UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ý☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED December 28, 2019
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 |
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE TRANSITION PERIOD FROM TO |
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | | | 06-1397316 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
251 Ballardvale Street Wilmington, Massachusetts
| Wilmington | Massachusetts | 01887 |
| (Address of Principal Executive Offices) | | (Zip Code) |
(Registrant’s telephone number, including area code): (781) (781) 222-6000
Securities registered pursuant to Section 12(b) of the Act: |
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| 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,stock, $0.01 par value | CRL | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NoneYes ☐ No ☒
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesý☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐Noý☒
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yesý☒ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý☐
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerý | ☑ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Accelerated filer o
| Emerging growth company | Non-accelerated filer o
(Do not check if smaller
reporting company)
| | Smaller reporting company o
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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 o☐ No ý☒
On June 25, 2016,29, 2019, the aggregate market value of the Registrant’sregistrant’s voting common stock held by non-affiliates of the Registrantregistrant was approximately $3,735,593,230.$6,796,882,148. As of January 27, 2017,24, 2020, there were 47,372,99548,959,576 shares of the Registrant’sregistrant’s common stock outstanding, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’sregistrant’s definitive Proxy Statement for its 20172020 Annual Meeting of Shareholders scheduled to be held on May 9, 2017,6, 2020, which will be filed with the Securities and Exchange Commission (SEC) not later than 120 days after December 31, 2016,28, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the 20172020 Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Form 10-K.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR 20162019
TABLE OF CONTENTS
| | | Item | | Page | | Page |
| | PART I | | PART I | |
| 1 | | | | |
| 1A | | | | |
| 1B | | | | |
| 2 | | | | |
| 3 | | | | |
| 4 | Mine Safety Disclosures | | Mine Safety Disclosures | |
| | PART II | | PART II | |
| 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| 6 | | | | |
| 7 | | | | |
| 7A | | | | |
| 8 | | | | |
| 9 | | | | |
| 9A | | | | |
| 9B | | | | |
| | PART III | | PART III | |
| 10 | | | | |
| 11 | | | | |
| 12 | | | | |
| 13 | | | | |
| 14 | | | | |
| | PART IV | | PART IV | |
| 15 | | | | |
| 16 | Form 10-K Summary | | Form 10-K Summary | |
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| Signatures | Signatures | | Signatures | |
| Exhibit Index | Exhibit Index | | Exhibit Index | |
PART I
Item 1. Business
General
This Annual Report on Form 10-K contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could” and other similar expressions that are predictions, 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: trends in our business and industry; goodwill and asset impairments still under review; future demand for drug discovery and development products and services, including the outsourcing of these services; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy, business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical companies and venture capital limited partnerships, and opportunities for future similar arrangements; our cost structure; the impact of completed and in-process acquisitions (including Argenta, BioFocus, VivoPath, ChanTest, Sunrise, Celsis, Oncotest, WIL Research, Blue Stream, and Agilux) and the timing of closing of in-process acquisitions; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure), including gains and losses attributable to businesses we plan to close, consolidate or divest; 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;clients, the effects of our cost-saving actions and the steps to optimize returns to shareholders on an effective and timely basis.
You should not rely on forward-lookingForward-looking statements because they are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include but are not limited to, those discussed in this Form 10-K under the sections entitled “Our Strategy,” “Risk Factors,” "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our press releases and other financial filings with the SEC. 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.
Corporate History
We began operating in 1947 and, since then, we have undergone several changes to our business structure. Charles River Laboratories International, Inc. was incorporated in 1994 and in 2000 we completed our initial public offering.offering in 2000. Our stock is traded on the New York Stock Exchange under the symbol “CRL” and is included in the Standard & Poor'sPoor’s 1000, MidCap 400 and Composite 1500 indices, the Dow Jones U.S. BiotechnologyHealth Care Index, the NYSE Arca Biotechnology Index, the NYSE Composite and Healthcare Sector indices, and many of the Russell indices, among others. We are headquartered in Wilmington, Massachusetts. Our headquarters mailing address is 251 Ballardvale Street, Wilmington, MA, 01887, and the telephone number at that location is (781) 222-6000. Our Internet site is www.criver.com. Material contained on our Internet site is not incorporated by reference into this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to “Charles River,” “we,” “us”“us,” “the Company” or “our” refer to Charles River Laboratories International, Inc. and its subsidiaries.
This Form 10-K, as well as all other reports filed with the SEC, is available free of charge through the Investor Relations section of our Internet site (www.criver.com) as soon as practicable after we electronically file such material with, or furnish it to, the SEC. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington,
DC 20549. In addition, you may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Overview
We are a full service, early-stage contract research organization (CRO). We have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, which is able to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities. 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.
Discovery represents the earliest stages of research in the life sciences, directed at the identification, screening, and selection of a lead molecule for future drug development. Discovery activities typically extend anywhere from 4 to 6 years in conventional pharmaceutical research and development timelines.
Development activities, which follow, and which can take up to 7 to10 years, are directed at demonstrating the safety, tolerability, and clinical efficacy of the selected drug candidates. During the non-clinical stage of the development process, a drug candidate is tested in vitro (non-animal, typically on a cellular or sub-cellular level in a test tube or multi-well petri plate) and in vivo (in research models) to support planned or on-going human clinical trials.
The development of new drugs requires thea steadily increasing investment of time and money. Various studies and reports estimate that it takes between 10 to 15 years, up to $2.0 billion excluding time costs and exploration of between 10,000 and 15,000 drug molecules to produce a single Food and Drug Administration (FDA)-approved drug.
Discovery represents the earliest stages of research in the life sciences, directed at the identification, screening, and selection of a lead molecule for future drug development. Discovery activities typically extend anywhere from 4 to 6 years in conventional pharmaceutical research and development (R&D) timelines.
Development activities, which follow, and which can take up to 7 to 10 years, are directed at demonstrating the safety, tolerability and clinical efficacy of the selected drug candidates. During the non-clinical stage of the development process, a drug candidate is tested in vitro (non-animal, typically on a cellular or sub-cellular level in a test tube or multi-well petri plate) and in vivo (in research models) to establish drug safety prior to and in support of human clinical trials.
For over 70 years, we have been in the business of providing the research models required in the research and development of new drugs, devices and therapies. Over this time, we have built upon our core competency of in vivo biology to develop a diverse and expanding portfolio of products and services, which now encompasses the broader early-stage drug research process. We are positioned to leverage our leading portfolio in early-stage drug research in an efficient and cost-effective way to aid our clients in bringing their drugs to market faster. Our clients reduce their costs, increase their speed, and improve their productivity and effectiveness in early-stage discovery and development by using our broad portfolio of products and services.
For 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 core competency of in vivo biology to develop a diverse and expanding portfolio of products and services, which now encompasses the broader early-stage drug research process. Our client base includes global pharmaceutical companies, a broad range of biotechnology companies, and many government agencies, and hospitals and academic institutions around the world. We currently operate 75 facilities in 23 countries worldwide, which numbers exclude our Insourcing Solutions (IS) sites. Our products and services, supported by our global infrastructure and deep scientific expertise, enable our clients to overcome many of the challenges of early-stage life sciences research. In 2016, our total revenue was $1.7 billion and our operating income from continuing operations, before income taxes, was $222.9 million.
We have three reporting segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing).
In April 2016, we acquired WRH, Inc. (WIL Research). WIL Research’s safety assessment business is reported in our DSA reportable segment and its contract development and manufacturing (CDMO) services business created a new operating segment, Contract Manufacturing, which is reported as part of our Manufacturing reportable segment. We divested the CDMO business on February 10, 2017.
The revised reportable segments are as follows:
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Research Models and Services | Discovery and Safety Assessment | Manufacturing Support |
Research Models | Discovery Services | Microbial Solutions |
Research Model Services | Safety Assessment | Avian |
| | Biologics |
| | Contract Manufacturing |
Through our RMS segment, we have been supplying research models to the drug development industry since 1947. With over 150 different strains, we continue to maintain our position as the global leader in the production and sale of the most widely used rodent research model strains, principally genetically and microbiologically defined purpose-bred rats and mice. We also provide a variety of related services that are designed to assist our clients in supporting the use of research models in drug discovery and development. We maintain multiple production centers, including barrier rooms and/or isolator facilities, on three
continents (North America, Europe, and Asia). In 2016, RMS accounted for 29.4% of our total revenue and approximately 3,200 of our employees, including approximately 110 science professionals with advanced degrees.
Our DSA business segment provides services that enable our clients to outsource their innovative drug discovery research, their related drug development activities, and regulatory-required safety assessment of potential new drugs, industrial chemicals, and agrochemicals to us. The demand for these services has historically been driven by the needs of large global pharmaceutical companies that have exceeded their internal capacity and by the needs of biotechnology companies and non-governmental organizations (NGOs) who traditionally outsourced most of their discovery, development and safety testing programs. Global pharmaceutical, biotechnology, and chemical companies choose to outsource their discovery, development, and safety activities because outsourcing reduces the significant investment in personnel and facilities and capital resources necessary to efficiently and effectively conduct required scientific studies. Additionally, outsourcing to Charles River provides companies access to scientific expertise that they may not have internally or available to them.
We are the largest provider of drug discovery, non-clinical development, and safety testing services worldwide and offer a comprehensive portfolio of services required for regulatory submission of pharmaceuticals, chemicals, and agrochemicals. We have extensive expertise in the discovery of small molecule clinical candidates and in the design, execution, and reporting of safety assessment studies for both small and large molecules and argochemicals. We currently provide discovery and safety assessment services at multiple facilities located in the United States (U.S.), Canada, and Europe. Our DSA segment represented 49.8% of our total revenue in 2016 and employed approximately 5,900 of our employees including approximately 960 science professionals with advanced degrees.
Through our Manufacturing segment, we help ensure the safe production and release of products manufactured by our clients. Our Microbial Solutions business provides in vitro methods for conventional and rapid quality control testing of sterile and non-sterile pharmaceuticals and consumer products. Our Biologics Testing Solutions business provides specialized testing of biologics and devices frequently outsourced by global pharmaceutical and biotechnology companies. Our Avian Vaccine Services business provides specific-pathogen-free (SPF) fertile chicken eggs and chickens used in the manufacture of live viruses.
In 2016, Manufacturing accounted for 20.9% of our total revenue from continuing operations and approximately 1,400 of our employees, including approximately 140 science professionals with advanced degrees.
In recent years, we have focused our efforts on unifying our businesses and improving the efficiency of our global operations to enhance our ability to support our key clients. Our key pharmaceutical and biotechnology clients are increasingly seeking full service, “one-stop” global partners to whom they can outsource more of their drug discovery and development efforts. It is estimated that the market for regulated safety assessment services is at least 50%over 55% outsourced, while emerging growth areas such as early and in vivo discovery and certain research model services are currently believed to be less outsourced.
We currently operate in over 90 facilities and in over 20 countries worldwide (excluding our Insourcing Solutions sites). Our products and services, supported by our global infrastructure and deep scientific expertise, enable our clients to overcome many of the challenges of early-stage life sciences research. In 2019, our total revenue was $2.6 billion and our operating income from continuing operations, before income taxes, was $304.1 million.
We have three reporting segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA) and Manufacturing Support (Manufacturing).
Through our RMS segment, we have been supplying research models to the drug development industry since 1947. With over 150 different stocks and strains, we continue to maintain our position as a global leader in the production and sale of the most widely used rodent research model strains and purpose-bred rats and mice. We also provide a variety of related services that are designed to support our clients in the use of research models in drug discovery and development. We maintain multiple production centers, including barrier rooms and/or isolator facilities, on three continents (North America, Europe, and Asia). In 2019, RMS accounted for 20.5% of our total revenue and approximately 3,600 of our employees, including approximately 170 science professionals with advanced degrees. In addition, in January 2020, we acquired HemaCare Corporation (HemaCare), a leading global provider of human-derived cellular materials used in the development and production of cell therapies, as part of our Research Products business.
Our DSA business segment provides services that enable our clients to outsource their innovative drug discovery research, their related drug development activities, and their regulatory-required safety testing of potential new drugs, industrial and agricultural chemicals, consumer products, veterinary medicines and medical devices. The demand for these services is driven by the needs of large global pharmaceutical companies that have exceeded their internal capacity or that continue to transition to an outsourced drug development model, as well as by the needs of small biotechnology companies, chemical companies and non-governmental organizations that rely on outsourcing for most of their discovery, development and safety testing programs. These entities may choose to outsource their discovery, development and safety activities to reduce fixed costs and to gain
access to additional scientific expertise and capabilities.
We are the largest provider of drug discovery, non-clinical development and safety testing services worldwide. We have extensive expertise in the discovery of clinical candidates and in the design, execution and reporting of safety assessment studies for numerous types of compounds including small and large molecule pharmaceuticals, industrial and agricultural chemicals, consumer products, veterinary medicines, cell and gene therapies, biocides and medical devices. We currently provide discovery and safety assessment services at multiple facilities located in the United States (U.S.), Canada, and Europe. In 2019, our DSA segment represented 61.8% of our total revenue and employed approximately 10,900 of our employees including approximately 1,500 science professionals with advanced degrees.
Through our Manufacturing segment, we help ensure the safe production and release of products manufactured by our clients. Our Manufacturing Segment is comprised of three businesses: Microbial Solutions, Biologics Testing Solutions and Avian Vaccine Services. Our Microbial Solutions products and services businesses provide in vitro methods for conventional and rapid quality control testing of sterile and non-sterile pharmaceuticals and consumer products. Our Biologics Testing Solutions business provides specialized testing of biologics frequently outsourced by global pharmaceutical and biotechnology companies. Our Avian Vaccine Services business provides specific-pathogen-free (SPF) fertile chicken eggs, SPF chickens and diagnostic products used to manufacture vaccines. In 2019, Manufacturing accounted for 17.7% of our total revenue from continuing operations and approximately 1,900 of our employees, including approximately 150 science professionals with advanced degrees.
Research Models and Services. Our RMS segment is comprised of (1)three businesses: Research Models, and (2) Research Model Services.Services and Research Products.
Research Models. Our Research Models business is comprised of the production and sale of research models.
Research Models. A significant portion of this business is comprised ofinvolves the commercial production and sale of research models, principally purpose-bred rats and mice for use by researchers. We provide our rodent models to numerous clients around the world, including most pharmaceutical companies, a broad range of biotechnology companies, and many government agencies, hospitals, and academic institutions. We have a global footprint with production facilities strategically located in 8 countries, in close proximity to our clients. Our research models include standard stocks and strains and disease models such as those with compromised immune systems, which are in demand as early-stage research tools. The FDA and foreign regulatory agencies typically require that the safety and efficacy of new drug candidates be tested on research models like ours prior to testing in humans. As a result, our research models are an essential part of the drug discovery and development process.
We provide our rodent models to numerous clients around the world, including most pharmaceutical companies, a broad range of biotechnology companies, other contract research organizations and many government agencies, hospitals, and academic institutions. We have a global footprint with production facilities strategically located in 8 countries, in close proximity to our clients. Our research models include commonly used laboratory strains, disease models and specialized strains with compromised immune systems, which are in demand as early-stage tools in the drug discovery and development process.
Our rodent species have been, and continue to be, some of the most extensively used research models in the world, largely as a result of our geographic footprint and continuous commitment to innovation and quality. Our research models are bred and maintained in a variety of controlled environments, which are designed to ensure that the models are free of specific viral and bacterial agents and other contaminants that can disrupt research operations and distort researchscientific results. With our production capabilities, we are able to deliver consistently high-quality research models worldwide.
Our research models include:
inbred, which are bred to be homogeneous;
hybrid, which are the offspring of parents from two different genotypes;
outbred, which are purposefully bred for heterogeneity;
inbred, which are bred to be homogeneous;
spontaneous mutant, whose genotype results in a naturally occurring genetic mutation (such as immune deficiency);
hybrid, which are the offspring of two different inbred parents; and
other genetically modified research models, such as knock-out models with one or more disabled genes and transgenic models.
Certain of our research models are proprietary disease-specific rodent models used to research treatments for diseasesin several therapeutic areas, such as diabetes, obesity, cardiovascular, cancer, central nervous system (CNS) and kidney disease.
We are also a premier provider of high quality, purpose bred, SPF large research models to the biomedical research community.
Research Model Services. RMS also offers a variety of services designed to support our clients' use of research models in basic research and screening non-clinical drug candidates. These services address the need among pharmaceutical and biotechnology
companies to outsource the non-core aspects of their drug discovery activities. Our services include those which are related to the maintenance and monitoring of research models, and managing research operations for government entities, academic organizations, and commercial clients. We currently have three service offerings in research models services: Genetically Engineered Models and Services (GEMS), Insourcing Solutions and Research Animal Diagnostic Services.Services (RADS).
Genetically Engineered Models and Services (GEMS). We create, breed and maintain research models purchased or purposefully createdrequired by our clients for biomedical research activities. The creation of a genetically engineered model (GEM) is a critical scientific event, but it is only the first step in the discovery process.process, and our scientists can advise clients on how to efficiently create custom models utilizing in-licensed technologies and approaches to modify the genome. Through our phenotyping platforms, we can also design and conduct the relevant studies and tests allowing characterization of the generated models. Productive utilization of GEMs requires significant additional technical expertise in order to properly support basic and early discovery research. We provide breeding expertise and colony development, quarantine, health and genetic testing and monitoring, germplasm cryopreservation and rederivation, including assisted reproduction and model creation. Our team of project managers is supported by a proprietary, technologically advanced Internet Colony Management (ICM™) system that allows for real-time data exchange. We provide these services to clients around the world, including pharmaceutical and biotechnology companies, hospitals, universities, and government agencies.
Insourcing Solutions (IS). We manage the research operations of government entities, academic organizations and commercial clients (including recruitment, training, staffing and management services) for government entities, academic organizations,in our clients’ facilities utilizing our Charles River Accelerator and commercialDevelopment Lab (CRADL™) option, in which we lease space to our clients. Some research institutions prefer to retain certain elements of their research in-house, while outsourcing staffing and management, thus driving demand for our services. We believe that our expertise in early-stage drug research, and in particular research model care, scientific and technical support, facility operations, and discovery and development services, enhances the productivity and quality of our clients'clients’ research programs.
Research Animal Diagnostic Services (RADS). We monitor and analyze the health profiles of our clients’ research models and cell lines usedresearch biologics by our clients.providing infectious agents and pathology assessment. We developed this capability internally in order to address the diagnostic needsquality control of our own research model business. We are able tocan serve as theirour clients’ sole-source testing laboratory, or as an alternative source supporting our clients’ internal laboratory capabilities. We believe we are the reference laboratory of choice for health testingassessment of laboratory research models and an industry leader in the field of laboratory animal diagnostics.
Research Products. In January 2020, we acquired HemaCare, a leading global provider of human-derived cellular materials used in the development of production of cell therapies, as part of our Research Products business. The business supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. Research Products supports biotechnology and pharmaceutical companies, academic institutions and other research organizations who rely on high-quality, viable and functional human primary cells and blood components for biomedical and drug discovery research and cell therapy development.
Discovery and Safety Assessment (DSA)
Our DSA segment is comprised of two businesses: Discovery Services and Safety Assessment. We currently offer discovery and safety assessment services, both regulated and non-regulated in which we include both DSA services, including in vitro and in vivostudies, supporting laboratory support services, and strategic non-clinical consulting and program management to support product development.
Discovery Services. We offer a full spectrum of discovery services from identification and validation of a novel druggable target, followed by high-throughput screeningtargets and medical chemistry,chemical compounds with actual or potential intellectual property value through delivery of non-clinical drug and therapeutic candidates ready for safety assessment. Our Discovery Services include Early Discovery, In Vitro Discovery and In VivoDiscovery businesses are integrated into a single business line - Discovery Services - as evidence of our efforts to streamline and enhance the integrated support we can provide for clients’ integrated drug discovery programs. OneThis seamless discovery organization also allows us to better engage with clients at the earliest stagesany stage of their drug discovery and support their complex scientific needs. We support a variety ofOur discovery services business unit focuses on several therapeutic areas, including oncology, central nervous system, boneCNS, immunology, inflammation and musculoskeletal, inflammation, metabolic diseases, respiratory and fibrotic diseases, cardiovascular, gastrointestinal, genito-urinary, anti-infectives, and ophthalmology.diseases. We also provide expertise in the growing area of rare and orphan diseases, which are typically diseases of high unmet medical need in smaller patient populations, such as myotonic dystrophy, cystic fibrosis, and Huntington’s Disease.populations. We believe there are emerging opportunities to assist our clients in a variety of drug discovery applications and platforms from target discovery to candidate selection.selection and across a range of modalities, including small molecules and large molecules (including oligonucleotides, antibodies, proteins) and cell and gene therapy drug candidates.
Early Discovery. We are a global leader in integrated drug discovery services, with a predominant focus on the integration of in vitrobiology, capabilitiesmedicinal chemistry and medicinal chemistry. Our knowledge and expertise allow us to support our clients as they drive their molecules forward through design and implementation of clear program plans.in vivo pharmacology capabilities. Our full suite of service offerings, together with our knowledge and expertise, allows us to support our clients at the earliest stages of their research, including the design and
implementations of their research programs, and to stay with them through the entire early-stagedrug discovery process. Our Early Discovery service capabilities include:
target discovery and validation, validation;
hit identification medicinal chemistry, and testing how a drug is absorbed, distributed in the body, metabolized,optimization to deliver candidate molecules;
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| • | early nonclinical pharmacokinetic and pharmacodynamic studies, transporter-mediated drug-drug interaction, and in vitro and in vivo assays to assess mechanism, bioavailability and metabolism as required for regulatory approval of new drugs; and |
target engagement biomarker development to support non-clinical and excreted (ADME). We alsopotentially downstream clinical studies.
Additionally, we offer ion channel testing and in vitro cardiac safety assessment services,drug transporter testing for both discovery and non-clinical purposes. In addition,purposes, as well as genome editing services.
We provide many of these services at our clients’ laboratories with Charles River scientists as part of an insourcing service model. Through strategic partnerships we also offer custom in vivoan ultra-high throughput screening laboratory, a human antibody discovery and in vitro genome editing. With this technology, we are able to develop more translational research models designed to improve the efficiencydevelopment platform, an artificial intelligence drug design platform and effectiveness of the drug discovery process. These services extend from the early discovery screening process through to in vitro GLP safety assessment testing.a human stem cell model platform.
In Vivo Discovery Services. In Vivo Discovery Services are essential in early stage, non-clinical discovery research, and are directed at the identification, screening, optimization and selection of a lead compoundeffective therapeutic agents for drug development. InThese in vivoactivities typically extend anywhere from 42 to 64 years in conventional pharmaceutical research and developmentR&D timelines. We offer research and developmentR&D expertise, capabilities and services globally to accelerate our clients'clients’ drug discovery pipelines from lead generation to candidate selection and on occasion, complete in vivostudies in support of clinical efforts or post-marketing work. We complement and extend clients'clients’ capabilities and expertise to improve their decision-making, increase their flexibility, and reduce their internal costs and product development timelines. In addition, we provide in vitro and in vivo assays in support of lead optimization to candidate selection activities. Examples of this include early pharmacokinetic and pharmacodynamic studies and in vitro andin vivoassays to assess mechanism, bioavailability, metabolism, efficacy, pharmacology and safety pharmacology.safety.
In September 2016,recent years, we acquired Agilux Laboratories, Inc. (Agilux)have made key acquisitions designed to augment our Discovery Services offerings, including businesses that provide critical data to advance novel therapeutics for the treatment of CNS diseases, immune (including oncology), a CRO that provides a suite of integrated discovery smallinflammatory and large molecule bioanalytical services,infectious diseases, as well as drug metabolismtransporter assays and pharmacokinetic services, and pharmacology services. This acquisition supports our strategy to offer clients a broader, integrated portfolio that provides services continuously from the earliest stages of drug research through the non-clinical development process.kits.
Safety Assessment. We offer a full range of safety assessment studies required for regulatory submission on a global basis. Our safety assessment business also provides expertise in several therapeutic areas, including respiratory, fibrotic, cardiovascular, gastrointestinal, genitourinary diseases, anti-infectives and ophthalmology indications, as well as the development of surgically implanted medical devices.
Bioanalysis, Drug Metabolism and Pharmacokinetics. In support of non-clinical drug safety testing and new chemical development, our clients are required to demonstrate appropriate exposure, stability in the collected biological sample, pharmacokinetics of their drug or compound in circulation, the presence of metabolites and, within the case of biologics, the presence or absence of anti-drug antibodies. We have scientific depthexpertise in the sophisticated bioanalytical techniques required to satisfy these requirements for a number of drug classes. After performing sample analysis in support of non-clinical studies, we have the opportunity to capture the benefits of bridging the non-clinical bioanalysis with subsequent clinical development.many drugs and chemicals. Once the analysis is complete, our scientists evaluate the data to provide information on the pharmacokinetics and/or toxicokinetics of the drug or chemical and complete an evaluation of the biologic disposition of the drug or chemical and its potential metabolites. Pharmacokinetics refers to the understanding of what the body does to a drug or compound once administered at therapeutic dose levels, including the process by which the drug is absorbed, distributed in the body, metabolized and excreted (ADME); toxicokineticsexcreted. Toxicokinetics refers to the same understanding as applied at higher doses that may result in adverse effects. These studies are required for the full non-clinical assessment of the disposition of the drug or chemical and the results are used in the final non-clinical safety evaluation of the compound to support the start of clinical trials.
Safety Pharmacology. Incompound. After performing sample analysis in support of non-clinical studies, we also support the clinical bioanalysis required in clinical trials for drug safety testing, ourdevelopment.
Safety Pharmacology. Our clients are also required to demonstrate thatconduct an assessment of Safety Pharmacology. This suite of studies is used to determine any effects on the vital organ systems of the body - cardiovascular, respiratory and CNS. Along with heart rate and blood pressure measurements, the cardiovascular assessment will also assess if the test article as formulated does not havehas the potential to alter cardiac ion channel currents and prolong the cardiac QT interval.interval of the electrocardiogram. Additionally, effects on the central nervous system (CNS) and respiratory systems are assessed to complete the battery of studies to evaluate the vital organ systems of the body. Supplemental studies can also be performed to assess the renal, gastrointestinal and autonomic nervous systems, as well as, dependency potential. We have the assays (bothin vitro andin vivo) and can perform the screening for this demonstration that is required forprior to the
commencement of first-in-human clinical trials. Our capabilities can also be used to investigate the mode of action behind an investigational new drug submission.adverse effect found in a safety assessment study.
Toxicology. We have expertise in the design and execution of development programs in support of both chemically-derived (small molecule)a broad diversity of therapeutic modalities, including small organics, peptides, proteins, oligonucleotides, antibody-based platforms, and biotechnology-derived (large molecule) pharmaceuticals. Oncemany other innovative pharmaceutical products. We also support safety studies to test industrial chemical, agrochemicals, consumer products, veterinary medicines and medical devices. For human pharmaceutical candidates, once a lead molecule is selected, toxicology studies are required to support clinical trials in humans and for new drug registrations.registration. These toxicology studies focus on assessing the safety of the moleculepotential therapeutic to determine if administration of the molecules to humans might cause any unintended harmful effects. TheseFor new chemicals, industrial chemicals, agrochemicals and medical devices, safety studies are performed to identify potential hazards to humans and the environment and are required for regulatory registration. Toxicology studies performed for any of these compounds are typically performed usingin vitro and in vivo research models to identify any potential adverse effects that a compound has on an organism over a variety of doses and over various time periods.periods of exposure.
Our toxicology services feature:
a broad offering of in vitro and in vivo capabilities and study types designed to identify possible safety risks for potential therapeutics, industrial chemicals, and agrochemicals as they transition from discovery into regulated drug development, toxicology, and human clinical testing, or as they are submitted for regulatory registration;
all the standard in vitro and in vivo studies in support of general toxicology (acute, sub-acute, and chronic studies), genetic toxicology, safety pharmacology, and carcinogenicity bioassays that are required for either regulatory submissions supporting “first-in-human” to “first-to-the-market” strategies, or for national chemical registration;
all the standard in vitro and in vivo studies in support of general toxicology (acute, sub-acute, and chronic studies), genetic toxicology, reproductive and developmental toxicology, environmental toxicology, and carcinogenicity bioassays that are required for regulatory submissions supporting the registration of industrial chemicals, food additives, agrochemicals, and biocides;
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| • | a broad offering of in vitro and in vivo capabilities and study types designed to identify possible safety risks; |
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| • | a broad offering of in vitro and in vivo studies in support of general toxicology (acute, sub-acute and chronic studies), genetic toxicology, safety pharmacology and carcinogenicity bioassays that are required for regulatory submissions supporting “first-in-human” to “first-to-the-market” strategies for potential human therapeutics; |
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| • | a broad offering of in vitro and in vivo studies in support of general toxicology (acute, sub-acute and chronic studies), genetic toxicology, reproductive and developmental toxicology, environmental toxicology and carcinogenicity bioassays that are required for regulatory submissions supporting the registration of industrial chemicals, agrochemicals and biocides; |
expertise in standard and specialty routes of administration (e.g., infusion, intravitreal, intrathecal and inhalation) that are important not only for the testing of potential pharmaceuticals and biopharmaceuticals, but also for the safety testing of medical devices, nutraceuticals, animal health products and other materials;
expertise in the conduct and assessment of reproductive, developmental and juvenile toxicology studies (in support of larger-scale and later-stage human clinical trials or chemical registration);
expertise in environmental toxicology (aquatic and terrestrial) and regulatory submissions required for chemical and agrochemical registration;
services in important specialty areas such as ocular, bone, juvenile/neonatal, immune-toxicology, ototoxicology, photobiology, inhalation, drug abuse liability, seizure liability testing, radiation biology, surgery, genomic analysis, imaging capabilities and dermal testing;
expertise in determining the potential for abuse of human pharmaceuticals (Drug Abuse Liability Testing);
expertise in testing of medical devices in the assessment of those devices and surrounding tissues;
expertise in immunology and immunotoxicology, including cell therapy products;
expertise in all major therapeutic areas;areas, particularly in cell and gene therapy, and orphan drugs;
study design and strategic advice to our clients based on our wealth of experience and scientific expertise in support of drug development and chemical registration; and
a strong history of assisting our clients in achieving their regulatory and/or internal milestones for the safety testing of numerous therapy types including stem cells,cell-based therapies, vaccines, gene therapies, proteins, antibodies, drug conjugates, oligonucleotide biotherapeutics, small molecules, medical devices, chemicals and agrochemicals.
Our safety assessment facilities comply with GLP to the extent required by the FDA, Environmental Protection Agency, USDA, European Medicines Agency, European Chemicals Agency and the Organization for Economic Co-operation and Development (OECD), as well as other international regulatory agencies. Furthermore, our early-stage discovery work, which is not subject to GLP standards, is typically carried out under a quality management system such as ISO 9100 or similarly constructed internally developed quality systems. Our facilities are regularly inspected by U.S. and other regulatory compliance monitoring authorities, our clients'clients’ quality assurance departments and our own internal quality assessment program.
Pathology Services. The ability to identify and characterize clinical and anatomic pathologic changes is critical in determining the safety and efficacy of potential new therapeutics, industrial and agrochemicals.agriculture chemicals and medical devices. Key “go/no-go” decisions regarding continued product development are typically dependent on the identification, characterization and evaluation of fluid, tissue and cellular changes that our experts identify and interpret for our clients. We employ a large number ofmany highly trained veterinary anatomic and clinical pathologists and other scientists who use state-of-the-art techniques to identify potential test compound-related changes within tissues, fluids, and cells.changes. In addition to all standard anatomic and clinical pathology techniques, we provide specialized evaluations such as cytology, platelet function, assay development, immunohistochemistry, in situ blood hybridization, electron microscopy, image analysis, tissue morphometry and stereology services.
Manufacturing Support (Manufacturing)
Our Manufacturing Support segment is comprised of three businesses: Microbial Solutions, Biologics Testing Solutions and Avian Vaccine Services.
Microbial Solutions. Our Microbial Solutions business provides in vitro methods for conventional and rapid quality control testing of sterile and non-sterile biopharmaceutical and consumer products.products, and includes our Endosafe®, Celsis® and Accugenix® businesses. Our legacyEndosafe® business providedprovides lot release testing of medical devices and injectable drugs for endotoxin contamination. Our Celsis® business provides rapid microbial detection systems for quality control testing in the pharmaceutical and consumer products industries. Our Accugenix® business provides state-of-the-art microbial identification and genetic sequencing services for manufacturing in the biopharmaceutical, medical device, nutraceutical and consumer care industries. We expect our comprehensive portfolio to drive increased adoption of our quality control testing solutions across both sterile and non-sterile applications.
Endosafe®. We are a market leader in endotoxin testing products and services, which are used for FDA-required quality control testing of injectable drugs and medical devices, their components, and the processes by which they are manufactured. Endotoxin testing is an in vitro process which uses a processed extract from the raw materials of the horseshoe crab,crabs, known as limulus amebocyte lysate (LAL). The LAL test is the first and most successful FDA-validated alternative to an in vivo test to date. The extraction of the raw materials for LAL does not harm the crabs, which are subsequently returned to their natural ocean environment. Our Microbial Solutions business produces and distributes a comprehensive portfolio of endotoxin testing, microbial detection and identification kits, reagents, software, accessories, instruments and associated microbial quality control
laboratory services to a broad range of companies manufacturing and releasing products from the pharmaceutical, biotechnology and consumer products industries, including the dairy, food and dairy industries worldwide.beverage markets through a strategic partnership. We are a market leader in endotoxin testing products and services, which are used for FDA-required quality control testing of injectable drugs and medical devices, their components, and the processes by which they are manufactured.
TheOne of the primary growth drivers in our Microbial Solutions business is driven by our FDA-approved line of next-generation endotoxin testing products. This line is based on the Endosafe Portable Testing System (Endosafe®-PTS™) technology, which allows rapid endotoxin testing in the central laboratory or manufacturing environment. In recent years, we expanded the PTS product portfolio to include a multiple sample testing system known as the Endosafe®Endosafe®-MCS™ (multi-cartridge system) and the first fully automated robotic system developed specifically for high-volume endotoxin testing, Endosafe®-Nexus, to satisfy the demand of our clients who require higher sample throughput. We anticipate our clients' demand for rapid testing methods will continue to increase as they respond to the FDA's Process Analytical Technology (PAT) Initiative, as well as move to faster, simpler testing methods for their technicians. In 2013, we launched the first fully automated robotic system developed specifically for high-volume endotoxin testing: Endosafe®-Nexus™. We expect to seehave seen expanded use of this rapid endotoxin testing technology in non-traditional areas such as renal dialysis, nuclear and compounding pharmacies, and cellular therapy.clients transition from traditional methods to our rapid cartridge technology.
Celsis®. Celsis’ systems are principally used for product-release testing to help ensure the safe manufacture of pharmaceutical pharmaceutical, and consumer products, including the Celsis Advance II™ and Celsis Accel™ systems for rapid microbial detection applications. In 2019, we launched a suite of products focused on sterility testing. Sterility testing is required prior to the release of sterile injectable products. The Advance II™, Accel™legacy method required a 14-day sample incubation period and Innovate™ systems for non-sterile applications complement our PTS-Micro™, a rapid bacterial (bioburden) detection system for sterile biopharmaceutical applications. We expect our comprehensive portfolio to drive increased adoption of our quality control testing solutions across both sterilewas subjective. Using the Celsis® protocol and non-sterile applications.instrumentation, clients can detect contamination within 6 days and make definitive product release decisions.
Accugenix®. Our Accugenix subsidiary® global lab network is the premier global provider of current ISO 17025 and Good Manufacturing Practice (cGMP)-compliantISO17025-accredited contract microbial identification and genetic sequencing testing.services. Accugenix® is an acknowledged industry leader in species-level identification and strain typing of bacteria and fungi that are recovered from manufacturing facilities. Utilizing state-of-the-art and proprietary in vitrotechnologies, coupled with scientific expertise and analysis, Accugenix® excels in providing accurate, timely, and cost-effective microbial identification services required to meet internal quality standards and government regulations.
Biologics Testing Solutions. We perform specialized testing of biologics frequently outsourced by global pharmaceutical and biotechnology companies.companies globally. Our laboratories in the U.S., Germany, Scotland, Ireland and France provide timely and regulatory-compliant services in the areas of analytical, molecular biology, virology, cell-based bioassays, bioanalysis,
immunochemistry, microbiology, cell biology, in vivo studies and related services. We provide analytical characterization, lot release and safety testing support for chemistry, manufacturing and controls and investigational new drug (IND) filings and confirm that biological processes and thebiomanufacturing of clinical drug candidates and commercial drugs produced are consistent, correctly defined, stable and essentially contaminant free. This testing is required by the FDA, EMA and other international regulatory authorities for our clients to obtain new drug approvals, to maintain government licensedgovernment-licensed manufacturing facilities and to manufacture and release approvedmarket-approved therapeutic products for patient treatment.
Our cGMP manufacturing services group growsfacilities grow and storesstore well-characterized early-stage client cell lines for later development or manufacture of therapeutic proteins and vaccines for clinical trials. We further design and provide viral clearance projectsprograms for Phase I, II and III human clinical studies in our German and U.S. facilities.
In June 2016,To meet growing demand, we acquired Blue Stream Laboratories, Inc. (Blue Stream), an analytical CRO supportingare currently expanding our Biologics Testing Solutions service offerings and facilities in the development of complex biologicsU.S. and biosimilars.Europe.
Avian Vaccine Services. We are the global leader for the supply of SPF fertile chicken eggs and chickens. SPF chicken embryos are used by animal health companiesvaccine producers as self-contained “bioreactors” for the manufacture of live viruses. These viruses are used as a raw material primarily in poultry as well asfor human and veterinary vaccine applications. The production of SPF eggs is performed under biosecure conditions, similar in many ways to our research model production. We have a worldwide presence, with several SPF egg production facilities in the U.S., and contracted production capabilities in Hungary. We also operate a specialized avian laboratory in the U.S., which provides in-house quality control testing of thetest reagents for our SPF flocks, offers testing services to vaccine companies and commercial poultry operations and manufactures poultry diagnostics and bulk antigens for poultry vaccines.
Contract Manufacturing. Through our acquisition of WIL Research in April 2016, we acquired its QS Pharma subsidiary. This business specializes in contract formulation development and manufacturing (including analytical services and stability testing) with a focus on high potency compounds, oral solid and liquid dose formulations, and manufacturing. On February 10, 2017, we divested this business. For additional information, see Note 17, “Subsequent Events” included in Item 8, “Financial Statements and Other Supplementary Data” in this Annual Report on Form 10-K.
Our Strategy
Our objective is to be the preferred strategic global partner for our clients. Our strategy is to deliver a comprehensive and integrated portfolio of drug discovery and non-clinical development products, services and solutions to support our clients'clients’ discovery and early-stage drug research, process development, scale up and manufacturing efforts, and enable them to bring new and improved therapies to market faster and more cost effectively. In addition, we believe we can improve and augment drug discovery and early-stage development effectiveness by coordinating the dialog between large pharmaceutical, biotechnology, academic and non-governmental organizations, and venture capitalists. Separately, through our various Manufacturing segment businesses, we aim to be the premier provider of products and services that ensure our clients produce and release their products safely. As these groups increasingly rely on and interact with one another in this field, we assist them in working together by developing deeper strategic relationships with each of these constituencies.
We believe we have certain competitive advantages in executing this strategy as a resultbecause of our continuing focus on the following:
Integrated Early-Stage Portfolio. We are the only large, global CRO with a portfolio of products, services and solutions that focuses on drug discovery and early-stage development. We provide research models and associated services, discovery research studies and services and comprehensive safety assessment studies in both regulated and non-regulated environments. As such, we are able tocan collaborate with clients from target discovery through candidate selection. When critical decisions are made regarding which therapeutics will progress from discovery to development, we continue to work alongside our clients as the drug candidates move downstream. Our recognized expertise in early-stage drug research and pharmacology provides us with a competitive advantage.advantage and enables our clients to make critical drug development decisions more quickly. We understand our clients'clients’ therapies and the challenges they face during the discovery and development process, including mechanism of action, efficacy, drug metabolism, safety assessment and toxicological testing critical for making “go/no-go” decisions.
Pharmaceutical Manufacturing Support Portfolio. We also offer a portfolio of products, services and solutions that supports the process development, scale up and quality control efforts of the biopharmaceutical industry. We provide products and services that support the development and release of commercialized biologics products. In particular, we are an industry leader in the areas of microbial detection and microbial identification to support process development and ongoing commercial production. Our portfolio spans a broad range of traditional and rapid methods, which provide the highest testing quality, enhance productivity and reduce cycle time.
Deep Scientific Expertise. We provide a breadth and depth of scientific expertise across a broad range of therapeutic areas which may be too costly for our clients to build and/or maintain in-house. We provide essential capabilities, including biomarkers, biologics, medicinal chemistry, in vitro screening, in vivo pharmacology, immunology, pathology, biologics process development testing, microbial detection and identification and other specialty service areas that have high infrastructure costs or are cost-prohibitive for clients to maintain in-house.independently. We continue to expand our portfolio in key therapeutic and pharmacology areas to align with our clients'clients’ internal drug discovery and development areas of focus. These areas of disease focus and expertise include oncology, metabolism and obesity, immunology, respiratory, bone and musculoskeletal, diabetes, cardiovascular, infectious disease,otology, ophthalmology and central nervous system.CNS. In the
areas of functional expertise, it includes synthetic and medicinal chemistry, library design, cell line development, in vitro and in vivo assay development screening, non-clinical imaging, structural biology, process chemistry, reproductive and general toxicology, safety pharmacology, veterinary pathology, bioanalysis, scale up and formulation development.development, cell and gene therapy, drug abuse liability and medical device testing. We also continue to enhance our small molecule and biologics manufacturing portfolio in areas of greatest industry need, where outsourcing provides major benefits for our clients and where we could provide significant benefits given our unique early development portfolio and global footprint.
Commitment to Animal Welfare. We are committed to being the worldwide leader in the humane care of laboratory animals and implementation of the “3Rs” initiative (Replacement, Reduction and Refinement). As researchers, we are responsible to our clients, our animals and the public for the health and well-being of the animals in our care. We work hand-in-handclosely with the scientific community to understand how living conditions, handling procedures and reduction of stress play an important role in the quality and efficiency of research.
Superior Quality and Client Support. We maintain scientific rigor and high qualityhigh-quality standards through management of key performance indicators and an intense focus on biosecurity.biosecurity and quality. These standards allow clients to access our global portfolio of products and services with the confidence that they will obtain consistent results no matter where they choose to obtain their products or conduct their research.
Flexible and Customized Environment to Provide the Right Solutions. Each of our clients is different, with unique needs and specific requirements. We understand the importance of flexibility, and leverage the expertise embedded in our integrated early-stage portfolio to provide customized solutions tailored to the specific need or therapeutic area for a particular client. By utilizing our streamlined and efficient facilities, we help clients create a flexible and integrated infrastructure in order to improve their workload and staffing requirements. This allows our clients to reduce internal capacity and/or staff.staff while ensuring the conduct of effective quality research for their projects. We provide enhanced value to clients who use us as a full-service integrated partner over a longer period of time.
Large, Global Partner. We believe there is a particularan important advantage in being a full service, high-quality provider of research models and associated services, discovery and non-clinicalin vivo and in vitro services and manufacturing support on a global scale. Many of our clients, especially large biopharmaceutical companies, have decided to limit the number of suppliers with which they work. Their preference isThey frequently chose to partner with large Tier 1 CROs like Charles River, who can offer clients support across the early-stage drug research process as a result of broader portfolios and experience in project management. This includes extensive scientific, technical and therapeutic area expertise, real-time access to data through secure portals, provision of data in sponsor-specific formats for data warehousing needs, accelerated reporting, reduced standard reporting timelines and industry-leading Standard Exchange of Non-Clinical Data (SEND) capabilities, a global footprint and streamlined and simplified processes and communications, including professional project and relationship management. We are focused on leveraging our competitive advantages to ensure we are recognized as the premier preferred provider, thereby enabling us to build broader and deeper long-term strategic relationships with our clients.
Global biopharmaceutical companies are continuingOur clients’ R&D needs continue to make the decision to outsource more significant tranches of their drug discovery, development, and manufacturing processes. Over the past few years we have entered into strategic relationships with leading global biopharmaceutical companies and expanded existing preferred provider agreements with other leading global biopharmaceutical companies. For example, in 2016, we extended the term of our longstanding integrated drug discovery alliance with Genentech, a member of the Roche Group. Through this alliance, we provide Genentech early discovery services, including medicinal chemistry, in vitro and in vivo biology, structural biology, and computer-aided drug design to help identify promising candidates for non-clinical development. And, in 2015, we extended the term of our collaboration with AstraZeneca for outsourced regulated safety assessment, and development drug metabolism and pharmacokinetics until 2020. For some of our partners, we provide a broad suite of research models and discovery and safety assessment services and for others we provide a customized and select array of discovery and safety assessment services and/or research models. Offering flexibility enables our clients to utilize our products and services to deliver innovative health solutions in a manner which best suits their individual needs.
There have been fundamental changes in our clients' research and development needs, particularly with regard to the large pharmaceutical industry. First, theseevolve. These clients are increasingly emphasizing studies that have greater translation to the clinic so that they can make appropriate decisions regarding the progression of potential therapeutic entities earlier in the development process. The result is a greater focus on discovery services, includingin vivo pharmacology studies consisting of efficacy and non-GLP DMPK (drug metabolism and pharmacokinetics) studies. Second, these clients are choosing to outsource additional discovery and safety assessment services in order to increase the efficiency and effectiveness of their drug selection processes.
We believe that this changing environment will provide enhanced outsourcing opportunities for us in the future. We remain optimistic that our clients are increasingly receptive to partnering with CROs as a means of meeting their discovery and non-clinical support needs. We believe that the successful development of new therapies and outsourcing by the pharmaceutical industry will continue to be positive drivers of demand for our products and services.
Global biopharmaceutical companies are continuing to make the decision to outsource more significant tranches of their drug discovery, development and manufacturing processes. Over the past few years we have entered into strategic relationships with leading global biopharmaceutical companies and expanded existing preferred provider agreements with other leading global biopharmaceutical companies. We also continue to broaden and extend our relationships with other research institutions across the portfolio.
We believe that larger biopharmaceutical companies will increasingly focus on efficiencies and execution. They will continue to
reassess what aretheir core differentiators from researchR&D to commercialization, and which aspects of their drug discovery, development and manufacturing processes they will choose to commercialization.outsource. We expect they will also continue to be conservative in re-building infrastructure and expertise. This should lead to more opportunities for strategic outsourcing as larger pharmaceutical clients choose to utilize external resources rather than invest in internal infrastructure. By partnering with a CRO like Charles River, they can take advantage of efficiencies in their early-stage research activities that can result in months or years saved in getting a drug to market. In the aggregate, we believe that the evolving large biopharmaceutical research and developmentR&D business model will make our essential products and services even more relevant to our clients, and allow them to leverage our integrated offerings and expertise to drive their research, non-clinical development and manufacturing efficiency and cost effectiveness.
We believe it is critical to participate in the strategic partnering process because these relationships are likely to extend for lengthy periods of time - three to five years. Furthermore, both the client and the CRO invest heavily in the initial phases of the relationship to successfully transfer work streams and establish governance processes. Given this investment, clients are less likely to change CROs at the conclusion of the initial relationship. Our goal is to prevail inBecause of this strategy, we have been successfully renewing the majority of these opportunities.our strategic partnerships.
The evolving biopharmaceutical R&D business model, coupled with a robust funding environment, have also led to the emergence of a significant number of new biotechnology companies in recent years that are discovering innovative new therapies. We also believe that our portfolio provides flexible solutions that meet the customized needs for virtual and small biotechnology companies, which have limited or no infrastructure. These clients also value our ability to provide a broad range
of services and integrated services where we work hand in hand with our customersclients to design, plan and manage integrated projects and programs. This includes classically outsourced services, “insourced” services and hybrid offerings blending resources from both our clients and our staff.
Our clients have utilized this capability, which blends resources both inside and outside their walls.
We maintain anstrategic imperatives are centered around our intense focus on initiatives designed to allow us to drive profitable growth, and maximize value for shareholders,enhance our operating efficiency and better position ourselves to operate successfully in the current and future business environment. As a result,environment, which we believe that we are well positionedwill collectively enable us to exploit both existing and new outsourcing opportunities.maximize value for our shareholders.
We intend to continue to broaden the scope of the products and services that we provide across the drug discovery and early-stage development continuum primarily through internal development, and, as needed, through focused acquisitions and alliances. Acquisitions, such as our acquisitions of CTL International (Citoxlab) in April 2019 and HemaCare in January 2020, are an integral part of our growth strategy, both to expand our portfolio and broaden our geographic footprint. We believe the acquisition of Citoxlab enhanced our position as a leading global early stage CRO by strengthening our ability to partner with clients across the drug discovery and development continuum. Further, we believe the acquisition of HemaCare enhances our ability to provide a comprehensive cell therapy solution from discovery through commercialization, which we believe will enhance our clients’ efficiency and accelerate their speed-to-market. We are committed to a disciplined approach that seeks to target businesses that are a sound strategic fit and that offer the prospect of enhancing shareholder value, typically including the achievement of a hurdle rate for return on invested capital above our weighted average cost of capital. For example,
In addition to conventional mergers and acquisitions, our long-term strategy includes growth through establishing relationships and exploring other opportunities and areas that have the potential to strengthen our broad-based portfolio of products and services. In particular, our focus has been to drive differentiation through technologies that enhance the speed to develop a clinical candidate and allow biopharmaceutical companies to make earlier go/no-go decisions. Among other arrangements, these relationships may include entering into license agreements, strategic partnerships or joint ventures that will allow us to access cutting-edge or nascent technologies with a modest investment component. Our ability to thoroughly assess these nascent technologies and market opportunities may later result in each of 2015 and 2016, we completed significant strategic acquisitions. In 2015, we acquired Celsis Group Limited., a leading provider of rapid bacterial detection systems for sterile and non-sterile quality control testing in the biopharmaceutical and consumer products industries. In 2016, we made three acquisitions. In April, we acquired WIL Research, a premier provider of safety assessment and contract development and manufacturing services to biopharmaceutical and agricultural and industrial chemical companies worldwide. In June, we acquired Blue Stream, an analytical CRO supporting the development of complex biologics and biosimilars. In September, we acquired Agilux, a CRO that provides a suite of integrated discovery small and large molecule bioanalytical services, drug metabolism and pharmacokinetic services, and pharmacology services.
Our acquisition strategy also takes into account geographic as well as strategic expansion of existing core services. For example, in 2015, we acquired Oncotest, a Germany-based CRO providing discovery services for oncology, which complements our existing In Vivo Discovery businesses in the U.S. and Finland, and Sunrise, a producer of SPF fertile chicken eggs and chickens used in the manufacture of live viruses.acquisition.
We are also partneringpartner with a numberdiverse set of leading venture capital firms around the world primarily investing in life sciences, healthcare,health care and technology companiestherapeutics with an emphasis on early-stage emerging growth companies. Through these partnerships and close relationships, we gain insight into their company and asset portfolios and are thus able to promote our contract research services for discovery, and safety assessment to these companies. For example, in 2016,and biologics testing. Thus, we committed to invest $10 million in BioMotiv, LLC, the therapeutic accelerator company associated with The Harrington Project for Discovery and Development. Through this agreement, we will be the preferred drug discovery and non-clinical development partner for BioMotiv’s portfolio of technologies and companies. This offers ushave the opportunity to establish ourselves as a provider of choice for a unique client group whichthat has emerged as biopharmaceutical companies rationalize and prioritize their development pipelines.
Customers
We maintain a three-pronged sales organization with a focus on:
global biopharmaceutical companies;
small and mid-sized pharmaceutical, biotechnology, agrochemical, industrial chemical, and veterinary medicine companies, as well as contract research organizations; and
academic and government institutions.
We also maintain several sales specialists which either have specific technical expertise (often degreed scientists) or cover unique markets.Clients
Our clients continue to consist primarily of all of the major biopharmaceutical companies; many biotechnology, agricultural and industrial chemical, life science, veterinary medicine, medical device, diagnostic and consumer product companies; contract research and contract manufacturing organizations; and other commercial entities, as well as leading hospitals, academic institutions and government agencies. We have stable, long-term relationships with many of our clients. During 2016,2019, no single commercial
client accounted for more than 3%2% of our total revenue and no single customerclient accounted for more than 10% of the revenue of any of our three business segments.
We continue to pursue a goal of expanding our relationships with our large biopharmaceutical clients, and with many of our larger mid-market clients. These relationships take different forms, from preferred provider arrangements to strategic partnerships. The structure of these relationships incentivizes clients to purchase more products and services across our early-
stageearly-stage portfolio. Because of the strength of these relationships, we have better insight into our clients'clients’ planning processes and, therefore, better visibility than in the past. For information regarding revenue attributable to each of our business segments for the last three fiscal years, please see Note 15,4, “Segment and Geographic Information” included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. For information regarding revenue and long-lived assets attributable to operations in the United States, Europe, Canada, Japan,Asia Pacific and other countries for each of the last three fiscal years, please review Note 15,4, “Segment and Geographic Information” included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
Sales, Marketing and Customer Support
We have designated dedicated sales people for each of our three client segments (global biopharmaceutical, small and mid-sized pharmaceutical and biotechnology companies, and academic and government institutions). This enhances our ability to meet client needs by offering customized, tailored solutions across our entire portfolio. In addition, our mid-market pharmaceutical and biotechnology clients benefit by additional support from a combination of account managers with broad portfolio knowledge and specialists with specific scientific expertise. This allows us to provide comprehensive coverage of all of the market segments among our diverse client population. We also apply the use of dedicated sales specialists for certain technical product lines, such as in our Manufacturing business.
We sell our products and services principally through our direct sales force and account management teams who work in North America, Europe, and the Asia-Pacific countries. In addition to interactions with our direct sales force, our primary promotional activities include organizing scientific symposia, publishing scientific papers and newsletters, hosting webinars and making presentations at, and participating in, scientific conferences and trade shows in North America, Europe, and Asia. We supplement these scientifically based marketing activities with internet-based marketing, advertising, and direct mail. In certain areas, our direct sales force is supplemented by international distributors and agents.
Our internal marketing/product management teams support the field sales staff and account management teams while developing and implementing programs to create close working relationships with our clients in the biomedical research industry. We maintain customer service, technical assistance, and consulting service departments (in addition to project managers for our service businesses), which address both our clients' routine and more specialized needs and generally serve as a scientific resource for them. We frequently assist our clients in solving problems related to animal husbandry, health and genetics, biosecurity, non-clinical study design, regulatory consulting, protocol development, and other areas in which our expertise is widely recognized as a valuable resource by our clients.
Our marketing efforts are focused on stimulating demand for further outsourcing across our entire services portfolio. We believe that our ability to provide solutions that address all aspects of early-stage drug research are increasingly attractive to our clients, and we continue to design and market our commercial activities to deliver flexible, customized programs designed by segment to meet our clients'clients’ global and site-specific needs.
Our go-to-market approach employs a number of sales and marketing strategies, including dedicated sales teams for each of our major lines of business. We also maintain several sales specialists that either have specific technical expertise (often degreed scientists) or cover unique markets.
In addition to our field sales teams and related specialists, we also have a team of alliance managers who are organized by key client within our market segments (global biopharmaceutical, small and mid-sized pharmaceutical and biotechnology companies, and academic and government institutions). This enhances our ability to meet client needs by offering customized, tailored solutions across our entire portfolio. In addition, our clients benefit by additional support from a combination of technical specialists with specific scientific and therapeutic area expertise. We also apply the use of dedicated sales specialists for certain technical product lines, such as in our Manufacturing businesses.
We sell our products and services principally through our direct sales and business development teams who work in North America, Europe and Asia. In addition to interactions with our direct sales force, our primary promotional activities include organizing scientific symposia, publishing scientific papers and newsletters, hosting webinars and seminars and making presentations at, and participating in, scientific conferences and trade shows in North America, Europe and Asia. We supplement these scientifically based marketing activities with digital marketing, advertising and direct mail. In certain areas, our direct sales force is supplemented by international distributors and agents.
Our internal marketing/product management teams support the field sales and business development teams while developing and implementing programs to create close working relationships with our clients in the biomedical research industry. We maintain client engagement, digital experience, inbound client support, technical assistance, and consulting service departments (in addition to project managers for our service businesses), which address both our clients’ routine and more specialized needs and generally serve as a scientific resource for them. We frequently assist our clients in solving problems related to animal husbandry, health and genetics, biosecurity, non-clinical study design, regulatory consulting, protocol development and other areas in which our expertise is widely recognized as a valuable resource by our clients.
Competition
Our goal is to be a leader in each of the markets in which we participate. We compete in the marketplace on the basis of our therapeutic and scientific expertise in early-stage drug research, quality, reputation, flexibility, responsiveness, pricing, innovation and global capabilities. We are able to offer a unique portfolio of early-stage products and services to support drug discovery and development.
We encounter a broad range of competitors of different sizes and capabilities in each of our three businesses segments, although the largest competitors within any segment vary.segments. We also face competition from the internal discovery and development resources of our clients.
For RMS, we have fivefour main competitors of which one is a government funded, not-for-profit entity; one is part of a large public company;privately held in Europe and two are privately held in Europe and one is privately held in the U.S. We believe that none of these competitors compares to us in global reach, financial strength, breadth of product and services offerings, technical expertise, or pharmaceutical and biotechnology industry relationships.
For DSA, both our Discovery Services and Safety Assessment businesses have numerous competitors. Discovery Services has hundreds of competitors, as itbut three main competitors: two are public companies in China and one is a highly competitive and fragmented market.public company in Europe. Safety Assessment has sevendozens of competitors of varying size, but one main competitors; onecompetitor that is parta division of a large public company in the U.S.; one is a privately held company in the U.K.; one is a public company in China; two are privately held companies in the U.S.; one is privately held in Canada; and one is privately held in France. Our DSA segment also competes with in-house departments of pharmaceutical and biotechnology companies, universities and teaching hospitals.
For Manufacturing, each of our underlying businesses has several competitors. Microbial Solutions has four main competitors, of which three are public companies in Europe and one is a private company in the U.S. In addition to many smaller competitors, Biologics has five main competitors, of which twofour are public companies in Europe one is a private company in the U.S., one is a public company in China, and one is a public company in the U.S.China. Avian has one main competitor to its SPF eggs business, which is privately helda private company in Europe, and numerous competitors for services provided through our specialized avian laboratory. Microbial Solutions has five main competitors, of which three are public companies in Europe and two are privately held in the U.S. Contract Manufacturing has five main competitors, of which two are public companies in the U.S. and three are privately held in Europe.laboratory services.
Industry Support and Animal Welfare
One of our core values is a concern for, and commitment to, animal welfare. We have been in the forefront of animal welfare improvements in our industry, and continue to show our commitment with special recognition programs for employees who demonstrate an extraordinary commitment in this critical aspect of our business. We created our own Humane Care Initiative, which is directed by our Animal Welfare and Training Group. The goal of the initiative is to assure that we continue as a worldwide leader in the humane care of laboratory animals and implementation of the 3Rs (Replacement, Reduction and Refinement). Laboratory animals are an important resource that further our knowledge of living systems and contribute to the discovery of life-saving drugs and procedures. We work hand-in-hand with the scientific community to understand how living conditions, handling procedures and stress play a role in the quality and efficiency of research. As researchers, we are responsible to our clients and the public for the health and well-being of the animals in our care.
We have been in the forefront of animal welfare improvements in our industry, and continue to show our commitment with special recognition programs for employees who demonstrate an extraordinary commitment in this critical aspect of our business. We created our own Humane Care Imperative (HCI), which is directed by our Global Animal Welfare and Training Group. The goal of HCI is to ensure that we continue as a worldwide leader in the humane care of laboratory animals and implementation of the 3Rs (Replacement, Reduction and Refinement).
