CHARLES RIVER LABORATORIES INTERNATIONAL, INC. - Quarter Report: 2020 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 26, 2020
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 23, 2020, there were 49,742,626 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 26, 2020
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 26, 2020 and September 28, 2019 | ||||||||
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 26, 2020 and September 28, 2019 | ||||||||
Condensed Consolidated Balance Sheets (Unaudited) as of September 26, 2020 and December 28, 2019 | ||||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 26, 2020 and September 28, 2019 | ||||||||
Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 26, 2020 and September 28, 2019 | ||||||||
Notes to Unaudited Condensed Consolidated Financial Statements | ||||||||
2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
3 | Quantitative and Qualitative Disclosure About Market Risk | |||||||
4 | Controls and Procedures | |||||||
PART II - OTHER INFORMATION | ||||||||
1 | Legal Proceedings | |||||||
1A | Risk Factors | |||||||
2 | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
6 | Exhibits | |||||||
Signatures |
1
Special Note on Factors Affecting Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could,” and other similar expressions which are predictions of, indicate future events and trends or which do not relate to historical matters, are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties and assumptions that are difficult to predict.
For example, we may use forward-looking statements when addressing topics such as: the COVID-19 pandemic, its duration, its impact on our business, results of operations, financial condition, liquidity, use of our borrowings, business practices, operations, suppliers, third party service providers, customers, employees, industry, ability to meet future performance obligations, ability to efficiently implement advisable safety precautions, and internal controls over financial reporting; the COVID-19 pandemic’s impact on demand, the global economy and financial markets; goodwill and asset impairments still under review; changes and uncertainties in the global economy; 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; the impact of unauthorized access into our information systems, including the timing and effectiveness of any enhanced security and monitoring; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy, business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical and biotechnology companies, venture capital investments, and opportunities for future similar arrangements; our cost structure; the impact of acquisitions, including HemaCare and Cellero, LLC; 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.
Forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document, or in the case of statements incorporated by reference, on the date of the document incorporated by reference.
Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 28, 2019, under the sections entitled “Our Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in this Quarterly Report on Form 10-Q, under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” in our press releases, and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or risks. New information, future events, or risks may cause the forward-looking events we discuss in this report not to occur.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
Service revenue | $ | 580,774 | $ | 523,169 | $ | 1,677,927 | $ | 1,479,991 | |||||||||||||||
Product revenue | 162,526 | 144,782 | 455,016 | 450,097 | |||||||||||||||||||
Total revenue | 743,300 | 667,951 | 2,132,943 | 1,930,088 | |||||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||
Cost of services provided (excluding amortization of intangible assets) | 377,226 | 351,894 | 1,124,988 | 1,014,063 | |||||||||||||||||||
Cost of products sold (excluding amortization of intangible assets) | 76,800 | 69,941 | 234,382 | 220,028 | |||||||||||||||||||
Selling, general and administrative | 128,289 | 129,509 | 385,902 | 388,024 | |||||||||||||||||||
Amortization of intangible assets | 28,232 | 23,805 | 83,869 | 65,611 | |||||||||||||||||||
Operating income | 132,753 | 92,802 | 303,802 | 242,362 | |||||||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income | 179 | 385 | 771 | 838 | |||||||||||||||||||
Interest expense | (18,867) | (5,698) | (53,286) | (36,520) | |||||||||||||||||||
Other income (expense), net | 21,211 | (14,254) | 23,400 | (8,161) | |||||||||||||||||||
Income from operations, before income taxes | 135,276 | 73,235 | 274,687 | 198,519 | |||||||||||||||||||
Provision (benefit) for income taxes | 32,665 | (317) | 53,571 | 24,970 | |||||||||||||||||||
Net income | 102,611 | 73,552 | 221,116 | 173,549 | |||||||||||||||||||
Less: Net (expense) income attributable to noncontrolling interests | (298) | 742 | 3 | 1,878 | |||||||||||||||||||
Net income attributable to common shareholders | $ | 102,909 | $ | 72,810 | $ | 221,113 | $ | 171,671 | |||||||||||||||
Earnings per common share | |||||||||||||||||||||||
Net income attributable to common shareholders: | |||||||||||||||||||||||
Basic | $ | 2.07 | $ | 1.49 | $ | 4.47 | $ | 3.53 | |||||||||||||||
Diluted | $ | 2.03 | $ | 1.46 | $ | 4.39 | $ | 3.46 | |||||||||||||||
Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
Basic | 49,703 | 48,818 | 49,482 | 48,682 | |||||||||||||||||||
Diluted | 50,702 | 49,715 | 50,371 | 49,627 | |||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements. |
3
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
Net income | $ | 102,611 | $ | 73,552 | $ | 221,116 | $ | 173,549 | |||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Foreign currency translation adjustment and other | 20,112 | (15,889) | (17,993) | (9,075) | |||||||||||||||||||
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans | 1,411 | 365 | 4,150 | 1,113 | |||||||||||||||||||
Comprehensive income, before income taxes | 124,134 | 58,028 | 207,273 | 165,587 | |||||||||||||||||||
Less: Income tax expense (benefit) related to items of other comprehensive income | 3,201 | (2,511) | 3,024 | (1,381) | |||||||||||||||||||
Comprehensive income, net of income taxes | 120,933 | 60,539 | 204,249 | 166,968 | |||||||||||||||||||
Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes | 591 | (37) | 399 | 1,064 | |||||||||||||||||||
Comprehensive income attributable to common shareholders, net of income taxes | $ | 120,342 | $ | 60,576 | $ | 203,850 | $ | 165,904 | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements. |
4
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts)
September 26, 2020 | December 28, 2019 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 242,879 | $ | 238,014 | |||||||
Trade receivables, net | 572,058 | 514,033 | |||||||||
Inventories | 181,367 | 160,660 | |||||||||
Prepaid assets | 69,481 | 52,588 | |||||||||
Other current assets | 74,489 | 56,030 | |||||||||
Total current assets | 1,140,274 | 1,021,325 | |||||||||
Property, plant and equipment, net | 1,037,212 | 1,044,128 | |||||||||
Operating lease right-of-use assets, net | 168,379 | 140,085 | |||||||||
Goodwill | 1,777,642 | 1,540,565 | |||||||||
Client relationships, net | 732,408 | 613,573 | |||||||||
Other intangible assets, net | 70,370 | 75,840 | |||||||||
Deferred tax assets | 39,515 | 44,659 | |||||||||
Other assets | 247,538 | 212,615 | |||||||||
Total assets | $ | 5,213,338 | $ | 4,692,790 | |||||||
Liabilities, Redeemable Noncontrolling Interests and Equity | |||||||||||
Current liabilities: | |||||||||||
Current portion of long-term debt and finance leases | $ | 47,946 | $ | 38,545 | |||||||
Accounts payable | 96,758 | 111,498 | |||||||||
Accrued compensation | 191,295 | 158,617 | |||||||||
Deferred revenue | 172,336 | 171,805 | |||||||||
Accrued liabilities | 151,061 | 139,118 | |||||||||
Other current liabilities | 127,618 | 90,598 | |||||||||
Total current liabilities | 787,014 | 710,181 | |||||||||
Long-term debt, net and finance leases | 1,968,161 | 1,849,666 | |||||||||
Operating lease right-of-use liabilities | 146,578 | 116,252 | |||||||||
Deferred tax liabilities | 202,392 | 167,283 | |||||||||
Other long-term liabilities | 183,695 | 182,933 | |||||||||
Total liabilities | 3,287,840 | 3,026,315 | |||||||||
Commitments and contingencies (Notes 2, 9, 11, 12, 16 and 17) | |||||||||||
Redeemable noncontrolling interests | 24,033 | 28,647 | |||||||||
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; 49,882 shares issued and 49,736 shares outstanding as of September 26, 2020, and 48,936 shares issued and 48,936 shares outstanding as of December 28, 2019 | 499 | 489 | |||||||||
Additional paid-in capital | 1,614,185 | 1,531,785 | |||||||||
Retained earnings | 501,442 | 280,329 | |||||||||
Treasury stock, at cost, 146 and 0 shares, as of September 26, 2020 and December 28, 2019, respectively | (23,905) | — | |||||||||
Accumulated other comprehensive loss | (195,281) | (178,019) | |||||||||
Total equity attributable to common shareholders | 1,896,940 | 1,634,584 | |||||||||
Noncontrolling interest | 4,525 | 3,244 | |||||||||
Total equity | 1,901,465 | 1,637,828 | |||||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 5,213,338 | $ | 4,692,790 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements. |
5
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended | |||||||||||
September 26, 2020 | September 28, 2019 | ||||||||||
Cash flows relating to operating activities | |||||||||||
Net income | $ | 221,116 | $ | 173,549 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 174,048 | 146,262 | |||||||||
Stock-based compensation | 40,973 | 43,429 | |||||||||
Deferred income taxes | (3,131) | (25,092) | |||||||||
Gain on venture capital and strategic equity investments, net | (32,226) | (5,724) | |||||||||
Other, net | 16,902 | 4,865 | |||||||||
Changes in assets and liabilities: | |||||||||||
Trade receivables, net | (51,456) | (24,491) | |||||||||
Inventories | (14,055) | (12,981) | |||||||||
Accounts payable | (12,327) | 24,481 | |||||||||
Accrued compensation | 29,438 | (23,320) | |||||||||
Deferred revenue | (1,308) | (1,556) | |||||||||
Customer contract deposits | 9,887 | (7,586) | |||||||||
Other assets and liabilities, net | 30,335 | 8,423 | |||||||||
Net cash provided by operating activities | 408,196 | 300,259 | |||||||||
Cash flows relating to investing activities | |||||||||||
Acquisition of businesses and assets, net of cash acquired | (419,146) | (515,647) | |||||||||
Capital expenditures | (78,706) | (76,675) | |||||||||
Purchases of investments and contributions to venture capital investments | (19,887) | (17,664) | |||||||||
Proceeds from sale of investments | 5,810 | 15 | |||||||||
Other, net | (1,192) | (660) | |||||||||
Net cash used in investing activities | (513,121) | (610,631) | |||||||||
Cash flows relating to financing activities | |||||||||||
Proceeds from long-term debt and revolving credit facility | 1,411,954 | 2,071,175 | |||||||||
Proceeds from exercises of stock options | 43,806 | 26,982 | |||||||||
Payments on long-term debt, revolving credit facility, and finance lease obligations | (1,320,961) | (1,798,620) | |||||||||
Purchase of treasury stock | (23,905) | (18,040) | |||||||||
Other, net | (4,417) | (10,516) | |||||||||
Net cash provided by financing activities | 106,477 | 270,981 | |||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 5,825 | 8,793 | |||||||||
Net change in cash, cash equivalents, and restricted cash | 7,377 | (30,598) | |||||||||
Cash, cash equivalents, and restricted cash, beginning of period | 240,046 | 197,318 | |||||||||
Cash, cash equivalents, and restricted cash, end of period | $ | 247,423 | $ | 166,720 | |||||||
Supplemental cash flow information: | |||||||||||
Cash and cash equivalents | $ | 242,879 | $ | 164,759 | |||||||
Restricted cash included in Other current assets | 2,968 | 534 | |||||||||
Restricted cash included in Other assets | 1,576 | 1,427 | |||||||||
Cash, cash equivalents, and restricted cash, end of period | $ | 247,423 | $ | 166,720 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements. |
6
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 | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 28, 2019 | 48,936 | $ | 489 | $ | 1,531,785 | $ | 280,329 | $ | (178,019) | — | $ | — | $ | 1,634,584 | $ | 3,244 | $ | 1,637,828 | |||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 50,769 | — | — | — | 50,769 | 399 | 51,168 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (40,898) | — | — | (40,898) | — | (40,898) | |||||||||||||||||||||||||||||||||||||||||||||||||
