SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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

FOR THE QUARTERLY PERIOD ENDED ~~September~~March 28, ~~2019~~2020

Commission File No. 001-15943

(State or Other Jurisdiction of

Incorporation or Organization)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Ticker symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

CRL

New York Stock Exchange

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

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. ☐

As of ~~October 25, 2019,~~April 24, 2020, there were ~~48,838,925~~49,487,437 shares of the Registrant’s common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~MARCH 28, ~~2019~~2020

TABLE OF CONTENTS


Item		Page
PART I - FINANCIAL INFORMATION
1	Financial Statements
	Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 28, 2020 and March 30, 2019	3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 28, 2020 and March 30, 2019	4
	Condensed Consolidated Balance Sheets (Unaudited) as of March 28, 2020 and December 28, 2019	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 28, 2020 and March 30, 2019	6
	Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three months ended March 28, 2020 and March 30, 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
3	Quantitative and Qualitative Disclosure About Market Risk	40
4	Controls and Procedures	41
PART II - OTHER INFORMATION
1	Legal Proceedings	42
1A	Risk Factors	42
2	Unregistered Sales of Equity Securities and Use of Proceeds	55
6	Exhibits	56

Signatures			57

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

Signatures
54

Special Note on Factors Affecting Future Results

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

For example, we may use forward-looking statements when addressing topics such as: the COVID-19 pandemic, its duration, its impact on our business, results of operations, financial condition, liquidity, use of our borrowings, business practices, operations, suppliers, third party service providers, customers, employees, industry, ability to meet future performance obligations, ability to efficiently implement advisable safety precautions, and internal controls over financial reporting; the COVID-19 pandemic’s impact on demand, the global economy and financial markets; goodwill and asset impairments still under review; changes and uncertainties in the global economy; future demand for drug discovery and development products and services, including the outsourcing of these services; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; the impact of unauthorized access into our information systems, including the timing and effectiveness of any enhanced security and monitoring; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy, business practices and methods of generating revenue; ~~the investment in, and~~ the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical and biotechnology companies, venture capital investments, and opportunities for future similar arrangements; our cost structure; the impact of acquisitions, including ~~Citoxlab;~~HemaCare; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure), including gains and losses attributable to businesses we plan to close, consolidate, divest or repurpose; changes in our expectations regarding future stock option, restricted stock, performance share units, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our liquidity. In addition, these statements include the impact of economic and market conditions on us and our clients; the effects of our cost saving actions and the steps to optimize returns to shareholders on an effective and timely basis; and our ability to withstand the current market conditions.

~~You should not rely on forward-looking~~Forward-looking statements ~~because they~~ are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document, or in the case of statements incorporated by reference, on the date of the document incorporated by reference.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December ~~29, 2018,~~28, 2019, under the sections entitled “Our Strategy,~~” “Risk Factors,~~” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in this Quarterly Report on Form 10-Q, under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” in our press releases, and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or risks. New information, future events, or risks may cause the forward-looking events we discuss in this report not to occur.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended
	March 28, 2020		March 30, 2019
Service revenue	$	546,592	$	450,942
Product revenue	160,467		153,627
Total revenue	707,059		604,569
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)	372,824		316,800
Cost of products sold (excluding amortization of intangible assets)	82,174		75,992
Selling, general and administrative	129,901		122,574
Amortization of intangible assets	27,879		19,411
Operating income	94,281		69,792
Other income (expense):
Interest income	316		179
Interest expense	(15,067)		(9,987)
Other (expense) income, net	(24,071)		6,306
Income from operations, before income taxes	55,459		66,290
Provision for income taxes	4,622		10,602
Net income	50,837		55,688
Less: Net income attributable to noncontrolling interests	68		555
Net income attributable to common shareholders	$	50,769	$	55,133

Earnings per common share
Net income attributable to common shareholders:
Basic	$	1.03	$	1.14
Diluted	$	1.02	$	1.11

Weighted-average number of common shares outstanding:
Basic	49,189		48,458
Diluted	49,966		49,462

See Notes to Unaudited Condensed Consolidated Financial Statements.

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

$ 60,368
$ 171,671
$ 166,708

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

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

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three Months Ended
	March 28, 2020		March 30, 2019
Net income	$	50,837	$	55,688
Other comprehensive income (loss):
Foreign currency translation adjustment and other	(44,855)		9,885
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans	1,374		374
Comprehensive income, before income taxes	7,356		65,947
Less: Income tax benefit related to items of other comprehensive income	(2,039)		(102)
Comprehensive income, net of income taxes	9,395		66,049
Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes	(476)		1,013
Comprehensive income attributable to common shareholders, net of income taxes	$	9,871	$	65,036






























See Notes to Unaudited Condensed Consolidated Financial Statements.

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

$ 54,529

$ 165,904

$ 155,321

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)


	March 28, 2020		December 28, 2019
Assets
Current assets:
Cash and cash equivalents	$	372,433	$	238,014
Trade receivables, net	542,390		514,033
Inventories	162,938		160,660
Prepaid assets	68,826		52,588
Other current assets	61,694		56,030
Total current assets	1,208,281		1,021,325
Property, plant and equipment, net	1,033,409		1,044,128
Operating lease right-of-use assets, net	155,568		140,085
Goodwill	1,731,837		1,540,565
Client relationships, net	752,516		613,573
Other intangible assets, net	80,347		75,840
Deferred tax assets	42,753		44,659
Other assets	197,079		212,615
Total assets	$	5,201,790	$	4,692,790
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases	$	47,667	$	38,545
Accounts payable	102,697		111,498
Accrued compensation	113,620		158,617
Deferred revenue	178,829		171,805
Accrued liabilities	139,163		139,118
Other current liabilities	108,920		90,598
Total current liabilities	690,896		710,181
Long-term debt, net and finance leases	2,326,770		1,849,666
Operating lease right-of-use liabilities	133,440		116,252
Deferred tax liabilities	197,094		167,283
Other long-term liabilities	173,924		182,933
Total liabilities	3,522,124		3,026,315
Commitments and contingencies (Notes 2, 9, 11, 12, 16 and 17)
Redeemable noncontrolling interests	24,039		28,647
Equity:
Preferred stock, $0.01 par value; 20,000 shares authorized; 0 shares issued and outstanding	—		—
Common stock, $0.01 par value; 120,000 shares authorized; 49,630 shares issued and 49,486 shares outstanding as of March 28, 2020, and 48,936 shares issued and 48,936 shares outstanding as of December 28, 2019	496		489
Additional paid-in capital	1,562,982		1,531,785
Retained earnings	331,098		280,329
Treasury stock, at cost, 144 and 0 shares, as of March 28, 2020 and December 28, 2019, respectively	(23,675)		—
Accumulated other comprehensive loss	(218,917)		(178,019)
Total equity attributable to common shareholders	1,651,984		1,634,584
Noncontrolling interest	3,643		3,244
Total equity	1,655,627		1,637,828
Total liabilities, redeemable noncontrolling interests and equity	$	5,201,790	$	4,692,790
See Notes to Unaudited Condensed Consolidated Financial Statements.

September 28, 2019 December 29, 2018
Assets
Current assets:
Cash and cash equivalents $ 164,759

$ 195,442
Trade receivables, net 524,074

472,248
Inventories 155,526

127,892
Prepaid assets 51,274
53,447
Other current assets 76,774

48,807
Total current assets 972,407

897,836
Property, plant and equipment, net 1,008,047

932,877
Operating lease right-of-use assets, net 140,359
—
Goodwill 1,521,619

1,247,133
Client relationships, net 620,868
537,945
Other intangible assets, net 81,257

72,943
Deferred tax assets 44,831

23,386
Other assets 193,174

143,759
Total assets $ 4,582,562

$ 3,855,879
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases $ 33,611
$ 31,416
Accounts payable 107,231
66,250
Accrued compensation 130,292
137,212
Deferred revenue 166,095
145,139
Accrued liabilities 130,015
106,925
Other current liabilities 114,402
71,280
Total current liabilities 681,646
558,222
Long-term debt, net and finance leases 1,882,593
1,636,598
Operating lease right-of-use liabilities 116,868
—
Deferred tax liabilities 165,480
143,635
Other long-term liabilities 171,243
179,121
Total liabilities 3,017,830
2,517,576
Commitments and contingencies (Note 17)

Redeemable noncontrolling interests 28,345
18,525
Equity:
Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding —
—
Common stock, $0.01 par value; 120,000 shares authorized; 48,976 shares issued and 48,837 shares outstanding as of September 28, 2019, and 48,210 shares issued and 48,209 shares outstanding as of December 29, 2018 490
482
Additional paid-in capital 1,514,620
1,447,512
Retained earnings 213,767
42,096
Treasury stock, at cost, 139 and 1 shares, as of September 28, 2019 and December 29, 2018, respectively (18,094 ) (55 )
Accumulated other comprehensive loss (178,470 ) (172,703 )
Total equity attributable to common shareholders 1,532,313
1,317,332
Noncontrolling interest 4,074
2,446
Total equity 1,536,387
1,319,778
Total liabilities, redeemable noncontrolling interests, and equity $ 4,582,562
$ 3,855,879
See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Three Months Ended
	March 28, 2020		March 30, 2019
Cash flows relating to operating activities
Net income	$	50,837	$	55,688
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	57,260		45,358
Stock-based compensation	10,960		12,899
Deferred income taxes	(2,973)		7,781
Loss (gain) on venture capital and other investments	12,035		(10,575)
Other, net	10,495		(380)
Changes in assets and liabilities:
Trade receivables, net	(32,136)		(23,127)
Inventories	4,076		(2,520)
Accounts payable	(10,003)		10,245
Accrued compensation	(45,245)		(55,114)
Deferred revenue	6,065		(14,405)
Customer contract deposits	4,454		(5,866)
Other assets and liabilities, net	2,765		(5,125)
Net cash provided by operating activities	68,590		14,859
Cash flows relating to investing activities
Acquisition of businesses and assets, net of cash acquired	(382,250)		(989)
Capital expenditures	(25,721)		(16,731)
Purchases of investments and contributions to venture capital investments	(7,121)		(2,419)
Proceeds from sale of investments	2,504		15
Other, net	(1,097)		(689)
Net cash used in investing activities	(413,685)		(20,813)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit facility	1,409,793		290,111
Proceeds from exercises of stock options	22,608		21,832
Payments on long-term debt, revolving credit facility, and finance lease obligations	(925,109)		(360,658)
Purchase of treasury stock	(23,675)		(17,760)
Other, net	(4,405)		(2,608)
Net cash provided by (used in) financing activities	479,212		(69,083)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	290		6,025
Net change in cash, cash equivalents, and restricted cash	134,407		(69,012)
Cash, cash equivalents, and restricted cash, beginning of period	240,046		197,318
Cash, cash equivalents, and restricted cash, end of period	$	374,453	$	128,306

Supplemental cash flow information:
Cash and cash equivalents	$	372,433	$	126,316
Restricted cash included in Other current assets	444		491
Restricted cash included in Other assets	1,576		1,499
Cash, cash equivalents, and restricted cash, end of period	$	374,453	$	128,306

See Notes to Unaudited Condensed Consolidated Financial Statements.

Nine Months Ended
September 28, 2019 September 29, 2018
Cash flows relating to operating activities
Net income $ 173,549
$ 168,526
Less: Income from discontinued operations, net of income taxes —
1,506
Income from continuing operations, net of income taxes 173,549
167,020
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization 146,262
120,198
Stock-based compensation 43,429
35,908
Deferred income taxes (25,092 ) (10,385 )
Gain on venture capital investments (5,724 ) (22,760 )
Other, net 4,865
10,036
Changes in assets and liabilities:
Trade receivables, net (24,491 ) (30,318 )
Inventories (12,981 ) (10,340 )
Accounts payable 24,481
(5,322 )
Accrued compensation (23,320 ) 6,088
Deferred revenue (1,556 ) 33,491
Customer contract deposits (7,586 ) 34,455
Other assets and liabilities, net 8,423
(26,904 )
Net cash provided by operating activities 300,259
301,167
Cash flows relating to investing activities
Acquisition of businesses and assets, net of cash acquired (515,647 ) (822,611 )
Capital expenditures (76,675 ) (71,378 )
Purchases of investments and contributions to venture capital investments (17,664 ) (20,535 )
Proceeds from sale of investments 15
30,595
Other, net (660 ) (118 )
Net cash used in investing activities (610,631 ) (884,047 )
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit facility 2,071,175
2,392,201
Proceeds from exercises of stock options 26,982
30,228
Payments on long-term debt, revolving credit facility, and finance lease obligations (1,798,620 ) (1,832,805 )
Payment of debt financing costs —
(18,337 )
Purchase of treasury stock (18,040 ) (13,791 )
Other, net (10,516 ) —
Net cash provided by financing activities 270,981
557,496
Discontinued operations
Net cash used in operating activities from discontinued operations —
(3,735 )
Effect of exchange rate changes on cash, cash equivalents, and restricted cash 8,793
4,664
Net change in cash, cash equivalents, and restricted cash (30,598 ) (24,455 )
Cash, cash equivalents, and restricted cash, beginning of period 197,318
166,331
Cash, cash equivalents, and restricted cash, end of period $ 166,720
$ 141,876

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

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

~~(in~~ (in thousands)


	Common Stock							Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)	Treasury Stock						Total Equity Attributable to Common Shareholders		Noncontrolling Interest	Total Equity
		Shares			Amount										Shares		Amount
December 28, 2019	48,936		$	489		$	1,531,785	$	280,329	$	(178,019)	—	$	—	$	1,634,584	$	3,244	$	1,637,828
Net income	—		—			—		50,769		—		—	—		50,769		399		51,168
Other comprehensive income	—		—			—		—		(40,898)		—	—		(40,898)		—		(40,898)
Buy-out and contingent consideration recognition in connection with redeemable noncontrolling interest	—		—			(2,379)		—		—		—	—		(2,379)		—		(2,379)
Issuance of stock under employee compensation plans	694		7			22,616		—		—		—	—		22,623		—		22,623
Acquisition of treasury shares	—		—			—		—		—		144	(23,675)		(23,675)		—		(23,675)
Stock-based compensation	—		—			10,960		—		—		—	—		10,960		—		10,960
March 28, 2020	49,630		$	496		$	1,562,982	$	331,098	$	(218,917)	144	$	(23,675)	$	1,651,984	$	3,643	$	1,655,627

	Common Stock							Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)	Treasury Stock						Total Equity Attributable to Common Shareholders		Noncontrolling Interest	Total Equity
		Shares			Amount										Shares		Amount
December 29, 2018	48,210		$	482		$	1,447,512	$	42,096	$	(172,703)	1	$	(55)	$	1,317,332	$	2,446	$	1,319,778
Net income	—		—			—		55,133		—		—	—		55,133		469		55,602
Other comprehensive income	—		—			—		—		9,903		—	—		9,903		—		9,903
Adjustment of redeemable noncontrolling interest to redemption value	—		—			(1,451)		—		—		—	—		(1,451)		—		(1,451)
Issuance of stock under employee compensation plans	674		7			22,051		—		—		—	—		22,058		—		22,058
Acquisition of treasury shares	—		—			—		—		—		136	(17,760)		(17,760)		—		(17,760)
Stock-based compensation	—		—			12,899		—		—		—	—		12,899		—		12,899
March 30, 2019	48,884		$	489		$	1,481,011	$	97,229	$	(162,800)	137	$	(17,815)	$	1,398,114	$	2,915	$	1,401,029
















See Notes to Unaudited Condensed Consolidated Financial Statements.

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

$ 1,514,620

$ 213,767

$ (178,470 )
139

$ (18,094 )
$ 1,532,313

$ 4,074

$ 1,536,387

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

$ 2,625,256

$ 460,120

$ (159,448 )
40,221

$ (1,673,705 )
$ 1,253,106

$ 3,603

$ 1,256,709
Balances may differ compared to prior condensed consolidated balance sheets due to rounding.

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal year ~~2018.~~2019. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

Use of Estimates

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

On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The COVID-19 pandemic is dynamic and expanding, and its ultimate scope, duration and effects are uncertain. This pandemic has and continues to result in, and any future epidemic or pandemic crises may potentially result in, direct and indirect adverse effects on the Company’s industry and customers, which in turn has (with respect to COVID-19) and may (with respect to future epidemics or crises) impact the Company’s business, results of operations and financial condition. Further, the COVID-19 pandemic may also affect the Company’s operating and financial results in a manner that is not presently known to the Company or that the Company currently does not expect to present significant risks to its operations or financial results. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s condensed consolidated financial statements.