We are firmly committed to the 3Rs and to reducing the number of animals used by emphasizing health, research animal behavioral management programs and genetic integrity to decrease study data variability. Whenever possible, we use technological advances such as new diagnostic tests for screening pathogens in laboratory rodents, microsampling and in vitro assays. We support a wide variety of organizations and individuals working to further animal welfare and the 3Rs, as well as the interests of the biomedical research community. We also partner with customersclients to develop study designs decreasing the number of animals needed and suggesting pilot studies where appropriate. We also maintain a quarterly award recognizing our employees’ efforts to continually implement the 3Rs at our sites globally.
We support a wide variety of organizations and individuals working to further animal welfare as well as the interests of the biomedical research community. We fund scholarships tofor training in laboratory animal training programs,science, provide financial support to non-profit institutionsorganizations that educate the public about the benefits of animal research and provide awards and prizes to outstanding leaders in the laboratory animal medicinescience field and the supporters of 3Rs.
Employees
As of December 31, 2016,28, 2019 (prior to the acquisition of HemaCare), we had approximately 11,00017,100 employees (including approximately 1,2001,900 science professionals with advanced degrees, including Ph.D.s, D.V.M.s and M.D.s). Our employees are not unionized in the U.S. Employees at some of our European facilities are represented by works councils, employee representative groups and/or unions, which is consistent with local customs for our industry. We believe we have good relationships with our employees, based on a number of factors including employee retention and survey results.retention.
Backlog
Our backlog for our RMS, DSA and Manufacturing reportable segments was $88.0$128.7 million, $551.8 million$1.0 billion and $39.5$65.4 million, respectively, as of December 31, 2016,28, 2019 (prior to the acquisition of HemaCare), as compared to $106.6$106.5 million, $327.8$900.8 million and $36.2$74.4 million, respectively, as of December 26, 2015.29, 2018. Related services are performed over varying durations, from short to extended periods of time, which may be as long as several years. We maintain an order backlog to track anticipated revenue from studies and projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We only recognize a study or project in backlog after we have received written evidence of a client'sclient’s intention to proceed. Canceled studies or projects are removed from backlog.
We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, studies vary in duration (i.e., some studies or projects that are included in December 31, 201628, 2019 backlog may be completed in 2017,2020, while others may be completed in later years). Second, the scope of studies or projects may change, which may either increase or decrease their value. Third, studies or projects included in backlog may be subject to bonus or penalty
payments. Fourth, studies or projects may be terminated or delayed at any time by the client or regulatory authorities for a number of reasons, including the failure of a drug to satisfy safety and efficacy requirements, or a sponsor making a strategic decision that a study or service is no longer necessary. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made. We cannot provide any assurance that we willmay not be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.
Regulatory Matters
As our business operates in a number of distinct operating environments and in a variety of locations worldwide, we are subject to numerous, and sometimes overlapping, regulatory environments.
The Animal Welfare Act (AWA) governs the care and use of certain species of animals used for research in the U.S. other than laboratory rats, mice and chickens.chickens bred for use in research. As a result, most of our U.S. small animal research models activities and our avian vaccine services operations are not subject to regulation under the AWA. For regulated species, the AWA and the associated Animal Care regulations require producers and users of regulated species to provide veterinary care and to utilize specific husbandry practices such as cage size, shipping conditions, sanitation and environmental enrichment to assureensure the welfare of these animals. Separately, facilities using live vertebrate animals in research funded by the U.S. Public Health Service (PHS) must also adhere to the PHS Policy on Humane Care and Use of Laboratory Animals and follow the Guide for the Care and Use of Laboratory Animals produced by the Institute for Laboratory Animal Research.
We comply with licensing and registration requirement standards set by the United States Department of Agriculture (USDA) and similar agencies in other countries such as the European Union,Europe, China Japan, and CanadaJapan for the care, handling and use of regulated species. Our animal production facilities in the U.S., our DSA facilities in the U.S.species and Canada, and mostbirds bred for research. All of our DSA and RMS sitesfacilities in North America and Europe are either accredited or in the Europe are accreditedprocess of initiating accreditation by the Association for Assessment and Accreditation of Laboratory Animal CareAAALAC International, a private, nonprofit, international organization that promotes the humane treatment of animals in science through voluntary accreditation and assessment programs.
Our import and export of animals and our operations in foreign countries are subject to international agreements and conventions, as well as a variety of national, regional and local laws and regulations, which establish the standards for the humane treatment, care, handling and transport of animals by dealers and research facilities.
We conduct non-clinical safety assessment studies to support the submissions for approval or licensing of our clients'clients’ products throughout the world. Many of these studies must comply with national statutory or regulatory requirements for Good Laboratory Practice (GLP).GLP. GLP regulations describe a quality system for the organizationalscientific, operational and quality process and the conditions under which non-clinical studies are planned, performed, monitored, recorded, reported and archived. GLP compliance is required by such regulatory agencies as the FDA, United States Environmental Protection Agency, European Medicines Agency, Medicines and Healthcare Products Regulatory Agency in the United Kingdom (U.K.), Health Products Regulatory Authority in Ireland, Health Canada and other similar monitoring authorities in the countries where we operate. GLP requirements are significantly harmonized throughout the world and our laboratories are capable of conducting studies in compliance with all necessary requirements.
Regulatory monitoring authorities such as the FDA, Medicines and Healthcare Products Regulatory Agency and OECD countries have indicated an increased emphasis on the management of electronic records generated by computerized systems to ensure data integrity under newly issued guidance. We have established a formal program to manage regulatory and client expectations regarding data integrity within our regulated businesses. Although each business has a different impact on patient safety, all are expected to generate data with integrity. We recognize the importance of generating quality, reliable, sustainable data and have instituted several processes and established a global governance team with oversight responsibilities for our Data Integrity Compliance Plans to ensure we are consistent in our approach. To ensure that we have proper regulatory oversight over our electronic records, a dedicated quality function reviews our computerized system practices to ensure that appropriate record controls are in place and that a robust audit strategy confirms requirements for compliance.
At a global level, retention of data and controls for electronic systems, proprietary data and quality standards are covered by global policies. We also have controls in place such as quality manuals, policies and procedures, work instructions, document control processes, training, quality assurance and quality control processes and personnel, validated computerized systems and archiving requirements. Within businesses, procedures govern performance of activities to ensure data integrity throughout its life cycle.
Our Manufacturing businesses produce endotoxin test kits, reagents, cell banks used in research and biopharmaceutical production, clinical trial vaccines and vaccine support products and provided GMP contract manufacturing of clinical and marketed products. Additionally, several of our laboratories conduct biosafety and analytical testing such as identity, stability, sterility and potency testing in support of our clients'clients’ manufacturing programs working with our clients and
to fulfill their validation requirements, as applicable. These activities are subject to regulation and consequently require these businesses to be inspected by the FDA and other national regulatory agencies under their respective current Good Manufacturing Practice (cGMP)cGMP regulations. These regulations require that we manufacture our products or perform testing in a prescribed manner with respect to cGMP compliance, and maintain records of our manufacturing, testing and control activities. In addition, the specific activities of some of our businesses require us to hold specialized licenses for the manufacture, distribution and/or marketing of particular products.
All of our sites are subject to licensing and regulation, as appropriate under international treaties and conventions, including national, regional and local laws relating to:
the surface and air transportation of chemicals, biological reagents and laboratory specimens;
the handling, use, storage and disposal of chemicals (including narcotics and psychotropic drugs), biological reagents, laboratory specimens, hazardous waste and radioactive materials;
the procurement, handling, use, storage and disposal of human cells, tissues and cellular and tissue basedtissue-based products for research purposes;
the safety and health of employees and visitors to our facilities; and
protection of the environment and general public.
Global regulatory compliance programs are centralized undermanaged by a singlededicated group responsible for regulatory affairs and compliance. Our compliance programs are also managed by global quality systems, such as vendor supplier programs, quality management systems and systemsglobal computer system validation. Within each regulated business, we have established Quality Assurance Units (QAUs) responsible for risk based internal audit programs to ensure that all business sectors comply with applicable statutory andmanage regulatory requirements and satisfy our clients’ expectations for
quality and regulatory compliance. To assure these compliance obligations, we established quality assurance units (QAUs) in each of our regulated businesses that require independent oversight.client expectations. The QAUs operate independently from those individuals that direct and conduct studies, manufacturing or analytical testingtesting. Our Data Integrity Compliance Program ensures that studiesmanagement has proper oversight with QAUs of our electronic records, inclusive of quality function reviews of our computerized system practices to ensure that supports manufacturing.appropriate record controls are in place and that a robust audit strategy confirms requirements for compliance.
Intellectual Property
We develop and implement computer software and technically derived procedures and products intended to maximize the quality and effectiveness of our services. Although our intellectual property rights are valuable to our success, we believe that such factors as the technical expertise, proprietary know-how, ability and experience of our professionals are more important, and that, overall, these technological capabilities provide significant benefits to our clients. Where we consider it appropriate, steps are taken to protect our know-how through confidentiality agreements and registrations. In addition, we in-license technology and products from other companies when it enhances our product and services businesses. In the future, in-licensing may become a larger initiative to enhance our offerings, particularly as we focus on therapeutic area expertise.innovative technologies to enhance our portfolio. With the exception of technology related to our Microbial Solutions testing business, we have no patents, trademarks, licenses, franchises, or concessions whichthat are material and upon which any of our products or services are dependent.
Corporate Governance
We are committed to operating our business with integrity and accountability. We strive to meet or exceed all of the corporate governance standards established by the New York Stock Exchange, the SEC and the U.S. Federal government as implemented by the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Eight of the nine members2010 and other applicable laws, rules and regulations. Each member of our Board of Directors, areother than our Chief Executive Officer, is independent and havehas no significant financial, business or personal ties to us or management and allmanagement. All of our board committees (with the exception of(except our Executive Committee and our Strategic Planning and Capital Allocation Committee) are composed entirely of independent directors. The Board adheres to our Corporate Governance Guidelines and a Code of Business Conduct and Ethics whichthat has been communicated to employees and posted on our website. We are diligent in complying with established accounting principles and are committed to providing financial information that is transparent, timely and accurate. We have a Related Person Transactions Policy designed to promote the timely identification of such transactions and to ensure we give appropriate consideration to any real or perceived conflicts in our commercial arrangements. We have aestablished global process through which employees, either directly or anonymously, can notify management (and the Audit Committee of the Board of Directors) of alleged accounting and auditing concerns or violations including fraud. Our internal Disclosure Committee meets regularly and operates pursuant to formal disclosure procedures and guidelines whichto help to ensure that our public disclosures, including our periodic reports filed with the SEC, earnings releases and other written information that we disclose to the investment
community are complete, accurate and timely. We continually monitor developments in the law and stock exchange regulations, as well as overall corporate governance trends and intend to adopt new procedures consistent with such developments to the extent applicable to and appropriate for our Company. Copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Related Person Transactions Policy are available on our website at www.ir.criver.com.http://ir.criver.com under the “Investor Relations - Corporate Governance” caption.
Information about Our Executive Officers of the Registrant (pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
Below are the names, ages and principal occupations of each of our current executive officers. All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal.
James C. Foster, age 66,69, joined us in 1976 as General Counsel. During his tenure, Mr. Foster has held various staff and managerial positions, and was named our President in 1991, Chief Executive Officer and President in 1992 and our Chairman in 2000.
William D. Barbo, age 56,59, joined us in 1982 as a laboratory technician. Between 1982 and 2005, Mr. Barbo served in a variety of positions of increasing responsibilities. He was named Corporate Vice President of Research Models and Services in 2005, Corporate Senior Vice President of Global Sales and Marketing in 2010, and Corporate Executive Vice President and Chief Commercial Officer in October 2016.
Birgit Girshick, age 50, joined us in 1989 and originally held positions of increasing responsibility in our RMS Germany and RMS Avian Vaccine businesses. In 2004, Ms. Girshick was promoted to General Manager of the RMS Avian Vaccine Services business. She was named Executive Director, RMS Process Improvement in 2009, and Corporate Vice President, Global Biopharmaceutical Services in 2010. In 2013, Ms. Girshick was promoted to Corporate Senior Vice President, Research Models and Biologics Testing Solutions. In 2016, Ms. Girshick was tasked with leading the integration of WIL Research into our Safety Assessment business. Also in 2016, Ms. Girshick assumed the role of Corporate Senior Vice President, Global Discovery Services. In February 2018, Ms. Girshick was appointed Corporate Executive Vice President, Global Discovery and Safety Assessment and in August 2018, additionally took on responsibility for our Biologics Testing Solutions and Avian Vaccine Services business.
David P. Johst, age 55,58, joined us in 1991 as Corporate Counsel and was named Vice President, Human Resources in 1995. He became Vice President, Human Resources and Administration in 1996, a Senior Vice President in 1999, and a Corporate Executive Vice President in 2005. He currently serves as our General Counsel and Chief Administrative Officer and is responsible for overseeing our corporate legal function Human Resources department, and several other corporate staff departments. Prior to joining us, Mr. Johst was in private practice at the law firm of Hale and Dorr (now WilmerHale). On August 2, 2019, we announced that Mr. Johst currently serves as a trustee of Mt. Ida College.will retire in May 2020.
Davide MolhoJoseph W. LaPlume, age 47,46, joined our Italian operationsus in 1999 and was promoted to Director of Operations for RMS Italy2005 as Senior Corporate Counsel. He became Deputy General Counsel in 2002. In 2005, his role was expanded to include French RMS operations and in 2007, he became Corporate2010, Vice President, European Research Models and Services with responsibility for all European RMS operations. In July 2009, Dr. Molho was promoted to Corporate Development in 2011, Senior Vice President North Americanin 2014 and European Research Models and Services. He was subsequently promoted to Corporate Executive Vice President, Corporate Development and President, Global Research ModelsStrategy in January 2019. In his current role, he oversees all aspects of strategic planning and Services in
December 2010. In 2011, Dr. Molhocorporate development activities across business segments and geographies. Prior to joining us, Mr. LaPlume was named Corporate Executive Vice President, North America Operationsa corporate lawyer at GTECH Corporation and in December 2013, he was named Corporate Executive Vice Presidentprivate practice at the law firms of Mintz Levin and President, Global RMS and DSA Operations.Goulston & Storrs.
David R. Smith, age 51,54, has served as our Corporate Executive Vice President and Chief Financial Officer since August 2015. He joined us as Corporate Vice President, Discovery Services through our acquisition of Argenta and BioFocus from Galapagos NV in March 2014 and was promoted to Corporate Senior Vice President, Global Discovery Services, in October 2014. At Galapagos, he served in various capacities, including as Chief Executive Officer of its Galapagos Services division and as Chief Financial Officer. Mr. Smith served as Chief Financial Officer for Cambridge University Hospitals from 2007 to 2013. Mr. Smith spent eight years at PricewaterhouseCoopers prior to joining AstraZeneca in 1997, where he spent the next nine years in various finance and business roles of increasingly greater responsibility.
Item 1A. Risk Factors
Set forth below, elsewhere in this Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-K. We note that factors set forth below, individually or in the aggregate, as well as additional risks and uncertainties either not presently known or that are currently believed to not be material to the business, may cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.uncertainties and the risks described below should be carefully considered together with the other information set forth in this report and in future documents we file with the SEC.
A reduction in demand may adversely affect our business.
Our business could be adversely affected by any significant decrease in drug R&D expenditures by pharmaceutical and biotechnology companies, as well as by academic institutions, government laboratories or private foundations. Similarly, economic factors and industry trends that affect our clients in these industries also affect their R&D budgets and, consequentially, our business as well.
Our clients include researchers at pharmaceutical and biotechnology companies. Our ability to continue to grow and win new business is dependent in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on molecules in the non-clinical phases of R&D (and in particular discovery and safety assessment) and to outsource the products and services we provide. Furthermore, our clients (particularly larger biopharmaceutical companies) continue to search for ways to maximize the return on their investments with a focus on lowering R&D costs per drug candidate. Fluctuations in the expenditure amounts in each phase of the R&D budgets of these researchers and their organizations could have a significant effect on the demand for our products and services. R&D budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities (including available resources of our biotechnology clients, particularly those that are cash-negative, who may be highly focused on rationing their liquid assets in a challenging funding environment), general economic conditions, institutional budgetary policies and the impact of government regulations, including potential drug pricing legislation. Available funding for biotechnology clients in particular may be affected by the capital markets, investment objectives of venture capital investors and priorities of biopharmaceutical industry sponsors.
For additional discussion of the factors that we believe have recently been influencing R&D budgets at our clients, please see the sections entitled “Our Strategy” and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
Further, our Research Products operations are structured to produce particular blood products based on customers’ existing demand, and perceived potential changes in demand, for these products. Sudden or unexpected changes in demand for these products could have an adverse impact on our profitability. Increasing demand could harm relationships with customers if we are unable to alter production capacity, or purchase products from other suppliers, to fill orders adequately. This could result in a decrease in overall revenue and profits. Decreases in demand may require us to make sizable investments to restructure operations away from declining products to the production of new products. Lack of access to sufficient capital, or lack of adequate time to properly respond to such a change in demand, could result in declining revenue and profits, as customers transfer to other suppliers.
A reduction or delay in government funding of R&D may adversely affect our business.
A portion of revenue, predominantly in our RMS segment, is derived from clients at academic institutions and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies, which can be difficult to forecast. We also sell directly to the NIH and these other agencies. Government funding of R&D is subject to the political process, which is inherently fluid and unpredictable. Our revenue may be adversely affected if our clients delay purchases as a result of uncertainties surrounding the approval of government budget proposals, included reduced allocations to government agencies that fund R&D activities. Government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund R&D activities, or NIH funding may not be directed towards projects and studies that require the use of our products and services, both of which could adversely affect our business and our financial results.
Several of our product and service offerings are dependent on a limited source of supply, which if interrupted could adversely affect our business.
We depend on a limited international source of supply for certain products, such as large research models. Disruptions to their continued supply may arise from health problems (including as a result of the spread of diseases, such as coronavirus), export or import laws/restrictions or embargoes, tariffs, international trade regulations, foreign government or economic instability, severe weather conditions, increased competition among suppliers for models, disruptions to the air travel system, activist campaigns, commercial disputes, supplier insolvency or other ordinary course or unanticipated events. Any disruption of supply could materially harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms. While we continue to take steps to find alternative supply channels and lock in supply with preferred sources through multi-year and/or minimum commitment contracts, such mitigating efforts may not prove successful at ensuring a steady and timely supply or may require us to pay significantly higher prices for such products
during periods of global shortage or restrictions on the transportation of products. In addition, limited global supply or regional restrictions on transportation for certain products may require us to source products from non-preferred vendors.
Further, our Research Products business depends on the availability of appropriate donors. If the level of donor participation declines, we may not be able to reduce costs sufficiently to maintain profitability of the Research Products business. For example, regulations intended to reduce the risk of introducing infectious diseases in the blood supply (including coronavirus) could also result in a decreased pool of potential donors. Due to any pandemic, epidemic or outbreak in one or more regions in which our Research Products business operates, the portion of the public that typically donates may be unable, or unwilling to donate, thereby significantly reducing the availability of research products upon which we rely. In addition, even if suspected diseases prove to be no more virulent than other more common disease, the heightened fear among the public resulting from widespread media coverage may result in a dramatic decline in donations.
We have in the past experienced and in the future could experience an unauthorized access into our information systems.
We operate large and complex information systems that contain significant amounts of client data. As a routine element of our business, we collect, analyze and retain substantial amounts of data pertaining to the non-clinical studies we conduct for our clients. Unauthorized third parties could attempt to gain entry to such information systems to steal data or disrupt the systems. While we have taken measures to protect them from intrusion, in March 2019, we detected evidence that an unauthorized third party, who we believe was well resourced and highly sophisticated, accessed certain of our information systems and copied data. We worked with a leading cyber security firm to assist in our investigation and coordinated with law enforcement authorities. Our investigation indicated that the affected information included client information.
In December 2019, we disclosed that we had completed our remediation of the incident identified in March of 2019. While we have implemented additional security safeguards, including:
remediation of the March 2019 incident;
cooperation with U.S. Federal authorities’ investigation into the incident and established an ongoing relationship to better understand the ever-changing nature of cybersecurity related threats;
additional visibility into our network and environment;
additional monitoring of our environment;
active threat hunting in our environment;
a reduction of our footprint of externally facing technology;
enhanced protection for externally facing web applications;
the addition of Multi-Factor Authentication to ingress points;
the addition of denial of service attack protection; and
increased network segmentation,
such efforts may not be successful, in which case we could suffer significant harm.
Our contracts with our clients typically contain provisions that require us to keep confidential the information generated from the studies we conduct. In the event the confidentiality of such information is compromised, whether by unauthorized access or other breaches, we could be exposed to significant harm, including termination of customer contracts, damage to our customer relationships, damage to our reputation and potential legal claims from customers, employees and other parties. In addition, we may face investigations by government regulators and agencies as a result of a breach.
Further, we are required to comply with the data privacy and security laws in many jurisdictions. For example, we are required to comply with the European Union (EU) General Data Protection Regulation (GDPR), which became effective on May 25, 2018 and imposes heightened obligations and enhanced penalties for noncompliance (including up to four percent (4%) of global revenue). The cost of compliance, and the potential for fines and penalties for non-compliance, with GDPR may have a significant adverse effect on our business and operations. Also, the California legislature passed the California Consumer Privacy Act (CCPA), which became effective January 1, 2020. The CCPA creates new transparency requirements and grants California residents several new rights with regard their personal information. Failure to comply with the CCPA may result in, among other things, significant civil penalties and injunctive relief, or potential statutory or actual damages. We have made changes to, and investments in, our business practices and will continue to monitor developments and make appropriate
changes to help attain compliance with these evolving and complex regulations. Additionally, while collecting research products from donors, we may collect, use, disclose, maintain and transmit patient information in ways that will be subject to many of the numerous state, federal and international laws and regulations governing the collection, use, disclosure, storage, transmission or confidentiality of patient-identifiable health information.
Contaminations in our animal populations can damage our inventory, harm our reputation for contaminant-free production, result in decreased sales and cause us to incur additional costs.
Our research models and fertile chicken eggs must be free of certain infectious agents, such as certain viruses and bacteria, because the presence of these contaminants can distort or compromise the quality of research results and could adversely impact human or animal health. The presence of these infectious agents in our animal production facilities and certain service operations could disrupt our contaminant-free research model and fertile egg production as well as our animal services businesses, including GEMS, harm our reputation for contaminant-free production and result in decreased sales. There also exists a risk that contaminations from models that we produce may affect our client’s facilities, with similar impact to them for which we could be liable for damages. In some cases, we may produce or import animals carrying infectious agents capable of causing disease in humans; and in the case of such a contamination or undiagnosed infection, there could be a possible risk of human exposure and infection and liability for damages to infected persons.
We are also subject to similar contamination risks with respect to our large research models. While some of these models are owned by us and maintained at our facilities, others are reserved for us and maintained at sites operated by the original provider. Accordingly, risk of contamination may be outside of our control, and we depend on the practices and protocols of third parties to ensure a contamination-free environment. A contamination may require extended CDC quarantine with subsequent reduced sales as a result of lost client orders, as well as the potential for complete inventory loss and disinfection of the affected quarantine rooms. Furthermore, while we often negotiate for contractual risk indemnification, the third party may refuse to fulfill its indemnification obligation or may be unable to as a result of insolvency or other impediments.
Contaminations are unanticipated and difficult to predict and could adversely impact our financial results. If they occur, contaminations typically require cleaning up, renovating, disinfecting, retesting and restarting production or services. Such clean-ups result in inventory loss, clean-up and start-up costs, and reduced sales as a result of lost client orders and potentially credits for prior shipments. In addition to microbiological contaminations, the potential for genetic mix-ups or mis-matings also exists and may require us to restart the applicable colonies, and would likely result in inventory loss, additional start-up costs and possibly reduced sales. Contaminations also expose us to risks that clients will request compensation for damages in excess of our contractual indemnification requirements.
Further, many of our operations are comprised of complex mechanical systems that are subject to periodic failure, including aging fatigue. Such failures are unpredictable, and while we have made significant capital expenditures designed to create redundancy within these mechanical systems, strengthen our biosecurity, improve our operating procedures to protect against such contaminations, and replace impaired systems and equipment in advance of such events, failures and/or contaminations may still occur.
Any failure by us to comply with applicable regulations and related guidance could harm our reputation and operating results, and compliance with new regulations and guidance may result in additional costs.
Any failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission on behalf of our clients to regulatory authorities. This could harm our reputation, our prospects for future work and our operating results. For example, the issuance of a notice of objectionable observations or a warning letter from the FDA based on a finding of a material violation affecting data integrity by us for GLP or cGMP requirements that are not addressed to the regulatory monitoring authorities’ satisfaction could materially and adversely affect us. If our operations are found to violate any applicable law or other governmental regulations, we might be subject to civil and criminal penalties, damages and fines. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.
In recent years FDA has issued guidance that now requires submissions to be presented in a format that conforms with the FDA’s SEND (Standardization for Exchange of Nonclinical Data) standards that apply to our clients’ NDA and IND submissions and require us to provide electronic data in specific formats that will allow for more efficient, higher quality regulatory reviews. Accordingly, our clients expect us to timely deliver their nonclinical data compliant with SEND. Notwithstanding, some of these standards require additional operating and capital expenses that will impact not only us and our industry competitors, but clients in the biomedical research community. Non-compliance with any of these expectations
could lead to official action by a government authority, damage to our reputation and a potential loss of business.
In addition, regulations and guidance worldwide concerning the production and use of laboratory animals for research purposes continue to evolve. Similarly, guidance has been and continues to be developed for other areas that impact the biomedical research community on both a national and international basis including transportation, mandated contingency planning, euthanasia guidance, import and export requirements of biological materials, health monitoring requirements and the use of disinfectants.
Our Research Products business is subject to extensive and complex regulation by federal, state and local governments in the U.S. and in the other countries in which it operates. This business requires us to obtain many licenses, permits, authorizations, approvals, certificates and other types of governmental permissions and to comply with various regulations in every jurisdiction in which we operate. Federal, state and local regulations change often, and new regulations are frequently adopted. Changes in the regulations could require us to change the way in which we operate our business and the cost of compliance with new or changed regulations could be significant.
Our donor collection centers are registered with the FDA and the FDA periodically conducts inspections of those facilities and operations. At the conclusion of each inspection, the FDA provides us with a list of observations of regulatory issues discovered during the inspection that could result in additional regulatory action. Failure to comply with the regulations of the FDA could result in sanctions and/or remedies and have a material adverse effect on us.
The outsourcing trend in non-clinical (discovery and safety assessment) stages of drug discovery and development may decrease, which could impair our growth.
Over the past decade, pharmaceutical and biotechnology companies have generally increased their outsourcing of non-clinical research support activities, such as discovery and safety assessment. While many industry analysts expect the outsourcing trend to continue to increase for the next several years (although with different growth rates for different phases of drug discovery and development), decreases in such outsourcing may result in a diminished growth rate in the sales of any one or more of our service lines and may adversely affect our financial condition and results of operations. For additional discussion of the factors that we believe have recently been influencinginfluenced outsourcing demand from our clients, please see the section entitled “Our Strategy” included elsewhere in this Form 10-K.
A reduction in research and development budgets at pharmaceutical and biotechnology companies may adversely affect our business.
Our clients include researchers at pharmaceutical and biotechnology companies. Our ability to continue to grow and win new business is dependent in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on molecules in the non-clinical phases of research and development (and in particular discovery and safety assessment) and to outsource the products and services we provide. Fluctuations in the expenditure amounts in each phase of the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products and services. Research and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities (including available resources of our biotechnology clients, particularly those that are cash-negative, who may be highly focused on rationing their liquid assets in a challenging funding environment), general economic conditions, and institutional budgetary policies. Available funding for biotechnology clients in particular may be affected by the capital markets, investment objectives of venture capital investors, and priorities of biopharmaceutical industry sponsors.
Our business could be adversely affected by any significant decrease in drug research and development expenditures by pharmaceutical and biotechnology companies, as well as by academic institutions, government laboratories, or private foundations. Similarly, economic factors and industry trends that affect our clients in these industries also affect their research and development budgets and, consequentially, our business as well. Furthermore, our clients (particularly larger biopharmaceutical companies) continue to search for ways to maximize the return on their investments with a focus on leaner research and development costs per drug candidate. For additional discussion of the factors that we believe have recently been influencing research and development budgets at our clients, please see the sections entitled “Our Strategy” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
A reduction or delay in government funding of research and development may adversely affect our business.
A portion of revenue in our RMS segment is derived from clients at academic institutions and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies, which can be difficult to forecast. Government
funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Our revenue may be adversely affected if our clients delay purchases as a result of uncertainties surrounding the approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities. Other programs, such as homeland security or defense, or general efforts to reduce the federal budget deficit could be viewed by the U.S. government as a higher priority. These budgetary pressures may result in reduced allocations in the future to government agencies that fund research and development activities. A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results. Also, there is no guarantee that NIH funding will be directed towards projects and studies that require use of our products and services.
Changes in government regulation or in practices relating to the pharmaceutical or biotechnology industries, including potential healthcare reform, could decrease the need for the services we provide.
Governmental agencies throughout the world but particularly in the U.S., strictly regulate the drug development process. Our business involves helping pharmaceutical and biotechnology companies, among others,our customers navigate thethese regulatory drug approval process.processes. Accordingly, many regulations, and often new regulations, are expected to result in higher regulatory standards and often additional revenues for companies that service these industries. However, some changes in regulations, such as a relaxation in regulatory requirements or the introduction of streamlined or expedited drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services.
Although we believe we are currently in compliance in all material respects with applicable national, regional and local laws, as well as other accepted guidance used by oversight bodies (which include(including the USDA, the standards set by the International Air Transport Association, the Convention on International Trade in Endangered Species of Wild Fauna and Flora, U.S. Fish and Wildlife Service, The Centers for Disease Control, the Department of Transportation, the Department of State, the office of Laboratory Animal Welfare of NIH, the Drug Enforcement Agency, as well as numerous other oversight agencies in Canada, Europe, and Asia)the jurisdictions in which we operate), failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. In addition, if regulatory authorities were to mandate a significant reduction in safety assessment procedures whichthat utilize laboratory animals (as has been advocated by certain groups), certain segments of our business could be materially adversely affected.
In March 2010, the U.S. Congress enacted healthcare reform legislation, intended over time to expand health insurance coveragethe Patient Protection and impose health industry cost containment measures. In June 2012, the U.S. Supreme Court upheld the constitutionality of this legislation. The Court’s decision allows implementation of keyAffordable Care Act (ACA), which includes provisions impacting drug manufacturers, going forward, including, but not limited to,such as (1) the expansion of access to health insurance coverage, (2) the expansion of the Medicaid program, (3) the enactment of an industry fee on pharmaceutical companies and (4) the imposition of an excise tax on the sale of medical devices. In addition, the Tax Cuts and Jobs Act, enacted in 2017, repeals the ACA’s individual health insurance mandate, which is considered a key component of the ACA. Since the lawACA and its implementation continue to face challenges in Congress and federal courts, and from certain state governments, opposition advocacy groups and some small business organizations, as well as from the incoming president and his administration, we are uncertain as to the ultimate effects of this legislation are unclear on our business and are unable to predict what legislative proposals will be adopted in the future.
Implementation of healthcare reform legislation may have certain benefits, but also may contain costs that could limit the profits that can be made from the development of new drugs. This could adversely affect research and developmentR&D expenditures by pharmaceutical and biotechnology companies, which could in turn decrease the business opportunities available to us both in the U.S. and abroad. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings. Furthermore, if health insurers were to change their practices with respect to reimbursements for pharmaceutical products, our clients may spend less or reduce their growth in spending on research and development.R&D.
In addition, the recent presidential and congressional elections in the U.S. may result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy. While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level, or in laws and regulations in effect in foreign jurisdictions in which we operate or have business relationships, may significantly impact our domestic and foreign businesses and/or those of our clients. Specific legislative and regulatory proposals discussed during and after the election that may have a material impact on us or our clients include, but are not limited to, appeal or reform of the Health Care Reform Act; andFurthermore, modifications to international trade policy, public company reporting requirements, environmental regulation and antitrust enforcement.
Contaminations inenforcement may have a materially adverse impact on us, our animal populations can damagesuppliers or our inventory, harm our reputation for contaminant-free production, result in decreased sales and cause us to incur additional costs.
Our research models and fertile chicken eggs must be free of certain infectious agents such as certain viruses and bacteria because the presence of these contaminants can distort or compromise the quality of research results and could adversely impact human or animal health. The presence of these infectious agents in our animal production facilities and certain service operations could disrupt our contaminant-free research model and fertile egg production as well as our animal services businesses including GEMS, harm our reputation for contaminant-free production, and result in decreased sales.
If they occur, contaminations typically require cleaning up, renovating, disinfecting, retesting, and restarting production or services. Such clean-ups result in inventory loss, clean-up and start-up costs, and reduced sales as a result of lost client orders and potentially credits for prior shipments. In addition to microbiological contaminations, the potential for genetic mix-ups or mis-matings also exists and may require the restarting of the applicable colonies. While this does not require the complete clean-up, renovation, and disinfection of the barrier room, it would likely result in inventory loss, additional start-up costs and possibly reduced sales. Contaminations also expose us to risks that clients will request compensation for damages in excess of our contractual indemnification requirements. There also exists a risk that contaminations from models that we produce may affect our client's facilities, with similar impact to them for which we could be liable for damages. In some cases, we may produce or import animals carrying infectious agents capable of causing disease in humans; and in the case of such a contamination or undiagnosed infection, there could be a possible risk of human exposure and infection.clients.
We are alsobear financial risk for contracts that may be terminated or reduced in scope, underpriced, subject to similar contamination risks with respect to our large research models. While often we own these models, they may be maintained on our behalf at a site operated by the original provider. Accordingly, risk of contamination may be outside of our control, and we depend on the practices and protocols of third parties to ensure a contamination-free environment. A contamination may require extended CDC quarantine with subsequent reduced sales as a result of lost client orders as well as the potential for complete inventory loss and disinfection of the affected quarantine rooms. Furthermore, while we often negotiate for contractual risk indemnification, we may be exposed in the event of such contaminations if the third party does not fulfill its indemnification obligationcost overruns or is unable to as a result of insolvency or other impediments.
All such contaminations described above are unanticipated and difficult to predict and could adversely impact our financial results. Many of our operations are comprised of complex mechanical systems which are subject to periodic failure, including aging fatigue. Such failures are unpredictable, and while we have made significant capital expenditures designed to create redundancy within these mechanical systems, strengthen our biosecurity, improve our operating procedures to protect against such contaminations, and replace impaired systems and equipment in advance of such events, failures and/or contaminations may still occur.
Any failure by us to comply with applicable regulations and related guidance could harm our reputation and operating results, and compliance with new regulations and guidance may result in additional costs.
Any failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. This could harm our reputation, our prospects for future work and our operating results. For example, the issuance of a notice of objectionable observations or a warning from the FDA based on a finding of a material violation by us for GLP or cGMP requirements could materially and adversely affect us. If our operations are found to violate any applicable law or other governmental regulations, we might be subject to civil and criminal penalties, damages and fines. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and damage our reputation.
In addition, regulations and guidance worldwide concerning the production and use of laboratory animals for research purposes continue to be updated. Notably, the European Directive 2010/63/EU requires new standards for animal housing and accommodations that require implementation by 2017. Some of these new standards require additional operating and capital expenses that will impact not only us and our industry competitors, but clients in the biomedical research community through both changes in the pricing of goods and services and changes in their own operations.
Similarly, guidance has been and continues to be developed for other areas that impact the biomedical research community on both a national and international basis including transportation, mandated contingency planning, euthanasia guidance, import and export requirements of biological materials, health monitoring requirements and the use of disinfectants.
We could experience a breach of the confidentiality of the information we hold or of the security of our computer systems.
We operate large and complex computer systems that contain significant amounts of client data. As a routine element of our business, we collect, analyze, and retain substantial amounts of data pertaining to the non-clinical studies we conduct for our clients. Unauthorized third parties could attempt to gain entry to such computer systems for the purpose of stealing data or disrupting the systems. We believe that we have taken appropriate measures to protect them from intrusion, and we continue to improve and enhance our systems in this regard, but in the event that our efforts are unsuccessful, we could suffer significant harm. Our contracts with our clients typically contain provisions that require us to keep confidential the information generated from these studies. In the event the confidentiality of such information was compromised, we could suffer significant harm.
Our revenue generating agreements contain termination and service reduction provisions or may otherwise terminate according to their term, which may result in less contract revenue than we anticipate.delayed.
Many of our agreements, with both large and small clients, including those which underlie our strategic relationships with some of our more significant customers,clients, provide for termination or reduction in scope with little or no notice. In addition, we sell our products and services to our competitors, and similarly they sell products and services to us. For instance, we have historically entered into, and currently are party to, contracts with certain of our competitors to distribute specialty research models in locations where our competitors may not have distribution capabilities.
Clients and/or competitorsOur counterparties (including our clients who are competitors) may elect to terminate their agreements with us for various reasons including:
the products being tested fail to satisfy safety requirements;
unexpected or undesired study results;
production problems resulting in shortages of the drug being tested;
a client'sclient’s decision to forego or terminate a particular study;
our competitors’ establishment of alternative distribution channels bychannels;
dissatisfaction with our competitors;performance under the agreement;
the loss of funding for the particular research study; or
general convenience/counterparty preference.
If a client or competitorcounterparty terminates a contract with us, we are typically entitled under the terms of the contract to receive revenue earned to date as well as certain other costs and, in some cases, termination fees. Cancellation of a large contract or proximate delay, cancellation or conclusion of multiple contracts could materially adversely affect our business and, therefore, may adversely affect our operating results.
Many of our contracts are fixed price and may be delayed or terminated or reduced in scope for reasons beyond our control, or we may under‑price or overrun cost estimates with these contracts, potentially resulting in financial losses.
ManyFurthermore, many of our contracts provide for services on a fixed price or fee-for-service with a cap basis and, accordingly, we bear the financial risk if we initially under-priceunderprice our contracts or otherwise overrun our cost estimates. In addition, these contracts may be terminatedSuch underpricing or reduced in scope either immediately or upon notice. Cancellations may occur for a variety of reasons, and often atsignificant cost overruns could have an adverse effect on the discretion of the client. The loss, reduction in scope or delay of a large contract or the loss or delay of multiple contracts could materially adversely affect our business, although our contracts frequently entitle us to receive the costsresults of winding down the terminated projects, as well as all fees earned by us up to the time of termination. Some contracts also entitle us to a predetermined termination feeoperations, financial condition and irrevocably committed costs/expenses.
Several of our product and service offerings are dependent on a limited source of supply, which if interrupted could adversely affect our business.
We depend on a limited international source of supply for certain products, such as large research models. Disruptions to their continued supply may arise from health problems, export or import laws/restrictions or embargoes, international trade regulations, foreign government or economic instability, severe weather conditions, increased competition among suppliers for models, disruptions to the air travel system, activist campaigns, commercial disputes, supplier insolvency, or other normal-course or unanticipated events. Any disruption of supply could harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms.
cash flows.
If we are not successful in selecting and integrating the businesses and technologies we acquire, or in managing our current and future divestitures, our business may suffer.be adversely impacted.
During the past fifteen years,last two decades, we have steadily expanded our business through numerous acquisitions.acquisitions, including our recent acquisitions of Citoxlab and HemaCare. We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions.
In April 2016, we acquired WIL Research, a premier provider of safety assessment and contract development manufacturing services to biopharmaceutical, agricultural, and industrial chemical companies worldwide. This transaction was our largest acquisition in over ten years.
Acquisitions and alliances involve numerous risks which may include:
difficulties in achieving business and financial success;
difficulties and expenses incurred in assimilating and integrating operations, services, products, technologies or pre-existing relationships with our customers,clients, distributors and suppliers;
challenges with developing and operating new businesses, including those whichthat are materially different from our existing businesses and whichthat may require the development or acquisition of new internal capabilities and expertise;
potential losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain from the seller or the insurance we acquire in connection with the transaction;
loss of key employees;
the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;
diversion of management'smanagement’s attention from other business concerns;
becoming subject to a more expansive regulatory environment;
acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common stock to the shareholders of the acquired company, dilutive to the percentage of ownership of our existing shareholders;
risks of not being able to overcome differences in foreign business practices, customs and importation regulations, language and other cultural barriers in connection with the acquisition of foreign companies;
new technologies and products may be developed whichthat cause businesses or assets we acquire to become less valuable; and
risks that disagreements or disputes with prior owners of an acquired business, technology, service or product that may result in litigation expenses and diversion of our management'smanagement’s attention.
In the event thatIf an acquired business, technology or an alliance does not meet our expectations, our results of operations may be adversely affected.
Some of the same risks exist when we decide to sell a business, site or product line. In addition, divestitures could involve additional risks, including the following:
difficulties in the separation of operations, services, products, and personnel;
diversion of management'smanagement’s attention from other business concerns; and
the need to agree to retain or assume certain current or future liabilities in order to complete the divestiture.
We continually evaluate the performance and strategic fit of our businesses. Thesebusinesses (including specific product lines and service offerings) to determine whether any divestitures are appropriate. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets and which could have an adverse effect on our results of operations and financial condition. In addition, we may encounter difficulty in finding buyers or alternative exit strategies at acceptable prices and terms, and in a timely manner. We may not be successful in managing these or any other significant risks that we encounter in divesting a business, site or product line or service offering and, as a result, we may not achieve some or all of the expected benefits of the divestiture.
Impairment of goodwill or other intangible assets may adversely impact future results of operations.
We have intangible assets, including goodwill, on our balance sheet due to our acquisitions of businesses. The initial identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition involve use of management judgments and estimates. These estimates are based on, among other factors, projections of cash flows that arise from identifiable intangible assets of acquired businesses and discount rates based on an analysis of our weighted average cost of capital, adjusted for specific risks associated with the assets. Disruptions in global financial markets and deterioration of economic conditions could, among other things, impact the discount rate and otherrate. Other assumptions used in the valuations and actual cash flows arising from a particular intangible asset could vary from projected cash flows, which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such assets.
If the future growth and operating results of our business are not as strong as anticipated, overall macroeconomic or industry conditions deteriorate and/or our market capitalization declines, this could impact the assumptions used in establishing the carrying value of goodwill or other intangible assets. To the extent goodwill or other intangible assets are impaired, their carrying value will be written down to their implied fair values and a charge will be made to our income from continuing operations. Such an impairment charge could materially and adversely affect our operating results. As of December 31, 2016,28, 2019, the carrying amount of goodwill and other intangibles on our consolidated balance sheet was $1,182.0 million.$2.2 billion.
Our business is subject to changes in foreign currency exchange rates and other risks relating to operating internationally.
A significant part of our revenue is derived from operations outside the U.S. Our international revenue represented approximately one-half of our total revenue in recent years. We expect that international revenue will continue to account for a significant percentage of our total revenue for the foreseeable future. There are a number of risks associated with
Changes in foreign currency exchange rates, could materially adversely impact our international business including:
foreignresults. Foreign currencies we receive for sales and in which we record expenses outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar, and reduceresulting in a reduction in the amount of revenue and cash flow (and an increase in the amount of expenses) that we recognize and causecausing fluctuations in reported financial results;
results. We also carry foreign currency exposure associated with differences between where we conduct business. For example, certain contracts particularly in Canada, are frequently denominated in currencies other than the currency in which we incur expenses related to those contracts, and wherecontracts. Where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations;operations.
Our exposure to currency exchange rate fluctuations results from the currency translation exposure associated with the preparation of our consolidated financial statements, as well as from the exposure associated with transactions of our subsidiaries that are denominated in a currency other than the respective subsidiary’s functional currency. While our financial results are reported in U.S. Dollars, the financial statements of many of our subsidiaries outside the U.S. are prepared using the local currency as the functional currency. During consolidation, these results are translated into U.S. Dollars by applying appropriate exchange rates. As a result, fluctuations in the exchange rate of the U.S. Dollar relative to the local currencies in which our foreign subsidiaries report could cause significant fluctuations in our reported results. Moreover, as exchange rates vary, revenue and other operating results may differ materially from our expectations. Adjustments resulting from financial statement translations are included as a separate component of shareholders’ equity.
Other risks associated with our international business include:
potentially negative consequences from changes in U.S. and/or foreign tax laws, or interpretations thereof, notably tax regulations issued and to-be-issued with respect to U.S. Tax Reform and the EU Anti-Tax Avoidance Directives I and II;
general economic and political conditions in the markets in which we operate;operate, including possible implications of Brexit;
potential international conflicts, including terrorist acts;
potential trade restrictions, exchange controls, adverse tax consequences and legal restrictions on the repatriation of funds into the U.S.;
difficulties and costs associated with staffing and managing foreign operations, including risks of work stoppages and/or strikes, as well as violations of local laws or anti-bribery laws such as the U.S. Foreign Corrupt Practices Act (FCPA), the UKU.K. Bribery Act and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
unexpected changes in regulatory requirements;
the difficulties of compliance with a wide variety of foreign laws and regulations;
unfavorable labor regulations in foreign jurisdictions;
potentially negative consequences from changes in or interpretations of U.S. and foreign tax laws;
exposure to business disruption or property damage due to geographically unique natural disasters;
longer accounts receivable cycles in certain foreign countries; and
compliance with export controls, import requirements and export licensing requirements. other trade regulations, including those relating to certain products of which there is limited supply.
These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. For example, as mentioned above, we are subject to compliance with the U.S. Foreign Corrupt Practices ActFCPA and similar anti-bribery laws, which generally prohibit companies and their third-party intermediaries from making improper payments to foreign
government officials for the
purpose of obtaining or retaining business. While our employees, distributors and agents are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from violations of these laws despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition and results of operations.
Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.
We depend on our customers and facilities for the continued operation of our business. While we maintain disaster recovery plans, they might not adequately protect us. Despite any precautions we take for natural disasters or other catastrophic events, these events, including terrorist attack, a pandemic, epidemic or outbreak of a disease (including coronavirus), hurricanes, fire, floods and ice and snow storms, could result in damage to and closure of our or our customers’ facilities or the infrastructure on which such facilities rely. Such disruptions could significant delays in the shipments of our products, reduce our capacity to provide services, eradicate unique manufacturing capabilities, result in our customers’ inability to pay for our products or services and, ultimately, result in the loss of revenue and clients. Although we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, our coverage might not be adequate to compensate us for all losses that may occur. Any natural disaster or catastrophic event affecting us or our customers could have a significant negative impact on our operations and financial performance.
Failure to comply with U.S., state, local or international environmental, health and safety laws and regulations, including regulations issued by the Occupational Safety and Health Administration, Environmental Protection Agency, Nuclear Regulatory Agency and Department of Transportation, could result in fines and penalties and loss of licensure, and have a material adverse effect upon the Company’s business.
We are subject to licensing and regulation under laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well as regulations relating to the safety and health of laboratory employees. Failure to comply with these laws and regulations could subject us to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions that could have a material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements on us that may be costly.
New technologies may be developed, validated and increasingly used in biomedical research, thatwhich could reduce demand for some of our products and services.
The scientific and research communities continue to explore methods to develop improved modelscellular and animal model systems that would improveincrease the translation of cellular and animal models to human studies and vice-versa and possibly replace or supplement the use of traditional living animals as test platforms in biomedical research. Some companies have developed techniques in these areas that may have scientific merit to improve translation between species. In addition, technological improvements to existing or new processes, such as imaging and other translational biomarker technologies, could result in the refinement and utility for the number of animal research models necessary to improve the translation from non-clinical to clinical studies. There is an increasing push to focus onin vitro technologies such that employ human materials,biospecimens, stem cell technology,technologies and other model creation technology. However, the increasing availability and utility of these in vitro models is partially offset by these technologies facilitating the creation of humanized, highly specialized and specific disease-mimicking models we can produce.genome editing.
It is our strategy to explore these in vitro technologies to refine and potentially reduce the utilization of animal models as these new methods become validated. For example, ChanTest Corporation has a well-developed programour Discovery and Safety Assessment businesses have programs to evaluate the cardiac propertiesutility of induced pluripotent stem cell-derived cardiomyocytes. Westems cells, advanced in vitro models, artificial intelligence and machine learning in discovery and preclinical development. Successful commercialization of alternatives to traditional research models may not be successful in commercializing these methods, and, furthermore, revenues from these new models and approaches if successfully developed may notsufficient to fully offset reduced sales or profits from research models. In addition, alternative research methods could decrease the need for future research models, and we may not be able to develop new products effectively or in a timely manner to replace any lost sales. Lastly, other companies or entities may develop research models with characteristics different than the ones that we produce, and which may be viewed as more desirable by some of our clients.
Negative attention from special interest groups may impair our business.
The products and services whichthat we provide our clients are essential to the drug discovery, development and manufacturing processes, and a significant amount are almost universally mandated by law. Notwithstanding, certain special interest groups categorically object to the use of animals for valid research purposes. Historically, our core research model activities with rats, mice and other rodents have not been the subject of significant animal rights media attention. However, research activities with animals have been the subject of adverse attention, including shareholder proposals and attempts to disrupt air carriers from transporting research models, impacting the industry. This has included periodic demonstrations near facilities operated by us and at our
annual meetings, as well as shareholder proposals we received for some of our past Annual Meetings of Shareholders. Any negative attention, threats or acts of vandalism directed against either our animal research activities or our third partythird-party service providers, such as our airline carriers, in the future could impair our ability to operate our business efficiently.
Our debt level could adversely affect our business and growth prospects.
As of December 31, 2016,28, 2019, we had $1.2$1.9 billion of debt. Our debt could have significant adverse effects on our business, including making it more difficult for us to obtain additional financing on favorable terms; requiring us to dedicate a substantial portion of our cash flows from operations to the repayment of debt and the interest on this debt; limiting our ability to capitalize on significant business opportunities; and making us more vulnerable to rising interest rates. For additional information regarding our debt, please see Note 7,9, “Long-Term Debt and CapitalFinance Lease Obligations”, included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
The drug discovery, development servicesinterest rate on our $2.3 billion credit facility (Credit Facility), which matures in fiscal year 2023, is linked to LIBOR. As of December 28, 2019, amounts outstanding on our Credit Facility were $193.8 million on our term loan and manufacturing support$676.1 million on our revolving credit facility, for which there is an aggregate available borrowing capacity of $2.05 billion. In 2017, the Financial Conduct Authority (FCA) in the U.K. announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or whether different benchmark rates used to price indebtedness will develop. If LIBOR ceases to exist, the method and rate used to calculate our interest rates and/or payments on our debt in the future may result in interest rates and/or payments that are higher than, or that do not otherwise correlate over time with, the interest rates and/or payments that would have been applicable to our obligations if LIBOR was available in its current form, which could have a material adverse effect on our financial position, results of operations and liquidity. While we continue to take steps to mitigate the impact of the phase-out or replacement of LIBOR, such efforts may not prove successful. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market could also have a material adverse effect on our financial position, results of operations and liquidity.
Costs increasing more rapidly than market prices could reduce profitability.
The cost of collecting, processing and testing blood products has risen significantly in recent years and will likely continue to increase. These cost increases are related to new and improved testing procedures, increased regulatory requirements related to blood safety, and higher staff and supply costs related to collecting and processing blood products. Competition and fixed price contracts may limit our ability to maintain existing operating margins. Some competitors have greater resources than us to sustain periods of marginally profitable or unprofitable sales. Costs increasing more rapidly than market prices may reduce profitability and may have a material adverse impact on our business and results of operations.
The industries in which we operate are highly competitive.
The drug discovery, non-clinical development, and manufacturing support services industries in which we operate are highly competitive. We often compete for business not only with other CROs but also withand blood product and therapeutic services companies, as well as internal discovery and development departments within our larger clients, who may have greater resources than ours. We also compete with universities and teaching hospitals for outsourced services. We compete on a variety of factors, including:
reputation for on-time quality performance;
reputation for regulatory compliance;
expertise and experience in multiple specialized areas;
scope and breadth of service and product offerings across the drug discovery and development spectrum;
scope and breadth of service and product offerings across the manufacturing support spectrum;
ability to provide flexible and customized solutions to support our clients'clients’ drug discovery, non-clinical development, and manufacturing support needs;
broad geographic availability (with consistent quality);
price/value;value, spend and flexibility;
technological and scientific expertise and efficient drug development processes;
quality of facilities;
financial stability;
size;
ability to acquire, process, analyze and report data in an accurate manner; and
accessibility of client data through secure portals.
If we do not compete successfully, our business will suffer. Increased competition might lead to price and other concessions that could adversely affect our operating results. The drug discovery and development services industry has continued to see a trend towards consolidation, particularly among the biotechnology companies, whowhich are targets for each other and for largerlarge pharmaceutical companies. If this trend continues, it is likely to produce more competition among the larger companies and CROs generally, with respect to both clients and acquisition candidates. In addition, small, specialized entities considering entering the CRO industries will continue to find lower barriers to entry, and private equity firms may determine that there are opportunities to acquire and consolidate these companies, thus further increasing possible competition. More generally, our competitors or others might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain competitive, our competitive position, and in turn our business, revenue and financial condition, would be materially and adversely affected. In the aggregate, these competitive pressures may affect the attractiveness of our technologies, services or products and could adversely affect our financial results.
Potential Changes in U.S. and International Tax Law.
In the2017, significant U.S., there are several proposals to reform corporate tax law that are currently under consideration. These proposals include reducingchanges from the corporateTax Cuts and Jobs Act of 2017 (U.S. Tax Reform) went into effect and reduced the U.S. federal statutory tax rate, broadeningbroadened the corporate tax base through the elimination or reduction of deductions, exclusions and credits, implementing a territorial regime of taxation, limitinglimited the ability of U.S. corporations to deduct interest expense modifyingand allowed for the repatriation of foreign tax credit rules, and reducingearnings to the ability to defer U.S. with a 100% federal dividends received deduction prospectively. In addition, U.S. Tax Reform required a one-time transitional tax on offshoreforeign cash equivalents and previously unremitted earnings. Several of the new provisions enacted as part of U.S. Tax Reform still require clarification and guidance from the Internal Revenue Service (IRS) and Treasury Department. These or other changes in the U.S. tax laws could impact our profits, effective tax rate and cash flows.
Additionally, the OECD, the European Commission (EC) and individual taxing jurisdictions have recently focused on issues related to the taxation of multinational corporations. The OECD released its comprehensive plan to create an agreed set of rules to address concerns regarding base erosion and profit shifting (BEPS). This initiative resulted in proposed and enacted changes to tax laws in various countries including France, Germany, Luxembourg, Netherlands and the U.K. In addition, the OECD and EC and individual countries are examining how taxing rights should be allocated among countries considering the digital economy. Future changes to tax laws or interpretation of tax laws resulting from enacted laws could increase our effective tax rate, which would affect our profitability.
We have substantial operations in Canada and the United Kingdom which currently benefit from favorable corporate tax arrangements. We receive substantial tax credits in Canada, from both the Canadian federal and Quebec governments, France and the U.K. Any reduction in the availability or amount of these tax credits or increase to tax rates due to tax law changes or outcomes of tax controversies could have a material adverse effect on our profits, cash flow,flows and effective tax rate.
Currently, the OECD has developed an action plan to address concerns regarding base erosion and profit shifting (BEPS). This initiative has resulted in proposed and enacted changes to tax laws in various countries including France, Germany, and the U.K. Future changes to tax laws or interpretation of tax laws resulting from the BEPS project could increase our effective tax rate, which would affect our profitability.
Contract research services create a risk of liability.
As a CRO, we face a range of potential liabilities, which may include:
risks associated with errors or omissions in reporting of study detail in non-clinical studies that may lead to inaccurate reports, which may undermine the usefulness of a study or data from the study, or which may potentially advance studies absent the necessary support or inhibit studies from proceeding to the next level of testing;
risks associated with our possible failure to properly care for our clients'clients’ property, such as research models and samples, study compounds, records, work in progress, other archived materials or goods and materials in transit, while in our possession;
risks that models in our breeding facilities or in facilities that we manage may be infected with diseases that may be harmful and even lethal to them or humans, despite preventive measures contained in our policies for the quarantine and handling of imported animals; and
risks that we may have errors and omissions and/or product liabilities related to our products designed to conduct
lot release testing of medical devices, injectable drugs, food, beverages and home and beauty products (primarily through our Microbial Solutions business), or in the testing of biologics and other services performed by our Biologics business, which could result in us or our clients failing to identify unsafe or contaminated materials.materials; and
risk of transmitting dangerous infectious diseases, as a result of the failure of our screening and testing processes, or new pathogens that may be undetected by such processes.
While we attempt to mitigate these risks through a variety of methods, it is impossible to completely eradicate such risks. In our RMS business, we mitigate these risks to the best of our abilities through our regimen of animal testing, quarantine procedures and veterinary staff vigilance, through which we seek to control the exposure of animal related disease or infections. In our DSA and Manufacturing businesses, we attempt to reduce these risks by contractual risk transfer provisions entitling us to be indemnified by our clients and subject to a limitation of liability, by insurance maintained by our clients and/or by us and by various regulatory requirements we must follow in connection with our business.
Contractual risk transfer indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct. We could be materially and adversely affected if we are required to pay damages or bear the costs of defending any claim that is outside any contractual indemnification provision, or if a party does not fulfill its indemnification obligations or the damage is beyond the scope or level of insurance coverage. We also often contractually indemnify our clients (subject to a limitation of liability), similar to the way they indemnify us, and we may be materially adversely affected if we have to fulfill our indemnity obligations. Furthermore, there can be no assurance that neithereither we noror a party required to indemnify us willmay not be able to maintain such insurance coverage (either at all or on terms acceptable to us).
Upgrading and integrating our business systems could result in implementation issues and business disruptions.
In recent years, we implemented a project to replacehave been updating and consolidating systems and automating processes in many parts of our numerous legacy business with a variety of systems, at certain sites worldwideincluding in connection with an enterprise wide, integrated enterprise resource planning (ERP) system.the integration of acquired businesses. The expansion and ongoing implementation of the ERP system to other international locationssystems may occur at a future date based on value to the business. In general, the process of planning and preparing for these types of integrated, wide-scale implementations is extremely complex and we are required to address a number of challenges, including information security assessment and remediation, data conversion, network and system cutover and user training. Problems in any of these areas could cause operational problems during implementation including delayed shipments, missed sales, billing errors and accounting errors,errors.
The failure to successfully obtain, maintain and enforce intellectual property rights and defend against challenges to our intellectual property rights could adversely affect us.
Many of our services, products and processes rely on intellectual property. In some cases, that intellectual property is owned by another party and licensed to us, sometimes exclusively. To protect our intellectual property rights, we primarily rely upon trade secret law, confidentiality agreements and policies, invention assignments and other operational issues. There have been numerous, well-publicized instancescontractual arrangements, along with patent, copyright and trademark laws. Existing laws of companies experiencing difficulties withcertain countries outside of the implementation of ERP systems,United States in which resulted in negative business consequences.
The drug discoverywe operate offer only limited protection, and development industry has a history of patent and otherthese are subject to change at any time. In addition, the agreements upon which we rely to protect our intellectual property litigation,might be breached, or might not be fully enforceable. Our intellectual property rights might not prevent our competitors from independently developing intellectual property that is similar to or duplicative of ours. Also, enforcing our intellectual property rights might also require substantial time, money and oversight, and we might not be involvedsuccessful in costlyenforcing our rights. If we are unable to obtain or maintain the proprietary rights to our intellectual property, lawsuits.if we are unable to prevent attempted infringement against our intellectual property, or if we are unable to defend against claims that we are infringing on another party’s intellectual property, we could be adversely affected. These adverse effects could include us having to abandon, alter or delay the deployment of products, services or processes that rely on such intellectual property; having to procure and pay for licenses from the holders of intellectual property rights that we seek to use; and having to pay damages, fines, court costs and attorney's fees in connection with intellectual property litigation.