Buy-out and contingent consideration recognition in connection with redeemable noncontrolling interest | — | — | (2,379) | — | — | — | — | (2,379) | — | (2,379) | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock under employee compensation plans | 694 | 7 | 22,616 | — | — | — | — | 22,623 | — | 22,623 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury shares | — | — | — | — | — | 144 | (23,675) | (23,675) | — | (23,675) | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 10,960 | — | — | — | — | 10,960 | — | 10,960 | |||||||||||||||||||||||||||||||||||||||||||||||||
March 28, 2020 | 49,630 | 496 | 1,562,982 | 331,098 | (218,917) | 144 | (23,675) | 1,651,984 | 3,643 | 1,655,627 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 67,435 | — | — | — | 67,435 | 441 | 67,876 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 6,203 | — | — | 6,203 | — | 6,203 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock under employee compensation plans | 174 | 2 | 13,992 | — | — | — | — | 13,994 | — | 13,994 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury shares | — | — | — | — | — | 1 | (118) | (118) | — | (118) | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 13,143 | — | — | — | — | 13,143 | — | 13,143 | |||||||||||||||||||||||||||||||||||||||||||||||||
June 27, 2020 | 49,804 | 498 | 1,590,117 | 398,533 | (212,714) | 145 | (23,793) | 1,752,641 | 4,084 | 1,756,725 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 102,909 | — | — | — | 102,909 | 441 | 103,350 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 17,433 | — | — | 17,433 | — | 17,433 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock under employee compensation plans | 78 | 1 | 7,198 | — | — | — | — | 7,199 | — | 7,199 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury shares | — | — | — | — | — | 1 | (112) | (112) | — | (112) | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 16,870 | — | — | — | — | 16,870 | — | 16,870 | |||||||||||||||||||||||||||||||||||||||||||||||||
September 26, 2020 | 49,882 | $ | 499 | $ | 1,614,185 | $ | 501,442 | $ | (195,281) | 146 | $ | (23,905) | $ | 1,896,940 | $ | 4,525 | $ | 1,901,465 | |||||||||||||||||||||||||||||||||||||||||
7
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 | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
8
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 2019. 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.
On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The COVID-19 pandemic is dynamic and expanding, and its ultimate scope, duration and effects are uncertain. This pandemic has and continues to result in, and any future epidemic or pandemic crises may potentially result in, direct and indirect adverse effects on the Company’s industry and customers, which in turn has (with respect to COVID-19) and may (with respect to future epidemics or crises) impact the Company’s business, results of operations and financial condition. Further, the COVID-19 pandemic may also affect the Company’s operating and financial results in a manner that is not presently known to the Company or that the Company currently does not expect to present significant risks to its operations or financial results. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s condensed consolidated financial statements.
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.
Segment Reporting
The Company reports its results in three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). The Company’s RMS reportable segment includes the Research Models, Research Model Services, and Research Products businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services). Research Products supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. The Company’s DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. The Company’s Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification
9
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 2019.
Newly Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (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 hosting arrangements that include an internal-use software license). This standard became effective for the Company in the three months ended March 28, 2020 and did not have a significant impact on the unaudited condensed 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. This standard became effective for the Company in the three months ended March 28, 2020 and did not have a significant impact on the unaudited condensed consolidated financial statements and related disclosures.
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. This standard became effective for the Company in the three months ended March 28, 2020 and did not have a significant impact on the unaudited condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard became effective for the Company in the three months ended March 28, 2020 and did not have an impact on the unaudited condensed consolidated financial statements and related disclosures. The Company performs its annual impairment test during the fourth quarter of a fiscal year and does not expect any significant impact on the consolidated financial statements and related disclosures.
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 trade and notes receivables, 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 standard became effective for the Company in the three months ended March 28, 2020 and did not have a significant impact on the unaudited condensed consolidated financial statements and related disclosures.
Newly Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU offers temporary optional expedients and exceptions for applying U.S. GAAP to modifications to agreements such as loans, debt securities, derivatives, and borrowings which reference LIBOR or another reference rate that is expected to be discontinued by December 31, 2021. The expedients and exceptions provided by the standard do not apply to modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 that an entity has elected certain optional expedients for and are retained through the end of the hedging relationship. The ASU is effective until December 31, 2022 when the replacement for LIBOR is expected to be completed. The interest rate on the Company’s senior credit facility, which matures in fiscal year 2023, is linked to LIBOR. The Company is in the process of evaluating options for transitioning away from the senior credit facility’s use of LIBOR and expects to be completed by the time LIBOR is phased out. The Company did not elect to apply any of the expedients or exceptions as of and for the three and nine months ended September 26, 2020 and is currently evaluating the impact this new standard will have on the unaudited condensed consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 states any equity security transitioning
10
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
from the alternative method of accounting under Topic 321 to the equity method, or vice versa, due to an observable transaction will be remeasured immediately before the transition. In addition, the ASU clarifies the accounting for certain non-derivative forward contracts or purchased call options to acquire equity securities stating such instruments will be measured using the fair value principles of Topic 321 before settlement or exercise. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied on a prospective basis. 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 December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intraperiod tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax), which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of any enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
2. BUSINESS COMBINATIONS
Cellero, LLC
On August 6, 2020, the Company acquired Cellero, LLC (Cellero), a provider of cellular products for cell therapy developers and manufacturers worldwide. The addition of Cellero enhances the Company’s unique, comprehensive solutions for the high-growth cell therapy market, strengthening the ability to help accelerate clients’ critical programs from basic research and proof-of-concept to regulatory approval and commercialization. It also expands the Company’s access to high-quality, human-derived biomaterials with Cellero’s donor sites in the United States. The purchase price for Cellero was $37.5 million in cash, subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through cash on hand. This business is reported as part of the Company’s RMS reportable segment.
The preliminary purchase price allocation of $37.0 million, net of $0.5 million of cash acquired was as follows:
August 6, 2020 | |||||
(in thousands) | |||||
Trade receivables | $ | 1,525 | |||
Inventories | 551 | ||||
Other current assets (excluding cash) | 182 | ||||
Property, plant and equipment | 1,648 | ||||
Goodwill | 19,532 | ||||
Definite-lived intangible assets | 16,230 | ||||
Other long-term assets | 849 | ||||
Current liabilities | (1,360) | ||||
Deferred tax liabilities | (1,467) | ||||
Other long-term liabilities | (740) | ||||
Total purchase price allocation | $ | 36,950 |
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:
11
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Definite-Lived Intangible Assets | Weighted Average Amortization Life | ||||||||||
(in thousands) | (in years) | ||||||||||
Client relationships | $ | 14,740 | 13 | ||||||||
Other intangible assets | 1,490 | 3 | |||||||||
Total definite-lived intangible assets | $ | 16,230 | 12 |
The goodwill resulting from the transaction, $10.8 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 RMS business from customers introduced through Cellero and the assembled workforce of the acquired business.
The Company incurred transaction and integration costs in connection with the acquisition of $2.0 million for the three and nine months ended September 26, 2020, which was primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.
Pro forma financial information as well as the disclosure of actual revenue and operating income (loss) have not been included because Cellero's financial results are not significant when compared to the Company’s consolidated financial results.
HemaCare Corporation
On January 3, 2020, the Company acquired HemaCare Corporation (HemaCare), a business specializing in the production of human-derived cellular products for the cell therapy market. The acquisition of HemaCare expands the Company’s comprehensive portfolio of early-stage research and manufacturing support solutions to encompass the production and customization of high-quality, human derived cellular products to better support clients’ cell therapy programs. The purchase price of HemaCare was $379.8 million in cash. 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. See Note 9, “Long-Term Debt and Finance Leases.” This business is reported as part of the Company’s RMS reportable segment.
The preliminary purchase price allocation of $376.7 million, net of $3.1 million of cash acquired was as follows:
January 3, 2020 | |||||
(in thousands) | |||||
Trade receivables | $ | 6,451 | |||
Inventories | 8,468 | ||||
Other current assets (excluding cash) | 3,494 | ||||
Property, plant and equipment | 10,033 | ||||
Goodwill | 210,196 | ||||
Definite-lived intangible assets | 183,540 | ||||
Other long-term assets | 5,920 | ||||
Current liabilities | (5,188) | ||||
Deferred tax liabilities | (38,529) | ||||
Other long-term liabilities | (7,664) | ||||
Total purchase price allocation | $ | 376,721 |
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 breakout of definite-lived intangible assets acquired was as follows:
Definite-Lived Intangible Assets | Weighted Average Amortization Life | ||||||||||
(in thousands) | (in years) | ||||||||||
Client relationships | $ | 170,390 | 19 | ||||||||
Trade name | 7,330 | 10 | |||||||||
Other intangible assets | 5,820 | 3 | |||||||||
Total definite-lived intangible assets | $ | 183,540 | 18 |
12
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s RMS business from customers introduced through HemaCare and the assembled workforce of the acquired business. The goodwill attributable to HemaCare is not deductible for tax purposes.
The Company incurred transaction and integration costs in connection with the acquisition of $0.1 million and $5.9 million for the three and nine months ended September 26, 2020, respectively, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.
Beginning on January 3, 2020, HemaCare has been included in the operating results of the Company. HemaCare revenue for the three and nine months ended September 26, 2020 was $12.8 million and $31.5 million, respectively. HemaCare operating income for the three months ended September 26, 2020 was $0.4 million and its operating loss for the nine months ended September 26, 2020 was $7.7 million.