Consolidation

The Company’s unaudited condensed consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.

The Company’s fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31.

Segment Reporting

The Company reports its results in 3 reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). The Company’s RMS reportable segment includes the Research Models, Research Model Services, and Research Products businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services). Research Products supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. The Company’s DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. The Company’s Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for fiscal year ~~2018 as well as Note 16, “Leases” in this Quarterly Report on Form 10-Q.~~2019.

Newly Adopted Accounting Pronouncements

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

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. It also creates more transparency around how economic results are presented, both on the face of the financial statements and in the disclosures. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. This standard became effective for the Company in the three months ended March 30, 2019 and did not have a material impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard, including subsequently issued amendments, collectively referred to as Accounting Standards Codification (ASC) 842, “Leases”, established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The Company adopted this standard using the modified retrospective transition approach as applied to leases existing as of or entered into after the adoption date (December 30, 2018) in the three months ended March 30, 2019. See Note 16, “Leases” for a discussion of the Company’s adoption of this standard and its impact on the consolidated financial statements and related disclosures.

~~Newly Issued Accounting Pronouncements~~

~~In August 2018, the FASB~~ issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement that is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

hosting arrangements that include an internal-use software license). ~~The ASU is~~This standard became effective for ~~fiscal years beginning after December 15, 2019,~~the Company in the three months ended March 28, 2020 and ~~interim periods within those fiscal years and will be applied either retrospectively or prospectively. Early adoption is permitted. The Company is still evaluating~~did not have a significant impact on the ~~impact this standard will have on its~~unaudited condensed consolidated financial statements and related ~~disclosures, but does~~disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 removes the disclosure requirement for the amount and reasons for transfers between Level 1 and Level 2 fair value measurements as well as the process for Level 3 fair value measurements. In addition, the ASU adds the disclosure requirements for changes in unrealized gains and losses included in Other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This standard became effective for the Company in the three months ended March 28, 2020 and did not ~~believe there will be~~have a ~~material~~significant impact ~~upon adoption.~~on the unaudited condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-14, “Compensation Retirement Benefits - Defined Benefit Plans -General (Subtopic 715-20).” ASU 2018-14 removes the requirements to disclose the amounts in Accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year and the related party disclosures about the amount of future annual benefits covered by insurance contracts. In addition, the ASU adds the requirement to disclose an explanation for any significant gains and losses related to changes in the benefit obligation for the period. ~~The ASU is~~This standard became effective for ~~fiscal years ending after December 15,~~the Company in the three months ended March 28, 2020 and ~~will be applied~~did not have a significant impact on ~~a retrospective basis to all periods presented. Early adoption is permitted. The Company is still evaluating~~ the ~~impact this standard will have on its~~unaudited condensed consolidated financial statements and related disclosures.

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

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard isbecame effective for ~~annual or interim goodwill impairment tests~~the Company in ~~fiscal years beginning after December 15, 2019,~~the three months ended March 28, 2020 and ~~will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is~~did not ~~expected to~~ have ~~a material~~an impact on the ~~Company’s~~unaudited condensed consolidated financial statements and related ~~disclosures, but~~disclosures. The Company performs its annual impairment test during the fourth quarter of a fiscal year and does not ~~believe there will be a material~~expect any significant impact ~~upon adoption.~~on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit ~~Losses.”~~Losses”. The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as ~~accounts receivable,~~trade and notes receivables, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This standard became effective for the Company in the three months ended March 28, 2020 and did not have a significant impact on the unaudited condensed consolidated financial statements and related disclosures.

Newly Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU offers temporary optional expedients and exceptions for applying U.S. GAAP to modifications to agreements such as loans, debt securities, derivatives, and borrowings which reference LIBOR or another reference rate that is expected to be discontinued by December 31, 2021. The expedients and exceptions provided by the standard do not apply to modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 that an entity has elected certain optional expedients for and are retained through the end of the hedging relationship. The ASU is effective until December 31, 2022 when the replacement for LIBOR is expected to be completed. The interest rate on the Company’s senior credit facility, which matures in fiscal year 2023, is linked to LIBOR. The Company is in the process of evaluating options for transitioning away from the senior credit facility’s use of LIBOR and expects to be completed by the time LIBOR is phased out. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures and has yet to elect an adoption date.

In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 states any equity security transitioning

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

from the alternative method of accounting under Topic 321 to the equity method, or vice versa, due to an observable transaction will be remeasured immediately before the transition. In addition, the ASU clarifies the accounting for certain non-derivative forward contracts or purchased call options to acquire equity securities stating such instruments will be measured using the fair value principles of Topic 321 before settlement or exercise. The ASU is effective for fiscal years beginning after December 15, ~~2019,~~2020, and ~~interim periods within those fiscal years, and requires the modified retrospective approach.~~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~~there will be a material impact upon adoption.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intraperiod tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax), which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of any enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

2. BUSINESS ~~ACQUISITIONS~~COMBINATIONS

HemaCare Corporation

On January 3, 2020, the Company acquired HemaCare Corporation (HemaCare), a business specializing in the production of human-derived cellular products for the cell therapy market. The acquisition of HemaCare expands the Company’s comprehensive portfolio of early-stage research and manufacturing support solutions to encompass the production and customization of high-quality, human derived cellular products to better support clients’ cell therapy programs. The purchase price of HemaCare was $379.8 million in cash. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. See Note 9, “Long-Term Debt and Finance Leases.” This business is reported as part of the Company’s RMS reportable segment.

The preliminary purchase allocation of $376.7 million, net of $3.1 million of cash acquired was as follows:


	January 3, 2020
	(in thousands)
Trade receivables	$	6,451
Inventories	8,468
Other current assets (excluding cash)	3,527
Property, plant and equipment	10,033
Goodwill	209,104
Definite-lived intangible assets	183,540
Other long-term assets	5,920
Current liabilities	(5,188)
Deferred tax liabilities	(37,470)
Other long-term liabilities	(7,664)
Total purchase price allocation	$	376,721

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Definite-Lived Intangible Assets		Weighted Average Amortization Life
	(in thousands)		(in years)
Client relationships	$	170,390	19
Trade name	7,330		10
Other intangible assets	5,820		3
Total definite-lived intangible assets	$	183,540	18

The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s RMS business from customers introduced through HemaCare and the assembled workforce of the acquired business. The goodwill attributable to HemaCare is not deductible for tax purposes.

The Company incurred transaction and integration costs in connection with the acquisition of $5.7 million for the three months ended March 28, 2020, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.

Beginning on January 3, 2020, HemaCare has been included in the operating results of the Company. HemaCare revenue and operating loss for the three months ended March 28, 2020 was $12.3 million and $2.2 million, respectively.

The following selected unaudited pro forma consolidated results of operations are presented as if the HemaCare acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 30, 2018, after giving effect to certain adjustments. For the three months ended March 28, 2020, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $0.2 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For the three months ended March 30, 2019, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $3.2 million, additional interest expense on borrowings of $2.8 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
	(unaudited)
Revenue	$	707,077	$	613,456
Net income attributable to common shareholders	55,705		52,186

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

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~~$527.1 million in ~~cash, subject to certain post-closing adjustments that may change the purchase price.~~cash. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. This business is reported as part of the Company’s DSA reportable segment.

The ~~preliminary~~ purchase allocation of ~~$491.0~~$490.4 million, net of $36.7 million of cash acquired was as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	April 29, 2019
	(in thousands)
Trade receivables	$	35,405
Inventories	5,282
Other current assets (excluding cash)	13,917
Property, plant and equipment	88,605
Goodwill	280,161
Definite-lived intangible assets	162,400
Other long-term assets	20,063
Deferred revenue	(15,278)
Current liabilities	(46,081)
Deferred tax liabilities	(27,458)
Other long-term liabilities	(22,624)
Redeemable noncontrolling interest	(4,035)
Total purchase price allocation	$	490,357

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

~~The preliminary purchase price allocation is subject to change as additional information becomes available concerning~~From the ~~fair value and tax basis~~date of the ~~assets acquired and liabilities assumed, including certain contracts and obligations. Any additional~~acquisition through March 28, 2020, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made ~~as soon as practicable but no later than one year from~~to the ~~date of acquisition.~~purchase price allocation.

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


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

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

The Company incurred transaction and integration costs in connection with the acquisition of ~~$1.9~~$1.4 million and ~~$19.1~~$5.2 million for the three ~~and nine~~ months ended ~~September~~March 28, 2020 and March 30, 2019, respectively, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.

Beginning on April 29, 2019, Citoxlab has been included in the operating results of the Company. Citoxlab revenue ~~for the three~~ and ~~nine months ended September 28, 2019 was $44.0 million and $74.9 million, respectively. Citoxlab~~ operating income for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 was ~~$0.2~~$45.3 million and ~~$2.2~~$2.5 million, respectively.

The following selected unaudited pro forma consolidated results of operations are presented as if the Citoxlab acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 31, 2017, after giving effect to certain adjustments. For the ~~nine~~three months ended ~~September 28,~~March 30, 2019, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of ~~$4.8~~$2.6 million, additional interest expense on borrowings of $1.2 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For the nine months ended September 29, 2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $7.3 million, additional interest expense on borrowings of $3.1 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

Three Months Ended

March 30, 2019

(in thousands)

(unaudited)

Revenue

650,875

Net income attributable to common shareholders

61,028

~~MPI Research~~

On April 3, 2018, the Company acquired MPI Research, a non-clinical CRO providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. The acquisition enhances the Company’s position as a leading global early-stage CRO by strengthening its ability to partner with clients across the drug discovery and development continuum. The purchase price for MPI Research was $829.7 million in cash. The acquisition was funded by borrowings on the Credit Facility as well as the issuance of the Company’s Senior Notes. See Note 9, “Long-Term Debt and Finance Lease Obligations.” This business is reported as part of the Company’s DSA reportable segment.

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

April 3, 2018
(in thousands)
Trade receivables (contractual amount of $35,073) $ 35,073
Inventories 4,463
Other current assets (excluding cash) 5,893
Property, plant and equipment 128,403
Goodwill 441,656
Definite-lived intangible assets 309,200
Other long-term assets 1,081
Deferred revenue (23,926 )
Current liabilities (32,885 )
Deferred tax liabilities (65,945 )
Other long-term liabilities (2,213 )
Total purchase price allocation $ 800,800
12

From the date of the acquisition through March 30, 2019, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.

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

Definite-Lived Intangible Assets Weighted Average Amortization Life
(in thousands) (in years)
Client relationships $ 264,900
13
Developed technology 23,400
3
Backlog 20,900
1
Total definite-lived intangible assets $ 309,200
12

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NaN significant integration costs were incurred in connection with the acquisition for the three and nine months ended September 28, 2019. The Company incurred transaction and integration costs in connection with the acquisition of $0.8 million and $15.3 million for the three and nine months ended September 29, 2018, respectively, which were primarily included in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income.

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

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

~~KWS BioTest Limited~~

~~On January 11, 2018, the Company acquired KWS BioTest Limited (KWS BioTest), a CRO specializing in~~ ~~in vitro~~ ~~and~~ ~~in vivo~~ discovery testing services for immuno-oncology, inflammatory and infectious diseases. The acquisition enhances the Company’s discovery expertise, with complementary offerings that provide the Company’s customers with additional tools in the active therapeutic research areas of oncology and immunology. The purchase price for KWS BioTest was $20.3 million in cash and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to £3.0 million based on future performance. During the three months ended September 29, 2018, the terms of these contingent payments were amended, resulting in a fixed payment of £2.0 million, or $2.6 million, which was paid during the three months ended March 30, 2019. The KWS BioTest business is reported as part of the Company’s DSA reportable segment.

~~The purchase price allocation of $21.5 million, net of $1.0 million of cash acquired and a final net working capital adjustment of $0.4 million, was as follows:~~

January 11, 2018
(in thousands)
Trade receivables (contractual amount of $1,309) $ 1,309
Other current assets (excluding cash) 99
Property, plant and equipment 1,136
Definite-lived intangible assets - client relationships 3,647
Goodwill 17,660
Current liabilities (1,575 )
Deferred revenue (151 )
Long-term liabilities (596 )
Total purchase price allocation $ 21,529

From the date of the acquisition through December 29, 2018, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.

~~The only definite-lived intangible asset relates to client relationships, which will be amortized over a weighted average life of 12 years.~~

The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through KWS BioTest and the assembled workforce of the acquired business. The goodwill attributable to KWS BioTest is not deductible for tax purposes.

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

NaN significant integration costs were incurred in connection with the acquisition for the three and nine months ended September 28, 2019. The Company incurred transaction and integration costs of $0.1 million and $0.6 million in connection with the acquisition for the three and nine months ended September 29, 2018, respectively, which were included in Selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.

Pro forma financial information as well as actual revenue and operating income have not been included because KWS BioTest’s financial results are not significant when compared to the Company’s consolidated financial results.

Other Acquisition

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

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

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


	August 28, 2019
	(in thousands)
Trade receivables	$	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

The purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts and obligations. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition. From the date of the acquisition through March 28, 2020, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis.

~~The Company incurred transaction and~~NaN significant integration costs ~~in connection~~were incurred with the acquisition ~~of $2.1 million and $3.2 million~~ for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019, respectively, which are primarily included in Selling, general and administrative expenses within the unaudited condensed statements of income.~~2020.

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

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

~~Revenue Recognition~~

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”).

To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, the Company

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

does not extend payment terms beyond one year. Applying the practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component for the nine months ended September 28, 2019 and September 29, 2018.

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the existing transaction price and measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, the Company generally measures its progress using either cost-to-cost (input method) or right-to-invoice (output method). The Company uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.

Disaggregation of Revenue

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


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Major Products/Service Lines:
RMS	$	145,996	$	137,172
DSA	438,683		354,197
Manufacturing	122,380		113,200
Total revenue	$	707,059	$	604,569

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Timing of Revenue Recognition:
RMS
Services and products transferred over time	$	60,041	$	54,813
Services and products transferred at a point in time	85,955		82,359
DSA
Services and products transferred over time	438,564		354,078
Services and products transferred at a point in time	119		119
Manufacturing
Services and products transferred over time	37,314		31,896
Services and products transferred at a point in time	85,066		81,304
Total revenue	$	707,059	$	604,569

RMS

The RMS business generates revenue through the commercial production and sale of research models, research products, and the provision of services related to the maintenance and monitoring of research models and management of clients’ research operations. Revenue from the sale of research models and products is recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the shipping terms of a contract. Revenue generated from research models services is recognized over time and is typically based on a right-to-invoice measure of progress (output method) as invoiced amounts correspond directly to the value of the Company’s performance to date.

DSA

The Discovery and Safety Assessment business provides a full suite of integrated drug discovery services directed at the identification, screening and selection of a lead compound for drug development and offers a full range of safety assessment services including bioanalysis, drug metabolism, pharmacokinetics, toxicology and pathology. Discovery and Safety Assessment services revenue is generally recognized over time using the cost-to-cost or right to invoice measures of progress, primarily representing fixed fee service contracts and per unit service contracts, respectively.

Manufacturing

The Manufacturing business includes Microbial Solutions, which provides in ~~vitro~~ vitro(non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens. Species identification service revenue is generally recognized at a point in time as identifications are completed by the Company. Biologics service revenue is generally recognized over time using the cost-to-cost measure of progress. Microbial Solutions and Avian product sales are generally recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the contractual shipping terms of a contract.

Transaction Price Allocated to Future Performance Obligations

The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of ~~September~~March 28, ~~2019.~~2020. Excluded from the disclosure is the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. The Company has assessed future performance obligations with respect to the COVID-19 pandemic uncertainties and believes there is an insignificant impact on the ability to meet future performance obligations and the amount of revenue to be recognized.

