CHARLES RIVER LABORATORIES INTERNATIONAL, INC. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 28, 2019



OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Commission File No. 001-15943

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware			06-1397316
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)
251 Ballardvale Street	Wilmington	Massachusetts	01887
(Address of Principal Executive Offices)			(Zip Code)

(Registrant’s telephone number, including area code): (781) 222-6000



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	CRL	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☑ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of October 25, 2019, there were 48,838,925 shares of the Registrant’s common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2019

TABLE OF CONTENTS



Item		Page
PART I - FINANCIAL INFORMATION
1	Financial Statements
	Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 28, 2019 and September 29, 2018	3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 28, 2019 and September 29, 2018	4
	Condensed Consolidated Balance Sheets (Unaudited) as of September 28, 2019 and December 29, 2018	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 28, 2019 and September 29, 2018	6
	Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 28, 2019 and September 29, 2018	8
	Notes to Unaudited Condensed Consolidated Financial Statements	10
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
3	Quantitative and Qualitative Disclosure About Market Risk	49
4	Controls and Procedures	50
PART II - OTHER INFORMATION
1	Legal Proceedings	51
1A	Risk Factors	51
2	Unregistered Sales of Equity Securities and Use of Proceeds	51
6	Exhibits	53

Signatures		54

Special Note on Factors Affecting Future Results

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could,” and other similar expressions which are predictions of, indicate future events and trends or which do not relate to historical matters, are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties and assumptions that are difficult to predict. These statements also include statements regarding risks and uncertainties associated with the unauthorized access into our information systems reported on April 30, 2019, including the timing and effectiveness of adding enforced security features and monitoring procedures, and the potential revenue and financial impact related to the incident.

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 investment in, and the development and performance of, our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical and biotechnology companies, venture capital investments, and opportunities for future similar arrangements; our cost structure; the impact of acquisitions, including Citoxlab; 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, divest or repurpose; changes in our expectations regarding future stock option, restricted stock, performance share units, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our liquidity. In addition, these statements include the impact of economic and market conditions on us and our clients; the effects of our cost saving actions and the steps to optimize returns to shareholders on an effective and timely basis; and our ability to withstand the current market conditions.

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 29, 2018, under the sections entitled “Our Strategy,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in this Quarterly Report on Form 10-Q, under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” in our press releases, and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or risks. New information, future events, or risks may cause the forward-looking events we discuss in this report not to occur.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Service revenue	$	523,169		$	443,038		$	1,479,991		$	1,226,948
Product revenue	144,782			142,257			450,097			437,618
Total revenue	667,951			585,295			1,930,088			1,664,566
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)	351,894			298,018			1,014,063			844,130
Cost of products sold (excluding amortization of intangible assets)	69,941			71,077			220,028			206,786
Selling, general and administrative	129,509			113,033			388,024			336,936
Amortization of intangible assets	23,805			18,805			65,611			47,813
Operating income	92,802			84,362			242,362			228,901
Other income (expense):
Interest income	385			230			838			694
Interest expense	(5,698		)	(17,197		)	(36,520		)	(47,031		)
Other (expense) income, net	(14,254		)	5,910			(8,161		)	24,069
Income from continuing operations, before income taxes	73,235			73,305			198,519			206,633
(Benefit) provision for income taxes	(317		)	12,403			24,970			39,613
Income from continuing operations, net of income taxes	73,552			60,902			173,549			167,020
Income from discontinued operations, net of income taxes	—			—			—			1,506
Net income	73,552			60,902			173,549			168,526
Less: Net income attributable to noncontrolling interests	742			534			1,878			1,818
Net income attributable to common shareholders	$	72,810		$	60,368		$	171,671		$	166,708

Earnings per common share
Basic:
Continuing operations attributable to common shareholders	$	1.49		$	1.25		$	3.53		$	3.43
Discontinued operations	$	—		$	—		$	—		$	0.03
Net income attributable to common shareholders	$	1.49		$	1.25		$	3.53		$	3.47
Diluted:
Continuing operations attributable to common shareholders	$	1.46		$	1.22		$	3.46		$	3.36
Discontinued operations	$	—		$	—		$	—		$	0.03
Net income attributable to common shareholders	$	1.46		$	1.22		$	3.46		$	3.39

Weighted-average number of common shares outstanding:
Basic	48,818			48,310			48,682			48,098
Diluted	49,715			49,326			49,627			49,118

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Net income	$	73,552		$	60,902		$	173,549		$	168,526
Other comprehensive income (loss):
Foreign currency translation adjustment and other	(15,889		)	(6,805		)	(9,075		)	(14,524		)
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans	365			615			1,113			1,864
Comprehensive income, before income taxes	58,028			54,712			165,587			155,866
Less: Income tax expense (benefit) related to items of other comprehensive income	(2,511		)	257			(1,381		)	(341		)
Comprehensive income, net of income taxes	60,539			54,455			166,968			156,207
Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes	(37		)	(74		)	1,064			886
Comprehensive income attributable to common shareholders, net of income taxes	$	60,576		$	54,529		$	165,904		$	155,321






























See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)