The following selected unaudited pro forma consolidated results of operations are presented as if the HemaCare acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 30, 2018, after giving effect to certain adjustments. For the nine months ended September 26, 2020, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $0.6 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For the nine months ended September 28, 2019, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $9.6 million, additional interest expense on borrowings of $8.8 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||
Revenue | $ | 743,300 | $ | 677,993 | $ | 2,132,961 | $ | 1,959,544 | |||||||||||||||
Net income attributable to common shareholders | 102,802 | 70,722 | 225,890 | 165,376 |
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 ad 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.
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 purchase price for Citoxlab was $527.1 million in cash. 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.
13
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation of $490.4 million, net of $36.7 million of cash acquired was as follows:
April 29, 2019 | |||||
(in thousands) | |||||
Trade receivables | $ | 35,405 | |||
Inventories | 5,282 | ||||
Other current assets (excluding cash) | 13,917 | ||||
Property, plant and equipment | 88,605 | ||||
Goodwill | 280,161 | ||||
Definite-lived intangible assets | 162,400 | ||||
Other long-term assets | 20,063 | ||||
Deferred revenue | (15,278) | ||||
Current liabilities | (46,081) | ||||
Deferred tax liabilities | (27,458) | ||||
Other long-term liabilities | (22,624) | ||||
Redeemable noncontrolling interest | (4,035) | ||||
Total purchase price allocation | $ | 490,357 |
From the date of the acquisition through March 28, 2020, 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 | $ | 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 $0.6 million and $1.9 million for the three months ended September 26, 2020 and September 28, 2019, respectively, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income. The Company incurred transaction and integration costs in connection with the acquisition of $3.1 million and $19.1 million for the nine months ended September 26, 2020 and September 28, 2019, 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 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.
September 28, 2019 | |||||||||||
Three Months Ended | Nine Months Ended | ||||||||||
Revenue | $ | 667,951 | $ | 1,992,472 | |||||||
Net income attributable to common shareholders | 74,948 | 189,601 |
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.
14
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 purchase price was $23.4 million, net of a $4.0 million pre-existing relationship for a supply agreement settled upon acquisition. 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 purchase price allocation of $23.1 million, net of $0.3 million of cash acquired was as follows:
August 28, 2019 | |||||
(in thousands) | |||||
Trade receivables | $ | 189 | |||
Inventories | 7,644 | ||||
Property, plant and equipment | 1,462 | ||||
Goodwill | 12,591 | ||||
Other long-term assets | 11,849 | ||||
Current liabilities | (441) | ||||
Deferred tax liabilities | (1,253) | ||||
Other long-term liabilities | (238) | ||||
Redeemable noncontrolling interest | (8,740) | ||||
Total purchase price allocation | $ | 23,063 |
From the date of the acquisition through June 27, 2020, 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.
No significant integration costs were incurred with the acquisition for the three and nine months ended September 26, 2020. 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 were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated 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
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 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Major Products/Service Lines: | |||||||||||||||||||||||
RMS | $ | 151,910 | $ | 132,546 | $ | 414,455 | $ | 405,772 | |||||||||||||||
DSA | 461,177 | 420,079 | 1,342,424 | 1,179,793 | |||||||||||||||||||
Manufacturing | 130,213 | 115,326 | 376,064 | 344,523 | |||||||||||||||||||
Total revenue | $ | 743,300 | $ | 667,951 | $ | 2,132,943 | $ | 1,930,088 |
15
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Timing of Revenue Recognition: | |||||||||||||||||||||||
RMS | |||||||||||||||||||||||
Services and products transferred over time | $ | 60,225 | $ | 56,243 | $ | 177,623 | $ | 168,377 | |||||||||||||||
Services and products transferred at a point in time | 91,685 | 76,303 | 236,832 | 237,395 | |||||||||||||||||||
DSA | |||||||||||||||||||||||
Services and products transferred over time | 460,821 | 419,445 | 1,341,832 | 1,178,874 | |||||||||||||||||||
Services and products transferred at a point in time | 356 | 634 | 592 | 919 | |||||||||||||||||||
Manufacturing | |||||||||||||||||||||||
Services and products transferred over time | 47,457 | 36,308 | 126,088 | 102,674 | |||||||||||||||||||
Services and products transferred at a point in time | 82,756 | 79,018 | 249,976 | 241,849 | |||||||||||||||||||
Total revenue | $ | 743,300 | $ | 667,951 | $ | 2,132,943 | $ | 1,930,088 |
RMS
The RMS business generates revenue through the commercial production and sale of research models, research products, and the provision of services related to the maintenance and monitoring of research models and management of clients’ research operations. Revenue from the sale of research models and products 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 26, 2020. 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 Company has assessed future performance obligations with respect to the COVID-19 pandemic uncertainties and believes there is an insignificant impact on the ability to meet future performance obligations and the amount of revenue to be recognized.
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 26, 2020:
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 | $ | 250,855 | $ | 106,704 | $ | 4,265 | $ | 15 | $ | 361,839 | |||||||||||||||||||
Manufacturing | 8,044 | 8,121 | 53 | 40 | 16,258 | ||||||||||||||||||||||||
Total | $ | 258,899 | $ | 114,825 | $ | 4,318 | $ | 55 | $ | 378,097 |
16
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract Balances from Contracts with Customers
The timing of revenue recognition, billings and cash collections results in billed receivables (client receivables), contract assets (unbilled revenue), and contract liabilities (current and long-term deferred revenue and customer contract deposits) on the unaudited condensed consolidated balance sheets. The Company’s payment terms are generally 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 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Balances from contracts with customers: | |||||||||||
Client receivables | $ | 429,935 | $ | 395,740 | |||||||
Contract assets (unbilled revenue) | 148,034 | 121,957 | |||||||||
Contract liabilities (current and long-term deferred revenue) | 191,459 | 192,788 | |||||||||
Contract liabilities (customer contract deposits) | 42,990 | 33,080 |
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $13 million and $27 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of September 26, 2020 and December 28, 2019, respectively. Advanced client payments of approximately $43 million and $33 million have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated balance sheets as of September 26, 2020 and December 28, 2019, respectively.
Other changes in the contract asset and the contract liability balances during the nine months ended September 26, 2020 were as follows:
(i) Changes due to business combinations:
See Note 2. “Business Combinations” for client receivables that were acquired as part of the HemaCare acquisition on January 3, 2020 and Cellero acquisition on August 6, 2020. No significant contract assets or contract liabilities were acquired as part of these acquisitions.
(ii) Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification:
During the nine months ended September 26, 2020, 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 28, 2019 was billed during the nine months ended September 26, 2020.
(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 28, 2019 were recognized as revenue during the nine months ended September 26, 2020.
17
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SEGMENT INFORMATION
The Company’s three reportable segments are RMS, DSA, and Manufacturing. The following table presents revenue and other financial information by reportable segment:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
RMS | |||||||||||||||||||||||
Revenue | $ | 151,910 | $ | 132,546 | $ | 414,455 | $ | 405,772 | |||||||||||||||
Operating income | 37,108 | 34,385 | 68,325 | 103,729 | |||||||||||||||||||
Depreciation and amortization | 9,455 | 4,895 | 27,333 | 14,198 | |||||||||||||||||||
Capital expenditures | 3,552 | 5,818 | 15,585 | 14,979 | |||||||||||||||||||
DSA | |||||||||||||||||||||||
Revenue | $ | 461,177 | $ | 420,079 | $ | 1,342,424 | $ | 1,179,793 | |||||||||||||||
Operating income | 90,348 | 64,995 | 234,872 | 175,214 | |||||||||||||||||||
Depreciation and amortization | 42,707 | 39,898 | 125,138 | 111,231 | |||||||||||||||||||
Capital expenditures | 15,532 | 21,141 | 46,436 | 45,130 | |||||||||||||||||||
Manufacturing | |||||||||||||||||||||||
Revenue | $ | 130,213 | $ | 115,326 | $ | 376,064 | $ | 344,523 | |||||||||||||||
Operating income | 48,246 | 39,253 | 132,288 | 103,893 | |||||||||||||||||||
Depreciation and amortization | 6,655 | 5,990 | 19,257 | 17,577 | |||||||||||||||||||
Capital expenditures | 5,787 | 6,421 | 13,985 | 14,299 |
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 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||
Three Months Ended: | |||||||||||||||||||||||||||||||||||
Total reportable segments | $ | 175,702 | $ | 138,633 | $ | 58,817 | $ | 50,783 | $ | 24,871 | $ | 33,380 | |||||||||||||||||||||||
Unallocated corporate | (42,949) | (45,831) | 763 | 975 | 1,314 | 1,783 | |||||||||||||||||||||||||||||
Total consolidated | $ | 132,753 | $ | 92,802 | $ | 59,580 | $ | 51,758 | $ | 26,185 | $ | 35,163 | |||||||||||||||||||||||
Nine Months Ended: | |||||||||||||||||||||||||||||||||||
Total reportable segments | $ | 435,485 | $ | 382,836 | $ | 171,728 | $ | 143,006 | $ | 76,006 | $ | 74,408 | |||||||||||||||||||||||
Unallocated corporate | (131,683) | (140,474) | 2,320 | 3,256 | 2,700 | 2,267 | |||||||||||||||||||||||||||||
Total consolidated | $ | 303,802 | $ | 242,362 | $ | 174,048 | $ | 146,262 | $ | 78,706 | $ | 76,675 | |||||||||||||||||||||||
Revenue for each significant product or service offering is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
RMS | $ | 151,910 | $ | 132,546 | $ | 414,455 | $ | 405,772 | |||||||||||||||
DSA | 461,177 | 420,079 | 1,342,424 | 1,179,793 | |||||||||||||||||||
Manufacturing | 130,213 | 115,326 | 376,064 | 344,523 | |||||||||||||||||||
Total revenue | $ | 743,300 | $ | 667,951 | $ | 2,132,943 | $ | 1,930,088 |
18
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of unallocated corporate expense consists of the following:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Stock-based compensation | $ | 10,116 | $ | 8,752 | $ | 25,023 | $ | 27,744 | |||||||||||||||
Compensation, benefits, and other employee-related expenses | 20,812 | 18,770 | 63,541 | 54,561 | |||||||||||||||||||
External consulting and other service expenses | 3,088 | 4,156 | 10,474 | 12,060 | |||||||||||||||||||
Information technology | 4,937 | 3,534 | 12,888 | 10,811 | |||||||||||||||||||
Depreciation | 763 | 975 | 2,320 | 3,256 | |||||||||||||||||||
Acquisition and integration | 2,124 | 5,679 | 9,976 | 23,621 | |||||||||||||||||||
Other general unallocated corporate | 1,109 | 3,965 | 7,461 | 8,421 | |||||||||||||||||||
Total unallocated corporate expense | $ | 42,949 | $ | 45,831 | $ | 131,683 | $ | 140,474 |
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 26, 2020 | $ | 406,975 | $ | 214,194 | $ | 78,995 | $ | 41,553 | $ | 1,583 | $ | 743,300 | |||||||||||||||||||||||
September 28, 2019 | 373,094 | 184,685 | 71,984 | 36,698 | 1,490 | 667,951 | |||||||||||||||||||||||||||||
Nine Months Ended: | |||||||||||||||||||||||||||||||||||
September 26, 2020 | $ | 1,196,605 | $ | 595,391 | $ | 227,171 | $ | 109,347 | $ | 4,429 | $ | 2,132,943 | |||||||||||||||||||||||
September 28, 2019 | 1,091,194 | 533,820 | 194,865 | 106,090 | 4,119 | 1,930,088 | |||||||||||||||||||||||||||||
Included in the Other category above are operations located in Brazil and Israel. Revenue represents sales originating in entities physically located in the identified geographic area.