~~The~~The following table ~~includes~~includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of ~~September~~March 28, ~~2019:~~2020:


	Revenue Expected to be Recognized in Future Periods
	Less than 1 Year		1 to 3 Years		4 to 5 Years		Beyond 5 Years		Total
	(in thousands)
DSA	$	195,192	$	92,180	$	4,861	$	639	$	292,872
Manufacturing	10,241		8,825		32		21		19,119
Total	$	205,433	$	101,005	$	4,893	$	660	$	311,991

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

~~Contract Balances from Contracts with Customers~~

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 ~~non-current~~long-term deferred ~~revenue),~~revenue and customer ~~deposits~~contract deposits) on the unaudited condensed consolidated balance sheets. The Company’s payment terms are generally 30 days in the United States and consistent with prevailing practice in international markets. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a customer is conditioned other than the passage of time. Client receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:

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


	March 28, 2020		December 28, 2019
	(in thousands)
Balances from contracts with customers:
Client receivables	$	415,359	$	395,740
Contract assets (unbilled revenue)	131,660		121,957
Contract liabilities (current and long-term deferred revenue)	194,907		192,788
Contract liabilities (customer contract deposits)	37,319		33,080

When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. ~~As of September 28, 2019, the~~The Company excluded approximately ~~$21~~ $19 million and $27 million of ~~unpaid~~unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of March 28, 2020 and ~~approximately $36 million of advanced~~December 28, 2019, respectively. Advanced client payments of approximately $37 million and $33 million have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated balance ~~sheets.~~sheets as of March 28, 2020 and December 28, 2019, respectively.

Other changes in the contract asset and the contract liability balances during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 were as follows:

(i) Changes due to business combinations:

See Note 2. “Business ~~Acquisitions”~~Combinations” for client receivables, contract assets, and contract liabilities that were acquired as part of the ~~Citoxlab~~HemaCare acquisition on ~~April 29, 2019.~~January 3, 2020.

(ii) Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification:

During the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, an immaterial cumulative catch-up adjustment to revenue was recorded.

(iii) A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be recorded as a client receivable):

~~Approximately 85%~~Approximately 60% of ~~unbilled~~unbilled revenue as of December ~~29, 2018~~28, 2019 was billed during the ~~nine~~three months ended ~~September~~March 28, ~~2019.~~2020.

(iv) A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability):

~~Approximately 80%~~Approximately 60% of ~~contract~~contract liabilities as of December ~~29, 2018~~28, 2019 were recognized as revenue during the ~~nine~~three months ended ~~September~~March 28, ~~2019.~~2020.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. SEGMENT INFORMATION

The Company’s 3 reportable segments are ~~Research Models~~RMS, DSA, and ~~Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing).~~

Manufacturing. The following table presents revenue and other financial information by reportable segment:

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


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
RMS
Revenue	$	145,996	$	137,172
Operating income	27,373		37,832
Depreciation and amortization	8,752		4,322
Capital expenditures	5,412		4,112
DSA
Revenue	$	438,683	$	354,197
Operating income	72,283		46,705
Depreciation and amortization	41,330		33,784
Capital expenditures	14,729		8,848
Manufacturing
Revenue	$	122,380	$	113,200
Operating income	41,112		31,499
Depreciation and amortization	6,366		5,805
Capital expenditures	5,161		3,606

Reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts are as follows:


	Operating Income						Depreciation and Amortization						Capital Expenditures
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
	(in thousands)
Three Months Ended:
Total reportable segments	$	140,768	$	116,036	$	56,448	$	43,911	$	25,302	$	16,566
Unallocated corporate	(46,487)		(46,244)		812		1,447		419		165
Total consolidated	$	94,281	$	69,792	$	57,260	$	45,358	$	25,721	$	16,731

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

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

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


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
RMS	$	145,996	$	137,172
DSA	438,683		354,197
Manufacturing	122,380		113,200
Total revenue	$	707,059	$	604,569

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

A summary of unallocated corporate expense consists of the following:

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


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Stock-based compensation	$	6,704	$	8,274
Compensation, benefits, and other employee-related expenses	21,980		22,038
External consulting and other service expenses	2,469		3,810
Information technology	3,716		2,723
Depreciation	812		1,447
Acquisition and integration	6,983		5,472
Other general unallocated corporate	3,823		2,480
Total unallocated corporate expense	$	46,487	$	46,244

Other general unallocated corporate expense consists of costs associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations.

Revenue by geographic area is as follows:

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


	U.S.		Europe		Canada		Asia Pacific		Other		Consolidated
	(in thousands)
Three Months Ended:
March 28, 2020	$	406,712	$	190,262	$	76,633	$	31,829	$	1,623	$	707,059
March 30, 2019	350,176		166,365		53,979		33,179		870		604,569

~~Included in the Asia Pacific category above are operations located in China, Japan, Korea, Australia, Singapore, and India.~~ Included in the Other category above are operations located in Brazil and Israel. Revenue represents sales originating in entities physically located in the identified geographic area.

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

5. SUPPLEMENTAL BALANCE SHEET INFORMATION

The composition of trade receivables, net is as follows:


	March 28, 2020		December 28, 2019
	(in thousands)
Client receivables	$	415,359	$	395,740
Unbilled revenue	131,660		121,957
Total	547,019		517,697
Less: Allowance for doubtful accounts	(4,629)		(3,664)
Trade receivables, net	$	542,390	$	514,033

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

The composition of inventories is as follows:

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

~~The composition of other current assets is as follows:~~


	March 28, 2020		December 28, 2019
	(in thousands)
Raw materials and supplies	$	24,708	$	24,613
Work in process	30,418		35,852
Finished products	107,812		100,195
Inventories	$	162,938	$	160,660

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

~~The composition of other assets is as follows:~~

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

~~The composition of other current liabilities is as follows:~~

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of other current assets is as follows:


	March 28, 2020		December 28, 2019
	(in thousands)
Prepaid income tax	$	60,016	$	54,358
Short-term investments	934		941
Restricted cash	444		431
Other	300		300
Other current assets	$	61,694	$	56,030

The composition of other assets is as follows:


	March 28, 2020		December 28, 2019
	(in thousands)
Venture capital investments	$	98,405	$	108,983
Other investments	18,659		13,996
Life insurance policies	31,617		38,207
Other long-term income tax assets	20,534		20,570
Restricted cash	1,576		1,601
Other	26,288		29,258
Other assets	$	197,079	$	212,615

The composition of other current liabilities is as follows:


	March 28, 2020		December 28, 2019
	(in thousands)
Current portion of operating lease right-of-use liabilities	$	22,469	$	20,357
Accrued income taxes	25,706		26,066
Customer contract deposits	37,319		33,080
Other	23,426		11,095
Other current liabilities	$	108,920	$	90,598

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


	March 28, 2020		December 28, 2019
	(in thousands)
U.S. Transition Tax	$	50,057	$	52,066
Long-term pension liability, accrued executive supplemental life insurance retirement plan and deferred compensation plan	78,272		80,833
Long-term deferred revenue	16,078		20,983
Other	29,517		29,051
Other long-term liabilities	$	173,924	$	182,933

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

6. VENTURE CAPITAL AND OTHER INVESTMENTS

The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from less than 1% to 12.0%. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity method of accounting. For publicly-held investments in the LPs, the Company adjusts for changes in fair market value based on reported share holdings at the end of each fiscal quarter. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LPs’ economic performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.

Venture capital investments were ~~$100.6~~$98.4 million and ~~$87.5~~$109.0 million as of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, respectively.The Company’s total commitment to the venture capital funds as of ~~September~~March 28, ~~2019~~2020 was ~~$128.1~~$128.4 million, of which the Company funded ~~$77.4~~$82.9 million through that date. The Company received dividends totaling ~~$0.2~~$0.9 million and ~~$5.6~~$0.8 million for the three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018, respectively. The Company received dividends totaling $1.8 million and $14.1 million for the nine months ended September 28,~~March 30, 2019, ~~and September 29, 2018,~~ respectively. The Company recognized losses of ~~$0.6~~$12.2 million and gains of ~~$5.4~~$10.6 million related to the venture capital investments for the three months ended ~~September~~March 28, 2020 and March 30, 2019, ~~and September 29, 2018,~~ respectively. The Company recognized gains of $5.7 million and $22.8 million related to the venture capital investments for the nine months ended September 28, 2019 and September 29, 2018, respectively. Gains and losses are recorded in Other income, net in the accompanying unaudited condensed consolidated statements of income.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company also invests, with minority positions, directly in equity of predominantly privately-held companies. These investments are reported at fair value or under the equity method of accounting, as appropriate. Equity investments that do not have readily determinable fair values are generally recorded at cost, plus or minus certain adjustments. Other investments were ~~$13.0~~$18.7 million and ~~$1.0~~$14.0 million as of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, respectively. The Company recognized an insignificant amount of gains and losses related to these investments for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018. Gains and losses from other investments are recorded in Other income, net in the accompanying unaudited consolidated statements of income.~~March 30, 2019.

7. FAIR VALUE

The Company has certain assets and liabilities recorded at fair value, which have been classified as Level 1, 2, or 3 within the fair value hierarchy:

•Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access,

•Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, and foreign currency spot rates,

•Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The fair value hierarchy level is determined by asset and class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, there were no transfers between levels.

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:

•Cash equivalents - Valued at market prices determined through third-party pricing services;

~~Mutual funds - Valued at the unadjusted quoted net asset value of shares held by the Company;~~

•Foreign currency forward contracts - Valued using market observable inputs, such as forward foreign exchange points and foreign exchanges rates;

•Life insurance policies - Valued at cash surrender value based on the fair value of underlying investments;

•Debt instruments - The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. The book value of the Company’s 5.5% Senior Notes ~~(Senior Notes)~~ due in 2026 and the 4.25% Senior Notes due in 2028 (Senior Notes), which are fixed rate debt, are carried at amortized cost. Fair value of the Senior Notes is based on quoted market prices and on borrowing rates available to the Company; and

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

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


	September 28, 2019									March 28, 2020
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
	(in thousands)									(in thousands)
Cash equivalents	$	—	$	436	$	—	$	436	Cash equivalents	$	—	$	186,599	$	—	$	186,599
Other assets:									Other assets:
Foreign currency forward contract	—		778		—		778
Life insurance policies	—		28,207		—		28,207		Life insurance policies	—		23,834		—		23,834
Total assets measured at fair value	$	—	$	29,421	$	—	$	29,421	Total assets measured at fair value	$	—	$	210,433	$	—	$	210,433

Other current liabilities measured at fair value:									Other current liabilities measured at fair value:
Contingent consideration	$	—	$	—	$	692	$	692	Contingent consideration	$	—	$	—	$	2,563	$	2,563
Total liabilities measured at fair value									Total liabilities measured at fair value	$	—	$	—	$	2,563	$	2,563

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

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 28, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents	$	—	$	55,278	$	—	$	55,278
Other assets:
Life insurance policies	—		30,454		—		30,454
Total assets measured at fair value	$	—	$	85,732	$	—	$	85,732

Other current liabilities measured at fair value:
Contingent consideration	$	—	$	—	$	712	$	712
Foreign currency forward contract	—		876		—		876
Total liabilities measured at fair value	$	—	$	876	$	712	$	1,588

Contingent Consideration

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

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


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Beginning balance	$	712	$	3,033
Additions	2,131		2,000
Payments	(218)		(2,610)
Foreign currency	(62)		74
Ending balance	$	2,563	$	2,497

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

Debt Instruments

The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2 within the fair value hierarchy.

~~As of both September 28, 2019 and December 29, 2018, the~~The book value of the Company’s 2026 and 2028 Senior Notes ~~which~~ is a fixed rate obligation carried at amortized ~~cost, was $500.0 million. The fair value of the Company’s Senior Notes as of September 28, 2019 and December 29, 2018 was $530.0 million and $495.0 million, respectively.~~cost. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy. The book value and fair value of the Company’s 2026 and 2028 Senior Notes is summarized below:


	March 28, 2020						December 28, 2019
	Book Value		Fair Value		Book Value		Fair Value
2026 Senior Notes	$	500,000	$	508,050	$	500,000	$	537,500
2028 Senior Notes	500,000		475,000		500,000		510,000

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

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


			Adjustments to Goodwill
	December 28, 2019		Acquisitions		Foreign Exchange		March 28, 2020
	(in thousands)
RMS	$	56,586	$	209,104	$	(219)	$	265,471
DSA	1,345,223		(550)		(13,865)		1,330,808
Manufacturing	138,756		—		(3,198)		135,558
Goodwill	$	1,540,565	$	208,554	$	(17,282)	$	1,731,837

The increase in goodwill during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 related primarily to the acquisition of ~~Citoxlab~~HemaCare in the ~~DSA~~RMS reportable segment, ~~and~~which was partially offset by the impact of foreign exchange.

Intangible Assets, Net

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


	March 28, 2020										December 28, 2019
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
	(in thousands)
Backlog	$	28,558	$	(27,133)	$	1,425	$	28,865	$	(26,895)	$	1,970
Technology	123,647		(62,307)		61,340		122,106		(57,737)		64,369
Trademarks and trade names	15,504		(4,983)		10,521		8,430		(4,901)		3,529
Other	19,874		(12,813)		7,061		18,279		(12,307)		5,972
Other intangible assets	187,583		(107,236)		80,347		177,680		(101,840)		75,840
Client relationships	1,085,540		(333,024)		752,516		934,668		(321,095)		613,573
Intangible assets	$	1,273,123	$	(440,260)	$	832,863	$	1,112,348	$	(422,935)	$	689,413

The increase in intangible assets, net during the three months ended March 28, 2020 related primarily to the acquisition of HemaCare.

9. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS

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


	March 28, 2020		December 28, 2019
	(in thousands)
Term loans	$	184,375	$	193,750
Revolving facility	1,168,096		676,134
2026 Senior Notes	500,000		500,000
2028 Senior Notes	500,000		500,000
Other debt	10,227		5,781
Finance leases (Note 16)	28,808		30,527
Total debt and finance leases	2,391,506		1,906,192
Less:
Current portion of long-term debt	44,738		35,548
Current portion of finance leases (Note 16)	2,929		2,997
Current portion of long-term debt and finance leases	47,667		38,545
Long-term debt and finance leases	2,343,839		1,867,647
Debt discount and debt issuance costs	(17,069)		(17,981)
Long-term debt, net and finance leases	$	2,326,770	$	1,849,666

As of March 28, 2020 and December 28, 2019, the weighted average interest rate on the Company’s debt was 3.03% and 3.46%, respectively.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Intangible Assets, Net~~

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

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

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

~~9. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS~~

~~Long-Term Debt and Finance Lease Obligations~~

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

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

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

Term Loans and Revolving Facility

~~On March 26, 2018, the~~The Company ~~amended and restated its $1.65 billion credit facility creating~~has a ~~$2.3~~$2.8 billion credit facility (Credit Facility)~~. The amendment extended the maturity date and provided for~~, consisting of a ~~$750.0~~$750 million term loan and a ~~$1.55~~$2.05 billion multi-currency revolving facility. The amendment was accounted for as a debt modification. In connection with the transaction, the Company capitalized approximately $6.2 million within Long-term debt, net and finance leases in the accompanying unaudited condensed consolidated balance sheets and expensed approximately $1.0 million of debt issuance costs recorded within Interest expense in the accompanying unaudited condensed consolidated statements of income for the year ended 2018. On September 25, 2019 the Company amended and restated the Credit Facility for certain administrative matters.

The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. ~~The revolving facility matures on March 26, 2023, and requires no scheduled payment before that date.~~

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

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~restated the Credit Facility to increase the multi-currency~~The revolving facility ~~by $500.0 million, from $1.55 billion to $2.05 billion. The amount outstanding under the multi-currency revolving facility has not significantly changed since September 28, 2019.~~ matures on March 26, 2023, and requires no scheduled payment before that date.

Under specified circumstances, the Company has the ability to increase the term loan and/or revolving facility by up to $1.0 billion in the aggregate.

The interest rates applicable to the term loan and revolving facility under the Credit Facility are, at the Company’s option, equal to either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.

The Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants. These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than 3.50 to 1.0 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than 4.00 to 1.0. As of ~~September~~March 28, ~~2019,~~2020, the Company was compliant with all covenants.

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

During the three ~~and nine~~ months ended ~~September~~March 28, 2020 and March 30, 2019, the Company had multiple U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Company’s Credit Facility, which ranged from $300 million to ~~$350~~$400 million. This resulted in foreign currency losses recognized in Other income, net of ~~$12.1~~$4.2 million and $6.4 million during the three months ended ~~September~~March 28, 2020 and March 30, 2019, ~~and $14.9 million during~~respectively, related to the ~~nine months ended September 28, 2019.~~remeasurement of the underlying debt. The Company entered into foreign exchange forward contracts to limit its foreign currency exposures related to these ~~borrowings.~~borrowings and recognized gains of $6.1 million and $8.9 million during the three months ended March 28, 2020 and March 30, 2019, respectively, within Interest expense. As of ~~September~~March 28, ~~2019,~~2020, the Company did not have any outstanding borrowings in a currency different than its respective functional currency. See Note 14, “Foreign Currency Contracts”, for further discussion.