TheFurther, the drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue.
In July 2015, IDEXX Laboratories, Inc. and IDEXX Distribution, Inc. (collectively, IDEXX) filed a complaint in the United States District Court for the District of Delaware alleging we have infringed three (3) recently issued patents related to a blood spot sample collection method used in determining the presence or absence of an infectious disease in a population of rodents. We filed our answer to the complaint on July 21, 2016. In addition, on July 29, 2016, we initiated an inter partes review (IPR) procedure with the United States Patent and Trademark Office challenging the validity of the IDEXX patents. On February 6, 2017, we entered into a settlement agreement with IDEXX, which involved the withdrawal by IDEXX of their complaint and withdrawal by us of the IPR.
Legal proceedings relating to intellectual property are expensive, take significant time, and divert management'smanagement’s attention from other business concerns, whether we win or lose. If we do not prevail in an infringement lawsuit brought against us, we mightmay have to pay substantial damages, including treble damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.
We may not be able to successfully develop and market new services and products.
We may seek to develop and market new services and products that complement or expand our existing business or service offerings. We believe our ability to in-license new technologies from third parties will be critical to our ability to offer new
products and services to our customers.clients. Our ability to gain access to technologies that we need for new products and services depends, in part, on our ability to convince inventors and their agents or assignees that we can successfully commercialize their inventions. We cannot guarantee that we will be able to identify new technologies of interest to our customers.clients. Even if we are able to identify new technologies of interest, we may not be able to negotiate license agreements on acceptable terms, or at all. If we are unable to develop new services and products and/or create demand for those newly developed services and products, our future business, results of operations, financial condition and cash flows could be adversely affected.
The decision by British voters to exit the European Union may adversely affect our business.
The first stage of the U.K.’s withdrawal from the European Union (“Brexit”) took place on January 31, 2020, when the U.K. left the European Union and entered a transition phase. During the transition phase, the U.K. needs to negotiate the terms of its future trading and other relationships with the European Union. The scope and timing of these negotiations have created significant uncertainty and continue to do so. The U.K. Prime Minister has said that a trade agreement needs to be reached by December 31, 2020. There is currently no mechanism to automatically extend the transition period, but there is a possibility that the transition period may be extended by agreement between the U.K. and the European Union.
Given the continuing uncertainty concerning the terms of the U.K.’s future relationship with the European Union, including the possibility that there may still be no negotiated agreement despite the results of the December 2019 general election, we have formed a committee (comprised of senior managers across our business functions) to address key risks among four main themes: (1) trade and customs, (2) employees and immigration, (3) strategy and business planning and (4) legislative changes. That committee will continue until the situation is clarified.
In the absence of a trade deal in the short to medium term, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods between the U.K. and the remaining member states of the European Union will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. These changes to the trading relationship between the U.K and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of our U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations. A weaker British pound versus the U.S. dollar also causes local currency results of our U.K. operations to be translated into fewer U.S. dollars during a reporting period. Although we are undertaking efforts to mitigate those risks within our control, a failure to adequately mitigate such risks or other factors outside our control could adversely affect our business, business opportunities, results of operations, financial condition and cash flows.
We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our business.
Our success depends to a significant extent on the continued services of our senior management and other members of management. James C. Foster, our Chief Executive Officer and President since 1992 and Chairman since 2000, has held various positions with us for four decades. We have noWhile we entered into an employment agreement with Mr. Foster or otherin 2018, most members of our non-European based senior management.management do not have employment agreements. If Mr. Foster or other members of senior management do not continue in their present positions, our business may suffer.be adversely impacted.
Because of the specialized scientific nature of our business, we are highly dependent upon attracting and retaining qualified scientific, technical and managerial personnel. While we have a strong record of employee retention, and we strive to reduce the impact of the potential loss of existing employees by having an established organizational talent review process that identifies successors and potential talent needs, there is still significant competition for qualified personnel in the veterinary, pharmaceutical and biotechnology fields. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, could harm our business.
Our quarterly operating results may vary, which could negatively affect the market price of our common stock.
Our results of operations in any quarter may vary from quarter to quarter and are influenced by such factorsthe risks discussed above, as well as:
changes in the general global economy;
the number and scope of ongoing client engagements;
the commencement, postponement, delay, progress, completion, or cancellation of client contracts in the quarter;
changes in the mix of our products and services;
competitive pricing pressures;
the extent of cost overruns;
holidaycyclical buying patterns of our clients;
budget cycles of our clients;
changes in tax laws, rules, regulations, and tax rates in the locations in which we operate;
the timing and charges associated with completed acquisitions and other events;
the financial performance of our venture capital investments; and
| |
• | the occasional extra week (“53rd week”) that we recognize in a fiscal year (and fourth fiscal quarter thereof) due to our fiscal year ending on the last Saturday in December; and
|
exchange rate fluctuations.the occasional extra week (“53rd week”) that we recognize in a fiscal year (and fourth fiscal quarter thereof) due to our fiscal year ending on the last Saturday in December.
We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results. Nonetheless, fluctuations in our quarterly operating results could negatively affect the market price of our common stock.
Referendum on the United Kingdom’s membership in the European Union (“Brexit”) may adversely affect our business.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the European Union (E.U.), referred to as “Brexit.” As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. The decision by referendum to withdraw the U.K. from the E.U. has caused significant
volatility in global stock markets and currency exchange rate fluctuations, including the strengthening of the U.S. dollar against foreign currencies. The execution of Brexit also may create global economic uncertainty, which may cause our customers and potential customers to monitor their costs and reduce their budgets for our products and services. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Given that we conduct a substantial portion of our business in the E.U. and the U.K., these effects of Brexit, among others, could adversely affect our business, business opportunities, results of operations, financial condition, and cash flows.
Our industry has a history of patent and other intellectual property litigation, which can be costly.
Our industry has a history of intellectual property litigation. On July 31, 2015, IDEXX Laboratories, Inc. and IDEXX Distribution, Inc. filed a complaint in the United States District Court for the District of Delaware alleging we infringed three recently issued patents related to a dried blood spot sample collection method used in determining the presence or absence of an infectious disease in a population of rodents. Legal proceedings relating to intellectual property can be expensive, take significant time, and divert management’s attention from other business concerns, regardless of the outcome of the litigation. On February 6, 2017, we entered into a settlement agreement with IDEXX, which involved the withdrawal by IDEXX of their complaint and withdrawal by us of the IPR.
Since we do not expect to pay any cash dividends for the foreseeable future, our shareholders will benefit from an investment in our common stock only if it appreciates in value.
We have not declared or paid any cash dividends on our common stock, and do not anticipate that we will pay any dividends to holders of our common stock for the foreseeable future. Any payment of cash dividends will be at the discretion of our Board of Directors and will depend on our financial condition, capital requirements, legal requirements, earnings and other factors. Consequently, our shareholders should not rely on dividends to receive a return on their investment.
Item 1B. Unresolved Staff Comments
There are no unresolved comments to be reported in response to Item 1B.
Item 2. Properties
We own or lease the land and buildings where we have facilities. We own large facilities (facilities over 50,000 square feet) for our DSA businesses in Canada, Denmark, France, Hungary, Ireland, Netherlands, Scotland and the U.S. and lease large facilities in England and the U.S. We own large RMS facilities in Canada, China, France, Germany, Italy, Japan, England and the U.S. We lease large RMS facilities in China. We own large Manufacturing segment facilities in the U.S. and China. None of our leases is individually material to our business operations. Many of our leases have an option to renew, and we believe that we will be able to successfully renew expiring leases on terms satisfactory to us. We believe that our facilities in each of our reportable segments are adequate for our operations and that suitable additional space will be available when needed. For additional information, see Note 7, “Long-Term Debt and Capital Lease Obligations” and Note 13, “Commitments and Contingencies”16, “Leases” included in Item 8, “Financial Statements and Other Supplementary Data” in this Annual Report on Form 10-K.
Capacity at our Safety Assessment businesses within our DSA segment is primarily based on physical room infrastructure designed towards meeting specific scientific and regulatory requirements. We track room utilization on an ongoing basis and, depending on the needs of our clients at given times, we may need to execute on contingentcontingency plans for expansion, which average between six and fifteen months to complete.
We may also expand at specific sites in order to accommodate needs resulting from any consolidation strategy. We continue to employ a master site planning strategy to proactively evaluate our real estate needs. Sites and leases added to the portfolio by way of acquisition are integrated into our overall real estate strategy. In certain circumstances, we dispose of or consolidate operations, which could result in impairment charges. In situations where the associated real estate is leased, and depending on the resolution of these situations, we may be encumbered with the remaining real estate lease obligations.
Item 3. Legal Proceedings
We are not party to any material legal proceedings other than ordinary routine litigation incidental to our business that is notare material to our business or financial condition.
In May 2013, with the assistance of the law firm of Davis Polk & Wardwell LLP, we commenced an investigation into inaccurate billing with respect to certain government contracts. This issue had been reported to our senior management by a Charles River employee. We promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services’ Office of the Inspector General, and the Department of Justice, and we are cooperating with these agencies to ensure the proper repayment and resolution of this matter. The investigation confirmed that our RMS business
segment billed the Department of Health and Human Services for certain work that had not been performed with respect to a small subset of our government contracts. It has been determined that when employees regularly assigned to work in research model barrier rooms associated with these contracts were absent, other employees' names would be substituted on time-keeping records associated with the relevant contracts. We billed the government for the hours associated with these substitute employees, despite the fact that, in many cases, these employees did not perform any services in connection with the relevant government contracts. Based on the findings of the investigation to date, we believe that this conduct was limited to our research model facilities in Raleigh, North Carolina, and Kingston, New York. We previously identified approximately $1.5 million of excess amounts billed on these contracts, and recorded a liability for such amount. Based on our ongoing discussions with the government, we have recorded an additional charge of $0.3 million during the fiscal year 2016. Our best estimate, which totals $1.8 million, may be subject to change based on the terms of any final settlement with the Department of Justice and the Department of Health and Human Services’ Office of the Inspector General. We have already taken appropriate steps to prevent this conduct from recurring, and will consider additional remedial measures following the conclusion of the matter.
In July 2015, IDEXX filed a complaint in the United States District Court for the District of Delaware alleging we have infringed three (3) recently issued patents related to a blood spot sample collection method used in determining the presence or absence of an infectious disease in a population of rodents. On September 21, 2015, we timely filed a motion to dismiss the complaint on the grounds that all of the claims are directed to unpatentable subject matter and therefore are invalid. On October 7, 2015, IDEXX filed an amended complaint, which substantially asserted the same patents and infringement allegations as asserted in the original complaint, and on October 26, 2015, we timely filed a motion to dismiss this amended complaint. The hearing on the motion to dismiss was held on January 12, 2016. On July 1, 2016, the Court issued an opinion denying the motion to dismiss. We filed our answer to the complaint on July 21, 2016. In addition, on July 29, 2016, we initiated an inter partes review (IPR) procedure with the United States Patent and Trademark Office, challenging the validity of the IDEXX patents. On February 6, 2017, we entered into a settlement agreement with IDEXX, which involved the withdrawal by IDEXX of their complaint and withdrawal by us of the IPR.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock began trading on the New York Stock Exchange on June 23, 2000 under the symbol “CRL.” The following table shows the high and low sales prices for our common stock:
|
| | | | | | | |
| Fiscal 2017 | High | | Low |
| First quarter (through January 27, 2017) | $ | 82.89 |
| | $ | 75.25 |
|
| Fiscal 2016 | High | | Low |
| First quarter | $ | 81.61 |
| | $ | 65.70 |
|
| Second quarter | 87.95 |
| | 73.42 |
|
| Third quarter | 89.18 |
| | 75.54 |
|
| Fourth quarter | 84.53 |
| | 67.20 |
|
| Fiscal 2015 | High | | Low |
| First quarter | $ | 84.69 |
| | $ | 63.22 |
|
| Second quarter | 80.30 |
| | 68.59 |
|
| Third quarter | 78.50 |
| | 63.75 |
|
| Fourth quarter | 80.44 |
| | 59.99 |
|
There were no equity securities that were not registered under the Securities Act of 1933, as amended, sold during fiscal year 2016.2019.
Shareholders
As of January 27, 2017,24, 2020, there were approximately 38090 registered shareholders of the outstanding shares of common stock.
Dividends
We have not declared or paid any cash dividends on shares of our common stock in the past two years and we do not intend to pay cash dividends in the foreseeable future. We currently intend to retain any earnings to finance future operations and expansion.
Issuer Purchases of Equity Securities
The following table provides information relating to our purchases of shares of our common stock during the fourth quarter of 2016:fiscal 2019: |
| | | | | | | | | | | | | |
| Total Number
of Shares
Purchased |
| Average
Price Paid
per Share |
| Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs |
| Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under the
Plans or Programs |
| For the period | | | | | | | (in thousands) |
| September 25, 2016 to October 22, 2016 | 482 |
| | $ | 83.34 |
| | — |
| | $ | 69,694 |
|
| October 23, 2016 to November 19, 2016 | — |
| | — |
| | — |
| | 69,694 |
|
| November 20, 2016 to December 31, 2016 | 20 |
| | 71.10 |
| | — |
| | 69,694 |
|
| Total | 502 |
| | | | — |
| | |
|
|
| | | | | | | | | | | | | |
| Total Number
of Shares
Purchased |
| Average
Price Paid
per Share |
| Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs |
| Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under the
Plans or Programs |
| | | | | | | | (in thousands) |
| September 29, 2019 to October 26, 2019 | 174 |
| | $ | 128.16 |
| | — |
| | $ | 129,105 |
|
| October 27, 2019 to November 23, 2019 | 48 |
| | 129.98 |
| | — |
| | 129,105 |
|
| November 24, 2019 to December 28, 2019 | 168 |
| | 145.25 |
| | — |
| | 129,105 |
|
| Total | 390 |
| | | | — |
| | |
|
In July 2010, our Board of Directors authorized a $500.0 million stock repurchase program, and subsequently approved increases to the program of $250.0 million in fiscal year 2010, $250.0 million in fiscal year 2013, $150.0 million in fiscal year 2014, and $150.0 million in fiscal year 2014,2017, for an aggregate authorization of $1,150.0 million.$1.3 billion. During the fourth quarter of fiscal year 2016,2019, we did not repurchase any shares of common stock under our Rule 10b5-1 Purchase Planstock repurchase program or in open market trading. As of December 28, 2019, we had $129.1 million remaining on the authorized stock repurchase program.
Additionally, our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, performance sharerestricted stock units, and restricted stockperformance share units in order to satisfy individual minimum statutory tax withholding requirements.
Comparison of 5-Year Cumulative Total Return
The following stock performance graph compares the annual percentage change in the Company’s cumulative total shareholder return on its Common Stock during a period commencing onDecember 31, 201127, 2014 and ending on December 31, 201628, 2019 (as measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the Company’s share price at the end and the beginning of the measurement period; by (2) the share price at the beginning of the measurement period) with the cumulative total return of the S&P 500 Index and the S&P 500 Health Care Index during such period. The Company has not paid any dividends on the Common Stock, and no dividends are included in the representation of the Company’s performance. The stock price performance on the graph below is not necessarily indicative of future price performance. The graph is not “soliciting material,” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. Information used in the graph was obtained from Standards & Poor’s Institutional Market Services, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such informationinformation.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
Among Charles River Laboratories International, Inc., The S&P 500 Index Andand
The S&P 500 Health Care Index
| | | | Fiscal Year | Fiscal Year |
| | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Charles River Laboratories International, Inc. | $ | 100 |
| | $ | 135 |
| | $ | 195 |
| | $ | 235 |
| | $ | 293 |
| | $ | 279 |
| $ | 100 |
| | $ | 125 |
| | $ | 119 |
| | $ | 170 |
| | $ | 174 |
| | $ | 236 |
|
| S&P 500 | 100 |
| | 116 |
| | 154 |
| | 175 |
| | 177 |
| | 198 |
| 100 |
| | 101 |
| | 114 |
| | 138 |
| | 132 |
| | 174 |
|
| S&P 500 Health Care | 100 |
| | 118 |
| | 167 |
| | 209 |
| | 223 |
| | 217 |
| 100 |
| | 107 |
| | 104 |
| | 127 |
| | 135 |
| | 163 |
|
Item 6. Selected Consolidated Financial Data
The selected financial data presented below for the fiscal years ended 2019, 2018, and 2017 and as of the fiscal years ended 2019 and 2018, is derived from our audited consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 and “Financial Statements and Supplementary Data” contained in Item 8 of this Annual Report on Form 10-K. The selected financial data presented below for the fiscal years ended 2016 and 2015 and as of the fiscal years ended 2017, 2016 and 2015, is derived from our audited consolidated financial statements within previously filed Annual Reports on Form 10-K. Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week was included in the fourth quarter of fiscal year 2016, which is occasionally necessary to align with a December 31 calendar year-end. The additional week was included in the fourth quarter.
| | | | Fiscal Year | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | Fiscal Year |
| | | | | | | | | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) | (in thousands, except per share amounts) |
| Statement of Income Data | | | | | | | | | | | | | | | | | | |
| Total revenue | $ | 1,681,432 |
| | $ | 1,363,302 |
| | $ | 1,297,662 |
| | $ | 1,165,528 |
| | $ | 1,129,530 |
| $ | 2,621,226 |
| | $ | 2,266,096 |
| | $ | 1,857,601 |
| | $ | 1,681,432 |
| | $ | 1,363,302 |
|
| Income from continuing operations, net of income taxes | 156,086 |
| | 152,037 |
| | 129,924 |
| | 105,416 |
| | 102,118 |
| 254,061 |
| | 227,218 |
| | 125,586 |
| | 156,086 |
| | 152,037 |
|
| Income (loss) from discontinued operations, net of income taxes | 280 |
| | (950 | ) | | (1,726 | ) | | (1,265 | ) | | (4,252 | ) | — |
| | 1,506 |
| | (137 | ) | | 280 |
| | (950 | ) |
| Common Share Data | | | | | | | | | | | | | | | | | | |
| Earnings per common share from continuing operations: | | | | | | | | | | |
| Earnings per common share from continuing operations attributable to common shareholders: | | | | | | | | | | |
| Basic | $ | 3.28 |
| | $ | 3.23 |
| | $ | 2.76 |
| | $ | 2.18 |
| | $ | 2.12 |
| $ | 5.17 |
| | $ | 4.69 |
| | $ | 2.60 |
| | $ | 3.28 |
| | $ | 3.23 |
|
| Diluted | $ | 3.22 |
| | $ | 3.15 |
| | $ | 2.70 |
| | $ | 2.15 |
| | $ | 2.10 |
| $ | 5.07 |
| | $ | 4.59 |
| | $ | 2.54 |
| | $ | 3.22 |
| | $ | 3.15 |
|
| Other Data | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | $ | 126,658 |
| | $ | 94,881 |
| | $ | 96,445 |
| | $ | 96,636 |
| | $ | 81,275 |
| $ | 198,095 |
| | $ | 161,779 |
| | $ | 131,159 |
| | $ | 126,658 |
| | $ | 94,881 |
|
| Capital expenditures | 55,288 |
| | 63,252 |
| | 56,925 |
| | 39,154 |
| | 47,534 |
| 140,514 |
| | 140,054 |
| | 82,431 |
| | 55,288 |
| | 63,252 |
|
| Balance Sheet Data (as of period end) | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 117,626 |
| | $ | 117,947 |
| | $ | 160,023 |
| | $ | 155,927 |
| | $ | 109,685 |
| $ | 238,014 |
| | $ | 195,442 |
| | $ | 163,794 |
| | $ | 117,626 |
| | $ | 117,947 |
|
Total assets(1) | 2,711,800 |
| | 2,068,497 |
| | 1,870,578 |
| | 1,623,438 |
| | 1,577,111 |
| |
Long-term debt, net and capital leases(1) | 1,207,696 |
| | 845,997 |
| | 740,557 |
| | 635,226 |
| | 520,712 |
| |
| Redeemable noncontrolling interest | 14,659 |
| | 28,008 |
| | 28,419 |
| | 20,581 |
| | — |
| |
| | | | | | | | | | | |
(1) During the second quarter of 2015, we elected early adoption of Accounting Standards Update (ASU) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” and applied the changes retrospectively to all prior periods. During the fourth quarter of 2015, we elected early adoption of ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” and applied the changes retrospectively to all prior periods. Prior years’ amounts have been updated to conform to current presentation. | |
| Total assets | | 4,692,790 |
| | 3,855,879 |
| | 2,929,922 |
| | 2,711,800 |
| | 2,068,497 |
|
| Long-term debt, net and finance leases | | 1,849,666 |
| | 1,636,598 |
| | 1,114,105 |
| | 1,207,696 |
| | 845,997 |
|
| Redeemable noncontrolling interests | | 28,647 |
| | 18,525 |
| | 16,609 |
| | 14,659 |
| | 28,008 |
|
Refer to Note 2, “Business Acquisitions”the following included in Item 8, “Financial Statements and Other Supplementary Data” in this Annual Report on Form 10-K for additional informationinformation:
Note 2, “Business Combinations and Divestiture” concerning the impact of our recent acquisitions.acquisitions, including revenue, operating income, assets acquired and liabilities assumed, and related acquisition and integration costs;
Note 9, “Long-Term Debt and Finance Lease Obligations” concerning the impact of debt related activities in connection with our recent acquisitions;
Note 11, “Income Taxes” concerning the impact of U.S. Tax Reform in fiscal year ended 2017; and
Note 16, “Leases” concerning the impact of adopting Accounting Standards Codification 842, “Leases” beginning in fiscal year 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. 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” and elsewhere in this Annual Report on Form 10-K. Certain percentage changes from period over period 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, which are ablethat 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 of the major global biopharmaceutical companies, many biotechnology companies, CROs, agricultural and industrial chemical companies, life science companies, veterinary medicine companies, contract manufacturing organizations,companies, medical device companies, and diagnostic and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world. We currently operate approximately 75in over 90 facilities in 23and over 20 countries worldwide, which numbers exclude our Insourcing Solutions (IS) sites.
Business Trends
The demand for our products and services increased in fiscal year 2016. Our pharmaceutical and biotechnology clients continued to intensify their use of strategic outsourcing to improve their operating efficiency and to access capabilities that they do not maintain internally. Many of our large biopharmaceutical clients have refocused on their drug discovery and early-stage development efforts, after a period of greater emphasis on late-stage programs to bring new drugs to market. In addition, small and mid-size biopharmaceutical clients benefited from the continued strength in the biotechnology funding environment in fiscal year 2016, from capital markets, partnering with large biopharmaceutical companies, and investment by venture capital. Academia has also benefited from partnering activities, as large biopharmaceutical companies have increasingly utilized academic research capabilities to broaden the scope of their research activities. Our full service, early-stage portfolio continued to lead to additional client discussions in fiscal year 2016 regarding strategic relationships, where clients seek to outsource larger portions of their early-stage drug research programs to us.
The primary result of these trends was improved demand for our safety assessment services in fiscal year 2016, particularly from biotechnology clients. This improvement led to increased capacity utilization in our safety assessment facilities, with utilization approaching optimal levels. Price also improved moderately in fiscal year 2016, as industry capacity utilization continued to increase. In view of client demand, we expanded our global footprint and reinforced our scientific leadership in safety assessment services by acquiring WRH, Inc. (WIL Research) in April 2016. We also opened small amounts of new capacity in fiscal year 2016, including the re-opening of our Charles River Massachusetts facility. We believe our scientific expertise, quality, and responsiveness remain key criteria when our clients make the decision to outsource to us.
Demand for our products and services that support our clients’ manufacturing activities was also robust in fiscal year 2016. Demand for our Microbial Solutions business remained strong as manufacturers continued to increase their use of our rapid microbial testing solutions. Our Biologics Testing Solutions (Biologics) business continued to benefit from increased demand for services associated with the growing proportion of biologic drugs in the pipeline and on the market. To enhance our ability to support biologic and biosimilar development, we acquired Blue Stream Laboratories, Inc. (Blue Stream) in June 2016.
As our clients continue to pursue their goal of more efficient and effective drug research, they are evaluating outsourcing new areas of their research programs, such as discovery services. We have enhanced our Discovery Services capabilities over the past three years to enable us to work with clients at the earliest stages of the discovery process. In fiscal year 2016, demand from biotechnology clients was strong for discovery services, but demand from larger biopharmaceutical clients fluctuated, particularly for our early discovery capabilities. We believe this is due to the fact that large biopharmaceutical companies have significant internal discovery capabilities, on which they can choose to rely. In order for large biopharmaceutical clients to
increasingly outsource more work to us, we must continue to demonstrate that our services can augment and accelerate our clients’ drug discovery process. We implemented business changes, including a small site consolidation and realignment of sales strategies, in fiscal year 2016 in our early discovery business to expedite this process. Demand for our in vivodiscovery services continued to increase in fiscal year 2016, and we acquired Agilux Laboratories, Inc. (Agilux) in September 2016 to strengthen our bioanalytical services offering, and reinforce the linkage between our discovery and safety assessment capabilities.
Demand for research models and services improved modestly in fiscal year 2016. We remain confident in the long-term drivers of this business because research models and services remain essential tools for our clients’ drug discovery and early-stage development efforts.
Acquisitions
We continued to make strategic acquisitions designed to expand our portfolio of services to support the drug discovery and early-stage development continuum and position us as a market leader in the outsourced discovery services market. Fiscal year 2016 acquisitions included:
On April 4, 2016, we acquired WIL Research, a provider of safety assessment and contract development and manufacturing (CDMO) services to biopharmaceutical and agricultural and industrial chemical companies worldwide. The acquisition enhanced our position as a leading global early-stage CRO by strengthening our ability to partner with clients across the drug discovery and development continuum. The purchase price for WIL Research was $604.8 million, including assumed liabilities of $0.4 million, and was funded by cash on hand and borrowings on our amended credit facility.
On June 27, 2016, we acquired Blue Stream, an analytical CRO supporting the development of complex biologics and biosimilars. Combining Blue Stream with our existing discovery, safety assessment, and biologics capabilities creates a leading provider with the ability to support biologic and biosimilar development from characterization through clinical testing and commercialization. The purchase price for Blue Stream was $11.7 million, including $3.0 million in contingent consideration, and was subject to certain customary adjustments. The acquisition was funded by borrowings on our revolving credit facility.
On September 28, 2016, we acquired Agilux, a CRO that provides a suite of integrated discovery small and large molecule bioanalytical services, drug metabolism and pharmacokinetic (DMPK) services, and pharmacology services. The acquisition supports our strategy to offer clients a broader, integrated portfolio that provides services continuously from the earliest stages of drug research through the nonclinical development process. The purchase price for Agilux was $64.9 million in cash and was funded by borrowings on our revolving credit facility.
Segment Reporting
We report our performance inOur three reportable segments:segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). We aggregate our operating segments into a reportable segment if (a) they have similar economic characteristics; (b) they are similar in the in the nature of the products or services, nature of the production process, type or class of customer for their products and services, methods used to distribute their products and services and nature of the regulatory environment; and (c) the aggregation helps users better understand our performance.
In the second quarter of 2016, we acquired WIL Research. WIL Research’s safety assessment business is reported in our DSA reportable segment and its CDMO business created a new operating segment, Contract Manufacturing, that is reported as part of our Manufacturing reportable segment. On February 10, 2017, we divested the CDMO business. In addition, amounts due to changes in our market strategy for certain services and resulting information provided to the Chief Operating Decision Maker were reclassified from ourOur RMS reportable segment to our Manufacturing reportable segment, including revenue of $2.8 million and $3.7 million for fiscal years 2015 and 2014, respectively, and operating income of $0.5 million and $0.6 million for fiscal years 2015 and 2014, respectively.
We reported segment results on this basis for all periods presented in this Annual Report on Form 10-K.
The revised reportable segments are as follows: |
| | |
Research Models and Services | Discovery and Safety Assessment | Manufacturing Support |
Research Models | Discovery Services | Microbial Solutions |
Research Model Services | Safety Assessment | Avian |
| | Biologics |
| | Contract Manufacturing |
Our RMS segment includes the Research Models and Research Model Services businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes three business units:includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered research models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and IS,Insourcing Solutions (IS), which provides colony management of our clients’ research operations (including recruitment, training, staffing, and management services). Our DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. Our Manufacturing reportable segment includes Microbial Solutions, which includes provides in vitro (non-animal) lot-release testing products, and microbial detection conventional and rapid quality control testing of sterile and non-sterile biopharmaceutical and consumer products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; Avian Vaccine Services (Avian), which supplies specific-pathogen-free fertile chicken eggs and chickens; and Contract Manufacturing,contract development and manufacturing (CDMO) services, which, until we divested this business on February 10, 2017, specialized inallowed us to provide formulation design and development, manufacturing, and analytical and stability testing for small molecules.
Recent Acquisitions and Divestiture
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. We continued to make strategic acquisitions designed to expand our portfolio of services to support the drug discovery and development continuum and position us as a market leader in the outsourced discovery services market. Our recent acquisitions and divestiture are described below.
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 will expand 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 preliminary purchase price of HemaCare was approximately $380 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 will be 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 preliminary purchase price was $23.4 million, net of a $4.0 million pre-existing relationship for a supply agreement settled upon acquisition, and subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash on hand and proceeds from 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 preliminary purchase price for Citoxlab was $527.7 million in cash, subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. Citoxlab is reported as part of our DSA reportable segment.
On April 3, 2018, we acquired MPI Research, a non-clinical CRO providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. The acquisition enhances our position as a leading global early-stage CRO by strengthening our ability to partner with clients across the drug discovery and development continuum. The purchase price for MPI Research was $829.7 million in cash. The acquisition was funded by borrowings on our Credit Facility as well as the issuance of $500.0 million of 5.5% Senior Notes due 2026 (2026 Senior Notes) in an unregistered offering. MPI Research is reported as part of our DSA reportable segment.
On January 11, 2018, we acquired KWS BioTest Limited (KWS BioTest), a CRO specializing in in vitro and in vivo discovery testing services for immuno-oncology, inflammatory and infectious diseases. The acquisition enhances our discovery expertise, with complementary offerings that provide our customers with additional tools in the active therapeutic research areas of oncology and immunology. The purchase price for KWS BioTest was $20.3 million in cash. In addition to the initial purchase price, the transaction included aggregate, undiscounted contingent payments of up to £3.0 million based on future performance. During the three months ended September 29, 2018, the terms of these contingent payments were amended, resulting in a fixed payment of £2.0 million, or $2.6 million, which was paid during the three months ended March 30, 2019. The KWS BioTest business is reported as part of our DSA reportable segment.
On August 4, 2017, we acquired Brains On-Line, a CRO providing critical data that advances novel therapeutics for the treatment of central nervous system (CNS) diseases. Brains On-Line strategically expands our existing CNS capabilities and establishes us as a single-source provider for a broad portfolio of discovery CNS services. The purchase price for Brains On-Line was $21.3 million in cash. In addition to the initial purchase price, the transaction included aggregate, undiscounted contingent payments of up to €6.7 million based on future performance. During the first quarter of fiscal year 2019, the terms of these contingent payments were amended, resulting in a fixed payment of $2.6 million, which was paid during the three months ended June 29, 2019. The Brains On-Line business is reported as part of our DSA reportable segment.
On February 10, 2017, we completed the divestiture of our CDMO business to Quotient Clinical Ltd., based in London, England for $75.0 million in proceeds, net of cash, cash equivalents, and working capital adjustments. The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and was reported in our Manufacturing reportable segment.
Fiscal Quarters
Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week was included in the fourth quarter of fiscal year 2016, which is occasionally necessary to align with a December 31 calendar year-end.
Business Trends
The additional week was includeddemand for our products and services continued to increase meaningfully in fiscal year 2019. Our pharmaceutical and biotechnology clients continued to intensify their use of strategic outsourcing to improve their operating efficiency and to access capabilities that they do not maintain internally. Small and mid-size biotechnology clients continued to be the primary driver of revenue growth as these clients benefited from the continued strength in the fourth quarter.biotechnology funding environment in fiscal year 2019, from capital markets, partnering with large biopharmaceutical companies, and investment by venture capital. Many of our large biopharmaceutical clients have continued to increase investments in their drug discovery and early-stage development efforts and have strengthened their relationships with both CROs, like Charles River, and biotechnology
companies to assist them in bringing new drugs to market. Our full service, early-stage portfolio continued to lead to additional client discussions and new business opportunities in fiscal year 2019, as clients seek to outsource larger portions of their early-stage drug research programs to us.
The primary result of these trends was robust revenue growth within our DSA reportable segment in fiscal year 2019, particularly from biotechnology clients. In addition to the acquisition of Citoxlab in April 2019, increased demand and pricing contributed to robust Safety Assessment revenue growth in fiscal year 2019. Our Safety Assessment facilities remained well utilized in fiscal year 2019. Recent acquisitions (most notably Citoxlab and MPI) added modest amounts of available capacity to accommodate increasing client demand. We believe the breadth and depth of our scientific expertise, quality, and responsiveness remain key criteria when our clients make the decision to outsource to us. As biotechnology funding remains robust and our clients continue to pursue their goal of more efficient and effective drug research to bring innovative new therapies to market, they are evaluating outsourcing more of their research programs, such as discovery services. We have enhanced our Discovery Services capabilities to provide clients with a comprehensive portfolio that enables them to start working with us at the earliest stages of the discovery process. We have accomplished this through acquisitions, including Citoxlab’s discovery services, KWS BioTest in January 2018 and Brains On-Line in August 2017, and through adding cutting-edge capabilities to our discovery toolkit through partnerships, such as Distributed Bio, BitBio, and Fios Genomics. In fiscal year 2019, demand in our Discovery Services business also increased meaningfully, driven by biotechnology clients as many of these clients either initiated or continued to work with us on integrated programs and other projects. Our efforts to enhance our sales strategies, provide clients with flexible partnering models, and become a trusted scientific partner for our clients’ early-stage programs have been successful, and enabled us to attract new clients. Demand from large biopharmaceutical companies also increased. These clients continue to have significant internal discovery capabilities, on which they can choose to rely. In order for large biopharmaceutical clients to increasingly outsource more work to us, we must continue to demonstrate that our services can augment and accelerate our clients’ drug discovery processes.
Demand for our products and services that support our clients’ manufacturing activities was also robust in fiscal year 2019. Demand for our Microbial Solutions business remained strong as manufacturers continued to increase their use of our rapid microbial testing solutions. Our Biologics business continued to benefit from increased demand for services associated with the growing proportion of biologic drugs in the pipeline and on the market. To support this increased demand, we continued to expand the capacity of our Biologics business.
Demand for our Research Models and Services increased in fiscal year 2019, driven by strong demand for research models in China, higher revenue for research model services, and improved pricing. Demand for research models in China continued to be robust in fiscal year 2019, as clients in this growing market continue to value our high-quality research models. Demand for research models services also improved in fiscal year 2019, particularly for our IS and GEMS businesses. The IS business further benefited from a five-year, $95.7 million contract from the National Institute of Allergy and Infectious Diseases, or NIAID, that commenced in September 2018. The continued effect of the consolidation of internal infrastructure within our large biopharmaceutical clients and a longer-term trend towards more efficient use of research models has led to reduced demand for research models outside of China. We are confident that research models and services will remain essential tools for our clients’ drug discovery and early-stage development efforts, and the RMS business will continue to be an important source of cash flow generation for us. In addition, in January 2020, we enhanced the RMS business’ growth profile and portfolio of critical research tools that we are able to supply through the acquisition of HemaCare, a premier provider of human-derived cellular products used in cell therapies.
Overview of Results of Operations and Liquidity
Revenue for fiscal year 2019 was $2.6 billion compared to $2.3 billion in fiscal year 2018. The 2019 increase as compared to the corresponding period in 2018 was $355.1 million, or 15.7%, and was primarily due to both growth in our DSA and Manufacturing segments, as discussed in the above “Business Trends” section, as well as the recent acquisitions of Citoxlab and MPI Research; partially offset by the negative effect of changes in foreign currency exchange rates which decreased revenue by $36.1 million, or 1.5%, when compared to the corresponding period in 2018.
In fiscal year 2019, our operating income and operating income margin were $351.2 million and 13.4%, respectively, compared with $331.4 million and 14.6%, respectively, in fiscal year 2018. The increase in operating income was primarily due to increased revenues discussed above and contributions from our recent acquisitions of Citoxlab and MPI Research; partially offset by the following, which decreased the operating income margin: increased amortization expense and costs related to our recent acquisition activity; increased costs incurred in connection with certain global restructuring initiatives, continued investments to support future growth of the businesses, which includes increased investments in personnel (staffing levels and hourly wage increases) and facility expansions (primarily in the RMS and Biologics businesses), and company-wide IT and
infrastructure projects. Offsetting the decreases in operating income margin were the realization of improved volume, mix, and pricing across our products and services portfolio as well as the impact of recent productivity initiatives across all businesses.
Net income attributable to common shareholders increased to $252.0 million in fiscal year 2019, from $226.4 million in the corresponding period of 2018. The increase in net income attributable to common shareholders of $25.6 million was primarily due to the increase in operating income described above, as well as a lower income tax rate due to recognizing a $20.6 million deferred tax asset in fiscal year 2019 for net operating losses expected to be utilized in the future due to changes in the Company’s international financing structure.
During fiscal year 2019, our cash flows from operations was $480.9 million compared with $441.1 million for fiscal year 2018. The increase was primarily driven by the increase to net income and the favorable timing of vendor and supplier payments compared to the same period in 2018, partially offset by unfavorable changes in operating assets and liabilities, specifically related to the timing of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits), increases in inventory levels in response to customer demand, and higher compensation payments compared to the prior year period.
On October 23, 2019, we issued $500.0 million of 4.25% Senior Notes due in 2028 (2028 Senior Notes) in an unregistered offering. Interest on the 2028 Senior Notes is payable semi-annually on May 1 and November 1, beginning on May 1, 2020. Net proceeds from the 2028 Senior Notes of approximately $494 million, along with available cash, was used to prepay $500.0 million of our term loan under our Credit Facility. Additionally, on November 4, 2019, we amended and restated our Credit Facility by increasing the amount of our multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. Under specified circumstances, we have the ability to increase the term loan and/or revolving facility by up to $1.0 billion in the aggregate.
In March 2019, we detected unauthorized access into portions of our information systems and commenced an investigation into the incident, coordinated with U.S. federal law enforcement and leading cyber security experts, and promptly implemented a comprehensive containment and remediation plan. In December 2019, we completed our remediation of this incident. The financial impact of the March 2019 event is not material. Refer to Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K for further details on the results of the remediation efforts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S.). The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
We believe that ourthe application of the followingour accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies”, to our consolidated financial statements contained in Item 8, “Financial Statements and Other Supplementary Data” in this Annual Report on Form 10-K.
We believe the following represent our critical accounting policies and estimates used in the preparation of our financial statements:
Revenue Recognition
We recognize revenue whenAccounting Standard Codification Topic 606, “Revenue from Contracts with Customers” (ASC 606) became effective for us on December 31, 2017 and was adopted using the modified retrospective method for all contracts not completed as of the following conditionsdate of adoption. For contracts that were modified before the effective date, we reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the practical expedient, which did not have a material effect on the cumulative impact of adopting ASC 606. The reported results for fiscal years 2019 and 2018 reflect the application of ASC 606 guidance while the historical results for fiscal year 2017 was prepared under the guidance of ASC 605, “Revenue Recognition” (ASC 605). There is no material difference in the reporting of revenue during fiscal years 2019 and 2018 in accordance with ASC 606 when compared to fiscal year 2017 in accordance with ASC 605.
Revenue is recognized when, or as, obligations under the terms of a contract are satisfied: persuasive evidencesatisfied, which occurs when control of an arrangement exists, delivery has occurredthe promised products or services have been provided,is transferred to customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer (“transaction price”).
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the amount to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, we do not extend payment terms beyond one year. Applying the practical expedient, we do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Our contracts do not generally contain significant financing components.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Product revenue is generally recognized when the customer is fixedobtains control of our product, which occurs at a point in time, and may be upon shipment or determinable, and collectibility is reasonably assured.
upon delivery based on the contractual shipping terms of a contract. Service revenue is generally evidenced by client contracts,recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which range in duration from a few weeksbetter depicts the transfer of value to a few years and typically take the formcustomer, we generally measure our progress using either cost-to-cost (input method) or right-to-invoice (output method). We use the cost-to-cost measure of an agreed upon rate per unit orprogress when it best depicts the transfer of value to the customer which occurs as we incur costs on our contract, generally related to fixed fee arrangements. Such contracts typically do not contain acceptance provisionsservice contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based uponon the achievementratio of certain study or laboratory testing results.costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of agreed uponprogress is generally related to rate per unit contracts, as the extent of progress towards completion is recognizedmeasured based on discrete service or time-based increments, such as services are performed, based upon rates specifiedsamples tested or labor hours incurred. Revenue is recorded in the contract. In cases where
performance spans reporting periods, revenue of fixed fee contracts is recognized as services are performed, measured on the ratio of outputs or performance obligations completedamount invoiced since that amount corresponds directly to the total contractual outputs or performance obligations to be provided. Changes in estimated effort to complete the fixed fee contract are reflected in the period in which the change becomes known. Changes in scopevalue of work are common, especially under long-term contracts, and generally result in a change in contract value. Once the parties have agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and revenue is typically recognized as described above.
Most contracts are terminable by the client, either immediately or upon notice. These contracts often require payment to us of expenses to wind down the project, fees earned to date or, in some cases, a termination fee. Such payments are included in revenues when earned.
We recognize product revenue, net of allowances for estimated returns, rebates and discounts, when title and risk of loss pass to customers. When we sell equipment with specified acceptance criteria, we assess our ability to meet the acceptance criteria in order to determine the timing of revenue recognition. We would defer revenue until completion of customer acceptance testing if we are not able to demonstrate the ability to meet such acceptance criteria.
A portion of our revenue is from multiple-element arrangements that include multiple products and/or services as deliverables in a single arrangement, with each deliverable, or a combination of the deliverables, representing a separate unit of accounting. We allocate revenues to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. Revenue allocated to each deliverable is then recognized when all revenue recognition criteria are met. Judgments as to the identification of deliverables, units of accounting, the allocation of consideration to the deliverable, and the appropriate timing of revenue recognition are critical with respect to these arrangements.
At the inception of each arrangement that includes milestone payments, we evaluate whether each milestone is substantive. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) our performance to achieve the milestone,date. During fiscal year 2019, $1.6 billion, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from our performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, clinical, regulatory, and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required, and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. If a substantive milestone is achieved and collection of the related receivable is reasonably assured, we recognize revenue related to the milestone in its entirety in the period in which the milestone is achieved. If we were to achieve milestones that we consider substantive under anyapproximately 60%, of our revenue arrangements, we may experience significant fluctuations in our revenue from quarter to quarter and year to year depending on the timing of achieving such substantive milestones. In those circumstances where a milestone is not substantive, we recognize as revenue, on the date the milestone is achieved, an amount equal to the applicable percentage of the performance period that had elapsed as of the date the milestone was achieved, with the balance being deferred and recognized over the remaining period of performance. As of December 31, 2016, we had no significant milestones that were deemed substantive.
The Company records shipping charges billed to customers in total revenue and records shipping costs in cost ofrecognized ($2.6 billion) is DSA service revenue (excluding amortization of intangible assets) for all periods presented.transferred over time.
Income Taxes
We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected
future taxable income, and the effects of tax planning strategies. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.
Our valuation allowance increased by $300.2 million from $9.8 million as of December 29, 2018 to $310.0 million as of December 28, 2019. The increase is primarily related to the recognition of $315.5 million of net operating loss deferred tax assets due to changes in our financing structure, $294.9 million of which we do not believe is more likely than not to be utilized.
We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited
to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the controversy process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
As ofOn December 31, 2016, our non-U.S. subsidiaries’ undistributed foreign earnings included in consolidated retained earnings were $704.6 million. As of the end of fiscal year 2016, our policy with respect to the undistributed earnings of our non-U.S. subsidiaries is to maintain an indefinite reinvestment assertion as they are required to fund needs outside of22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform. U.S. Tax Reform made broad and cannot be repatriated in a manner that is substantially tax-free. This assertion is made on a jurisdiction by jurisdiction basis and takes into account the liquidity requirements in both the U.S. and our foreign subsidiaries. If we decide to repatriate fundscomplex changes to the U.S. intax code, including, but not limited to, (i) reducing the future to execute our growth initiatives or to fund any other liquidity needs, the resulting tax consequences could negatively impact our results of operations through a higher effectiveU.S. federal statutory tax rate and dilutionfrom 35% to 21%; (ii) requiring companies to pay a one-time transition tax (Transition Tax) on certain unrepatriated earnings of our earnings. On December 18, 2015, theforeign subsidiaries; (iii) generally eliminating U.S federal income taxes on dividends from foreign subsidiaries; (iv) requiring a current inclusion in U.S. enacted the Consolidated Appropriations Act, which reinstated and extended thefederal taxable income of certain earnings of controlled foreign corporation look-throughcorporations; (v) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (vi) subjecting certain foreign earnings to U.S. taxation through base erosion anti-abuse tax (BEAT) and global intangible low-taxed income (GILTI); (vii) creating a new limitation on deductible interest expense; (viii) changing rules throughrelated to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and (ix) modifying the fiscal year 2019. This rule allows us to access Chinese and Canadian cash in a more tax-efficient manner and utilize the cash outside of the U.S. without triggering residual U.S. tax. As such, we are accruing foreign withholding taxes to reflect this changeofficer’s compensation limitation.
Our accounting for the years in whichelements of U.S. Tax Reform is complete. We have made an accounting policy election to treat taxes due on the rules are reinstated.GILTI inclusion as a current period expense. See Note 11, “Income Taxes” for further discussion.
Goodwill and Intangible Assets
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of ourthe weighted average cost of capital, adjusted for specific risks associated with the assets.
In our recent acquisitions, customer relationship intangible assets (also referred to as client relationships) have been the most significant identifiable assets acquired. To determine the fair value of the acquired client relationships, we utilized the multiple period excess earnings model (a commonly accepted valuation technique), which includes the following key assumptions: projections of cash flows from the acquired entities, which included future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital. The value of client relationships acquired were $134.6 million for Citoxlab in fiscal year 2019 and $264.9 million for MPI Research in fiscal year 2018.
We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from
projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset.
During fiscal year 2016, we determined that the carrying values of certain DSA intangible assets No impairments were not recoverable and recorded an impairment charge of $1.9 million, which was included in costs of services provided (excluding amortization of intangible assets).recognized during 2019, 2018 or 2017.
We evaluate goodwill for impairment annually, during the fourth quarter, and when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts. Estimates of future cash flows require assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill for impairment.
We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If we elect this option and believe, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, we may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, we compare the fair value of our reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, then the second step
of the impairment test is performed in order to determine the implied fair value of our goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
In fiscal years 2016, 20152019, 2018 and 2014,2017, we performedelected to perform the quantitative first step of the two-step goodwill impairment test for our reporting units. Fair value was determined by using a weighted combination of a market-based approach and an income approach, as this combination was deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilized information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determined fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn.
Our 2016, 20152019, 2018 and 20142017 impairment tests indicated that goodwill was not impaired.
In the second quarter of 2016, we revised the composition of our reportable segments to align with the view of the business following our acquisition of WIL Research. See Note 1, "Description of Business and Summary of Significant Accounting Policies." As a result, goodwill was allocated from our RMS reportable segment to our Manufacturing reportable segment based on the fair value of each business group within its original reporting unit relative to the fair value of that reporting unit. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.
Valuation and Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Factors we consider important whichthat could trigger an impairment review include, but are not limited to, the following:
significant underperformance relative to expected historical or projected future operating results;
significant negative industry or economic trends; or
significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, net of any sublease income, if applicable, and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. We measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Significant judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. We may also estimate fair value based on market prices for similar assets, as appropriate. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets.
In fiscal 2017, we recognized $17.7 million of asset impairment and accelerated depreciation charges on the RMS facility in Frederick, Maryland in connection with our 2017 RMS restructuring initiatives.
Pension and Other Post-Retirement Benefit Plans
Several of our U.S. and non-U.S. subsidiaries sponsor defined benefit pension and other post-retirement benefit plans. We recognize the funded status of our defined benefit pension and other postretirement benefit plans as an asset or liability. This
amount is defined as the difference between the fair value of plan assets and the benefit obligation. We measure plan assets and benefit obligations as of the date of our fiscal year end.
The cost and obligations of these arrangements are calculated using many assumptions to estimate the benefits that the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease. Major assumptions used in the accounting for these employee benefit plans include the expected return on plan assets, withdrawal and mortality rates, discount rate, and rate of increase in employee compensation levels. Assumptions are determined based on our data and appropriate market indicators, and are evaluated each year as of the plans’ measurement date. Should any of these assumptions change, they would have an effect on net periodic pension costs and the unfunded benefit obligation.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.
The discount rate reflects the rate we would have to pay to purchase high-quality investments that would provide cash sufficient to settle our current pension obligations. A 25 basis point change in the discount rate changes the projected benefit obligation by approximately $20 million for all our plans.
The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.
In fiscal year 2016,2019, new mortality improvement scales were issued in the U.S. and U.K reflecting a decline in longevity projection from the 20152018 releases that we adopted, which decreased our benefit obligations by $1.3$2.8 million as of December 31, 2016.28, 2019. In fiscal year 2015,2018, new mortality improvement scales were issued in the U.S. and the United Kingdom (U.K.)U.K. reflecting a decline in longevity projection from the 20142017 releases that we adopted, which decreased our benefit obligations by $3.3$1.7 million as of December 26, 2015.29, 2018.
On January 31, 2019, we commenced the process to terminate the Charles River Laboratories, Inc. Pension Plan (U.S. Pension Plan) and expect to complete the termination process during the second half of fiscal year 2020. As part of the planned termination, we re-balanced assets to better match the characteristics of the liabilities. At December 28, 2019, the U.S Pension Plan has a benefit obligation of $94.4 million and plan assets of $91.2 million. The benefit obligation has been valued at the amount expected to be required to settle the obligations. Assumptions utilized considered the portion of obligations expected to be settled through participant acceptance of lump sum payments or annuities and the cost to purchase annuities, which are subject to change upon actual plan settlement. Increasing the U.S Pension Plan’s obligations to reflect the expected settlement value resulted in an actuarial loss of approximately $6 million, which was recorded within Other comprehensive income as part of the annual revaluation for fiscal year 2019. Upon settlement of the benefit obligation, pension losses currently deferred and recorded within Accumulated other comprehensive loss on our consolidated balance sheets will be reclassified to Other expense, net within our consolidated statement of income. As of December 28, 2019, we had unrecognized losses related to the U.S. Pension Plan of approximately $14 million.
Stock-Based Compensation
We grant stock options, restricted stock, restricted stock units (RSUs), and performance share units (PSUs) to employees, and stock options, restricted stock, and restricted stock unitsRSUs to non-employee directors under stock-based compensation plans. We make certain assumptions in order to value and record expense associated with awards made under our stock-based compensation arrangements. Changes in these assumptions may lead to variability with respect to the timing and amount of expense we recognize in connection with share-based payments. Stock-based compensation is recognized as an expense in the consolidated statements of income based on the grant date fair value, adjusted for forfeitures when they occur, over the requisite service period.
Determining the appropriate valuation model and related assumptions requires judgment. The fair value of stock options granted is calculated using the Black-Scholes option-pricing model and the fair value of PSUs is calculatedestimated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others.
Determining the appropriate amount to expense based on the anticipated achievement of PSU’s performance targets requires judgment, including forecasting the achievement of future financial targets. The estimate of expense is revised periodically based on the probability of achieving the required performance targets. The cumulative impact of any changes to our estimates is reflected in the period of change.
We also estimate forfeitures over the requisite service period when recognizing share-based compensation expense based on historical rates and forward looking factors; these estimates are adjusted to the extent that actual forfeitures differ, or are expected to materially differ, from our estimates.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies” to our consolidated financial statements contained in Item 8, “Financial Statements and Other Supplementary Data,” in this Annual Report on Form 10-K.
Results of Operations
Fiscal Year 20162019 Compared to Fiscal Year 20152018
Revenue and Operating Income
The following table presentstables present consolidated revenue by type and by reportable segment:
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2016 | | 2015 | | $ change | | % change | | Impact of FX |
| | | | | | | | | | |
| | (in millions, except percentages) |
| RMS | $ | 494.0 |
| | $ | 470.4 |
| | $ | 23.6 |
| | 5.0 | % | | (0.2 | )% |
| DSA | 836.6 |
| | 612.2 |
| | 224.4 |
| | 36.7 | % | | (2.7 | )% |
| Manufacturing | 350.8 |
| | 280.7 |
| | 70.1 |
| | 25.0 | % | | (0.8 | )% |
| Total revenue | $ | 1,681.4 |
| | $ | 1,363.3 |
| | $ | 318.1 |
| | 23.3 | % | | (1.5 | )% |
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2019 | | 2018 | | $ change | | % change |
| | (in millions, except percentages) |
| Service revenue | $ | 2,029.4 |
| | $ | 1,687.9 |
| | $ | 341.5 |
| | 20.2 | % |
| Product revenue | 591.8 |
| | 578.2 |
| | 13.6 |
| | 2.4 | % |
| Total revenue | $ | 2,621.2 |
| | $ | 2,266.1 |
| | $ | 355.1 |
| | 15.7 | % |
Revenue for fiscal year 2016 |
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2019 | | 2018 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| RMS | $ | 537.1 |
| | $ | 519.7 |
| | $ | 17.4 |
| | 3.3 | % | | (1.9 | )% |
| DSA | 1,619.0 |
| | 1,316.9 |
| | 302.1 |
| | 22.9 | % | | (1.1 | )% |
| Manufacturing | 465.1 |
| | 429.5 |
| | 35.6 |
| | 8.3 | % | | (2.7 | )% |
| Total revenue | $ | 2,621.2 |
| | $ | 2,266.1 |
| | $ | 355.1 |
| | 15.7 | % | | (1.5 | )% |
The following table presents operating income by reportable segment:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2019 | | 2018 | | $ change | | % change |
| | (in millions, except percentages) |
| RMS | $ | 133.9 |
| | $ | 136.5 |
| | $ | (2.6 | ) | | (1.9 | )% |
| DSA | 258.9 |
| | 227.6 |
| | 31.3 |
| | 13.8 | % |
| Manufacturing | 145.4 |
| | 136.2 |
| | 9.2 |
| | 6.8 | % |
| Unallocated corporate | (187.0 | ) | | (168.9 | ) | | (18.1 | ) | | 10.8 | % |
| Total operating income | $ | 351.2 |
| | $ | 331.4 |
| | $ | 19.8 |
| | 6.0 | % |
| Operating income % of revenue | 13.4 | % | | 14.6 | % | |
| | (1.2 | )% |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2019 | | 2018 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| Revenue | $ | 537.1 |
| | $ | 519.7 |
| | $ | 17.4 |
| | 3.3 | % | | (1.9 | )% |
| Cost of revenue (excluding amortization of intangible assets) | 333.7 |
| | 319.8 |
| | 13.9 |
| | 4.3 | % | | |
| Selling, general and administrative | 68.1 |
| | 61.8 |
| | 6.3 |
| | 10.1 | % | | |
| Amortization of intangible assets | 1.4 |
| | 1.6 |
| | (0.2 | ) | | (12.9 | )% | | |
| Operating income | $ | 133.9 |
| | $ | 136.5 |
| | $ | (2.6 | ) | | (1.9 | )% | | |
| Operating income % of revenue | 24.9 | % | | 26.3 | % | |
|
| | (1.4 | )% | | |
RMS revenue increased $318.1$17.4 million, or 23.3%3.3%, compared with fiscal year 2015. The negativedue primarily to higher research model services revenue and higher research model product revenue in China. Research model services benefited from a large government contract in the IS business and strong client demand in the GEMS business resulting from increased research and development activity conducted across biotechnology and academic institutional clients. Partially offsetting these increases were the effect of changes in foreign currency exchange rates and lower research model product revenue outside of China, particularly from large biopharmaceutical clients.
RMS operating income decreased revenue by $20.0$2.6 million, or 1.5%1.9%, when compared to the prior year.
corresponding period in 2018. RMS revenue increased $23.6 million due to higher research model services revenue in North America, Europe, and Japan and higher research model revenue in North America, Europe, and Asia; partially offset by the negative effect of changes in foreign currency exchange rates.
DSA revenue increased $224.4 million due to higher revenue in the Safety Assessment business, primarily as a result of the WIL Research acquisition that contributed $163.5 million to revenue growth, and increased study volume, mix of services, and pricing in our legacy business; and higher revenue in Discovery Services’ In Vivo business, which includes the acquisitions of Oncotest and Agilux that contributed $14.6 million to revenue growth; partially offset by lower Early Discovery revenue due primarily to softer demand from global clients; and the negative effect of changes in foreign currency exchange rates.
Manufacturing revenue increased $70.1 million due to higher revenue in the Microbial Solutions business, which includes the acquisition of the Celsis business that contributed $17.9 million to revenue growth; higher revenue in the Biologics business, which includes the Blue Stream acquisition that contributed $4.1 million to revenue growth; higher revenue in the Avian business, primarily due to the acquisition of the Sunrise business that contributed $4.9 million to revenue growth; and Contract Manufacturing revenue related to the CDMO services of WIL Research acquired in April 2016 that contributed $12.6 million to revenue growth; partially offset by the negative effect of changes in foreign currency exchange rates.
The following table presents consolidated revenue by type:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2016 | | 2015 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| Service revenue | $ | 1,130.7 |
| | $ | 858.2 |
| | $ | 272.5 |
| | 31.7 | % |
| Product revenue | 550.7 |
| | 505.1 |
| | 45.6 |
| | 9.0 | % |
| Total revenue | $ | 1,681.4 |
| | $ | 1,363.3 |
| | $ | 318.1 |
| | 23.3 | % |
Service revenue increased $272.5 million due to higher revenue in the Safety Assessment business, primarily as a result of the WIL Research acquisition that contributed $163.5 million to service revenue growth, and increased study volume, mix of services, and pricing in our legacy business; and higher revenue in Discovery Services’ In Vivo business, which includes the acquisitions of Oncotest and Agilux that contributed $14.6 million to revenue growth; Contract Manufacturing revenue related to the CDMO services of WIL Research acquired in April 2016 that contributed $12.6 million to revenue growth; higher revenue in the Biologics business, which includes the Blue Stream acquisition that contributed $4.1 million to revenue growth; and higher research model services revenue in North America, Europe, and Japan; partially offset by lower Early Discovery revenue due primarily to softer demand from global clients; and the negative effect of changes in foreign currency exchange rates.
Product revenue increased $45.6 million due to higher revenue in Microbial Solutions and Avian, which included the acquisitions of the Celsis and Sunrise businesses, respectively, and in total contributed $22.1 million to product revenue growth; and higher research model revenue in North America, Europe, and Asia; partially offset by the negative effect of changes in foreign currency exchange rates.
Cost of Services Provided and Products Sold (Excluding Amortization of Intangible Assets)
The following table presents consolidated cost of services provided and products sold (excluding amortization of intangible assets) by reportable segment:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2016 | | 2015 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| RMS | $ | 292.8 |
| | $ | 284.2 |
| | $ | 8.6 |
| | 3.0 | % |
| DSA | 572.4 |
| | 407.0 |
| | 165.4 |
| | 40.6 | % |
| Manufacturing | 169.5 |
| | 141.0 |
| | 28.5 |
| | 20.3 | % |
| Total cost of services provided and products sold (excluding amortization of intangible assets) | $ | 1,034.7 |
| | $ | 832.2 |
| | $ | 202.5 |
| | 24.3 | % |
Cost of services provided and products sold (excluding amortization of intangible assets) (Costs) for fiscal year 2016 increased $202.5 million, or 24.3%, compared with fiscal year 2015. Costsoperating income as a percentage of revenue for fiscal year 2016 were 61.5%2019 was 24.9%, an increasea decrease of 0.5%,1.4% from 61.0%26.3% for fiscal year 2015.