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Client receivables | $ | 429,935 | $ | 395,740 | |||||||
Unbilled revenue | 148,034 | 121,957 | |||||||||
Total | 577,969 | 517,697 | |||||||||
Less: Allowance for doubtful accounts | (5,911) | (3,664) | |||||||||
Trade receivables, net | $ | 572,058 | $ | 514,033 |
The composition of inventories is as follows:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Raw materials and supplies | $ | 26,300 | $ | 24,613 | |||||||
Work in process | 34,672 | 35,852 | |||||||||
Finished products | 120,395 | 100,195 | |||||||||
Inventories | $ | 181,367 | $ | 160,660 |
19
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of other current assets is as follows:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Prepaid income tax | $ | 70,258 | $ | 54,358 | |||||||
Short-term investments | 963 | 941 | |||||||||
Restricted cash | 2,968 | 431 | |||||||||
Other | 300 | 300 | |||||||||
Other current assets | $ | 74,489 | $ | 56,030 |
The composition of other assets is as follows:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Venture capital investments | $ | 142,998 | $ | 108,983 | |||||||
Strategic equity investments | 21,019 | 13,996 | |||||||||
Life insurance policies | 38,339 | 38,207 | |||||||||
Other long-term income tax assets | 21,376 | 20,570 | |||||||||
Restricted cash | 1,576 | 1,601 | |||||||||
Other | 22,230 | 29,258 | |||||||||
Other assets | $ | 247,538 | $ | 212,615 |
The composition of other current liabilities is as follows:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Current portion of operating lease right-of-use liabilities | $ | 24,870 | $ | 20,357 | |||||||
Accrued income taxes | 36,978 | 26,066 | |||||||||
Customer contract deposits | 42,990 | 33,080 | |||||||||
Other | 22,780 | 11,095 | |||||||||
Other current liabilities | $ | 127,618 | $ | 90,598 |
The composition of other long-term liabilities is as follows:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
U.S. Transition Tax | $ | 48,781 | $ | 52,066 | |||||||
Long-term pension liability, accrued executive supplemental life insurance retirement plan and deferred compensation plan | 75,960 | 80,833 | |||||||||
Long-term deferred revenue | 19,123 | 20,983 | |||||||||
Other | 39,831 | 29,051 | |||||||||
Other long-term liabilities | $ | 183,695 | $ | 182,933 |
6. VENTURE CAPITAL AND STRATEGIC EQUITY INVESTMENTS
Venture capital investments were $143.0 million and $109.0 million as of September 26, 2020 and December 28, 2019, respectively. The Company’s total commitment to the venture capital funds as of September 26, 2020 was $130.8 million, of which the Company funded $92.0 million through that date. The Company received dividends totaling $6.3 million and $0.2 million for the three months ended September 26, 2020 and September 28, 2019, respectively. The Company received dividends totaling $9.6 million and $1.8 million for the nine months ended September 26, 2020 and September 28, 2019, respectively.
20
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recognized gains of $19.9 million and losses of $0.6 million related to the venture capital investments for the three months ended September 26, 2020 and September 28, 2019, respectively. The Company recognized gains of $31.6 million and $5.7 million related to the venture capital investments for the nine months ended September 26, 2020 and September 28, 2019, respectively.
The Company also invests, with minority positions, directly in equity of predominantly privately-held companies. Strategic equity investments were $21.0 million and $14.0 million as of September 26, 2020 and December 28, 2019, respectively. The Company recognized insignificant gains and losses for the three and nine months ended September 26, 2020 and September 28, 2019, respectively.
7. FAIR VALUE
The Company has certain assets and liabilities recorded at fair value, which have been classified as Level 1, 2, or 3 within the fair value hierarchy:
•Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access,
•Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, and foreign currency spot rates,
•Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The fair value hierarchy level is determined by asset and 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 26, 2020 and September 28, 2019, there were no transfers between levels.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
•Cash equivalents - Valued at market prices determined through third-party pricing services;
•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 due in 2026 and the 4.25% Senior Notes due in 2028 (Senior Notes), 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 26, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Cash equivalents | $ | — | $ | 1,678 | $ | — | $ | 1,678 | |||||||||||||||
Other assets: | |||||||||||||||||||||||
Life insurance policies | — | 30,459 | — | 30,459 | |||||||||||||||||||
Total assets measured at fair value | $ | — | $ | 32,137 | $ | — | $ | 32,137 | |||||||||||||||
Other current liabilities measured at fair value: | |||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 2,220 | $ | 2,220 | |||||||||||||||
Total liabilities measured at fair value | $ | — | $ | — | $ | 2,220 | $ | 2,220 |
21
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 28, 2019 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Cash equivalents | $ | — | $ | 55,278 | $ | — | $ | 55,278 | |||||||||||||||
Other assets: | |||||||||||||||||||||||
Life insurance policies | — | 30,454 | — | 30,454 | |||||||||||||||||||
Total assets measured at fair value | $ | — | $ | 85,732 | $ | — | $ | 85,732 | |||||||||||||||
Other current liabilities measured at fair value: | |||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 712 | $ | 712 | |||||||||||||||
Foreign currency forward contract | — | 876 | — | 876 | |||||||||||||||||||
Total liabilities measured at fair value | $ | — | $ | 876 | $ | 712 | $ | 1,588 |
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to previous business acquisitions. See Note 2, “Business Combinations.”
Nine Months Ended | |||||||||||
September 26, 2020 | September 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Beginning balance | $ | 712 | $ | 3,033 | |||||||
Additions | 2,131 | 2,869 | |||||||||
Payments | (230) | (5,252) | |||||||||
Adjustment of previously recorded contingent liability | (468) | — | |||||||||
Foreign currency | 75 | 42 | |||||||||
Ending balance | $ | 2,220 | $ | 692 |
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.
The book value of the Company’s 2026 and 2028 Senior Notes is a fixed rate obligation carried at amortized cost. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy. The book value and fair value of the Company’s 2026 and 2028 Senior Notes is summarized below:
September 26, 2020 | December 28, 2019 | ||||||||||||||||||||||
Book Value | Fair Value | Book Value | Fair Value | ||||||||||||||||||||
2026 Senior Notes | $ | 500,000 | $ | 519,450 | $ | 500,000 | $ | 537,500 | |||||||||||||||
2028 Senior Notes | 500,000 | 515,000 | 500,000 | 510,000 |
22
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
Adjustments to Goodwill | |||||||||||||||||||||||
December 28, 2019 | Acquisitions | Foreign Exchange | September 26, 2020 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
RMS | $ | 56,586 | $ | 229,728 | $ | 618 | $ | 286,932 | |||||||||||||||
DSA | 1,345,223 | (629) | 7,484 | 1,352,078 | |||||||||||||||||||
Manufacturing | 138,756 | — | (124) | 138,632 | |||||||||||||||||||
Goodwill | $ | 1,540,565 | $ | 229,099 | $ | 7,978 | $ | 1,777,642 |
The increase in goodwill during the nine months ended September 26, 2020 related primarily to the acquisitions of HemaCare and Cellero in the RMS reportable segment.
Intangible Assets, Net
The following table displays intangible assets, net by major class:
September 26, 2020 | December 28, 2019 | ||||||||||||||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||
Backlog | $ | 28,875 | $ | (28,382) | $ | 493 | $ | 28,865 | $ | (26,895) | $ | 1,970 | |||||||||||||||||||||||
Technology | 127,288 | (74,045) | 53,243 | 122,106 | (57,737) | 64,369 | |||||||||||||||||||||||||||||
Trademarks and trade names | 15,622 | (5,374) | 10,248 | 8,430 | (4,901) | 3,529 | |||||||||||||||||||||||||||||
Other | 20,600 | (14,214) | 6,386 | 18,279 | (12,307) | 5,972 | |||||||||||||||||||||||||||||
Other intangible assets | 192,385 | (122,015) | 70,370 | 177,680 | (101,840) | 75,840 | |||||||||||||||||||||||||||||
Client relationships | 1,116,222 | (383,814) | 732,408 | 934,668 | (321,095) | 613,573 | |||||||||||||||||||||||||||||
Intangible assets | $ | 1,308,607 | $ | (505,829) | $ | 802,778 | $ | 1,112,348 | $ | (422,935) | $ | 689,413 |
The increase in intangible assets, net during the nine months ended September 26, 2020 related primarily to the acquisitions of HemaCare and Cellero.
9. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
Long-term debt, net and finance leases consists of the following:
September 26, 2020 | December 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Term loans | $ | 160,938 | $ | 193,750 | |||||||
Revolving facility | 836,767 | 676,134 | |||||||||
2026 Senior Notes | 500,000 | 500,000 | |||||||||
2028 Senior Notes | 500,000 | 500,000 | |||||||||
Other debt | 5,867 | 5,781 | |||||||||
Finance leases (Note 16) | 27,783 | 30,527 | |||||||||
Total debt and finance leases | 2,031,355 | 1,906,192 | |||||||||
Less: | |||||||||||
Current portion of long-term debt | 45,017 | 35,548 | |||||||||
Current portion of finance leases (Note 16) | 2,929 | 2,997 | |||||||||
Current portion of long-term debt and finance leases | 47,946 | 38,545 | |||||||||
Long-term debt and finance leases | 1,983,409 | 1,867,647 | |||||||||
Debt discount and debt issuance costs | (15,248) | (17,981) | |||||||||
Long-term debt, net and finance leases | $ | 1,968,161 | $ | 1,849,666 |
As of September 26, 2020 and December 28, 2019, the weighted average interest rate on the Company’s debt was 3.21% and 3.46%, respectively.