Base Indenture for Senior Notes ~~Offerings~~

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

The Indenture contains certain covenants including, but not limited to, limitations and restrictions on the ability of the Company and its U.S. subsidiaries to (i) create certain liens, (ii) enter into any Sale and Leaseback Transaction (as defined in the Indenture) with respect to any property, and (iii) merge, consolidate, sell or otherwise dispose of all or substantially all of their assets. These covenants are subject to a number of conditions, qualifications, exceptions and limitations. Any event of default, as defined, could result in the acceleration of the repayment of the obligations.

2026 Senior Notes ~~Offering~~

~~On April 3,~~In fiscal year 2018, the Company entered into the first supplemental indenture (First Supplemental Indenture) with the Trustee in connection with an offering of ~~$500.0~~$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 within Long-term debt, net and finance leases in the accompanying unaudited condensed consolidated balance sheets.

The Company may redeem all or part of the 2026 Senior Notes at any time prior to April 1, 2021, at its option, at a redemption price equal to 100% of the principal amount of such Senior Notes plus the Applicable Premium (as defined in the First Supplemental Indenture). The Company may also redeem up to 40% of the Senior Notes with the proceeds of certain equity offerings completed before April 1, 2021, at a redemption price equal to 105.5% of the principal amount of such 2026 Senior Notes. On or after April 1, 2021, the Company may on any one or more occasions redeem all or a part of the 2026 Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the 2026 Senior Notes at a purchase price equal to 101% of the aggregate principal amount of such 2026 Senior Notes. Any redemption of the 2026 Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.

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

2028 Senior Notes ~~Offering~~

~~On October 23,~~In fiscal year 2019, the Company entered into a second supplemental indenture (Second Supplemental Indenture) with the Trustee in connection with the offering of ~~$500.0~~$500 million in aggregate principal amount of the Company’s 4.25% Senior Notes

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

The Company may redeem all or part of the 2028 Senior Notes at any time prior to May 1, 2023, at its option, at a redemption price equal to 100% of the principal amount of such 2028 Senior Notes plus the Applicable Premium (as defined in the Indenture). The Company may also redeem up to 40% of the 2028 Senior Notes with the proceeds of certain equity offerings completed before May 1, 2023, at a redemption price equal to 104.25% of the principal amount of such 2028 Senior Notes. On or after May 1, 2023, the Company may on any one or more occasions redeem all or a part of the 2028 Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the Senior Notes at a purchase price equal to 101% of the aggregate principal amount of such Senior Notes. Any redemption of the Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.

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

~~Commitment Letter~~

On February 12, 2018, the Company secured an $830 million commitment under a 364-day senior unsecured bridge loan facility (the Bridge Facility) for the purpose of financing the acquisition of MPI Research. The Bridge Facility was terminated as of April 3, 2018 upon the successful acquisition of MPI Research. Debt issuance costs of $1.8 million, which were capitalized upon the execution of the Bridge Facility, were expensed upon termination of the agreement on April 3, 2018. In addition, the Company incurred and expensed $2.0 million of fees pertaining to a temporary backstop facility related to the negotiation of the Credit Facility during the three months ended March 31, 2018. These costs were included in Interest expense in the accompanying unaudited condensed consolidated statements of income.

Letters of Credit

As of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, the Company had ~~$6.7~~$8.3 million and ~~$6.5~~$7.5 million, respectively, in outstanding letters of credit.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. EQUITY AND NONCONTROLLING INTERESTS

Earnings Per Share

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

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

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

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Numerator:
Net income	$	50,837	$	55,688
Less: Net income attributable to noncontrolling interests	68		555
Net income attributable to common shareholders	$	50,769	$	55,133

Denominator:
Weighted-average shares outstanding - Basic	49,189		48,458
Effect of dilutive securities:
Stock options, restricted stock units and performance share units	777		1,004
Weighted-average shares outstanding - Diluted	49,966		49,462

Options to purchase 0.4 million ~~and 0.5 million~~ shares for each of the three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018, respectively,~~March 30, 2019, as well as ~~a non-significant~~an insignificant number of restricted ~~shares, restricted~~ stock units (RSUs), and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase 0.4 million and 0.5 million shares for the nine months ended September 28, 2019 and September 29, 2018, respectively, as well as a non-significant number of restricted shares, RSUs and PSUs, were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted-average shares outstanding for ~~both~~ the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018~~March 30, 2019 excluded the impact of 0.6 million and 1.0 million shares of non-vested ~~restricted stock~~RSUs and ~~RSUs.~~PSUs, respectively.

Treasury Shares

During the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, the Company did 0t repurchase any shares under its authorized stock repurchase program. As of ~~September~~March 28, ~~2019,~~2020, the Company had $129.1 million remaining on the authorized stock repurchase program.

The Company’s stock-based compensation plans permit the netting of common stock upon vesting of RSUs and PSUs in order to satisfy individual statutory tax withholding requirements. During the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, the Company acquired 0.1 million shares for ~~$18.0~~$23.7 million and 0.1 million shares for ~~$13.8~~$17.8 million, respectively, from such ~~netting.~~netting.

Accumulated Other Comprehensive Income (Loss)

Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:

Foreign Currency Translation Adjustment
and Other
Pension and Other Post-Retirement Benefit Plans Total
(in thousands)
December 29, 2018 $ (102,199 ) $ (70,504 ) $ (172,703 )
Other comprehensive loss before reclassifications (8,261 ) —
(8,261 )
Amounts reclassified from accumulated other comprehensive loss —
1,113
1,113
Net current period other comprehensive income (loss) (8,261 ) 1,113
(7,148 )
Income tax expense (benefit) (1,615 ) 234
(1,381 )
September 28, 2019 $ (108,845 ) $ (69,625 ) $ (178,470 )


	Foreign Currency Translation Adjustment and Other		Pension and Other Post-Retirement Benefit Plans		Total
	(in thousands)
December 28, 2019	$	(87,578)	$	(90,441)	$	(178,019)
Other comprehensive loss before reclassifications	(44,311)		—		(44,311)
Amounts reclassified from accumulated other comprehensive loss	—		1,374		1,374
Net current period other comprehensive income (loss)	(44,311)		1,374		(42,937)
Income tax expense (benefit)	(2,330)		291		(2,039)
March 28, 2020	$	(129,559)	$	(89,358)	$	(218,917)

Nonredeemable Noncontrolling Interest

The Company has an investment in an entity whose financial results are consolidated in the Company’s unaudited condensed consolidated financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling ~~interest.~~interest within Equity in the accompanying unaudited condensed consolidated balance sheets. The activity within the nonredeemable noncontrolling interest was immaterial during the three ~~and nine~~ months ended ~~September~~March 28, 2020 and March 30, 2019, ~~and September 29, 2018.~~respectively.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Redeemable Noncontrolling Interests

~~On June 13, 2019, the~~The Company ~~purchased an additional 5%~~has a 92% equity interest in Vital River ~~for $7.9 million, resulting in total ownership of 92%.~~with an 8% redeemable noncontrolling interest. 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 withhas 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 $2.2 million in Selling, general and administrative expenses within the unaudited condensed consolidated statements of income, equal to the excess fair value of the hybrid instrument (equity interest with embedded derivative) over the fair value of the 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 ~~($14.5~~($14.7 million as of ~~September~~March 28, ~~2019)~~2020) and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 8% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The ~~agreement does not limit the~~ amount that the Company could be required to pay to purchase the remaining 8% equity ~~interest.~~

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

interest is not limited.

As part of the Citoxlab acquisition ~~on April 29,~~in 2019, the Company acquired an approximate 90% equity interest in a ~~less than wholly owned~~ subsidiary that is fully consolidated under the voting interest ~~model. The Company acquired a 90% equity interest,~~model, which ~~includes a~~included an approximate 10% redeemable noncontrolling interest. ~~The~~In February 2020, the Company purchased the remaining approximate 10% noncontrolling interest holders have the ability to require the Company to purchase the remaining 10% interest at certain dates in the future between 2021 through 2023. The noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets and isfor approximately $4 million asand assumption of ~~September 28, 2019.~~a contingent consideration liability of approximately $2 million payable to the former shareholders. See Note 7. “Fair Value”.

~~On August 28,~~In 2019, the Company acquired an 80% equity interest in a supplier that is fully consolidated, which ~~included~~includes a 20% redeemable noncontrolling interest. The ~~contract provides the~~ Company has 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~~predetermined floor value. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 20% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The ~~agreement does not limit the~~ amount that the Company could be required to pay to purchase the remaining 20% equity ~~interest.~~interest is not limited.

The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Beginning balance	$	28,647	$	18,525
Acquisition of noncontrolling interest	(3,732)		—
Adjustment to Vital River redemption value	—		1,451
Net (loss) income attributable to noncontrolling interests	(332)		85
Foreign currency translation	(544)		458
Ending balance	$	24,039	$	20,519

Nine Months Ended
September 28, 2019 September 29, 2018
(in thousands)
Beginning balance $ 18,525
$ 16,609
Adjustment to Vital River redemption value 1,451
1,111
Purchase of Vital River 5% equity interest (8,745 ) —
Change in fair value of Vital River 8% equity interest, included in additional-paid-in-capital 2,708
—
Modification of Vital River 8% purchase option 2,196
—
Acquisition of a 10% non-controlling interest through acquiring Citoxlab 4,035
—
Acquisition of a 20% non-controlling interest through acquiring a supplier 8,740
—
Net income attributable to noncontrolling interests 249
543
Foreign currency translation (814 ) (932 )
Ending balance $ 28,345
$ 17,331

11. INCOME TAXES

The Company’s effective tax rates for the three months ended ~~September~~March 28, 2020 and March 30, 2019 were 8.3% and ~~September 29, 2018 were (0.4)% and 16.9%, respectively. The Company’s effective tax rates for the nine months ended September 28, 2019 and September 29, 2018 were 12.6% and 19.2%~~16.0%, respectively. For the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, the ~~change in the effective tax rates from the prior year periods were~~decrease was primarily attributable to ~~recognizing a $20.4 million deferred~~an increased tax ~~asset~~benefit from stock-based compensation deductions compared to the corresponding period in ~~the three months ended September 28, 2019 for net operating losses expected to be utilized in the future due to changes in the Company’s international financing structure.~~2019.

For the three months ended ~~September~~March 28, ~~2019,~~2020, the Company’s unrecognized tax benefits decreased ~~by $5.8~~by $0.6 million to ~~$19.0~~$19.1 million, primarily due to ~~the lapse of statutes of limitations,~~tax authority settlements and favorable foreign exchange, offset by an additional ~~quarter~~quarter of Canadian Scientific Research and Experimental Development Credit reserves. ~~For the three months ended September 28, 2019, the~~The amount of unrecognized income tax benefits that would impact the effective tax rate decreased by ~~$6.1~~$0.7 millionto ~~$16.6~~$16.3 million, for the same reasons ~~discussed~~listed above. The accrued interest on unrecognized tax benefits was ~~$2.2~~$2.3 million at ~~September~~March 28, ~~2019.~~2020. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by up to ~~$1.6~~$3.0 million over the next twelve-month period, primarily due to the outcome of pending tax audits.

The Company conducts business in ~~several~~a number of tax jurisdictions. As a result, it is subject to tax audits inon a regular basis including, but not limited to, such major jurisdictions ~~including~~as the U.S., the U.K., China, France, Germany, ~~Canada, Japan~~ and ~~India.~~Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2016.

The Company and certain of its subsidiaries have ongoing tax controversies ~~with various tax authorities~~ in the U.S., ~~Canada, Japan, India, China,~~France and ~~France.~~Canada. The Company does not anticipate resolution of these audits will have a material impact on its consolidated financial statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The following table provides the components of net periodic cost for the Company’s pension, deferred compensation and executive supplemental life insurance retirement plans:

Three Months Ended Nine Months Ended
September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
(in thousands)
Service cost $ 701

$ 814
$ 2,088
$ 2,629
Interest cost 2,902

2,752
8,652
8,241
Expected return on plan assets (3,236 )
(3,801 ) (9,706 ) (11,690 )
Amortization of prior service cost (credit) 92

(135 ) 274
(406 )
Amortization of net loss 489

736
1,466
2,267
Net periodic cost $ 948
$ 366
$ 2,774
$ 1,041


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Service cost	$	797	$	630
Interest cost	2,355		2,875
Expected return on plan assets	(2,981)		(3,235)
Amortization of prior service cost (credit)	(125)		91
Amortization of net loss	1,586		489
Other adjustments	125		—
Net periodic cost	$	1,757	$	850

Service cost is recorded as an operating expense within the accompanying unaudited condensed consolidated statements of income. All other components of net periodic costs are recorded in Other ~~income,~~expense, net in the accompanying unaudited condensed consolidated statements of income. The net periodic cost for the Company’s other post-retirement benefit plan for the three ~~and nine~~ months ended ~~September~~March 28, 2020 and March 30, 2019 ~~and September 29, 2018~~ was ~~not~~0t significant.

13. STOCK-BASED COMPENSATION

The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock, RSUs, and PSUs.

The following table provides stock-based compensation by the financial statement line item in which it is reflected:

Three Months Ended Nine Months Ended
September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
(in thousands)
Cost of revenue $ 2,354
$ 1,596
$ 6,792
$ 4,747
Selling, general and administrative 11,671
10,224
36,637
31,161
Stock-based compensation, before income taxes 14,025
11,820
43,429
35,908
Provision for income taxes (2,166 ) (2,370 ) (7,068 ) (6,940 )
Stock-based compensation, net of income taxes $ 11,859
$ 9,450
$ 36,361

$ 28,968


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Cost of revenue	$	2,035	$	1,949
Selling, general and administrative	8,925		10,950
Stock-based compensation, before income taxes	10,960		12,899
Provision for income taxes	(1,551)		(2,047)
Stock-based compensation, net of income taxes	$	9,409	$	10,852

During the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, the Company granted an insignificant amount of stock options representing 0.5 million common shares with a per-share weighted-average grant date fair value of $33.97, RSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $142.89, and PSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $162.74. The maximum number of common shares to be issued upon vesting of PSUs granted during the nine months ended September 28, 2019 is 0.3 million.RSUs.

14. FOREIGN CURRENCY CONTRACTS

Cross currency ~~loan~~loans

The Company ~~entered~~periodically enters into foreign exchange forward contracts ~~during the nine months ended September 28, 2019 and three months ended December 29, 2018~~ to limit its foreign currency exposure related to a U.S. dollar denominated ~~loan~~loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility. These contracts are not designated as hedging instruments. Any gains or losses on these forward contracts are recognized immediately in Interest ~~expense.~~

~~The open contract at December 29, 2018, which had a duration of approximately 3 months, was recorded at fair value~~expense in the ~~Company’s accompanying~~ unaudited condensed consolidated ~~balance sheets. The notional amount and fair value~~statements of ~~the open contract is summarized as follows:~~

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Notional Amount Fair Value Balance Sheet Location
(in thousands)
December 29, 2018 $ 343,300
$ (1,319 ) Other current liabilities

income.

The Company had no open forward contracts related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency at ~~September~~March 28, 2020 or December 28, 2019.

The following table summarizes the effect of the foreign exchange forward contracts entered into to limit ~~its~~the Company’s foreign currency exposure related to a U.S. dollar denominated ~~loan~~loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility on the Company’s unaudited condensed consolidated statements of income:


	March 28, 2020						March 30, 2019
Location of gain (loss)	Financial statement caption amount		Amount of gain (loss)		Financial statement caption amount		Amount of gain (loss)
	(in thousands)
Three Months Ended:
Interest expense	$	(15,067)	$	6,067	$	(9,987)	$	8,917

September 28, 2019 September 29, 2018
Location of hedge gain (loss) Financial statement caption amount Amount of gain (loss) Financial statement caption amount Amount of gain (loss)
(in thousands)
Three Months Ended:
Interest expense $ (5,698 ) $ 14,311
$ (17,197 ) $ —
Nine Months Ended:
Interest expense $ (36,520 ) $ 21,622
$ (47,031 ) $ —

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Intercompany loans

The Company ~~also entered~~periodically enters into foreign exchange forward contracts ~~during the nine months ended September 28, 2019~~ to limit its foreign currency exposure related to certain intercompany loans. These contracts are not designated as hedging instruments. Any gains or losses on forward contracts associated with intercompany loans are recognized immediately in Other income, net and are largely offset by the remeasurement of the underlying intercompany loans.