RMS Costs increased $8.6 million due primarily to the growth of the business, partially offset by cost savings achieved as a result of our efficiency initiatives. RMS Costscorresponding period in 2018. Operating income and operating income as a percentage of revenue for fiscal year 2016 were 59.3%, a decrease of 1.1%, from 60.4% for fiscal year 2015.
DSA Costs increased $165.4 milliondecreased primarily due primarily to an increase in Safety Assessment Costs, which included a higher cost base dueof revenue and selling, general, and administrative expenses to the acquisition of WIL Research,support the growth of the legacy business; an increase in Discovery Services Costs,businesses, which included the following: a higher cost base due to the acquisitions of Oncotest and Agilux; a$2.2 million charge of $1.9 million related to an impairment of certain intangibles; and a restructuring charge of $9.4 million related to the consolidation of small DSA facilities in the U.S., Ireland, and the U.K.; partially offset by the favorable effect of changes in foreign currency exchange rates. DSA Costs as a percentage of revenue for fiscal year 2016 were 68.4%, an increase of 1.9%, from 66.5% for fiscal year 2015, primarily due to the acquisition of WIL Research.
Manufacturing Costs increased $28.5 million due primarily to an increase in Biologics Costs resulting from the growth of the business and the acquisition of Blue Stream; an increase in Contract Manufacturing Costs related to the CDMO services of WIL Research acquired in April 2016; an increase in Microbial Solutions Costs resulting from the acquisition of Celsis and the growth of the legacy business; and an increase in Avian Costs, primarily due to the acquisition of the Sunrise business; partially offset by $4.1 million due to lower amortization of inventory fair value adjustments related to the Celsis acquisition. Manufacturing Costs as a percentage of revenue for fiscal year 2016 were 48.3%, a decrease of 1.9%, from 50.2% for fiscal year 2015.
The following table presents consolidated cost of services provided and products sold (excluding amortization of intangible assets) by type:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2016 | | 2015 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| Cost of services provided | $ | 757.7 |
| | $ | 568.2 |
| | $ | 189.5 |
| | 33.4 | % |
| Cost of products sold | 277.0 |
| | 264.0 |
| | 13.0 |
| | 4.9 | % |
| Total cost of services provided and products sold (excluding amortization of intangible assets) | $ | 1,034.7 |
| | $ | 832.2 |
| | $ | 202.5 |
| | 24.3 | % |
Cost of services provided increased $189.5 million due to an increase in Safety Assessment Costs, which included a higher cost base due to the acquisition of WIL Research, the growth of the legacy business; an increase in Discovery Services Costs, which included a higher cost base due to the acquisitions of Oncotest and Agilux; a charge of $1.9 million related to an impairment of certain intangibles; a restructuring charge of $9.4 million related to the consolidation of small DSA facilities in the U.S., Ireland, and the U.K.; higher Biologics Costs resulting from the growth of the business and the acquisition of Blue Stream; an increase in Contract Manufacturing Costs related to the CDMO services of WIL Research acquired in April 2016; and increased research model services costs due to growth in the business; partially offset by the favorable effect of changes in foreign currency exchange rates primarily related to the Safety Assessment and Discovery Services businesses.
Cost of products sold increased $13.0 million due primarily to higher Microbial Solutions Costs as a result of the acquisition of Celsis and the growth of the legacy business; higher Avian Costs, primarily due to the acquisition of the Sunrise business; and
higher research model costs due to growth in the business; partially offset by $4.1 million due to lower amortization of inventory fair value adjustments related to the Celsis acquisition and savings associated with global efficiency initiatives in the research models business.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2016 | | 2015 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| RMS | $ | 62.5 |
| | $ | 62.1 |
| | $ | 0.4 |
| | 0.5 | % |
| DSA | 98.3 |
| | 69.2 |
| | 29.1 |
| | 42.0 | % |
| Manufacturing | 65.1 |
| | 57.9 |
| | 7.2 |
| | 12.5 | % |
| Unallocated corporate | 141.6 |
| | 111.2 |
| | 30.4 |
| | 27.4 | % |
| Total selling, general and administrative | $ | 367.5 |
| | $ | 300.4 |
| | $ | 67.1 |
| | 22.3 | % |
Selling,recorded within selling, general and administrative expenses (SG&A) forcosts in fiscal year 2016 increased $67.1 million, or 22.3%, compared with fiscal year 2015. SG&A as a percentage of revenue for fiscal year 2016 was 21.9%, a decrease of 0.1%, from 22.0% for fiscal year 2015.
The increase in RMS SG&A of $0.4 million was related to an increase of $1.3 million in external consulting and other service expenses; an increase of $0.5 million in operating expenses, including information technology infrastructure and facility expenses; an increase of $0.3 million in compensation, benefits, and other employee-related expenses; and an increase of $0.2 million in stock-based compensation expense; partially offset by a decrease of $0.8 million in severance expense; a decrease of $0.3 million in costs associated with the evaluation and integration of acquisitions; a decrease of $0.2 million in bad debt expense; and a decrease of $0.6 million in other expenses. RMS SG&A as a percentage of revenue for fiscal year 2016 was 12.6%, a decrease of 0.6%, from 13.2% for fiscal year 2015.
The increase in DSA SG&A of $29.1 million was related to an increase of $12.5 million in compensation, benefits, and other employee-related expenses; an increase of $5.9 million in operating expenses, including information technology infrastructure and facility expenses; an increase of $5.7 million in costs associated with the evaluation and integration of acquisitions; an increase of $2.9 million in severance expense; an increase of $1.5 million in external consulting and other service expenses; an increase of $1.3 million in depreciation expense; an increase of $1.2 million in stock-based compensation expense; and an increase of $0.3 million in other expenses; partially offset by a decrease of $2.2 million in bad debt expense. DSA SG&A as a percentage of revenue for fiscal year 2016 was 11.8%, an increase of 0.5%, from 11.3% for fiscal year 2015.
The increase in Manufacturing SG&A of $7.2 million was related to an increase of $6.7 million in compensation, benefits, and other employee-related expenses; an increase of $1.2 million in external consulting and other service expenses; an increase of $1.0 million in operating expenses, including information technology infrastructure and facility expenses; an increase of $0.7 million in stock-based compensation; and an increase of $0.6 million in other expenses; partially offset by a decrease of $1.8 million in severance expense; a decrease of $1.0 million in costs associated with the evaluation and integration of acquisitions; and a decrease of $0.2 million in depreciation expense. Manufacturing SG&A as a percentage of revenue for fiscal year 2016 was 18.6%, a decrease of 2.0%, from 20.6% for fiscal year 2015.
The increase in unallocated corporate SG&A of $30.4 million was related to an increase of $8.0 million in external consulting and other service expenses; an increase of $6.2 million in compensation, benefits, and other employee-related expenses; an increase of $4.8 million in information technology expenses; an increase of $4.0 million in costs associated with the evaluation and integration of acquisitions; an increase of $1.5 million in stock-based compensation; an increase of $1.0 million in depreciation expense; and an increase of $4.9 million in other expenses.
Amortization of Intangible Assets Amortization of intangibles for fiscal year 2016 was $41.7 million, an increase of $17.5 million, or 72.1%, from $24.2 million for fiscal year 2015, due primarily to certain intangibles acquired in connection with the Agilux, Blue Stream, WIL Research, Oncotest, Celsis, and Sunrise acquisitions.
Interest Income Interest income, which represents earnings on held cash, cash equivalents, and time deposits was $1.3 million for fiscal year 2016, an increase of $0.3 million, or 26.0%, compared to $1.0 million for fiscal year 2015.
Interest Expense Interest expense for fiscal year 2016 was $27.7 million, an increase of $12.6 million, or 83.8%, compared to $15.1 million for fiscal year 2015. The increase was primarily due to the write-off of a portion of debt issuance costs in connection with the modification of our $1.3B Credit Facility, a higher average debt balance outstanding as a result of business
acquisitions, a higher average interest rate as a result of a higher leverage ratio, and an increased interest expense related to capital leases.
Other Income (Expense), Net Other income (expense), net, was a net other income of $11.9 million for fiscal year 2016, an increase of $8.9 million, or 295.5%, compared to a net other income of $3.0 million for fiscal year 2015. The increase in other income (expense), net was driven by the absence of an expense of $10.4 million due to a reversal of the indemnification asset associated with a previous acquisition in the corresponding period in 2015; an increase of $6.5 million in gains on our venture capital investments accounted for under the equity method; a higher net gain of $2.1 million on life insurance policy investments; a $0.7 million gain on remeasurement of previously held equity interest in an entity acquired in a step acquisition; and an increase of $0.6 million in other activity; partially offset by the absence of a bargain purchase gain of $9.9 million associated with the acquisition of Sunrise in May 2015; and a $1.5 million charge recorded2019 in connection with the modification of the option to purchase the remaining 13%8% equity interest in Vital River.
Income Taxes Income tax expense was $66.8 million for fiscal year 2016, an increase of $23.4 million, compared to $43.4 million for fiscal year 2015. Our effective tax rate was 30.0%River, increased investments in the fiscal year 2016, compared to 22.2%personnel (staffing levels and hourly wage increases), higher severance charges in the fiscal year 2015. The increase was primarily driven by non-deductible expenses associatedconnection with acquisitionscertain global restructuring initiatives, and restructurings.facility expansions (primarily in China). In addition, we recognizedoperating income as a reduction in unrecognized tax benefits and related interestpercentage of $10.4 millionrevenue decreased due to the expiration of the statute of limitations associated with pre-acquisition tax positionslower operating income margins on the forgivenessaforementioned large government contract, and lower sales volume for research models outside of debt and a non-taxable bargain purchase gain of $9.9 million associated with the acquisition of Sunrise in the fiscal year 2015.China.
Fiscal Year 2015 Compared to Fiscal Year 2014
Revenue
The following table presents consolidated revenue by reportable segment:DSA
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2015 | | 2014 | | $ change | | % change | | Impact of FX |
| | | | | | | | | | |
| | (in millions, except percentages) |
| RMS | $ | 470.4 |
| | $ | 503.7 |
| | $ | (33.3 | ) | | (6.6 | )% | | (6.3 | )% |
| DSA | 612.2 |
| | 538.2 |
| | 74.0 |
| | 13.7 | % | | (3.4 | )% |
| Manufacturing | 280.7 |
| | 255.8 |
| | 24.9 |
| | 9.7 | % | | (7.6 | )% |
| Total revenue | $ | 1,363.3 |
| | $ | 1,297.7 |
| | $ | 65.6 |
| | 5.1 | % | | (5.3 | )% |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2019 | | 2018 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| Revenue | $ | 1,619.0 |
| | $ | 1,316.9 |
| | $ | 302.1 |
| | 22.9 | % | | (1.1 | )% |
| Cost of revenue (excluding amortization of intangible assets) | 1,104.1 |
| | 903.9 |
| | 200.2 |
| | 22.2 | % | | |
| Selling, general and administrative | 176.9 |
| | 131.2 |
| | 45.7 |
| | 34.8 | % | | |
| Amortization of intangible assets | 79.1 |
| | 54.2 |
| | 24.9 |
| | 45.9 | % | | |
| Operating income | $ | 258.9 |
| | $ | 227.6 |
| | $ | 31.3 |
| | 13.8 | % | | |
| Operating income % of revenue | 16.0 | % | | 17.3 | % | | | | (1.3 | )% | | |
Revenue for fiscal year 2015DSA revenue increased $65.6$302.1 million, or 5.1%22.9%, compared with fiscal year 2014. The negativedue primarily to the recent acquisitions of Citoxlab and MPI Research, which contributed $123.7 million and $73.0 million, respectively, to service revenue growth. Additionally, service revenue increased in both the Safety Assessment and Discovery Services businesses due to demand from biotechnology clients and increased pricing of services. These increases were partially offset by the effect of changes in foreign currency exchange rates decreased revenue by $69.4rates.
DSA operating income increased $31.3 million, or 5.3%13.8%, when compared to the prior period.corresponding period in 2018. DSA operating income as a percentage of revenue for fiscal year 2019 was 16.0%, a decrease of 1.3% from 17.3% for the corresponding period in 2018. The increase to operating income was primarily attributable to contributions from our recent acquisitions of Citoxlab and MPI Research. This increase was partially offset by increased costs in both cost of revenue and selling, general, and administrative expenses to support the growth of the businesses, which included the following: increased investments in personnel (staffing levels and hourly wage increases); increased investments related to facility expansions; higher severance charges in connection with certain global restructuring initiatives, and higher amortization of intangible assets and acquisition and integration costs associated with our recent acquisitions. These increased costs collectively decreased operating income as a percentage of revenue in 2019 compared to 2018.
RMSManufacturing
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2019 | | 2018 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| Revenue | $ | 465.1 |
| | $ | 429.5 |
| | $ | 35.6 |
| | 8.3 | % | | (2.7 | )% |
| Cost of revenue (excluding amortization of intangible assets) | 225.0 |
| | 202.3 |
| | 22.7 |
| | 11.2 | % | | |
| Selling, general and administrative | 85.6 |
| | 82.0 |
| | 3.6 |
| | 4.4 | % | | |
| Amortization of intangible assets | 9.1 |
| | 9.0 |
| | 0.1 |
| | 0.3 | % | | |
| Operating income | $ | 145.4 |
| | $ | 136.2 |
| | $ | 9.2 |
| | 6.8 | % | | |
| Operating income % of revenue | 31.3 | % | | 31.7 | % | | | | (0.4 | )% | | |
Manufacturing revenue decreased $33.3increased $35.6 million, or 8.3%, due primarily to higher demand for endotoxin products, bioburden products and services, and species identification services in the negative effect of changes in foreign currency exchange rates. Excluding the impact of foreign exchange rates, RMS revenue decreased slightly due to lower research model services revenueMicrobial Solutions business and lower research modelshigher service revenue in Japan;the Biologics business; partially offset by higher research models revenue in North America, China, and Europe.
DSA revenue increased $74.0 million due to higher revenue in the Safety Assessment business, as a result of increased study volume; higher revenue in the Discovery Services business, primarily as a result of the Argenta, BioFocus, ChanTest, and Oncotest acquisitions that contributed $27.0 million to revenue growth; partially offset by the negative effect of changes in foreign currency exchange rates.
Manufacturing revenueoperating income increased $24.9$9.2 million, or 6.8%, compared to the corresponding period in 2018. Manufacturing operating income as highera percentage of revenue for Microbial Solutions and Avian, which includefiscal year 2019 was 31.3%, a decrease of 0.4% from 31.7% for the Celsis and Sunrise acquisitions, respectively, corresponding period in 2018. The increase to operating income was due primarily to the increase in revenue. This increase
was partially offset by increased costs in both cost of revenue and selling, general, and administrative expenses to support the negative effectgrowth of changesthe businesses, which included the following: increased investments in foreign currency exchange rates.process improvements to further enhance Microbial Solutions’ operating efficiency; increased investments in personnel (staffing levels and hourly wage increases), and increased investments related to facility expansions (primarily in Biologics), and certain site consolidation costs. These increased costs collectively decreased operating income as a percentage of revenue in 2019 compared to 2018.
The following table presents consolidated revenue by type:Unallocated Corporate
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2015 | | 2014 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| Service revenue | $ | 858.2 |
| | $ | 797.8 |
| | $ | 60.4 |
| | 7.6 | % |
| Product revenue | 505.1 |
| | 499.9 |
| | 5.2 |
| | 1.0 | % |
| Total revenue | $ | 1,363.3 |
| | $ | 1,297.7 |
| | $ | 65.6 |
| | 5.1 | % |
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2019 | | 2018 | | $ change | | % change |
| | (in millions, except percentages) |
| Unallocated corporate | $ | 187.0 |
| | $ | 168.9 |
| | $ | 18.1 |
| | 10.8 | % |
| Unallocated corporate % of revenue | 7.1 | % | | 7.5 | % | | | | (0.4 | )% |
Service revenue increased $60.4 million dueUnallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to higher revenuethe reportable segments. The increase in the Safety Assessment business, as a resultunallocated corporate costs of increased study volume; and higher revenue in the Discovery Services business, which included the acquisitions of Argenta, BioFocus,
ChanTest, and Oncotest that contributed $27.0 million to service revenue growth; partially offset by lower revenue in our research model services and the negative effect of changes in foreign currency exchange rates.
Product revenue increased $5.2 million due to higher revenue for Microbial Solutions and Avian, which include the acquisitions of Celsis and Sunrise, respectively, that contributed $16.7 million to product revenue growth; higher research models revenue in North America, China, and Europe; partially offset by lower revenue in our research models and the negative effect of changes in foreign currency exchange rates.
Cost of Services Provided and Products Sold (Excluding Amortization of Intangible Assets)
The following table presents consolidated cost of services provided and products sold (excluding amortization of intangible assets) by reportable segment:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2015 |
| 2014 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| RMS | $ | 284.2 |
| | $ | 314.7 |
| | $ | (30.5 | ) | | (9.7 | )% |
| DSA | 407.0 |
| | 387.3 |
| | 19.7 |
| | 5.1 | % |
| Manufacturing | 141.0 |
| | 123.0 |
| | 18.0 |
| | 14.6 | % |
| Total cost of services provided and products sold (excluding amortization of intangible assets) | $ | 832.2 |
| | $ | 825.0 |
| | $ | 7.2 |
| | 0.9 | % |
Costs for fiscal year 2015 increased $7.2$18.1 million, or 0.9%10.8%, compared to the corresponding period in 2018 is related to an increase in compensation, benefits, and other employee-related expenses; costs associated with fiscal year 2014.the evaluation and integration of our recent acquisition activity; and costs related to the remediation of the unauthorized access into our information systems. Costs as a percentage of revenue for fiscal year 2015 were 61.0%2019 was 7.1%, a decrease of 2.6%,0.4% from 63.6%7.5% for the corresponding period in 2018.
Interest Income Interest income, which represents earnings on cash, cash equivalents, and time deposits was $1.5 million and $0.8 million for fiscal years 2019 and 2018, respectively. The increase of $0.7 million was primarily due to higher average cash balances in 2019 as compared to 2018.
Interest Expense Interest expense for fiscal year 2014.
RMS costs decreased $30.52019 was $60.9 million, a decrease of $2.9 million, or 4.5%, compared to $63.8 million for fiscal year 2018. The decrease was due primarily to favorable effect of changes ina foreign currency gain recognized in connection with a debt-related foreign exchange rates, cost savings achieved as a result offorward contract and lower debt issuance costs incurred compared to the corresponding period in 2018; partially offset by higher interest expense from increased debt to fund our efficiency initiatives, and reduced restructuring costs. RMS costs as a percentage of revenuerecent acquisitions.
Other Income, Net Other income, net, was $12.3 million for fiscal year 2015 were 60.4%,2019, a decrease of 2.1%$1.0 million, or 7.3%, from 62.5%compared to $13.3 million for fiscal year 2014.
DSA costs increased $19.7 million due primarily to an increase in Discovery Services costs, which included a higher cost base2018. The decrease was due to higher foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency compared to the acquisitions of Argenta, BioFocus, ChanTest,corresponding period in 2018 and Oncotest;higher pension-related costs as compared to the corresponding period in 2018; partially offset by higher net gains on our venture capital investments and our life insurance policy investments compared to the favorable effect of changescorresponding period in foreign currency exchange rates. Safety Assessment costs increased due to higher costs resulting from the growth of the business, partially offset by the favorable effect of changes in foreign currency exchanges rates. DSA costs as a percentage of revenue2018.
Income Taxes Income tax expense was $50.0 million for fiscal year 2015 were 66.5%,2019, a decrease of 5.5%, from 72.0%$4.5 million, compared to $54.5 million for fiscal year 2014,2018. Our effective tax rate was 16.5% for fiscal year 2019, compared to 19.3% for fiscal year 2018. The decrease in our effective tax rate in the 2019 period compared to the 2018 period was primarily due to improvedrecognizing a $20.6 million deferred tax asset in fiscal year 2019 for net operating leverage as a result of increased study volumelosses expected to be utilized in the future due to changes in our Safety Assessment business.international financing structure.
Manufacturing costs increased $18.0 million due primarilyFiscal Year 2018 Compared to the CelsisFiscal Year 2017
Revenue and Sunrise acquisitions, partially offsetOperating Income
The following tables present consolidated revenue by the favorable effect of changes in foreign currency exchange rates. Manufacturing costs as a percentage of revenue for fiscal year 2015 were 50.2%, an increase of 2.1%, from 48.1% for fiscal year 2014.type and by reportable segment:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2018 | | 2017 | | $ change | | % change |
| | (in millions, except percentages) |
| Service revenue | $ | 1,687.9 |
| | $ | 1,298.3 |
| | $ | 389.6 |
| | 30.0 | % |
| Product revenue | 578.2 |
| | 559.3 |
| | 18.9 |
| | 3.4 | % |
| Total revenue | $ | 2,266.1 |
| | $ | 1,857.6 |
| | $ | 408.5 |
| | 22.0 | % |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2018 | | 2017 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| RMS | $ | 519.7 |
| | $ | 493.6 |
| | $ | 26.1 |
| | 5.3 | % | | 1.6 | % |
| DSA | 1,316.9 |
| | 980.0 |
| | 336.9 |
| | 34.4 | % | | 1.1 | % |
| Manufacturing | 429.5 |
| | 384.0 |
| | 45.5 |
| | 11.9 | % | | 1.4 | % |
| Total revenue | $ | 2,266.1 |
| | $ | 1,857.6 |
| | $ | 408.5 |
| | 22.0 | % | | 1.3 | % |
The following table presents consolidated cost of services provided and products sold (excluding amortization of intangible assets)operating income by type:reportable segment:
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2015 | | 2014 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| Cost of services provided | $ | 568.2 |
| | $ | 558.6 |
| | $ | 9.6 |
| | 1.7 | % |
| Cost of products sold | 264.0 |
| | 266.4 |
| | (2.4 | ) | | (0.9 | )% |
| Total cost of services provided and products sold (excluding amortization of intangible assets) | $ | 832.2 |
| | $ | 825.0 |
| | $ | 7.2 |
| | 0.9 | % |
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2018 | | 2017 | | $ change | | % change |
| | (in millions, except percentages) |
| RMS | $ | 136.5 |
| | $ | 114.6 |
| | $ | 21.9 |
| | 19.1 | % |
| DSA | 227.6 |
| | 182.8 |
| | 44.8 |
| | 24.5 | % |
| Manufacturing | 136.2 |
| | 123.9 |
| | 12.3 |
| | 9.9 | % |
| Unallocated corporate | (168.9 | ) | | (133.0 | ) | | (35.9 | ) | | 27.0 | % |
| Total operating income | $ | 331.4 |
| | $ | 288.3 |
| | $ | 43.1 |
| | 15.0 | % |
| Operating income % of revenue | 14.6 | % | | 15.5 | % | | | | (0.9 | )% |
CostThe following presents and discusses our consolidated results by each of services providedour reportable segments:
RMS
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2018 | | 2017 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| Revenue | $ | 519.7 |
| | $ | 493.6 |
| | $ | 26.1 |
| | 5.3 | % | | 1.6 | % |
| Cost of revenue (excluding amortization of intangible assets) | 319.8 |
| | 317.1 |
| | 2.7 |
| | 0.9 | % | | |
| Selling, general and administrative | 61.8 |
| | 60.2 |
| | 1.6 |
| | 2.7 | % | | |
| Amortization of intangible assets | 1.6 |
| | 1.7 |
| | (0.1 | ) | | (5.4 | )% | | |
| Operating income | $ | 136.5 |
| | $ | 114.6 |
| | $ | 21.9 |
| | 19.1 | % | | |
| Operating income % of revenue | 26.3 | % | | 23.2 | % | | | | 3.1 | % | | |
RMS revenue increased $9.6$26.1 million, or 5.3%, due primarily to a higher cost base, as a result of the acquisitions of Argenta, BioFocus, ChanTest, and Oncotest as well as increased Safety Assessment revenues; partially offset by the favorable effect of changes in foreign currency exchange rates and lower costs for our research model product revenue in China and higher revenue for research model services. Research model services asbenefited from a result of lower revenue.
Cost of products sold decreased $2.4 million due to savings associated withlarge government contract in the IS business and strong client demand in the GEMS business resulting from increased research and development activity conducted across biotechnology, global efficiency initiatives, reduced restructuring costsbiopharmaceutical, and academic institutional clients, and the favorable effect of changes in foreign currency exchange rates; partially offset by lower research model product revenue outside of China.
RMS operating income increased costs as a result of the acquisitions of Sunrise and Celsis.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2015 | | 2014 | | $ change | | % change |
| | | | | | | | |
| | (in millions, except percentages) |
| RMS | $ | 62.1 |
| | $ | 65.7 |
| | $ | (3.6 | ) | | (5.5 | )% |
| DSA | 69.2 |
| | 63.1 |
| | 6.1 |
| | 9.7 | % |
| Manufacturing | 57.9 |
| | 48.1 |
| | 9.8 |
| | 20.4 | % |
| Unallocated corporate | 111.2 |
| | 92.1 |
| | 19.1 |
| | 20.7 | % |
| Total selling, general and administrative | $ | 300.4 |
| | $ | 269.0 |
| | $ | 31.4 |
| | 11.7 | % |
SG&A for fiscal year 2015 increased $31.4$21.9 million, or 11.7%19.1%, compared with fiscal year 2014. SG&Ato the corresponding period in 2017. RMS operating income as a percentage of revenue for fiscal year 20152018 was 22.0%26.3%, an increase of 1.3%,3.1% from 20.7%23.2% for fiscal year 2014.
The decreasethe corresponding period in RMS SG&A2017. Operating income and operating income as a percentage of $3.6revenue increased due primarily to lower amount of costs associated with the realignment of our research model production site in Maryland in 2018 compared to 2017. Restructuring costs (recorded primarily within cost of revenue) incurred during 2017 were $18.1 million, waswhich primarily related to non-cash asset impairments and accelerated depreciation charges. Restructuring costs incurred during 2018 were $2.0 million, which primarily related to cash payments for severance and transition costs. Additionally, operating income and operating income as a decreasepercentage of $1.4 million in external consulting and other service expenses; a decrease of $1.2 million in depreciation expense; a decrease of $1.1 million in compensation, benefits and other employee related expenses; and a decrease of $0.4 million in other expenses;revenue increased due to the increased revenue discussed above; partially offset by an increasecontinued investments to support future growth, including increased investments in personnel (staffing levels and hourly wage increases), and facility expansions (primarily in China) as well as lower operating income margins on the aforementioned large government contract.
DSA
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2018 | | 2017 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| Revenue | $ | 1,316.9 |
| | $ | 980.0 |
| | $ | 336.9 |
| | 34.4 | % | | 1.1 | % |
| Cost of revenue (excluding amortization of intangible assets) | 903.9 |
| | 661.7 |
| | 242.2 |
| | 36.6 | % | | |
| Selling, general and administrative | 131.2 |
| | 105.6 |
| | 25.6 |
| | 24.3 | % | | |
| Amortization of intangible assets | 54.2 |
| | 29.9 |
| | 24.3 |
| | 81.4 | % | | |
| Operating income | $ | 227.6 |
| | $ | 182.8 |
| | $ | 44.8 |
| | 24.5 | % | | |
| Operating income % of revenue | 17.3 | % | | 18.7 | % | | | | (1.4 | )% | | |
DSA revenue increased $336.9 million, or 34.4%, due primarily to the recent acquisitions of $0.5MPI Research, KWS BioTest, and Brains On-Line, which contributed $209.5 million, $8.6 million and $6.0 million to service revenue growth, respectively. Additionally, service revenue increased in stock-based compensation, primarily relatedboth the Safety Assessment and Discovery Services businesses due to our annual stock-based grants madedemand from both biotechnology and global biopharmaceutical clients and favorable pricing and mix of services. The effect of changes in foreign currency exchange rates also increased revenue.
DSA operating income increased $44.8 million, or 24.5%, compared to the first quarter of 2015, which included a new retirement vesting provision. RMS SG&Acorresponding period in 2017. DSA operating income as a percentage of revenue for fiscal year 20152018 was 13.2%17.3%, an increasea decrease of 0.1%,1.4% from 13.1%18.7% for fiscal year 2014.
the corresponding period in 2017. The increase in DSA SG&Ato operating income was primarily attributable to contributions from recent acquisitions of $6.1 million was relatedMPI Research, KWS BioTest, and Brains On-Line. These increases were partially offset by increased costs to support the growth of the Company, which include costs due to the acquisitions, including a higher service cost base, an increase of $5.9 million in compensation, benefits, and other employee related expenses; an increaseemployee-related expenses recorded within both cost of $1.4revenue and selling, general, and administrative expense, and higher amortization of intangible assets as substantially all of our acquisitions in fiscal year 2018 are included within the DSA reportable segment. These increased costs collectively decreased operating income as a percentage of revenue in 2018 compared to 2017.
Manufacturing
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2018 | | 2017 | | $ change | | % change | | Impact of FX |
| | (in millions, except percentages) |
| Revenue | $ | 429.5 |
| | $ | 384.0 |
| | $ | 45.5 |
| | 11.9 | % | | 1.4 | % |
| Cost of revenue (excluding amortization of intangible assets) | 202.3 |
| | 177.8 |
| | 24.5 |
| | 13.8 | % | | |
| Selling, general and administrative | 82.0 |
| | 72.5 |
| | 9.5 |
| | 13.0 | % | | |
| Amortization of intangible assets | 9.0 |
| | 9.8 |
| | (0.8 | ) | | (7.9 | )% | | |
| Operating income | $ | 136.2 |
| | $ | 123.9 |
| | $ | 12.3 |
| | 9.9 | % | | |
| Operating income % of revenue | 31.7 | % | | 32.3 | % | | | | (0.6 | )% | | |
Manufacturing revenue increased $45.5 million, or 11.9%, due primarily to higher demand for endotoxin products and species identification services in external consultingthe Microbial Solutions business, higher service revenue in the Biologics business, higher product revenue in the Avian business, and other service expenses; an increasethe effect of $0.4 millionchanges in operating expenses, including information technology infrastructure and facility expenses; an increase of $0.4 million in bad debt expense; and an increase of $0.3 million in depreciation expense;foreign currency exchange rates; partially offset by a decreasethe absence of $1.8 million of service revenue related to the CDMO business.
Manufacturing operating income increased $12.3 million, or 9.9%, compared to the corresponding period in severance expense and a decrease of $0.5 million in other expenses. DSA SG&A2017. Manufacturing operating income as a percentage of revenue for fiscal year 20152018 was 11.3%31.7%, a decrease of 0.4%,0.6% from 11.7%32.3% for fiscal year 2014.
the corresponding period in 2017. The increase to operating income was due primarily to the increase in Manufacturing SG&A of $9.8 millionrevenue. This increase was related to an increase of $4.8 million in compensation, benefits and other employee related expenses; an increase of $1.7 million in external consulting and other service expenses; an increase of $1.6 million in severance expense; an increase of $1.0 million in operating expenses, including information technology infrastructure and facility expenses; an increase of $0.9 million in depreciation expense; and an increase of $0.5 million in stock-based compensation, primarily related to our annual stock-based grants made in the first quarter of 2015, which included a new retirement vesting provision; partially offset by a decreaseincreased costs to support the growth of $0.7 millionthe Company, including increased investments in other expenses. Manufacturing SG&Apersonnel (staffing levels and hourly wage increase), facility expansions (primarily in Microbial Solutions and Biologics), and increased investments in technology to support research and development efforts (primarily in Microbial Solutions). Increased costs are recorded in cost of revenue and selling, general, and administrative expenses and these higher costs decreased operating income as a percentage of revenue for fiscal year 2015 was 20.6%, an increase of 1.8% from 18.8% for fiscal year 2014.in 2018 compared to 2017.
Unallocated Corporate
|
| | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2018 | | 2017 | | $ change | | % change |
| | (in millions, except percentages) |
| Unallocated corporate | $ | 168.9 |
| | $ | 133.0 |
| | $ | 35.9 |
| | 27.0 | % |
| Unallocated corporate % of revenue | 7.5 | % | | 7.2 | % | | | | 0.3 | % |
The increase in unallocated corporate SG&Acosts of $19.1$35.9 million, wasor 27.0%, is consistent with the allocated selling, general, and administrative expense increases discussed above and are primarily related to an increase of $7.3 million in stock-based compensation, primarily related to our annual stock-based grants made in the first quarter of 2015, which included a new retirement vesting provisionbenefits, and the modification of certain stock-based awards as part of executive retirement transitions;other employee-related expenses and an increase of $7.3 million in costs associated with the evaluation and integration of our recent acquisitions and compensation costs related to business acquisitions;support the growth of the Company. Costs as a percentage of revenue for fiscal year 2018 was 7.5%, an increase of $2.2 million0.3% from 7.2% for the corresponding period in compensation, benefits and other employee-related expenses; an increase of $2.0 million in external consulting and other service expenses; an increase of $1.9 million in information technology related expenses; and an increase of $0.4 million in other expenses; partially offset by a decrease of $2.0 million in contingent consideration related to business acquisitions.2017.
Amortization of Intangible Assets Amortization of intangibles for fiscal year 2015 was $24.2 million, a decrease of $1.8 million, or 6.7%, from $26.0 million for fiscal year 2014, due primarily to certain intangibles acquired in connection with several Discovery Services and Safety Assessment businesses becoming fully amortized and the effect of changes in foreign currency exchange rates, partially offset by an increase due to recent acquisitions, primarily Argenta, BioFocus, ChanTest, Sunrise, Celsis and Oncotest.
Interest Income Interest income, which represents earnings on held cash, cash equivalents, and time deposits was $1.0remained consistent at $0.8 million and $0.7 million for fiscal year 2015, a decrease of $0.2 million, or 9.4%, compared to $1.2 million for fiscal year 2014.years 2018 and 2017, respectively.
Interest Expense Interest expense for fiscal year 20152018 was $15.1$63.8 million, an increase of $3.1$34.0 million, or 26.1%114.2%, compared to $12.0$29.8 million for fiscal year 2014.2017. The increase was due primarily to the write-off of a portion ofhigher debt issuance costs in connection with the modification ofto fund our $970M Credit Facility in April 2015, interest expense related to new capital leases, and overall higher average debt due to additional borrowings related to businessrecent acquisitions.
Other Income, (Expense), Net Other income, (expense), net, was net other income of $3.0$13.3 million for fiscal year 2015,2018, a decrease of $7.7$24.5 million, or 71.9%64.9%, compared to net other income of $10.7$37.8 million for fiscal year 2014.2017. The decrease in other
income, (expense), net was driven by a decrease of $10.4 million due to a reversal of the indemnification asset associated with a pre-acquisition tax position and corresponding unrecognized tax benefit; a decrease of $5.5$7.0 million in income fromgains recognized related to our venture capital investments, accounted for under the equity method;a decrease of $6.0 million in gains related to certain life insurance policies, and the absence of a noncash$10.6 million gain recognized as a result of $2.1 million related to assets assumed at our Frederick, Maryland, facility following the termination of a customer contract, which was recorded in fiscal year 2014; partially offset by a bargain purchase gain of $9.8 million associated with the acquisition of Sunrise and an increase of $0.5 million from other activity.CDMO business.
Income Taxes Income tax expense was $43.4 million in fiscal year 2015, a decrease of $4.3 million compared to $47.7$54.5 million for fiscal year 2014.2018, a decrease of $116.9 million, compared to $171.4 million for fiscal year 2017. Our effective tax rate was 22.2% in19.3% for fiscal year 2015,2018, compared to 26.8% in57.7% for fiscal year 2014.2017. The decrease was primarily attributable to a $10.4 milliondriven by the net effects of U.S. Tax Reform, including the reduction in unrecognized tax benefits and related interest due to the expiration of the statuteU.S. federal statutory tax rate from 35% in 2017 to 21% in 2018, as well as the impact of limitations associated with pre-acquisition tax positionsthe one-time Transition Tax and change of our assertion of indefinite reinvestment of foreign earnings in 2017. In addition, 2017 includes the impact of the gain on the forgiveness of debt and a non-taxable bargain purchase gain of $9.8 million associated with the acquisition of Sunrise. These benefits were offset by a tax accrual of $6.6 million of withholding taxes in order to access cash from our Canadian and Chinese operations for use outsidedivestiture of the U.S.CDMO business.
Liquidity and Capital Resources
We currently require cash to fund our working capital needs, pension obligations, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future.
The following table presents our cash, cash equivalents and short-term investments:
| | | | December 31, 2016 | | December 26, 2015 | | | | | |
| | | | | December 28, 2019 | | December 29, 2018 |
| | (in millions) | (in millions) |
| Cash and cash equivalents: | | | | | | |
| Held in the U.S. entities | $ | 10.6 |
| | $ | 3.6 |
| |
| Held in U.S. entities | | $ | 56.5 |
| | $ | 67.3 |
|
| Held in non-U.S. entities | 107.0 |
| | 114.3 |
| 181.5 |
| | 128.1 |
|
| Total cash and cash equivalents | 117.6 |
| | 117.9 |
| 238.0 |
| | 195.4 |
|
| Investments: | | | | |
| Held in the U.S. entities | — |
| | 4.5 |
| |
| Short-term investments: | | | | |
| Held in non-U.S. entities | 3.8 |
| | 16.0 |
| 1.0 |
| | 0.9 |
|
| Total cash, cash equivalents and investments | $ | 121.4 |
| | $ | 138.4 |
| |
| Total cash, cash equivalents and short-term investments | | $ | 239.0 |
| | $ | 196.3 |
|
Borrowings
In April 2015,On March 26, 2018, we amended and restated our $970M Credit Facility, creating a $1.3 billion facility ($1.3B Credit Facility) that provides for a $400.0 million term loan facility and a $900.0 million multi-currency revolving facility. The interest rates applicable to term loans and revolving loans under the Company’s $1.3B Credit Facility were, at our option, equal to either the alternate base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.5% or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate, plus an interest rate margin based upon our leverage ratio.
On March 30, 2016, we amended and restated our $1.3B Credit Facility, creating a $1.65 billion credit facility, ($1.65B Credit Facility) which (1) extendsextended the maturity date and provided for the credit facility and (2) makes certain other amendments in connection with our acquisition of WIL Research. The $1.65B Credit Facility provides for up to approximately $1.65 billion in financing, including a $650.0$750.0 million term loan facility and a $1.0$1.55 billion multi-currency revolving facility.facility (Credit Facility). The term loan facility matures in 19 quarterly installments with the last installment due March 30, 2021.26, 2023. The revolving facility matures on March 30, 2021,26, 2023, and requires no scheduled payment before that date. On October 23, 2019, we prepaid $500.0 million of the term loan with proceeds from a $500.0 million unregistered private offering (see 2028 Senior Notes below). Additionally, on November 4, 2019, we further amended and restated the Credit Facility to increase the multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. Under specified circumstances, we have the ability to increase the term loansloan and/or revolving line of creditfacility by up to $500.0 million$1.0 billion in the aggregate.
On April 3, 2018, we entered into an indenture (Base Indenture) with MUFG Union Bank, N.A. to allow for senior notes offerings under supplemental indentures. Concurrently on April 3, 2018, we entered into our first supplemental indenture and raised $500.0 million in aggregate principal amount of 5.5% Senior Notes due in 2026 (2026 Senior Notes) in an unregistered offering. Under the terms of the first supplemental indenture, interest on the 2026 Senior Notes is payable semi-annually on April 1 and October 1, beginning on October 1, 2018. On October 23, 2019, we entered into our second supplemental indenture and raised an additional $500.0 million in aggregate principal amount of 4.25% Senior Notes due in 2028 (2028 Senior Notes) 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.
Amounts outstanding under our credit facilities and both the $1.65B Credit Facility2026 Senior Notes and the 2028 Senior Notes were as follows as of December 31, 2016 and December 26, 2015:follows:
| | | | December 31, 2016 | | December 26, 2015 | | | | | |
| | | | | December 28, 2019 | | December 29, 2018 |
| | (in millions) | (in millions) |
| Term loans | $ | 633.8 |
| | $ | 390.0 |
| $ | 193.8 |
| | $ | 731.3 |
|
| Revolving credit facility | 578.8 |
| | 446.0 |
| |
| Revolving facility | | 676.1 |
| | 397.5 |
|
| 2026 Senior Notes | | 500.0 |
| | 500.0 |
|
| 2028 Senior Notes | | 500.0 |
| | — |
|
| Total | $ | 1,212.6 |
| | $ | 836.0 |
| $ | 1,869.9 |
| | $ | 1,628.8 |
|
The interest rates applicable to the term loan and revolving loansfacility under the $1.65B Credit Facility are, at our 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%1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon our leverage ratio.
We entered into foreign exchange forward contracts during fiscal years 2019 and 2018 to limit our foreign currency exposure related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under the Credit Facility.
The acquisition of Citoxlab on April 29, 2019 for $527.7 million in cash was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility.
The acquisition of HemaCare on January 3, 2020 for approximately $380 million in cash was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility.
Repurchases of Common Stock
In July 2010,On May 9, 2017, our Board of Directors authorized a $500.0 millionincreased the stock repurchase program, and subsequently approved increases forauthorization by $150.0 million, to an aggregate authorizationamount of $1,150.0 million.$1.3 billion. During fiscal year 2016,2019, we did not repurchase any shares under our authorized stock repurchase program. As of December 31, 2016,28, 2019, we had $69.7$129.1 million remaining on the authorized stock repurchase program. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, PSUs,restricted stock units, and restricted stockperformance share units in order to satisfy individual minimum statutory tax withholding requirements. During fiscal year 2016,2019, we acquired approximately 0.20.1 million shares for $12.3 million.$18.1 million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
| | | | Fiscal Year | Fiscal Year |
| | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
| | | | | | | (in millions) |
| | (in millions) | |
| Income from continuing operations | $ | 156.1 |
| | $ | 152.0 |
| | $ | 129.9 |
| |
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities | 174.3 |
| | 126.6 |
| | 126.0 |
| |
Income from continuing operations, net of income taxes | | $ | 254.1 |
| | $ | 227.2 |
| | $ | 125.6 |
|
| Adjustments to reconcile income from continuing operations, net of income taxes, to net cash provided by operating activities | | 220.7 |
| | 199.1 |
| | 186.6 |
|
| Changes in assets and liabilities | (30.0 | ) | | 9.6 |
| | (3.8 | ) | 6.1 |
| | 14.8 |
| | 5.9 |
|
| Net cash provided by operating activities | $ | 300.4 |
| | $ | 288.2 |
| | $ | 252.1 |
| $ | 480.9 |
| | $ | 441.1 |
| | $ | 318.1 |
|
CashNet cash provided by cash flows from operating activities representrepresents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our income from continuing operations for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, deferred income taxes, gains on venture capital investments and gains on bargain purchases,divestiture, and impairment charges, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. For fiscal year 2019, compared to fiscal year 2018, the increase in net cash provided by operating activities was primarily driven by an increase in income from continuing operations, net of income taxes
and the favorable timing of vendor and supplier payments compared to the same period in 2018; partially offset by unfavorable changes in operating assets and liabilities, specifically related to the timing of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits), increases in inventory levels in response to customer demand, and higher compensation payments compared to the prior year period. The increase in net cash provided by operating activities from fiscal year 20152017 to 20162018 was primarily driven by higher income from continuing operations; and an increase in non-cash adjustments, primarily an increase in depreciation and amortization as well as stock-based compensation; partially offset by a negative change in operating assets and liabilities. The increase in cash provided by operating activities from fiscal year 2014 and 2015 was primarily driven by higher income from continuing operations and a positive changechanges in operating assets and liabilities. Our days sales outstanding, which includesliabilities resulting from an increase in our deferred revenue (primarily due to a one-time up-front payment received in connection with a strategic agreement), an increase in customer contract deposits, as an offset to accounts receivable in the calculation, was 52 dayswell as improved collections of December 31, 2016, compared to 51 days as of December 26, 2015, and 52 days as of December 27, 2014.
our receivables.
The following table presents our net cash used in investing activities:
| | | | Fiscal Year | | | | | | | |
| | 2016 | | 2015 | | 2014 | Fiscal Year |
| | | | | | | 2019 | | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Acquisition of businesses and assets, net of cash acquired | $ | (648.5 | ) | | $ | (247.7 | ) | | $ | (234.3 | ) | $ | (515.7 | ) | | $ | (824.9 | ) | | $ | (25.0 | ) |
| Capital expenditures | (55.3 | ) | | (63.3 | ) | | (56.9 | ) | (140.5 | ) | | (140.1 | ) | | (82.4 | ) |
| Investments, net | 13.7 |
| | (7.1 | ) | | (5.6 | ) | (21.4 | ) | | 10.7 |
| | (37.2 | ) |
| Proceeds from divestiture | | — |
| | — |
| | 72.5 |
|
| Other, net | 3.7 |
| | (2.2 | ) | | (1.2 | ) | (3.9 | ) | | (0.7 | ) | | (0.5 | ) |
| Net cash used in investing activities | $ | (686.4 | ) | | $ | (320.3 | ) | | $ | (298.0 | ) | $ | (681.5 | ) | | $ | (955.0 | ) | | $ | (72.6 | ) |
The principalprimary use of cash used in investing activities in fiscal year 2016 was2019 related to our acquisitionsthe acquisition of WIL Research for $577.4 million, netCitoxlab, the acquisition of cash acquired; Agilux for $62.0 million, neta supplier, capital expenditures to support the growth of cash acquired;the business, and Blue Stream for $8.7 million, net of cash acquired; as well as our capital expenditures; partially offset by proceeds from the sale of investments and distributions fromin certain venture capital investments, net of purchases.and other equity investments. The principalprimary use of cash in fiscal year 2015 was2018 related to our acquisitions of Celsis for $202.0 million, net of cash acquired; Oncotest for $35.2 million, net of cash acquired;MPI Research and Sunrise for $9.6 million, net of cash acquired; as well asKWS BioTest, and our capital expenditures.expenditures to support the growth of the business; partially offset by proceeds from net investments, which primarily relate to short-term investments held by our U.K. operations. The principalprimary use of cash in fiscal year 2014 was primarily2017 related to our acquisitionscapital expenditures to support the growth of Argentathe business, net investment activity, and BioFocus for $182.5 million, netour acquisition of cash acquired; and ChanTest for $51.1 million, netBrains On-Line, partially offset by the proceeds from the divestiture of cash acquired; as well as our capital expenditures.the CDMO business.
The following table presents our net cash provided by (used in) financing activities:
| | | | Fiscal Year | | | | | | | |
| | 2016 | | 2015 | | 2014 | Fiscal Year |
| | | | | | | 2019 | | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Proceeds from long-term debt and revolving credit facility | $ | 1,044.7 |
| | $ | 492.5 |
| | $ | 298.9 |
| $ | 3,358.5 |
| | $ | 2,755.0 |
| | $ | 236.8 |
|
| Payments on long-term debt, revolving credit facility, and finance lease obligations | | (3,124.6 | ) | | (2,201.0 | ) | | (372.4 | ) |
| Proceeds from exercises of stock options | 23.2 |
| | 39.3 |
| | 73.7 |
| 34.5 |
| | 37.7 |
| | 38.9 |
|
| Payments on long-term debt, revolving credit facility, and capital lease obligations | (656.6 | ) | | (417.3 | ) | | (194.5 | ) | |
| Payments on debt financing costs | | (6.6 | ) | | (18.3 | ) | | — |
|
| Purchase of treasury stock | (12.3 | ) | | (117.5 | ) | | (122.0 | ) | (18.1 | ) | | (13.8 | ) | | (106.9 | ) |
| Other, net | (8.2 | ) | | 7.5 |
| | 5.3 |
| (11.8 | ) | | (1.5 | ) | | (4.9 | ) |
| Net cash provided by financing activities | $ | 390.8 |
| | $ | 4.5 |
| | $ | 61.4 |
| |
| Net cash provided by (used in) financing activities | | $ | 231.9 |
| | $ | 558.1 |
| | $ | (208.5 | ) |
For fiscal year 2016,2019, net cash provided by financing activities reflected the net borrowingsproceeds of $388.0$233.9 million on our long-term debt, revolving credit facility, and finance lease obligations. Included in the net proceeds are the following amounts:
Proceeds of $494 million received from the issuance of the 2028 Senior Notes on October 23, 2019, proceeds of approximately $581 million from our revolving credit facility to fund our recent acquisitions; and $98 million of proceeds from our revolving credit facility to fund activities in the normal course of business; partially offset by,
Payments of $537.5 million on our term loan, which included the $500.0 million prepayment on November 4, 2019, and approximately $151 million of repayments to our revolving credit facility in the normal course of business;
Additionally, we had $2.4 billion of gross payments, partially offset by $2.2 billion of gross proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $23.2 million;$34.5 million. Net cash provided by financing activities was partially offset by treasury stock purchases of $12.3$18.1 million made due to the
netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements and the purchase of an additional 5% equity interest in Vital River for $7.9 million which is included in Other, net.
For fiscal year 2018, net cash provided by financing activities reflected the incremental proceeds from the refinancing of our previous $1.65 Billion Credit Facility to the $2.3 Billion Credit Facility and the proceeds from our $500.0 million 2026 Senior Notes. Subsequent to refinancing our $2.3 Billion Credit Facility, we repaid €300 million of our revolving facility borrowed by a non-U.S. Euro functional currency entity and replaced the borrowing with a $343 million U.S. dollar denominated loan. A forward currency contract was then executed to mitigate any foreign currency gains or losses on the $343 million U.S. dollar denominated loan. Additionally, proceeds from exercises of employee stock options of $37.7 million; partially offset by payments on debt financing costs of $18.3 million, and treasury stock purchases of $13.8 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual minimum statutory tax withholding requirements and other activity. requirements.
For fiscal year 2015,2017, cash provided byused in financing activities reflected net borrowingspayments of $75.2 million;$135.6 million on long-term debt, revolving credit facility, and finance lease obligations; and treasury stock purchases of $106.9 million made pursuant to our authorized stock repurchase program and the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements; partially offset by proceeds from exercises of employee stock options of $39.3 million, and other activity; partially offset by treasury stock purchases of $117.5 million made pursuant to our authorized stock repurchase program. For fiscal year 2014, cash provided by financing activities reflected net borrowings of $104.4 million; proceeds from exercises of employee stock options of $73.7 million, and other activity; partially offset by treasury stock purchases of $122.0 million made pursuant to our authorized stock repurchase program.
$38.9 million.
Contractual Commitments and Obligations
Minimum future payments of our contractual obligations as of December 31, 201628, 2019 are as follows: | | | | Payments Due by Period | | | | | | | | | | | |
| | Total | | Less than
1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than
5 Years | Payments Due by Period |
| | | | | | | | | | | Total | | Less than
1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than
5 Years |
| | (in millions) | (in millions) |
Notes payable (1) | $ | 1,212.7 |
| | $ | 24.6 |
| | $ | 89.4 |
| | $ | 1,098.7 |
| | $ | — |
| $ | 1,875.7 |
| | $ | 35.5 |
| | $ | 155.1 |
| | $ | 683.1 |
| | $ | 1,002.0 |
|
Operating leases (2) | 101.3 |
| | 23.4 |
| | 37.4 |
| | 21.4 |
| | 19.1 |
| 222.0 |
| | 27.1 |
| | 52.4 |
| | 41.2 |
| | 101.3 |
|
| Capital leases | 43.2 |
| | 4.1 |
| | 6.5 |
| | 4.6 |
| | 28.0 |
| |
Redeemable noncontrolling interest (3) | 14.1 |
| | — |
| | 14.1 |
| | — |
| | — |
| |
| Finance leases | | 40.7 |
| | 4.3 |
| | 7.7 |
| | 5.1 |
| | 23.6 |
|
Redeemable noncontrolling interests (3) | | 26.3 |
| | 4.0 |
| | 22.3 |
| | — |
| | — |
|
Venture capital investment commitments (4) | 46.6 |
| | 29.9 |
| | 15.7 |
| | 1.0 |
| | — |
| 48.1 |
| | 34.8 |
| | 13.3 |
| | — |
| | — |
|
Contingent consideration (5) | 3.8 |
| | 3.8 |
| | — |
| | — |
| | — |
| |
Contingent payments (5) | | 0.9 |
| | 0.9 |
| | — |
| | — |
| | — |
|
Unconditional purchase obligations (6) | 86.2 |
| | 79.1 |
| | 7.1 |
| | — |
| | — |
| 154.0 |
| | 106.1 |
| | 45.0 |
| | 2.9 |
| | — |
|
| Total contractual cash obligations | $ | 1,507.9 |
| | $ | 164.9 |
| | $ | 170.2 |
| | $ | 1,125.7 |
| | $ | 47.1 |
| $ | 2,367.7 |
| | $ | 212.7 |
| | $ | 295.8 |
| | $ | 732.3 |
| | $ | 1,126.9 |
|
| |
(1) | Notes payable includes the principal payments on our debt, which include our $2.3B Credit Facility, our Senior Notes and Other debt. |
| |
(2) | We lease properties and equipment for use in our operations. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance, and other operating expenses. Amounts reflected within the table detail future minimum rental commitments under non-cancellable operating leases, net of income from subleases, for each of the periods presented. Approximately $57 million of contractually committed lease payments are reflected in the table for which leases have not yet commenced, as we do not yet control the underlying assets. |
| |
(3) | The estimated cash obligation for redeemable noncontrolling interest isinterests are based on the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value as of December 31, 2016.28, 2019. |
| |
(4) | The timing of the remaining capital commitment payments to venture capital funds is subject to the procedures of the limited liability partnerships and limited liability companies; the above table reflects the earliest possible date the payment can be required under the relevant agreements. |
| |
(5) | In connection with certain business and asset acquisitions, we agreed to make additional payments of upaggregating to $3.8$0.9 million based upon the achievement of certain financial targets.targets in connection with the respective acquisition. The contingent consideration obligationpayment obligations included in the table above hashave not been probability adjusted or discounted. |
| |
(6) | Unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty. |
The above table excludes obligations related to our pension and other post-retirement benefit plans. Refer to Item 8, “Financial Statements and Other Supplementary Data,” in this Annual Report on Form 10-K for more details.
Tax Related Obligations
We excluded liabilities pertaining to uncertain tax positions from our summary of contractual obligations presented above, as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 31, 2016,28, 2019, we had $24.2$19.7 million of liabilities associated with uncertain tax positions.
Additionally, we excluded federal and state income tax liabilities of $52.1 million from our summary of contractual obligations presented above, relating to the one-time Transition Tax on unrepatriated earnings under U.S. Tax Reform. The Transition Tax will be paid, interest free, over an eight-year period through 2026.
Off-Balance Sheet Arrangements
As of December 31, 2016,28, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated under the Exchange Act, except as disclosed below.
Venture Capital Investments
We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to these entitiesthe funds as of December 31, 201628, 2019 was $84.8$128.4 million, of which we had funded $38.2 million.$80.3 million through December 28, 2019. Refer to Note 4,6, “Venture Capital Investments and Marketable Securities,Other Investments,” to our consolidated financial statements contained in Item 8, “Financial Statements and Other Supplementary Data,” in this Annual Report on Form 10-K for further details.
Letters of Credit
Our off-balance sheet commitments related to our outstanding letters of credit as of December 31, 201628, 2019 were $4.9$7.5 million.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and currency exchange rates, which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.
Interest Rate Risk
We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of December 31, 2016,28, 2019, our debt portfolio was comprised primarily of floating interest rate borrowings. A 100-basis point increase in interest rates would increase our annual pre-tax interest expense by approximately $12.1$8.7 million.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our financial position, results of operations, and cash flows.
While the financial results of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations in their respective local currency. The principal functional currencies of the Company’s foreign subsidiaries are the Euro, British Pound, Canadian Dollar, and Canadian Dollar.Chinese Yuan Renminbi. During fiscal year 2016,2019, the most significant drivers of foreign currency translation adjustment that the Company recorded as part of other comprehensive income (loss) were the Euro,Canadian Dollar, British Pound, Canadian Dollar,Hungarian Forint, Euro, and to a lesser extent, the Chinese Yuan Renminbi and Japanese Yen.Renminbi.
Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our financial position, results of operations, and cash flows. As the U.S. dollar strengthens against other currencies, particularly as a result of Brexit and other recent developments, the value of our non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expense,expenses, which will also decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, and expenses, assets, liabilities, and cash flows will generally increase when reported in U.S. dollars. For fiscal year 2016,2019, our revenue would have decreasedincreased by approximately $65.9$90.5 million and our operating income would have decreasedincreased by approximately $2.8$2.0 million, respectively, if the U.S. dollar exchange rate would havehad strengthened by 10%, with all other variables held constant.
We attempt to minimize this exposure by using certain financial instruments in accordance with our overall risk management and our hedge policy. We do not enter into speculative derivative agreements.
During fiscal year 2016,years 2019 and 2018, we utilizedentered into foreign exchange forward contracts principally to hedge certain balance sheet exposures resulting fromlimit our foreign currency fluctuations.exposure related to both intercompany loans and a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under our Credit Facility. Refer to Note 14, “Foreign Currency Contracts,” to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for further details regarding these types of forward contracts.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| |
| |
Consolidated Statements of Income for fiscal years 2016, 20152019, 2018 and 20142017 | |
Consolidated Statements of Comprehensive Income for fiscal years 2016, 20152019, 2018 and 20142017 | |
Consolidated Balance Sheets as of December 31, 201628, 2019 and December 26, 201529, 2018 | |
Consolidated Statements of Cash Flows for fiscal years 2016, 20152019, 2018 and 20142017 | |
Consolidated Statements of Changes in Equity for fiscal years 2016, 20152019, 2018 and 20142017 | |
| |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Charles River Laboratories International, Inc.:
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Charles River Laboratories International, Inc. and its subsidiaries (the “Company”) as of December 28, 2019 and December 29, 2018, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three fiscal years in the period ended December 28, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Charles River Laboratories International, Inc. and its subsidiaries atthe Company as of December 31, 201628, 2019 and December 26, 2015,29, 2018, and the results of theirits operations and theirits cash flows for each of the three fiscal years in the period ended December 31, 201628, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofCOSO.
Change in Accounting Principle
As discussed in Note 1 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Citoxlab and the acquisition of a DSA supplier from its assessment of internal control over financial reporting as of December 28, 2019 because they were acquired by the Company in purchase business combinations during 2019. We have also excluded Citoxlab and the acquisition of the DSA supplier from our audit of internal control over financial reporting. Citoxlab and the DSA supplier whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 5.0% and 4.7%, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended December 28, 2019.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of Citoxlab - Valuation of Acquired Customer Relationship Intangible Assets
As described in Management's Report on Internal Control over Financial Reporting, management has excluded WRH, Inc., Blue Stream Laboratories, Inc.,Notes 1 and Agilux Laboratories, Inc. from its assessment of internal control over2 to the consolidated financial reporting as of December 31, 2016 because they were acquired bystatements, the Company during 2016. We have also excluded WRH, Inc.completed the acquisition of Citoxlab on April 29, 2019. The preliminary purchase price allocation included customer relationship intangible assets (also referred to as client relationships) of $134.6 million. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price, requires the use of significant judgment with regard to (i) the fair value; and (ii) the period and the method by which the intangible assets will be amortized. To determine the fair value of the acquired client relationships, management utilized the multiple period excess earnings model (a commonly accepted valuation technique), Blue Stream Laboratories, Inc.,which includes the following key assumptions: projections of cash flows from the acquired entities, which include future revenue growth rates, operating income margins, and Agilux Laboratories, Inc. fromcustomer attrition rates, as well as discount rates based on an analysis of the weighted average cost of capital.