23
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Term Loans and Revolving Facility
The Company has a credit facility consisting of a $750 million term loan and a $2.05 billion multi-currency revolving facility (Credit Facility). The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. 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 below). The revolving facility matures on March 26, 2023, and requires no scheduled payment before that date.
Under specified circumstances, the Company has the ability to increase the term loan and/or revolving facility by up to $1.0 billion in the aggregate.
The interest rates applicable to the term loan and revolving facility under the 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 26, 2020, 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 nine months ended September 26, 2020 and 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 $400 million. This resulted in foreign currency losses recognized in Other income, net of $4.2 million and $14.9 million during the nine months ended September 26, 2020 and September 28, 2019, respectively, related to the remeasurement of the underlying debt. The Company entered into foreign exchange forward contracts to limit its foreign currency exposures related to these borrowings and recognized gains of $6.1 million and $21.6 million during the nine months ended September 26, 2020 and September 28, 2019, respectively, within Interest expense. As of September 26, 2020, 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
The Company has 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 the senior notes described below.
2026 Senior Notes
In fiscal year 2018, the Company entered into the first supplemental indenture (First Supplemental Indenture) with the Trustee in connection with an offering of $500 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.
2028 Senior Notes
In fiscal year 2019, the Company entered into a second supplemental indenture (Second Supplemental Indenture) with the Trustee in connection with the offering of $500 million in aggregate principal amount of the Company’s 4.25% Senior Notes (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.
Letters of Credit
As of September 26, 2020 and December 28, 2019, the Company had $8.1 million and $7.5 million, respectively, in outstanding letters of credit.
24
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Net income | $ | 102,611 | $ | 73,552 | $ | 221,116 | $ | 173,549 | |||||||||||||||
Less: Net (expense) income attributable to noncontrolling interests | (298) | 742 | 3 | 1,878 | |||||||||||||||||||
Net income attributable to common shareholders | $ | 102,909 | $ | 72,810 | $ | 221,113 | $ | 171,671 | |||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted-average shares outstanding - Basic | 49,703 | 48,818 | 49,482 | 48,682 | |||||||||||||||||||
Effect of dilutive securities: | |||||||||||||||||||||||
Stock options, restricted stock units and performance share units | 999 | 897 | 889 | 945 | |||||||||||||||||||
Weighted-average shares outstanding - Diluted | 50,702 | 49,715 | 50,371 | 49,627 |
Options to purchase 0.3 million and 0.4 million shares for the three months ended September 26, 2020 and September 28, 2019, respectively, as well as a non-significant number of 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 0.3 million and 0.4 million shares for the nine months ended September 26, 2020 and September 28, 2019, respectively, as well as a non-significant number of 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 the nine months ended September 26, 2020 and September 28, 2019 excluded the impact of 0.9 million and 1.0 million shares of non-vested RSUs and PSUs, respectively.
Treasury Shares
During the nine months ended September 26, 2020 and September 28, 2019, the Company did not repurchase any shares under its authorized stock repurchase program. As of September 26, 2020, the Company had $129.1 million remaining on the authorized stock repurchase program.
The Company’s stock-based compensation plans permit the netting of common stock upon vesting of RSUs and PSUs in order to satisfy individual statutory tax withholding requirements. During the nine months ended September 26, 2020 and September 28, 2019, the Company acquired 0.1 million shares for $23.9 million and 0.1 million shares for $18.0 million, respectively, from such netting.
Accumulated Other Comprehensive Income (Loss)
Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
Foreign Currency Translation Adjustment and Other | Pension and Other Post-Retirement Benefit Plans | Total | |||||||||||||||
(in thousands) | |||||||||||||||||
December 28, 2019 | $ | (87,578) | $ | (90,441) | $ | (178,019) | |||||||||||
Other comprehensive loss before reclassifications | (18,388) | — | (18,388) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 4,150 | 4,150 | ||||||||||||||
Net current period other comprehensive income (loss) | (18,388) | 4,150 | (14,238) | ||||||||||||||
Income tax expense | 2,135 | 889 | 3,024 | ||||||||||||||
September 26, 2020 | $ | (108,101) | $ | (87,180) | $ | (195,281) |
25
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Nonredeemable Noncontrolling Interest
The Company has an investment in an entity whose financial results are consolidated in the Company’s unaudited condensed consolidated financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest within Equity in the accompanying unaudited condensed consolidated balance sheets. The activity within the nonredeemable noncontrolling interest was immaterial during the three and nine months ended September 26, 2020 and September 28, 2019.
Redeemable Noncontrolling Interests
The Company has a 92% equity interest in Vital River with an 8% redeemable noncontrolling interest. The Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 8% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. These rights are exercisable beginning in 2022 and are accelerated in certain events. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($15.6 million as of September 26, 2020) and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 8% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The amount that the Company could be required to pay to purchase the remaining 8% equity interest is not limited.
As part of the Citoxlab acquisition in 2019, the Company acquired an approximate 90% equity interest in a subsidiary that was fully consolidated under the voting interest model, which included an approximate 10% redeemable noncontrolling interest. In February 2020, the Company purchased the remaining approximate 10% noncontrolling interest for approximately $4 million and assumption of a contingent consideration liability of approximately $2 million payable to the former shareholders. See Note 7. “Fair Value”.
In 2019, the Company acquired an 80% equity interest in a supplier that is fully consolidated under the voting interest model, which includes a 20% redeemable noncontrolling interest. The Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 20% equity interest at its appraised value. These rights are exercisable beginning in 2022. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the appraised value and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest or a predetermined floor value. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 20% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The amount that the Company could be required to pay to purchase the remaining 20% equity interest is not limited.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:
Nine Months Ended | |||||||||||
September 26, 2020 | September 28, 2019 | ||||||||||
(in thousands) | |||||||||||
Beginning balance | $ | 28,647 | $ | 18,525 | |||||||
Acquisition of noncontrolling interest | (3,732) | — | |||||||||
Adjustment to Vital River redemption value (three months ended March 30, 2019) | — | 1,451 | |||||||||
Purchase of Vital River 5% equity interest | — | (8,745) | |||||||||
Change in fair value of Vital River 8% equity interest, included in additional-paid-in-capital | — | 2,708 | |||||||||
Modification of Vital River 8% purchase option | — | 2,196 | |||||||||
Acquisition of a 10% non-controlling interest through acquiring Citoxlab | — | 4,035 | |||||||||
Acquisition of a 20% non-controlling interest through acquiring a supplier | — | 8,740 | |||||||||
Net (loss) income attributable to noncontrolling interests | (1,278) | 249 | |||||||||
Foreign currency translation | 396 | (814) | |||||||||
Ending balance | $ | 24,033 | $ | 28,345 |
11. INCOME TAXES
The Company’s effective tax rates for the three months ended September 26, 2020 and September 28, 2019 were 24.1% and (0.4)%, respectively. The Company’s effective tax rates for the nine months ended September 26, 2020 and September 28, 2019
26
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
were 19.5% and 12.6%, respectively. For the three and nine months ended September 26, 2020, the increase in the effective tax rates from the prior year periods were primarily related to the recognition of $20.4 million of deferred tax assets expected to be utilized as a result of changes to the Company’s international financing structure during the three months ended September 28, 2019. Partially offsetting the increase for the nine months ended September 26, 2020 was an increased tax benefit from stock-based compensation deductions in 2020 compared to the corresponding period in 2019.
For the three months ended September 26, 2020, the Company’s unrecognized tax benefits increased by $0.5 million to $18.4 million, primarily due to an additional quarter of Canadian Scientific Research and Experimental Development Credit Reserves, partially offset by audit settlements of prior period positions. For the three months ended September 26, 2020, the amount of unrecognized income tax benefits that would impact the effective tax rate increased by $0.9 million to $16.0 million for the same reasons discussed above. The accrued interest on unrecognized tax benefits was $2.2 million at September 26, 2020. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $1.0 million over the next twelve-month period, primarily due to expiring statutes of limitations.
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the U.S., the U.K., China, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2017.
The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., Canada, Germany, and France. The Company does not anticipate resolution of these audits will have a material impact on its consolidated financial statements.
12. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The following table provides the components of net periodic cost for the Company’s pension, deferred compensation and executive supplemental life insurance retirement plans:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Service cost | $ | 797 | $ | 701 | $ | 2,392 | $ | 2,088 | |||||||||||||||
Interest cost | 2,355 | 2,902 | 7,064 | 8,652 | |||||||||||||||||||
Expected return on plan assets | (2,981) | (3,236) | (8,944) | (9,706) | |||||||||||||||||||
Amortization of prior service cost (credit) | (125) | 92 | (376) | 274 | |||||||||||||||||||
Amortization of net loss | 1,586 | 489 | 4,758 | 1,466 | |||||||||||||||||||
Other adjustments | 125 | — | 375 | — | |||||||||||||||||||
Net periodic cost | $ | 1,757 | $ | 948 | $ | 5,269 | $ | 2,774 |
Service cost is recorded as an operating expense within the accompanying unaudited condensed consolidated statements of income. All other components of net periodic costs are recorded in Other expense, net in the accompanying unaudited condensed consolidated statements of income. The net periodic cost for the Company’s other post-retirement benefit plan for the three and nine months ended September 26, 2020 and September 28, 2019 was not significant.
U.S. Pension Plan Termination
The Charles River Laboratories, Inc. Pension Plan (U.S. Pension Plan) is a qualified, non-contributory defined benefit plan covering certain U.S. employees. The U.S. Pension Plan was amended in 2002 to exclude new participants and in 2008 the accrual of benefits was frozen. In January 2019, the Company commenced the process to terminate this plan and received regulatory approval in April 2020. In October 2020, the Company settled all remaining benefits directly with vested participants through either lump sum payouts or the purchase of a group annuity contract from a qualified insurance company to administer all future payments. Prior to the settlement, the U.S. Pension Plan was underfunded with a benefit obligation of approximately $94 million and plan assets of approximately $93 million. In the fourth quarter of fiscal year 2020, the Company made a contribution of approximately $1 million to fully fund this plan to cover the lump sum payments, purchase the group annuity contract, and settle remaining termination costs. Upon settlement of the pension liability, the Company recognized a non-cash settlement charge of approximately $10 million related to pension losses, reclassified from accumulated other comprehensive loss to other expense in the Company's consolidated statement of income subsequent to September 26, 2020.