The Company entered into foreign currency forward contracts during 2020 and 2019. NaN contract remained open at December 28, 2019, which had 1a duration of less than one month and is recorded at fair value in the Company’s accompanying unaudited condensed consolidated balance sheets. The Company did 0t have any open foreign currency forward ~~contract~~contracts related to ancertain intercompany ~~loan~~loans at ~~September~~March 28, ~~2019.~~2020. The notional amount and fair value of the open contract is summarized as follows:

Notional Amount Fair Value Balance Sheet Location
(in thousands)
September 28, 2019 $ 108,029
$ 778
Other current assets

~~The forward contract outstanding as of September 28, 2019 had a duration of less than 1 month. The Company had 0 such open contracts at December 29, 2018.~~


December 28, 2019
Notional Amount		Fair Value		Balance Sheet Location
(in thousand)
$	115,038	$	(876)	Other current liabilities

The following table summarizes the effect of the foreign exchange forward contracts ~~entered into~~ in connection with certain intercompany loans on the Company’s unaudited condensed consolidated statements of income:


	March 28, 2020						March 30, 2019
Location of gain (loss)	Financial statement caption amount		Amount of gain (loss)		Financial statement caption amount		Amount of gain (loss)
	(in thousands)
Three Months Ended:
Other (expense) income, net	$	(24,071)	$	(892)	$	6,306	$	—

September 28, 2019 September 29, 2018
Location of hedge gain (loss) Financial statement caption amount Amount of gain (loss) Financial statement caption amount Amount of gain (loss)
(in thousands)
Three Months Ended:
Other (expense) income, net $ (14,254 ) $ 840
$ 5,910
$ 235
Nine Months Ended:
Other (expense) income, net $ (8,161 ) $ 1,358
$ 24,069
$ (850 )

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.

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The following table presents a summary of restructuring costs related to these initiatives within the unaudited condensed consolidated statements of income.


	Three Months Ended
	March 28, 2020										March 30, 2019
	Severance and Transition Costs		Asset Impairments and Other Costs		Total		Severance and Transition Costs		Asset Impairments and Other Costs		Total
	(in thousands)
Cost of services provided and products sold (excluding amortization of intangible assets)	$	247	$	229	$	476	$	267	$	1,149	$	1,416
Selling, general and administrative	83		—		83		133		—		133
Total	$	330	$	229	$	559	$	400	$	1,149	$	1,549

Three Months Ended
September 28, 2019 September 29, 2018
Severance and Transition Costs Asset Impairments and Other Costs Total Severance and Transition Costs Asset Impairments and Other Costs Total
(in thousands)
Cost of services provided and products sold (excluding amortization of intangible assets) $ 435
$ 180
$ 615
$ 30
$ 5
$ 35
Selling, general and administrative 2,038
—
2,038
4,619
21
4,640
Total $ 2,473
$ 180
$ 2,653
$ 4,649
$ 26
$ 4,675

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Nine Months Ended
September 28, 2019 September 29, 2018
Severance and Transition Costs Asset Impairments and Other Costs Total Severance and Transition Costs Asset Impairments and Other Costs Total
(in thousands)
Cost of services provided and products sold (excluding amortization of intangible assets) $ 1,074
$ 1,685
$ 2,759
$ 767
$ 27
$ 794
Selling, general and administrative 3,110
18
3,128
6,354
21
6,375
Total $ 4,184
$ 1,703
$ 5,887
$ 7,121
$ 48
$ 7,169

The following table presents restructuring costs by reportable segment for these productivity improvement initiatives:


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)

RMS	$	220	$	301
DSA	83		13
Manufacturing	256		1,235

Total	$	559	$	1,549

Three Months Ended Nine Months Ended
September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
(in thousands)

RMS $ 381
$ —
$ 1,323
$ —
DSA 1,843
56
2,529
1,021
Manufacturing 429
—
2,035
870
Unallocated corporate —
4,619
—
5,278
Total $ 2,653
$ 4,675
$ 5,887
$ 7,169

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~2017 RMS Restructuring Initiative~~

~~In the fourth quarter~~Rollforward 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 repurposing it for alternative initiatives, and reducing its workforce at certain RMS facilities during 2018.

~~The following table presents a summary of severance and transition costs, and asset impairments (referred to as~~ restructuring costs) during the three and nine months ended September 29, 2018 related to this initiative within the unaudited condensed consolidated statements of income. The Company did 0t incur any restructuring costs in the three and nine months ended September 28, 2019.

September 29, 2018
Three Months Ended Nine Months Ended
Severance and Transition Costs Asset Impairments and Other Costs Total Severance and Transition Costs Asset Impairments and Other Costs Total

Cost of services provided and products sold (excluding amortization of intangible assets) $ 95
$ 238
$ 333
$ 650
$ 822
$ 1,472
Selling, general and administrative (30 ) —
(30 ) 158
—
158
Total $ 65
$ 238
$ 303
$ 808
$ 822
$ 1,630

Cumulative restructuring costs incurred during 2017 and 2018 were $20.1 million, which primarily related to non-cash asset impairments and accelerated depreciation charges of $17.7 million and cash payments for severance and transition costs of $1.2 million and were recorded in the RMS reportable segment. All severance and transition costs have been paid as of June 29, 2019 and no further restructuring costs related to the 2017 RMS Restructuring Initiative are expected to be incurred.activities

The following table provides a rollforward for all of the Company’s severance and transition costs, and lease obligation liabilities related to all restructuring activities:

Three Months Ended Nine Months Ended
September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
(in thousands)
Beginning balance $ 2,758
$ 6,810
$ 2,921
$ 6,856
Expense (excluding non-cash charges) 2,653
4,714
5,508
7,929
Payments / utilization (1,604 ) (4,407 ) (4,608 ) (7,544 )
Foreign currency adjustments (24 ) (55 ) (38 ) (179 )
Ending balance $ 3,783
$ 7,062
$ 3,783
$ 7,062


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Beginning balance	$	6,406	$	2,921
Expense (excluding non-cash charges)	517		1,246
Payments / utilization	(4,243)		(2,034)
Foreign currency adjustments	(149)		(20)
Ending balance	$	2,531	$	2,113

As of ~~September~~March 28, 2020 and March 30, 2019, ~~and September 29, 2018, $3.8~~$2.4 million and ~~$2.6~~$1.8 million of severance and other personnel related costs liabilities and lease obligation liabilities, respectively, were included in accrued compensation and accrued liabilities within the Company’s unaudited condensed consolidated balance sheets and 0$0.1 million and ~~$4.4~~$0.3 million, respectively, were included in other long-term liabilities within the Company’s unaudited condensed consolidated balance sheets.

~~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 the transition guidance within the new standard. The practical expedient package applied to leases that 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.

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The reporting results for the nine months ended September 28, 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 condensed consolidated statements of income and cash flows. The adoption of the new standard resulted in the following impact to the condensed consolidated balance sheet: 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 condensed consolidated balance sheet, adjusted for 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 30, 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 asset.
⁽²⁾ Derecognition of approximately $26 million of leased properties, recorded in Property, plant and equipment, 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-to-use asset 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 the Operating lease right-of-use asset.
⁽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 asset.
⁽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

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 condensed 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,

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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, 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 condensed consolidated financial statements.~~

Right-of-use lease assets and lease liabilities are reported in the Company’s unaudited condensed consolidated balance sheets as follows:



	March 28, 2020		December 28, 2019
	(in thousands)
Operating leases
Operating lease right-of-use assets, net	$	155,568	$	140,085

Other current liabilities	$	22,469	$	20,357
Operating lease right-of-use liabilities	133,440		116,252
Total operating lease liabilities	$	155,909	$	136,609

Finance leases
Property, plant and equipment, net	$	30,859	$	32,519

Current portion of long-term debt and finance leases	$	2,929	$	2,997
Long-term debt, net and finance leases	25,879		27,530
Total finance lease liabilities	$	28,808	$	30,527

September 28, 2019
(in thousands)
Operating leases
Operating lease right-of-use assets, net $ 140,359

Other current liabilities $ 20,032
Operating lease right-of-use liabilities 116,868
Total operating lease liabilities $ 136,900

Finance leases
Property, plant and equipment, net $ 32,076

Current portion of long-term debt and finance leases $ 3,002
Long-term debt, net and finance leases 26,710
Total finance lease liabilities $ 29,712

The components of operating and finance lease costs ~~for the three and nine months ended September 28, 2019~~ were as follows:

September 28, 2019
Three Months Ended
Nine Months Ended
(in thousands)
Operating lease costs $ 7,839
$ 23,433
Finance lease costs:
Amortization of right-of-use assets 1,070
2,921
Interest on lease liabilities 360
1,001
Short-term lease costs 256
652
Variable lease costs 646
1,911
Sublease income (383 ) (474 )
Total lease costs $ 9,788
$ 29,444

~~Other information related to leases was as follows:~~

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Operating lease costs	$	8,077	$	7,706
Finance lease costs:
Amortization of right-of-use assets	951		921
Interest on lease liabilities	340		296
Short-term lease costs	589		192
Variable lease costs	1,045		335
Sublease income	(586)		(46)
Total lease costs	$	10,416	$	9,404

Other information related to leases was as follows:

Supplemental cash flow information


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in thousands)
Cash flows included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,974	$	6,533
Operating cash flows from finance leases	340		352
Finance cash flows from finance leases	1,572		838

Non-cash leases activity:
Right-of-use lease assets obtained in exchange for new operating lease liabilities	$	25,407	$	1,688
Right-of-use lease assets obtained in exchange for new finance lease liabilities	593		—

Nine Months Ended
September 28, 2019
(in thousands)
Cash flows included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 20,084
Operating cash flows from finance leases 1,058
Finance cash flows from finance leases 2,862

Non-cash leases activity:
Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 20,805
Right-of-use lease assets obtained in exchange for new finance lease liabilities 4,741

Lease term and discount rate


		As of
		~~As of~~March 28, 2020
	~~September 28, 2019~~
Weighted-average remaining lease term (in years)
Operating lease		~~8.35~~8.40
Finance lease		~~12.94~~12.71
Weighted-average discount rate
Operating lease		~~4.37~~4.24
Finance lease		~~4.40~~4.54

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 ~~September~~March 28, ~~2019,~~2020, maturities of operating and finance lease liabilities for each of the following five years and a total thereafter were as follows:

Operating Leases Finance Leases
(in thousands)
2019 (excluding the nine months ended September 28, 2019) $ 6,264
$ 1,244
2020 25,519
4,658
2021 23,993
3,651
2022 20,188
3,622
2023 16,197
2,760
Thereafter 74,148
24,235
Total minimum future lease payments 166,309
40,170
Less: Imputed interest 29,409
10,458
Total lease liabilities $ 136,900
$ 29,712

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Operating Leases		Finance Leases
	(in thousands)
2020 (excluding the three months ended March 28, 2020)	$	21,347	$	3,063
2021	27,308		3,804
2022	23,483		3,754
2023	19,810		2,898
2024	19,168		2,146
Thereafter	76,170		22,531
Total minimum future lease payments	187,286		38,196
Less: Imputed interest	31,377		9,388
Total lease liabilities	$	155,909	$	28,808

Total minimum future lease payments (predominantly operating leases) of approximately ~~$47~~$48 million for leases that have not commenced as of ~~September~~March 28, ~~2019,~~2020, as the Company does not yet control the underlying assets, are not included in the unaudited condensed consolidated financial statements. These leases are expected to commence between fiscal years ~~2019~~2020 and 2024 with lease terms of approximately 32 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:~~

~~CHARLES RIVER LABORATORIES INTERNATIONAL, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year ~~2018.~~2019. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” ~~in our Annual Report on~~included elsewhere within this Form ~~10-K for fiscal year 2018.~~10-Q. Certain percentage changes may not recalculate due to rounding.

Overview

We are a full service, early-stage contract research organization (CRO). For over 70 years, we have been in the business of providing the research models required in research and development of new drugs, devices, and therapies. Over this time, we have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that enable us to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.

Our client base includes all major global biopharmaceutical companies, many biotechnology companies, CROs, agricultural and industrial chemical companies, life science companies, veterinary medicine companies, contract manufacturing companies, medical device companies, and diagnostic and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world.

Segment Reporting

Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). Our RMS reportable segment includes the Research Models, ~~and~~ Research Model Services, and Research Products businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of our clients’ research operations (including recruitment, training, staffing, and management services). Research Products supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. Our DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.

COVID-19

Overview

On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The COVID-19 pandemic is dynamic and expanding, and its ultimate scope, duration and effects are uncertain. This pandemic has had and continues to result in direct and indirect adverse effects on our industry and customers, which in turn has impacted our business, results of operations, and financial condition. Further, the COVID-19 pandemic may also affect our operating and financial results in ways that are and are not presently known to us, or that we currently do not expect to present significant risks to our operations or financial results but which may in fact turn out to negatively affect us to a magnitude greater than anticipated. Refer to Item 1A, Risk Factors, included herein for risk factors reflecting the impact of the COVID-19 pandemic. Giving consideration to each of these risk factors, the following is our current estimate and belief of the impact of the COVID-19 pandemic during the first quarter of fiscal 2020 and how it may continue to affect us in subsequent periods.

Business continuity

To date, we generally have not experienced significant challenges in implementing our business continuity plans. Many government agencies have provided guidance permitting “essential” or “critical” business operations to remain open. As of the date of this quarterly report, in the geographies where business restrictions have been imposed, we believe all of our business operations have satisfied the requirements to be designated to be “essential” or “critical” according to the guidance provided by

government, health and other regulatory agencies with authority over such matters. As a result, all of our operating sites remain open and adequately staffed as of the date of this quarterly report. For certain operations or sites experiencing logistical delays, we have experienced some inefficiencies as it relates to completing work or fulfilling orders; however, we do not believe material expenditures will be required or material resource constraints will occur. Logistical delays include a small number of sites that have experienced reduced operations (including as a result of increased employee absenteeism) or voluntarily closed, as well as delays in transportation activities.

We have comprehensive business continuity plans in place for each site globally and are continuously updating these to address the evolving COVID-19 pandemic situation. We implemented our initial plans in China beginning in January 2020, and have continuously refined our plans for other regions as the virus has spread. We have encouraged and expressed our expectations that employees work remotely whenever possible; and for those employees who need to come into our sites to fulfill their responsibilities, we are adhering to guidelines from government, health, and other regulatory agencies. This includes social distancing, flexible scheduling such as split shifts, restricting visitors, enhanced cleaning, and providing personal protective equipment (PPE), such as masks and gloves, to employees. Due to the nature of our business, many employees already work in biosecure environments that require PPE and adhere to other procedures to safely accomplish their daily responsibilities. Accordingly, to date, we believe we have been able to efficiently implement the additional safety precautions.

Supply chain

We are focused on ensuring that we have adequate inventory and supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain. Accordingly, we have and expect to continue to increase inventory and supplies through the second quarter of 2020 and beyond as deemed appropriate. We proactively engaged with our suppliers beginning in January 2020 to limit any potential disruption to our supply chain. However, notwithstanding generally successful efforts to maintain supply chain continuity, we have experienced and expect to experience increased costs and potential delays throughout our supply chain during the pandemic.

Financial condition and results of our global operations

We are a global company that operates in over 90 facilities across over 20 countries worldwide. As we perform business across various borders, we are experiencing a continuum of impacts in each location as the COVID-19 pandemic has impacted the global economy in different phases. We are continuing to see demand for products and services across all of our businesses, although as described below theimpact of the COVID-19 pandemic on the level of demand varies with our different businesses. While there is uncertainty, our clients are still in need of the products and services we provide to biomedical research to advance discovery and develop new therapies for the treatment of disease, including the COVID-19 pandemic. Due to certain restrictions in place at the various sites of our clients and suppliers (including client and supplier site closures), there have been challenges relating to timely receiving and shipping products globally in all businesses. Should these restrictions continue, demand/supply issues may persist and could impact revenue growth, operating income (including operating income margins) and cash flows. We have observed some impact due to constraints from internal site restrictions, remote work, resources, and productivity. However, we believe the impact to us has not been as significant as to companies in many other industries because of the nature of our businesses, the classification of our businesses as essential or critical, as the case may be, and our business continuity plans.

Our RMS business was moderately impacted by the COVID-19 pandemic during the three months ended March 28, 2020, although the impact accelerated during the final month of the quarter. Demand for research models began to decline due primarily to the physical shutdown of our client’s facilities, principally academic institutions. While many of our clients are deemed essential businesses as well, we began to experience a slowdown, initially in China in January 2020, and then across Europe and North America later in the period, as measures were implemented by various governments to slow the spread of the COVID-19 pandemic. We expect this trend of reduced demand for research models to continue in upcoming quarters, which will negatively impact revenue, operating income, operating income margins, and cash flows. An increase in demand is not expected until our clients reopen impacted sites and resume their research activity. Research models services, specifically our GEMS and Insourcing Solutions businesses, experienced higher revenues in the three month period ended March 28, 2020 compared to the corresponding prior period.

