the three months ended September 27, 2014 and September 28, 2013, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. For the nine months ended September 27, 2014 and September 28, 2013, anti-dilutive options outstanding were 785,880 and 2,363,878 shares, respectively. Basic weighted average shares outstanding for the three and nine months ended September 27, 2014 and September 28, 2013 excluded the weighted average impact of 1,190,400 and 1,107,313 shares, respectively, of non-vested restricted stock awards.
The following table reconciles the numerator and denominator in the computations of the basic and diluted earnings per share.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands, except share amounts) |
Numerator: | | | | | | | |
Net income from continuing operations attributable to common shareholders | $ | 31,984 |
| | $ | 30,980 |
| | $ | 100,394 |
| | $ | 84,912 |
|
Income (loss) from discontinued operations, net of income taxes | 52 |
| | (113 | ) | | (862 | ) | | (1,183 | ) |
Net income attributable to common shareholders | $ | 32,036 |
| | $ | 30,867 |
| | $ | 99,532 |
| | $ | 83,729 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares outstanding—Basic | 46,016,036 |
| | 47,910,649 |
| | 46,682,826 |
| | 47,950,018 |
|
Effect of dilutive securities: | | | | | | | |
Stock options and contingently issuable restricted stock | 861,694 |
| | 530,516 |
| | 883,008 |
| | 704,118 |
|
Weighted-average shares outstanding—Diluted | 46,877,730 |
| | 48,441,165 |
| | 47,565,834 |
| | 48,654,136 |
|
Treasury Shares
In July 2010, the Company's Board of Directors authorized a $500.0 million stock repurchase program, and subsequently approved increases to the stock repurchase program of $250.0 million in 2010 and of $250.0 million in 2013 for an aggregate authorization of $1.0 billion. As of September 27, 2014, the Company had $28.5 million remaining on the authorized stock repurchase program. The Company's 2007 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share repurchases for the three and nine months ended September 27, 2014 and September 28, 2013 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands, except share amounts) |
Stock Repurchase Program: | | | | | | | |
Number of shares of common stock repurchased | 380,300 |
| | 1,398,346 |
| | 2,093,200 |
| | 1,945,021 |
|
Total cost of repurchase | $ | 20,364 |
| | $ | 65,515 |
| | $ | 110,645 |
| | $ | 88,553 |
|
| | | | | | | |
Netted for taxes: | | | | | | | |
Number of shares of common stock repurchased | 199 |
| | — |
| | 113,627 |
| | 112,748 |
|
Total cost of repurchase | $ | 11 |
| | $ | — |
| | $ | 6,702 |
| | $ | 4,519 |
|
| | | | | | | |
Total: | | | | | | | |
Number of shares of common stock repurchased | 380,499 |
| | 1,398,346 |
| | 2,206,827 |
| | 2,057,769 |
|
Total cost of repurchase | $ | 20,375 |
| | $ | 65,515 |
| | $ | 117,347 |
| | $ | 93,072 |
|
10. INCOME TAXES
The following table provides a reconciliation of the provision for income taxes on the condensed consolidated statements of income: |
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Income from continuing operations before income taxes | 43,882 |
| | 42,726 |
| | 137,409 |
| | 115,221 |
|
Effective tax rate | 26.4 | % | | 26.7 | % | | 26.2 | % | | 25.5 | % |
Provision for income taxes | 11,582 |
| | 11,390 |
| | 36,021 |
| | 29,331 |
|
The Company's overall effective tax rate was 26.4% for the three months ended September 27, 2014 and 26.7% for the three months ended September 28, 2013. The decrease was primarily attributable to a prior year discrete tax cost of $2.0 million related to an ongoing transfer pricing controversy with the Canadian Revenue Agency (CRA) in excess of current year tax costs, associated with tax law changes, including a statutory 25% decrease in the Canadian Scientific Research and Experimental Development (SR&ED) credit and a decrease in the deductibility of interest expense in France.