	September 28, 2019			December 29, 2018
Assets
Current assets:
Cash and cash equivalents	$	164,759		$	195,442
Trade receivables, net	524,074			472,248
Inventories	155,526			127,892
Prepaid assets	51,274			53,447
Other current assets	76,774			48,807
Total current assets	972,407			897,836
Property, plant and equipment, net	1,008,047			932,877
Operating lease right-of-use assets, net	140,359			—
Goodwill	1,521,619			1,247,133
Client relationships, net	620,868			537,945
Other intangible assets, net	81,257			72,943
Deferred tax assets	44,831			23,386
Other assets	193,174			143,759
Total assets	$	4,582,562		$	3,855,879
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases	$	33,611		$	31,416
Accounts payable	107,231			66,250
Accrued compensation	130,292			137,212
Deferred revenue	166,095			145,139
Accrued liabilities	130,015			106,925
Other current liabilities	114,402			71,280
Total current liabilities	681,646			558,222
Long-term debt, net and finance leases	1,882,593			1,636,598
Operating lease right-of-use liabilities	116,868			—
Deferred tax liabilities	165,480			143,635
Other long-term liabilities	171,243			179,121
Total liabilities	3,017,830			2,517,576
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	28,345			18,525
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; 48,976 shares issued and 48,837 shares outstanding as of September 28, 2019, and 48,210 shares issued and 48,209 shares outstanding as of December 29, 2018	490			482
Additional paid-in capital	1,514,620			1,447,512
Retained earnings	213,767			42,096
Treasury stock, at cost, 139 and 1 shares, as of September 28, 2019 and December 29, 2018, respectively	(18,094		)	(55		)
Accumulated other comprehensive loss	(178,470		)	(172,703		)
Total equity attributable to common shareholders	1,532,313			1,317,332
Noncontrolling interest	4,074			2,446
Total equity	1,536,387			1,319,778
Total liabilities, redeemable noncontrolling interests, and equity	$	4,582,562		$	3,855,879
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 28, 2019			September 29, 2018
Cash flows relating to operating activities
Net income	$	173,549		$	168,526
Less: Income from discontinued operations, net of income taxes	—			1,506
Income from continuing operations, net of income taxes	173,549			167,020
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	146,262			120,198
Stock-based compensation	43,429			35,908
Deferred income taxes	(25,092		)	(10,385		)
Gain on venture capital investments	(5,724		)	(22,760		)
Other, net	4,865			10,036
Changes in assets and liabilities:
Trade receivables, net	(24,491		)	(30,318		)
Inventories	(12,981		)	(10,340		)
Accounts payable	24,481			(5,322		)
Accrued compensation	(23,320		)	6,088
Deferred revenue	(1,556		)	33,491
Customer contract deposits	(7,586		)	34,455
Other assets and liabilities, net	8,423			(26,904		)
Net cash provided by operating activities	300,259			301,167
Cash flows relating to investing activities
Acquisition of businesses and assets, net of cash acquired	(515,647		)	(822,611		)
Capital expenditures	(76,675		)	(71,378		)
Purchases of investments and contributions to venture capital investments	(17,664		)	(20,535		)
Proceeds from sale of investments	15			30,595
Other, net	(660		)	(118		)
Net cash used in investing activities	(610,631		)	(884,047		)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit facility	2,071,175			2,392,201
Proceeds from exercises of stock options	26,982			30,228
Payments on long-term debt, revolving credit facility, and finance lease obligations	(1,798,620		)	(1,832,805		)
Payment of debt financing costs	—			(18,337		)
Purchase of treasury stock	(18,040		)	(13,791		)
Other, net	(10,516		)	—
Net cash provided by financing activities	270,981			557,496
Discontinued operations
Net cash used in operating activities from discontinued operations	—			(3,735		)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	8,793			4,664
Net change in cash, cash equivalents, and restricted cash	(30,598		)	(24,455		)
Cash, cash equivalents, and restricted cash, beginning of period	197,318			166,331
Cash, cash equivalents, and restricted cash, end of period	$	166,720		$	141,876



	Nine Months Ended
	September 28, 2019		September 29, 2018
Supplemental cash flow information:
Cash and cash equivalents	$	164,759	$	138,866
Restricted cash included in Other current assets	534		426
Restricted cash included in Other assets	1,427		2,584
Cash, cash equivalents, and restricted cash, end of period	$	166,720	$	141,876











See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(in thousands)



	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
	Shares	Amount		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Shares	Amount			Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
December 29, 2018	48,210	$	482	$	1,447,512		$	42,096	$	(172,703	)	1	$	(55	)	$	1,317,332		$	2,446	$	1,319,778
Net income	—	—		—			55,133		—			—	—			55,133			469		55,602
Other comprehensive income	—	—		—			—		9,903			—	—			9,903			—		9,903
Adjustment of redeemable noncontrolling interest to redemption value	—	—		(1,451		)	—		—			—	—			(1,451		)	—		(1,451		)
Issuance of stock under employee compensation plans	674	7		22,051			—		—			—	—			22,058			—		22,058
Acquisition of treasury shares	—	—		—			—		—			136	(17,760		)	(17,760		)	—		(17,760		)
Stock-based compensation	—	—		12,899			—		—			—	—			12,899			—		12,899
March 30, 2019	48,884	489		1,481,011			97,229		(162,800		)	137	(17,815		)	1,398,114			2,915		1,401,029
Net income	—	—		—			43,728		—			—	—			43,728			383		44,111
Other comprehensive loss	—	—		—			—		(3,436		)	—	—			(3,436		)	—		(3,436		)
Purchase of additional equity interest in and modification of Vital River redeemable noncontrolling interest	—	—		(1,870		)	—		—			—	—			(1,870		)	—		(1,870		)
Issuance of stock under employee compensation plans	53	—		2,148			—		—			—	—			2,148			—		2,148
Acquisition of treasury shares	—	—		—			—		—			1	(123		)	(123		)	—		(123		)
Stock-based compensation	—	—		16,505			—		—			—	—			16,505			—		16,505
June 29, 2019	48,937	489		1,497,794			140,957		(166,236		)	138	(17,938		)	1,455,066			3,298		1,458,364
Net income	—	—		—			72,810		—			—	—			72,810			776		73,586
Other comprehensive loss	—	—		—			—		(12,234		)	—	—			(12,234		)	—		(12,234		)
Issuance of stock under employee compensation plans	39	1		2,801			—		—			—	—			2,802			—		2,802
Acquisition of treasury shares	—	—		—			—		—			1	(156		)	(156		)	—		(156		)
Stock-based compensation	—	—		14,025			—		—			—	—			14,025			—		14,025
September 28, 2019	48,976	$	490	$	1,514,620		$	213,767	$	(178,470	)	139	$	(18,094	)	$	1,532,313		$	4,074	$	1,536,387