Our DSA business was not significantly impacted by the COVID-19 pandemic during the three months ended March 28, 2020. Towards the end of the first fiscal quarter of 2020, we experienced some client work shifting towards subsequent quarters of fiscal year 2020 due to the various actions and restrictions put in place by governments around the world intended to slow the spread of the COVID-19 pandemic. The work performed in our Discovery Services and Safety Assessment businesses are largely dependent on our internal sites being open. Therefore, to the extent that clients require work to be completed, we have

been able to maintain the ability to continue to meet client demands and perform the work so long as our work force at the specific site the work is done is not significantly adversely impacted by the COVID-19 pandemic. This trend is expected to continue as government actions to slow the spread of the COVID-19 pandemic begin to subside, employees return to work, and economies across the world begin to reopen. Costs of supply are expected to increase as we procure the materials required to

perform our work. We expect a small-to-modest adverse impact to our revenue growth, operating income, operating margin and cash flow through the rest of the year.

Our Manufacturing business was not significantly impacted by the COVID-19 pandemic during the three months ended March 28, 2020. We expect to see a minor negative impact due to the COVID-19 pandemic as our customers experience minor disruptions in their manufacturing operations. We expect Manufacturing products, such as Microbial Solutions endotoxin products and avian products, to see continued demand through the remainder of fiscal 2020. Our Biologics testing facilities remain open and performing services for our clients. Similar to our other services businesses, our ability to perform work is contingent on our internal facilities and our work force not being significantly adversely impacted by the COVID-19 pandemic. We expect a small adverse impact to our revenue growth, operating income, operating margin and cash flows through the rest of the year.

Liquidity, capital and financial resources

We require cash to fund working capital needs as well as capital expansion, acquisitions, venture capital and strategic investments, debt obligations, leases, and pension obligations. The principal sources of liquidity have been cash flows from operations, supplemented by long-term borrowings. In fiscal year 2019, we issued $500 million Senior Notes, repaid part of our term loan for $500 million, and increased our multi-currency revolving facility by $500 million, from $1.55 billion to $2.05 billion. As of March 28, 2020, we had $2.4 billion of debt outstanding, of which $44.7 million is current. Available on the revolving line of credit (Revolver) is approximately $900 million, which matures on March 26, 2023 and does not require scheduled payments before that date should additional borrowings occur. The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. The Senior Notes become due in 2026 and 2028.

Due to the uncertainty resulting from the COVID-19 pandemic, we borrowed an additional $150 million from the Revolver during the three months ended March 28, 2020. While there remains uncertainty for the remainder of 2020, we currently do not anticipate needing to use these borrowings to fund operations. The purpose of borrowing the additional funds was to protect against any prolonged adverse impacts on liquidity markets that are currently unforeseeable. We expect to generate cash inflows from our operating activities sufficient to satisfy our working capital needs as well as to service our debt, pension, and venture capital obligations. Due to this higher debt, we do expect an increase to interest expense, however, this additional charge is not expected to materially adversely impact us. We do not currently anticipate we will need to borrow additional funds during 2020. However, we have analyzed the cash flows and debt balances noting there is significant capacity on the remaining Revolver assuming we achieve the results of operations consistent with what we have described herein. Accordingly, we do not anticipate a material risk of non-compliance with our debt covenants based on our current estimate of future earnings. Our debt levels consist of a combination of fixed and variable debt, which include $1.0 billion of fixed senior notes (2026 and 2028 Senior Notes). To protect against adverse liquidity concerns, there are various mechanisms for us to improve cash flows. To date we have implemented cost reduction plans including delaying compensation related increases, implementing hiring restrictions, reducing working hours, reducing all non-essential travel, and reducing certain discretionary spending. Additionally, we have reduced our investment activity, including planned acquisitions and capital projects.

As of the date these unaudited condensed consolidated financial statements are issued, based on our current and expected liquidity position, we do not believe there is significant uncertainty in our ability to continue as a going concern.

Recoverability and/or impairment of assets

The COVID-19 pandemic did not, nor is expected to impact, the ability to timely account for assets on our balance sheet. There are judgments involved as it relates to reviewing our allowance for doubtful accounts, valuation of inventory, and valuations/recovery of investments. We believe we have the necessary support for estimates derived for these account balances. We have reviewed the collectability and valuation of the assets through the date of financial statement issuance, noting no significant recoverability concerns or any impairments identified. Gains and losses on certain investments in venture capital funds are recorded on a quarterly lag due to the availability of the funds’ financial information, which is consistent with our venture capital investment accounting policy described in our Annual Report on Form 10-K for fiscal 2019. We did not identify any triggering events when reviewing impairment indicators for our goodwill and long-lived assets (tangible and intangible) that would indicate an impairment may exist. Review of impairment indicators and quantifying any impact will continue to be a focus throughout fiscal year 2020. Should a prolonged disruption occur where there is a material change from our current expectation of future cash flows, we could experience additional write-offs of client receivables or impairments to certain asset balances due to collectability and valuation issues.

Internal controls over financial reporting in a remote work environment

Internal controls over financial reporting are a focus for us to ensure they continue to be designed and operating effectively. As of March 28, 2020 and through the issuance of these unaudited condensed consolidated financial statements, we did not have any material changes to our internal controls over financial reporting. For personnel responsible for internal control activities

and working remote, the ability to work effectively enabled us to continue to maintain effective internal control over financial reporting. System and efficiency programs implemented in recent years, as well as those implemented as part of business continuity plans, have enabled us to effectively complete our financial reporting process in a similar way we completed it prior to the COVID-19 pandemic despite a largely remote working environment. Although there is uncertainty over the duration of the COVID-19 pandemic disruption, we do not anticipate any adverse impact to relevant systems or to the operating effectiveness of internal controls over financial reporting.

Recent Acquisitions

Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.

On January 3, 2020, we acquired HemaCare Corporation (HemaCare), a business specializing in the production of human-derived cellular products for the cell therapy market. The acquisition of HemaCare expands our comprehensive portfolio of early-stage research and manufacturing support solutions to encompass the production and customization of high-quality, human derived cellular products to better support clients’ cell therapy programs. The purchase price of HemaCare was $379.8 million in cash. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. This business is reported as part of our RMS reportable segment.

On August 28, 2019, we acquired an 80% ownership interest in a supplier that supports our DSA reportable segment. The remaining 20% interest is a redeemable non-controlling interest. The ~~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.~~acquisition. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. The business is reported as part of our DSA reportable segment.

On April 29, 2019, we acquired Citoxlab, a non-clinical CRO, specializing in regulated safety assessment services, non-regulated discovery services, and medical device testing. With operations in Europe and North America, the acquisition of Citoxlab further strengthens our position as a leading, global, early-stage CRO by expanding our scientific portfolio and geographic footprint, which enhances our ability to partner with clients across the drug discovery and development continuum. The ~~preliminary~~ purchase price for Citoxlab was ~~$527.7~~$527.1 million in ~~cash, subject to certain post-closing adjustments that may change the purchase price.~~cash. The acquisition was funded through a combination of cash on hand and proceeds from our Credit Facility under the multi-currency revolving facility. Citoxlab is reported as part of our DSA reportable segment.

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 includes aggregate, undiscounted contingent payments of up to £3.0 million based on future performance. During the three months ended September 29, 2018, the terms of these contingent payments were amended, resulting in a fixed payment of £2.0 million, or $2.6 million, which was paid during the three months ended March 30, 2019. The KWS BioTest business is reported as part of our DSA reportable segment.

Overview of Results of Operations and Liquidity

Revenue for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~$668.0~~$707.1 million compared to ~~$585.3~~$604.6 million in the corresponding period in ~~2018.~~2019. This increase of ~~$82.7~~$102.5 million, or ~~14.1%~~17.0%, was primarily due to the recent ~~acquisition~~acquisitions of Citoxlab and HemaCare as well as growth in our DSA and Manufacturing segments; partially offset by a reduction in RMS product revenue due to the impact of the COVID-19 pandemic, and by the negative effect of changes in foreign currency exchange rates which decreased revenue by ~~$7.7~~$4.6 million, or ~~1.3%~~0.7%, when compared to the corresponding period in 2018. Revenue for the nine months ended September 28, 2019 was $1.9 billion compared to $1.7 billion in the corresponding period in 2018. The increase of $265.5 million, or 16.0%, was primarily due to the reasons described above as well as the acquisition of MPI Research; partially offset by the negative effect of changes in foreign currency exchange rates, which decreased revenue by $32.6 million, or 1.9%, when compared to the corresponding period in 2018.2019.

In the three months ended ~~September~~March 28, ~~2019,~~2020, our operating income and operating income margin were ~~$92.8~~$94.3 million and ~~13.9%~~13.3%, respectively, compared with ~~$84.4~~$69.8 million and ~~14.4%~~11.5%, respectively, in the corresponding period of ~~2018. In the nine months ended September 28, 2019, our~~2019. The increases in operating income and operating income margin ~~were $242.4 million and 12.6%, respectively, compared with $228.9 million and 13.8%, respectively, in the corresponding period of 2018. The increases in operating income~~ were primarily due to contributions from our ~~recent acquisitions of Citoxlab~~DSA segment, partially offset by lower RMS operating income and ~~MPI Research. The decreases in~~ operating income margin ~~were primarily~~ due to the impact of the COVID-19 pandemic, as well as increased ~~amortization expense and~~ costs related to our recent ~~acquisitions; as well as continued investments to support future growth~~acquisition of ~~the businesses, which includes increased investments in personnel (staffing levels and hourly wage increases) and facility expansions.~~HemaCare.

Net income attributable to common shareholders ~~increased~~decreased to ~~$72.8~~$50.8 million in the three months ended ~~September~~March 28, ~~2019,~~2020, from ~~$60.4~~$55.1 million in the corresponding period of ~~2018. Net income attributable to common shareholders increased to $171.7 million in the nine months ended September 28, 2019, from $166.7 million in the corresponding period of 2018.~~2019. The ~~increases~~decrease in Net income attributable to common shareholders was primarily due to ~~recognizing a $20.4 million deferred tax asset in~~net losses on our venture capital investments and life insurance policy investments for the three months ended ~~September~~March 28, ~~2019~~2020 as compared to net gains for ~~net operating losses expected to be utilized~~both investments in the ~~future due~~corresponding period in 2019; partially offset by higher operating income mentioned above compared to ~~changes~~the corresponding period in ~~the Company’s international financing structure.~~2019.

During the first ~~nine~~three months of ~~2019,~~2020, our cash flows from operations ~~remained relatively consistent at $300.3~~was $68.6 million compared with ~~$301.2~~$14.9 million for the same period in ~~2018.~~2019. The ~~slight decrease~~increase was ~~primarily~~ driven by ~~unfavorable~~higher net income adjusted for non-cash items and certain favorable changes in ~~operating assets and liabilities, specifically related to the~~working capital items, including favorable timing of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits), and ~~higher~~lower compensation payments compared to the prior year period; partially offset by the ~~favorable~~unfavorable timing of vendor and supplier payments compared to the same period in ~~2018.~~2019.

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 and available cash were 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 cybersecurity experts, and promptly implemented a comprehensive containment and remediation plan. While the investigation is ongoing, we have determined that some client data was copied by a highly sophisticated, well-resourced intruder. We have not yet determined the potential revenue or financial impact related to this incident.

Results of Operations

Three Months Ended ~~September~~March 28, ~~2019~~2020 Compared to the Three Months Ended ~~September 29, 2018~~March 30, 2019

Revenue and Operating Income

The following tables present consolidated revenue by type and by reportable segment:


	Three Months Ended
	March 28, 2020		March 30, 2019		$ change		% change
	(in millions, except percentages)
Service revenue	$	546.6	$	451.0	$	95.6	21.2	%
Product revenue	160.5		153.6		6.9		4.5	%
Total revenue	$	707.1	$	604.6	$	102.5	17.0	%

Three Months Ended
September 28, 2019 September 29, 2018 $ change % change
(in millions, except percentages)
Service revenue $ 523.2
$ 443.0
$ 80.2
18.1 %
Product revenue 144.8
142.3
2.5
1.8 %
Total revenue $ 668.0
$ 585.3
$ 82.7
14.1 %


	Three Months Ended											Three Months Ended
	September 28, 2019		September 29, 2018		$ change		% change		Impact of FX			March 28, 2020		March 30, 2019		$ change		% change		Impact of FX
	(in millions, except percentages)											(in millions, except percentages)
RMS	$	132.6	$	126.8	$	5.8	4.5	%	(1.3	)%	RMS	$	146.0	$	137.2	$	8.8	6.4	%	(0.9)	%
DSA	420.1		352.3		67.8		19.3	%	(1.1	)%	DSA	438.7		354.2		84.5		23.9	%	(0.5)	%
Manufacturing	115.3		106.2		9.1		8.6	%	(2.2	)%	Manufacturing	122.4		113.2		9.2		8.1	%	(1.5)	%
Total revenue	$	668.0	$	585.3	$	82.7	14.1	%	(1.3	)%	Total revenue	$	707.1	$	604.6	$	102.5	17.0	%	(0.7)	%

The following table presents operating income by reportable segment:


	Three Months Ended												Three Months Ended
	September 28, 2019			September 29, 2018			$ change			% change			March 28, 2020			March 30, 2019			$ change		% change
	(in millions, except percentages)												(in millions, except percentages)
RMS	$	34.4		$	32.1		$	2.3		7.0	%	RMS	$	27.4		$	37.8		$	(10.4)	(27.6)	%
DSA	65.0			62.9			2.1			3.3	%	DSA	72.3			46.7			25.6		54.8	%
Manufacturing	39.2			33.3			5.9			18.0	%	Manufacturing	41.1			31.5			9.6		30.5	%
Unallocated corporate	(45.8		)	(43.9		)	(1.9		)	4.3	%	Unallocated corporate	(46.5)			(46.2)			(0.3)		0.5	%
Total operating income	$	92.8		$	84.4		$	8.4		10.0	%	Total operating income	$	94.3		$	69.8		$	24.5	35.1	%
Operating income % of revenue	13.9		%	14.4		%				(0.5	)%	Operating income % of revenue	13.3		%	11.5		%			1.8	%

The following presents ~~the~~and discusses our consolidated financial results ofby each of our reportable segments:

RMS


	Three Months Ended														Three Months Ended
	September 28, 2019			September 29, 2018			$ change			% change		Impact of FX			March 28, 2020			March 30, 2019			$ change		% change		Impact of FX
	(in millions, except percentages)														(in millions, except percentages)
Revenue	$	132.6		$	126.8		$	5.8		4.5	%	(1.3	)%	Revenue	$	146.0		$	137.2		$	8.8	6.4	%	(0.9)	%
Cost of revenue (excluding amortization of intangible assets)	81.9			79.2			2.7			3.4	%			Cost of revenue (excluding amortization of intangible assets)	95.9			82.8			13.1		15.7	%
Selling, general and administrative	16.0			15.1			0.9			5.4	%			Selling, general and administrative	19.1			16.2			2.9		18.6	%
Amortization of intangible assets	0.3			0.4			(0.1		)	(11.4	)%			Amortization of intangible assets	3.6			0.4			3.2		923.6	%
Operating income	$	34.4		$	32.1		$	2.3		7.0	%			Operating income	$	27.4		$	37.8		$	(10.4)	(27.6)	%
Operating income % of revenue	25.9		%	25.3		%				0.6	%			Operating income % of revenue	18.7		%	27.6		%			(8.9)	%

RMS revenue increased ~~$5.8~~$8.8 million due primarily to the recent acquisition of HemaCare which contributed $12.3 million to revenue growth; and higher research model services revenue, specifically our Insourcing Solutions and ~~higher~~GEMS businesses. Partially offsetting these increases were lower research model product revenue ~~in China. Research model services benefited from a large government contract in~~across the ~~IS business. Partially offsetting these increases were~~majority of our locations due to the

impact of the COVID-19 pandemic, largely driven by many closures of academic clients, and the effect of changes in foreign currency exchange ~~rates and lower research model product revenue outside of China, particularly from large biopharmaceutical clients.~~rates.