The Company's overall effective tax rate was 26.2% and 25.5% for each of the nine months ended September 27, 2014 and September 28, 2013, respectively. The increase reflects the items above as well as a discrete tax cost of $1.4 million related to the nondeductible transaction costs incurred in 2014 for the acquisition of the Early Discovery businesses and a discrete tax cost of $1.2 million related to the write-off of deferred tax assets as a result of the reorganization of the Company's RMS U.K. entities. These increases were partially offset by an ability to offset the tax on a capital gain from an investment in a limited partnership with the release of an uncertain tax position of $2.1 million in the nine months ended September 27, 2014.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the third quarter of 2014, the Company's unrecognized tax benefits recorded decreased by $0.5 million to $34.3 million primarily due to the foreign currency translation on pre-acquisition tax positions taken by the newly acquired Early Discovery businesses, offset by a new unrecognized tax benefit related to an ongoing audit in Germany. The amount of unrecognized income tax benefits that would impact the effective tax rate decreased by $0.7 million to $32.2 million. The amount of accrued interest on unrecognized tax benefits is $1.3 million at the end of the third quarter of 2014. The Company believes that it is reasonably possible that the Company's unrecognized tax benefits (and a corresponding indemnification asset) will decrease by up to $11.6 million, including $0.5 million of interest expense, over the next twelve-month period as a result of the expiration of the statute of limitations on an issue related to the forgiveness of debt and an additional decrease by up to $0.4 million over the next twelve-month period as a result of the settlement of a German audit.
In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The ASU requires an entity to present an unrecognized tax benefit as a reduction of the deferred tax asset for a net operating loss, or similar loss or tax credit carryforward, as opposed to a liability, unless certain circumstances exist. The ASU became effective during the Company's first fiscal quarter and the Company adopted the provisions of ASU 2013-11 retrospectively. The adoption of the ASU decreased net non-current deferred tax assets and decreased the associated long-term tax liabilities related to unrecognized tax benefits by $16.1 million and $11.9 million as of September 27, 2014 and December 28, 2013, respectively.
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., Japan, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2010 although carryforward attributes that were generated prior to 2010 may still be adjusted upon examination by taxing authorities if they either have been, or will be, used in a future period. As of September 27, 2014, the statute of limitations has expired for a year which includes an uncertain tax position associated with an acquisition agreement termination fee. However, the Company does not expect the liability associated with this uncertain tax position to decrease until the statute expires on the year in which a carryforward attribute is utilized.
The Company and certain of its subsidiaries are currently under audit by various tax authorities in 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.
On June 4, 2014, the Quebec government furthered a proposed tax law change on its SR&ED credit that, if passed, would provide a one-time benefit to operating income in the year of enactment and would provide a corresponding increase to the Company's effective tax rate. If passed as proposed, this tax law change would also provide for a reduction in benefit to operating income in 2015 and an additional corresponding increase to the Company's effective tax rate in 2015 and beyond.
In accordance with the Company's policy, the remaining undistributed earnings of its non-U.S. subsidiaries remain indefinitely reinvested as of the end of the third quarter of 2014 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.
The income tax expense (benefit) related to items of other comprehensive income are as follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Income tax expense (benefit) related to foreign currency translation adjustment | $ | — |
| | $ | (615 | ) | | $ | (105 | ) | | $ | 42 |
|
Income tax expense related to change in unrecognized pension gains, losses and prior service costs | 125 |
| | 289 |
| | 378 |
| | 832 |
|
Income tax expense (benefit) related to items of other comprehensive income | $ | 125 |
|
| $ | (326 | ) |
| $ | 273 |
|
| $ | 874 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. EMPLOYEE BENEFITS
The following table provides the components of net periodic cost (benefit) for the Company's defined benefit plans for the three-month period ended:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Supplemental Retirement Benefits |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Service cost | $ | 880 |
|
| $ | 822 |
| | $ | 190 |
|
| $ | 160 |
|
Interest cost | 3,211 |
|
| 2,762 |
| | 252 |
|
| 177 |
|
Expected return on plan assets | (4,540 | ) |
| (3,593 | ) | | — |
|
| — |
|
Amortization of prior service cost (credit) | (166 | ) |
| (147 | ) | | 159 |
|
| 165 |
|
Amortization of net loss | 238 |
|
| 671 |
|
| 60 |
|
| 63 |
|
Net periodic cost (benefit) | $ | (377 | ) |
| $ | 515 |
|
| $ | 661 |
|
| $ | 565 |
|
The following table provides the components of net periodic cost (benefit) for the Company's defined benefit plans for the nine-month period ended:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Supplemental Retirement Benefits |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Service cost | $ | 2,565 |
| | $ | 2,492 |
| | 569 |
| | $ | 482 |
|
Interest cost | 9,633 |
| | 8,334 |
| | 757 |
| | 531 |
|
Expected return on plan assets | (13,095 | ) | | (10,842 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | (484 | ) | | (444 | ) | | 489 |
| | 495 |
|
Amortization of net loss | 684 |
| | 2,043 |
| | 185 |
| | 189 |
|
Net periodic cost (benefit) | $ | (697 | ) | | $ | 1,583 |
| | $ | 2,000 |
| | $ | 1,697 |
|
During 2014, the Company expects to contribute $6.5 million to its pension plans.