The principal considerations for our determination that performing procedures relating to the acquisition of Citoxlab - valuation of acquired customer relationship intangible assets is a critical audit matter are (i) there was a high degree of internal controlauditor judgment and subjectivity in applying procedures relating to the fair value measurement of customer relationship intangible assets acquired due to the significant amount of judgment and estimation by management when developing the estimate, (ii) significant audit effort was required in evaluating the key assumptions relating to the estimate, including future revenue growth rates, operating income margins, customer attrition rates, and discount rates, and in evaluating audit evidence relating to the economic useful life over financial reporting. WRH, Inc., Blue Stream Laboratories, Inc., and Agilux Laboratories, Inc. are wholly-owned subsidiaries whose totalwhich cash flow projections were estimated in the valuation of the customer relationship intangible assets, and total revenues represent 7.8 percent(iii) the audit effort involved the use of professionals with specialized skill and 11.1 percent, respectively,knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of acquired customer relationship intangible assets, including controls over the review of the relatedvaluation methodology, the key assumptions underlying the valuation, and the useful lives of the acquired customer relationship intangible assets. These procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of customer relationship intangible assets and evaluating the reasonableness of the estimated future revenue growth rates, operating margins and customer attrition rate assumptions by evaluating their consistency with data from external sources, past performance of the acquired business, and evidence obtained in other areas of the audit, and (iii) evaluating the reasonableness of the economic useful life over which cash flow projections are estimated. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s valuation model and certain significant assumptions, including customer attrition and the discount rates.
Discovery and Safety Assessment Revenue Recognized Over Time
As described in Notes 1 and 3 to the consolidated financial statement amountsstatements, the Company recognized revenue of $1,619.0 million in its Discovery and Safety Assessment (DSA) segment in 2019, of which $1,618.3 million was recognized over time as services are delivered to the customer based on the extent of progress towards completion of the performance obligation using either the cost-to-cost (input method) or right to invoice measures of progress (output method). The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Management uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer, which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.
The principal considerations for our determination that performing procedures relating to DSA revenue recognized over time is a critical audit matter are there was a high degree of auditor subjectivity and effort in performing procedures to evaluate the calculation of DSA revenue recognized over time, including the estimates of the variables within the calculation of the forecasted cost of service contracts, such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to DSA revenue recognized over time, including controls over the review of agreements, development of the forecasted costs, the review of budget versus actual costs incurred and the review of revenue recognition. These procedures also included, among others, (i) reading agreements and reports describing the results of services provided for a sample of service contracts selected for testing, (ii) evaluating and testing management’s process for determining the amount of revenue recognized for a sample of service contracts, which included evaluating the reasonableness of forecasted costs through a comparison of actual current year ended December 31, 2016.project costs to historical management cost estimates for completed service contracts, and (iii) testing actual costs incurred for a sample of in-process service contracts by examining evidence of costs incurred, including invoices, time cards, human resources documents, and the completeness and accuracy of overhead allocations.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 14, 201711, 2020
We have served as the Company’s auditor since 1999.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| | | | Fiscal Year | Fiscal Year |
| | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
| Service revenue | $ | 1,130,733 |
| | $ | 858,244 |
| | $ | 797,765 |
| $ | 2,029,371 |
|
| $ | 1,687,941 |
|
| $ | 1,298,298 |
|
| Product revenue | 550,699 |
| | 505,058 |
| | 499,897 |
| 591,855 |
|
| 578,155 |
|
| 559,303 |
|
| Total revenue | 1,681,432 |
| | 1,363,302 |
| | 1,297,662 |
| 2,621,226 |
|
| 2,266,096 |
|
| 1,857,601 |
|
| Costs and expenses: | | | | | | | | | | |
| Cost of services provided (excluding amortization of intangible assets) | 757,732 |
| | 568,227 |
| | 558,578 |
| 1,371,699 |
|
| 1,150,371 |
|
| 867,014 |
|
| Cost of products sold (excluding amortization of intangible assets) | 277,034 |
| | 263,983 |
| | 266,424 |
| 291,216 |
|
| 275,658 |
|
| 289,669 |
|
| Selling, general and administrative | 367,548 |
| | 300,414 |
| | 269,033 |
| 517,622 |
|
| 443,854 |
|
| 371,266 |
|
| Amortization of intangible assets | 41,699 |
| | 24,229 |
| | 25,957 |
| 89,538 |
|
| 64,830 |
|
| 41,370 |
|
| Operating income | 237,419 |
| | 206,449 |
| | 177,670 |
| 351,151 |
|
| 331,383 |
|
| 288,282 |
|
| Other income (expense): | | | | | | | | | | |
| Interest income | 1,314 |
| | 1,043 |
| | 1,154 |
| 1,522 |
|
| 812 |
|
| 690 |
|
| Interest expense | (27,709 | ) | | (15,072 | ) | | (11,950 | ) | (60,882 | ) |
| (63,772 | ) |
| (29,777 | ) |
| Other income (expense), net | 11,897 |
| | 3,008 |
| | 10,721 |
| |
| Other income, net | | 12,293 |
|
| 13,258 |
|
| 37,760 |
|
| Income from continuing operations, before income taxes | 222,921 |
| | 195,428 |
| | 177,595 |
| 304,084 |
|
| 281,681 |
|
| 296,955 |
|
| Provision for income taxes | 66,835 |
| | 43,391 |
| | 47,671 |
| 50,023 |
|
| 54,463 |
|
| 171,369 |
|
| Income from continuing operations, net of income taxes | 156,086 |
| | 152,037 |
| | 129,924 |
| 254,061 |
|
| 227,218 |
|
| 125,586 |
|
| Income (loss) from discontinued operations, net of income taxes | 280 |
| | (950 | ) | | (1,726 | ) | — |
|
| 1,506 |
|
| (137 | ) |
| Net income | 156,366 |
| | 151,087 |
| | 128,198 |
| 254,061 |
|
| 228,724 |
|
| 125,449 |
|
| Less: Net income attributable to noncontrolling interests | 1,601 |
| | 1,774 |
| | 1,500 |
| 2,042 |
|
| 2,351 |
|
| 2,094 |
|
| Net income attributable to common shareholders | $ | 154,765 |
| | $ | 149,313 |
| | $ | 126,698 |
| $ | 252,019 |
|
| $ | 226,373 |
|
| $ | 123,355 |
|
| Earnings (loss) per common share | | | | | | |
| | | | | | |
| Earnings per common share | | | | | | |
| Basic: | | | | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 3.28 |
| | $ | 3.23 |
| | $ | 2.76 |
| $ | 5.17 |
|
| $ | 4.69 |
|
| $ | 2.60 |
|
| Discontinued operations | $ | 0.01 |
| | $ | (0.02 | ) | | $ | (0.04 | ) | $ | — |
|
| $ | 0.03 |
|
| $ | — |
|
| Net income attributable to common shareholders | $ | 3.29 |
| | $ | 3.21 |
| | $ | 2.72 |
| $ | 5.17 |
|
| $ | 4.72 |
|
| $ | 2.60 |
|
| Diluted: | | | | | | | | |
| |
| Continuing operations attributable to common shareholders | $ | 3.22 |
| | $ | 3.15 |
| | $ | 2.70 |
| $ | 5.07 |
|
| $ | 4.59 |
|
| $ | 2.54 |
|
| Discontinued operations | $ | 0.01 |
| | $ | (0.02 | ) | | $ | (0.04 | ) | $ | — |
|
| $ | 0.03 |
|
| $ | — |
|
| Net income attributable to common shareholders | $ | 3.23 |
| | $ | 3.13 |
| | $ | 2.66 |
| $ | 5.07 |
|
| $ | 4.62 |
|
| $ | 2.54 |
|
| | | | | | | | | |
|
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Weighted-average number of common shares outstanding: | | | | |
|
|
| Basic | | 48,730 |
|
| 47,947 |
|
| 47,481 |
|
| Diluted | | 49,693 |
|
| 49,018 |
|
| 48,564 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | Fiscal Year | Fiscal Year |
| | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
| Net income | $ | 156,366 |
| | $ | 151,087 |
| | $ | 128,198 |
| $ | 254,061 |
| | $ | 228,724 |
| | $ | 125,449 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
| Foreign currency translation adjustment and other | (73,243 | ) | | (61,982 | ) | | (48,955 | ) | 14,224 |
| | (28,305 | ) | | 78,084 |
|
| Cumulative translation adjustment related to intercompany loan forgiveness | — |
| | (2,341 | ) | | — |
| |
| Pension and other post-retirement benefit plans (Note 10): | | | | | | |
| Prior service cost and gains (losses) arising during the period | (60,678 | ) | | (302 | ) | | (42,236 | ) | |
| Amortization of net gains (losses) and prior service benefit included in net periodic pension cost | 1,711 |
| | 2,617 |
| | 1,234 |
| |
| Pension and other post-retirement benefit plans (Note 12): | | | | | | |
| Prior service cost and (losses) gains arising during the period | | (25,165 | ) | | (1,659 | ) | | 36,593 |
|
| Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans | | 1,772 |
| | 2,477 |
| | 3,344 |
|
| Comprehensive income, before income taxes | 24,156 |
| | 89,079 |
| | 38,241 |
| 244,892 |
| | 201,237 |
| | 243,470 |
|
Income tax expense (benefit) related to items of other comprehensive income
(Note 8) | (12,369 | ) | | 530 |
| | (9,897 | ) | |
Less: Income tax (benefit) expense related to items of other comprehensive income
(Note 10) | | (3,633 | ) | | (1,892 | ) | | 7,954 |
|
| Comprehensive income, net of income taxes | 36,525 |
| | 88,549 |
| | 48,138 |
| 248,525 |
| | 203,129 |
| | 235,516 |
|
| Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes | (24 | ) | | 537 |
| | 1,044 |
| |
| Less: Comprehensive income related to noncontrolling interests, net of income taxes | | 1,822 |
| | 1,398 |
| | 3,128 |
|
| Comprehensive income attributable to common shareholders, net of income taxes | $ | 36,549 |
| | $ | 88,012 |
| | $ | 47,094 |
| $ | 246,703 |
| | $ | 201,731 |
| | $ | 232,388 |
|
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See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| | | | December 31, 2016 | | December 26, 2015 | December 28, 2019 | | December 29, 2018 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 117,626 |
| | $ | 117,947 |
| $ | 238,014 |
| | $ | 195,442 |
|
| Trade receivables, net | 364,050 |
| | 270,068 |
| 514,033 |
| | 472,248 |
|
| Inventories | 95,833 |
| | 93,735 |
| 160,660 |
| | 127,892 |
|
| Prepaid assets | 34,315 |
| | 30,198 |
| 52,588 |
| | 53,447 |
|
| Other current assets | 45,008 |
| | 47,286 |
| 56,030 |
| | 48,807 |
|
| Total current assets | 656,832 |
| | 559,234 |
| 1,021,325 |
| | 897,836 |
|
| Property, plant and equipment, net | 755,827 |
| | 677,959 |
| 1,044,128 |
| | 932,877 |
|
| Operating lease right-of-use assets, net | | 140,085 |
| | — |
|
| Goodwill | 787,517 |
| | 438,829 |
| 1,540,565 |
| | 1,247,133 |
|
| Client relationships, net | 320,157 |
| | 213,374 |
| 613,573 |
| | 537,945 |
|
| Other intangible assets, net | 74,291 |
| | 67,430 |
| 75,840 |
| | 72,943 |
|
| Deferred tax assets | 28,746 |
| | 40,028 |
| 44,659 |
| | 23,386 |
|
| Other assets | 88,430 |
| | 71,643 |
| 212,615 |
| | 143,759 |
|
| Total assets | $ | 2,711,800 |
| | $ | 2,068,497 |
| $ | 4,692,790 |
| | $ | 3,855,879 |
|
| Liabilities, Redeemable Noncontrolling Interest and Equity | | | | |
| Liabilities, Redeemable Noncontrolling Interests and Equity | | | | |
| Current liabilities: | | | | | | |
| Current portion of long-term debt and capital leases | $ | 27,313 |
| | $ | 17,033 |
| |
| Current portion of long-term debt and finance leases | | $ | 38,545 |
| | $ | 31,416 |
|
| Accounts payable | 68,485 |
| | 36,675 |
| 111,498 |
| | 66,250 |
|
| Accrued compensation | 93,471 |
| | 72,832 |
| 158,617 |
| | 137,212 |
|
| Deferred revenue | 127,731 |
| | 81,343 |
| 171,805 |
| | 145,139 |
|
| Accrued liabilities | 84,470 |
| | 89,494 |
| 139,118 |
| | 106,925 |
|
| Other current liabilities | 26,500 |
| | 12,544 |
| 90,598 |
| | 71,280 |
|
| Current liabilities of discontinued operations | 1,623 |
| | 1,840 |
| |
| Total current liabilities | 429,593 |
| | 311,761 |
| 710,181 |
| | 558,222 |
|
| Long-term debt, net and capital leases | 1,207,696 |
| | 845,997 |
| |
| Long-term debt, net and finance leases | | 1,849,666 |
| | 1,636,598 |
|
| Operating lease right-of-use liabilities | | 116,252 |
|
| — |
|
| Deferred tax liabilities | 55,717 |
| | 48,223 |
| 167,283 |
| | 143,635 |
|
| Other long-term liabilities | 159,239 |
| | 89,062 |
| 182,933 |
| | 179,121 |
|
| Long-term liabilities of discontinued operations | 5,771 |
| | 7,890 |
| |
| Total liabilities | 1,858,016 |
| | 1,302,933 |
| 3,026,315 |
| | 2,517,576 |
|
| Commitments and contingencies (Notes 2, 7, 9, 10, 13, and 17) |
| |
| |
| Redeemable noncontrolling interest | 14,659 |
| | 28,008 |
| |
| Commitments and contingencies (Notes 2, 9, 11, 12, 16 and 17) | |
| |
|
| Redeemable noncontrolling interests | | 28,647 |
| | 18,525 |
|
| Equity: | | | | | | |
| Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding | — |
| | — |
| — |
| | — |
|
| Common stock, $0.01 par value; 120,000 shares authorized; 86,301 shares issued and 47,363 shares outstanding as of December 31, 2016 and 85,464 shares issued and 46,698 shares outstanding as of December 26, 2015 | 863 |
| | 855 |
| |
| Common stock, $0.01 par value; 120,000 shares authorized; 48,936 shares issued and 48,936 shares outstanding as of December 28, 2019 and 48,210 shares issued and 48,209 shares outstanding as of December 29, 2018 | | 489 |
| | 482 |
|
| Additional paid-in capital | 2,477,371 |
| | 2,397,960 |
| 1,531,785 |
| | 1,447,512 |
|
| Retained earnings | 165,303 |
| | 10,538 |
| 280,329 |
| | 42,096 |
|
| Treasury stock, at cost, 38,938 shares and 38,766 shares as of December 31, 2016 and December 26, 2015, respectively | (1,553,005 | ) | | (1,540,738 | ) | |
| Treasury stock, at cost, 0 and 1 share as of December 28, 2019 and December 29, 2018, respectively | | — |
| | (55 | ) |
| Accumulated other comprehensive loss | (253,764 | ) | | (135,548 | ) | (178,019 | ) | | (172,703 | ) |
| Total equity attributable to common shareholders | 836,768 |
| | 733,067 |
| 1,634,584 |
| | 1,317,332 |
|
| Noncontrolling interests | 2,357 |
| | 4,489 |
| |
| Noncontrolling interest | | 3,244 |
| | 2,446 |
|
| Total equity | 839,125 |
| | 737,556 |
| 1,637,828 |
| | 1,319,778 |
|
| Total liabilities, redeemable noncontrolling interest and equity | $ | 2,711,800 |
| | $ | 2,068,497 |
| |
| Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,692,790 |
| | $ | 3,855,879 |
|
See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | Fiscal Year | Fiscal Year |
| | 2016 | | 2015 | | 2014 | 2019 | | 2018 |
| 2017 |
| Cash flows relating to operating activities | | | | | | | | | | |
| Net income | $ | 156,366 |
| | $ | 151,087 |
| | $ | 128,198 |
| $ | 254,061 |
|
| $ | 228,724 |
|
| $ | 125,449 |
|
| Less: Income (loss) from discontinued operations, net of income taxes | 280 |
| | (950 | ) | | (1,726 | ) | — |
|
| 1,506 |
|
| (137 | ) |
| Income from continuing operations, net of income taxes | 156,086 |
| | 152,037 |
| | 129,924 |
| 254,061 |
|
| 227,218 |
|
| 125,586 |
|
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 126,658 |
| | 94,881 |
| | 96,445 |
| 198,095 |
| | 161,779 |
| | 131,159 |
|
| Amortization of debt issuance costs and discounts | 2,831 |
| | 2,380 |
| | 1,725 |
| |
| Stock-based compensation | 43,642 |
| | 40,122 |
| | 31,035 |
| 57,271 |
| | 47,346 |
| | 44,003 |
|
| Deferred income taxes | 1,945 |
| | 2,689 |
| | 7,060 |
| (21,895 | ) | | (9,702 | ) | | 28,254 |
|
| Gain on venture capital investments | (10,284 | ) | | (3,823 | ) | | (9,301 | ) | (20,706 | ) | | (15,928 | ) | | (22,867 | ) |
| Gain on bargain purchase | 16 |
| | (9,837 | ) | | — |
| |
| Gain on divestiture | | — |
| | — |
| | (10,577 | ) |
| Impairment charges | | — |
| | — |
| | 17,239 |
|
| Other, net | 9,499 |
| | 168 |
| | (982 | ) | 7,931 |
| | 15,613 |
| | (666 | ) |
| Changes in assets and liabilities: | | | | | | | | | | |
| Trade receivables, net | (52,780 | ) | | (16,963 | ) | | (28,088 | ) | (8,323 | ) | | (21,196 | ) | | (48,279 | ) |
| Inventories | (4,021 | ) | | 3,364 |
| | (2,956 | ) | (21,399 | ) | | (13,338 | ) | | (17,838 | ) |
| Other assets | (6,215 | ) | | 850 |
| | (5,145 | ) | |
| Accounts payable | 22,076 |
| | 1,174 |
| | 4,599 |
| 29,775 |
| | (12,732 | ) | | 34 |
|
| Accrued compensation | 9,298 |
| | 8,414 |
| | 13,631 |
| 3,394 |
| | 31,616 |
| | 3,666 |
|
| Long-term payable on Transition Tax (Notes 5 and 11) | | — |
| | (8,974 | ) | | 61,038 |
|
| Deferred revenue | 14,580 |
| | 6,274 |
| | 22,244 |
| (3,620 | ) | | 36,072 |
| | (8,466 | ) |
| Accrued liabilities | (11,487 | ) | | 14,069 |
| | 8,284 |
| |
| Taxes payable and prepaid taxes | (1,800 | ) | | (3,906 | ) | | (7,090 | ) | |
| Other liabilities | 331 |
| | (3,659 | ) | | (9,253 | ) | |
| Customer contract deposits | | (10,898 | ) | | 28,115 |
| | — |
|
| Other assets and liabilities, net | | 17,250 |
| | (24,749 | ) | | 15,788 |
|
| Net cash provided by operating activities | 300,375 |
| | 288,234 |
| | 252,132 |
| 480,936 |
| | 441,140 |
| | 318,074 |
|
| Cash flows relating to investing activities | | | | | | | | | | |
| Acquisition of businesses and assets, net of cash acquired | (648,482 | ) | | (247,651 | ) | | (234,267 | ) | (515,701 | ) | | (824,868 | ) | | (25,012 | ) |
| Capital expenditures | (55,288 | ) | | (63,252 | ) | | (56,925 | ) | (140,514 | ) | | (140,054 | ) | | (82,431 | ) |
| Purchases of investments | (40,248 | ) | | (34,235 | ) | | (26,648 | ) | |
| Proceeds from sale of investments and distributions from venture capital investments | 53,954 |
| | 27,072 |
| | 21,000 |
| |
| Purchases of investments and contributions to venture capital investments | | (22,341 | ) | | (25,125 | ) | | (46,217 | ) |
| Proceeds from sale of investments | | 942 |
| | 35,849 |
| | 9,128 |
|
| Proceeds from divestiture | | — |
| | — |
| | 72,462 |
|
| Other, net | 3,694 |
| | (2,221 | ) | | (1,150 | ) | (3,888 | ) | | (805 | ) | | (516 | ) |
| Net cash used in investing activities | (686,370 | ) | | (320,287 | ) | | (297,990 | ) | (681,502 | ) | | (955,003 | ) | | (72,586 | ) |
| Cash flows relating to financing activities | | | | | | | | | | |
| Proceeds from long-term debt and revolving credit facility | 1,044,666 |
| | 492,514 |
| | 298,920 |
| 3,358,461 |
| | 2,755,028 |
| | 236,856 |
|
| Proceeds from exercises of stock options | 23,197 |
| | 39,367 |
| | 73,688 |
| 34,546 |
| | 37,657 |
| | 38,870 |
|
| Payments on long-term debt, revolving credit facility, and capital lease obligations | (656,636 | ) | | (417,331 | ) | | (194,536 | ) | |
| Payments on long-term debt, revolving credit facility, and finance lease obligations | | (3,124,588 | ) | | (2,201,003 | ) | | (372,435 | ) |
| Payments on debt financing costs | | (6,593 | ) | | (18,337 | ) | | — |
|
| Purchase of treasury stock | (12,267 | ) | | (117,478 | ) | | (122,018 | ) | (18,087 | ) | | (13,846 | ) | | (106,909 | ) |
| Other, net | (8,234 | ) | | 7,476 |
| | 5,360 |
| (11,802 | ) | | (1,440 | ) | | (4,858 | ) |
| Net cash provided by financing activities | 390,726 |
| | 4,548 |
| | 61,414 |
| |
| Net cash provided by (used in) financing activities | | 231,937 |
| | 558,059 |
| | (208,476 | ) |
| Discontinued operations | | | | | | | | | | |
| Net cash used in operating activities from discontinued operations | (2,056 | ) | | (1,876 | ) | | (1,081 | ) | — |
| | (3,735 | ) | | (1,809 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (2,996 | ) | | (12,695 | ) | | (10,379 | ) | |
| Net change in cash and cash equivalents | (321 | ) | | (42,076 | ) | | 4,096 |
| |
| Cash and cash equivalents, beginning of period | 117,947 |
| | 160,023 |
| | 155,927 |
| |
| Cash and cash equivalents, end of period | $ | 117,626 |
| | $ | 117,947 |
| | $ | 160,023 |
| |
| | | | | | | |
| | | | | | | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | 11,357 |
| | (9,474 | ) | | 11,234 |
|
| Net change in cash, cash equivalents, and restricted cash | | 42,728 |
| | 30,987 |
| | 46,437 |
|
| Cash, cash equivalents, and restricted cash, beginning of period | | 197,318 |
| | 166,331 |
| | 119,894 |
|
| Cash, cash equivalents, and restricted cash, end of period | | $ | 240,046 |
| | $ | 197,318 |
| | $ | 166,331 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
| | | | Fiscal Year | Fiscal Year |
| | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
| Supplemental cash flow information: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 238,014 |
|
| $ | 195,442 |
|
| $ | 163,794 |
|
| Restricted cash included in Other current assets | | 431 |
|
| 465 |
|
| 592 |
|
| Restricted cash included in Other assets | | 1,601 |
|
| 1,411 |
|
| 1,945 |
|
| Cash, cash equivalents, and restricted cash, end of period | | $ | 240,046 |
|
| $ | 197,318 |
|
| $ | 166,331 |
|
| |
|
|
|
|
|
|
|
|
| Cash paid for income taxes | $ | 42,868 |
| | $ | 24,436 |
| | $ | 29,704 |
| $ | 54,060 |
|
| $ | 67,600 |
|
| $ | 60,377 |
|
| Cash paid for interest | $ | 22,756 |
| | $ | 11,101 |
| | $ | 10,199 |
| $ | 67,813 |
|
| $ | 47,540 |
|
| $ | 27,417 |
|
| Non-cash investing and financing activities: | | | | | |
|
|
|
|
|
|
|
|
| Capitalized interest | $ | 4 |
| | $ | 424 |
| | $ | 1,032 |
| |
| Additions to property, plant and equipment, net | $ | 5,333 |
| | $ | 6,720 |
| | $ | 4,355 |
| $ | 21,447 |
|
| $ | 18,212 |
|
| $ | 38,199 |
|
| Assets acquired under capital lease | $ | 1,335 |
| | $ | 10,281 |
|
| $ | 18,690 |
| |
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| | | | | | | |
| | | | | | | |
| Assets acquired under finance leases | | $ | 4,819 |
|
| $ | 1,473 |
|
| $ | 722 |
|
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See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
| | | | Common stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interests | | Total Equity | 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 | | Shares | | Amount | | Shares | | Amount | |
| December 28, 2013 | 82,523 |
| | $ | 825 |
| | $ | 2,206,155 |
| | $ | (265,473 | ) | | $ | 5,357 |
| | 34,969 |
| | $ | (1,305,880 | ) | | $ | 640,984 |
| | $ | 3,093 |
| | $ | 644,077 |
| |
| December 31, 2016 | | 86,301 |
| | $ | 863 |
| | $ | 2,477,371 |
| | $ | 165,303 |
| | $ | (253,764 | ) | | 38,938 |
| | $ | (1,553,005 | ) | | $ | 836,768 |
| | $ | 2,357 |
| | $ | 839,125 |
|
| Net income | — |
| | — |
| | — |
| | 126,698 |
| | — |
| | — |
| | — |
| | 126,698 |
| | 645 |
| | 127,343 |
| — |
| | — |
| | — |
| | 123,355 |
| | — |
| | — |
| | — |
| | 123,355 |
| | 1,179 |
| | 124,534 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (79,604 | ) | | — |
| | — |
| | (79,604 | ) | | (14 | ) | | (79,618 | ) | |
| Adjustment of redeemable noncontrolling interest to fair value | — |
| | — |
| | (7,425 | ) | | — |
| | — |
| | — |
| | — |
| | (7,425 | ) | | — |
| | (7,425 | ) | |
| Tax benefit associated with stock issued under employee compensation plans | — |
| | — |
| | 4,301 |
| | — |
| | — |
| | — |
| | — |
| | 4,301 |
| | — |
| | 4,301 |
| |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 109,033 |
| | — |
| | — |
| | 109,033 |
| | — |
| | 109,033 |
|
| Dividends declared to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,209 | ) | | (1,209 | ) |
| Issuance of stock under employee compensation plans | 1,980 |
| | 20 |
| | 73,574 |
| | — |
| | — |
| | — |
| | — |
| | 73,594 |
| | — |
| | 73,594 |
| 1,194 |
| | 12 |
| | 38,818 |
| | — |
| | — |
| | — |
| | — |
| | 38,830 |
| | — |
| | 38,830 |
|
| Acquisition of treasury shares | — |
| | — |
| | — |
| | — |
| | — |
| | 2,207 |
| | (117,380 | ) | | (117,380 | ) | | — |
| | (117,380 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | 1,155 |
| | (106,909 | ) | | (106,909 | ) | | — |
| | (106,909 | ) |
| Stock-based compensation | — |
| | — |
| | 31,035 |
| | — |
| | — |
| | — |
| | — |
| | 31,035 |
| | — |
| | 31,035 |
| — |
| | — |
| | 44,003 |
| | — |
| | — |
| | — |
| | — |
| | 44,003 |
| | — |
| | 44,003 |
|
| December 27, 2014 | 84,503 |
| | 845 |
| | 2,307,640 |
| | (138,775 | ) | | (74,247 | ) | | 37,176 |
| | (1,423,260 | ) | | 672,203 |
| | 3,724 |
| | 675,927 |
| |
| December 30, 2017 | | 87,495 |
| | 875 |
| | 2,560,192 |
| | 288,658 |
| | (144,731 | ) | | 40,093 |
| | (1,659,914 | ) | | 1,045,080 |
| | 2,327 |
| | 1,047,407 |
|
| Net income | — |
| | — |
| | — |
| | 149,313 |
| | — |
| | — |
| | — |
| | 149,313 |
| | 936 |
| | 150,249 |
| — |
| | — |
| | — |
| | 226,373 |
| | — |
| | — |
| | — |
| | 226,373 |
| | 1,550 |
| | 227,923 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (61,301 | ) | | — |
| | — |
| | (61,301 | ) | | (171 | ) | | (61,472 | ) | — |
| | — |
| | — |
| | — |
| | (24,642 | ) | | — |
| | — |
| | (24,642 | ) | | — |
| | (24,642 | ) |
| Adjustment of redeemable noncontrolling interest to fair value | — |
| | — |
| | 183 |
| | — |
| | — |
| | — |
| | — |
| | 183 |
| | — |
| | 183 |
| |
| Tax benefit associated with stock issued under employee compensation plans | — |
| | — |
| | 10,608 |
| | — |
| | — |
| | — |
| | — |
| | 10,608 |
| | — |
| | 10,608 |
| |
| Reclassification due to adoption of ASU 2018-02 | | — |
| | — |
| | — |
| | 3,330 |
| | (3,330 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Adjustment due to adoption of ASU 2016-01 | | — |
| | — |
| | — |
| | 1,424 |
| | — |
| | — |
| | — |
| | 1,424 |
| | — |
| | 1,424 |
|
| Dividends declared to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,431 | ) | | (1,431 | ) |
| Adjustment of redeemable noncontrolling interest to redemption value | | — |
| | — |
| | (2,069 | ) | | — |
| | — |
| | — |
| | — |
| | (2,069 | ) | | — |
| | (2,069 | ) |
| Issuance of stock under employee compensation plans | 961 |
| | 10 |
| | 39,407 |
| | — |
| | — |
| | — |
| | — |
| | 39,417 |
| | — |
| | 39,417 |
| 936 |
| | 9 |
| | 37,657 |
| | — |
| | — |
| | — |
| | — |
| | 37,666 |
| | — |
| | 37,666 |
|
| Acquisition of treasury shares | — |
| | — |
| | — |
| | — |
| | — |
| | 1,590 |
| | (117,478 | ) | | (117,478 | ) | | — |
| | (117,478 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | 129 |
| | (13,846 | ) | | (13,846 | ) | | — |
| | (13,846 | ) |
| Retirement of treasury shares | | (40,221 | ) | | (402 | ) | | (1,195,614 | ) | | (477,689 | ) | | — |
| | (40,221 | ) | | 1,673,705 |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 40,122 |
| | — |
| | — |
| | — |
| | — |
| | 40,122 |
| | — |
| | 40,122 |
| — |
| | — |
| | 47,346 |
| | — |
| | — |
| | — |
| | — |
| | 47,346 |
| | — |
| | 47,346 |
|
| December 26, 2015 | 85,464 |
| | 855 |
| | 2,397,960 |
| | 10,538 |
| | (135,548 | ) | | 38,766 |
| | (1,540,738 | ) | | 733,067 |
| | 4,489 |
| | 737,556 |
| |
| 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 | — |
| | — |
| | — |
| | 154,765 |
| | — |
| | — |
| | — |
| | 154,765 |
| | 924 |
| | 155,689 |
| — |
| | — |
| | — |
| | 252,019 |
| | — |
| | — |
| | — |
| | 252,019 |
| | 2,084 |
| | 254,103 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (118,216 | ) | | — |
| | — |
| | (118,216 | ) | | (154 | ) | | (118,370 | ) | — |
| | — |
| | — |
| | — |
| | (5,316 | ) | | — |
| | — |
| | (5,316 | ) | | — |
| | (5,316 | ) |
| Dividends declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,902 | ) | | (2,902 | ) | |
| Adjustment of redeemable noncontrolling interest to fair value | — |
| | — |
| | 1,690 |
| | — |
| | — |
| | — |
| | — |
| | 1,690 |
| | — |
| | 1,690 |
| |
Purchase of additional equity in redeemable noncontrolling interest
| — |
| | — |
| | 1,593 |
| | — |
| | — |
| | — |
| | — |
| | 1,593 |
| | — |
| | 1,593 |
| |
| Tax benefit associated with stock issued under employee compensation plans | — |
| | — |
| | 9,274 |
| | — |
| | — |
| | — |
| | — |
| | 9,274 |
| | — |
| | 9,274 |
| |
| Dividends declared to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,286 | ) | | (1,286 | ) |
| Adjustment of redeemable noncontrolling interest to redemption value | | — |
| | — |
| | (1,451 | ) | | — |
| | — |
| | — |
| | — |
| | (1,451 | ) | | — |
| | (1,451 | ) |
| 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 | 837 |
| | 8 |
| | 23,212 |
| | — |
| | — |
| | — |
| | — |
| | 23,220 |
| | — |
| | 23,220 |
| 866 |
| | 8 |
| | 34,678 |
| | — |
| | — |
| | — |
| | — |
| | 34,686 |
| | — |
| | 34,686 |
|
| Acquisition of treasury shares | — |
| | — |
| | — |
| | — |
| | — |
| | 172 |
| | (12,267 | ) | | (12,267 | ) | | — |
| | (12,267 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | 139 |
| | (18,087 | ) | | (18,087 | ) | | — |
| | (18,087 | ) |
| Retirement of treasury shares | | (140 | ) | | (1 | ) | | (4,355 | ) | | (13,786 | ) | | — |
| | (140 | ) | | 18,142 |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 43,642 |
| | — |
| | — |
| | — |
| | — |
| | 43,642 |
| | — |
| | 43,642 |
| — |
| | — |
| | 57,271 |
| | — |
| | — |
| | — |
| | — |
| | 57,271 |
| | — |
| | 57,271 |
|
| December 31, 2016 | 86,301 |
| | $ | 863 |
| | $ | 2,477,371 |
| | $ | 165,303 |
| | $ | (253,764 | ) | | 38,938 |
| | $ | (1,553,005 | ) | | $ | 836,768 |
| | $ | 2,357 |
| | $ | 839,125 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| December 28, 2019 | | 48,936 |
| | $ | 489 |
| | $ | 1,531,785 |
| | $ | 280,329 |
| | $ | (178,019 | ) | | — |
| | $ | — |
| | $ | 1,634,584 |
| | $ | 3,244 |
| | $ | 1,637,828 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Charles River Laboratories International, Inc. (the Company), together with its subsidiaries, is a full service, early-stage contract research organization (CRO). The Company has built upon its core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, which are ablethat enable the Company to support its clients from target identification through non-clinical development. The Company also provides a suite of products and services to support its clients’ manufacturing activities.
Principles of Consolidation
The Company’s 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. A 53rd week was included in fiscal year 2016, which is occasionally necessary to align with a December 31 calendar year-end. The additional week was included in the fourth quarter.
Reclassifications
Certain reclassifications have been made to prior year statements to conform to the current year presentation. These reclassifications have no impact on period reported net income or cash flow.
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 aggregates its operating segments into aCompany’s RMS reportable segment if (a) they have similar economic characteristics; (b) theyincludes the Research Models and Research Model Services businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services). The Company’s DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are similar 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 the in the nature of thevitro (non-animal) lot-release testing products, or services, nature of the production process, type or class of customer for theirmicrobial detection products, and services, methods used to distribute their productsspecies identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and services and nature of the regulatory environment; and (c) the aggregation helps users better understand the Company’s performance.
During the second quarter of 2016, the Company acquired WRH, Inc. (WIL Research), a provider of safety assessmentchickens; and contract development and manufacturing (CDMO) services. WIL Research’s safety assessmentservices, which, until the Company divested this business is reported in the Company’s DSA reportable segment and its CDMO business created a new operating segment, Contract Manufacturing, that is reported as part of the Company’s Manufacturing reportable segment. Onon February 10, 2017, the Company divested the CDMO business. In addition, amounts dueallowed it to changes in the Company’s market strategyprovide formulation design and development, manufacturing, and analytical and stability testing for certain services and resulting information provided to the Chief Operating Decision Maker were reclassified from the Company’s RMS reportable segment to its Manufacturing reportable segment, including revenue of $2.8 million and $3.7 million for fiscal years 2015 and 2014, respectively, and operating income of $0.5 million and $0.6 million for fiscal years 2015 and 2014, respectively. The Company reported segment results on this basis for all periods presented.
The revised reportable segments are as follows: |
| | |
Research Models and Services | Discovery and Safety Assessment | Manufacturing Support |
Research Models | Discovery Services | Microbial Solutions |
Research Model Services | Safety Assessment | Avian |
| | Biologics |
| | Contract Manufacturing |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
small molecules.
Use of Estimates
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP) requires that the Company makesmake 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.
Cash, and Cash Equivalents, and Investments
Cash equivalents include money market funds, time deposits and other investments with remaining maturities at the purchase date of three months or less.
Investments
Marketable securities are reported at fair value. Realized gains and losses on marketable securities are included in other income (expense), net and are determined using the specific identification method. Unrealized gains and losses on available-for-sale marketable securities are included in accumulated other comprehensive income (loss). Time deposits with original maturities of greater than three months are reported as short term investments.
Trade Receivables, Net
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company records trade receivables net of an allowance for doubtful accounts. An allowance for doubtful accounts is established based on historical collection information, a review of major client accounts receivable balances and current economic conditions in the geographies in which it operates. Amounts determined to be uncollectible are charged or written off against the allowance.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade receivables. The Company places cash and cash equivalents and investments in various financial institutions with high credit rating and limits the amount of credit exposure to any one financial institution. Trade receivables are primarily from clients in the pharmaceutical and biotechnology industries, as well as academic and government institutions. Concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the wide variety of customers using the Company’s products and services as well as their dispersion across many geographic areas. No single client accounted for more than 5% of revenue in fiscal years 2019, 2018, or 2017 or trade receivables for the periods endedas of December 31, 2016 and28, 2019 or December 26, 2015.29, 2018.
Fair Value Measurements
The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and requires certain disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has certain financial assets and liabilities recorded at fair value, which have been classified as Level 1, 2 or 3 within the fair value hierarchy:
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;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;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 liability and redeemable noncontrolling interest 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.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash equivalents - Valued at market prices determined through third-party pricing services;
Mutual funds - Valued at the unadjusted quoted net asset value of shares held by the Company;
Foreign currency forward contracts - Valued using readilymarket observable market 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;
Redeemable noncontrolling interest - Valued using the income approach based on estimated future cash flows of the underlying business discounted by a weighted average cost of capital.outcomes.
Inventories
The Company’s inventories consist of raw materials, work in process and finished product related primarily to small models, large models, microbial solutions products, and avian related eggs and flocks. Inventories are stated at the lower of cost or net realizable value. CostInventory value is determinedgenerally based on the averagestandard cost method for the small model business and first-in-first-outall businesses except for the Company’s large model and Microbial Solutions businesses.Avian business, which is based on an average cost. Standard costs are trued-up to reflect actual cost. For the small model business, cost includesmodels inventory, costs include direct materials such as feed and bedding, costs of personnel directly involved in the care of the models, and an allocation of facility overhead. For the large model business, cost ismodels inventory, costs are primarily the external cost paid to acquire the model. Certain businesses value
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the microbial solutions inventory, based on standard costs which are periodically compared toinclude direct materials, cost of personnel directly involved in the manufacturing and adjusted to actual costs.assembly of products sold, and an allocation of facility overhead. For the avian related inventory, costs include direct materials, such as animal feed, cost of personnel directly involved with the care of the eggs and flocks, and an allocation of facility overhead. Inventory costs are charged to cost of revenue in the period the products are sold to an external party. The Company analyzes its inventory levels on a quarterly basis and writes down inventory that is determined to be damaged, obsolete or otherwise unmarketable, with a corresponding charge to cost of products sold.
Property, Plant and Equipment, Net
Property, plant and equipment, net, including improvements that significantly add to productive capacity or extend useful life, are carried at cost and are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The cost of normal, recurring, or periodic repairs and maintenance activities related to property, plant and equipment is expensed as incurred. In addition, the Company capitalizes certain internal use computer software development costs. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.
Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset.
The Company generally depreciates the cost of its property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets as follow:
|
| |
| | Estimated
Useful Lives |
| | (in years) |
| Land | Indefinite |
| Buildings | 20 - 40 |
| Machinery and equipment | 3 - 20 |
| Furniture and fixtures | 5 - 10 |
| Computer hardware and software | 3 - 8 |
| Vehicles | 3 - 5 |
Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. CapitalFinance lease assets are amortized over the lease term, however, if ownership is transferred by the end of the capitalfinance lease, or there is a bargain purchase option, such capitalfinance lease assets are amortized over the useful life that would be assigned if such assets were owned.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
When the Company disposes of property, plant and equipment, it removes the associated cost and accumulated depreciation from the related accounts on its consolidated balance sheet and includes any resulting gain or loss in its consolidated statement of income.
Business AcquisitionsCombinations
The Company accounts for acquisitions as business combinations under the acquisition method of accounting. The Company allocates the amounts that it pays for each acquisition to the assets it acquires and liabilities it assumes based on their fair values at the dates of acquisition, including identifiable intangible assets.assets, which typically represents a significant portion of the purchase price. The Company basesdetermination of the fair value of identifiable intangible assets acquired in a business combination on valuations thatrequires the use information and assumptions determined by management and which considerof significant judgment using management’s best estimates of inputs and assumptions that a market participant would use. Significant judgments include (i) the fair value; and (ii) whether such intangible assets are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. The Company utilizes commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In recent acquisitions, customer relationship intangible assets (also referred to as client relationships) are the most significant identifiable asset acquired. To determine the fair value of the acquired client relationships, the Company typically utilizes the multiple period excess earnings model (a commonly accepted valuation technique), which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital.
Contingent Consideration
The consideration for the Company’s acquisitions often includes future payments that are contingent upon the occurrence of a particular event. The Company records an obligation for such contingent payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and thusthe likelihood of making related payments. The Company revalues these contingent consideration obligations each reporting period. Changes in the fair value of the contingent consideration obligations are recognized in the Company’s consolidated statements of income as a component of selling, general and administrative expenses. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates and changes in the assumed probabilities of successful achievement of certain financial targets.
Discount rates in the Company’s valuation models represent a measure of the credit risk associated with settling the liability. The period over which the Company discounts its contingent obligations is typically based on when the contingent payments would be triggered. These fair value measurements are based on significant inputs not observable in the market. See Note 5,7, “Fair Value.”
Goodwill and Intangible Assets
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchaseacquisition method of accounting. Goodwill is not amortized, but reviewed for impairment on an annual basis, during the fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting units below their carrying amounts.
The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, the Company compares the fair value of its reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, then the second step of the impairment test is performed in order to determine the implied fair value of the Company’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
Definite-lived intangible assets, including client relationships, are amortized over the pattern in which the economic benefits of the intangible assets are utilized and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, which requires the use of customer attribution rates and other assumptions. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the definite-lived intangible assets, the definite-lived intangible assets are written-down to their fair values.
Valuation and Impairment of Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-lived assets to be disposed of are carried at fair value less costs to sell.
Venture Capital Investments
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from 0.7%less than 1% to 12.0%approximately 12%. The Company accounts for suchthe investments in limited liability partnerships (LLP)(LPs), which are variable interest entities, under the equity or cost method of accounting. For publicly-held investments in the LPs, the Company adjusts for changes in fair market value based on reported share holdings at the end of each fiscal quarter. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LLPs’LPs’ economic performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.
Under the equity method of accounting, the Company’s portion of the investment gains and losses, as reported in the fund’s financial statements on a quarterly lag each reporting period, is recorded in other income, (expense), net.net in the accompanying consolidated statements of income. In addition, the Company adjusts the carrying value of these investments to reflect its estimate of changes to fair value since the fund’s financial statements are based on information from the fund’s management team, market prices of known public holdings of the fund and other information.
UnderOther Investments
The Company invests in equity of certain privately-held companies, primarily with minority positions. These investments are reported at fair value or under the costequity method of accounting, the Company’s investment is initially measuredas appropriate. Equity investments that do not have readily determinable fair values are generally recorded at cost, with distributions recognized in other income (expense), net. Distributions received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment. The Company reviews its cost method investments to determine whether a decline in fair value below the cost basis is other-than-temporary. If the decline in fair value is determined to be other-than-temporary, the cost basis of the investment is written down to fair value.plus or minus certain adjustments.
Life Insurance Contracts
Investments in life insurance contracts are recorded at cash surrender value. The initial investment at the transaction price is recognized and remeasured based on fair value of underlying investments or contractual value each reporting period. Investments in and redemptions of these life insurance contracts are reported as cash flows from investing activities in the consolidated statement of cash flows. As ofThe Company held 44 and 45 contracts at December 31, 201628, 2019 and December 26, 2015, the Company held 43 and 42 contracts, respectively,29, 2018, with a face value of $61.4$72.7 million and $60.5$65.2 million, respectively.
Leases
At inception of a contract, the Company determines if a contract meets the definition of a lease. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if the contract conveys the right to control the use of an identified asset for a period of time. The Company assesses throughout the period of use whether the Company has both of the following: (1) the right to obtain substantially all of the economic benefits from use of the identified asset, and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments.
The Company leases laboratory, production, and office space (real estate), as well as land, vehicles and certain equipment under non-cancellable operating and finance leases. The carrying value of the Company’s right-of-use lease assets is substantially concentrated in its real estate leases, while the volume of lease agreements is primarily concentrated in vehicles and equipment leases. The Company’s policy is to not record leases with an original term of twelve months or less on the consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term.
Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period in which the obligation for these payments was incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use asset and liability. Only when lease components and their associated non-lease components are fixed are they accounted for as a single lease component and are recognized as part of a right-of-use asset and liability. Total contract consideration is allocated to the combined fixed lease and non-lease component. This policy election applies consistently to all asset classes under lease agreements.
Most leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 5 years. Certain lease agreements contain options to purchase the leased property and options to terminate the lease. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when it is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
or is not at the Company’s option. The Company determines whether the reasonably certain threshold is met by considering contract-, asset-, market-, and entity-based factors.
A portfolio approach is applied to certain lease contracts with similar characteristics. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases.
The Company subleases a limited number of lease arrangements. Sublease activity is not material to the consolidated financial statements.
Stock-Based Compensation
The Company grantsmay grant stock options, restricted stock, restricted stock units (RSUs), and performance share units (PSUs) to employees and stock options, restricted stock, and restricted stock unitsRSUs to non-employee directors under stock-based compensation plans. Stock-based compensation is recognized as an expense in the consolidated financial statements of income based on the grant date fair value, adjusted for estimated forfeitures when they occur, over the requisite service period.
For stock options, restricted stock and restricted stock unitsRSUs that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. Where awards are made with non-substantive vesting periods whereand a portion of the award continues to vestsvest after the employee’s eligible retirement, the Company recognizes expense based on the period from the grant date to the date on which the employee is retirement eligible. The Company records the expense for PSU grants subject to performance and/or market conditions using the accelerated attribution method over the remaining service period when management determines that achievement of the performance-based milestone is probable.
The fair value of stock options granted is calculated using the Black-Scholes option-pricing model and the fair value of PSUs is estimated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others. The expected volatility assumption is typically determined using the historical volatility of the Company’s common stock over the expected life of the stock-based award. The expected term is determined using historical option exercise activity. The fair value of restricted stock and restricted stock unitsRSUs is based on the market value of the Company’s common stock on the date of grant.
Revenue Recognition
TheAccounting Standard Codification Topic 606, “Revenue from Contracts with Customers” (ASC 606) became effective for the Company recognizes revenue whenon December 31, 2017 and was adopted using the modified retrospective method for all contracts not completed as of the following conditionsdate of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the practical expedient, which did not have a material effect on the cumulative impact of adopting ASC 606. The reported results for fiscal years 2019 and 2018 reflect the application of ASC 606 guidance while the historical results for fiscal year 2017 was prepared under the guidance of ASC 605, “Revenue Recognition” (ASC 605). There is no material difference in the reporting of revenue during fiscal years 2019 and 2018 in accordance with ASC 606 when compared to fiscal year 2017 in accordance with ASC 605.
Revenue is recognized when, or as, obligations under the terms of a contract are satisfied: persuasive evidencesatisfied, which occurs when control of an arrangement exists, delivery has occurredthe promised products or services have been provided,is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”).
To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, the Company does not extend payment terms beyond one year. Applying the practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is fixedone year or determinable, and collectibility is reasonably assured.
Service revenue is generally evidenced by clientless. The Company’s contracts which range in duration from a few weeks to a few years and typically take the form of an agreed upon rate per unit or fixed fee arrangements. Such contracts typically do not generally contain acceptance provisions based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate per unit contracts is recognized as services are performed, based upon rates specified in the contract. In cases wheresignificant financing components.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contracts with customers may contain multiple performance spans reporting periods,obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, the Company generally measures its progress using either cost-to-cost (input method) or right-to-invoice (output method). The Company uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as the Company incurs costs on its contract, generally related to fixed fee contractsservice contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is recognized as services are performed, measured based on the ratio of outputs or performance obligations completedcosts incurred to date to the total contractual outputsestimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or performance obligations to be provided. Changes in estimated effort to complete the fixed fee contract are reflectedtime-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the period in which the change becomes known. Changes in scope of work are common, especially under long-term contracts, and generally result in a change in contract value. Once the client has agreedamount invoiced since that amount corresponds directly to the changes in scope and renegotiated pricing terms, the contract value is amended and revenue is typically recognized as described above.
Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are recorded as deferred revenue. As the contracted services are subsequently performed and the associated revenue is recognized, the deferred revenue balance is reduced by the amount of revenue recognized during the period. In other cases, services may be provided and revenue is recognized before the client is invoiced. In these cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to the customer pursuant to contractual terms, is recorded as an unbilled receivable. Once the client is invoiced, the unbilled receivable is reduced for the amount billed, and a corresponding trade receivable is recorded.
Most contracts are terminable by the client, either immediately or upon notice. These contracts often require payment to the Company of expenses to wind down the project, fees earned to date or, in some cases, a termination fee. Such payments are included in revenues when earned.
The Company recognizes product revenue net of allowances for estimated returns, rebates and discounts when title and risk of loss pass to customers. When the Company sells equipment with specified acceptance criteria, it assesses its ability to meet the acceptance criteria in order to determine the timing of revenue recognition. The Company would defer revenue until completion of customer acceptance testing if it is not able to demonstrate the ability to meet such acceptance criteria.
A portion of the Company’s revenue is from multiple-element arrangements that include multiple products and/or services as deliverables in a single arrangement with each deliverable, or a combination of the deliverables, representing a separate unit of accounting. The Company allocates revenues to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. Revenue allocated to each deliverable is then recognized when all revenue recognition criteria are met. Judgments as to the identification of deliverables, units of accounting, the allocation of consideration to the deliverable, and the appropriate timing of revenue recognition are critical with respect to these arrangements.
At the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) the Company’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. If a substantive milestone is achieved and collection of the related receivable is reasonably assured, the Company recognizes revenue related to the milestone in its entirety in the period in which the milestone is achieved. In those circumstances where a milestone is not substantive, the Company recognizes as revenue, on the date the milestone is achieved, an amount equal to the applicable percentage of the performance period that had elapsed as of the date the milestone was achieved, with the balance being deferred and recognized over the remaining period of performance. As of December 31, 2016, the Company had no significant milestones that were deemed substantive.
The Company records shipping charges billed to customers in total revenue and records shipping costs in cost of revenue (excluding amortization of intangible assets) for all periods presented.
Advertising Costs
Advertising costs are expensed as incurred. For fiscal years 2016, 2015 and 2014, advertising costs totaled $1.4 million, $1.2 million and $1.3 million, respectively.date.
Income Taxes
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements carrying amounts and their respective tax basis. The Company measures deferred tax assets and liabilities using the enacted tax rates in effect when the temporary differences are expected to be settled. The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in processin-process audit activities and changes in facts or circumstances related to a tax position. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
Foreign Currency Contracts
Foreign currency contracts are recorded at fair value in the Company’s consolidated balance sheetsheets and are not designated as hedging instruments. Any gains or losses on suchforward contracts associated with intercompany loans are recognized immediately in Other income, net and are largely offset by the remeasurement of the underlying intercompany loan. Any gains or losses on forward contracts associated with the Company’s U.S. dollar denominated loan borrowed by a non-U.S. entity under the Company’s Credit Facility are recognized immediately in otherInterest expense. Gains or losses incurred on the remeasurement of the Company’s U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency is recorded in Other income, (expense), net.
Translation of Foreign Currencies
For the Company’s subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
foreign exchange rates for the period. Adjustments resulting from the translation of the financial statements of the Company’s foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income (loss),loss, a separate component of equity.
Pension and Other Post-Retirement Benefit Plans
The Company recognizes the funded status of its defined benefit pension and other post-retirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. The Company measures plan assets and benefit obligations as of its fiscal year end.
The key assumptions used to calculate benefit obligations and related pension costs include expected long-term rate of return on plan assets, withdrawal and mortality rates, expected rate of increase in employee compensation levels and a discount rate. Assumptions are determined based on the Company’s data and appropriate market indicators, and evaluated each year as of the plan’s measurement date.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.
In fiscal year 2016, new mortality improvement scales were issued in the U.S. reflecting a decline in longevity projection from the 2015 releases that the Company adopted, which decreased the Company’s benefit obligations by $1.3 million as of December 31, 2016. In fiscal year 2015, new mortality improvement scales were issued in the U.S. and the United Kingdom (U.K.) reflecting a decline in longevity projection from the 2014 releases that the Company adopted, which decreased the Company’s benefit obligations by $3.3 million as of December 26, 2015.
The discount rate reflects the rate the Company would have to pay to purchase high-quality investments that would provide cash sufficient to settle its current pension obligations.
The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.
The Company is required to recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and prior service costs or credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive income is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.
The Company records the service cost component of the net periodic benefit cost within Cost of services provided and Selling, general, and administrative expenses (within Operating income) and all other components of net periodic benefit cost within Other income, net in the consolidated statements of income.
The Company recognizes pension settlement gains or losses in the period when all of the following settlement criteria are met: there is an irrevocable action, the Company is relieved of primary responsibility for a benefit obligation, and significant risks related to the obligation and the assets used to effect the settlement are eliminated. Refer to Note 12. “Employee Benefit Plans” for further discussion of the U.S. Pension Plan termination and expected settlement in fiscal 2020.
Earnings Per Share
Basic earnings per share areis calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share is computed using the treasury stock method, assuming the exercise of stock options and the vesting of restricted stock awards, restricted stock units,RSUs, or PSUs, as well as their related income tax effects.
Treasury Shares
The Company periodically retires treasury shares acquired through share repurchases and returns those shares to the status of authorized but unissued. The Company accounts for treasury stock transactions under the cost method. For each reacquisition of common stock, the number of shares and the acquisition price for those shares is added to the existing treasury stock count and total value. Thus, the average cost per share is re-averaged each time shares are acquired. When treasury shares are retired, the Company allocates the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in-capital. The portion allocated to additional paid-in-capital is determined by applying a percentage, determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in-capital as of the retirement date.
Newly Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and nonemployees as well as improves financial reporting for share-based payments to nonemployees. The Company’s adoption of this standard in fiscal year 2019 did not have a significant impact on the consolidated financial statements and related disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. It also creates more transparency around how economic results are presented, both on the face of the financial statements and in the disclosures. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. The Company’s adoption of this standard in fiscal year 2019 did not have a significant impact on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard, including subsequently issued amendments, collectively referred to as Accounting Standards Codification (ASC) 842, “Leases”, established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The Company adopted this standard using the modified retrospective transition approach as applied to leases existing as of or entered into after the adoption date (December 30, 2018) in fiscal year 2019. See Note 16, “Leases” for a discussion of the Company’s adoption of this standard and its impact on the consolidated financial statements and related disclosures.
Newly AdoptedIssued Accounting Pronouncements
In July 2015,January 2020, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU) 2015-11, “SimplifyingASU 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 from the Measurementalternative method of Inventory,” that simplifiesaccounting under Topic 321 to the subsequent measurementequity 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 inventories by replacing the current lower of costTopic 321 before settlement or market test with a lower of cost or net realizable value test.exercise. The ASU is effective for fiscal years beginning after December 15, 2016,2020, 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.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement that is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.years and will be applied either retrospectively or prospectively. Early adoption is permitted. During the fourth quarterThe adoption of 2016, the Company adopted this standard which had nois not expected to have a material impact on inventories as of December 31, 2016.the Company’s consolidated financial statements and related disclosures.
In August 2014,2018, the FASB issued ASU 2014-15, “Disclosure2018-14, “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 Uncertaintiesnet 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 Entity’s Abilityexplanation for any significant gains and losses related to Continue as a Going Concern.” The standard requires management to assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year afterchanges in the issuance date and, as applicable, provide additional disclosures on management’s plan to alleviatebenefit obligation for the substantial doubt.period. The ASU is effective for fiscal years ending after December 15, 2016,2020 and interimwill be applied on a retrospective basis to all periods within annual periods beginning after December 15, 2016.presented. Early adoption is permitted. During the fourth quarterThe adoption of 2016, the Company adopted this standard which had nois not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
Newly Issued Accounting PronouncementsIn 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and will be applied on a retrospective basis to all periods presented. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s 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. The ASUThis standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and shouldwill be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In January 2017,June 2016, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.2016-13, “Financial Instruments - Credit Losses.” The standard, clarifiesincluding subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the definitionnet 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 a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. Thethe reported amount. This ASU is effective for fiscal years beginning after December 15, 2017,2019, and interim periods within those fiscal years. Early adoption is permitted for certain transactions. The Company is still evaluatingyears, and requires the impact this standard will have on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” The standard addresses the classification and presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.modified retrospective approach. Early adoption is permitted. The Company is still evaluatingBased on the impact this standard will have on its consolidatedcomposition of the Company’s trade receivables and other financial statementsassets, current market conditions, and related disclosures.
In October 2016,historical credit loss activity, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects for an intra-entity asset transfer other than inventory. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. 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 AND DIVESTITURE
HemaCare Corporation
On January 3, 2020, the FASB issued ASU 2016-15, “ClassificationCompany acquired HemaCare Corporation (HemaCare), a business specializing in the production of Certain Cash Receiptshuman-derived cellular products for the cell therapy market. The acquisition of HemaCare will expand the Company’s comprehensive portfolio of early-stage research and Cash Payments.manufacturing support solutions to encompass the production and customization of high-quality, human derived cellular products to better support clients’ cell therapy programs. The preliminary purchase price of HemaCare was approximately $380 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 will be reported as part of the Company’s RMS reportable segment. Due to the limited time between the acquisition date and the filing of this Annual Report on Form 10-K, it is not practicable for the Company to disclose the preliminary allocation of the purchase price to assets acquired and liabilities assumed. The standard addressesCompany incurred transaction and integration costs in connection with the classificationacquisition of certain transactions$3.3 million during fiscal year 2019, which were included in Selling, general and administrative expenses within the statementconsolidated statements of income.
Citoxlab
On April 29, 2019, the Company acquired Citoxlab, a non-clinical CRO, specializing in regulated safety assessment services, non-regulated discovery services, and medical device testing. With operations in Europe and North America, the acquisition of Citoxlab further strengthens the Company’s position as a leading, global, early-stage CRO by expanding its scientific portfolio and geographic footprint, which enhances the Company’s ability to partner with clients across the drug discovery and development continuum. The preliminary purchase price for Citoxlab was $527.7 million in cash, subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash flows, including cash payments for debt prepayment or debt extinguishment costs, contingent consideration payments made after aon hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. This business combination, and distributions received from equity method investments. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspectsreported as part of the accounting for employee share-based compensation, including the income tax consequences, classificationCompany’s DSA reportable segment.
The preliminary purchase allocation of awards as either equity or liabilities and classification on the statement$491.0 million, net of $36.7 million of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the full impact this standard will have on itsacquired was as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consolidated financial statements and related disclosures but expects to recognize substantially all of its leases on the balance sheet, by recording a right-to-use asset and a corresponding lease liability. |
| | | |
| | April 29, 2019 |
| | (in thousands) |
| Trade receivables (contractual amount of $35,405) | $ | 35,405 |
|
| Inventories | 5,282 |
|
| Other current assets (excluding cash) | 13,917 |
|
| Property, plant and equipment | 88,605 |
|
| Goodwill | 280,711 |
|
| Definite-lived intangible assets | 162,400 |
|
| Other long-term assets | 20,163 |
|
| 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 | $ | 491,007 |
|
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the full retrospective or modified retrospective transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. The Company has selected the modified retrospective transition method and is still evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.