27
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCK-BASED COMPENSATION
The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock, RSUs, and PSUs.
The following table provides stock-based compensation by the financial statement line item in which it is reflected:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Cost of revenue | $ | 3,261 | $ | 2,354 | $ | 7,616 | $ | 6,792 | |||||||||||||||
Selling, general and administrative | 13,609 | 11,671 | 33,357 | 36,637 | |||||||||||||||||||
Stock-based compensation, before income taxes | 16,870 | 14,025 | 40,973 | 43,429 | |||||||||||||||||||
Provision for income taxes | (2,508) | (2,166) | (6,047) | (7,068) | |||||||||||||||||||
Stock-based compensation, net of income taxes | $ | 14,362 | $ | 11,859 | $ | 34,926 | $ | 36,361 |
During the nine months ended September 26, 2020, the Company granted stock options representing 0.3 million common shares with a per-share weighted-average grant date fair value of $53.20, RSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $178.76, and PSUs representing 0.1 million common shares with a per-share weighted-average grant date fair value of $210.55. The maximum number of common shares to be issued upon vesting of PSUs granted during the nine months ended September 26, 2020 is 0.2 million.
14. FOREIGN CURRENCY CONTRACTS
Cross currency loans
The Company periodically enters into foreign exchange forward contracts to limit its foreign currency exposure related to U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility. These contracts are not designated as hedging instruments. Any gains or losses on these forward contracts are recognized immediately in Interest expense in the unaudited condensed consolidated statements of income.
The Company had no open forward contracts related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency at September 26, 2020 or December 28, 2019. Additionally, the Company did not enter into any these contracts during the three months ended September 26, 2020.
The following table summarizes the effect of the foreign exchange forward contracts entered into to limit the Company’s foreign currency exposure related to U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility on the Company’s unaudited condensed consolidated statements of income:
September 26, 2020 | September 28, 2019 | |||||||||||||||||||||||||
Location of gain (loss) | Financial statement caption amount | Amount of gain (loss) | Financial statement caption amount | Amount of gain (loss) | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Three Months Ended: | ||||||||||||||||||||||||||
Interest expense | $ | (18,867) | $ | — | $ | (5,698) | $ | 14,311 | ||||||||||||||||||
Nine Months Ended: | ||||||||||||||||||||||||||
Interest expense | $ | (53,286) | $ | 6,067 | $ | (36,520) | $ | 21,622 | ||||||||||||||||||
Intercompany loans
The Company periodically enters into foreign exchange forward contracts to limit its foreign currency exposure related to certain intercompany loans. These contracts are not designated as hedging instruments. Any gains or losses on forward contracts associated with intercompany loans are recognized immediately in Other income, net and are largely offset by the remeasurement of the underlying intercompany loans.
The Company entered into foreign currency forward contracts during 2020 and 2019. One contract remained open at December 28, 2019, which had a duration of less than one month and is recorded at fair value in the Company’s accompanying unaudited condensed consolidated balance sheets. The Company did not have any open foreign currency forward contracts
28
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
related to certain intercompany loans at September 26, 2020. The notional amount and fair value of the open contract is summarized as follows:
December 28, 2019 | ||||||||||||||
Notional Amount | Fair Value | Balance Sheet Location | ||||||||||||
(in thousand) | ||||||||||||||
$ | 115,038 | $ | (876) | Other current liabilities |
The following table summarizes the effect of the foreign exchange forward contracts in connection with certain intercompany loans on the Company’s unaudited condensed consolidated statements of income:
September 26, 2020 | September 28, 2019 | |||||||||||||||||||||||||
Location of gain (loss) | Financial statement caption amount | Amount of gain (loss) | Financial statement caption amount | Amount of gain (loss) | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Three Months Ended: | ||||||||||||||||||||||||||
Other income (expense), net | $ | 21,211 | $ | — | $ | (14,254) | $ | 840 | ||||||||||||||||||
Nine Months Ended: | ||||||||||||||||||||||||||
Other income (expense), net | $ | 23,400 | $ | (892) | $ | (8,161) | $ | 1,358 | ||||||||||||||||||
15. RESTRUCTURING AND ASSET IMPAIRMENTS
Global Restructuring Initiatives
In recent fiscal years, the Company has undertaken productivity improvement initiatives within all reportable segments at various locations across the U.S., Canada, Europe, China, and Japan. This includes workforce right-sizing and scalability initiatives, resulting in severance and transition costs; and cost related to the consolidation of facilities, resulting in asset impairment and accelerated depreciation charges.
The following table presents a summary of restructuring costs related to these initiatives within the unaudited condensed consolidated statements of income.
Three Months Ended | |||||||||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | ||||||||||||||||||||||||||||||||||
Severance and Transition Costs | Asset Impairments and Other Costs | Total | Severance and Transition Costs | Asset Impairments and Other Costs | Total | ||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||
Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 606 | $ | 300 | $ | 906 | $ | 435 | $ | 180 | $ | 615 | |||||||||||||||||||||||
Selling, general and administrative | 212 | 462 | 674 | 2,038 | — | 2,038 | |||||||||||||||||||||||||||||
Total | $ | 818 | $ | 762 | $ | 1,580 | $ | 2,473 | $ | 180 | $ | 2,653 |
Nine Months Ended | |||||||||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | ||||||||||||||||||||||||||||||||||
Severance and Transition Costs | Asset Impairments and Other Costs | Total | Severance and Transition Costs | Asset Impairments and Other Costs | Total | ||||||||||||||||||||||||||||||
Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 4,152 | $ | 558 | $ | 4,710 | $ | 1,074 | $ | 1,685 | $ | 2,759 | |||||||||||||||||||||||
Selling, general and administrative | 2,384 | 3,395 | 5,779 | 3,110 | 18 | 3,128 | |||||||||||||||||||||||||||||
Total | $ | 6,536 | $ | 3,953 | $ | 10,489 | $ | 4,184 | $ | 1,703 | $ | 5,887 |
29
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents restructuring costs by reportable segment for these productivity improvement initiatives:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
RMS | $ | (33) | $ | 381 | $ | 727 | $ | 1,323 | |||||||||||||||
DSA | 1,074 | 1,843 | 7,572 | 2,529 | |||||||||||||||||||
Manufacturing | 503 | 429 | 2,154 | 2,035 | |||||||||||||||||||
Unallocated corporate | 36 | — | 36 | — | |||||||||||||||||||
Total | $ | 1,580 | $ | 2,653 | $ | 10,489 | $ | 5,887 |
Rollforward of restructuring activities
The following table provides a rollforward for all of the Company’s severance and transition costs, and lease obligation liabilities related to all restructuring activities:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Beginning balance | $ | 7,199 | $ | 2,758 | $ | 6,405 | $ | 2,921 | |||||||||||||||
Expense (excluding non-cash charges) | 1,069 | 2,653 | 7,943 | 5,508 | |||||||||||||||||||
Payments / utilization | (1,592) | (1,604) | (7,509) | (4,608) | |||||||||||||||||||
Foreign currency adjustments | 42 | (24) | (121) | (38) | |||||||||||||||||||
Ending balance | $ | 6,718 | $ | 3,783 | $ | 6,718 | $ | 3,783 |
As of September 26, 2020 and September 28, 2019, $6.8 million and $3.8 million of severance and other personnel related costs liabilities and lease obligation liabilities, respectively, were included in accrued compensation and accrued liabilities within the Company’s unaudited condensed consolidated balance sheets and less than $0.1 million and zero, respectively, were included in other long-term liabilities within the Company’s unaudited condensed consolidated balance sheets.
16. LEASES
Operating and Finance Leases
Right-of-use lease assets and lease liabilities are reported in the Company’s unaudited condensed consolidated balance sheets as follows:
September 26, 2020 | December 28, 2019 | |||||||||||||
(in thousands) | ||||||||||||||
Operating leases | ||||||||||||||
Operating lease right-of-use assets, net | $ | 168,379 | $ | 140,085 | ||||||||||
Other current liabilities | $ | 24,870 | $ | 20,357 | ||||||||||
Operating lease right-of-use liabilities | 146,578 | 116,252 | ||||||||||||
Total operating lease liabilities | $ | 171,448 | $ | 136,609 | ||||||||||
Finance leases | ||||||||||||||
Property, plant and equipment, net | $ | 30,247 | $ | 32,519 | ||||||||||
Current portion of long-term debt and finance leases | $ | 2,929 | $ | 2,997 | ||||||||||
Long-term debt, net and finance leases | 24,854 | 27,530 | ||||||||||||
Total finance lease liabilities | $ | 27,783 | $ | 30,527 |
30
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of operating and finance lease costs were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Operating lease costs | $ | 8,416 | $ | 7,839 | $ | 24,387 | $ | 23,433 | ||||||||||||||||||
Finance lease costs: | ||||||||||||||||||||||||||
Amortization of right-of-use assets | 966 | 1,070 | 2,853 | 2,921 | ||||||||||||||||||||||
Interest on lease liabilities | 323 | 360 | 986 | 1,001 | ||||||||||||||||||||||
Short-term lease costs | 530 | 256 | 1,644 | 652 | ||||||||||||||||||||||
Variable lease costs | 1,556 | 646 | 3,669 | 1,911 | ||||||||||||||||||||||
Sublease income | (440) | (383) | (1,216) | (474) | ||||||||||||||||||||||
Total lease costs | $ | 11,351 | $ | 9,788 | $ | 32,323 | $ | 29,444 |
Other information related to leases was as follows:
Supplemental cash flow information
Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | |||||||||||||
(in thousands) | ||||||||||||||
Cash flows included in the measurement of lease liabilities: | ||||||||||||||
Operating cash flows from operating leases | $ | 21,959 | $ | 20,084 | ||||||||||
Operating cash flows from finance leases | 986 | 1,058 | ||||||||||||
Finance cash flows from finance leases | 3,474 | 2,862 | ||||||||||||
Non-cash leases activity: | ||||||||||||||
Right-of-use lease assets obtained in exchange for new operating lease liabilities | $ | 50,491 | $ | 20,805 | ||||||||||
Right-of-use lease assets obtained in exchange for new finance lease liabilities | 735 | 4,741 |
Lease term and discount rate
As of | ||||||||
September 26, 2020 | ||||||||
Weighted-average remaining lease term (in years) | ||||||||
Operating lease | 8.24 | |||||||
Finance lease | 12.60 | |||||||
Weighted-average discount rate | ||||||||
Operating lease | 4.16 | |||||||
Finance lease | 4.52 |
At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate.