	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
	Shares	Amount		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Shares	Amount			Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
December 30, 2017	87,495	$	875	$	2,560,192		$	288,658	$	(144,731	)	40,093	$	(1,659,914	)	$	1,045,080		$	2,327	$	1,047,407
Net income	—	—		—			52,631		—			—	—			52,631			464		53,095
Other comprehensive income	—	—		—			—		23,604			—	—			23,604			—		23,604
Reclassification due to adoption of ASU 2018-02 Reclass	—	—		—			3,330		(3,330		)	—	—			—			—		—
Adjustment due to adoption of ASU 2016-01	—	—		—			1,424		—			—	—			1,424			—		1,424
Issuance of stock under employee compensation plans	630	6		20,088			—		—			—	—			20,094			—		20,094
Acquisition of treasury shares	—	—		—			—		—			126	(13,549		)	(13,549		)	—		(13,549		)
Stock-based compensation	—	—		10,541			—		—			—	—			10,541			—		10,541
March 31, 2018	88,125	881		2,590,821			346,043		(124,457		)	40,219	(1,673,463		)	1,139,825			2,791		1,142,616
Net income	—	—		—			53,709		—			—	—			53,709			448		54,157
Other comprehensive loss	—	—		—			—		(29,151		)	—	—			(29,151		)	—		(29,151		)
Issuance of stock under employee compensation plans	96	1		4,154			—		—			—	—			4,155			—		4,155
Acquisition of treasury shares	—	—		—			—		—			1	(119		)	(119		)	—		(119		)
Stock-based compensation	—	—		13,547			—		—			—	—			13,547			—		13,547
June 30, 2018	88,221	882		2,608,522			399,752		(153,608		)	40,220	(1,673,582		)	1,181,966			3,239		1,185,205
Net income	—	—		—			60,368		—			—	—			60,368			364		60,732
Other comprehensive loss	—	—		—			—		(5,840		)	—	—			(5,840		)	—		(5,840		)
Adjustment of redeemable non-controlling interest to fair value	—	—		(1,111		)	—		—			—	—			(1,111		)	—		(1,111		)
Issuance of stock under employee compensation plans	94	1		6,025			—		—			—	—			6,026			—		6,026
Acquisition of treasury shares	—	—		—			—		—			1	(123		)	(123		)	—		(123		)
Stock-based compensation	—	—		11,820			—		—			—	—			11,820			—		11,820
September 29, 2018	88,315	$	883	$	2,625,256		$	460,120	$	(159,448	)	40,221	$	(1,673,705	)	$	1,253,106		$	3,603	$	1,256,709
Balances may differ compared to prior condensed consolidated balance sheets due to rounding.



See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal year 2018. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

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 2018 as well as Note 16, “Leases” in this Quarterly Report on Form 10-Q.

Newly Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and nonemployees as well as improves financial reporting for share-based payments to nonemployees. This standard became effective for the Company in the three months ended March 30, 2019 and did not have a material impact on the consolidated financial statements and related disclosures.

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 standard became effective for the Company in the three months ended March 30, 2019 and did not have a material impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard, including subsequently issued amendments, collectively referred to as Accounting Standards Codification (ASC) 842, “Leases”, 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. The Company adopted this standard using the modified retrospective transition approach as applied to leases existing as of or entered into after the adoption date (December 30, 2018) in the three months ended March 30, 2019. See Note 16, “Leases” 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 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement that is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

hosting arrangements that include an internal-use software license). The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and will be applied either retrospectively or prospectively. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures, but does not believe there will be a material impact upon adoption.

In August 2018, the FASB issued ASU 2018-14, “Compensation Retirement Benefits - Defined Benefit Plans -General (Subtopic 715-20).” ASU 2018-14 removes the requirements to disclose the amounts in Accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year and the related party disclosures about the amount of future annual benefits covered by insurance contracts. In addition, the ASU adds the requirement to disclose an explanation for any significant gains and losses related to changes in the benefit obligation for the period. The ASU is effective for fiscal years ending after December 15, 2020 and will be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 removes the disclosure requirement for the amount and reasons for transfers between Level 1 and Level 2 fair value measurements as well as the process for Level 3 fair value measurements. In addition, the ASU adds the disclosure requirements for changes in unrealized gains and losses included in Other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and will be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures, but does not believe there will be a material impact upon adoption.

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, but does not believe there will be a material impact upon adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.” The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and requires the modified retrospective approach. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures, but does not believe there will be a material impact upon adoption.