2. BUSINESS ACQUISITIONS
Agilux
On September 28, 2016, the Company acquired Agilux Laboratories, Inc. (Agilux), a CRO that provides a suite of integrated discovery small and large molecule bioanalytical services, drug metabolism and pharmacokinetic services, and pharmacology services. The acquisition supports the Company’s strategy to offer clients a broader, integrated portfolio that provides services continuously from the earliest stages of drug research through the non-clinical development process. The purchase price for Agilux was $64.9 million in cash and was funded by borrowings on the Company’s revolving credit facility. The business is reported as part of the Company’s DSA reportable segment.
The preliminary purchase price allocation of $62.0 million, net of $2.9 million of cash acquired, was as follows:
|
| | | |
| | September 28, 2016 |
| | (in thousands) |
| Trade receivables (contractual amount of $4,799) | $ | 4,799 |
|
| Other current assets (excluding cash) | 1,509 |
|
| Property, plant and equipment | 3,907 |
|
| Other long-term assets | 11 |
|
| Definite-lived intangible assets | 21,900 |
|
| Goodwill | 43,899 |
|
| Current liabilities | (3,987 | ) |
| Long-term liabilities | (10,013 | ) |
| Total purchase price allocation | $ | 62,025 |
|
The purchase price allocations areis subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed.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 | $ | 16,700 |
| | 17 |
| Other intangible assets | 5,200 |
| | 4 |
| Total definite-lived intangible assets | $ | 21,900 |
| | 14 |
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers and technology introduced through Agilux, and the assembled workforce of the acquired business. The goodwill attributable to Agilux is not deductible for tax purposes.
The Company incurred transaction and integration costs of $1.7 million in connection with the acquisition during fiscal year 2016, which were included in selling, general and administrative expenses.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma financial information as well as actual revenue and operating income (loss) have not been included because Agilux’s financial results are non-significant when compared with the Company’s consolidated financial results.
Blue Stream
On June 27, 2016, the Company acquired Blue Stream Laboratories, Inc. (Blue Stream), an analytical CRO supporting the development of complex biologics and biosimilars. Combining Blue Stream with the Company’s existing discovery, safety assessment, and biologics capabilities creates a leading CRO that has the ability to support biologic and biosimilar development from characterization through clinical testing and commercialization. The purchase price for Blue Stream was $11.7 million, including $3.0 million in contingent consideration, and was subject to certain customary adjustments. The acquisition was funded by borrowings on the Company’s revolving credit facility. The business is reported in the Company’s Manufacturing reportable segment.
The contingent consideration is a one-time payment that could become payable based on the achievement of a revenue target. If achieved, the payment will become due in the third quarter of fiscal year 2017. The aggregate, undiscounted amount of contingent consideration that the Company may pay is $3.0 million. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The purchase price allocation of $11.7 million, net of a non-significant amount of cash acquired, was as follows:
|
| | | |
| | June 27, 2016 |
| | (in thousands) |
| Trade receivables (contractual amount of $1,104) | $ | 1,104 |
|
| Other current assets (excluding cash) | 15 |
|
| Property, plant and equipment | 912 |
|
| Other long-term assets | 187 |
|
| Definite-lived intangible assets | 1,230 |
|
| Goodwill | 10,477 |
|
| Current liabilities | (1,132 | ) |
| Long-term liabilities | (1,044 | ) |
| Total purchase price allocation | $ | 11,749 |
|
The purchase price allocations are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. From the date of the acquisition through December 31, 2016, the Company recorded a measurement-period adjustment related to the acquisition that resulted in an immaterial change to the purchase price allocation. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The breakout of definite-lived intangible assets acquired was as follows:
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 650 |
| | 10 |
| Other intangible assets | 580 |
| | 5 |
| Total definite-lived intangible assets | $ | 1,230 |
| | 7 |
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s Manufacturing business from customers and technology introduced through Blue Stream, the assembled workforce of the acquired business, expected synergies, and the development of future proprietary processes. The goodwill attributable to Blue Stream is not deductible for tax purposes.
The Company incurred $0.6 million of transaction and integration costs in connection with the acquisition during fiscal year 2016, which were included in selling, general and administrative expenses.
Pro forma financial information as well as actual revenue and operating income (loss) have not been included because Blue Stream’s financial results are non-significant when compared with the Company’s consolidated financial results.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
WIL Research
On April 4, 2016, the Company acquired WIL Research, a provider of safety assessment and CDMO services to biopharmaceutical and agricultural and industrial chemical companies worldwide. The acquisition enhanced the Company’s position as a leading global early-stage CRO by strengthening its ability to partner with clients across the drug discovery and development continuum. The purchase price for WIL Research was $604.8 million, including assumed liabilities of $0.4 million. The purchase price includes payment for estimated working capital, which was subject to final adjustment based on the actual working capital of the acquired business. The acquisition was funded by cash on hand and borrowings on the Company’s amended credit facility. See Note 7, “Long-Term Debt and Capital Lease Obligations.” WIL Research’s safety assessment and CDMO businesses are reported in the Company’s DSA and Manufacturing reportable segments, respectively.
The purchase price allocation of $577.4 million, net of $27.4 million of cash acquired, was as follows:
|
| | | |
| | April 4, 2016 |
| | (in thousands) |
| Trade receivables (contractual amount of $48,625) | $ | 48,157 |
|
| Inventories | 2,296 |
|
| Other current assets (excluding cash) | 3,814 |
|
| Property, plant and equipment | 129,066 |
|
| Other long-term assets | 1,060 |
|
| Definite-lived intangible assets | 164,800 |
|
| Goodwill | 330,602 |
|
| Deferred revenue | (39,103 | ) |
| Other current liabilities | (27,386 | ) |
| Long-term liabilities | (35,915 | ) |
| Total purchase price allocation | $ | 577,391 |
|
The purchase price allocations are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. From the date of the acquisition through December 31, 2016,28, 2019, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The breakout of definite-lived intangible assets acquired was as follows:
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 134,600 |
| | 13 |
| Developed technology | 19,900 |
| | 3 |
| Backlog | 7,900 |
| | 1 |
| Total definite-lived intangible assets | $ | 162,400 |
| | 12 |
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 137,500 |
| | 15 |
| Developed technology | 20,700 |
| | 3 |
| Backlog | 6,600 |
| | 1 |
| Total definite-lived intangible assets | $ | 164,800 |
| | 13 |
The goodwill resulting from the transaction, $19.0$7.2 million of which is deductible for tax purposes due to a prior asset acquisition, is primarily attributedattributable to the potential growth of the Company’s DSA and Manufacturing businessesbusiness from clientscustomers introduced through WIL Research,Citoxlab and the assembled workforce of the acquired business, and expected cost synergies.business.
The Company incurred transaction and integration costs in connection with the acquisition of $15.5 million and $3.2$20.7 million during fiscal years 2016 and 2015, respectively,year 2019, which were primarily included in selling,Selling, general and administrative expenses.expenses within the consolidated statements of income.
WIL Research revenue and operating income from April 4, 2016 through December 31, 2016 was $176.1 million and $12.5 million, respectively. Beginning on April 4, 2016, WIL Research29, 2019, Citoxlab has been included in the operating results of the Company. Citoxlab revenue and operating income from April 29, 2019 through December 28, 2019 was $123.7 million and $6.2 million, respectively.
The following selected unaudited pro forma consolidated results of operations are presented as if the WIL ResearchCitoxlab 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 fiscal year 2016,2019, these adjustments included additional amortization of intangible assets and depreciation of
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fixed assets of $0.4$5.7 million, reversal ofadditional interest expense on borrowings of $2.6$1.2 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For fiscal year 2015,2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $13.6$9.4 million, reversal ofadditional interest expense on borrowings of $10.5 million, inclusion of acquisition-related transaction costs of $11.5$4.1 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 |
| | | | |
| | (in thousands, except per share amounts) |
| | (unaudited) |
| Revenue | $ | 1,741,964 |
| | $ | 1,578,133 |
|
| Net income attributable to common shareholders | 175,779 |
| | 153,974 |
|
| Earnings per common share: | | | |
| Basic | $ | 3.74 |
| | $ | 3.31 |
|
| Diluted | $ | 3.67 |
| | $ | 3.23 |
|
|
| | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 |
| | (in thousands) |
| | (unaudited) |
| Revenue | $ | 2,683,610 |
| | $ | 2,442,283 |
|
| Net income attributable to common shareholders | 268,995 |
| | 233,288 |
|
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 datedates indicated or that may result in the future. No effect has been given for synergies, if any, that may have beenbe realized through the acquisition.
OncotestMPI Research
On November 18, 2015,April 3, 2018, the Company acquired Oncotest GmbH (Oncotest),MPI Research, a Germannon-clinical CRO providing discoverycomprehensive testing services for oncology, one ofto biopharmaceutical and medical device companies worldwide. The acquisition enhances the largest therapeutic areas for biopharmaceutical researchCompany’s position as a leading global early-stage CRO by strengthening its ability to partner with clients across the drug discovery and development spending. With this acquisition, the Company has expanded its oncology services capabilities, enabling it to provide clients with access to a more comprehensive portfolio of technologies, including patient-derived xenograft (PDX) and syngeneic models.continuum. The purchase price for OncotestMPI Research was $36.0 million, including $0.3$829.7 million in contingent consideration.cash. The acquisition was funded by borrowings on the Company's revolving credit facility. TheCredit Facility as well as the issuance of the Company’s 2026 Senior Notes. See Note 9, “Long-Term Debt and Finance Lease Obligations.” This business is reported inas part of the Company’s DSA reportable segment.
The contingent consideration earn-out period ended in the fourth quarter of 2016. As a result, the related contingent consideration liability was reversed and a gain of $0.3 million was recorded in selling, general and administrative expenses, as no payments were expected to be made. The contingent consideration was a one-time payment that could have become payable based on the achievement of a revenue target for fiscal year 2016. If achieved, the payment would have become due in the first quarter of fiscal year 2017. The aggregate, undiscounted amount of contingent consideration that the Company could have paid was €2.0 million ($2.1 million as of December 31, 2016). The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The purchase price allocation of $35.4$800.8 million, net of $0.6$27.7 million of cash acquired and a final net working capital adjustment of $1.2 million, was as follows:
|
| | | |
| | April 3, 2018 |
| | (in thousands) |
| Trade receivables (contractual amount of $35,073) | $ | 35,073 |
|
| Inventories | 4,463 |
|
| Other current assets (excluding cash) | 5,893 |
|
| Property, plant and equipment | 128,403 |
|
| Goodwill | 441,656 |
|
| Definite-lived intangible assets | 309,200 |
|
| Other long-term assets | 1,081 |
|
| Deferred revenue | (23,926 | ) |
| Current liabilities | (32,885 | ) |
| Deferred tax liabilities | (65,945 | ) |
| Other long-term liabilities | (2,213 | ) |
| Total purchase price allocation | $ | 800,800 |
|
|
| | | |
| | November 18, 2015 |
| | (in thousands) |
| Trade receivables (contractual amount of $3,546) | $ | 3,520 |
|
| Inventories | 129 |
|
| Other current assets (excluding cash) | 706 |
|
| Property, plant and equipment | 2,528 |
|
| Definite-lived intangible assets | 13,330 |
|
| Goodwill | 22,894 |
|
| Other long-term assets | 250 |
|
| Current liabilities | (3,456 | ) |
| Long-term liabilities | (4,470 | ) |
| Total purchase price allocation | $ | 35,431 |
|
The breakout of definite-lived intangible assets acquired was as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The breakout of definite-lived intangible assets acquired was as follows:
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 264,900 |
| | 13 |
| Developed technology | 23,400 |
| | 3 |
| Backlog | 20,900 |
| | 1 |
| Total definite-lived intangible assets | $ | 309,200 |
| | 12 |
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 7,146 |
| | 19 |
| Developed technology | 5,960 |
| | 19 |
| Other intangible assets | 224 |
| | 3 |
| Total definite-lived intangible assets | $ | 13,330 |
| | 19 |
The goodwill resulting from the transaction, is primarily attributed to the potential growth in the Company's DSA businesses from customers and technology introduced through Oncotest, the assembled workforce$4.1 million of the acquired business and expected cost synergies. The goodwill attributable to Oncotestwhich is not deductible for tax purposes.
The Company incurred non-significant transaction and integration costs in connection with thepurposes due to a prior asset acquisition, during fiscal year 2016 and costs of $2.1 million during fiscal year 2015, which were included in selling, general and administrative expenses.
Pro forma financial information as well as actual revenue and operating income (loss) have not been included because Oncotest’s financial results are non-significant when compared with the Company’s consolidated financial results.
Celsis
On July 24, 2015, the Company acquired Celsis Group Limited (Celsis), a leading provider of rapid testing systems for non-sterile bacterial contamination for the biopharmaceutical and consumer products industries. The purpose of this acquisition was to enhance the Company’s portfolio of rapid microbial detection products and services with the addition of a rapid bioburden testing product. The purchase price for Celsis was $214.5 million, including assumed debt and certain liabilities of $10.3 million. The acquisition was funded by cash on hand and borrowings on the Company’s revolving credit facility. The business is reported in the Company’s Manufacturing reportable segment.
The purchase price allocation of $212.2 million, net of $2.3 million of cash acquired, was as follows:
|
| | | |
| | July 24, 2015 |
| | (in thousands) |
| Trade receivables (contractual amount of $5,410) | $ | 5,288 |
|
| Inventories | 10,103 |
|
| Other current assets (excluding cash) | 13,269 |
|
| Property, plant and equipment | 4,639 |
|
| Definite-lived intangible assets | 118,140 |
|
| Goodwill | 105,550 |
|
| Other long-term assets | 537 |
|
| Current debt | (9,766 | ) |
| Other current liabilities | (7,136 | ) |
| Long-term liabilities | (28,388 | ) |
| Total purchase price allocation | $ | 212,236 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 | $ | 71,000 |
| | 16 |
| Developed technology | 39,140 |
| | 14 |
| Trademark and trade names | 5,200 |
| | 14 |
| Non-compete | 2,800 |
| | 5 |
| Total definite-lived intangible assets | $ | 118,140 |
| | 15 |
The goodwill resulting from the transaction is primarily attributedattributable to the potential growth of the Company’s ManufacturingDSA business from clientscustomers introduced through Celsis,MPI Research and the assembled workforce of the acquired business and expected cost synergies. The goodwill attributable to Celsis is not deductiblebusiness.
NaN significant integration costs were incurred in connection with the acquisition for tax purposes.
fiscal year 2019. The Company incurred transaction and integration costs in connection with the acquisition of $1.0 million and $8.8$16.5 million during fiscal years 2016 and 2015,year 2018, which were primarily included in selling,Selling, general and administrative expenses.expenses within the consolidated statements of income.
CelsisMPI Research revenue and operating lossincome from July 24, 2015April 3, 2018 through December 26, 201529, 2018 was $11.1$209.5 million and $6.1$33.4 million, respectively. Beginning on July 24, 2015, CelsisApril 3, 2018, MPI Research has been included in the operating results of the Company.
The following selected unaudited pro forma consolidated results of operations are presented as if the CelsisMPI Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is January 1, 2017, after giving effect to certain nonrecurringadjustments.For fiscal year 2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of$14.1 million, additional interest expense on borrowings of$2.8 million, elimination of intercompany activity and other one-time costs, and otherthe tax impacts of these adjustments. For fiscal year 2017, these adjustments resulting in a reversal of $0.6 million andincluded additional expenses of $13.1 million for fiscal years 2015 and 2014, respectively, related to depreciation and amortization of property, plantintangible assets and equipment, inventory fair value adjustmentsdepreciation of fixed assets of $22.4 million, additional interest expense on borrowings of $27.1 million, elimination of intercompany activity and intangible assets.other one-time costs, and the tax impacts of these adjustments.
|
| | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 |
| | (in thousands) |
| | (unaudited) |
| Revenue | $ | 2,328,213 |
| | $ | 2,095,385 |
|
| Net income attributable to common shareholders | 225,550 |
| | 126,641 |
|
|
| | | | | | | |
| | Fiscal Year |
| | 2015 | | 2014 |
| | | | |
| | (in thousands, except per share amounts) |
| | (unaudited) |
| Revenue | $ | 1,380,493 |
| | $ | 1,329,025 |
|
| Net income attributable to common shareholders | 162,672 |
| | 110,387 |
|
| Earnings per common share: | | | |
| Basic | $ | 3.50 |
| | $ | 2.37 |
|
| Diluted | $ | 3.42 |
| | $ | 2.32 |
|
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 datedates indicated or that may result in the future. No effect has been given for synergies, if any, that may have beenbe realized through the acquisition.
SunriseKWS BioTest Limited
On May 5, 2015,January 11, 2018, the Company acquired Sunrise Farms, Inc. (Sunrise)KWS BioTest Limited (KWS BioTest), a producer of specific-pathogen-free fertile chicken eggsCRO specializing in in vitro and chickens usedin vivo discovery testing services for immuno-oncology, inflammatory and infectious diseases. The acquisition enhances the Company’s discovery expertise, with complementary offerings that provide the Company’s customers with additional tools in the manufactureactive therapeutic research areas of live viruses. The purpose of this business acquisition was to expand the capabilities of the Company’s existing Avian Vaccine Services business.oncology and immunology. The purchase price of the acquisitionfor KWS BioTest was $9.6$20.3 million in cash, and was funded by cash on hand and borrowings on the Company’s revolving credit facility.various borrowings. In addition to the initial purchase price, the transaction included aggregate, undiscounted contingent payments of up to £3.0 million based on future performance. The terms of these contingent payments were amended during fiscal year 2018, resulting in a fixed payment of £2.0 million or $2.6 million, which was paid during the first quarter of fiscal year 2019. The KWS BioTest business is reported inas part of the Company’s ManufacturingDSA reportable segment.
The Company recorded a bargain purchase gain of $9.8 million, which represents the excess of the estimated fair value of the net assets acquired over the purchase price. The bargain purchase gain was recorded in other income (expense), net in the Company’s consolidated statement of income and was not recognized for tax purposes. The Company believes there were several factors that contributed to this transaction resulting in a bargain purchase gain, including the highly specialized nature of Sunrise’s business falling outside of the seller’s core activities and a limited pool of potential buyers.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Before recognizing the gain from the bargain purchase, the Company reassessed its initial identification and valuation of assets acquired and liabilities assumed to validate that all assets and liabilities that the Company was able to identify at the acquisition date were properly recognized.
The purchase price allocation of $9.6$21.5 million, net of less than $0.1$1.0 million of cash acquired and a final net working capital adjustment of $0.4 million, was as follows:
|
| | | |
| | January 11, 2018 |
| | (in thousands) |
| Trade receivables (contractual amount of $1,309) | $ | 1,309 |
|
| Other current assets (excluding cash) | 99 |
|
| Property, plant and equipment | 1,136 |
|
| Definite-lived intangible assets - client relationships | 3,647 |
|
| Goodwill | 17,660 |
|
| Current liabilities | (1,575 | ) |
| Deferred revenue | (151 | ) |
| Long-term liabilities | (596 | ) |
| Total purchase price allocation | $ | 21,529 |
|
|
| | | |
| | May 5, 2015 |
| | (in thousands) |
| Trade receivables (contractual amount of $995) | $ | 965 |
|
| Inventories | 1,518 |
|
| Other current assets (excluding cash) | 973 |
|
| Property, plant and equipment | 13,698 |
|
| Definite-lived intangible assets | 3,400 |
|
| Current liabilities | (925 | ) |
| Long-term liabilities | (250 | ) |
| Fair value of net assets acquired | 19,379 |
|
| Bargain purchase gain | (9,821 | ) |
| Total purchase price allocation | $ | 9,558 |
|
The identifiableonly definite-lived intangible assets acquired represent theasset relates to client relationships, intangible, which is beingwill be amortized over thea weighted average estimated useful life of approximately 1512 years.
The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through KWS BioTest and the assembled workforce of the acquired business. The goodwill attributable to KWS BioTest is not deductible for tax purposes.
NaN significant integration costs were incurred in connection with the acquisition during fiscal year 2019. The Company incurred non-significant transaction and integration costs in connection with the acquisition during fiscal year 2016 and costs of $1.5$0.7 million during fiscal year 2015,2018, which were included in selling,Selling, general and administrative expenses.expenses within the consolidated statements of income.
Pro forma financial information as well as actual revenue and operating income (loss) have not been included because Sunrise’sKWS BioTest’s financial results are non-significantnot significant when compared withto the Company’s consolidated financial results.
ChanTestBrains On-Line
On October 29, 2014,August 4, 2017, the Company acquired ChanTest Corporation (ChanTest),Brains On-Line, a leading providerCRO providing critical data that advances novel therapeutics for the treatment of ion channel testing services to the biopharmaceutical industry. The acquisition augmentscentral nervous system (CNS) diseases. Brains On-Line strategically expands the Company’s early discoveryexisting CNS capabilities and enhancesestablishes the Company’s ability to support clients’ targetCompany as a single-source provider for a broad portfolio of discovery and lead optimization efforts.CNS services. The purchase price of the acquisitionfor Brains On-Line was $59.2 million, including $0.3$21.3 million in contingent consideration,cash and was funded by borrowings on the Company’s revolving credit facility and cashvarious borrowings. In addition to the initial purchase price, the transaction included aggregate, undiscounted contingent payments of up to €6.7 million based on hand.future performance. During the first quarter of fiscal year 2019, the terms of these contingent payments were amended, resulting in a fixed payment of $2.6 million, which was paid during the three months ended June 29, 2019. The Brains On-Line business is reported inas part of the Company’s DSA reportable segment.
The contingent consideration earn-out period ended in the fourth quarter of 2015. As a result, the related contingent consideration liability was reversed and a gain of $0.3 million was recorded in selling, general and administrative expenses, as no payments were expected to be made. The aggregate, undiscounted amount of contingent consideration that could have become payable was $2.0 million. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The purchase price allocation of $52.0 million, net of $7.2 million in cash acquired, is as follows:
|
| | | |
| | October 29, 2014 |
| | (in thousands) |
| Current assets (excluding cash) | $ | 4,669 |
|
| Property, plant and equipment | 1,637 |
|
| Definite-lived intangible assets | 23,920 |
|
| Goodwill | 34,775 |
|
| Current liabilities | (3,486 | ) |
| Long-term liabilities | (9,486 | ) |
| Total purchase price allocation | $ | 52,029 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation of $20.1 million, net of $0.6 million of cash acquired, was as follows:
|
| | | |
| | August 4, 2017 |
| | (in thousands) |
| Trade receivables (contractual amount of $1,146) | $ | 1,146 |
|
| Other current assets (excluding cash) | 640 |
|
| Property, plant and equipment | 664 |
|
| Other long-term assets | 29 |
|
| Definite-lived intangible assets | 9,300 |
|
| Goodwill | 12,582 |
|
| Current liabilities | (1,683 | ) |
| Deferred revenue | (405 | ) |
| Long-term liabilities | (2,151 | ) |
| Total purchase price allocation | $ | 20,122 |
|
From the date of the acquisition through June 30, 2018, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.
The breakout of definite-lived intangible assets acquired iswas as follows:
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 7,000 |
| | 13 |
| Other intangible assets | 2,300 |
| | 10 |
| Total definite-lived intangible assets | $ | 9,300 |
| | 12 |
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 19,000 |
| | 13 |
| Other intangible assets | 4,920 |
| | 9 |
| Total definite-lived intangible assets | $ | 23,920 |
| | 12 |
The definite-lived intangibles are largely attributed to the expected cash flows related to client relationships existing at the acquisition closing date. The goodwill resulting from the transaction is primarily attributedattributable to the potential growth of the businessCompany’s DSA businesses from customers and technology introduced through Brains On-Line and the assembled workforce of the acquired business. The goodwill attributable to Brains On-Line is not deductible for tax purposes.
NaN significant integration costs were incurred in connection with the acquisition during fiscal years 2019 or 2018. The Company incurred non-significant transaction and integration costs in connection with the acquisition during both fiscal years 2016 and 2015, and costs of $1.1$2.6 million during fiscal year 2014,2017, which were included in selling, general and administrative expenses.expenses within the consolidated statements of income.
Pro forma financial information as well as actual revenue and operating income (loss) have not been included because ChanTest’sBrains On-Line’s financial results are non-significantnot significant when compared withto the Company’s consolidated financial results.
VivoPathOther Acquisition
On June 16, 2014,August 28, 2019, the Company acquired substantially all ofan 80% ownership interest in a supplier that supports the assets of VivoPath LLC (VivoPath),Company’s DSA reportable segment. The remaining 20% interest is a discovery services company specializing in the rapid, in vivo compound evaluation of molecules in the therapeutic areas of metabolism, inflammationredeemable non-controlling interest. See Note 10, “Equity and oncology.Noncontrolling Interests.” The preliminary purchase price was $2.3$23.4 million, including $1.6net of a $4.0 million in contingent consideration,pre-existing relationship for a supply agreement settled upon acquisition, and subject to certain post-closing adjustments that may change the purchase price. The acquisition was allocated primarily tofunded through a combination of cash on hand and proceeds from the intangible assets acquired. The Company estimatedCompany’s Credit Facility under the fair value of this contingent consideration based on a probability-weighted set of outcomes. The undiscounted total amount of contingent consideration was a maximum of $2.4 million, payable over three years based on the achievement of revenue growth targets and other contractual requirements. During fiscal year 2016, the Company paid the second year tranche of the contingent consideration of $0.2 million. During fiscal year 2015, the Company paid the first year tranche of the contingent consideration of $0.6 million and recorded a gain of $0.8 million, primarily due to a decrease in the expected future contingent consideration payments. As of December 31, 2016, the remaining contingent consideration payable is a maximum of $0.2 million.multi-currency revolving facility. The business is reported inas part of the Company’s DSA reportable segment.
Argenta and BioFocus
On April 1, 2014, the Company acquired (1) 100% of the shares of the U.K. based entities Argenta and BioFocus, and (2) certain Dutch assets. These businesses have formed the core of the Company’s Early Discovery business. With this acquisition, the Company has enhanced its position as a full service, early-stage CRO, with integrated in vitro and in vivo capabilities from target discovery through non-clinical development. The purchase price of the acquisition was $191.8 million, including $0.9 million in contingent consideration. The acquisition was funded by cash on hand and borrowings on the Company’s revolving credit facility. The businesses are reported in the Company’s DSA reportable segment.
The contingent consideration earn-out period ended on April 1, 2015. As a result, the related contingent consideration liability, as adjusted for subsequent changes in fair value, was reversed and a gain of $0.8 million was recorded in selling, general and administrative expenses during fiscal year 2015, as no payments were expected to be made. The contingent consideration was a one-time payment that could have become payable in the second quarter of 2015 based on the achievement of a certain revenue target for the twelve-month period following the acquisition. The aggregate, undiscounted amount of contingent consideration that the Company could have paid was €5.0 million ($5.3 million as of December 31, 2016). The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The preliminary purchase price allocation of $183.6$23.1 million, net of $8.2$0.3 million of cash acquired was as follows: |
| | | |
| | August 28, 2019 |
| | (in thousands) |
| Trade receivables (contractual amount of $189) | $ | 189 |
|
| Inventories | 7,644 |
|
| Property, plant and equipment | 1,462 |
|
| Goodwill | 12,669 |
|
| Other long-term assets | 11,849 |
|
| Current liabilities | (441 | ) |
| Deferred tax liabilities | (1,331 | ) |
| Other long-term liabilities | (238 | ) |
| Redeemable noncontrolling interest | (8,740 | ) |
| Total purchase price allocation | $ | 23,063 |
|
|
| | | |
| | April 1, 2014 |
| | (in thousands) |
| Current assets (excluding cash) | $ | 31,682 |
|
| Property, plant and equipment | 21,008 |
|
| Other long-term assets | 11,140 |
|
| Definite-lived intangible assets | 104,470 |
|
| Goodwill | 65,235 |
|
| Current liabilities | (13,139 | ) |
| Long-term liabilities | (36,802 | ) |
| Total purchase price allocation | $ | 183,594 |
|
The breakoutpurchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of definite-lived intangiblethe assets acquired wasand liabilities assumed, including certain contracts and obligations. Any additional adjustments to the purchase price allocation will be made as follows:
|
| | | | | |
| | Definite-Lived Intangible Assets | | Weighted Average Amortization Life |
| | (in thousands) | | (in years) |
| Client relationships | $ | 94,000 |
| | 18 |
| Backlog | 5,900 |
| | 1 |
| Trademark and trade names | 1,170 |
| | 3 |
| Leasehold interests | 1,000 |
| | 13 |
| Other intangible assets | 2,400 |
| | 19 |
| Total definite-lived intangible assets | $ | 104,470 |
| | 17 |
The goodwill resultingsoon as practicable but no later than one year from the transaction is primarily attributeddate of acquisition. From the date of the acquisition through December 28, 2019, the Company recorded measurement-period adjustments related to the potential growth ofacquisition that resulted in an immaterial change to the Company’s DSA businesses from clients introduced through Argenta and BioFocus, the assembled workforce of the acquired businesses and expected cost synergies. The goodwill attributable to Argenta and BioFocus is not deductible for tax purposes.purchase price allocation on a consolidated basis.
The Company incurred non-significant transaction and integration costs in connection with the acquisition during both fiscal years 2016 and 2015, and costs of $5.3$3.6 million duringfor fiscal year 2014,2019 which wereare primarily included in selling,Selling, general and administrative expenses.expenses within the consolidated statements of income.
ArgentaPro 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.
Contract Manufacturing
On February 10, 2017, the Company sold its CDMO business to Quotient Clinical Ltd., based in London, England, for $75 million in proceeds, net of $0.6 million in cash and BioFocus revenuecash equivalents transferred in conjunction with the sale and operating income for fiscal year 2014 were $71.4$0.3 million of working capital adjustments.
The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and $1.8 million, respectively. Beginning onwas reported in the Company’s Manufacturing reportable segment. The Company determined that the CDMO business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.
During the three months ended April 1, 2014, Argenta and BioFocus have been2017, the Company recorded a gain on the divestiture of the CDMO business of $10.6 million, which was included in other income, net within the operating resultsCompany’s consolidated statements of income. The carrying amounts of the Company.
The following selected unaudited pro forma consolidated resultsmajor classes of operations are presented as ifassets and liabilities associated with the Argenta and BioFocus acquisition had occurred asdivestiture of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments, including amortization of intangible assets and depreciation of fixed assets of $3.7 million and other nonrecurring costs.CDMO business were as follows:
|
| | | |
| | February 10, 2017 |
| | (in thousands) |
| Assets | |
| Current assets | $ | 5,505 |
|
| Property, plant and equipment, net | 11,174 |
|
| Goodwill | 35,857 |
|
| Long-term assets | 17,154 |
|
| Total assets | $ | 69,690 |
|
| Liabilities | |
| Deferred revenue | $ | 4,878 |
|
| Other current liabilities | 1,158 |
|
| Total liabilities | $ | 6,036 |
|
|
| | | |
| | Fiscal Year |
| | 2014 |
| | (in thousands, except per share amounts) |
| | (unaudited) |
| Revenue | $ | 1,322,771 |
|
| Net income attributable to common shareholders | 128,195 |
|
| Earnings per common share: | |
| Basic | $ | 2.75 |
|
| Diluted | $ | 2.70 |
|
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These unaudited pro formaDisaggregation of Revenue
The following tables disaggregate the Company’s revenue by major business line and timing of transfer of products or services:
|
| | | | | | | |
| Major Products/Service Lines: | 2019 | | 2018 |
| | (in thousands) |
| RMS | $ | 537,089 |
| | $ | 519,682 |
|
| DSA | 1,618,995 |
| | 1,316,854 |
|
| Manufacturing | 465,142 |
| | 429,560 |
|
| Total revenue | $ | 2,621,226 |
| | $ | 2,266,096 |
|
|
| | | | | | | |
| Timing of Revenue Recognition: | 2019 | | 2018 |
| | (in thousands) |
| RMS | | | |
| Services and products transferred over time | $ | 227,872 |
| | $ | 202,872 |
|
| Services and products transferred at a point in time | 309,217 |
| | 316,810 |
|
| DSA | | | |
| Services and products transferred over time | 1,618,281 |
| | 1,316,005 |
|
| Services and products transferred at a point in time | 714 |
| | 849 |
|
| Manufacturing | | | |
| Services and products transferred over time | 142,896 |
| | 128,287 |
|
| Services and products transferred at a point in time | 322,246 |
| | 301,273 |
|
| Total revenue | $ | 2,621,226 |
| | $ | 2,266,096 |
|
RMS
The RMS business generates revenue through the commercial production and sale of research models and the provision of services related to the maintenance and monitoring of research models and management of clients’ research operations. Revenue from the sale of research models is recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the shipping terms of a contract. Revenue generated from research models services is recognized over time and is typically based on a right-to-invoice measure of progress (output method) as invoiced amounts correspond directly to the value of the Company’s performance to date.
DSA
The Discovery and Safety Assessment business provides a full suite of integrated drug discovery services directed at the identification, screening and selection of a lead compound for drug development and offers a full range of safety assessment services including bioanalysis, drug metabolism, pharmacokinetics, toxicology and pathology. Discovery and Safety Assessment services revenue is generally recognized over time using the cost-to-cost or right to invoice measures of progress, primarily representing fixed fee service contracts and per unit service contracts, respectively.
Manufacturing
The Manufacturing business includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens. Species identification service revenue is generally recognized at a point in time as identifications are completed by the Company. Biologics service revenue is generally recognized over time using the cost-to-cost measure of progress. Microbial Solutions and Avian product sales are generally recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the contractual shipping terms of a contract.
Transaction Price Allocated to Future Performance Obligations
The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of December 28, 2019. Excluded from the disclosure is the value of unsatisfied performance obligations for (i)
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of December 28, 2019:
|
| | | | | | | | | | | | | | | | | | | |
| | Revenue Expected to be Recognized in Future Periods |
| | Less than 1 Year | | 1 to 3 Years | | 4 to 5 Years | | Beyond 5 Years | | Total |
| | (in thousands) |
| DSA | $ | 156,125 |
| | $ | 89,458 |
| | $ | 5,965 |
| | $ | 527 |
| | $ | 252,075 |
|
| Manufacturing | 11,604 |
| | 11,816 |
| | 19 |
| | 13 |
| | 23,452 |
|
| Total | $ | 167,729 |
| | $ | 101,274 |
| | $ | 5,984 |
| | $ | 540 |
| | $ | 275,527 |
|
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 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 operationstime. 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 preparedmet. The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Balances from contracts with customers: | | | |
| Client receivables | $ | 395,740 |
| | $ | 370,131 |
|
| Contract assets (unbilled revenue) | 121,957 |
| | 105,216 |
|
| Contract liabilities (current and long-term deferred revenue) | 192,788 |
| | 179,559 |
|
| Contract liabilities (customer contract deposits) | 33,080 |
| | 38,245 |
|
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $27 million and $22 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying consolidated balance sheets as of December 28, 2019 and December 29, 2018, respectively. Advanced client payments of approximately $33 million and $38 million have been presented as customer contract deposits within other current liabilities in the accompanying consolidated balance sheets as of December 28, 2019 and December 29, 2018.
Other changes in the contract asset and the contract liability balances during fiscal year 2019 were as follows:
(i) Changes due to business combinations:
See Note 2. “Business Combinations and Divestiture” for comparative purposes only,client receivables, contract assets, and they do not purportcontract liabilities that were acquired as part of the Citoxlab acquisition on April 29, 2019.
(ii) Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification:
During fiscal year 2019, an immaterial cumulative catch-up adjustment to revenue was recorded.
(iii) A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recorded as a client receivable):
Approximately 95% of unbilled revenue as of December 29, 2018 was billed during fiscal year 2019.
(iv) A change in the time frame for a performance obligation to be indicativesatisfied (that is, for the recognition of the resultsrevenue arising from a contract liability):
Approximately 85% of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future. No effect has been given for synergies, if any, that may have been realized through the acquisition.contract liabilities as of December 29, 2018 were recognized as revenue during fiscal year 2019.
3.4. SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s 3 reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). Asset information on a reportable segment basis is not disclosed as this information is not separately identified and internally reported to the Company’s Chief Operating Decision Maker.
The following table presents revenue and other financial information by reportable segment:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| RMS | | | | | |
| Revenue | $ | 537,089 |
| | $ | 519,682 |
| | $ | 493,615 |
|
| Operating income | 133,912 |
| | 136,468 |
| | 114,588 |
|
| Depreciation and amortization | 19,197 |
| | 19,469 |
| | 19,627 |
|
| Capital expenditures | 26,989 |
| | 35,172 |
| | 20,879 |
|
| DSA | | | |
| | |
|
| Revenue | $ | 1,618,995 |
| | $ | 1,316,854 |
| | $ | 980,022 |
|
| Operating income | 258,903 |
| | 227,577 |
| | 182,796 |
|
| Depreciation and amortization | 151,139 |
| | 112,976 |
| | 79,355 |
|
| Capital expenditures | 86,843 |
| | 73,425 |
| | 36,616 |
|
| Manufacturing | | | | | |
| Revenue | $ | 465,142 |
| | $ | 429,560 |
| | $ | 383,964 |
|
| Operating income | 145,420 |
| | 136,212 |
| | 123,898 |
|
| Depreciation and amortization | 23,584 |
| | 22,529 |
| | 22,893 |
|
| Capital expenditures | 23,617 |
| | 23,323 |
| | 15,188 |
|
The following tables present reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Operating Income | | Depreciation and Amortization |
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Total reportable segments | $ | 538,235 |
| | $ | 500,257 |
| | $ | 421,282 |
| | $ | 193,920 |
| | $ | 154,974 |
| | $ | 121,875 |
|
| Unallocated corporate | (187,084 | ) | | (168,874 | ) | | (133,000 | ) | | 4,175 |
| | 6,805 |
| | 9,284 |
|
| Total consolidated | $ | 351,151 |
| | $ | 331,383 |
| | $ | 288,282 |
| | $ | 198,095 |
| | $ | 161,779 |
| | $ | 131,159 |
|
|
| | | | | | | | | | | |
| | Capital Expenditures |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Total reportable segments | $ | 137,449 |
| | $ | 131,920 |
| | $ | 72,683 |
|
| Unallocated corporate | 3,065 |
| | 8,134 |
| | 9,748 |
|
| Total consolidated | $ | 140,514 |
| | $ | 140,054 |
| | $ | 82,431 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue for each significant product or service offering is as follows:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| RMS | $ | 537,089 |
| | $ | 519,682 |
| | $ | 493,615 |
|
| DSA | 1,618,995 |
| | 1,316,854 |
| | 980,022 |
|
| Manufacturing | 465,142 |
| | 429,560 |
| | 383,964 |
|
| Total revenue | $ | 2,621,226 |
| | $ | 2,266,096 |
| | $ | 1,857,601 |
|
A summary of unallocated corporate expense consists of the following:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Stock-based compensation | $ | 37,855 |
| | $ | 32,068 |
| | $ | 27,114 |
|
| Compensation, benefits, and other employee-related expenses | 73,893 |
| | 69,191 |
| | 46,920 |
|
| External consulting and other service expenses | 16,639 |
| | 18,652 |
| | 22,224 |
|
| Information technology | 16,080 |
| | 12,463 |
| | 11,997 |
|
| Depreciation | 4,175 |
| | 6,805 |
| | 9,284 |
|
| Acquisition and integration | 26,877 |
| | 16,295 |
| | 3,728 |
|
| Other general unallocated corporate | 11,565 |
| | 13,400 |
| | 11,733 |
|
| Total unallocated corporate expense | $ | 187,084 |
| | $ | 168,874 |
| | $ | 133,000 |
|
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 and long-lived assets by geographic area are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Canada | | Asia Pacific | | Other | | Consolidated |
| | (in thousands) |
| 2019 | | | | | | | | | | | |
| Revenue | $ | 1,471,097 |
| | $ | 726,421 |
| | $ | 271,987 |
| | $ | 146,218 |
| | $ | 5,503 |
| | $ | 2,621,226 |
|
| Long-lived assets | 602,654 |
| | 253,665 |
| | 127,495 |
| | 60,213 |
| | 101 |
| | 1,044,128 |
|
| 2018 | | | | | | | | | | | |
| Revenue | $ | 1,267,620 |
| | $ | 643,957 |
| | $ | 206,382 |
| | $ | 142,495 |
| | $ | 5,642 |
| | $ | 2,266,096 |
|
| Long-lived assets | 597,223 |
| | 205,185 |
| | 74,051 |
| | 56,262 |
| | 156 |
| | 932,877 |
|
| 2017 | | | | | | | | | | |
|
|
| Revenue | $ | 959,263 |
| | $ | 569,812 |
| | $ | 200,343 |
| | $ | 126,462 |
| | $ | 1,721 |
| | $ | 1,857,601 |
|
| Long-lived assets | 446,574 |
| | 203,911 |
| | 82,228 |
| | 49,020 |
| | 240 |
| | 781,973 |
|
Included in the Asia Pacific category above are operations located in China, Japan, South Korea, Australia, Singapore, and India. Included in the Other category above are operations located in Brazil and Israel. Revenue represents sales originating in entities physically located in the identified geographic area. Long-lived assets consist of property, plant, and equipment, net.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Client receivables | $ | 395,740 |
| | $ | 370,131 |
|
| Unbilled revenue | 121,957 |
| | 105,216 |
|
| Total | 517,697 |
| | 475,347 |
|
| Less: Allowance for doubtful accounts | (3,664 | ) | | (3,099 | ) |
| Trade receivables, net | $ | 514,033 |
| | $ | 472,248 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Client receivables | $ | 283,997 |
| | $ | 230,010 |
|
| Unbilled revenue | 82,203 |
| | 45,996 |
|
| Total | 366,200 |
| | 276,006 |
|
| Less: Allowance for doubtful accounts | (2,150 | ) | | (5,938 | ) |
| Trade receivables, net | $ | 364,050 |
| | $ | 270,068 |
|
Recoveries to the allowance for doubtful accounts in fiscal year 2016Net provisions of $3.0 million, $2.1 million, and $0.9 million were $0.5 million. Provisionsrecorded to the allowance for doubtful accounts in fiscal years 20152019, 2018, and 2014 were $1.8 million and $0.5 million,2017, respectively.
The composition of inventories is as follows:
| | | | December 31, 2016 | | December 26, 2015 | | | | | |
| | | | | December 28, 2019 | | December 29, 2018 |
| | (in thousands) | (in thousands) |
| Raw materials and supplies | $ | 18,893 |
| | $ | 15,998 |
| $ | 24,613 |
| | $ | 22,378 |
|
| Work in process | 13,681 |
| | 12,101 |
| 35,852 |
| | 21,732 |
|
| Finished products | 63,259 |
| | 65,636 |
| 100,195 |
| | 83,782 |
|
| Inventories | $ | 95,833 |
| | $ | 93,735 |
| $ | 160,660 |
| | $ | 127,892 |
|
The composition of other current assets is as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Prepaid income tax | $ | 54,358 |
| | $ | 47,157 |
|
| Short-term investments | 941 |
| | 885 |
|
| Restricted cash | 431 |
| | 465 |
|
| Other | 300 |
| | 300 |
|
| Other current assets | $ | 56,030 |
| | $ | 48,807 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Investments | $ | 3,771 |
| | $ | 20,516 |
|
| Prepaid income tax | 40,705 |
| | 26,350 |
|
| Restricted cash | 532 |
| | 271 |
|
| Other | — |
| | 149 |
|
| Other current assets | $ | 45,008 |
| | $ | 47,286 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of property, plant and equipment, net is as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Land | $ | 63,077 |
| | $ | 52,266 |
|
Buildings (1) | 1,006,357 |
| | 938,184 |
|
Machinery and equipment (1) | 585,965 |
| | 501,894 |
|
| Leasehold improvements | 84,630 |
| | 59,854 |
|
| Furniture and fixtures | 28,304 |
| | 26,700 |
|
Computer hardware and software (1) | 179,865 |
| | 166,398 |
|
Vehicles (1) | 5,561 |
| | 5,167 |
|
| Construction in progress | 67,939 |
| | 56,549 |
|
| Total | 2,021,698 |
| | 1,807,012 |
|
| Less: Accumulated depreciation | (977,570 | ) | | (874,135 | ) |
| Property, plant and equipment, net | $ | 1,044,128 |
| | $ | 932,877 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Land | $ | 47,392 |
| | $ | 39,846 |
|
Buildings (1) | 784,129 |
| | 713,841 |
|
| Machinery and equipment | 403,123 |
| | 362,695 |
|
| Leasehold improvements | 47,071 |
| | 41,477 |
|
| Furniture and fixtures | 24,148 |
| | 21,783 |
|
| Computer hardware and software | 127,283 |
| | 113,466 |
|
| Vehicles | 4,118 |
| | 3,819 |
|
| Construction in progress | 24,703 |
| | 25,845 |
|
| Total | 1,461,967 |
| | 1,322,772 |
|
| Less: Accumulated depreciation | (706,140 | ) | | (644,813 | ) |
| Property, plant and equipment, net | $ | 755,827 |
| | $ | 677,959 |
|
(1) The These balances as of December 31, 2016 and December 26, 2015 include capital lease buildings.assets under finance leases. See Note 7, “Long-Term Debt and Capital Lease Obligations.16, “Leases.”
Depreciation expense in fiscal years 2016, 20152019, 2018 and 20142017 was $85.0$108.6 million, $70.7$96.9 million and $70.5$89.8 million, respectively.
The composition of other assets is as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Venture capital investments | $ | 108,983 |
| | $ | 87,545 |
|
| Other investments | 13,996 |
| | 1,046 |
|
| Life insurance policies | 38,207 |
| | 32,340 |
|
| Restricted cash | 1,601 |
| | 1,411 |
|
| Other | 49,828 |
| | 21,417 |
|
| Other assets | $ | 212,615 |
| | $ | 143,759 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Life insurance policies | $ | 29,456 |
| | $ | 27,554 |
|
| Venture capital investments | 45,331 |
| | 32,730 |
|
| Restricted cash | 1,736 |
| | 1,745 |
|
| Other | 11,907 |
| | 9,614 |
|
| Other assets | $ | 88,430 |
| | $ | 71,643 |
|
The composition of other current liabilities is as follows:
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Accrued income taxes | $ | 25,621 |
| | $ | 12,168 |
|
| Other | 879 |
| | 376 |
|
| Other current liabilities | $ | 26,500 |
| | $ | 12,544 |
|
The composition of other long-term liabilities is as follows:
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Long-term pension liability | $ | 89,984 |
| | $ | 34,604 |
|
| Accrued executive supplemental life insurance retirement plan and deferred compensation plan | 32,880 |
| | 30,188 |
|
| Other | 36,375 |
| | 24,270 |
|
| Other long-term liabilities | $ | 159,239 |
| | $ | 89,062 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. VENTURE CAPITAL INVESTMENTS AND MARKETABLE SECURITIES
Venture Capital Investments
During fiscal years 2016, 2015, and 2014, the Company recognized gains related to the venture capital investments of $10.3 million, $3.8 million and $9.3 million, respectively. The Company’s total commitment to these entities as of December 31, 2016 was $84.8 million, of which the Company had funded $38.2 million as of December 31, 2016. During fiscal years 2016, 2015, and 2014, the Company received dividends totaling $7.1 million, $7.3 million, and $7.4 million, respectively. As of December 31, 2016 and December 26, 2015, the Company’s consolidated retained earnings (accumulated deficit) included $4.4 million and $2.4 million, respectively, of the undistributed earnings related to these entities.
Marketable Securities
The Company held no marketable securities as of December 31, 2016.
The following is a summary of the Company’s marketable securities, all of which are classified as available-for-sale, as of December 26, 2015:
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
| | (in thousands) |
| Mutual fund | $ | 4,650 |
| | $ | — |
| | $ | (141 | ) | | $ | 4,509 |
|
| Total | $ | 4,650 |
| | $ | — |
| | $ | (141 | ) | | $ | 4,509 |
|
During fiscal year 2016, the Company realized non-significant losses and received proceeds of $4.6 million from the sale of its available-for-sale securities. There were no sales of available-for-sale securities during fiscal year 2015.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE
Assets, liabilities, and redeemable noncontrolling interest measured at fair value on a recurring basis are summarized below:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (in thousands) |
| Cash equivalents | $ | — |
| | $ | 21 |
| | $ | — |
| | $ | 21 |
|
| Other assets: | | | | | | | |
| Life insurance policies | — |
| | 22,121 |
| | — |
| | 22,121 |
|
| Total assets measured at fair value | $ | — |
| | $ | 22,142 |
| | $ | — |
| | $ | 22,142 |
|
| | | | | | | | |
| Other current liabilities: | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 3,621 |
| | $ | 3,621 |
|
| Total liabilities measured at fair value | $ | — |
| | $ | — |
| | $ | 3,621 |
| | $ | 3,621 |
|
|
| | | | | | | | | | | | | | | |
| | December 26, 2015 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (in thousands) |
| Cash equivalents | $ | — |
| | $ | 190 |
| | $ | — |
| | $ | 190 |
|
| Other current assets: | | | | | | | |
| Marketable securities | 4,509 |
| | — |
| | — |
| | 4,509 |
|
| Foreign currency forward contracts | — |
| | 15 |
| | — |
| | 15 |
|
| Other assets: | | | | | | | |
| Life insurance policies | — |
| | 20,364 |
| | — |
| | 20,364 |
|
| Total assets measured at fair value | $ | 4,509 |
| | $ | 20,569 |
| | $ | — |
| | $ | 25,078 |
|
| | | | | | | | |
| Other current liabilities: | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 1,172 |
| | $ | 1,172 |
|
| Other long-term liabilities: | | | | | | | |
| Contingent consideration | — |
| | — |
| | 198 |
| | 198 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 28,008 |
| | 28,008 |
|
| Total liabilities and redeemable noncontrolling interest measured at fair value | $ | — |
| | $ | — |
| | $ | 29,378 |
| | $ | 29,378 |
|
During fiscal years 2016 and 2015, there were no transfers between fair value levels.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The composition of other current liabilities is as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Current portion of operating lease right-of-use liabilities | $ | 20,357 |
| | $ | — |
|
| Accrued income taxes | 26,066 |
| | 24,120 |
|
| Customer contract deposits | 33,080 |
| | 38,245 |
|
| Other | 11,095 |
| | 8,915 |
|
| Other current liabilities | $ | 90,598 |
| | $ | 71,280 |
|
The composition of other long-term liabilities is as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| U.S. Transition Tax | $ | 52,066 |
| | $ | 52,064 |
|
| Long-term pension liability | 43,054 |
| | 24,671 |
|
| Accrued executive supplemental life insurance retirement plan and deferred compensation plan | 37,779 |
| | 36,086 |
|
| Long-term deferred revenue | 20,983 |
| | 34,420 |
|
| Other | 29,051 |
| | 31,880 |
|
| Other long-term liabilities | $ | 182,933 |
| | $ | 179,121 |
|
6. VENTURE CAPITAL AND OTHER INVESTMENTS
Venture capital investments were $109.0 million and $87.5 million as of December 28, 2019 and December 29, 2018, respectively. The Company’s total commitment to the venture capital funds as of December 28, 2019 was $128.4 million, of which the Company funded $80.3 million through that date. During fiscal years 2019, 2018, and 2017, the Company received dividends totaling $11.4 million, $18.2 million, and $10.1 million, respectively. During fiscal years 2019, 2018, and 2017, the Company recognized gains related to the venture capital investments of $20.7 million, $15.9 million and $22.9 million, respectively. As of December 28, 2019 and December 29, 2018, the Company’s consolidated retained earnings included $20.6 million and $14.1 million, respectively, of the undistributed earnings related to these investments.
Other investments were $14.0 million and $1.0 million as of December 28, 2019 and December 29, 2018, respectively. The Company recognized an insignificant amount of gains and losses related to these investments for fiscal years 2019 and 2018.
Gains and losses from venture capital and other investments are recorded in Other income, net in the accompanying consolidated statements of income.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
| | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | |
| | December 29, 2018 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) |
| Cash equivalents | $ | — |
| | $ | 45,982 |
| | $ | — |
| | $ | 45,982 |
|
| Other assets: | | | | | | | |
| Life insurance policies | — |
| | 24,541 |
| | — |
| | 24,541 |
|
| Total assets measured at fair value | $ | — |
| | $ | 70,523 |
| | $ | — |
| | $ | 70,523 |
|
| | | | | | | | |
| Other current liabilities: | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 3,033 |
| | $ | 3,033 |
|
| Foreign currency forward contract | — |
| | 1,319 |
| | — |
| | 1,319 |
|
| Total liabilities measured at fair value | $ | — |
| | $ | 1,319 |
| | $ | 3,033 |
| | $ | 4,352 |
|
During fiscal years 2019 and 2018, there were no transfers between fair value levels.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to previous business acquisitions. See Note 2, “Business Acquisitions.”Combinations and Divestiture”.
|
| | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 |
| | (in thousands) |
| Beginning balance | $ | 3,033 |
| | $ | 298 |
|
| Additions | 2,869 |
| | 3,315 |
|
| Payments | (5,252 | ) | | — |
|
| Total gains or losses (realized/unrealized): | | | |
| Foreign currency translation | 62 |
| | (298 | ) |
| Reversal of previously recorded contingent liability and change in fair value | — |
| | (282 | ) |
| Ending balance | $ | 712 |
| | $ | 3,033 |
|
|
| | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 |
| | | | |
| | (in thousands) |
| Beginning balance | $ | 1,370 |
| | $ | 2,828 |
|
| Additions | 3,600 |
| | 973 |
|
| Payments | (872 | ) | | (600 | ) |
| Total gains or losses (realized/unrealized): | | | |
| Reversal of previously recorded contingent liability and change in fair value | (477 | ) | | (1,831 | ) |
| Ending balance | $ | 3,621 |
| | $ | 1,370 |
|
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
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 theirthe 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.
Redeemable Noncontrolling Interest
The Company’s redeemable noncontrolling interest resulted from the acquisition of an interest in Vital River in January 2013 and July 2016.
The following table provides a rollforwardbook 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 redeemable noncontrolling interest for fiscal year 2015:2026 and 2028 Senior Notes is summarized below:
|
| | | | | | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | Book Value | | Fair Value | | Book Value | | Fair Value |
| 2026 Senior Notes | $ | 500,000 |
| | $ | 537,500 |
| | $ | 500,000 |
| | $ | 495,000 |
|
| 2028 Senior Notes | 500,000 |
| | 510,000 |
| | — |
| | — |
|
|
| | | |
| | Redeemable Noncontrolling Interest |
| | (in thousands) |
| December 27, 2014 | $ | 28,419 |
|
| Total gains or losses (realized/unrealized): | |
| Net income attributable to noncontrolling interest | 838 |
|
| Foreign currency translation | (1,066 | ) |
| Change in fair value, included in additional paid-in capital | (183 | ) |
| December 26, 2015 | 28,008 |
|
| Total gains or losses (realized/unrealized): | |
| Net income attributable to noncontrolling interest | 320 |
|
| Foreign currency translation | (653 | ) |
| Change in fair value, included in additional paid-in capital | (1,690 | ) |
| July 7, 2016 | $ | 25,985 |
|
Since July 7, 2016, the redeemable noncontrolling interest is no longer reported at fair value. See Note 8, “Equity and Redeemable Noncontrolling Interest.”
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Adjustments to Goodwill | | | | Adjustments to Goodwill | | |
| | December 27, 2014 | | Acquisitions | | Foreign Exchange | | December 26, 2015 | | Acquisitions | | Transfers | | Foreign Exchange | | December 31, 2016 |
| | | | | | | | | | | | | | | | |
| | (in thousands) |
| RMS | $ | 59,196 |
| | $ | — |
| | $ | (1,029 | ) | | $ | 58,167 |
| | $ | — |
| | $ | (342 | ) | | $ | (1,428 | ) | | $ | 56,397 |
|
| DSA | 1,234,302 |
| | 22,146 |
| | (4,398 | ) | | 1,252,050 |
| | 337,872 |
| | — |
| | (21,446 | ) | | 1,568,476 |
|
| Manufacturing | 32,579 |
| | 105,567 |
| | (4,534 | ) | | 133,612 |
| | 46,859 |
| | 342 |
| | (13,169 | ) | | 167,644 |
|
| Gross carrying amount | 1,326,077 |
| |
|
| |
|
| | 1,443,829 |
| |
|
| |
|
| |
|
| | 1,792,517 |
|
| Accumulated impairment loss - DSA | (1,005,000 | ) | | — |
| | — |
| | (1,005,000 | ) | | — |
| | — |
| | — |
| | (1,005,000 | ) |
| Goodwill | $ | 321,077 |
| |
|
| |
|
| | $ | 438,829 |
| |
|
| | | |
|
| | $ | 787,517 |
|
During the second quarter of 2016, the Company revised the composition of its reportable segments to align with the view of the business following its acquisition of WIL Research. See Note 1, "Description of Business and Summary of Significant Accounting Policies." As a result, goodwill was allocated from the Company's RMS reportable segment to its Manufacturing reportable segment, as shown in the preceding table within "transfers." The allocation was based on the fair value of each business group within its original reporting unit relative to the fair value of that reporting unit. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Adjustments to Goodwill | | | | Adjustments to Goodwill | | |
| | December 30, 2017 | | Acquisitions | | Foreign Exchange | | December 29, 2018 | | Acquisitions | | Foreign Exchange | | December 28, 2019 |
| | (in thousands) |
| RMS | $ | 58,122 |
| | $ | — |
| | $ | (1,154 | ) | | $ | 56,968 |
| | $ | — |
| | $ | (382 | ) | | $ | 56,586 |
|
| DSA | 1,610,176 |
| | 460,223 |
| | (13,929 | ) | | 2,056,470 |
| | 293,380 |
| | 373 |
| | 2,350,223 |
|
| Manufacturing | 141,608 |
| | 2,551 |
| | (5,464 | ) | | 138,695 |
| | — |
| | 61 |
| | 138,756 |
|
| Gross carrying amount | 1,809,906 |
| | 462,774 |
| | (20,547 | ) | | 2,252,133 |
| | 293,380 |
| | 52 |
| | 2,545,565 |
|
| Accumulated impairment loss - DSA | (1,005,000 | ) | | — |
| | — |
| | (1,005,000 | ) | | — |
| | — |
| | (1,005,000 | ) |
| Goodwill | $ | 804,906 |
| |
|
| |
|
| | $ | 1,247,133 |
| |
|
| |
|
| | $ | 1,540,565 |
|
Based on the Company’s step one goodwill impairment test, which was performed in the fourth quarter for each of the fiscal years 2016, 20152019, 2018 and 2014,2017, the fair value of each reporting unit exceeded the reporting unit’s book value and, therefore, goodwill was not impaired.
The increase in goodwill during fiscal year 2019 related primarily to the acquisition of Citoxlab in the DSA reportable segment. The increase in goodwill during fiscal year 2018 related primarily to the acquisitions of MPI Research and KWS BioTest in the DSA reportable segment, an immaterial acquisition of an Australian business in the Manufacturing reportable segment, and the impact of foreign exchange.