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of September 26, 2020, maturities of operating and finance lease liabilities for each of the following five years and a total thereafter were as follows:
Operating Leases | Finance Leases | |||||||||||||
(in thousands) | ||||||||||||||
2020 (excluding the nine months ended September 26, 2020) | $ | 7,846 | $ | 1,134 | ||||||||||
2021 | 30,704 | 3,904 | ||||||||||||
2022 | 26,432 | 3,342 | ||||||||||||
2023 | 23,321 | 3,030 | ||||||||||||
2024 | 22,636 | 2,810 | ||||||||||||
Thereafter | 94,238 | 22,511 | ||||||||||||
Total minimum future lease payments | 205,177 | 36,731 | ||||||||||||
Less: Imputed interest | 33,729 | 8,948 | ||||||||||||
Total lease liabilities | $ | 171,448 | $ | 27,783 |
Total minimum future lease payments (predominantly operating leases) of approximately $70 million for leases that have not commenced as of September 26, 2020, as the Company does not yet control the underlying assets, are not included in the unaudited condensed consolidated financial statements. These leases are expected to commence between fiscal years 2020 and 2024 with lease terms of approximately 8 to 16 years.
17. COMMITMENTS AND CONTINGENCIES
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2019. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” included elsewhere within this Form 10-Q. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, early-stage contract research organization (CRO). For over 70 years, we have been in the business of providing the research models required in research and development of new drugs, devices, and therapies. Over this time, we have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that enable us to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.
Our client base includes all major global biopharmaceutical companies, many biotechnology companies, CROs, agricultural and industrial chemical companies, life science companies, veterinary medicine companies, contract manufacturing companies, medical device companies, and diagnostic and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). Our RMS reportable segment includes the Research Models, Research Model Services, and Research Products businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of our clients’ research operations (including recruitment, training, staffing, and management services). Research Products supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. Our DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.
COVID-19
Overview
On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The COVID-19 pandemic is dynamic and expanding, and its ultimate scope, duration and effects are uncertain. This pandemic has had and may continue to result in direct and indirect adverse effects on our industry and customers, which in turn has impacted our business, results of operations, and financial condition. Further, the COVID-19 pandemic may also affect our operating and financial results in ways that are and are not presently known to us, or that we currently do not expect to present significant risks to our operations or financial results but which may in fact turn out to negatively affect us to a magnitude greater than anticipated. Refer to Item 1A, Risk Factors, included herein for risk factors reflecting the impact of the COVID-19 pandemic. Giving consideration to each of these risk factors, the following is our current estimate and belief of the impact of the COVID-19 pandemic during the three and nine months ended September 26, 2020 and how it may continue to affect us in subsequent periods.
Business continuity
To date, we generally have not experienced significant challenges in implementing our business continuity plans. Many government agencies have provided guidance permitting “essential” or “critical” business operations to remain open. As of the date of this quarterly report, in the geographies where business restrictions have been imposed, we believe all of our business operations have satisfied the requirements to be designated to be “essential” or “critical” according to the guidance provided by government, health and other regulatory agencies with authority over such matters. As a result, all of our operating sites remain
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open and adequately staffed as of the date of this quarterly report. For certain operations or sites experiencing logistical delays, we have experienced some inefficiencies as it relates to completing work or fulfilling orders; however, we do not believe material expenditures will be required or material resource constraints will occur. Logistical delays include a small number of sites that have experienced reduced operations (including as a result of increased employee absenteeism) or voluntarily closed, as well as delays in transportation activities.
We have comprehensive business continuity plans in place for each site globally and are continuously updating these to address the evolving COVID-19 pandemic situation. We implemented our initial plans in China beginning in January 2020, and have continuously refined our plans for other regions as the virus has spread. We have encouraged and expressed our expectations that employees work remotely whenever possible; and for those employees who need to come into our sites to fulfill their responsibilities, we are adhering to guidelines from government, health, and other regulatory agencies. This includes social distancing, flexible scheduling such as split shifts, restricting visitors, enhanced cleaning, and providing personal protective equipment (PPE), such as masks and gloves, to employees. Due to the nature of our business, many employees already work in biosecure environments that require PPE and adhere to other procedures to safely accomplish their daily responsibilities. Accordingly, to date, we believe we have been able to efficiently implement the additional safety precautions.
Supply chain
We are focused on ensuring that we have adequate inventory and supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain. Accordingly, we have and expect to continue to increase inventory and supplies through 2020 and beyond as deemed appropriate. We proactively engaged with our suppliers beginning in January 2020 to limit any potential disruption to our supply chain. However, notwithstanding generally successful efforts to maintain supply chain continuity, we have experienced and expect to experience increased costs and potential delays throughout our supply chain during the pandemic.
Financial condition and results of our global operations
We are a global company that operates in over 90 facilities across over 20 countries worldwide. As we perform business across various borders, we are experiencing a continuum of impacts in each location as the COVID-19 pandemic has impacted the global economy in different phases. We are continuing to see demand for products and services across all of our businesses, although as described below the impact of the COVID-19 pandemic on the level of demand varies with our different businesses. While there is uncertainty, our clients are still in need of the products and services we provide to biomedical research to advance discovery and develop new therapies for the treatment of disease, including the COVID-19 pandemic. Due to certain restrictions in place at the various sites of our clients and suppliers (including client and supplier site closures), there have been challenges relating to timely receiving and shipping products globally in all businesses. Should these restrictions continue, demand/supply issues may persist and could impact revenue growth, operating income (including operating income margins) and cash flows. We have observed some impact due to constraints from internal site restrictions, remote work, resources, and productivity. However, we believe the impact to us has not been as significant as to companies in many other industries because of the nature of our businesses, the classification of our businesses as essential or critical, as the case may be, and our business continuity plans.
Our RMS business was meaningfully impacted by the COVID-19 pandemic during the nine months ended September 26, 2020. The impact accelerated during March 2020 and continued during the three months ended June 27, 2020. Demand for research models declined due primarily to the physical shutdown of our client’s facilities, principally academic institutions. While many of our clients are deemed essential businesses as well, we experienced a slowdown, initially in China in January 2020, and then across Europe and North America later in the three months ended March 28, 2020, as measures were implemented by various governments to slow the spread of the COVID-19 pandemic. This trend of reduced demand for research models continued during the three months ended June 27, 2020, which negatively impacted revenue, operating income, operating income margins, and cash flows. During the three months ended September 26, 2020, we experienced an increase in demand as our clients reopened impacted sites and resumed their research activity, which positively impacted revenue, operating income, operating income margins, and cash flows. Research models services, specifically our GEMS and Insourcing Solutions businesses, experienced higher revenues in the nine months ended September 26, 2020 compared to the corresponding prior period and were not as adversely impacted by the COVID-19 pandemic.
Our DSA business was not significantly impacted by the COVID-19 pandemic during the nine months ended September 26, 2020. Towards the end of the first fiscal quarter of 2020, we experienced some client work shifting towards subsequent quarters of fiscal year 2020 due to the various actions and restrictions put in place by governments around the world intended to slow the spread of the COVID-19 pandemic. The work performed in our Discovery Services and Safety Assessment businesses are largely dependent on our internal sites being open. Therefore, to the extent that clients require work to be completed, we have
been able to continue to meet client demands and perform the work so long as our work force at the specific site the work is done is not significantly adversely impacted by the COVID-19 pandemic. This trend is expected to continue as government actions to slow the spread of the COVID-19 pandemic begin to subside, employees return to work, and economies across the
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world begin to reopen. Costs of supply have and may continue to increase as we procure the materials required to perform our work.
Our Manufacturing business was not significantly impacted by the COVID-19 pandemic during the nine months ended September 26, 2020, however, some of our customers experienced disruptions in their manufacturing operations, which resulted in delays in instrument installations in our Microbial Solutions business. We expect Manufacturing products, such as Microbial Solutions endotoxin products and Avian products, to see continued demand through the remainder of fiscal 2020. Our Biologics testing facilities remain open and performing services for our clients. Similar to our other services businesses, our ability to perform work is contingent on our internal facilities and our work force not being significantly adversely impacted by the COVID-19 pandemic. We expect a small adverse impact to our revenue growth, operating income, operating income margin and cash flows through the rest of the year.
Liquidity, capital and financial resources
We require cash to fund working capital needs as well as capital expansion, acquisitions, venture capital and strategic investments, debt obligations, leases, and pension obligations. The principal sources of liquidity have been cash flows from operations, supplemented by long-term borrowings. In fiscal year 2019, we issued $500 million Senior Notes, repaid part of our term loan for $500 million, and increased our multi-currency revolving facility by $500 million, from $1.55 billion to $2.1 billion. As of September 26, 2020, we had $2.0 billion of debt and finance leases outstanding, of which $47.9 million is current. Available on the revolving line of credit (Revolver) is $1.2 billion, which matures on March 26, 2023 and does not require scheduled payments before that date should additional borrowings occur. The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. The Senior Notes become due in 2026 and 2028.
Due to the uncertainty resulting from the COVID-19 pandemic, we borrowed an additional $150 million from the Revolver during the three months ended March 28, 2020 to protect against any prolonged adverse impacts on liquidity markets. While there remains uncertainty for the remainder of 2020, we currently do not anticipate needing to use these borrowings to fund operations and these funds were repaid during the three months ended September 26, 2020. We expect to generate cash inflows from our operating activities sufficient to satisfy our working capital needs as well as to service our debt, pension, and venture capital obligations. Due to this higher debt, we incurred immaterially higher interest expense. We do not currently anticipate we will need to borrow additional funds during 2020. However, we have analyzed the cash flows and debt balances noting there is significant capacity on the remaining Revolver assuming we achieve the results of operations consistent with what we have described herein. Accordingly, we do not anticipate a material risk of non-compliance with our debt covenants based on our current estimate of future earnings.
Our debt levels consist of a combination of fixed and variable debt, which include $1.0 billion of fixed senior notes (2026 and 2028 Senior Notes). To protect against adverse liquidity concerns, there are various mechanisms for us to improve cash flows. To date we have implemented cost reduction plans including delaying compensation related increases, implementing hiring restrictions, reducing working hours, reducing all non-essential travel, and reducing certain discretionary spending. Beginning in the third fiscal quarter of 2020, we reinstated certain annual compensation increases, which had previously been delayed from the beginning of the second quarter of 2020. Additionally, we had temporarily slowed our investment activity, including acquisitions and capital projects, but have since resumed certain of those activities, including the acquisition of Cellero, LLC (Cellero) during the third fiscal quarter of 2020.