2. BUSINESS ACQUISITIONS

Citoxlab

On April 29, 2019, the Company acquired Citoxlab, a non-clinical CRO, specializing in regulated safety assessment services, non-regulated discovery services, and medical device testing. With operations in Europe and North America, the acquisition of Citoxlab further strengthens the Company’s position as a leading, global, early-stage CRO by expanding its scientific portfolio and geographic footprint, which enhances the Company’s ability to partner with clients across the drug discovery and development continuum. The preliminary purchase price for Citoxlab was $527.7 million in cash, subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. This business is reported as part of the Company’s DSA reportable segment.

The preliminary purchase allocation of $491.0 million, net of $36.7 million of cash acquired was as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	April 29, 2019
	(in thousands)
Trade receivables (contractual amount of $35,405)	$	35,405
Inventories	5,282
Other current assets (excluding cash)	13,822
Property, plant and equipment	88,912
Goodwill	280,588
Definite-lived intangible assets	162,400
Other long-term assets	20,164
Deferred revenue	(15,278		)
Current liabilities	(46,682		)
Deferred tax liabilities	(27,655		)
Other long-term liabilities	(21,916		)
Redeemable noncontrolling interest	(4,035		)
Total purchase price allocation	$	491,007

The preliminary 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 breakout of definite-lived intangible assets acquired was as follows:



	Definite-Lived Intangible Assets		Weighted Average Amortization Life
	(in thousands)		(in years)
Client relationships	$	134,600	13
Developed technology	19,900		3
Backlog	7,900		1
Total definite-lived intangible assets	$	162,400	12

The goodwill resulting from the transaction, $7.2 million of which is deductible for tax purposes due to a prior asset acquisition, is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through Citoxlab and the assembled workforce of the acquired business.

The Company incurred transaction and integration costs in connection with the acquisition of $1.9 million and $19.1 million for the three and nine months ended September 28, 2019, respectively, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.

Beginning on April 29, 2019, Citoxlab has been included in the operating results of the Company. Citoxlab revenue for the three and nine months ended September 28, 2019 was $44.0 million and $74.9 million, respectively. Citoxlab operating income for the three and nine months ended September 28, 2019 was $0.2 million and $2.2 million, respectively.

The following selected unaudited pro forma consolidated results of operations are presented as if the Citoxlab acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 31, 2017, after giving effect to certain adjustments. For the nine months ended September 28, 2019, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $4.8 million, additional interest expense on borrowings of $1.2 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For the nine months ended September 29, 2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $7.3 million, additional interest expense on borrowings of $3.1 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
Revenue	$	667,951	$	627,758	$	1,992,472	$	1,795,312
Net income attributable to common shareholders	$	74,948	$	63,919	$	189,601	$	170,557

These unaudited pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the dates indicated or that may result in the future. No effect has been given for synergies, if any, that may be realized through the acquisition.

MPI Research

On April 3, 2018, the Company acquired MPI Research, a non-clinical 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 discovery and development continuum. The purchase price for MPI Research was $829.7 million in cash. The acquisition was funded by borrowings on the Credit Facility as well as the issuance of the Company’s Senior Notes. See Note 9, “Long-Term Debt and Finance Lease Obligations.” This business is reported as part of the Company’s DSA reportable segment.

The purchase allocation of $800.8 million, net of $27.7 million of cash acquired and a final net working capital adjustment of $1.2 million, was as follows:



	April 3, 2018
	(in thousands)
Trade receivables (contractual amount of $35,073)	$	35,073
Inventories	4,463
Other current assets (excluding cash)	5,893
Property, plant and equipment	128,403
Goodwill	441,656
Definite-lived intangible assets	309,200
Other long-term assets	1,081
Deferred revenue	(23,926		)
Current liabilities	(32,885		)
Deferred tax liabilities	(65,945		)
Other long-term liabilities	(2,213		)
Total purchase price allocation	$	800,800

From the date of the acquisition through March 30, 2019, 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. No further adjustments will be made to the purchase price allocation.

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	$	264,900	13
Developed technology	23,400		3
Backlog	20,900		1
Total definite-lived intangible assets	$	309,200	12

The goodwill resulting from the transaction, $4.1 million of which is deductible for tax purposes due to a prior asset acquisition, is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through MPI Research and the assembled workforce of the acquired business.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

No significant integration costs were incurred in connection with the acquisition for the three and nine months ended September 28, 2019. The Company incurred transaction and integration costs in connection with the acquisition of $0.8 million and $15.3 million for the three and nine months ended September 29, 2018, respectively, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.

The following selected unaudited pro forma consolidated results of operations are presented as if the MPI Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is January 1, 2017, after giving effect to certain adjustments. For the nine months ended September 29, 2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $11.8 million, additional interest expense on borrowings of $2.8 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.



	September 29, 2018
	Three Months Ended		Nine Months Ended
	(in thousands)
Revenue	$	585,295	$	1,726,683
Net income attributable to common shareholders	59,297		168,872

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 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 based on future performance. During the three months ended September 29, 2018, the terms of these contingent payments were amended, resulting in a fixed payment of £2.0 million, or $2.6 million, which was paid during the three months ended March 30, 2019. The KWS BioTest business is reported as part of the Company’s DSA reportable segment.