RMS operating income ~~increased $2.3~~decreased $10.4 million compared to the corresponding period in ~~2018.~~2019. RMS operating income as a percentage of revenue for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~25.9%~~18.7%, ~~an increase~~a decrease of ~~0.6%~~8.9% from ~~25.3%~~27.6% for the corresponding period in ~~2018.~~2019. Operating income and operating income as a percentage of revenue ~~increased~~decreased primarily ~~due to higher revenue described above and the impact of ongoing efficiency initiatives; partially offset~~ due to lower operating income ~~margins~~ on ~~the aforementioned large government contract and~~ lower sales volume for research ~~models outside~~model products due to the COVID-19 pandemic as described above and due to the recent acquisition of ~~China.~~HemaCare, which increased amortization of intangible assets and an inventory fair value adjustment; partially offset by higher revenue described above.

DSA


	Three Months Ended													Three Months Ended
	September 28, 2019			September 29, 2018			$ change		% change		Impact of FX			March 28, 2020			March 30, 2019			$ change		% change		Impact of FX
	(in millions, except percentages)													(in millions, except percentages)
Revenue	$	420.1		$	352.3		$	67.8	19.3	%	(1.1	)%	Revenue	$	438.7		$	354.2		$	84.5	23.9	%	(0.5)	%
Cost of revenue (excluding amortization of intangible assets)	285.8			239.3			46.5		19.4	%			Cost of revenue (excluding amortization of intangible assets)	301.1			252.2			48.9		19.4	%
Selling, general and administrative	48.0			33.8			14.2		41.8	%			Selling, general and administrative	43.3			38.6			4.7		12.1	%
Amortization of intangible assets	21.3			16.3			5.0		31.2	%			Amortization of intangible assets	22.0			16.7			5.3		31.6	%
Operating income	$	65.0		$	62.9		$	2.1	3.3	%			Operating income	$	72.3		$	46.7		$	25.6	54.8	%
Operating income % of revenue	15.5		%	17.9		%			(2.4	)%			Operating income % of revenue	16.5		%	13.2		%			3.3	%

DSA revenue increased ~~$67.8~~$84.5 million due primarily to the recent acquisition of Citoxlab which contributed ~~$44.0~~$45.3 million 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. DSA revenue was not significantly impacted by the COVID-19 pandemic during the three months ended March 28, 2020.

DSA operating income increased ~~$2.1~~$25.6 million during the three months ended ~~September~~March 28, ~~2019~~2020 compared to the corresponding period in ~~2018.~~2019. DSA operating income as a percentage of revenue for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~15.5%~~16.5%, ~~a decrease~~an increase of ~~2.4%~~3.3% from ~~17.9%~~13.2% for the corresponding period in ~~2018. The increase to operating income was~~2019. These increases were primarily attributable to higher revenues described ~~above. This increase was~~above, realizing the favorable impact of recent cost saving efficiencies, and lower acquisitions related costs, partially offset by higher amortization of intangible assets ~~and acquisition and integration costs associated with~~related to our recent acquisitions. ~~These increased costs collectively decreased operating income as a percentage of revenue in the three months ended September 28, 2019 compared to the same period in 2018.~~

Manufacturing revenue increased ~~$9.1~~$9.2 million due primarily to higher demand for ~~endotoxin product~~products in ~~the~~both our Microbial ~~Solutions~~Solutions’ Endotoxin business and our Avian business, and higher service revenue in the Biologics ~~business;~~business due to our facility in Pennsylvania being fully operational in 2020 compared to 2019 where work continued to be transitioned from a legacy facility; partially offset by lower product revenue in our Microbial Solutions’ Bioburden business, specifically due to the timing of a large stocking order from a strategic partner in 2019, which did not recur in 2020 and the effect of changes in foreign currency

exchange rates. Manufacturing revenue was not significantly impacted by the COVID-19 pandemic during the three months ended March 28, 2020.

Manufacturing operating income increased ~~$5.9~~$9.6 million during the three months ended ~~September~~March 28, ~~2019~~2020 compared to the corresponding period in ~~2018.~~2019. Manufacturing operating income as a percentage of revenue for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~34.0%~~33.6%, an increase of ~~2.7%~~5.8% from ~~31.3%~~27.8% for the corresponding period in ~~2018.~~2019. The increases were due primarily to higher revenues as well as improved production efficiencies and the impact of certain cost savings initiatives in the three months ended ~~September~~March 28, ~~2019~~2020 compared to the same period in ~~2018.~~2019.

Unallocated Corporate

Three Months Ended
September 28, 2019 September 29, 2018 $ change % change
(in millions, except percentages)
Unallocated corporate $ 45.8
$ 43.9
$ 1.9
4.3 %
Unallocated corporate % of revenue 6.9 % 7.5 % (0.6 )%

Interest income, which represents earnings on cash, cash equivalents, and time deposits remained consistent at $0.4 million and $0.2 million for the three months ended September 28, 2019 and the corresponding period in 2018, respectively.

~~Interest Expense~~

Other expense, net, was $14.3 million for the three months ended September 28, 2019, a decrease of $20.2 million, or 341.2%, compared to Other income, net of $5.9 million for the corresponding period in 2018. The decrease was due to a foreign currency loss recognized in the three months ended September 28, 2019 in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency and a net loss on our venture capital investments compared to a net gain in the corresponding period in 2018.

Income tax benefit for the three months ended September 28, 2019 was $0.3 million, a decrease of $12.7 million compared to income tax expense of $12.4 million for the corresponding period in 2018. Our effective tax rate was (0.4)% for the three months ended September 28, 2019, compared to 16.9% for the corresponding period in 2018. The decrease in our effective tax rate in the 2019 period compared to the 2018 period was primarily due to recognizing a $20.4 million deferred tax asset in the three months ended September 28, 2019 for net operating losses expected to be utilized in the future due to changes in the Company’s international financing structure.

~~Revenue and Operating Income~~

~~The following tables present consolidated revenue by type and by reportable segment:~~

Nine Months Ended
September 28, 2019 September 29, 2018 $ change % change
(in millions, except percentages)
Service revenue $ 1,480.0
$ 1,227.0
$ 253.0
20.6 %
Product revenue 450.1
437.6
12.5
2.9 %
Total revenue $ 1,930.1
$ 1,664.6
$ 265.5
16.0 %

Nine Months Ended
September 28, 2019 September 29, 2018 $ change % change Impact of FX
(in millions, except percentages)
RMS $ 405.8
$ 391.2
$ 14.6
3.7 % (2.3 )%
DSA 1,179.8
958.7
221.1
23.1 % (1.4 )%
Manufacturing 344.5
314.7
29.8
9.5 % (3.1 )%
Total revenue $ 1,930.1
$ 1,664.6
$ 265.5
16.0 % (1.9 )%

~~The following table presents operating income by reportable segment:~~

Nine Months Ended
September 28, 2019 September 29, 2018 $ change % change
(in millions, except percentages)
RMS $ 103.7
$ 104.9
$ (1.2 ) (1.1 )%
DSA 175.2
160.4
14.8
9.2 %
Manufacturing 103.9
95.9
8.0
8.3 %
Unallocated corporate (140.4 ) (132.3 ) (8.1 ) 6.2 %
Total operating income $ 242.4
$ 228.9
$ 13.5
5.9 %
Operating income % of revenue 12.6 % 13.8 % (1.2 )%

~~The following presents the results of each of our reportable segments:~~

Nine Months Ended
September 28, 2019 September 29, 2018 $ change % change Impact of FX
(in millions, except percentages)
Revenue $ 405.8
$ 391.2
$ 14.6
3.7 % (2.3 )%
Cost of revenue (excluding amortization of intangible assets) 248.8
238.8
10.0
4.2 %
Selling, general and administrative 52.2
46.3
5.9
12.8 %
Amortization of intangible assets 1.1
1.2
(0.1 ) (13.3 )%
Operating income $ 103.7
$ 104.9
$ (1.2 ) (1.1 )%
Operating income % of revenue 25.6 % 26.8 % (1.2 )%

RMS revenue increased $14.6 million due 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 $1.2 million compared to the corresponding period in 2018. RMS operating income as a percentage of revenue for the nine months ended September 28, 2019 was 25.6%, a decrease of 1.2% from 26.8% for the corresponding period in 2018. Operating income and operating income as a percentage of revenue decreased primarily due to higher cost of revenue and selling, general, and administrative expenses to support the growth of the businesses, which included the following: a $2.2 million charge recorded within selling, general and administrative costs in the nine months ended September 28, 2019 in connection with the modification of the option to purchase the remaining 8% equity interest in Vital River, increased investments in personnel (staffing levels and hourly wage increases), and facility expansions (primarily in China). In addition, operating income as a percentage of revenue decreased due to lower operating income margins on the aforementioned large government contract, and lower sales volume for research models outside of China.

Nine Months Ended
September 28, 2019 September 29, 2018 $ change % change Impact of FX
(in millions, except percentages)
Revenue $ 1,179.8
$ 958.7
$ 221.1
23.1 % (1.4 )%
Cost of revenue (excluding amortization of intangible assets) 815.5
661.9
153.6
23.2 %
Selling, general and administrative 131.3
96.5
34.8
36.1 %
Amortization of intangible assets 57.8
39.9
17.9
44.9 %
Operating income $ 175.2
$ 160.4
$ 14.8
9.2 %
Operating income % of revenue 14.9 % 16.7 % (1.8 )%

DSA revenue increased $221.1 million due primarily to the recent acquisitions of Citoxlab and MPI Research, which contributed $74.9 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.

DSA operating income increased $14.8 million during the nine months ended September 28, 2019 compared to the corresponding period in 2018. DSA operating income as a percentage of revenue for the nine months ended September 28, 2019 was 14.9%, a decrease of 1.8% from 16.7% 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; 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 the nine months ended September 28, 2019 compared to the same period in 2018.

Nine Months Ended
September 28, 2019 September 29, 2018 $ change % change Impact of FX
(in millions, except percentages)
Revenue $ 344.5
$ 314.7
$ 29.8
9.5 % (3.1 )%
Cost of revenue (excluding amortization of intangible assets) 169.8
150.2
19.6
13.0 %
Selling, general and administrative 64.0
61.8
2.2
3.6 %
Amortization of intangible assets 6.8
6.8
—
— %
Operating income $ 103.9
$ 95.9
$ 8.0
8.3 %
Operating income % of revenue 30.2 % 30.5 % (0.3 )%

Manufacturing revenue increased $29.8 million due primarily to higher demand for endotoxin products, bioburden products and services, and species identification services in the Microbial Solutions business and higher service revenue in the Biologics business; partially offset by the effect of changes in foreign currency exchange rates.

Manufacturing operating income increased $8.0 million during the nine months ended September 28, 2019 compared to the corresponding period in 2018. Manufacturing operating income as a percentage of revenue for the nine months ended September 28, 2019 was 30.2%, a decrease of 0.3% from 30.5% for the 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 growth of the businesses, which included the following: increased investments in 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 the nine months ended September 28, 2019 compared to the same period in 2018.

Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The increase in unallocated corporate costs of ~~$8.1~~$0.3 million, ~~is related~~or 0.5%, compared to ~~an increase~~the corresponding period in ~~costs~~2019 is associated with the evaluation and integration of our recent acquisition activity and costs related to the remediation of the unauthorized access into our information ~~systems;~~systems, partially offset by a net decrease in compensation, benefits, and other employee-related ~~expenses related to certain severance and executive transition costs incurred in the corresponding period in 2018.~~expenses. Costs as a percentage of revenue for the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 was ~~7.3%~~6.6%, a decrease of ~~0.6%~~1.0% from ~~7.9%~~7.6% for the corresponding period in ~~2018.~~2019.

Interest income, which represents earnings on cash, cash equivalents, and time deposits ~~remained consistent at $0.8~~was $0.3 million and ~~$0.7~~$0.2 million for the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 and the corresponding period in ~~2018,~~2019, respectively.

Interest expense for the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 was ~~$36.5~~$15.1 million, ~~a decrease~~an increase of ~~$10.5~~$5.1 million, or ~~22.3%~~50.9%, compared to ~~$47.0~~$10.0 million for the corresponding period in ~~2018.~~2019. The ~~decrease~~increase was due primarily to higher interest expense from increased debt to fund our recent acquisitions and a lower foreign currency gain recognized in connection with ana debt-related foreign exchange forward ~~contract and the absence of debt issuance costs that were incurred in the corresponding period in 2018; partially offset by higher debt to fund our recent acquisitions.~~contract.

Other expense, net, was ~~$8.2~~$24.1 million for the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, a decrease of ~~$32.3~~$30.4 million, or ~~133.9%~~481.7%, compared to Other income, net of ~~$24.1~~$6.3 million for the corresponding period in ~~2018.~~2019. The decrease was due primarily to a foreign currency loss recognized in the nine months ended September 28, 2019 in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency and lower net ~~gains~~losses on our venture capital investments and ~~our~~ life insurance policy investments for the three months ended March 28, 2020 as compared to net gains for both investments in the corresponding period in ~~2018.~~2019.

Income tax expense for the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 was ~~$25.0~~$4.6 million, a decrease of ~~$14.6~~$6.0 million compared to ~~$39.6~~$10.6 million for the corresponding period in ~~2018.~~2019. Our effective tax rate was ~~12.6%~~8.3% for the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020, compared to ~~19.2%~~16.0% for the corresponding period in ~~2018.~~2019. The decrease in our effective tax rate in the ~~2019~~2020 period compared to the ~~2018~~2019 period was primarily ~~due~~attributable to ~~recognizing a $20.4 million deferred~~increased tax ~~asset in the three months ended September 28, 2019 for net operating losses expected to be utilized in the future due to changes in the Company’s international financing structure.~~benefits from stock-based compensation deductions.

Liquidity and Capital Resources

We currently require cash to fund our working capital needs, capital expansion, ~~and~~ 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.~~future as previously discussed in our section on the COVID-19 pandemic impacts.

The following table presents our cash, cash equivalents and short-term investments:

~~On March 26, 2018, we amended and restated our $1.65 billion~~We have a credit facility, which ~~extended the maturity date and provided for~~consists of a $750.0 million term loan, of which $184.4 million remains outstanding as of March 28, 2020, and a ~~$1.55~~$2.05 billion multi-currency revolving ~~facility.~~facility (Credit Facility). The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. The revolving facility matures on March 26, 2023, and requires no scheduled payment before that date. On October 23, 2019, 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. The amount outstanding under the multi-currency revolving facility has not significantly changed since September 28, 2019. 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.

~~On April 3, 2018, we entered into~~We also have an indenture ~~(Base Indenture) with MUFG Union Bank, N.A. to allow~~that allows for senior notes offerings under supplemental indentures. ~~Concurrently on April 3,~~In 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,~~In 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 2026 Senior Notes and the 2028 Senior Notes were as follows:

The interest rates applicable to the term loan and revolving facility under the 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 1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon our leverage ratio.

We entered into foreign exchange forward contracts during the nine months ended September 28, 2019 and three months ended December 29, 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.

Repurchases of Common Stock

During the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, we did not repurchase any shares under our authorized stock repurchase program. As of ~~September~~March 28, ~~2019,~~2020, we had $129.1 million remaining on the authorized $1.3 billion stock repurchase program and we do not intend to repurchase shares for the remainder of ~~2019.~~2020. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, we acquired 0.1 million shares for ~~$18.0~~$23.7 million through such netting.

The following table presents our net cash provided by operating activities:


	Three Months Ended
	March 28, 2020		March 30, 2019
	(in millions)
Net income	$	50.8	$	55.7
Adjustments to reconcile net income to net cash provided by operating activities	87.8		55.1
Changes in assets and liabilities	(70.0)		(95.9)
Net cash provided by operating activities	$	68.6	$	14.9

Nine Months Ended
September 28, 2019 September 29, 2018
(in millions)
Income from continuing operations, net of income taxes $ 173.5
$ 167.0
Adjustments to reconcile net income from continuing operations, net of income taxes, to net cash provided by operating activities 163.8
133.0
Changes in assets and liabilities (37.0 ) 1.2
Net cash provided by operating activities $ 300.3
$ 301.2

Net cash provided by cash flows from operating activities represents 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 net income ~~from continuing operations~~ for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, deferred income taxes, gains and/or losses on venture capital investments, 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 the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, compared to the ~~nine~~three months ended ~~September 29, 2018,~~March 30, 2019, the ~~slight decrease~~increase in net cash provided by operating activities ~~was primarily~~was driven by ~~unfavorable~~higher net income adjusted for non-cash items. While net income was slightly less compared to the prior year, the non-cash items adjusting net income were higher, specifically venture capital and life insurance investment losses of approximately $18 million in three months ended March 28, 2020 compared to gains of approximately $13 million in the corresponding period in 2019. We experienced certain favorable changes in ~~operating assets and liabilities, specifically related to the~~working capital items, including favorable timing of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits), and ~~higher~~lower compensation payments compared to the prior year period; partially offset by the ~~favorable~~unfavorable timing of vendor and supplier payments compared to the same period in ~~2018.~~

The following table presents our net cash used in investing activities:

For the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, the primary use of cash used in investing activities related to the acquisition of ~~Citoxlab, the acquisition of a supplier,~~HemaCare, capital expenditures to support the growth of the business, and investments in certain venture capital and other equity investments. For the ~~nine~~three months ended ~~September 29, 2018,~~March 30, 2019, the primary use of cash used in investing activities related ~~primarily~~ to ~~our acquisitions of MPI Research and KWS BioTest, and~~ our capital expenditures to support the growth of the ~~business; partially offset by proceeds from net investments, which primarily related to short-term investments held by our U.K. operations.~~business.