As of the date these unaudited condensed consolidated financial statements are issued, based on our current and expected liquidity position, we do not believe there is significant uncertainty in our ability to continue as a going concern.
Recoverability and/or impairment of assets
The COVID-19 pandemic did not, nor is expected to impact, the ability to timely account for assets on our balance sheet. There are judgments involved as it relates to reviewing our allowance for doubtful accounts, valuation of inventory, and valuations/recovery of investments. We believe we have the necessary support for estimates derived for these account balances. We have reviewed the collectability and valuation of the assets through the date of financial statement issuance, noting no significant recoverability concerns or any impairments identified. Gains and losses on certain investments in venture capital funds are recorded on a quarterly lag due to the availability of the funds’ financial information, which is consistent with our venture capital investment accounting policy described in our Annual Report on Form 10-K for fiscal 2019. We did not identify any triggering events when reviewing impairment indicators for our goodwill and long-lived assets (tangible and intangible) that would indicate an impairment may exist. Review of impairment indicators and quantifying any impact will continue to be a focus throughout fiscal year 2020. Should a prolonged disruption occur where there is a material change from our current expectation of future cash flows, we could experience additional write-offs of client receivables or impairments to certain asset balances due to collectability and valuation issues.
Internal controls over financial reporting in a remote work environment
Internal controls over financial reporting are a focus for us to ensure they continue to be designed and operating effectively. As of September 26, 2020 and through the issuance of these unaudited condensed consolidated financial statements, we did not
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have any material changes to our internal controls over financial reporting. For personnel responsible for internal control activities and working remote, the ability to work effectively enabled us to continue to maintain effective internal control over financial reporting. System and efficiency programs implemented in recent years, as well as those implemented as part of business continuity plans, have enabled us to effectively complete our financial reporting process in a similar way we completed it prior to the COVID-19 pandemic despite a largely remote working environment. Although there is uncertainty over the duration of the COVID-19 pandemic disruption, we do not anticipate any adverse impact to relevant systems or to the operating effectiveness of internal controls over financial reporting.
Recent Acquisitions
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.
On August 6, 2020, we acquired Cellero, a provider of cellular products for cell therapy developers and manufacturers worldwide. The addition of Cellero enhances our unique, comprehensive solutions for the high-growth cell therapy market, strengthening our ability to help accelerate clients’ critical programs from basic research and proof-of-concept to regulatory approval and commercialization. It also expands our access to high-quality, human-derived biomaterials with Cellero’s donor sites in the United States. The purchase price for Cellero was $37.5 million in cash. The acquisition was funded through cash on hand. This business is reported as part of our RMS reportable segment.
On January 3, 2020, we acquired HemaCare Corporation (HemaCare), a business specializing in the production of human-derived cellular products for the cell therapy market. The acquisition of HemaCare expands our comprehensive portfolio of early-stage research and manufacturing support solutions to encompass the production and customization of high-quality, human derived cellular products to better support clients’ cell therapy programs. The purchase price of HemaCare was $379.8 million in cash. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. This business is reported as part of our RMS reportable segment.
On August 28, 2019, we acquired an 80% ownership interest in a supplier that supports our DSA reportable segment. The remaining 20% interest is a redeemable non-controlling interest. The purchase price was $23.4 million, net of a $4.0 million pre-existing relationship for a supply agreement settled upon acquisition. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. The business is reported as part of our DSA reportable segment.
On April 29, 2019, we 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 our position as a leading, global, early-stage CRO by expanding our scientific portfolio and geographic footprint, which enhances our ability to partner with clients across the drug discovery and development continuum. The purchase price for Citoxlab was $527.1 million in cash. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. Citoxlab is reported as part of our DSA reportable segment.
Overview of Results of Operations and Liquidity
Revenue for the three months ended September 26, 2020 was $743.3 million compared to $668.0 million in the corresponding period in 2019. This increase of $75.3 million, or 11.3%, was primarily due to the recent acquisition of HemaCare as well as growth in our DSA and Manufacturing segments, and by the positive effect of changes in foreign currency exchange rates which increased revenue by $8.4 million, or 1.3%, when compared to the corresponding period in 2019. Revenue for the nine months ended September 26, 2020 was $2.1 billion compared to $1.9 billion in the corresponding period in 2019. The increase of $202.8 million, or 10.5%, was primarily due to the reasons described above and was partially offset by a reduction in RMS product revenue due to the impact of the COVID-19 pandemic when compared to the corresponding period in 2019.
In the three months ended September 26, 2020, our operating income and operating income margin were $132.8 million and 17.9%, respectively, compared with $92.8 million and 13.9%, respectively, in the corresponding period of 2019. The increases in operating income and operating income margin were primarily due to higher DSA and Manufacturing operating income and operating income margins, partially offset by increased amortization of intangible assets related to our recent acquisition of HemaCare. In the nine months ended September 26, 2020, our operating income and operating margin were $303.8 million and 14.2%, respectively, compared with $242.4 million and 12.6%, respectively, in the corresponding period of 2019. The increases in operating income and operating income margin were primarily due to contributions from our DSA and Manufacturing segments and lower acquisition related costs compared to the corresponding period in 2019, partially offset by lower RMS operating income and operating income margin due to the impact of the COVID-19 pandemic, as well as increased amortization of intangible assets related to our recent acquisition of HemaCare.
Net income attributable to common shareholders increased to $102.9 million in the three months ended September 26, 2020, from $72.8 million in the corresponding period of 2019. The increase in Net income attributable to common shareholders was primarily due the increase in operating income described above, as well as higher net gains on our venture capital investments
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in 2020 as compared to net losses on our venture capital investments in the corresponding period in 2019. Net income attributable to common shareholders increased to $221.1 million in the nine months ended September 26, 2020, from $171.7 million in the corresponding period of 2019. The increase in Net income attributable to common shareholders was primarily due to higher operating income mentioned above and higher net gains on our venture capital investments compared to the corresponding period in 2019.
During the first nine months of 2020, our cash flows from operations was $408.2 million compared with $300.3 million for the same period in 2019. The increase was driven by higher net income and certain favorable changes in working capital items, including favorable timing of certain government deferrals of income and payroll tax payments, and deferrals of certain compensation related items in response to the COVID-19 pandemic; partially offset by the timing of vendor and supplier payments compared to the same period in 2019.
Results of Operations
Three Months Ended September 26, 2020 Compared to the Three Months Ended September 28, 2019
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
Three Months Ended | |||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | $ change | % change | ||||||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||||
Service revenue | $ | 580.8 | $ | 523.2 | $ | 57.6 | 11.0 | % | |||||||||||||||
Product revenue | 162.5 | 144.8 | 17.7 | 12.3 | % | ||||||||||||||||||
Total revenue | $ | 743.3 | $ | 668.0 | $ | 75.3 | 11.3 | % |
Three Months Ended | |||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||||||||||
RMS | $ | 151.9 | $ | 132.6 | $ | 19.3 | 14.6 | % | 1.5 | % | |||||||||||||||||||
DSA | 461.2 | 420.1 | 41.1 | 9.8 | % | 1.2 | % | ||||||||||||||||||||||
Manufacturing | 130.2 | 115.3 | 14.9 | 12.9 | % | 1.4 | % | ||||||||||||||||||||||
Total revenue | $ | 743.3 | $ | 668.0 | $ | 75.3 | 11.3 | % | 1.3 | % |
The following table presents operating income by reportable segment:
Three Months Ended | |||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | $ change | % change | ||||||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||||
RMS | $ | 37.1 | $ | 34.4 | $ | 2.7 | 7.9 | % | |||||||||||||||
DSA | 90.4 | 65.0 | 25.4 | 39.0 | % | ||||||||||||||||||
Manufacturing | 48.2 | 39.2 | 9.0 | 22.9 | % | ||||||||||||||||||
Unallocated corporate | (42.9) | (45.8) | 2.9 | (6.3) | % | ||||||||||||||||||
Total operating income | $ | 132.8 | $ | 92.8 | $ | 40.0 | 43.0 | % | |||||||||||||||
Operating income % of revenue | 17.9 | % | 13.9 | % | 4.0 | % |
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The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
Three Months Ended | |||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||||||||||
Revenue | $ | 151.9 | $ | 132.6 | $ | 19.3 | 14.6 | % | 1.5 | % | |||||||||||||||||||
Cost of revenue (excluding amortization of intangible assets) | 89.3 | 81.9 | 7.4 | 9.1 | % | ||||||||||||||||||||||||
Selling, general and administrative | 21.5 | 16.0 | 5.5 | 34.8 | % | ||||||||||||||||||||||||
Amortization of intangible assets | 4.0 | 0.3 | 3.7 | 1,076.2 | % | ||||||||||||||||||||||||
Operating income | $ | 37.1 | $ | 34.4 | $ | 2.7 | 7.9 | % | |||||||||||||||||||||
Operating income % of revenue | 24.4 | % | 25.9 | % | (1.5) | % |
RMS revenue increased $19.3 million due primarily to the acquisitions of HemaCare and Cellero which contributed $12.8 million and $1.9 million, respectively, to research model product revenue; higher research model services revenue, specifically our GEMS and Insourcing Solutions businesses; and the effect of changes in foreign currency exchange rates. Partially offsetting these increases were lower research model product revenue in North America due to the impact of the COVID-19 pandemic.
RMS operating income increased $2.7 million compared to the corresponding period in 2019. RMS operating income as a percentage of revenue for the three months ended September 26, 2020 was 24.4%, a decrease of 1.5% from 25.9% for the corresponding period in 2019. Operating income increased primarily due to higher revenue described above. Operating income as a percentage of revenue decreased primarily due to increased amortization of intangible assets in connection with our recent acquisitions of HemaCare and Cellero.
DSA
Three Months Ended | |||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||||||||||
Revenue | $ | 461.2 | $ | 420.1 | $ | 41.1 | 9.8 | % | 1.2 | % | |||||||||||||||||||
Cost of revenue (excluding amortization of intangible assets) | 306.4 | 285.8 | 20.6 | 7.2 | % | ||||||||||||||||||||||||
Selling, general and administrative | 42.4 | 48.0 | (5.6) | (11.7) | % | ||||||||||||||||||||||||
Amortization of intangible assets | 22.0 | 21.3 | 0.7 | 3.8 | % | ||||||||||||||||||||||||
Operating income | $ | 90.4 | $ | 65.0 | $ | 25.4 | 39.0 | % | |||||||||||||||||||||
Operating income % of revenue | 19.6 | % | 15.5 |