The purchase price allocation of $21.5 million, net of $1.0 million of cash acquired and a final net working capital adjustment of $0.4 million, 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	17,660
Current liabilities	(1,575		)
Deferred revenue	(151		)
Long-term liabilities	(596		)
Total purchase price allocation	$	21,529

From the date of the acquisition through December 29, 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. No further adjustments will be made to the purchase price allocation.

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 business 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.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

No significant integration costs were incurred in connection with the acquisition for the three and nine months ended September 28, 2019. The Company incurred transaction and integration costs of $0.1 million and $0.6 million in connection with the acquisition for the three and nine months ended September 29, 2018, respectively, 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.

Other Acquisition

On August 28, 2019, the Company acquired an 80% ownership interest in a supplier that supports the Company’s DSA reportable segment. The remaining 20% interest is a redeemable non-controlling interest. See Note 10, “Equity and Noncontrolling Interests.” The preliminary purchase price was $23.4 million, net of a $4.0 million pre-existing relationship for a supply agreement settled upon acquisition, and subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. The business is reported as part of the Company’s DSA reportable segment.

The preliminary purchase allocation of $23.1 million, net of $0.3 million of cash acquired was as follows:



	August 28, 2019
	(in thousands)
Trade receivables (contractual amount of $189)	$	189
Inventories	7,644
Property, plant and equipment	1,462
Goodwill	12,528
Other long-term assets	11,849
Current liabilities	(300		)
Deferred tax liabilities	(1,331		)
Other long-term liabilities	(238		)
Redeemable noncontrolling interest	(8,740		)
Total purchase price allocation	$	23,063

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 Company incurred transaction and integration costs in connection with the acquisition of $2.1 million and $3.2 million for the three and nine months ended September 28, 2019, respectively, which are primarily included in Selling, general and administrative expenses within the unaudited condensed statements of income.

Pro forma financial information as well as the disclosure of actual results have not been included because these financial results are not significant when compared to the Company’s consolidated financial results.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

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 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. Generally, the Company

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

does not extend payment terms beyond one year. 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 nine months ended September 28, 2019 and September 29, 2018.

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 hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.

Disaggregation of Revenue

The following tables disaggregate the Company’s revenue by major business line and timing of transfer of products or services:



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
Major Products/Service Lines:
RMS	$	132,546	$	126,811	$	405,772	$	391,195
DSA	420,079		352,257		1,179,793		958,665
Manufacturing	115,326		106,227		344,523		314,706
Total revenue	$	667,951	$	585,295	$	1,930,088	$	1,664,566

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
Timing of Revenue Recognition:
RMS
Services and products transferred over time	$	56,243	$	49,417	$	168,377	$	146,947
Services and products transferred at a point in time	76,303		77,394		237,395		244,248
DSA
Services and products transferred over time	419,445		352,203		1,178,874		958,174
Services and products transferred at a point in time	634		54		919		491
Manufacturing
Services and products transferred over time	36,308		31,420		102,674		92,978
Services and products transferred at a point in time	79,018		74,807		241,849		221,728
Total revenue	$	667,951	$	585,295	$	1,930,088	$	1,664,566

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 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

The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 28, 2019. Excluded from the disclosure is the value of unsatisfied performance obligations for (i) 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 September 28, 2019:



	Revenue Expected to be Recognized in Future Periods
	Less than 1 Year		1 to 3 Years		4 to 5 Years		Beyond 5 Years		Total
	(in thousands)
DSA	$	163,868	$	111,890	$	6,641	$	409	$	282,808
Manufacturing	10,165		12,997		20		8		23,190
Total	$	174,033	$	124,887	$	6,661	$	417	$	305,998

Contract Balances from Contracts with Customers

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a customer is conditioned other than the passage of time. Client receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:



	September 28, 2019		December 29, 2018
	(in thousands)
Balances from contracts with customers:
Client receivables	$	394,135	$	370,131
Contract assets (unbilled revenue)	134,169		105,216
Contract liabilities (current and long-term deferred revenue)	191,443		179,559
Contract liabilities (customer contract deposits)	36,006		38,245

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 September 28, 2019, the Company excluded approximately $21 million of unpaid advanced client billings from both client receivables and deferred revenue and approximately $36 million of advanced client payments have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Other changes in the contract asset and the contract liability balances during the nine months ended September 28, 2019 were as follows:

(i) Changes due to business combinations:

See Note 2. “Business Acquisitions” for client receivables, contract assets, and contract liabilities that were acquired as part of the Citoxlab acquisition on April 29, 2019.

(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 nine months ended September 28, 2019, 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 85% of unbilled revenue as of December 29, 2018 was billed during the nine months ended September 28, 2019.

(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 80% of contract liabilities as of December 29, 2018 were recognized as revenue during the nine months ended September 28, 2019.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. SEGMENT INFORMATION

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				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
RMS
Revenue	$	132,546	$	126,811	$	405,772	$	391,195
Operating income	34,385		32,121		103,729		104,893
Depreciation and amortization	4,895		4,811		14,198		14,565
Capital expenditures	5,818		8,166		14,979		18,105
DSA
Revenue	$	420,079	$	352,257	$	1,179,793	$	958,665
Operating income	64,995		62,909		175,214		160,391
Depreciation and amortization	39,898		31,433		111,231		83,262
Capital expenditures	21,141		10,800		45,130		34,496
Manufacturing
Revenue	$	115,326	$	106,227	$	344,523	$	314,706
Operating income	39,253		33,266		103,893		95,904
Depreciation and amortization	5,990		5,709		17,577		17,313
Capital expenditures	6,421		2,709		14,299		12,731