12. STOCK PLANS AND 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 and performance share units.
The following table provides the financial statement line items in which stock-based compensation is reflected:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Stock-based compensation expense included in: | | | | | | | |
Cost of revenue | $ | 1,337 |
| | $ | 1,332 |
| | $ | 4,008 |
| | $ | 4,051 |
|
Selling, general and administration | 6,914 |
| | 4,715 |
| | 19,124 |
| | 14,180 |
|
Stock-based compensation, before income taxes | 8,251 |
| | 6,047 |
| | 23,132 |
| | 18,231 |
|
Provision for income taxes | (2,943 | ) | | (2,103 | ) | | (8,271 | ) | | (6,422 | ) |
Stock-based compensation, net of tax | $ | 5,308 |
| | $ | 3,944 |
| | $ | 14,861 |
| | $ | 11,809 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance Based Stock Award Program
In the first quarters of 2014 and 2013, the Company issued performance share units (PSUs) to certain employees. The number of shares of common stock issued for each PSU is adjusted based on a performance condition linked to the Company's financial performance. Certain awards are further adjusted based on a market condition, which is calculated based on the Company's stock price performance relative to a peer group over the three-year vesting period. The fair value of the market condition is reflected in the fair value of the award at grant date. Each reporting period, the Company records a ratable amount of stock-based compensation for the estimated number of common shares expected to be issued upon the vesting of the PSUs based on the Company's estimated outcome for the performance condition.
During the three months ended March 29, 2014, the Company issued 214,823 PSUs using a fair value per share of $67.82. The maximum amount of common shares to be issued upon vesting of these PSUs is 429,646. During the first quarter of 2013, the Company issued 163,847 PSUs using a fair value per share of $44.47. The maximum amount of common shares to be issued upon vesting of these PSUs is 327,694. During the three months ended June 28, 2014, the Company issued 5,800 PSUs using a fair value per share of $61.25. These 5,800 PSUs are not adjusted based on a market condition and have a maximum amount of common shares to be issued upon vesting of 5,800. For the three and nine months ended September 27, 2014, the Company recognized $2.6 million and $6.3 million, respectively, of stock-based compensation related to PSUs granted in 2014 and 2013. For the three and nine months ended September 28, 2013, the Company recognized $0.6 million and $1.5 million, respectively, of stock-based compensation related to PSUs granted in 2013.
13. COMMITMENTS AND CONTINGENCIES
Various lawsuits, claims and proceedings of a nature considered normal to the Company's business are pending against it. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company's consolidated financial statements.
In early May 2013, the Company commenced an investigation into inaccurate billing with respect to certain government contracts. The Company promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services' Office of the Inspector General, and the Department of Justice, and the Company is cooperating with these agencies to ensure the proper repayment and resolution of this matter. The Company identified approximately $1.5 million in excess amounts billed on these contracts since January 1, 2007 and reserved such amount. Because of the early stage of discussions with the government and complex nature of this matter, the Company believes that it is reasonably possible that additional losses may be incurred. However, the Company cannot at this time estimate the potential range of loss beyond the current reserve of $1.5 million.
In July 2012, a Mauritius supplier of large animal models submitted an Application for Arbitration with The Permanent Secretariat, The Permanent Court of Arbitration, The Mauritius Chamber of Commerce and Industry in Port Louis, Mauritius. The supplier asserted that the Company failed to pay certain invoices and the supplier was therefore permitted to terminate the supply agreement. The Company filed a counterclaim asserting that the supplier had failed to meet its contractual obligations under the supply agreement. The arbitration hearing relating to this contract dispute took place in Mauritius in August 2013 and final arguments were presented in March 2014. In May 2014 and August 2014, the arbitrator issued the final rulings, ordering the Company to pay the supplier (1) the sum of $1.2 million and (2) all of the supplier's arbitration costs, in each case with interest. In September 2014, the Company paid the supplier $1.6 million in accordance with the arbitration ruling.