Intangible Assets, Net
The following table displays intangible assets, net by major class:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| | | | | | | | | | | | |
| | (in thousands) |
| Backlog | $ | 8,370 |
| | $ | (6,390 | ) | | $ | 1,980 |
| | $ | 50,568 |
| | $ | (50,554 | ) | | $ | 14 |
|
| Technology | 71,425 |
| | (14,314 | ) | | 57,111 |
| | 60,350 |
| | (5,911 | ) | | 54,439 |
|
| Trademarks and trade names | 8,177 |
| | (4,124 | ) | | 4,053 |
| | 11,495 |
| | (5,944 | ) | | 5,551 |
|
| Other | 16,775 |
| | (5,628 | ) | | 11,147 |
| | 14,711 |
| | (7,285 | ) | | 7,426 |
|
| Other intangible assets | 104,747 |
| | (30,456 | ) | | 74,291 |
| | 137,124 |
| | (69,694 | ) | | 67,430 |
|
| Client relationships | 519,123 |
| | (198,966 | ) | | 320,157 |
| | 396,537 |
| | (183,163 | ) | | 213,374 |
|
| Intangible assets | $ | 623,870 |
| | $ | (229,422 | ) | | $ | 394,448 |
| | $ | 533,661 |
| | $ | (252,857 | ) | | $ | 280,804 |
|
During fiscal year 2016, the Company determined that the carrying values of certain DSA intangible assets were not recoverable and recorded an impairment charge of $1.9 million, which was included in costs of services provided (excluding amortization of intangible assets).
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| | (in thousands) |
| Backlog | $ | 28,865 |
| | $ | (26,895 | ) | | $ | 1,970 |
| | $ | 20,900 |
| | $ | (18,691 | ) | | $ | 2,209 |
|
| Technology | 122,106 |
| | (57,737 | ) | | 64,369 |
| | 101,506 |
| | (41,870 | ) | | 59,636 |
|
| Trademarks and trade names | 8,430 |
| | (4,901 | ) | | 3,529 |
| | 8,331 |
| | (4,640 | ) | | 3,691 |
|
| Other | 18,279 |
| | (12,307 | ) | | 5,972 |
| | 17,448 |
| | (10,041 | ) | | 7,407 |
|
| Other intangible assets | 177,680 |
| | (101,840 | ) | | 75,840 |
| | 148,185 |
| | (75,242 | ) | | 72,943 |
|
| Client relationships | 934,668 |
| | (321,095 | ) | | 613,573 |
| | 791,725 |
| | (253,780 | ) | | 537,945 |
|
| Intangible assets | $ | 1,112,348 |
| | $ | (422,935 | ) | | $ | 689,413 |
| | $ | 939,910 |
| | $ | (329,022 | ) | | $ | 610,888 |
|
The increase in intangible assets, net during the fiscal year 2019 related primarily to the acquisition of Citoxlab. The increase in intangible assets, net during the fiscal year 2018 related primarily to the acquisitions of MPI Research and KWS BioTest.
Amortization expense of definite-lived intangible assets, including client relationships, for fiscal years 2016, 20152019, 2018 and 20142017 was $41.7$89.5 million, $24.2$64.8 million and $26.0$41.4 million, respectively. EstimatedAs of December 28, 2019, estimated amortization expense for intangible assets for each of the next five fiscal years is expected to be as follows:
|
| | | | |
| Fiscal Year | | Amortization Expense |
| | | (in thousands) |
| 2020 | | $ | 97,024 |
|
| 2021 | | 87,540 |
|
| 2022 | | 76,204 |
|
| 2023 | | 67,807 |
|
| 2024 | | 60,918 |
|
|
| | | | |
| Fiscal Year | | Amortization Expense |
| | | (in thousands) |
| 2017 | | $ | 42,525 |
|
| 2018 | | 40,731 |
|
| 2019 | | 34,995 |
|
| 2020 | | 34,382 |
|
| 2021 | | 32,994 |
|
7.9. LONG-TERM DEBT AND CAPITALFINANCE LEASE OBLIGATIONS
Long-Term Debt
Long-term debt, net and finance leases consists of the following:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Term loans | $ | 193,750 |
| | $ | 731,250 |
|
| Revolving facility | 676,134 |
| | 397,452 |
|
| 2026 Senior Notes | 500,000 |
| | 500,000 |
|
| 2028 Senior Notes | 500,000 |
| | — |
|
| Other debt | 5,781 |
| | 26,286 |
|
| Finance leases (Note 16) | 30,527 |
| | 29,240 |
|
| Total debt and finance leases | 1,906,192 |
| | 1,684,228 |
|
| Less: | | | |
| Current portion of long-term debt | 35,548 |
| | 28,228 |
|
| Current portion of finance leases (Note 16) | 2,997 |
| | 3,188 |
|
| Current portion of long-term debt and finance leases | 38,545 |
| | 31,416 |
|
| Long-term debt and finance leases | 1,867,647 |
| | 1,652,812 |
|
| Debt discount and debt issuance costs | (17,981 | ) | | (16,214 | ) |
| Long-term debt, net and finance leases | $ | 1,849,666 |
| | $ | 1,636,598 |
|
The acquisition of HemaCare on January 3, 2020 for approximately $380 million was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. The increased borrowings occurred subsequent to December 28, 2019 and are not reflected in the table above.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Term loans | $ | 633,750 |
| | $ | 390,000 |
|
| Revolving credit facility | 578,759 |
| | 446,041 |
|
| Other long-term debt | 185 |
| | 193 |
|
| Total debt | 1,212,694 |
| | 836,234 |
|
| Less: Current portion of long-term debt | (24,560 | ) | | (15,193 | ) |
| Long-term debt | 1,188,134 |
| | 821,041 |
|
| Debt discount and debt issuance costs | (7,633 | ) | | (6,805 | ) |
| Long-term debt, net | $ | 1,180,501 |
| | $ | 814,236 |
|
As of December 31, 201628, 2019 and December 26, 2015,29, 2018, the weighted average interest rate on the Company’s debt was 1.89%3.46% and 1.33%4.24%, respectively.
In April 2015, the Company amendedTerm Loans and restated the $970M CreditRevolving Facility creating a $1.3 billion facility ($1.3B Credit Facility) that provides for a $400.0 million term loan facility and a $900.0 million multi-currency revolving facility. The interest rates applicable to term loans and revolving loans under the Company’s $1.3B Credit Facility were, at the Company’s option, equal to either the alternate base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.5% or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.
On March 30, 2016,26, 2018, the Company amended and restated its $1.3B$1.65 billion credit facility creating a $1.65$2.3 billion credit facility ($1.65B Credit(Credit Facility) which (1) extends. The amendment extended the maturity date and provided for the credit facilitya $750 million term loan and (2) makes certain other amendments in connection with the Company’s acquisition of WIL Research.a $1.55 billion multi-currency revolving facility. The amendment was accounted for as a debt modification with a partial extinguishment of debt.modification. In connection with the transaction, the Company capitalized approximately $3.3$6.2 million within Long-term debt, net and finance leases in the accompanying consolidated balance sheets and expensed approximately $1.4$1.0 million of debt issuance costs.
The $1.65B Credit Facility providescosts recorded within Interest expense in the accompanying consolidated statements of income for a $650.0 million term loan and a $1.0 billion multi-currency revolving facility.the year ended 2018. The term loan facility matures in 19 quarterly installments with the last installment due March 30, 2021.26, 2023. The revolving facility matures on March 30, 2021,26, 2023, and requires no scheduled payment before that date. On September 25, 2019, the Company amended and restated the Credit Facility for certain administrative matters.
On October 23, 2019, the Company prepaid $500.0 million of the term loan with proceeds from a $500.0 million unregistered private offering (see 2028 Senior Notes Offering below) which was treated as a debt modification. Additionally, on November 4, 2019, the Company amended and restated the Credit Facility to increase the multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. In connection with these transactions, the Company capitalized $0.5 million within Long-term debt, net and finance leases in the accompanying consolidated balance sheets and expensed $1.6 million of debt issuance costs recorded within Interest expense in the accompanying consolidated statements of income for the year ended 2019. Under specified circumstances, the Company has the ability to increase the term loan and/or revolving line of creditfacility by up to $500 million$1.0 billion in the aggregate.
The interest rates applicable to the term loan and revolving loansfacility under the $1.65B 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%1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The $1.65B 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 4.254.00 to 1.0 with step downs to 3.50 to 1.0 by the last day of the fourth quarter of 2017.1.0. As of December 31, 2016,28, 2019, the Company was compliant with all covenants.
The obligations of the Company under the $1.65B Credit Facility are collateralized by substantially all of the assets of the Company.
During fiscal years 2019 and 2018, 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 each. This resulted in foreign currency losses recognized in Other income, net of $9.6 million and less than $0.1 million during fiscal years 2019 and 2018, 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 $18.7 million and $1.5 million during fiscal years 2019 and 2018, respectively, within Interest expense. As of December 28, 2019, the Company did not have any outstanding borrowings in a currency different than its respective functional currency. See Note 14, “Foreign Currency Contracts”, for further discussion.
Base Indenture for Senior Notes Offerings
On April 3, 2018, the Company entered into an indenture (Base Indenture) with MUFG Union Bank, N.A., (Trustee). The purpose of the Indenture was to allow the Company the ability to issue senior notes. The Company has entered into two supplemental indentures in connection with two unregistered offerings, which are described below.
The Indenture contains certain covenants including, but not limited to, limitations and restrictions on the ability of the Company and its U.S. subsidiaries to (i) create certain liens, (ii) enter into any Sale and Leaseback Transaction (as defined in the Indenture) with respect to any property, and (iii) merge, consolidate, sell or otherwise dispose of all or substantially all of their assets. These covenants are subject to a number of conditions, qualifications, exceptions and limitations. Any event of default, as defined, could result in the acceleration of the repayment of the obligations.
2026 Senior Notes Offering
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 3, 2018, the Company entered into the first supplemental indenture (First Supplemental Indenture) with the Trustee in connection with an offering of $500 million in aggregate principal amount of the Company’s 5.5% Senior Notes (2026 Senior Notes), due in 2026, in an unregistered offering. Under the terms of the First Supplemental Indenture, interest on the Senior Notes is payable semi-annually on April 1 and October 1, beginning on October 1, 2018. The 2026 Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred $7.4 million of debt issuance costs, which the Company capitalized upon issuance on April 3, 2018 and recorded within Long-term debt, net and finance leases in the accompanying consolidated balance sheets.
The Company may redeem all or part of the 2026 Senior Notes at any time prior to April 1, 2021, at its option, at a redemption price equal to 100.0% of the principal amount of such Senior Notes plus the Applicable Premium (as defined in the First Supplemental Indenture). The Company may also redeem up to 40.0% of the Senior Notes with the proceeds of certain equity offerings completed before April 1, 2021, at a redemption price equal to 105.5% of the principal amount of such 2026 Senior Notes. On or after April 1, 2021, the Company may on any one or more occasions redeem all or a part of the 2026 Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the 2026 Senior Notes at a purchase price equal to 101.0% of the aggregate principal amount of such 2026 Senior Notes. Any redemption of the 2026 Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.
Net proceeds from the 2026 Senior Notes of $493.8 million were used to partially repay the outstanding revolving credit facility on April 3, 2018 as well as fund the acquisition of MPI Research.
2028 Senior Notes Offering
On October 23, 2019, the Company entered into a second supplemental indenture (Second Supplemental Indenture) with the Trustee in connection with the offering of $500 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. The 2028 Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred approximately $6 million of debt issuance costs, which were capitalized upon the 2028 Senior Notes issuance on October 23, 2019, and was recorded within Long-term debt, net and finance leases in the accompanying consolidated balance sheets.
The Company may redeem all or part of the 2028 Senior Notes at any time prior to May 1, 2023, at its option, at a redemption price equal to 100% of the principal amount of such 2028 Senior Notes plus the Applicable Premium (as defined in the Indenture). The Company may also redeem up to 40% of the 2028 Senior Notes with the proceeds of certain equity offerings completed before May 1, 2023, at a redemption price equal to 104.25% of the principal amount of such 2028 Senior Notes. On or after May 1, 2023, the Company may on any one or more occasions redeem all or a part of the 2028 Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the Senior Notes at a purchase price equal to 101% of the aggregate principal amount of such Senior Notes. Any redemption of the Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.
Net proceeds from the 2028 Senior Notes of approximately $494 million and available cash were used to prepay a portion of the term loan on October 23, 2019.
Commitment Letter
On February 12, 2018, the Company secured an $830 million commitment under a 364-day senior unsecured bridge loan facility (Bridge Facility) for the purpose of financing the acquisition of MPI Research. The Bridge Facility was terminated as of April 3, 2018 upon the successful acquisition of MPI Research. Debt issuance costs of $1.8 million, which were capitalized upon the execution of the Bridge Facility, were expensed upon termination of the agreement on April 3, 2018. In addition, the Company incurred and expensed $2.0 million of fees pertaining to a temporary backstop facility related to the negotiation of the Credit Facility during the three months ended March 31, 2018. These costs were included within Interest expense in the accompanying consolidated statements of income.
Principal Maturities
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Principal maturities of existing debt for the periods set forth in the table below, are as follows:
|
| | | |
| | Principal |
| | (in thousands) |
| 2020 | $ | 35,536 |
|
| 2021 | 61,151 |
|
| 2022 | 93,966 |
|
| 2023 | 682,602 |
|
| 2024 | 468 |
|
| Thereafter | 1,001,942 |
|
| Total | $ | 1,875,665 |
|
|
| | | | |
| | | Principal |
| | | (in thousands) |
| 2017 | | $ | 24,560 |
|
| 2018 | | 36,563 |
|
| 2019 | | 52,813 |
|
| 2020 | | 81,250 |
|
| 2021 | | 1,017,508 |
|
| Total | | $ | 1,212,694 |
|
Letters of Credit
As of both December 31, 201628, 2019 and December 26, 2015,29, 2018, the Company had $4.9$7.5 million and $6.5 million, respectively, in outstanding under letters of credit.
Capital Lease ObligationsThe Company acquired a build-to-suit lease as part of its acquisition of Argenta and BioFocus. In accordance with accounting guidance applicable to entities involved with the construction of an asset that will be leased when the construction is completed, the Company was considered the owner, for accounting purposes, of this property during the construction period. Accordingly, the Company recorded an asset and a corresponding financing obligation on its consolidated balance sheet for the amount of total project costs incurred related to the construction in progress for this property through completion of the construction period. Upon completion of the construction during the second quarter of fiscal year 2015, the Company determined that it was no longer considered the owner of the property because it did not have continuing involvement. Consequently, the Company recorded a successful sale leaseback and derecognized the property and the associated financing obligation from the Company’s consolidated balance sheet and recorded a capital lease asset and a corresponding liability of $35.8 million.
As of December 31, 2016, the minimum lease payments under capital leases for each of the next five years and total thereafter were as follows:
|
| | | | |
| | | Minimum Lease Payments |
| | | (in thousands) |
| 2017 | | $ | 4,097 |
|
| 2018 | | 3,503 |
|
| 2019 | | 3,005 |
|
| 2020 | | 2,385 |
|
| 2021 | | 2,250 |
|
| Thereafter | | 27,974 |
|
| Total | | $ | 43,214 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.10. EQUITY AND REDEEMABLE NONCONTROLLING INTERESTINTERESTS
Earnings Per Share
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Numerator: | | | | | |
| Income from continuing operations, net of income taxes | $ | 254,061 |
| | $ | 227,218 |
| | $ | 125,586 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | 1,506 |
| | (137 | ) |
| Less: Net income attributable to noncontrolling interests | 2,042 |
| | 2,351 |
| | 2,094 |
|
| Net income attributable to common shareholders | $ | 252,019 |
| | $ | 226,373 |
| | $ | 123,355 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted-average shares outstanding—Basic | 48,730 |
| | 47,947 |
| | 47,481 |
|
| Effect of dilutive securities: | | | | | |
| Stock options, restricted stock, restricted stock units and performance share units | 963 |
| | 1,071 |
| | 1,083 |
|
| Weighted-average shares outstanding—Diluted | 49,693 |
| | 49,018 |
| | 48,564 |
|
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Numerator: | | | | | |
| Income from continuing operations, net of income taxes | $ | 156,086 |
| | $ | 152,037 |
| | $ | 129,924 |
|
| Income (loss) from discontinued operations, net of income taxes | 280 |
| | (950 | ) | | (1,726 | ) |
| Less: Net income attributable to noncontrolling interests | 1,601 |
| | 1,774 |
| | 1,500 |
|
| Net income attributable to common shareholders | $ | 154,765 |
| | $ | 149,313 |
| | $ | 126,698 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted-average shares outstanding—Basic | 47,014 |
| | 46,496 |
| | 46,627 |
|
| Effect of dilutive securities: | | | | | |
| Stock options, restricted stock units, performance share units and restricted stock | 944 |
| | 1,138 |
| | 931 |
|
| Weighted-average shares outstanding—Diluted | 47,958 |
| | 47,634 |
| | 47,558 |
|
Options to purchase approximately 0.80.4 million shares, 0.5 million shares, and 0.6 million shares for fiscal years 2016, 20152019, 2018 and 2014,2017, respectively, as well as a non-significant number of restricted stock, restricted stock units (RSUs),shares, RSUs, and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted averageweighted-average shares outstanding for fiscal years 2016, 20152019, 2018 and 20142017 excluded the impact of approximately 1.11.0 million shares, 1.11.0 million shares and 1.21.1 million shares, respectively, of non-vested restricted stock, restricted stock units,RSUs and PSUs.
Treasury Shares
In July 2010, the Company’s Board of Directors authorized a $500.0 million stock repurchase program, and subsequently approved increases to the stock repurchase program of $250.0 million in 2010, $250.0 million in 2013, $150.0 million in 2014, and $150.0 million in 2014,2017, for an aggregate authorization of $1,150.0 million.$1.3 billion. Under its authorized stock repurchase program, the Company did not0t repurchase any shares in fiscal year 2016,years 2019 and 2018. The Company repurchased approximately 1.51.0 million shares for $108.8 million and approximately 2.1 million shares for $110.6totaling $90.6 million in fiscal years 2015 and 2014, respectively.year 2017. As of December 31, 2016,28, 2019, the Company had $69.7$129.1 million remaining on the authorized stock repurchase program. In addition, the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock unitsRSUs, and performance share unitsPSUs in order to satisfy individual minimum statutory tax withholding requirements. The Company acquired approximately0.1 million shares for $18.1 million, 0.1 million shares for $13.8 million, and 0.2 million shares for $12.3 million, approximately 0.1 million shares for $8.7 million, and approximately 0.1 million shares for $6.8$16.3 million in fiscal years 2016, 20152019, 2018 and 2014,2017, respectively, from such netting.
In fiscal years 2019 and 2018, the Company’s Board of Directors approved the cancellation and return to satisfy individual minimum statutory tax withholding requirements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Company’s authorized and unissued capital stock of 0.1 million treasury shares totaling $18.1 million and 40.2 million treasury shares totaling $1.7 billion, respectively, reducing treasury stock on the Company’s consolidated balance sheet. The Company allocated the excess of the repurchase price over the par value of shares acquired to reduce both retained earnings and additional paid-in capital for $13.8 million and $4.3 million, respectively, in fiscal 2019 and $0.5 billion and $1.2 billion, respectively, in fiscal year 2018.
Accumulated Other Comprehensive Income (Loss)
Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
|
| | | | | | | | | | | |
| | Foreign Currency Translation Adjustment and Other | | Pension and Other Post-Retirement Benefit Plans | | Total |
| | (in thousands) |
| December 30, 2017 | $ | (77,545 | ) | | $ | (67,186 | ) | | $ | (144,731 | ) |
Other comprehensive loss before reclassifications (1) | (27,352 | ) | | (1,659 | ) | | (29,011 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 2,477 |
| | 2,477 |
|
| Net current period other comprehensive (loss) income | (27,352 | ) | | 818 |
| | (26,534 | ) |
| Amount reclassified from accumulated other comprehensive loss due to the adoption of ASU 2018-02 | — |
| | 3,330 |
| | 3,330 |
|
| Income tax (benefit) expense | (2,698 | ) | | 806 |
| | (1,892 | ) |
| December 29, 2018 | (102,199 | ) | | (70,504 | ) | | (172,703 | ) |
Other comprehensive income (loss) before reclassifications (1) | 14,444 |
| | (25,165 | ) | | (10,721 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 1,772 |
| | 1,772 |
|
| Net current period other comprehensive income (loss) | 14,444 |
| | (23,393 | ) | | (8,949 | ) |
| Income tax (benefit) | (177 | ) | | (3,456 | ) | | (3,633 | ) |
| December 28, 2019 | $ | (87,578 | ) | | $ | (90,441 | ) | | $ | (178,019 | ) |
(1) The impact of the foreign currency translation adjustment to other comprehensive income (loss) before reclassifications was primarily due to the effect of changes in foreign currency exchange rates of the Euro, British Pound, and Canadian Dollar and to a lesser extent due to the impact of changes in the Chinese Yuan Renminbi and Japanese Yen. |
|
| | | | | | | | | | | |
| | Foreign Currency Translation and Other(3) | | Pension and Other Post-Retirement Benefit Plans | | Total |
| | | | | | |
| | (in thousands) |
| December 27, 2014 | $ | (19,891 | ) | | $ | (54,356 | ) | | $ | (74,247 | ) |
Other comprehensive loss before reclassifications (1) | (60,745 | ) | | (302 | ) | | (61,047 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | (2,341 | ) | | 2,617 |
| | 276 |
|
| Net current period other comprehensive income (loss) | (63,086 | ) | | 2,315 |
| | (60,771 | ) |
| Income tax expense | — |
| | 530 |
| | 530 |
|
| December 26, 2015 | (82,977 | ) | | (52,571 | ) | | (135,548 | ) |
Other comprehensive loss before reclassifications (2) | (71,618 | ) | | (60,678 | ) | | (132,296 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 1,711 |
| | 1,711 |
|
| Net current period other comprehensive income (loss) | (71,618 | ) | | (58,967 | ) | | (130,585 | ) |
| Income tax expense (benefit) | — |
| | (12,369 | ) | | (12,369 | ) |
| December 31, 2016 | $ | (154,595 | ) | | $ | (99,169 | ) | | $ | (253,764 | ) |
(1) The impact of the foreign currency translation adjustment to other comprehensive income (loss) before reclassifications for fiscal year 2015 was primarily due to the effect of changes in foreign currency exchange rates of the Euro and Canadian Dollar and to a lesser extent due to the impact of changes in the British Pound. |
(2) The impact of the foreign currency translation adjustment to other comprehensive income (loss) before reclassifications for fiscal year 2016 was primarily due to the effect of changes in foreign currency exchange rates of the Euro, British Pound, and Canadian Dollar and to a lesser extent due to the impact of changes in the Chinese Yuan Renminbi and Japanese Yen. |
(3) Foreign currency translation and other includes a non-significant amount of unrealized gains (losses) on available-for-sale marketable securities. |
Nonredeemable Noncontrolling InterestsInterest
The Company has investmentsan investment in several entities,an entity whose financial results are consolidated in the Company’s financial statements, as it has the ability to exercise control over these entities.this entity. The interestsinterest of the respective noncontrolling partiesparty in these entities havethis entity has been recorded as noncontrolling interest within Equity in the accompanying consolidated balance sheets. The activity within the nonredeemable noncontrolling interests.interest during fiscal years 2019, 2018, and 2017 was not significant.
Redeemable Noncontrolling InterestInterests
In January 2013, the Company acquired a 75% ownership interest ofin Vital River, a commercial provider of research models and related services in China, for $24.2 million, net of $2.7 million of cash acquired. Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling interest holders that provided the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 25% of the entity for cash at its fair value beginning in January 2016. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets, which is presented above
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining equity interest.
During fiscal years 2016 through the 2019, the following transactions and amendments impacted the Vital River redeemable noncontrolling interest as follows:
On July 7, 2016, the Company purchased an additional 12% equity interest in Vital River for $10.8 million, resulting in total ownership of 87%. The Company recorded a $1.6 million gain in equity equal to the excess fair value of the 12% equity interest over the purchase price. Concurrent with the transaction, the original agreement was amended providing the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 13% equity interest at a contractually defined redemption value, subject to a redemption floor, (embedded derivative).which represents a derivative embedded within the equity instrument. These rights are exercisable beginning in 2019 and are accelerated in certain events. Subsequent to the amendment during fiscal years 2016 through 2019, the redeemable noncontrolling interest was 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 ($18.5 million as of December 29, 2018) and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest.
On June 13, 2019, the Company purchased an additional 5% equity interest in Vital River for $7.9 million, resulting in total ownership of 92%. The Company recorded a $0.8 million gain in equity equal to the excess fair value of the 5% equity interest over the purchase price. Concurrent with the transaction, the pre-existing agreement was further amended to provide the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 8% equity interest (redeemable noncontrolling 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 Company recorded a charge of $1.5$2.2 million in otherSelling, general and administrative expenses within the consolidated statements of income, (expense), net, equal to the excess fair value of the hybrid instrument (equity interest with an embedded derivative) over the fair value of the 13%8% equity interest. 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 ($14.115.5 million as of December 31, 2016)28, 2019) and itsthe carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
noncontrolling interest holders have the ability to require the Company to purchase the remaining 13%8% interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheet,sheets, which is presented above the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining 13%8% equity interest.
As part of the Citoxlab acquisition on April 29, 2019, the Company acquired a less than wholly owned subsidiary that is fully consolidated under the voting interest model. The Company acquired an approximate 90% equity interest, which includes an approximate 10% redeemable noncontrolling interest. The noncontrolling interest holders have the ability to require the Company to purchase the remaining approximate 10% interest at certain dates in the future between 2021 through 2023. The noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets and is approximately $4 million as of December 28, 2019.
On August 28, 2019, the Company acquired an 80% equity interest in a supplier, which included a 20% redeemable noncontrolling interest. The contract provides the Company the right to purchase, and the noncontrolling interest holders with 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 pre-determined 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 consolidated balance sheets, which is presented above the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining 20% equity interest.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interest subsequent to the acquisition of the additional 12% equity interest on July 7, 2016:interests:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | |
| | Redeemable Noncontrolling Interest |
| | (in thousands) |
| July 7, 2016 | $ | 25,985 |
|
| Purchase of 12% equity interest | (12,360 | ) |
| Total gains or losses (realized/unrealized): | |
| Net income attributable to noncontrolling interest | 357 |
|
| Foreign currency translation | (818 | ) |
| Modification of 13% purchase option | 1,495 |
|
| December 31, 2016 | $ | 14,659 |
|
See Note 5, “Fair Value,” for the activity within the redeemable noncontrolling interest prior to July 7, 2016. |
| | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 |
| | (in thousands) |
| Beginning balance | $ | 18,525 |
| | $ | 16,609 |
|
| Adjustment to Vital River redemption value | 1,451 |
| | 2,069 |
|
| 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 an approximate 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 | (42 | ) | | 800 |
|
| Foreign currency translation | (221 | ) | | (953 | ) |
| Ending balance | $ | 28,647 |
| | $ | 18,525 |
|
9.11. INCOME TAXES
The components of income from continuing operations before income taxes and the related provision for income taxes are presented below:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Income from continuing operations before income taxes: | |
| | | | |
| U.S. | $ | 108,326 |
| | $ | 95,062 |
| | $ | 123,896 |
|
| Non-U.S. | 195,758 |
| | 186,619 |
| | 173,059 |
|
| | $ | 304,084 |
| | $ | 281,681 |
| | $ | 296,955 |
|
| Income tax provision (benefit): | |
| | | | |
| Current: | |
| | | | |
| Federal | $ | 18,101 |
| | $ | 17,390 |
| | $ | 93,871 |
|
| Foreign | 43,489 |
| | 38,557 |
| | 37,150 |
|
| State | 9,915 |
| | 8,837 |
| | 12,361 |
|
| Total current | 71,505 |
| | 64,784 |
| | 143,382 |
|
| Deferred: | |
| | | | |
| Federal | (3,226 | ) | | (7,145 | ) | | 9,416 |
|
| Foreign | (17,111 | ) | | (4,104 | ) | | 14,953 |
|
| State | (1,145 | ) | | 928 |
| | 3,618 |
|
| Total deferred | (21,482 | ) | | (10,321 | ) | | 27,987 |
|
| | $ | 50,023 |
| | $ | 54,463 |
| | $ | 171,369 |
|
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Income from continuing operations before income taxes: | |
| | | | |
| U.S. | $ | 59,255 |
| | $ | 76,157 |
| | $ | 71,002 |
|
| Non-U.S. | 163,666 |
| | 119,271 |
| | 106,593 |
|
| | $ | 222,921 |
| | $ | 195,428 |
| | $ | 177,595 |
|
| Income tax provision: | |
| | | | |
| Current: | |
| | | | |
| Federal | $ | 18,592 |
| | $ | 23,687 |
| | $ | 13,733 |
|
| Foreign | 39,829 |
| | 8,572 |
| | 20,364 |
|
| State | 5,263 |
| | 6,819 |
| | 4,746 |
|
| Total current | 63,684 |
| | 39,078 |
| | 38,843 |
|
| Deferred: | |
| | | | |
| Federal | 7,206 |
| | 1,790 |
| | 12,982 |
|
| Foreign | (4,024 | ) | | 3,064 |
| | (4,672 | ) |
| State | (31 | ) | | (541 | ) | | 518 |
|
| Total deferred | 3,151 |
| | 4,313 |
| | 8,828 |
|
| | $ | 66,835 |
| | $ | 43,391 |
| | $ | 47,671 |
|
The Company’s accounting for the elements of U.S. Tax Reform is complete based on all published tax law and corresponding guidance. However, proposed and final clarifying guidance is anticipated for various aspects of U.S. Tax Reform which are relevant to the Company. The effects of any additional guidance will be recorded in the period such guidance is issued.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliations of the statutory U.S. federal income tax rate to effective tax rates are as follows:
|
| | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| U.S. statutory income tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| Foreign tax rate differences | 2.7 |
| | 0.5 |
| | (6.8 | ) |
| State income taxes, net of federal tax benefit | 2.6 |
| | 2.4 |
| | 2.0 |
|
| Non-deductible compensation | 1.7 |
| | 1.0 |
| | 1.3 |
|
| Research tax credits and enhanced deductions | (4.4 | ) | | (2.9 | ) | | (2.4 | ) |
| Stock-based compensation | (2.2 | ) | | (2.1 | ) | | (3.2 | ) |
| Enacted tax rate changes | (0.7 | ) | | (0.1 | ) | | (4.2 | ) |
| Transition Tax | — |
| | (0.3 | ) | | 24.8 |
|
| Impact of tax uncertainties | (2.6 | ) | | (1.1 | ) | | (0.4 | ) |
| Tax on unremitted earnings | 1.7 |
| | 1.2 |
| | 7.3 |
|
| Impact of acquisitions and restructuring | 2.7 |
| | 0.3 |
| | 3.8 |
|
| Net operating loss deferred tax asset recognition, net of valuation allowance (NOL DTA) | (6.8 | ) | | — |
| | — |
|
| Other | 0.8 |
| | (0.6 | ) | | 0.5 |
|
| Effective income tax rate | 16.5 | % | | 19.3 | % | | 57.7 | % |
The components of deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Deferred tax assets: | | | |
| Compensation | $ | 40,582 |
| | $ | 36,724 |
|
| Accruals and reserves | 13,687 |
| | 13,183 |
|
| Net operating loss and credit carryforwards | 367,269 |
| | 35,679 |
|
| Operating lease liability | 33,785 |
| | — |
|
| Other | 7,181 |
| | 5,060 |
|
| Valuation allowance | (309,962 | ) | | (9,788 | ) |
| Total deferred tax assets | 152,542 |
| | 80,858 |
|
| Deferred tax liabilities: | | | |
| Goodwill and other intangibles | (174,847 | ) | | (154,743 | ) |
| Depreciation related | (29,317 | ) | | (19,373 | ) |
| Venture capital investments | (12,806 | ) | | (10,557 | ) |
| Tax on unremitted earnings | (17,282 | ) | | (14,140 | ) |
| Right-of-use assets | (34,953 | ) | | — |
|
| Other | (5,961 | ) | | (2,296 | ) |
| Total deferred tax liabilities | (275,166 | ) | | (201,109 | ) |
| Net deferred taxes | $ | (122,624 | ) | | $ | (120,251 | ) |
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Deferred tax assets: | | | |
| Compensation | $ | 70,863 |
| | $ | 55,259 |
|
| Accruals and reserves | 8,103 |
| | 8,941 |
|
| Inventory reserves and valuations | 3,447 |
| | 2,022 |
|
| Financing related | — |
| | 902 |
|
| Net operating loss and credit carryforwards | 58,081 |
| | 35,233 |
|
| Other | 2,921 |
| | 2,593 |
|
| Valuation allowance | (10,101 | ) | | (6,112 | ) |
| Total deferred tax assets | 133,314 |
| | 98,838 |
|
| Deferred tax liabilities: | | | |
| Goodwill and other intangibles | (121,256 | ) | | (73,208 | ) |
| Financing related | (854 | ) | | — |
|
| Depreciation related | (32,271 | ) | | (23,664 | ) |
| Venture capital investments | (5,084 | ) | | (3,570 | ) |
| Foreign withholding taxes | (821 | ) | | (6,590 | ) |
| Total deferred tax liabilities | (160,286 | ) | | (107,032 | ) |
| Net deferred taxes | $ | (26,972 | ) | | $ | (8,194 | ) |
Reconciliations of the statutory U.S. Federal income tax rate to effective tax rates are as follows:
|
| | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| U.S. statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Foreign tax rate differences | (10.3 | )% | | (8.6 | )% | | (9.4 | )% |
| State income taxes, net of Federal tax benefit | 1.6 | % | | 1.9 | % | | 1.9 | % |
| Research tax credits and enhanced deductions | (3.5 | )% | | (2.6 | )% | | (4.1 | )% |
| Enacted tax rate changes | (0.8 | )% | | (1.5 | )% | | — | % |
| Impact of tax uncertainties | 0.2 | % | | (5.2 | )% | | (0.7 | )% |
| Foreign withholding taxes | 2.0 | % | | 3.4 | % | | — | % |
| Impact of acquisitions and restructuring | 1.8 | % | | (2.0 | )% | | 1.6 | % |
| Other | 4.0 | % | | 1.8 | % | | 2.5 | % |
| Effective income tax rate | 30.0 | % | | 22.2 | % | | 26.8 | % |
The tax rate benefit for enacted tax rate changesvaluation allowance increased by $300.2 million from $9.8 million as of December 29, 2018 to $310.0 million as of December 28, 2019. The increase is primarily associated with a reductionrelated to the recognition of $315.5 million of net operating loss deferred tax assets due to changes in the U.K.’s statutory tax rates.Company’s financing structure, $294.9 million of which the Company does not believe is more likely than not to be utilized.
As of December 31, 2016,28, 2019, the Company had foreign net operating loss and tax credit carryforwards of $58.5$337.3 million, as compared to $34.6$35.7 million as of December 26, 2015.29, 2018. Of this amount, $5.2$23.3 million will expire beginning after 2016, $40.5 million willare definite-lived and begin to expire in 2028 and beyond,2020, and the remainder of $12.8$314.0 million can be carried forward indefinitely. In accordance with Canadian FederalThe Company has tax law, the Company claims Scientific Research and Experimental Development (SR&ED) credits on qualified research and development costs incurred in its Safety Assessment facility in Montreal, and currently maintains $16.8 million in credit carryforwards of $30.1 million,
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which will begin to expire in 2033.after 2035 and beyond. Additionally, the Company records a benefit to operating income for research and development and other credits in both Quebec, France, the Netherlands, and the U.K. related to its Safety Assessment and Early DiscoveryDSA facilities.
The Company has fully recognized its deferred tax assets on the belief that it is more likely than not that they will be realized. The only exceptions relate to deferred tax assets primarily for net operating losses in France, Hong Kong, Luxembourg, the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Netherlands and Germany,certain capital losses, in the U.S., and fixed assets in the U.K. The valuation allowance increased by $4.0 million from $6.1 million as of December 26, 2015 to $10.1 million as of December 31, 2016.
A reconciliation of the Company’s beginning and ending unrecognized income tax benefits is as follows:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Beginning balance | $ | 18,827 |
| | $ | 24,710 |
| | $ | 24,186 |
|
| Additions to tax positions for current year | 3,691 |
| | 2,477 |
| | 1,791 |
|
| Additions to tax positions for prior years | 5,234 |
| | — |
| | 1,428 |
|
| Reductions to tax positions for prior years | (1,033 | ) | | (4,543 | ) | | — |
|
| Settlements | (274 | ) | | (3,380 | ) | | (1,754 | ) |
| Expiration of statute of limitations | (6,780 | ) | | (437 | ) | | (941 | ) |
| Ending balance | $ | 19,665 |
| | $ | 18,827 |
| | $ | 24,710 |
|
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Beginning balance | $ | 23,338 |
| | $ | 34,627 |
| | $ | 18,475 |
|
| Additions to tax positions for current year | 2,194 |
| | 2,362 |
| | 1,700 |
|
| Additions to tax positions for prior years | 2,035 |
| | 3,028 |
| | 18,502 |
|
| Reductions to tax positions for current year | — |
| | — |
| | — |
|
| Reductions to tax positions for prior years | (1,866 | ) | | (3,991 | ) | | (3,722 | ) |
| Settlements | (918 | ) | | (1,946 | ) | | (308 | ) |
| Expiration of statute of limitations | (597 | ) | | (10,742 | ) | | (20 | ) |
| Ending balance | $ | 24,186 |
| | $ | 23,338 |
| | $ | 34,627 |
|
The $0.8 million increase in unrecognized income tax benefits during fiscal year 20162019 as compared to the corresponding period in 2018 is primarily attributable to pre-acquisition tax positions taken by WIL Research, as well asincreases due to business combinations and an additional year of Canadian SR&ED credit, partially offset by a settlement related to the tax year ended 2014 for Canadian SR&ED credits and favorable foreign exchange movement.expiration of statutes of limitations.
The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $21.4$17.0 million as of December 31, 201628, 2019 and $20.1$17.6 million as of December 26, 2015.29, 2018. The $1.3$0.6 million increasedecrease is primarily pre-acquisition tax positions takenattributable to expiration of statutes of limitations, partially offset by WIL Research, as well asincreases due to business combinations and an additional year of Federal Canadian SR&ED credit, offset by favorable foreign exchange movement.credit. It is reasonably possible as of December 31, 201628, 2019 that the liability for unrecognized tax benefits for the uncertain tax position will decrease by $4.6$4.0 million over the next twelve month period, primarily as a result of the outcomelapsing statutes of a pending tax ruling and competent authority proceedings.limitations. The Company continues to recognize interest and penalties related to unrecognized income tax benefits in income tax expense. The total amount of accrued interest related to unrecognized income tax benefits as of December 31, 201628, 2019 and December 26, 201529, 2018 was $1.7$2.3 million and $1.0$2.7 million, respectively. The total amount ofThere were 0 accrued penalties related to unrecognized income tax benefits as of December 31, 2016 was $0.2 million.28, 2019 or as of December 29, 2018.
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, Japan, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2013.2016.
The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., Canada, Germany,France and France.Canada. The Company does not anticipate resolution of these audits will have a material impact on its financial statements.
During 2015, the Company applied with the Internal Revenue Service (IRS) and Canadian Revenue Authority (CRA) for relief pursuant to the competent authority procedure provided in the tax treaty between the U.S. and Canada for transfer pricing tax assessments related to the tax years 2008 through 2012. The Company believes that the controversy will likely be ultimately settled via the competent authority process and accordingly have recorded both a Canadian liability and a U.S. receivable. The actual amounts of the liability for Canadian taxes and the asset for the correlative relief in the U.S. could be different based upon the agreement reached between the IRS and the CRA.In accordance with the Company’s policy, the undistributed earnings of the Company’s non-U.S. subsidiaries remain indefinitely reinvested outside of the U.S. as of the end of 2016 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free. As of December 31, 2016, the earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $704.6 million. No provision for U.S. income taxes has been provided herein. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because of the complexities with the hypothetical calculation. Additionally, the amount of liability is dependent on circumstances existing if and when remittance occurs. On December 18, 2015, the U.S. enacted the Consolidated Appropriations Act, which provides for a reinstatement and extension of the controlled foreign corporation look-through rules. This rule allows the Company to access Chinese and Canadian cash in a more tax-efficient manner and utilize the cash outside of the U.S. without triggering residual U.S. tax. As such, in 2016 the Company accrued $4.5 million of foreign withholding taxes.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.12. EMPLOYEE BENEFIT PLANS
Pension Plans
The Charles River Laboratories, Inc. Pension Plan (CRL(U.S. Pension Plan) is a qualified, non-contributory defined benefit plan covering certain U.S. employees. Effective 2002, the planU.S. Pension Plan was amended to exclude new participants from joining and in 2008 the accrual of benefits was frozen. On January 31, 2019, the Company commenced the process to terminate the U.S. Pension Plan and expects to complete the termination process during fiscal year 2020. As part of the planned termination, the Company re-balanced assets to a target asset allocation (primarily fixed income investments) to better match our assets to the characteristics of the liabilities. At December 28, 2019, the U.S Pension Plan has a benefit obligation of $94.4 million and plan assets of $91.2 million. The benefit obligation has been valued at the amount expected to be required to settle the obligations. Assumptions utilized considered the portion of obligations expected to be settled through participant acceptance of lump sum payments or annuities and the cost to purchase annuities, which are subject to change upon actual plan settlement. Increasing the U.S Pension Plan’s obligations to reflect the expected settlement value resulted in an actuarial loss of approximately $6 million, which was recorded to Other comprehensive income as part of the annual revaluation for fiscal year 2019. In the event that approvals are received and we proceed with effecting termination of this plan, settlement of the obligation is expected to occur in the second half of 2020. Upon settlement of the benefit obligation, the Company will
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reclassify the related pension losses, currently recorded within Accumulated other comprehensive loss on the consolidated balance sheet, to Other expense, net in the consolidated statements of income. As of December 28, 2019, the Company had unrecognized losses related to the U.S. Pension Plan of approximately $14 million.
The Charles River Pension Plan (U.K. Pension Plan) is a defined contribution and defined benefit pension plan covering certain U.K. employees. Benefits are based on participants’ final pensionable salary and years of service. Participants’ rights vest immediately. Effective December 31, 2002, the plan was amended to exclude new participants from joining the defined benefit section of the plan and a defined contribution section was established for new entrants. Contributions under the defined contribution plan are determined as a percentage of gross salary. In the fourth quarter of 2015, the Charles RiverU.K. Pension Plan was amended such that the members of the defined benefit section of the plan ceased to accrue additional benefits; however, their benefits continue to be adjusted for changes in their final pensionable salary or a specified inflation index, as applicable.
In addition, the Company has several defined benefit plans in certain other countries in which it maintains an operating presence, including Japan, Canada, France, Germany, Japan, Italy, and the Netherlands.
The net periodic benefit cost (income) associated with these plans for fiscal years 2019, 2018 and 2017 totaled $1.5 million, $(1.5) million and $1.6 million, respectively.
Charles River Laboratories Deferred Compensation Plan and Executive Supplemental Life Insurance Retirement Plan
The Company maintains a non-qualified deferred compensation plan, known as the Charles River Laboratories Deferred Compensation Plan (DCP), which allows a select group of eligible employees to defer a portion of their compensation. At the present time, no contributions are credited to the DCP, except as set forth below. Participants must specify the distribution date for deferred amounts at the time of deferral, in accordance with applicable IRS regulations. Generally, amounts may be paid in lump sum or installments upon retirement or termination of employment, or later if the employee terminates employment after age 55 and before age 65. Amounts may also be distributed during employment, subject to a minimum deferral requirement of three years.
The Company provides certain active employees an annual contribution into their DCP account of 10% of the employee’s base salary plus the lesser of their target annual bonus or actual annual bonus.
In addition to the DCP, certain officers and key employees also participate, or in the past participated, in the Company’s Executive Supplemental Life Insurance Retirement Plan (ESLIRP), which is a non-funded, non-qualified arrangement. Annual benefits under this plan will equal a percentage of the highest five consecutive years of compensation, offset by amounts payable under the CRLU.S. Pension Plan and Social Security. In connection with the establishment of the DCP, certain active ESLIRP participants, who agreed to convert their accrued ESLIRP benefit to a comparable deferred compensation benefit, discontinued their direct participation in the ESLIRP. Instead, the present values of the accrued benefits of ESLIRP participants were credited to their DCP accounts, and future accruals are converted to present values and credited to their DCP accounts annually. In fiscal year 2019, one executive officer, who converted their ESLIRP benefit into the DCP, announced their intention to retire in May 2020 and therefore the DCP liability reflects the expected departure.
The costsnet periodic benefit cost associated with these plans including the ESLIRP, for fiscal years 2016, 20152019, 2018 and 20142017 totaled $2.2$2.5 million, $2.6$2.9 million and $3.3$2.3 million, respectively.
The Company has invested in several corporate-owned key-person life insurance policies with the intention of using these investments to fund the ESLIRP and the DCP. Participants have no interest in any such investments. As of December 31, 201628, 2019 and December 26, 2015,29, 2018, the cash surrender value of these life insurance policies were $29.5$38.2 million and $27.6$32.3 million, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a reconciliation of benefit obligations and plan assets of the Company’s pension, DCP and ESLIRP plans:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Change in projected benefit obligations: | |
| | |
|
| Benefit obligation at beginning of year | $ | 362,805 |
| | $ | 392,964 |
|
| Service cost | 2,833 |
| | 2,612 |
|
| Interest cost | 11,583 |
| | 10,850 |
|
| Other | 850 |
| | 1,499 |
|
| Benefit payments | (11,062 | ) | | (8,886 | ) |
| Settlements | (74 | ) | | — |
|
| Special/Contractual Termination Benefits | 166 |
| | — |
|
| Plan amendments | — |
| | 104 |
|
| Transfer in from acquisition | 6,818 |
| | — |
|
| Actuarial loss (gain) | 66,432 |
| | (21,168 | ) |
| Administrative expenses paid | (470 | ) | | (195 | ) |
| Effect of foreign exchange | 7,528 |
| | (14,975 | ) |
| Benefit obligation at end of year | $ | 447,409 |
| | $ | 362,805 |
|
| Change in fair value of plan assets: | | | |
| Fair value of plan assets at beginning of year | $ | 305,709 |
| | $ | 304,325 |
|
| Actual return on plan assets | 53,741 |
| | (7,419 | ) |
| Employer contributions | 2,105 |
| | 31,174 |
|
| Settlements | (74 | ) | | — |
|
| Transfer in from acquisition | 119 |
| | — |
|
| Benefit payments | (11,062 | ) | | (8,886 | ) |
| Administrative expenses paid | (470 | ) | | (195 | ) |
| Effect of foreign exchange | 7,113 |
| | (13,290 | ) |
| Fair value of plan assets at end of year | $ | 357,181 |
| | $ | 305,709 |
|
| | | | |
| Net balance sheet liability | $ | 90,228 |
| | $ | 57,096 |
|
| | | | |
| Amounts recognized in balance sheet: | | | |
| Noncurrent assets | $ | 1,742 |
| | $ | 3,280 |
|
| Current liabilities | 12,788 |
| | 1,095 |
|
| Noncurrent liabilities | 79,182 |
| | 59,281 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Change in projected benefit obligations: | |
| | |
|
| Benefit obligation at beginning of year | $ | 345,220 |
| | $ | 359,130 |
|
| Service cost | 2,453 |
| | 4,293 |
|
| Interest cost | 12,046 |
| | 12,974 |
|
| Benefit payments | (13,383 | ) | | (8,191 | ) |
| Curtailment | (279 | ) | | — |
|
| Settlements | (5,499 | ) | | — |
|
| Plan amendments | 188 |
| | — |
|
| Transfer in from acquisition | 5,271 |
| | — |
|
| Actuarial loss (gain) | 71,006 |
| | (10,362 | ) |
| Administrative expenses paid | (605 | ) | | (411 | ) |
| Effect of foreign exchange | (36,476 | ) | | (12,213 | ) |
| Benefit obligation at end of year | $ | 379,942 |
| | $ | 345,220 |
|
| Change in fair value of plan assets: | | | |
| Fair value of plan assets at beginning of year | $ | 275,480 |
| | $ | 281,290 |
|
| Actual return on plan assets | 23,388 |
| | 6,263 |
|
| Employer contributions | 10,551 |
| | 6,762 |
|
| Settlements | (5,499 | ) | | — |
|
| Transfer in from acquisition | 508 |
| | — |
|
| Benefit payments | (13,383 | ) | | (8,191 | ) |
| Administrative expenses paid | (605 | ) | | (411 | ) |
| Effect of foreign exchange | (33,537 | ) | | (10,233 | ) |
| Fair value of plan assets at end of year | $ | 256,903 |
| | $ | 275,480 |
|
| | | | |
| Net balance sheet liability | $ | 123,039 |
| | $ | 69,740 |
|
| | | | |
| Amounts recognized in balance sheet: | | | |
| Noncurrent assets | $ | — |
| | $ | 261 |
|
| Current liabilities | 1,120 |
| | 6,133 |
|
| Noncurrent liabilities | 121,919 |
| | 63,868 |
|
Amounts recognized in accumulated other comprehensive loss related to the Company’s pension, DCP and ESLIRP plans are as follows:
|
| | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 |
| | (in thousands) |
| Net actuarial loss | $ | 116,930 |
| | $ | 93,483 |
|
| Net prior service cost (credit) | (2,096 | ) | | (2,585 | ) |
| Net amount recognized | $ | 114,834 |
| | $ | 90,898 |
|
|
| | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 |
| | | | |
| | (in thousands) |
| Net actuarial loss | $ | 123,743 |
| | $ | 73,412 |
|
| Net prior service cost (credit) | (3,300 | ) | | (4,584 | ) |
| Net amount recognized | $ | 120,443 |
| | $ | 68,828 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accumulated benefit obligation and fair value of plan assets for the Company’s pension, DCP and ESLIRP plans with accumulated benefit obligations in excess of plan assets are as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Accumulated benefit obligation | $ | 410,243 |
| | $ | 254,138 |
|
| Fair value of plan assets | 337,344 |
| | 207,538 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Accumulated benefit obligation | $ | 346,122 |
| | $ | 306,433 |
|
| Fair value of plan assets | 242,172 |
| | 253,225 |
|
The projected benefit obligation and fair value of plan assets for the Company’s pension, DCP and ESLIRP plans with projected benefit obligations in excess of plan assets are as follows:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in thousands) |
| Projected benefit obligation | $ | 435,638 |
| | $ | 273,625 |
|
| Fair value of plan assets | 343,688 |
| | 213,249 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | | | |
| | (in thousands) |
| Projected benefit obligation | $ | 379,942 |
| | $ | 336,155 |
|
| Fair value of plan assets | 256,903 |
| | 266,154 |
|
The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year are as follows:
|
| | | |
| | December 28, 2019 |
| | (in thousands) |
| Amortization of net actuarial loss | $ | 6,344 |
|
| Amortization of net prior service credit | (501 | ) |
|
| | | |
| | December 31, 2016 |
| | (in thousands) |
| Amortization of net actuarial loss | $ | 3,867 |
|
| Amortization of net prior service credit | (475 | ) |
Components of net periodic benefit cost for the Company’s pension, DCP and ESLIRP plans are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Service cost | $ | 2,833 |
| | $ | 2,612 |
| | $ | 3,110 |
|
| Interest cost | 11,583 |
| | 10,850 |
| | 11,642 |
|
| Expected return on plan assets | (13,005 | ) | | (15,516 | ) | | (14,249 | ) |
| Amortization of prior service credit | (489 | ) | | (514 | ) | | (496 | ) |
| Amortization of net loss | 2,250 |
| | 2,990 |
| | 3,845 |
|
| Other | 850 |
| | 910 |
| | — |
|
| Net periodic cost (benefit) | $ | 4,022 |
| | $ | 1,332 |
| | $ | 3,852 |
|
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Service cost | $ | 2,453 |
| | $ | 4,293 |
| | $ | 4,155 |
|
| Interest cost | 12,046 |
| | 12,974 |
| | 13,831 |
|
| Expected return on plan assets | (14,164 | ) | | (16,987 | ) | | (17,444 | ) |
| Amortization of prior service cost (credit) | (292 | ) | | (581 | ) | | 1,211 |
|
| Amortization of net loss (gain) | 2,003 |
| | 3,198 |
| | 23 |
|
| Curtailment | (279 | ) | | — |
| | — |
|
| Settlements | 788 |
| | — |
| | — |
|
| Net periodic cost (benefit) | $ | 2,555 |
| | $ | 2,897 |
| | $ | 1,776 |
|
Assumptions
Weighted-average assumptions used to determine projected benefit obligations are as follows:
| | | | December 31, 2016 | | December 26, 2015 | December 28, 2019 | | December 29, 2018 |
| Discount rate | 3.01 | % | | 3.89 | % | 2.14 | % | | 3.21 | % |
| Rate of compensation increase | 3.25 | % | | 3.17 | % | 2.99 | % | | 3.23 | % |
The discount rate reflects the rate the Company would have to pay to purchase high-quality investments that would provide cash sufficient to settle its current pension obligations. Specifically for the expected termination of the U.S. Pension Plan, estimated costs of lump sum payments and annuity purchases are reflected in the discount rate. A 25 basis point change across all discount rates changes the projected benefit obligation by approximately $20 million for all Company plans.
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
|
| | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | December 30, 2017 |
| Discount rate | 3.21 | % | | 2.82 | % | | 3.01 | % |
| Expected long-term return on plan assets | 4.28 | % | | 5.18 | % | | 5.41 | % |
| Rate of compensation increase | 3.23 | % | | 3.16 | % | | 3.25 | % |
|
| | | | | | | | |
| | December 31, 2016 | | December 26, 2015 | | December 27, 2014 |
| Discount rate | 3.89 | % | | 3.75 | % | | 4.44 | % |
| Expected long-term return on plan assets | 5.83 | % | | 6.24 | % | | 6.41 | % |
| Rate of compensation increase | 3.17 | % | | 3.18 | % | | 3.36 | % |
A 0.5% decrease in the expected rate of return would increase annual pension expense by $1.3$1.8 million.
In fiscal years 2019 and 2018, new mortality improvement scales were issued in the U.S. and the United Kingdom (U.K.) reflecting a decline in longevity projection from previous releases the Company adopted, which decreased the Company’s benefit obligations by $2.8 million and $1.7 million as of December 28, 2019 and December 29, 2018, respectively.
Plan assetsAssets
The Company invests its pension assets with the objective of achieving a total long-term rate of return sufficient to fund future pension obligations and to minimize future pension contributions. The Company is willing to tolerate a commensurate level of risk to achieve this objective. The Company controls its risk by maintaining a diversified portfolio of assetsasset classes. Plan assets did not include any of the Company’s common stock as of December 31, 201628, 2019 or December 26, 2015.29, 2018. The weighted-average target asset allocations are approximately 45.0%24.0% to equity securities, approximately 31.5%24.6% to fixed income securities and approximately 23.5%51.4% to other securities.
The fair value of the Company’s pension plan assets by asset category are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 26, 2015 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | | | | | |
| | (in thousands) |
| Cash | $ | 108 |
| | $ | — |
| | $ | — |
| | $ | 108 |
| | $ | 92 |
| | $ | — |
| | $ | — |
| | $ | 92 |
|
Equity securities(1) | 63,348 |
| | 6,252 |
| | — |
| | 69,600 |
| | 65,890 |
| | 5,941 |
| | — |
| | 71,831 |
|
Debt securities(2) | 59,294 |
| | 3,269 |
| | — |
| | 62,563 |
| | 68,489 |
| | 2,822 |
| | — |
| | 71,311 |
|
Mutual funds(3) | 64,698 |
| | 56,596 |
| | — |
| | 121,294 |
| | 63,689 |
| | 65,725 |
| | — |
| | 129,414 |
|
| Other | 1,318 |
| | 586 |
| | 1,434 |
| | 3,338 |
| | 1,021 |
| | 49 |
| | 1,762 |
| | 2,832 |
|
| Total | $ | 188,766 |
| | $ | 66,703 |
| | $ | 1,434 |
| | $ | 256,903 |
| | $ | 199,181 |
| | $ | 74,537 |
| | $ | 1,762 |
| | $ | 275,480 |
|
(1) This category comprises equity securities held by non-U.S. pension plans valued at the quoted closing price, and translated into U.S. dollars using a foreign currency exchange rate at year end. |
(2) This category comprises debt securities held by non-U.S. pension plans valued at the quoted closing price, and translated into U.S. dollars using a foreign currency exchange rate at year end. |
(3) This category comprises mutual funds valued at the net asset value of shares held at year end. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) |
| Cash and cash equivalents | $ | 2,388 |
| | $ | 1,022 |
| | $ | — |
| | $ | 3,410 |
| | $ | 7,317 |
| | $ | — |
| | $ | — |
| | $ | 7,317 |
|
Equity securities (1) | 7,621 |
| | 84,377 |
| | — |
| | 91,998 |
| | 72,237 |
| | — |
| | — |
| | 72,237 |
|
Debt securities (2) | 40,281 |
| | 89,684 |
| | — |
| | 129,965 |
| | 17,147 |
| | 4,100 |
| | — |
| | 21,247 |
|
Mutual funds (3) | 6,324 |
| | 68,632 |
| | — |
| | 74,956 |
| | 86,282 |
| | 59,984 |
| | — |
| | 146,266 |
|
Other (4) | 551 |
| | 54,787 |
| | 1,514 |
| | 56,852 |
| | 718 |
| | 56,283 |
| | 1,641 |
| | 58,642 |
|
| Total | $ | 57,165 |
| | $ | 298,502 |
| | $ | 1,514 |
| | $ | 357,181 |
| | $ | 183,701 |
| | $ | 120,367 |
| | $ | 1,641 |
| | $ | 305,709 |
|
(1) This category comprises equity investments and securities held by non-U.S. pension plans valued at the quoted closing price, and translated into U.S. dollars using a foreign currency exchange rate at year end. |
(2) This category comprises debt investments and securities held by U.S. and non-U.S. pension plans valued at the quoted closing price. For non-U.S. pension plans, the quoted closing price is translated into U.S. dollars using a foreign currency exchange rate at year end. Holdings primarily include investment-grade corporate bonds and U.S. treasuries at various durations. |
(3) This category comprises non-U.S. mutual funds valued at the net asset value of shares held at year end and translated into U.S. dollars using a foreign currency exchange rate at year end. |
(4) This category mainly comprises fixed income securities tied to various U.K. government bond yields held by non-US pension plans valued at the net asset value of shares held at year-end, and translated into U.S. dollars using a foreign currency exchange rate at year end. |
The activity within the Level 3 pension plan assets was non-significant during the periods presented.
During fiscal year 2016,2019, the Company contributed $4.0$0.8 million to the pension plans and expects to contribute $4.0approximately $11.9 million to its pension plans in fiscal year 2017.2020. During fiscal year 2019, the Company contributed $1.3 million directly to certain participants outside of plan assets.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected benefit payments are estimated using the same assumptions used in determining the Company’s benefit obligation as of December 31, 2016.28, 2019. Benefit payments will depend on future employment and compensation levels, among other factors, and changes in any of these factors could significantly affect these estimated future benefit payments. Estimated future benefit payments during the next five years and in the aggregate for fiscal years thereafter,2025 through 2029, are as follows:follows. Payments in fiscal year 2020 reflect the estimated payments of approximately $94 million to participants in connection with the U.S. Pension Plan termination and $8 million to an executive officer expected to retire:
|
| | | | |
| Fiscal Year | | Pension Plans |
| | | (in thousands) |
| 2020 | | $ | 111,848 |
|
| 2021 | | 9,420 |
|
| 2022 | | 10,344 |
|
| 2023 | | 40,911 |
|
| 2024 | | 10,814 |
|
| 2025-2029 | | 59,646 |
|
|
| | | | |
| Fiscal Year | | Pension Plans |
| | | (in thousands) |
| 2017 | | $ | 8,610 |
|
| 2018 | | 8,818 |
|
| 2019 | | 9,682 |
|
| 2020 | | 10,014 |
|
| 2021 | | 30,717 |
|
| Thereafter | | 57,705 |
|
Post-Retirement Health and Life Insurance Plans
The Company’s Canadian location offers post-retirement life insurance benefits to its employees and post-retirement medical and dental insurance coverage to certain executives. The plan is non-contributory and unfunded. As of December 31, 201628, 2019 and December 26, 2015,29, 2018, the accumulated benefit obligation related to the plan was $1.2$1.1 million and $0.9$1.5 million, respectively. The amounts included in other accumulated comprehensive income as well as expenses related to the plan were non-significant for fiscal years 2016, 2015,2019, 2018 and 2014.2017.