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
	September 28, 2019			September 29, 2018			September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
Three Months Ended:
Total reportable segments	$	138,633		$	128,296		$	50,783	$	41,953	$	33,380	$	21,675
Unallocated corporate	(45,831		)	(43,934		)	975		1,639		1,783		764
Total consolidated	$	92,802		$	84,362		$	51,758	$	43,592	$	35,163	$	22,439

Nine Months Ended:
Total reportable segments	$	382,836		$	361,188		$	143,006	$	115,140	$	74,408	$	65,332
Unallocated corporate	(140,474		)	(132,287		)	3,256		5,058		2,267		6,046
Total consolidated	$	242,362		$	228,901		$	146,262	$	120,198	$	76,675	$	71,378

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue for each significant product or service offering is as follows:



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
RMS	$	132,546	$	126,811	$	405,772	$	391,195
DSA	420,079		352,257		1,179,793		958,665
Manufacturing	115,326		106,227		344,523		314,706
Total revenue	$	667,951	$	585,295	$	1,930,088	$	1,664,566

A summary of unallocated corporate expense consists of the following:



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
Stock-based compensation	$	8,752	$	7,910	$	27,744	$	24,517
Compensation, benefits, and other employee-related expenses	18,770		20,464		54,561		56,375
External consulting and other service expenses	4,156		4,767		12,060		12,711
Information technology	3,534		3,070		10,811		8,723
Depreciation	975		1,639		3,256		5,058
Acquisition and integration	5,679		1,122		23,621		15,678
Other general unallocated corporate	3,965		4,962		8,421		9,225
Total unallocated corporate expense	$	45,831	$	43,934	$	140,474	$	132,287

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:
September 28, 2019	$	373,094	$	184,685	$	71,984	$	36,698	$	1,490	$	667,951
September 29, 2018	336,811		159,473		53,665		34,062		1,284		585,295
Nine Months Ended:
September 28, 2019	$	1,091,194	$	533,820	$	194,865	$	106,090	$	4,119	$	1,930,088
September 29, 2018	919,807		481,955		153,802		104,817		4,185		1,664,566

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.

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:



	September 28, 2019			December 29, 2018
	(in thousands)
Client receivables	$	394,135		$	370,131
Unbilled revenue	134,169			105,216
Total	528,304			475,347
Less: Allowance for doubtful accounts	(4,230		)	(3,099		)
Trade receivables, net	$	524,074		$	472,248

The composition of inventories is as follows:



	September 28, 2019		December 29, 2018
	(in thousands)
Raw materials and supplies	$	23,670	$	22,378
Work in process	36,851		21,732
Finished products	95,005		83,782
Inventories	$	155,526	$	127,892

The composition of other current assets is as follows:



	September 28, 2019		December 29, 2018
	(in thousands)
Prepaid income tax	$	75,019	$	47,157
Investments	855		885
Restricted cash	534		465
Other	366		300
Other current assets	$	76,774	$	48,807

The composition of other assets is as follows:



	September 28, 2019		December 29, 2018
	(in thousands)
Venture capital investments	$	100,553	$	87,545
Other investments	13,045		1,046
Life insurance policies	35,861		32,340
Restricted cash	1,427		1,411
Other	42,288		21,417
Other assets	$	193,174	$	143,759

The composition of other current liabilities is as follows:



	September 28, 2019		December 29, 2018
	(in thousands)
Current portion of operating lease right-of-use liabilities	$	20,032	$	—
Accrued income taxes	44,121		24,120
Customer contract deposits	36,006		38,245
Other	14,243		8,915
Other current liabilities	$	114,402	$	71,280

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of other long-term liabilities is as follows:



	September 28, 2019		December 29, 2018
	(in thousands)
U.S. Transition Tax	$	52,066	$	52,064
Long-term pension liability	29,028		24,671
Accrued executive supplemental life insurance retirement plan	37,328		36,086
Long-term deferred revenue	25,348		34,420
Other	27,473		31,880
Other long-term liabilities	$	171,243	$	179,121

6. VENTURE CAPITAL AND OTHER 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 less than 1% to 12.0%. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity method of accounting. For publicly-held investments in the LPs, the Company adjusts for changes in fair market value based on reported share holdings at the end of each fiscal quarter. 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.

Venture capital investments were $100.6 million and $87.5 million as of September 28, 2019 and December 29, 2018, respectively. The Company’s total commitment to the venture capital funds as of September 28, 2019 was $128.1 million, of which the Company funded $77.4 million through that date. The Company received dividends totaling $0.2 million and $5.6 million for the three months ended September 28, 2019 and September 29, 2018, respectively. The Company received dividends totaling $1.8 million and $14.1 million for the nine months ended September 28, 2019 and September 29, 2018, respectively. The Company recognized losses of $0.6 million and gains of $5.4 million related to the venture capital investments for the three months ended September 28, 2019 and September 29, 2018, respectively. The Company recognized gains of $5.7 million and $22.8 million related to the venture capital investments for the nine months ended September 28, 2019 and September 29, 2018, respectively. Gains and losses are recorded in Other income, net in the accompanying unaudited condensed consolidated statements of income.