As a result of the Company's April 1, 2014 Early Discovery acquisition, the Company became the obligor for an aggregate of approximately $82.4 million in minimum lease payments under non-cancellable operating and capital leases payable over a period of up to 20 years.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENT INFORMATION
During the quarter ended June 28, 2014, the Company revised its reportable segments to align with its view of the business following its Early Discovery acquisition. See Note 1, "Basis of Presentation." The Company reports segment results on this basis beginning in the quarter ended June 28, 2014 and retrospectively for all comparable prior periods.
The following table presents revenue and other financial information by reportable segment. |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Research Models and Services | | | | | | | |
Revenue | $ | 124,021 |
| | $ | 124,236 |
| | $ | 389,636 |
| | $ | 388,868 |
|
Gross margin | 45,295 |
| | 39,127 |
| | 149,392 |
| | 143,603 |
|
Operating income | 28,056 |
| | 23,803 |
| | 97,734 |
| | 97,576 |
|
Depreciation and amortization | 7,277 |
| | 13,548 |
| | 20,277 |
| | 27,642 |
|
Capital expenditures | 4,110 |
| | 4,208 |
| | 11,528 |
| | 10,417 |
|
Discovery and Safety Assessment | | | | | | | |
Revenue | $ | 140,862 |
| | $ | 112,627 |
| | $ | 388,614 |
| | $ | 321,908 |
|
Gross margin | 39,968 |
| | 33,061 |
| | 105,084 |
| | 81,112 |
|
Operating income | 19,329 |
| | 18,968 |
| | 48,840 |
| | 38,672 |
|
Depreciation and amortization | 13,340 |
| | 9,486 |
| | 33,867 |
| | 28,269 |
|
Capital expenditures | 3,436 |
| | 2,459 |
| | 11,330 |
| | 7,315 |
|
Manufacturing Support | | | | | | | |
Revenue | 62,684 |
| | 55,266 |
| | 189,864 |
| | 165,524 |
|
Gross margin | 33,005 |
| | 27,738 |
| | 98,239 |
| | 81,992 |
|
Operating income | 19,220 |
| | 16,125 |
| | 58,091 |
| | 46,576 |
|
Depreciation and amortization | 3,513 |
| | 3,881 |
| | 10,625 |
| | 11,424 |
|
Capital expenditures | 1,463 |
| | 2,429 |
| | 5,444 |
| | 7,587 |
|
A reconciliation of segment operating income to consolidated operating income is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Total segment operating income | $ | 66,605 |
| | $ | 58,896 |
| | $ | 204,665 |
| | $ | 182,824 |
|
Unallocated corporate overhead | (20,433 | ) | | (18,053 | ) | | (67,762 | ) | | (56,030 | ) |
Consolidated operating income | $ | 46,172 |
| | $ | 40,843 |
| | $ | 136,903 |
| | $ | 126,794 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue for each significant product or service area is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Research models | $ | 81,705 |
| | $ | 81,366 |
| | $ | 256,501 |
| | $ | 257,582 |
|
Research model services | 42,316 |
| | 42,870 |
| | 133,135 |
| | 131,286 |
|
Total research models and services | 124,021 |
| | 124,236 |
| | 389,636 |
| | 388,868 |
|
Total discovery and safety assessment | 140,862 |
| | 112,627 |
| | 388,614 |
| | 321,908 |
|
Endotoxin and Microbial Detection | 31,834 |
| | 28,331 |
| | 97,879 |
| | 83,214 |
|
Other manufacturing support | 30,850 |
| | 26,935 |
| | 91,985 |
| | 82,310 |
|
Total manufacturing support | $ | 62,684 |
| | $ | 55,266 |
| | $ | 189,864 |
| | $ | 165,524 |
|
Total revenue | $ | 327,567 |
| | $ | 292,129 |
| | $ | 968,114 |
| | $ | 876,300 |
|
A summary of unallocated corporate overhead consists of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Stock-based compensation expense | $ | 4,918 |
| | $ | 3,260 |
| | $ | 13,525 |
| | $ | 9,927 |
|
Salary, bonus and fringe | 5,892 |
| | 5,636 |
| | 23,597 |
| | 18,776 |
|
Consulting, audit and professional services | 3,053 |
| | 2,250 |
| | 8,721 |
| | 6,578 |
|
IT related expenses | 1,767 |
| | 3,002 |
| | 4,667 |
| | 8,448 |
|
Depreciation expense | 1,954 |
| | 1,570 |
| | 5,666 |
| | 4,712 |
|
Costs associated with evaluation and integration of acquisitions | 580 |
| | 306 |
| | 5,256 |
| | 986 |
|
Other general unallocated corporate expenses | 2,269 |
| | 2,029 |
| | 6,330 |
| | 6,603 |
|
Total unallocated corporate overhead costs | $ | 20,433 |
| | $ | 18,053 |
| | $ | 67,762 |
| | $ | 56,030 |
|
Other general unallocated corporate expenses consist of various departmental costs including those associated with senior executives, corporate accounting, legal, tax, human resources and treasury.