The following table presents our net cash provided by (used in) financing activities:

Payments on long-term debt, revolving credit facility and finance lease obligations

For the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, net cash provided by financing activities reflected the net proceeds of ~~$272.6~~$484.7 million on our Credit Facility and finance lease obligations. Included in the net proceeds are the following amounts:

•Proceeds of approximately ~~$1.6 billion~~$415 million from our revolving Credit Facility to fund our recent acquisitions. Additionally, towards the end of the fiscal quarter, we borrowed an additional $150 million from our revolving Credit Facility to secure cash on hand in response to uncertainties due to the COVID-19 pandemic; partially offset by,

•Payments of approximately $10 million on our term loan and payments of $70 million to our revolving Credit Facility in the normal course of business throughout the fiscal quarter;

•Additionally, we had $798 million of gross payments, partially offset by $794 million of gross proceeds ~~and payments on the revolving credit facility, which resulted from~~in connection with a non-U.S. Euro functional currency entity repaying ~~an existing~~ Euro ~~loan~~loans and replacing the Euro ~~loan~~loans with a U.S. dollar denominated ~~loan.~~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 and net to zero.~~ activities.

Net cash ~~provided~~provided by financing activities also reflected proceeds from exercises of employee stock options of ~~$27.0 million. Net cash provided by financing activities was partially~~$22.6 million, offset by treasury stock purchases of ~~$18.0~~$23.7 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.~~requirements.

For the ~~nine~~three months ended ~~September 29, 2018,~~March 30, 2019, net cash ~~provided by~~used in financing activities reflected the ~~incremental~~net payments of $70.6 million on our Credit Facility and finance lease obligations. Included in the net proceeds ~~from~~are the ~~refinancing~~following amounts:

•Payments of $9 million on our ~~previous $1.65 billion credit facility~~term loan and payments of $3 million to our revolving Credit Facility in the ~~$2.3 billion credit facility and~~normal course of business throughout the ~~proceeds from our $500.0~~fiscal quarter;

•Additionally, we had $343 million ~~2026 Senior Notes; and proceeds from exercises~~ of ~~employee stock options of $30.2 million;~~gross payments, partially offset by $285 million 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 ~~on debt~~are presented as gross financing ~~costs of $18.3 million and~~activities.

Net cash used in financing activities also reflected treasury stock purchases of ~~$13.8~~$17.8 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding ~~requirements.~~requirements; partially offset by proceeds from exercises of employee stock options of $21.8 million.

Contractual Commitments and Obligations

The disclosure of our contractual commitments and obligations was reported in our Annual Report on Form 10-K for fiscal ~~2018.~~2019. There have been no material changes from the contractual commitments and obligations previously disclosed in our Annual Report on Form 10-K for fiscal ~~2018~~2019 other than the changes described in Note 2, “Business ~~Acquisitions,~~Combinations,” Note 7, “Fair Value,” Note 9, “Long-Term Debt and Finance Lease Obligations,” Note 16, “Leases,” and Note 17, “Commitments and Contingencies” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

As of ~~September~~March 28, ~~2019,~~2020, 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 the funds as of ~~September~~March 28, ~~2019~~2020 was ~~$128.1~~$128.4 million, of which we funded ~~$77.4~~$82.9 million through ~~September~~March 28, ~~2019.~~2020. Refer to Note 6, “Venture Capital and Other Investments” in this Quarterly Report on Form 10-Q for additional information.

Our off-balance sheet commitments related to our outstanding letters of credit as of ~~September~~March 28, ~~2019~~2020 were ~~$6.7~~$8.3 million.

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 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 ~~our~~the application of ~~the following~~our 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: (1) revenue recognition, (2) income taxes, (3) goodwill and intangible assets, (4) valuation and impairment of long-lived assets, (5) pension and other retirement benefit plans, and (6) stock-based compensation.results. Our significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for fiscal year ~~2018 as well as Note 16, “Leases” in this Quarterly Report on Form 10-Q.~~2019.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements please refer to Note 1, “Basis of Presentation,” in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, “Basis of Presentation,” we did not adopt any other new accounting pronouncements during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 that had a significant effect on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 3. 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.

We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of ~~September~~March 28, ~~2019,~~2020, 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 ~~$13.9~~$13.5 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 Chinese Yuan ~~Renminbi, and Japanese Yen. During~~Renminbi. During the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, the most significant drivers of foreign currency translation adjustment the Company recorded as part of Other comprehensive income (loss) were the ~~Euro,~~Canadian Dollar, British Pound, ~~Canadian Dollar,~~Hungarian Forint, Chinese Yuan Renminbi, Brazilian real, and ~~Japanese Yen.~~Euro.

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, 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. expenses, which will decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, expenses,

assets, liabilities, and cash flows will generally increase when reported in U.S. dollars. For the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, our revenue would have increased by ~~$65.7~~$21.9 million and our operating income would have ~~increased~~decreased by ~~$0.9~~$1.1 million, if the U.S. dollar exchange rate had strengthened by 10.0%, 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 the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, we entered into foreign exchange forward contracts to limit our foreign currency 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” in this Quarterly Report on Form 10-Q for additional information regarding ~~foreign currency contracts open as~~these types of ~~September 28, 2019.~~forward contracts.

Item 4. 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 ~~September~~March 28, ~~2019,~~2020, 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 recognizes 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.

(b) Changes in Internal Controls

The Company continued to execute a plan to centralize certain accounting transaction processing functions to internal shared service centers during the three months ended ~~September~~March 28, ~~2019.~~2020. 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 quarter ended ~~September~~March 28, ~~2019~~2020 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to Note 17, “Commitments and Contingencies” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

~~In addition~~Set forth below, elsewhere in this Form 10-Q 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-Q. 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. 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 and the risks described below should be carefully considered together with the other information set forth in this report ~~you should carefully consider~~and in future documents we file with the ~~factors discussed~~SEC.

The COVID-19 pandemic is dynamic and expanding. The continuation of this outbreak likely will have, and the emergence of other epidemic or pandemic crises could have, material adverse effects on our business, results of operations, or financial condition.

•deterioration of worldwide, regional or national economic conditions and activity, which could adversely affect global demand for our products and services;

•disruptions to our operations as a result of the potential health impact on our employees and crew, and on the workforces of our customers and business partners;

•temporary and/or partial closures of our facilities or the facilities of our customers (including academic institutions, government laboratories and private foundations) and third-party service providers;

•interruption of the operations of global supply chains and those of our suppliers;

•disruptions to our business from, or additional costs related to, new regulations, directives or practices implemented in response to the pandemic, such as travel restrictions, shelter in place/stay in place/work from home orders, increased inspection regimes, hygiene measures (such as quarantining and physical distancing) or increased implementation of remote working arrangements;

•potential reduced cash flows and financial condition, including potential liquidity constraints;

•reduced access to capital, including the ability to refinance any existing obligations, as a result of any credit tightening generally or due to continued declines in global financial markets, including to the prices of publicly-traded equity securities of us, our peers and of listed companies generally;

•potential deterioration in the financial condition and prospects of our customers or attempts by customers, suppliers or service providers to invoke force majeure contractual clauses, or the legal doctrines of impossibility or impracticability (or other similar doctrines) as a result of delays or other disruptions;

•potential delays in the commencement of, or the suspension or cancellation of, client studies; and

•the effects described elsewhere in these Risk ~~Factors” in~~Factors.

The COVID-19 pandemic has caused us to modify our ~~Annual Report on Form 10-K for fiscal year 2018, which~~business practices, including but not limited to health management of employees, customers and suppliers, management of production inventory, supply chain risk management, compensation practices and capital expenditure planning. We have formed a tiered structure of designated COVID-19 crisis management teams throughout our organization to identify, implement and monitor such actions as required by the dynamic exigencies arising from the pandemic. Such measures and others may not be sufficient to mitigate all the risks posed by COVID-19, and our ability to perform critical functions could be materially adversely affected.

Although disruption and effects from the COVID-19 pandemic may be temporary, given the dynamic nature of these circumstances and the worldwide nature of our business and operations, the duration of any business disruption and the related financial impact to us cannot be reasonably estimated at this time but could materially affect our business, results of operations and financial ~~condition,~~condition.

Changes and uncertainties in the economy have harmed and could continue to harm our operating results.

As the COVID-19 pandemic is still ongoing and may worsen, there is significant uncertainty surrounding its developments and impacts, including whether the current epidemic or continued spread of COVID-19 will cause a broader economic slowdown or a global recession, and we cannot predict at this time the impact it will have on our business or results of operations. Changes and uncertainties in the economy have harmed and could continue to harm our operating results. As a result of the continuing economic uncertainties, our operating results, and the economic strength of our customers and suppliers, are increasingly difficult to predict. Sales of our products and services, as well as access to our products and services within our supply chain, are affected by many factors, including, among others, general economic conditions, interest rates, inflation, liquidity in the credit markets, unemployment trends, shipping costs, geopolitical events, and other factors. If economic conditions significantly weaken on a global scale it may cause some of our customers to experience a slowdown, from time to time, which may in turn have an adverse effect on our sales and operating results. Changes and uncertainties in the economy also increase the risk of uncollectible accounts receivable. The pricing we receive from suppliers may also be impacted by general economic conditions. Continued and future changes and uncertainties in the economic climate in the United States and elsewhere could have a similar negative impact on the rate and amounts of purchases by our current and potential customers, create price inflation for our products, or otherwise have a negative impact on our expenses, gross margins and revenues, and could hinder our growth.

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 (including the COVID-19 pandemic and the impact of measures intended to reduce the spread of COVID-19) 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 section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-Q in addition to the sections entitled “Our Strategy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended December 28, 2019, filed with the Commission on February 11, 2020.

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. The impact of measures intended to reduce the spread of COVID-19 has caused us to temporarily suspend blood donations at our Research Products facilities, further limiting our ability to respond to changes in demand. Lack of access to sufficient capital, or lack of adequate time to properly (or the failure to adequately) respond to changes 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. Furthermore, changes in government budgetary priorities as a result of the COVID-19 pandemic and the impact of measures intended to reduce the spread of COVID-19 could reduce government funding of R&D that is unrelated to the disease, 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 that, when interrupted, adversely affects our business.

We depend on a limited international source of supply for certain products, such as large research models. Disruptions to their continued supply from time to time arise from health problems (including as a result of the COVID-19 pandemic and the spread of other diseases), 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, geopolitical disputes, measures intended to slow the spread of COVID-19 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 ~~future results. The risks described~~minimum commitment contracts, such mitigating efforts may not prove successful at ensuring a steady and timely supply or may require (and in the past have required) 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 ~~Annual Report~~Research Products business depends on ~~Form 10-K~~the availability of appropriate donors. As a result of the COVID-19 pandemic and the impact of measures intended to reduce the spread of COVID-19 we have chosen to temporarily suspend blood donations at our Research Products facilities, thus limiting our access to new donors. As donor participation declines, we may not be able to reduce costs sufficiently to maintain profitability of the Research Products business. Regulations intended to reduce the risk of introducing infectious diseases in the blood supply (including COVID-19) could also result in a decreased pool of potential donors or integrity of inventory. 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, the heightened fear and health concerns among the public resulting from widespread media coverage may result in a dramatic decline in donations when our blood donation facilities re-open.

We bear financial risk for contracts that may be terminated or reduced in scope, underpriced, subject to cost overruns or delayed.

Many of our agreements, including those which underlie our strategic relationships with some of our more significant 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.

Our counterparties (including our clients who are competitors) may elect to terminate their agreements with us for various reasons including:

•the invocation of force majeure clauses, or the legal doctrines of impossibility or impracticability (or other similar legal doctrines), as a result of the COVID-19 pandemic;

•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’s decision to forego or terminate a particular study;

•our competitors’ establishment of alternative distribution channels;

•dissatisfaction with our performance under the agreement;

•the loss of funding for the particular research study; or

•general convenience/counterparty preference.

If a counterparty 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; however, in many cases we are not entitled to any termination fees in the ~~only risks we face. Additional risks and uncertainties not currently known to us~~event of a termination as a result of force majeure. Cancellation of a large contract or ~~that we currently deem to be immaterial also may~~proximate delay, cancellation or conclusion of multiple contracts could materially adversely affect our business and, therefore, may adversely affect our operating results.

Furthermore, 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 underprice our contracts or otherwise overrun our cost estimates. Such underpricing or significant cost overruns could have an adverse effect on our business, results of operations, financial condition ~~and/or operating results. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for fiscal year 2018, except as disclosed below.~~and cash flows.

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 ~~for the purpose of stealing~~to steal data or ~~disrupting~~disrupt the ~~systems.~~ systems or for financial gain. Like other companies, we have on occasion experienced, and will continue to experience, threats and incursions to our data and systems, including malicious codes and viruses, phishing, business email compromise and social engineering attacks or other cyber-attacks. The number and complexity of these threats continue to increase over time.

While we have taken measures to protect ~~them~~our information systems from intrusion, in March 2019, we detected evidence that an unauthorized third party, ~~has~~who we believe was well resourced and highly sophisticated, accessed certain of our information systems and ~~acquired~~copied data. ~~The Company’s investigation is ongoing, but we believe that the incident is attributable to a sophisticated intruder.~~ We ~~are working~~worked with a leading ~~data~~cyber security firm to assist in our investigation and ~~are also coordinating~~coordinated with law enforcement authorities. ~~The~~Our investigation ~~indicates~~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.

Further, we are at risk of being targeted, and we have in the past been victim to, business email compromise fraud, which results in payments being made to illegitimate bank accounts. Although these instances have not resulted in our incurring material losses, if similar instances occur in the future, we may incur such losses.

Our contracts with our clients typically contain provisions that require us to keep confidential the information generated from the studies we conduct. ~~The~~In the event the confidentiality of such information is compromised, whether by unauthorized access ~~detected, as well as any~~or other breaches, we could ~~expose us~~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 ~~others.~~other parties. In addition, we may face investigations by government regulators and agencies as a result of ~~this incident~~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 ~~future incidents.~~

~~While~~lost client orders, as well as the ~~Company is in~~potential for complete inventory loss and disinfection of the ~~process of implementing additional security safeguards, it is expected~~affected quarantine rooms. Furthermore, while we often negotiate for contractual risk indemnification, the third party may refuse to take a number of months for all of these additional security safeguards to be fully implemented. While we have taken steps to limit the unauthorized third party’s access to our computer systems, we willfulfill its indemnification obligation or may be unable to ~~determine~~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 ~~this matter~~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 or the temporary closure of our facilities. Any action against us for violation of these laws or regulations, 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.



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



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



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

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

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

See Notes to Unaudited Condensed Consolidated Financial Statements.



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



	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



	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



	September 28, 2019					September 29, 2018
Location of hedge gain (loss)	Financial statement caption amount			Amount of gain (loss)		Financial statement caption amount			Amount of gain (loss)
	(in thousands)
Three Months Ended:
Interest expense	$	(5,698	)	$	14,311	$	(17,197	)	$	—
Nine Months Ended:
Interest expense	$	(36,520	)	$	21,622	$	(47,031	)	$	—



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 asset.
⁽²⁾ Derecognition of approximately $26 million of leased properties, recorded in Property, plant and equipment, 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-to-use asset 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 the Operating lease right-of-use asset.
⁽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 asset.
⁽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 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.



	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)
June 30, 2019 to July 27, 2019	387	$	142.10	—	$	129,105
July 28, 2019 to August 24, 2019	519	133.28		—	129,105
August 25, 2019 to September 28, 2019	246	131.01		—	129,105
Total	1,152			—