The Company also invests, with minority positions, directly in equity of predominantly privately-held companies. These investments are reported at fair value or under the equity method of accounting, as appropriate. Equity investments that do not have readily determinable fair values are generally recorded at cost, plus or minus certain adjustments. Other investments were $13.0 million and $1.0 million as of September 28, 2019 and December 29, 2018, respectively. The Company recognized an insignificant amount of gains and losses related to these investments for the three and nine months ended September 28, 2019 and September 29, 2018. Gains and losses from other investments are recorded in Other income, net in the accompanying unaudited consolidated statements of income.

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 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 nine months ended September 28, 2019 and September 29, 2018, there were no transfers between levels.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. The book value of the Company’s 5.5% Senior Notes (Senior Notes) due in 2026, which are fixed rate debt, are carried at amortized cost. Fair value of the Senior Notes is based on quoted market prices and on borrowing rates available to the Company; and


•	Contingent consideration - Valued based on a probability weighting of the future cash flows associated with the potential outcomes.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



	September 28, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents	$	—	$	436	$	—	$	436
Other assets:
Foreign currency forward contract	—		778		—		778
Life insurance policies	—		28,207		—		28,207
Total assets measured at fair value	$	—	$	29,421	$	—	$	29,421

Other current liabilities measured at fair value:
Contingent consideration	$	—	$	—	$	692	$	692



	December 29, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents	$	—	$	45,982	$	—	$	45,982
Other assets:
Life insurance policies	—		24,541		—		24,541
Total assets measured at fair value	$	—	$	70,523	$	—	$	70,523

Other current liabilities:
Contingent consideration	$	—	$	—	$	3,033	$	3,033
Foreign currency forward contract	—		1,319		—		1,319
Total liabilities measured at fair value	$	—	$	1,319	$	3,033	$	4,352

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contingent Consideration

The following table provides a rollforward of the contingent consideration related to previous business acquisitions. See Note 2, “Business Acquisitions.”



	Nine Months Ended
	September 28, 2019			September 29, 2018
	(in thousands)
Beginning balance	$	3,033		$	298
Additions	2,869			3,315
Payments	(5,252		)	—
Foreign currency translation	42			(213		)
Ending balance	$	692		$	3,400

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.

As of both September 28, 2019 and December 29, 2018, the book value of the Company’s Senior Notes, which is a fixed rate obligation carried at amortized cost, was $500.0 million. The fair value of the Company’s Senior Notes as of September 28, 2019 and December 29, 2018 was $530.0 million and $495.0 million, respectively. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy.

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table provides a rollforward of the Company’s goodwill:



			Adjustments to Goodwill
	December 29, 2018		Acquisitions		Foreign Exchange			September 28, 2019
	(in thousands)
RMS	$	56,968	$	—	$	(761	)	$	56,207
DSA	1,051,470		293,116		(13,660		)	1,330,926
Manufacturing	138,695		—		(4,209		)	134,486
Goodwill	$	1,247,133	$	293,116	$	(18,630	)	$	1,521,619

The increase in goodwill during the nine months ended September 28, 2019 related primarily to the acquisition of Citoxlab in the DSA reportable segment and the impact of foreign exchange.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Intangible Assets, Net

The following table displays intangible assets, net by major class:



	September 28, 2019							December 29, 2018
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
	(in thousands)
Backlog	$	28,716	$	(23,969	)	$	4,747	$	20,900	$	(18,691	)	$	2,209
Technology	119,180		(52,291		)	66,889		101,506		(41,870		)	59,636
Trademarks and trade names	8,108		(4,724		)	3,384		8,331		(4,640		)	3,691
Other	17,850		(11,613		)	6,237		17,448		(10,041		)	7,407
Other intangible assets	173,854		(92,597		)	81,257		148,185		(75,242		)	72,943
Client relationships	919,738		(298,870		)	620,868		791,725		(253,780		)	537,945
Intangible assets	$	1,093,592	$	(391,467	)	$	702,125	$	939,910	$	(329,022	)	$	610,888

The increase in intangible assets, net during the nine months ended September 28, 2019 related primarily to the acquisition of Citoxlab.

9. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS

Long-Term Debt and Finance Lease Obligations

Long-term debt, net and finance leases consists of the following:



	September 28, 2019			December 29, 2018
	(in thousands)
Term loans	$	703,125		$	731,250
Revolving facility	691,459			397,452
2026 Senior Notes	500,000			500,000
Other debt	5,692			26,286
Finance leases (Note 16)	29,712			29,240
Total debt and finance leases	1,929,988			1,684,228
Less:
Current portion of long-term debt	30,609			28,228
Current portion of finance leases (Note 16)	3,002			3,188
Current portion of long-term debt and finance leases	33,611			31,416
Long-term debt and finance leases	1,896,377			1,652,812
Debt discount and debt issuance costs	(13,784		)	(16,214		)
Long-term debt, net and finance leases	$	1,882,593		$	1,636,598

As of September 28, 2019 and December 29, 2018, the weighted average interest rate on the Company’s debt was 3.33% and 4.24%, respectively.

Term Loans and Revolving Facility

On March 26, 2018, the Company amended and restated its $1.65 billion credit facility creating a $2.3 billion credit facility (Credit Facility). The amendment extended the maturity date and provided 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 within Long-term debt, net and finance leases in the accompanying unaudited condensed consolidated balance sheets and expensed approximately $1.0 million of debt issuance costs recorded within Interest expense in the accompanying unaudited condensed consolidated statements of income for the year ended 2018. On September 25, 2019 the Company amended and restated the Credit Facility for certain administrative matters.

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.

On October 23, 2019, the Company prepaid $500.0 million of the term loan with proceeds from a $500.0 million unregistered private offering (see 2028 Senior Notes Offering below). Additionally, on November 4, 2019, the Company amended and

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

restated the Credit Facility to increase the multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. The amount outstanding under the multi-currency revolving facility has not significantly changed since September 28, 2019. 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 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 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 4.00 to 1.0. As of September 28, 2019, the Company was compliant with all covenants.

The obligations of the Company under the Credit Facility are collateralized by substantially all of the assets of the Company.

During the three and nine months ended September 28, 2019, the Company had multiple U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Company’s Credit Facility, which ranged from $300 million to $350 million. This resulted in foreign currency losses recognized in Other income, net of $12.1 million during the three months ended September 28, 2019 and $14.9 million during the nine months ended September 28, 2019. The Company entered into foreign exchange forward contracts to limit its foreign currency exposures related to these borrowings. As of September 28, 2019, the Company did not have any outstanding borrowings in a currency different than its respective functional currency. See Note 14, “Foreign Currency Contracts”, for further discussion.

Base Indenture for Senior Notes Offerings

On April 3, 2018, the Company entered into an indenture (Base Indenture) with MUFG Union Bank, N.A., (Trustee). The purpose of the Indenture was to allow the Company the ability to issue senior notes. The Company has entered into two supplemental indentures in connection with two unregistered offerings, which are described below.

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.

2026 Senior Notes Offering

On April 3, 2018, the Company entered into the first supplemental indenture (First Supplemental Indenture) with the Trustee in connection with an offering of $500.0 million in aggregate principal amount of the Company’s 5.5% Senior Notes (2026 Senior Notes), due in 2026, in an unregistered offering. Under the terms of the First Supplemental Indenture, interest on the Senior Notes is payable semi-annually on April 1 and October 1, beginning on October 1, 2018. The 2026 Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred $7.4 million of debt issuance costs within Long-term debt, net and finance leases in the accompanying unaudited condensed consolidated balance sheets.

The Company may redeem all or part of the 2026 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 First Supplemental 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 2026 Senior Notes. On or after April 1, 2021, the Company may on any one or more occasions redeem all or a part of the 2026 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 2026 Senior Notes at a purchase price equal to 101% of the aggregate principal amount of such 2026 Senior Notes. Any redemption of the 2026 Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.

Net proceeds from the 2026 Senior Notes of $493.8 million were used to partially repay the outstanding revolving credit facility on April 3, 2018 as well as fund the acquisition of MPI Research.

2028 Senior Notes Offering

On October 23, 2019, the Company entered into a second supplemental indenture (Second Supplemental Indenture) with the Trustee in connection with the offering of $500.0 million in aggregate principal amount of the Company’s 4.25% Senior Notes

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2028 Senior Notes), due in 2028, in an unregistered offering. Under the terms of the Second Supplemental Indenture, interest on the 2028 Senior Notes is payable semi-annually on May 1 and November 1, beginning on May 1, 2020. The 2028 Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred approximately $6 million of debt issuance costs, which were capitalized upon the 2028 Senior Notes issuance on October 23, 2019.

The Company may redeem all or part of the 2028 Senior Notes at any time prior to May 1, 2023, at its option, at a redemption price equal to 100% of the principal amount of such 2028 Senior Notes plus the Applicable Premium (as defined in the Indenture). The Company may also redeem up to 40% of the 2028 Senior Notes with the proceeds of certain equity offerings completed before May 1, 2023, at a redemption price equal to 104.25% of the principal amount of such 2028 Senior Notes. On or after May 1, 2023, the Company may on any one or more occasions redeem all or a part of the 2028 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, up to but excluding the redemption date.

Net proceeds from the 2028 Senior Notes of approximately $494 million and available cash were used to prepay a portion of the term loan on October 23, 2019.

Commitment Letter

On February 12, 2018, the Company secured an $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 upon the successful acquisition of MPI Research. Debt issuance costs of $1.8 million, which were capitalized upon the execution of the Bridge Facility, were expensed upon termination of the agreement on April 3, 2018. In addition, the Company incurred and expensed $2.0 million of fees pertaining to a temporary backstop facility related to the negotiation of the Credit Facility during the three months ended March 31, 2018. These costs were included in Interest expense in the accompanying unaudited condensed consolidated statements of income.

Letters of Credit

As of September 28, 2019 and December 29, 2018, the Company had $6.7 million and $6.5 million, respectively, in outstanding letters of credit.

10. EQUITY AND NONCONTROLLING INTERESTS

Earnings Per Share

The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	(in thousands)
Numerator:
Income from continuing operations, net of income taxes	$	73,552	$	60,902	$	173,549	$	167,020
Income from discontinued operations, net of income taxes	—		—		—		1,506
Less: Net income attributable to noncontrolling interests	742		534		1,878		1,818
Net income attributable to common shareholders	$	72,810	$	60,368	$	171,671	$	166,708

Denominator:
Weighted-average shares outstanding - Basic	48,818		48,310		48,682		48,098
Effect of dilutive securities:
Stock options, restricted stock units, performance share units and restricted stock	897		1,016		945		1,020
Weighted-average shares outstanding - Diluted	49,715		49,326		49,627		49,118

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Options to purchase 0.4 million and 0.5 million shares for the three months ended September 28, 2019 and September 29, 2018, 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. Options to purchase 0.4 million and 0.5 million shares for the nine months ended September 28, 2019 and September 29, 2018, respectively, as well as a non-significant number of restricted shares, RSUs and 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 nine mont