Charles River Laboratories Employee Savings Plan
The Charles River Laboratories Employee Savings Plan is a defined contribution plan in the form of a qualified 401(k) plan in which substantially all U.S. employees are eligible to participate upon employment. The plan contains a provision whereby the Company matches a percentage of employee contributions. During fiscal years 2016, 20152019, 2018 and 2014,2017, the costs associated with this defined contribution plan totaled $6.2$19.1 million, $5.3$13.4 million and $4.9$11.6 million, respectively.
11.13. 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, restricted stock units (RSUs), and PSUs.performance share units (PSUs).
During fiscal years 2016, 20152019, 2018 and 2014,2017, the primary share-based awards and their general terms and conditions are as follows:
Stock options, which entitle the holder to purchase a specified number of shares of common stock at an exercise price equal to the closing market price of common stock on the date of grant; typically vest over 4 years; and typically expire 5 to 7 years from date of grant.
Restricted stock units,RSUs, which represent an unsecured promise to grant at no cost a set number of shares of common stock upon the completion of the vesting schedule, and typically vest over 2 to 4 years. With respect to restricted stock units,RSUs, recipients are not entitled to cash dividends and have no voting rights on the stock during the vesting period.
Restricted stock, which is an award of common stock issued on the grant date and subject to vesting, typically over 2 to 4 years. Recipients cannot sell or transfer the shares until the restriction period has lapsed, but are entitled to forfeitable cash dividends and to vote their respective shares upon grant.
PSUs, which entitle the holder to receive at no cost, a specified number of shares of common stock within a range of shares from zero0 to a specified maximum and typically vest over 3 years. Payout of this award is contingent upon achievement of certain performance and market conditions.
In May 2007, the Company’s shareholders approved the 2007 Incentive Plan, which was amended in 2009, 2011, 2013 and 2015 (2007 Plan). The 2007 Plan provided no further awards to be granted under preexisting stock option and incentive plans; provided, however, that any shares that have been forfeited or canceled in accordance with the terms of the applicable award under a preexisting plan may be subsequently awarded in accordance with the terms of the preexisting plan. The 2007 Plan allows a maximum of 18.7 million shares to be awarded, of which restricted stock grants, restricted stock units,RSUs, and
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
performance based stock awards count as 2.3 shares and stock options count as 1.0 shares.share. Any stock options and other share-based awards that were granted under prior plans and were outstanding in May 2007 continue in accordance with the terms of the respective plans.
In May 2016, the Company’s shareholders approved the 2016 Incentive Plan (2016 Plan). The 2016 Plan provided no further awards to be granted under preexisting stock option and incentive plans; provided, however, that any shares that have been
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
forfeited or canceled in accordance with the terms of the applicable award under a preexisting plan may be subsequently awarded in accordance with the terms of the preexisting plan. The 2016 Plan allows a maximum of 6.1 million shares to be awarded, of which restricted stock grants, restricted stock unitsRSUs, and performance based stock awards count as 2.3 shares and stock options count as 1.0 shares.share. Any stock options and other share-based awards that were granted under prior plans and were outstanding in May 2016 continue in accordance with the terms of the respective plans.
In May 2018, the Company’s shareholders approved the 2018 Incentive Plan (2018 Plan). The 2018 Plan provided no further awards to be granted under preexisting stock option and incentive plans; provided, however, that any shares that have been forfeited or canceled in accordance with the terms of the applicable award under a preexisting plan may be subsequently awarded in accordance with the terms of the preexisting plan. The 2018 Plan allows a maximum of 7.2 million shares to be awarded, of which restricted stock grants, RSUs, and performance based stock awards count as 2.3 shares and stock options count as 1.0 share. Any stock options and other share-based awards that were granted under prior plans and were outstanding in May 2018 continue in accordance with the terms of the respective plans.
As of December 31, 2016,28, 2019, approximately 7.35.8 million shares were authorized for future grants under the Company’s share-based compensation plans. The Company settles employee share-based compensation awards with newly issued shares. The following table provides stock-based compensation by the financial statement line itemsitem in which stock-based compensationit is reflected:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Cost of revenue | $ | 9,038 |
| | $ | 6,285 |
| | $ | 6,509 |
|
| Selling, general and administrative | 48,233 |
| | 41,061 |
| | 37,494 |
|
| Stock-based compensation, before income taxes | 57,271 |
| | 47,346 |
| | 44,003 |
|
| Provision for income taxes | (9,465 | ) | | (9,188 | ) | | (13,428 | ) |
| Stock-based compensation, net of income taxes | $ | 47,806 |
| | $ | 38,158 |
| | $ | 30,575 |
|
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Cost of revenue (excluding amortization of intangible assets) | $ | 6,508 |
| | $ | 6,511 |
| | $ | 5,382 |
|
| Selling, general and administrative | 37,134 |
| | 33,611 |
| | 25,653 |
|
| Stock-based compensation expense, before income taxes | 43,642 |
| | 40,122 |
| | 31,035 |
|
| Provision for income taxes | (15,548 | ) | | (14,225 | ) | | (11,006 | ) |
| Stock-based compensation, net of income taxes | $ | 28,094 |
| | $ | 25,897 |
| | $ | 20,029 |
|
During fiscal year 2015, the Company modified certain stock-based awards granted in previous years as part of executive retirement transitions. For the stock-based awards granted to employees during and subsequent to fiscal year 2015, the Company introduced a new retirement provision, which allows for continued vesting of such awards after the employee’s retirement if certain eligibility conditions are met. The introduction of the new retirement provision and stock-based award modifications increased the Company’s stock-based compensation expense for 2015 by $4.5 million.
The Company capitalized noNaN stock-based compensation related costs forwere capitalized in fiscal years 2016, 20152019, 2018 and 2014.
The Company’s pool of excess tax benefits, which is computed in accordance with the long form method, was $32.2 million as of December 31, 2016, $22.3 million as of December 26, 2015, and $10.8 million as of December 27, 2014. During fiscal year 2016, the Company recorded a tax benefit of $9.3 million to additional paid-in capital related to the exercise of stock options and vesting of restricted shares and restricted stock units, compared to a tax benefit of $10.6 million in fiscal year 2015.2017.
Stock Options
The following table summarizes stock option activitiesactivity under the Company’s stock-based compensation plans:
|
| | | | | | | | | | | | |
| | Number of shares | | Weighted Average
Exercise Price | | Weighted Average
Remaining
Contractual Life | | Aggregate
Intrinsic
Value |
| | (in thousands) | | | | (in years) | | (in thousands) |
| Options outstanding as of December 29, 2018 | 1,556 |
| | $ | 86.44 |
| | | | |
|
| Options granted | 454 |
| | $ | 144.42 |
| | | | |
|
| Options exercised | (442 | ) | | $ | 78.49 |
| | | | |
|
| Options canceled | (61 | ) | | $ | 113.17 |
| | | | |
|
| Options outstanding as of December 28, 2019 | 1,507 |
| | $ | 105.19 |
| | 2.7 | | $ | 70,459 |
|
| Options exercisable as of December 28, 2019 | 390 |
| | $ | 77.87 |
| | 1.5 | | $ | 28,897 |
|
| Options expected to vest as of December 28, 2019 | 1,117 |
| | $ | 114.73 |
| | 3.1 | | $ | 41,562 |
|
|
| | | | | | | | | | | | |
| | Number of shares | | Weighted Average
Exercise Price | | Weighted Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| | | | | | | | |
| | (in thousands, except per share amounts) |
| Options outstanding as of December 26, 2015 | 2,066 |
| | $ | 50.62 |
| | | | |
|
| Options granted | 588 |
| | $ | 74.13 |
| | | | |
|
| Options exercised | (601 | ) | | $ | 38.52 |
| | | | |
|
| Options canceled | (83 | ) | | $ | 62.66 |
| | | | |
|
| Options outstanding as of December 31, 2016 | 1,970 |
| | $ | 60.82 |
| | 3.4 | | $ | 30,638 |
|
| Options exercisable as of December 31, 2016 | 746 |
| | $ | 48.34 |
| | 2.6 | | $ | 20,817 |
|
| Options expected to vest as of December 31, 2016 | 1,202 |
| | $ | 68.40 |
| | 3.8 | | $ | 9,690 |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
| | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| Expected life (in years) | 3.6 |
| | 3.7 |
| | 3.6 |
|
| Expected volatility | 27 | % | | 25 | % | | 24 | % |
| Risk-free interest rate | 2.4 | % | | 2.4 | % | | 1.6 | % |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
|
| | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| Expected life (in years) | 3.6 |
| | 3.6 |
| | 4.2 |
|
| Expected volatility | 25 | % | | 28 | % | | 30 | % |
| Risk-free interest rate | 1.2 | % | | 1.1 | % | | 1.5 | % |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
The weighted-average grant date fair value of stock options granted was $15.12, $17.24$33.97, $24.80 and $15.19$18.33 for fiscal years 2016, 20152019, 2018 and 2014,2017, respectively.
As of December 31, 2016,28, 2019, the unrecognized compensation cost related to unvested stock options expected to vest was $10.8$16.5 million. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.22.3 years.
The total intrinsic value of options exercised during fiscal years 2016, 20152019, 2018 and 20142017 was $23.0$27.0 million, $28.3$29.0 million and $30.5$30.0 million, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the exercise price.
Restricted Stock and Restricted Stock Units
The following table summarizes the restricted stock and restricted stock units activity for fiscal year 2016:2019:
|
| | | | | | |
| | Restricted Stock Units | | Weighted
Average
Grant Date
Fair Value |
| | (in thousands) | | |
| December 29, 2018 | 490 |
| | $ | 93.80 |
|
| Granted | 221 |
| | $ | 142.85 |
|
| Vested | (185 | ) | | $ | 89.34 |
|
| Canceled | (30 | ) | | $ | 115.10 |
|
| December 28, 2019 | 496 |
| | $ | 116.07 |
|
|
| | | | | | |
| | Restricted Stock and Restricted Stock Units | | Weighted
Average
Grant Date
Fair Value |
| | (in thousands) | | |
| December 26, 2015 | 607 |
| | $ | 55.52 |
|
| Granted | 236 |
| | $ | 75.10 |
|
| Vested | (296 | ) | | $ | 49.29 |
|
| Canceled | (32 | ) | | $ | 63.36 |
|
| December 31, 2016 | 515 |
| | $ | 67.62 |
|
As of December 31, 2016,28, 2019, the unrecognized compensation cost related to shares of unvested restricted stock and restricted stock unitsRSUs expected to vest was $19.2$32.6 million, which is expected to be recognized over an estimated weighted-average amortization period of 1.22.3 years. The total fair value of restricted stock and restricted stock unitRSU grants that vested during fiscal years 2016, 20152019, 2018 and 20142017 was $14.6$16.5 million, $15.7$15.5 million and $13.9$13.6 million, respectively.
Performance Based Stock Award Program
The Company issues PSUs to certain corporate officers. The number of shares of common stock issued for each PSU is adjusted based on a performance condition linked to the Company’s financial performance. Certain awards are further adjusted based on a market condition, which is calculated based on the Company’s stock performance relative to a peer group over the three-year vesting period. The fair value of the market condition is reflected in the fair value of the award at grant date.
The Company utilizes a Monte Carlo simulation valuation model to value these awards. Information pertaining to the Company’s PSUs and the related estimated weighted-average assumptions used to calculate their fair value were as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (shares in thousands) |
| PSUs granted | 160 |
| | 200 |
| | 198 |
|
| Weighted average grant date fair value | $ | 164.47 |
| | $ | 117.89 |
| | $ | 99.96 |
|
| Key Assumptions: | | | | | |
| Expected volatility | 25 | % | | 26 | % | | 26 | % |
| Risk-free interest rate | 2.4 | % | | 2.4 | % | | 1.3 | % |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
| Total shareholder return of 20-trading day average stock price on grant date | 17.7 | % | | 2.9 | % | | 17.7 | % |
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| PSUs granted | 190,628 |
| | 148,900 |
| | 214,823 |
|
| Weighted average per share fair value | $ | 80.38 |
| | $ | 88.62 |
| | $ | 67.82 |
|
| Key Assumptions: | | | | | |
| Expected volatility | 24 | % | | 23 | % | | 29 | % |
| Risk-free interest rate | 0.91 | % | | 0.96 | % | | 0.63 | % |
| Expected dividend yield | — | % | | — | % | | — | % |
| 20 trading day average stock price on grant date | (4.8 | )% | | 20.6 | % | | 13.1 | % |
The maximum amountnumber of common shares to be issued upon vesting of PSUs is approximately 0.3 million. For fiscal years 2016, 20152019, 2018 and 2014,2017, the Company recognized stock-based compensation related to PSUs of $19.7$25.3 million, $14.7$20.4 million and $8.5$18.9 million, respectively. The total fair value of PSUs that vested during fiscal years 20162019, 2018 and 20152017 was $18.0$20.2 million, $18.3 million and $6.6$14.4 million, respectively.
In fiscal year 2016,years 2019, 2018 and 2017, the Company also issued approximately 18,00015,000, 17,000 and 15,000 PSUs using a weighted averageweighted-average grant date fair value per share of $73.70.$144.67, $109.34 and $88.05 respectively. These PSUs vest upon the achievement of financial targets and other performance measures.
12.14. FOREIGN CURRENCY CONTRACTS
Cross currency loans
The Company entered into foreign exchange forward contracts during fiscal 2019 and 2018 to limit its foreign currency exposure related U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Company’s Credit Facility. These contracts are not designated as hedging instruments. Any gains or losses on these forward contracts are recognized immediately within Interest expense in the 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 as of December 28, 2019. One contract remained open as of December 29, 2018, which has a duration of approximately 3 months, and is recorded at fair value in the Company’s accompanying consolidated balance sheets. The notional amount and fair value of the open contract is summarized as follows:
|
| | | | | | | | |
| December 29, 2018 |
| Notional Amount | | Fair Value | | Balance Sheet Location |
| (in thousands) | | |
| $ | 343,300 |
| | $ | (1,319 | ) | | Other current liabilities |
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 consolidated statements of income:
|
| | | | | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2019 | 2018 |
| Location of gain (loss) | | Financial statement caption amount | | Amount of gain (loss) | | Financial statement caption amount | | Amount of gain (loss) |
| | | (in thousands) |
| Interest expense | | $ | 60,882 |
| | $ | 18,672 |
| | $ | 63,772 |
| | 1,486 |
|
Intercompany loans
The Company periodically enters into foreign exchange forward contracts to limit its foreign currency exposure related to certain intercompany loans that are not of a long-term investment nature.loans. These contracts are recorded at fair value in the Company’s consolidated balance sheet and are not designated as hedging instruments. Any gains or losses on such contracts are immediately recognized in other income (expense), net, and are largely offset by the remeasurement of the underlying intercompany loan balances.
The Company did not have any foreign currency contracts open as of December 31, 2016. The notional amount and fair value of the Company’s foreign currency forward contracts as of December 26, 2015 were as follows:
|
| | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Location |
| | | | | |
| (in thousands) |
| $ | 88,483 |
| | $ | 15 |
| | Other current assets |
The following table summarizes gains (losses) recognized on foreign exchange forward contracts related to intercompany loans denominated in British Pounds and Euros on the Company’s consolidated statement of income:
|
| | | | | | | | |
| | | Fiscal Year |
| Location of Gain (Loss) | | 2016 | | 2015 |
| | | | | |
| | | (in thousands) |
| Other income (expense), net | | $ | 3,373 |
| | $ | (4,917 | ) |
The forward contracts outstanding as of December 26, 2015 had durations of approximately 3 months.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company rents laboratory and office space, land, vehicles and certain equipment under non-cancellable operating leases. These lease agreements contain various clauses for renewal at the Company’s option and, in certain cases, rent escalation clauses. Rental expense under these leases amounted to $21.8 million, $23.4 million and $14.2 million in fiscal years 2016, 2015 and 2014, respectively. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other operating expenses.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 consolidated balance sheets. The Company did not have any significant foreign currency forward contracts related to certain intercompany loans during fiscal years 2018 and 2017. 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 thousands) | | |
| $ | 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 consolidated statements of income:
|
| | | | | | | | |
| | | Fiscal Year |
| | | 2019 |
| Location of gain (loss) | | Financial statement caption amount | | Amount of gain (loss) |
| | | (in thousands) |
| Other income, net | | $ | 12,293 |
| | $ | (121 | ) |
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 Company does not have any significant remaining lease obligations for facilities associated with restructuring activities.
The following table presents a summary of restructuring costs related to these initiatives by classification within the consolidated statements of income:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Severance and Transition Costs | | Asset Impairments and Other Costs | | Total |
| | (in thousands) |
| December 28, 2019 | | | | | |
| Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 4,348 |
| | $ | 2,367 |
| | $ | 6,715 |
|
| Selling, general and administrative | 7,106 |
| | 18 |
| | 7,124 |
|
| Total | $ | 11,454 |
| | $ | 2,385 |
| | $ | 13,839 |
|
| December 29, 2018 | | | | | |
| Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 923 |
| | $ | 27 |
| | $ | 950 |
|
| Selling, general and administrative | 6,597 |
| | 21 |
| | 6,618 |
|
| Total | $ | 7,520 |
| | $ | 48 |
| | $ | 7,568 |
|
| December 30, 2017 | | | | | |
| Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 1,944 |
| | $ | 929 |
| | $ | 2,873 |
|
| Selling, general and administrative | 1,905 |
| | — |
| | 1,905 |
|
| Total | $ | 3,849 |
| | $ | 929 |
| | $ | 4,778 |
|
The following table presents restructuring costs by reportable segment for these productivity improvement initiatives:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| RMS | $ | 3,110 |
| | $ | — |
| | $ | 291 |
|
| DSA | 7,307 |
| | 1,063 |
| | 1,604 |
|
| Manufacturing | 3,032 |
| | 1,227 |
| | 2,883 |
|
| Unallocated corporate | 390 |
| | 5,278 |
| | — |
|
| Total | $ | 13,839 |
| | $ | 7,568 |
| | $ | 4,778 |
|
2017 RMS Restructuring Initiative
In the fourth quarter of fiscal year 2017, the Company committed to a plan to further reduce costs and improve operating efficiencies in its RMS reportable segment. The plan included ceasing production within the Company’s facility in Maryland and reducing its workforce at various global RMS facilities during 2018. On August 1, 2018, the Company’s Board of Directors approved a modification to the plan which repurposed the facility in Maryland to be used for alternative initiatives. The Company’s existing lease obligation continues through 2028 and the Company expects to remain in the facility for the duration of the lease term.
The following table presents a summary of severance and transition costs, and asset impairments (referred to as restructuring costs) related to this initiative during fiscal years 2018 and 2017 by classification within the consolidated statements of income. The Company did not incur any restructuring costs during fiscal year December 28, 2019.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Severance and Transition Costs | | Asset Impairments and Other Costs | | Total |
| | (in thousands) |
| December 29, 2018 | | | | | |
| Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 847 |
| | $ | 822 |
| | $ | 1,669 |
|
| Selling, general and administrative | 314 |
| | — |
| | 314 |
|
| Total | $ | 1,161 |
| | $ | 822 |
| | $ | 1,983 |
|
| December 30, 2017 | | | | | |
| Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 362 |
| | $ | 17,716 |
| | $ | 18,078 |
|
| Selling, general and administrative | 67 |
| | — |
| | 67 |
|
| Total | $ | 429 |
| | $ | 17,716 |
| | $ | 18,145 |
|
Restructuring costs incurred during 2017 were $18.1 million, which primarily related to non-cash asset impairments and accelerated depreciation charges of $17.7 million. The costs incurred during 2018 were $2.0 million, which primarily related to cash payments for severance and transition costs of $1.2 million. All of the costs are recorded in the RMS reportable segment. All severance and transition costs have been paid as of December 28, 2019 and no further restructuring costs related to the 2017 RMS Restructuring Initiative are expected to be incurred.
Rollforward of restructuring activities
The following table provides a rollforward for all of the Company’s severance and transition costs, and certain lease obligation liabilities related to restructuring activities:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Beginning balance | $ | 2,921 |
| | $ | 6,856 |
| | $ | 8,102 |
|
| Expense (excluding non-cash charges) | 12,674 |
| | 8,681 |
| | 4,278 |
|
| Payments / utilization | (9,206 | ) | | (12,341 | ) | | (6,103 | ) |
| Foreign currency adjustments | 17 |
| | (275 | ) | | 579 |
|
| Ending balance | $ | 6,406 |
| | $ | 2,921 |
| | $ | 6,856 |
|
As of December 31, 2016, minimum rental commitments28, 2019 and December 29, 2018, $6.3 million and $2.4 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 consolidated balance sheets and $0.1 million and $0.5 million, respectively, were included in other long-term liabilities within the Company's consolidated balance sheets.
16. LEASES
Adoption of ASC Topic 842, “Leases” (ASC 842)
ASC 842 became effective for the Company on December 30, 2018 and was adopted using the modified retrospective method for all leases that had commenced as of the effective date, along with certain available practical expedients. The Company elected to recognize any effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, which there were none. In addition, the Company elected to adopt the package of practical expedients permitted under non-cancellablethe transition guidance within the new standard. The practical expedient package applied to leases netthat commenced prior to the effective date of the new standard and permits a reporting entity not to: i) reassess whether any expired or existing contracts are or contain leases, ii) reassess the historical lease classification for any expired or existing leases, and iii) reassess initial direct costs for any existing leases.
The reporting results for fiscal year 2019 reflect the application of ASC 842 guidance while the historical results for fiscal year 2018 were prepared under the guidance of ASC 840. The adoption of the new standard did not have a significant impact upon the Company’s consolidated statements of income from subleases,and cash flows. The adoption of the new standard resulted in the following impact to the consolidated balance sheets: i) no significant change in the carrying values of assets and liabilities related to the Company’s finance leases, previously referred to as capital leases (See Note 9, “Long-Term Debt and Finance Lease Obligations”), ii) the derecognition of assets and related liabilities pertaining to certain build-to-suit arrangements previously accounted for under ASC 840 and recording them under the guidance of ASC 842, and iii) the recording of right-of-use assets and corresponding lease liabilities pertaining to the Company’s operating leases on the consolidated balance sheets, adjusted for
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
existing balances of prepaid rent and deferred rent liabilities as of the transition date. The cumulative effect of applying ASC 842 to all leases that had commenced as of December 29, 2018 was as follows:
|
| | | | | | | | | | | | |
| Balance sheet captions impacted by ASC 842 | December 30, 2018 (Prior to adoption of ASC 842) | | Effect of the adoption of ASC 842 | | | December 30, 2018 (As adjusted) |
| | (in thousands) |
| Prepaid assets | $ | 53,447 |
| | $ | (4,413 | ) | (1) | | $ | 49,034 |
|
| Property, plant and equipment, net | 932,877 |
| | (23,448 | ) | (2) | | 909,429 |
|
| Operating lease right-of-use assets, net | — |
| | 134,172 |
| (3) | | 134,172 |
|
| Other assets | 143,759 |
| | (4,989 | ) | (4) | | 138,770 |
|
| Other current liabilities | 71,280 |
| | 15,935 |
| (5) | | 87,215 |
|
| Operating lease right-of-use liabilities | — |
| | 111,570 |
| (6) | | 111,570 |
|
| Long-term debt, net and finance leases | 1,636,598 |
| | (26,183 | ) | (7) | | 1,610,415 |
|
| ASC 842 adoption adjustments: |
(1) Short term prepaid rent reclassified from Prepaid assets to the Operating lease right-of-use assets, net. |
(2) Derecognition of approximately $26 million of leased properties, recorded in Property, plant and equipment, net, specifically Construction-in-process, that were recognized under the previously existing build-to-suit accounting
rules; partially offset by Prepaid assets related to finance leases reclassified from Prepaid assets. |
(3) Recognition of Operating lease right-of-use assets, net, and adjusted for prepaid rent and deferred rent liability reclassification adjustments identified in adjustments (1) (4) (5). |
(4) Long-term prepaid rent reclassified from Other assets to Operating lease right-of-use assets, net. |
(5) Recognition of short-term portion of the Operating lease right-of-use liabilities offset by reclassification of deferred rent liability to Operating lease right-of-use assets, net. |
(6) Recognition of long-term portion of the Operating lease right-of-use liabilities. |
(7) Derecognition of approximately $26 million of Other debt associated with leased properties that were recognized under the previously existing build-to-suit accounting rules. |
Operating and Finance Leases
Right-of-use lease assets and lease liabilities are reported in the Company’s consolidated balance sheets as follows:
|
| | | |
| | December 28, 2019 |
| | (in thousands) |
| Operating leases | |
| Operating lease right-of-use assets, net | $ | 140,085 |
|
| | |
| Other current liabilities | $ | 20,357 |
|
| Operating lease right-of-use liabilities | 116,252 |
|
| Total operating lease liabilities | $ | 136,609 |
|
| | |
| Finance leases | |
| Property, plant and equipment, net | $ | 32,519 |
|
| | |
| Current portion of long-term debt and finance leases | $ | 2,997 |
|
| Long-term debt, net and finance leases | 27,530 |
|
| Total finance lease liabilities | $ | 30,527 |
|
The components of operating and finance lease costs for fiscal year 2019 were as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | |
| | Fiscal Year |
| | December 28, 2019 |
| | (in thousands) |
| Operating lease costs | $ | 30,885 |
|
| Finance lease costs: | |
| Amortization of right-of-use assets | 4,007 |
|
| Interest on lease liabilities | 1,349 |
|
| Short-term lease costs | 1,056 |
|
| Variable lease costs | 3,161 |
|
| Sublease income | (994 | ) |
| Total lease costs | $ | 39,464 |
|
Other information related to leases was as follows:
Supplemental cash flow information
|
| | | |
| | Fiscal Year |
| | December 28, 2019 |
| | (in thousands) |
| Cash flows included in the measurement of lease liabilities: | |
| Operating cash flows from operating leases | $ | 27,153 |
|
| Operating cash flows from finance leases | 1,406 |
|
| Finance cash flows from finance leases | 3,766 |
|
| | |
| Non-cash leases activity: | |
| Right-of-use lease assets obtained in exchange for new operating lease liabilities | $ | 24,382 |
|
| Right-of-use lease assets obtained in exchange for new finance lease liabilities | 4,819 |
|
Lease term and discount rate
|
| |
| As of |
| December 28, 2019 |
| Weighted-average remaining lease term (in years) | |
| Operating lease | 8.23 |
| Finance lease | 12.97 |
| Weighted-average discount rate | |
| Operating lease | 4.36 |
| Finance lease | 4.58 |
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.
As of December 28, 2019, maturities of operating and finance lease liabilities for each of the nextfollowing five years and a total thereafter were as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | |
| | | Minimum Lease Payments |
| | | (in thousands) |
| 2017 | | $ | 23,410 |
|
| 2018 | | 20,273 |
|
| 2019 | | 17,119 |
|
| 2020 | | 13,254 |
|
| 2021 | | 8,104 |
|
| Thereafter | | 19,116 |
|
| Total | | $ | 101,276 |
|
|
| | | | | | | |
| | Operating Leases | | Finance Leases |
| | (in thousands) |
| 2020 | $ | 25,955 |
| | $ | 4,308 |
|
| 2021 | 25,028 |
| | 3,832 |
|
| 2022 | 20,614 |
| | 3,819 |
|
| 2023 | 16,853 |
| | 2,929 |
|
| 2024 | 16,007 |
| | 2,141 |
|
| Thereafter | 60,371 |
| | 23,650 |
|
| Total minimum future lease payments | 164,828 |
| | 40,679 |
|
| Less: Imputed interest | 28,219 |
| | 10,152 |
|
| Total lease liabilities | $ | 136,609 |
| | $ | 30,527 |
|
Total minimum future lease payments (predominantly operating leases) of approximately $57 million for leases that have not commenced as of December 28, 2019, as the Company does not yet control the underlying assets, are not included in the consolidated financial statements. These leases are expected to commence between fiscal years 2020 and 2024 with lease terms of approximately 4 to 15 years.
As of December 29, 2018, minimum future lease payments under non-cancellable leases for each of the following five years and a total thereafter were as follows:
|
| | | | | | | |
| | Operating Leases (1) | | Finance Leases (1) |
| | (in thousands) |
| 2019 | $ | 25,411 |
| | $ | 3,972 |
|
| 2020 | 22,400 |
| | 3,759 |
|
| 2021 | 21,544 |
| | 2,869 |
|
| 2022 | 18,535 |
| | 2,967 |
|
| 2023 | 15,398 |
| | 2,209 |
|
| Thereafter | 66,870 |
| | 24,304 |
|
| Total minimum future lease payments | $ | 170,158 |
| | $ | 40,080 |
|
(1) Lease commitments are presented under the guidance of ASC 840 and includes approximately $14 million of minimum future lease payments for leases that had not commenced as of December 29, 2018. These commitments relate to existing leases for which the Company does not yet control certain expansion space. |
17. COMMITMENTS AND CONTINGENCIES
Insurance
The Company maintains certain insurance policies that maintain large deductibles up to approximately $5.0$1.0 million, some with or without stop-loss limits, depending on market availability. Insurance policies at certain locations are based on a percentage of the insured assets, for which deductibles for certain property may exceed $5.0 million in the event of a catastrophic event.
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.
In July 2015, IDEXX Laboratories, Inc. and IDEXX Distribution, Inc. (collectively, IDEXX) filed a complaint in the United States District Court for the District of Delaware alleging the Company has infringed three recently issued patents related to a blood spot sample collection method used in determining the presence or absence of an infectious disease in a population of rodents. On September 21, 2015, the Company timely filed a motion to dismiss the complaint on the grounds that all of the claims are directed to unpatentable subject matter and therefore are invalid. On October 7, 2015, IDEXX filed an amended complaint, which substantially asserted the same patents and infringement allegations as asserted in the original complaint, and on October 26, 2015, the Company timely filed a motion to dismiss this amended complaint. The hearing on the motion to dismiss was held on January 12, 2016. On July 1, 2016, the Court issued an opinion denying the motion to dismiss. The Company filed its answer to the complaint on July 21, 2016. In addition, on July 29, 2016, the Company initiated an inter partes review (IPR) procedure with the United States Patent and Trademark Office challenging the validity of the IDEXX patents. On February 6, 2017, we entered into a settlement agreement with IDEXX, which involved the withdrawal by IDEXX of their complaint and withdrawal by us of the IPR.
In May 2013, the Company commenced an investigation into inaccurate billing with respect to certain government contracts. The Company promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services’ Office of the Inspector General, and the Department of Justice, and the Company is cooperating with these agencies to ensure the proper repayment and resolution of this matter. The Company previously identified approximately $1.5 million of excess amounts billed on these contracts since January 1, 2007, and recorded a liability for such amount. Based on its ongoing discussions with the government, the Company has recorded an additional charge of $0.3 million during the fiscal year 2016. The Company’s best estimate, which totals $1.8 million, may be subject to change based on the terms of any final settlement with the Department of Justice and the Department of Health and Human Services’ Office of the Inspector General.
Guarantees
The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically include agreements with directors and officers, business partners, contractors, landlords, and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. However, to date the Company has not incurred
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these obligations is minimal.
Purchase Obligations
The Company enters into unconditional purchase obligations, in the ordinary course of business, that include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty. The aggregate amount of the Company’s unconditional purchase obligations totaled $86.2$154.0 million as of December 31, 2016.28, 2019 and is expected to be paid as follows:
|
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Less than
1 Year | | 1 - 3 Years | | 3 - 5 Years | | Total |
| | (in millions) |
Unconditional purchase obligations | $ | 106.1 |
| | $ | 45.0 |
| | $ | 2.9 |
| | $ | 154.0 |
|
14. RESTRUCTURING AND ASSET IMPAIRMENTS
Workforce Reductions
The Company periodically implements workforce reductions to improve operating efficiency at various sites. The following table provides a rollforward of the Company’s severance and retention costs liability:
|
| | | | | | | | | | | |
| | December 31, 2016 | | December 26, 2015 | | December 27, 2014 |
| | | | | | |
| | (in thousands) |
| Balance, beginning of period | $ | 2,969 |
| | $ | 2,666 |
| | $ | 2,782 |
|
| Expense | 8,454 |
| | 6,173 |
| | 7,792 |
|
| Payments / utilization | (7,473 | ) | | (5,820 | ) | | (7,900 | ) |
| Foreign currency adjustments | (270 | ) | | (50 | ) | | (8 | ) |
| Balance, end of period | $ | 3,680 |
| | $ | 2,969 |
| | $ | 2,666 |
|
As of December 31, 2016 and December 26, 2015, $3.6 million and $2.6 million of severance and retention costs liability, respectively, was included in accrued compensation and $0.1 million and $0.3 million, respectively, was included in other long-term liabilities on the Company's consolidated balance sheets.
The following table presents severance and retention costs by classification on the consolidated statements of income:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Cost of services provided and products sold (excluding amortization of intangible assets) | $ | 4,717 |
| | $ | 735 |
| | $ | 3,342 |
|
| Selling, general and administrative | 3,737 |
| | 5,438 |
| | 4,450 |
|
| Total severance and retention costs | $ | 8,454 |
| | $ | 6,173 |
| | $ | 7,792 |
|
The following presents severance and retention costs by reportable segment:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| RMS | $ | 759 |
| | $ | 1,338 |
| | $ | 4,593 |
|
| DSA | 7,689 |
| | 1,068 |
| | 2,912 |
|
| Manufacturing | 6 |
| | 1,639 |
| | 166 |
|
| Unallocated corporate | — |
| | 2,128 |
| | 121 |
|
| Total severance and retention costs | $ | 8,454 |
| | $ | 6,173 |
| | $ | 7,792 |
|
Facilities
In fiscal year 2016, the Company commenced a consolidation of small DSA facilities in the U.S., Ireland, and the United Kingdom. As a result, an asset impairment charge of $9.4 million was recorded related to the consolidation plans.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In fiscal year 2015, the Company commenced a consolidation of certain RMS facilities in the U.S., Europe, and Japan. As a result, an asset impairment charge of $1.8 million was recorded related to the consolidation plans.
In fiscal year 2014, the Company committed to plans to consolidate certain research model operations in the U.S., Japan, and Europe. As a result, the Company recorded $2.2 million of asset impairments and other charges and $4.3 million of accelerated depreciation related to certain facilities impacted by the consolidation plans. Also, in fiscal year 2014, the Company recorded a gain of $1.0 million on the sale of a European facility.
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company revised its reportable segments during fiscal year 2016 to align with its view of the business following its acquisition of WIL Research. See Note 1, “Description of Business and Summary of Significant Accounting Policies.” The Company reported segment results on this basis retrospectively for all comparable prior periods. Asset information on a reportable segment basis is not disclosed as this information is not separately identified and internally reported to the Company’s Chief Operating Decision Maker.
The following table presents revenue and other financial information by reportable segment:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| RMS | | | | | |
| Revenue | $ | 494,037 |
| | $ | 470,411 |
| | $ | 503,656 |
|
| Operating income | 136,365 |
| | 120,973 |
| | 120,736 |
|
| Depreciation and amortization | 20,853 |
| | 22,526 |
| | 27,309 |
|
| Capital expenditures | 11,642 |
| | 17,398 |
| | 18,669 |
|
| DSA | | | |
| | |
|
| Revenue | $ | 836,593 |
| | $ | 612,173 |
| | $ | 538,218 |
|
| Operating income | 138,157 |
| | 121,981 |
| | 69,749 |
|
| Depreciation and amortization | 71,816 |
| | 46,812 |
| | 47,138 |
|
| Capital expenditures | 27,493 |
| | 30,333 |
| | 19,759 |
|
| Manufacturing | | | | | |
| Revenue | $ | 350,802 |
| | $ | 280,718 |
| | $ | 255,788 |
|
| Operating income | 104,543 |
| | 74,675 |
| | 79,260 |
|
| Depreciation and amortization | 25,566 |
| | 18,129 |
| | 14,295 |
|
| Capital expenditures | 12,247 |
| | 9,814 |
| | 15,621 |
|
For fiscal years ended 2016, 2015 and 2014, reconciliations of segment operating income and capital expenditures to the respective consolidated amounts are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Operating Income | | Capital Expenditures |
| | Fiscal Year | | Fiscal Year |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | | | |
| | (in thousands) |
| Total reportable segments | $ | 379,065 |
| | $ | 317,629 |
| | $ | 269,745 |
| | $ | 51,382 |
| | $ | 57,545 |
| | $ | 54,049 |
|
| Unallocated corporate | (141,646 | ) | | (111,180 | ) | | (92,075 | ) | | 3,906 |
| | 5,707 |
| | 2,876 |
|
| Total consolidated | $ | 237,419 |
| | $ | 206,449 |
| | $ | 177,670 |
| | $ | 55,288 |
| | $ | 63,252 |
| | $ | 56,925 |
|
Revenue for each significant product or service offering is as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| RMS | $ | 494,037 |
| | $ | 470,411 |
| | $ | 503,656 |
|
| DSA | 836,593 |
| | 612,173 |
| | 538,218 |
|
| Manufacturing | 350,802 |
| | 280,718 |
| | 255,788 |
|
| Total revenue | $ | 1,681,432 |
| | $ | 1,363,302 |
| | $ | 1,297,662 |
|
A summary of unallocated corporate overhead consists of the following:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| | (in thousands) |
| Stock-based compensation expense | $ | 27,272 |
| | $ | 25,751 |
| | $ | 18,474 |
|
| Salary, bonus, and fringe | 39,189 |
| | 33,026 |
| | 30,838 |
|
| Consulting, audit, and professional services | 23,421 |
| | 15,418 |
| | 13,431 |
|
| IT related expenses | 13,233 |
| | 8,400 |
| | 6,528 |
|
| Depreciation expense | 8,423 |
| | 7,414 |
| | 7,703 |
|
| Acquisition related adjustments | 15,608 |
| | 11,644 |
| | 6,285 |
|
| Other general unallocated corporate expenses | 14,500 |
| | 9,527 |
| | 8,816 |
|
| Total unallocated corporate overhead costs | $ | 141,646 |
| | $ | 111,180 |
| | $ | 92,075 |
|
Other general unallocated corporate expenses consist of various departmental costs including those associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations.
Revenue and long-lived assets by geographic area are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Canada | | Japan | | Other Non-U.S. | | Consolidated |
| | | | | | | | | | | | |
| | (in thousands) |
| 2016 | | | | | | | | | | | |
| Revenue | $ | 850,422 |
| | $ | 520,937 |
| | $ | 194,210 |
| | $ | 46,829 |
| | $ | 69,034 |
| | $ | 1,681,432 |
|
| Long-lived assets | 462,330 |
| | 177,423 |
| | 78,866 |
| | 20,941 |
| | 16,267 |
| | 755,827 |
|
| 2015 | | | | | | | | | | | |
| Revenue | $ | 659,466 |
| | $ | 435,491 |
| | $ | 172,349 |
| | $ | 40,520 |
| | $ | 55,476 |
| | $ | 1,363,302 |
|
| Long-lived assets | 402,238 |
| | 159,445 |
| | 77,535 |
| | 22,348 |
| | 16,393 |
| | 677,959 |
|
| 2014 | | | | | | | | | | |
|
|
| Revenue | $ | 588,531 |
| | $ | 446,263 |
| | $ | 163,490 |
| | $ | 49,921 |
| | $ | 49,457 |
| | $ | 1,297,662 |
|
| Long-lived assets | 386,624 |
| | 153,203 |
| | 95,272 |
| | 23,896 |
| | 17,802 |
| | 676,797 |
|
Included in the other non-U.S. category above are operations located in China, Korea, Australia, Singapore, and India. Revenues represent sales originating in entities physically located in the identified geographic area. Long-lived assets include property, plant, and equipment and other long-lived assets.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16.18. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table contains quarterly financial information for fiscal years 20162019 and 2015.2018. The operating results for any quarter are not necessarily indicative of future period results.
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | (in thousands, except per share amounts) |
| Fiscal Year 2019 | |
| Total revenue | $ | 604,569 |
| | $ | 657,568 |
| | $ | 667,951 |
| | $ | 691,138 |
|
Gross profit (1) | 211,777 |
| | 238,104 |
| | 246,116 |
| | 262,314 |
|
| Operating income | 69,792 |
| | 79,768 |
| | 92,802 |
| | 108,789 |
|
| Net income attributable to common shareholders | 55,133 |
| | 43,728 |
| | 72,810 |
| | 80,348 |
|
| Earnings per common share | | | | | | | |
| Basic: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 1.14 |
| | $ | 0.90 |
| | $ | 1.49 |
| | $ | 1.64 |
|
| Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net income attributable to common shareholders | $ | 1.14 |
| | $ | 0.90 |
| | $ | 1.49 |
| | $ | 1.64 |
|
| Diluted: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 1.11 |
| | $ | 0.88 |
| | $ | 1.46 |
| | $ | 1.61 |
|
| Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net income attributable to common shareholders | $ | 1.11 |
| | $ | 0.88 |
| | $ | 1.46 |
| | $ | 1.61 |
|
| Fiscal Year 2018 | | | | | | | |
| Total revenue | $ | 493,970 |
| | $ | 585,301 |
| | $ | 585,295 |
| | $ | 601,530 |
|
Gross profit (1) | 181,469 |
| | 215,981 |
| | 216,200 |
| | 226,417 |
|
| Operating income | 67,829 |
| | 76,710 |
| | 84,362 |
| | 102,482 |
|
| Net income attributable to common shareholders | 52,631 |
| | 53,709 |
| | 60,368 |
| | 59,665 |
|
| Earnings per common share | | | | | | | |
| Basic: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 1.10 |
| | $ | 1.08 |
| | $ | 1.25 |
| | $ | 1.24 |
|
| Discontinued operations | $ | — |
| | $ | 0.03 |
| | $ | — |
| | $ | — |
|
| Net income attributable to common shareholders | $ | 1.10 |
| | $ | 1.11 |
| | $ | 1.25 |
| | $ | 1.24 |
|
| Diluted: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 1.08 |
| | $ | 1.06 |
| | $ | 1.22 |
| | $ | 1.21 |
|
| Discontinued operations | $ | — |
| | $ | 0.03 |
| | $ | — |
| | $ | — |
|
| Net income attributable to common shareholders | $ | 1.08 |
| | $ | 1.10 |
| | $ | 1.22 |
| | $ | 1.21 |
|
(1) Gross profit is calculated as total revenue minus cost of revenue (excluding amortization of intangible assets). |
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | | |
| Fiscal Year 2016 | (in thousands, except per share amounts) |
| Total revenue | $ | 354,868 |
| | $ | 434,055 |
| | $ | 425,720 |
| | $ | 466,789 |
|
Gross profit(1) | 140,768 |
| | 169,747 |
| | 156,270 |
| | 179,881 |
|
| Operating income | 51,472 |
| | 58,061 |
| | 58,795 |
| | 69,091 |
|
| Net income attributable to common shareholders | 37,143 |
| | 35,207 |
| | 37,735 |
| | 44,680 |
|
| Earnings (loss) per common share | | | | | | | |
| Basic: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.80 |
| | $ | 0.75 |
| | $ | 0.79 |
| | $ | 0.95 |
|
| Discontinued operations | $ | — |
| | $ | — |
| | $ | 0.01 |
| | $ | — |
|
| Net income attributable to common shareholders | $ | 0.80 |
| | $ | 0.75 |
| | $ | 0.80 |
| | $ | 0.95 |
|
| Diluted: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.78 |
| | $ | 0.73 |
| | $ | 0.78 |
| | $ | 0.93 |
|
| Discontinued operations | $ | — |
| | $ | — |
| | $ | 0.01 |
| | $ | — |
|
| Net income attributable to common shareholders | $ | 0.78 |
| | $ | 0.73 |
| | $ | 0.79 |
| | $ | 0.93 |
|
| Fiscal Year 2015 | | | | | | | |
| Total revenue | $ | 320,414 |
| | $ | 339,573 |
| | $ | 349,465 |
| | $ | 353,850 |
|
Gross profit(1) | 119,660 |
| | 132,783 |
| | 138,075 |
| | 140,574 |
|
| Operating income | 43,005 |
| | 55,735 |
| | 55,440 |
| | 52,269 |
|
| Net income attributable to common shareholders | 31,541 |
| | 48,509 |
| | 37,379 |
| | 31,884 |
|
| Earnings (loss) per common share | | | | | | | |
| Basic: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.67 |
| | $ | 1.04 |
| | $ | 0.81 |
| | $ | 0.71 |
|
| Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.02 | ) |
| Net income attributable to common shareholders | $ | 0.67 |
| | $ | 1.04 |
| | $ | 0.81 |
| | $ | 0.69 |
|
| Diluted: | | | | | | | |
| Continuing operations attributable to common shareholders | $ | 0.66 |
| | $ | 1.02 |
| | $ | 0.79 |
| | $ | 0.69 |
|
| Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.02 | ) |
| Net income attributable to common shareholders | $ | 0.66 |
| | $ | 1.02 |
| | $ | 0.79 |
| | $ | 0.67 |
|
(1) Gross profit is calculated as total revenues minus cost of revenue (excluding amortization of intangible assets). |
Full-year amounts may not sum due to rounding.
17. SUBSEQUENT EVENTS
On February 10, 2017, the Company completed the divestiture of its CDMO business to Quotient Clinical Ltd., based in London, England, for $75.0 million in cash, subject to certain post-closing adjustments.
The CDMO business, which represented approximately 1% of the Company’s 2016 consolidated revenue, was acquired in April 2016 as part of the acquisition of WIL Research. See Note 1, “Description of Business and Summary of Significant Accounting Policies” and Note 2, “Business Acquisitions.” Following a strategic review, the Company determined that the CDMO business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.
The Company is in the process of evaluating the transaction and its impact on the financial statements, including evaluating the resulting gain (loss) that will be recognized. As of December 31, 2016, the carrying amounts of the major classes of assets and liabilities associated with the CDMO business were as follows:
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | |
| | December 31, 2016 |
| | (in thousands) |
| Assets | |
| Current assets | $ | 4,270 |
|
| Property, plant and equipment, net | 11,313 |
|
| Goodwill | 35,857 |
|
| Long-term assets | 17,332 |
|
| Total assets | $ | 68,772 |
|
| Liabilities | |
| Current liabilities | $ | 5,840 |
|
| Long-term liabilities | 7,856 |
|
| Total liabilities | $ | 13,696 |
|
As of December 31, 2016, the assets and liabilities of the CDMO business were not classified as held-for-sale as management had not committed to a formal plan to sell the business and the sale was not deemed probable.
Item 9. Changes in and DisagreementDisagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation, required by paragraph (b) of Rules 13a-15 or 15d-15, promulgated by the Securities Exchange Act of 1934, as amended (Exchange Act), the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, are effective, at a reasonable assurance level, as of December 31, 2016,28, 2019, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizedrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2016.28, 2019.
We have excluded the business acquisitions completed during fiscal year 2016, including WRH, Inc., Blue Stream Laboratories, Inc.,2019, includingCitoxlab and Agilux Laboratories, Inc., the acquisition of a DSA supplier,from the assessment of the effectiveness of internal control over financial reporting as of December 31, 2016. The acquired businesses are wholly-owned subsidiaries whose total28, 2019. Total assets and total revenues revenue ofthe acquired businessescollectively represent 7.8%represent 5.0% and 11.1%4.7%, respectively, of the related consolidated financial statement amounts as of and for fiscal year endedDecember 31, 2016.28, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2016,28, 2019, has been audited by PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report which is includedappears in Item 8, “Financial Statements and Other Supplementary Data” in this Annual Report on Form 10-K.
(b) Changes in Internal Controls
During the fourth quarter of 2016,fiscal year 2019, the Company continued to execute a plan to centralize certain accounting transaction processing functions to internal shared service centers. This planned effort is expected to continue in subsequent quarters. There were no other material changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15 that occurred during the fourth quarter of 20162019 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
A. Directors and Compliance with Section 16(a) of the Exchange Act
TheAny information required by this Item regarding our directors and compliance with Section 16(a) of the Exchange Act by our officers and directors will be included in the 20172020 Proxy Statement under the sections captioned “Nominees for Directors” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” and is incorporated herein by reference thereto. The information required by this Item regarding our corporate governance will be included in the 20172020 Proxy Statement under the section captioned “Corporate Governance” and is incorporated herein by reference thereto.
B. Our Executive Officers
The information required by this Item regarding our executive officers is reported in Part I of this Form 10-K under the heading “Item 1. Business”
C. Audit Committee Financial Expert
The information required by this Item regarding the audit committee of the Board of Directors and financial experts will be included in the 20172020 Proxy Statement under the section captioned “The Board of Directors and its Committees-Audit Committee and Financial Experts” and is incorporated herein by reference thereto.
D. Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees and directors, including our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. Our Code of Business Conduct and Ethics is posted on our website and can be accessed by selecting the “Corporate Governance” link at http://ir.criver.com. We will provide to any person, without charge, a copy of our Code of Business Conduct and Ethics. To obtain a copy, please mail a request to the Secretary, Charles River Laboratories International, Inc., 251 Ballardvale Street, Wilmington, MA 01887. Information on our website is not incorporated by reference in this annual report.
E. Changes to Board Nomination Procedures
Since December 2008, there have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
Item 11. Executive Compensation
The information required by this Item will be included in the 20172020 Proxy Statement under the sections captioned “2016“2019 Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation and Related Information,” “Compensation Committee Interlocks and Insider Participation” and “Report of Compensation Committee,” and is incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be included in the 20172020 Proxy Statement under the sections captioned “Beneficial Ownership of Securities” and “Equity Compensation Plan Information” and is incorporated herein by reference thereto.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the 20172020 Proxy Statement under the sections captioned “Related Person Transaction Policy” and “Corporate Governance-Director Qualification Standards; Director Independence” and is incorporated herein by reference thereto.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be included in the 20172020 Proxy Statement under the section captioned “Statement of Fees Paid to Independent Registered Public Accounting Firm” and is incorporated herein by reference thereto.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 15(a)(1) and (2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Financial Statements Schedules" at Item 8 to this Annual Report on Form 10-K. Other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto.
Item 15(a)(3) and Item 15(b) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits. We have identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(c) of Form 10-K.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | CHARLES RIVER LABORATORIES INTERNATIONAL, INC. |
| February 11, 2020 | By: | /s/ DAVID R. SMITH |
| | | David R. Smith |
Date: | February 14, 2017 | Corporate Executive Vice President and Chief Financial Officer and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated below and on the dates indicated.
|
| | | |
| Signatures | Title | Date |
| By: | /s/ JAMES C. FOSTER | Chairman, President and Chief Executive Officer and Chairman | February 14, 201711, 2020 |
| | James C. Foster | | |
| | | | |
| By: | /s/ DAVID R. SMITH | Corporate Executive Vice President Chiefand | February 14, 201711, 2020 |
| | David R. Smith | Chief Financial Officer | |
| | | |
| By: | /s/ MICHAEL G. KNELL | Corporate Senior Vice President and | February 11, 2020 |
| Michael G. Knell | Chief Accounting Officer | |
| | | | |
| By: | /s/ ROBERT J. BERTOLINI | Director | February 14, 201711, 2020 |
| | Robert J. Bertolini | | |
| | | | |
| By: | /s/ STEPHEN D. CHUBB | Director | February 14, 201711, 2020 |
| | Stephen D. Chubb | | |
| | | | |
| By: | /s/ GEORGE E. MASSARODEBORAH T. KOCHEVAR | Director | February 14, 201711, 2020 |
| | George E. MassaroDeborah T. Kochevar | | |
| | | | |
| By: | /s/ DEBORAH KOCHEVARMARTIN MACKAY | Director | February 14, 201711, 2020 |
| | Deborah KochevarMartin Mackay | | |
| | | |
| By: | /s/ JEAN-PAUL MANGEOLLE | Director | February 11, 2020 |
| Jean-Paul Mangeolle | | |
| | | |
| By: | /s/ GEORGE E. MASSARO | Director | February 11, 2020 |
| George E. Massaro | | |
| | | | |
| By: | /s/ GEORGE M. MILNE, JR. | Director | February 14, 201711, 2020 |
| | George M. Milne, Jr. | | |
| | | | |
| By: | /s/ C. RICHARD REESE | Director | February 14, 201711, 2020 |
| | C. Richard Reese | | |
| | | | |
| By: | /s/ CRAIG B. THOMPSONRICHARD F. WALLMAN | Director | February 14, 201711, 2020 |
| | Craig B. ThompsonRichard F. Wallman | | |
| | | | |
| By: | /s/ RICHARD F. WALLMANVIRGINIA M. WILSON | Director | February 14, 201711, 2020 |
| | Richard F. WallmanVirginia M. Wilson | | |
EXHIBIT INDEX
| | | Exhibit No. | Description | Filed with this Form 10-K | Incorporation by Reference | Description | Filed with this Form 10-K | Incorporation by Reference |
| Form | Filing Date | Exhibit No. | Form | Filing Date | Exhibit No. |
| 3.1 | Second Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. dated June 5, 2000 | | S-1/A | June 23, 2000 | 3.1 | | | S-1/A | June 23, 2000 | 3.1 |
| 3.2 | Fifth Amended and Restated By-Laws of Charles River Laboratories International, Inc. | | 8-K | May 16, 2016 | 3.2 | | | 8-K | May 16, 2016 | 3.2 |
| 4.1 | Form of Common Stock certificate, $0.01 par value, of Charles River Laboratories International, Inc. | | S-1 | June 23, 2000 | 4.1 | | | S-1/A | June 23, 2000 | 4.1 |
| 4.2 | Charles River Laboratories International, Inc. Form of Performance Share Unit granted under the 2007 Incentive Plan | | 10-K | February 27, 2013 | 4.4 | | X | |
| 4.3 | Charles River Laboratories International, Inc. Form of Performance Share Unit granted under the 2016 Incentive Plan | X | | |
| 4.3* | | | | 10-K | February 27, 2013 | 4.4 |
| 4.4* | | | | 10-K | February 14, 2017 | 4.3 |
| 4.5 | | | | 10-Q | Jul 31, 2019
| 4.1 |
| 4.6 | | | | 8-K | April 3, 2018 | 4.1 |
| 4.7 | | | | 8-K | April 3, 2018 | 4.2 |
| 4.8 | | | | 8-K | April 3, 2018 | 4.3 |
| 4.9 | | | | 8-K | October 23, 2019 | 4.1 |
| 4.10 | | | | 8-K | October 23, 2019 | 4.2 |
| 10.1* | Charles River Laboratories International, Inc. 2007 Incentive Plan, as amended | | 10-K | February 17, 2015 | 10.13 | | | 10-K | February 17, 2015 | 10.13 |
| 10.2* | Charles River Laboratories International, Inc. 2016 Incentive Plan | | 10-Q | August 3, 2016 | 10.1 | | | 10-Q | August 3, 2016 | 10.1 |
| 10.3* | Charles River Laboratories International, Inc. Form of Stock Option granted under the 2007 Incentive Plan, as amended | | 10-K | February 20, 2008 | 10.17 | | | 10-Q | May 10, 2018 | 10.2 |
| 10.4* | Charles River Laboratories International, Inc. Form of Stock Option granted under the 2016 Incentive Plan | X | | | | 10-K | February 20, 2008 | 10.17 |
| 10.5* | Charles River Laboratories International, Inc. Form of Restricted Stock Award granted under the 2007 Incentive Plan, as amended | | 10-K | February 20, 2008 | 10.18 | | | 10-K | February 14, 2017 | 10.4 |
| 10.6* | Charles River Laboratories International, Inc. Form of Restricted Stock Unit granted under the 2007 Incentive Plan | X | | | | 10-K | February 20, 2008 | 10.18 |
| 10.7* | Charles River Laboratories International, Inc. Form of Restricted Stock Unit granted under the 2016 Incentive Plan | X | | | | 10-K | February 14, 2017 | 10.6 |
| 10.8* | Charles River Corporate Officer Separation Plan dated April 30, 2010 | | 10-Q | August 3, 2010 | 10.1 | | | 10-K | February 14, 2017 | 10.7 |
| 10.9* | Form of Change in Control Agreement | | 10-K | February 23, 2009 | 10.7 | | | 10-Q | Jul 31, 2019
| 10.1 |
| 10.10* | Executive Incentive Compensation Plan dated January 1, 2016 | | 10-K | February 12, 2016 | 10.4 | | | 10-Q | Jul 31, 2019
| 10.2 |
| 10.11* | Charles River Laboratories International, Inc. Non-Employee Directors Deferral Plan dated April 5, 2016 | | 10-Q | May 4, 2016 | 10.1 | | | 10-Q | August 3, 2010 | 10.1 |
| 10.12* | Charles River Laboratories, Inc. Executive Life Insurance/Supplemental Retirement Income Plan | | 10-K | March 9, 2005 | 10.23 | | | 10-K | February 23, 2009 | 10.7 |
| 10.13* | Charles River Laboratories amended and restated Deferred Compensation Plan, as amended | | 10-K | February 27, 2012 | 10.11 | | | 10-K | February 12, 2016 | 10.4 |
| 10.14* | Amended and Restated Deferred Compensation Plan Document dated July 17, 2012 | | 10-Q | August 7, 2012 | 10.1 | | | 10-Q | May 4, 2016 | 10.1 |
| 10.15* | Letter Agreements with Davide Molho dated May 22, 2009 | | 10-K | February 23, 2011 | 10.17 | | | 10-K | March 9, 2005 | 10.23 |
| 10.16* | Agreement between Thomas Ackerman and Charles River Laboratories, Inc. dated February 25, 2015 | | 8-K | February 27, 2015 | 99.10 | | | 10-K | February 27, 2012 | 10.11 |
| 10.17* | Agreement between David Smith and Charles River Laboratories, Inc. dated March 3, 2015 | | 10-K | February 12, 2016 | 10.16 | |
| 10.18 | Charles River Laboratories International, Inc. Seventh Amended and Restated Credit Agreement dated March 30, 2016 | | 8-K | April 5, 2016 | 10.1 | |
| 21.1 | Subsidiaries of Charles River Laboratories International, Inc. | X | | |
| 23.1 | Consent of PricewaterhouseCoopers LLP | X | | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | X | | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | X | | |
| 32.1 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer | X | | |
| 101.INS | eXtensible Business Reporting Language (XBRL) Instance Document | X | | |
| 101.SCH | XBRL Taxonomy Extension Schema | X | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | | |
|
| | | | | |
Exhibit No. | Description | Filed with this Form 10-K | Incorporation by Reference |
Form | Filing Date | Exhibit No. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | | | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase | X | | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | | | |
* Management contract or compensatory plan, contract or arrangement.
|
|
| | | | | |
| Exhibit No. | Description | Filed with this Form 10-K | Incorporation by Reference |
| Form | Filing Date | Exhibit No. |
| 10.17* | | | 10-Q | August 7, 2012 | 10.1 |
| 10.18* | | | 8-K | February 13, 2018 | 99.2 |
| 10.19* | | | 10-K | February 12, 2016 | 10.16 |
| 10.20 | | | 8-K | March 26, 2018 | 10.1 |
| 10.21 | | | 10-Q | November 6, 2019 | 10.2 |
| 10.22 | | | 10-Q | November 6, 2019 | 10.3 |
| 10.23* | | | 10-Q | November 6, 2019 | 10.1 |
| 10.24 | | | 8-K | May 1, 2019 | 2.1 |
| 21.1 | | X | | | |
| 23.1 | | X | | | |
| 31.1 | | X | | | |
| 31.2 | | X | | | |
| 32.1 | | X | | | |
| 101.INS | eXtensible Business Reporting Language (XBRL) Instance Document | X | | | |
| 101.SCH | XBRL Taxonomy Extension Schema | X | | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | | | |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase | X | | | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | | | |
| * Management contract or compensatory plan, contract or arrangement. |
| | | | | | |