15. DISCONTINUED OPERATIONS
On March 28, 2011, the Company disposed of its Phase I clinical business though the Company remained the guarantor of a facility lease that runs through January 2021 with remaining lease payments of $10.3 million at September 27, 2014. The lease liability for the Company's obligation under the lease is presented net of estimated sublease income and reflected on the consolidated balance sheet as a liability of discontinued operations.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The consolidated financial statements classify, as discontinued operations, the assets and liabilities, operating results and cash flows, of businesses that are discontinued for all periods presented. Operating results from discontinued operations are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2014 | | September 28, 2013 | | September 27, 2014 | | September 28, 2013 |
| (in thousands) |
Loss from operations of discontinued businesses, before income taxes | $ | (38 | ) | | $ | (172 | ) | | $ | (1,614 | ) | | $ | (1,894 | ) |
Benefit for income taxes | 90 |
| | 59 |
| | 752 |
| | 711 |
|
Income (loss) from operations of discontinued businesses, net of taxes | $ | 52 |
| | $ | (113 | ) | | $ | (862 | ) | | $ | (1,183 | ) |
Assets and liabilities of discontinued operations at September 27, 2014 and December 28, 2013 consisted of the following:
|
| | | | | | | |
| September 27, 2014 | | December 28, 2013 |
| (in thousands) |
Current assets | $ | 835 |
| | $ | 750 |
|
Long-term assets | 3,106 |
| | 3,151 |
|
Total assets | $ | 3,941 |
| | $ | 3,901 |
|
| | | |
Current liabilities | $ | 2,059 |
| | $ | 1,931 |
|
Long-term liabilities | 7,876 |
| | 8,080 |
|
Total liabilities | $ | 9,935 |
| | $ | 10,011 |
|
Current and long-term assets include deferred tax assets. Current and long-term liabilities consist primarily of estimated lease payments, less sublease income, for the Phase I facility.
16. SUBSEQUENT EVENTS
On October 29, 2014, we acquired ChanTest Corporation (ChanTest), a leading provider of ion channel testing services to the pharmaceutical and biotech industry. We expect that the acquisition will augment our early discovery capabilities, enhancing our ability to support our clients’ target discovery and lead optimization efforts. The preliminary purchase price of the acquisition is $52.0 million in cash and up to an additional $2.0 million in contingent consideration. The purchase price is subject to an adjustment based on the final determined net working capital as of the closing date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes of this quarterly report on Form 10-Q and our audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 28, 2013.
Overview
We are a leading full-service contract research organization (CRO) with integrated early-stage capabilities to support the drug discovery and early-stage development process. We provide our products and services to pharmaceutical and biotechnology companies, government agencies, leading hospitals and academic institutions around the world in order to bring drugs to market faster and more efficiently. We have built upon our 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 are able to support our clients from target identification through preclinical development. 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. We have been in business for over 65 years and currently operate more than 70 facilities in 17 countries worldwide.
In the second quarter of 2014, we revised our reportable segments to ensure alignment with our view of the business following our acquisition of the CRO services division of Galapagos N.V. (Early Discovery). We reviewed the new and existing markets addressed by the business, the recently revised go-to-market strategy, long-term operating margins and the discrete financial information available to our Chief Operating Decision Maker and considered how our businesses aggregate based on these qualitative and quantitative factors. Based on this review, we identified three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA) and Manufacturing Support (Manufacturing). We reported segment results on this basis beginning in the second quarter of 2014 and retrospectively for all comparable prior periods. The change to our reportable segments did not impact our historical consolidated operating results previously reported.
The revised reportable segments are as follows: