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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| | | | | |
FORM 10-Q |
(Mark One) | |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED September 30, 2023 | | | | | |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO |
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter) | | | | | | | | | | | | | | |
Delaware | | | | 06-1397316 |
(State or Other Jurisdiction of Incorporation or Organization) | | | | (I.R.S. Employer Identification No.) |
251 Ballardvale Street
Wilmington, Massachusetts 01887
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s telephone number, including area code): (781) 222-6000
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value | CRL | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☑ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 27, 2023, there were 51,296,804 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 30, 2023
TABLE OF CONTENTS | | | | | | | | |
Item | | Page |
PART I - FINANCIAL INFORMATION |
1 | Financial Statements | |
| Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2023 and September 24, 2022 | |
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2023 and September 24, 2022 | |
| Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2023 and December 31, 2022 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and September 24, 2022 | |
| Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 30, 2023 and September 24, 2022 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | |
2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Overview | |
| Results of Operations | |
| Liquidity and Capital Resources | |
| Critical Accounting Policies and Estimates | |
| Recent Accounting Pronouncements | |
3 | Quantitative and Qualitative Disclosure About Market Risk | |
4 | Controls and Procedures | |
PART II - OTHER INFORMATION |
1 | Legal Proceedings | |
1A | Risk Factors | |
2 | Unregistered Sales of Equity Securities and Use of Proceeds | |
5 | Other Information | |
6 | Exhibits | |
| | |
Signatures | |
Special Note on Factors Affecting Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could,” and other similar expressions which are predictions of, indicate future events and trends or which do not relate to historical matters, are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties and assumptions that are difficult to predict.
For example, we may use forward-looking statements when addressing topics such as: our expectations regarding the availability of non-human primates and our ability to diversify our non-human primate supply chain; the outcome of (1) the U.S. government investigations and inquiries related to the NHP supply chain (including shipments of non-human primates from Cambodia received by the Company) and (2) the putative securities class action lawsuit filed against us and three current/former officers on May 19, 2023; the timing of the development and implementation of additional procedures to reasonably ensure that non-human primates imported to the United States from Cambodia are purpose-bred; changes and uncertainties in the global economy and financial markets, including any changes in business, political, or economic conditions due to the November 16, 2022 announcement by the U.S. Department of Justice through the U.S. Attorney’s Office for the Southern District of Florida that a Cambodian non-human primate supplier and two Cambodian officials had been criminally charged in connection with illegally importing non-human primates into the United States; client demand, particularly future demand for drug discovery and development products and services, including the outsourcing of these services; our expectations with respect to our ability to meet financial targets; 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; our ability to successfully execute our business strategy; our ability to timely build infrastructure to satisfy capacity needs and support business growth, our ability to fund our operations for the foreseeable future, the impact of unauthorized access into our information systems, including the timing and effectiveness of any enhanced security and monitoring present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy, business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical and biotechnology companies, venture capital investments, and opportunities for future similar arrangements; our cost structure; our expectations regarding acquisitions and divestitures, including their impact and projected timing; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements, particularly with respect to our CDMO business); 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 and the impact of operations and cost structure alignment efforts (including as estimated on an annualized basis); our expectations with respect to our study cancellation rate and the impact of such cancellations; 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; our liquidity; and the impact of litigation, including our ability to successfully defend litigation against us. In addition, these statements include the impact of economic and market conditions on us and our clients, the effects of our cost-saving actions and the steps to optimize returns to shareholders on an effective and timely basis; and our ability to withstand the current market conditions.
Forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document, or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, under the sections entitled “Our Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in this Quarterly Report on Form 10-Q, under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” in our press releases, and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or risks. New information, future events, or risks may cause the forward-looking events we discuss in this report not to occur.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Service revenue | $ | 869,759 | | | $ | 812,894 | | | $ | 2,602,016 | | | $ | 2,316,206 | |
Product revenue | 156,864 | | | 176,263 | | | 513,917 | | | 560,011 | |
Total revenue | 1,026,623 | | | 989,157 | | | 3,115,933 | | | 2,876,217 | |
Costs and expenses: | | | | | | | |
Cost of services provided (excluding amortization of intangible assets) | 587,560 | | | 530,706 | | | 1,731,136 | | | 1,540,193 | |
Cost of products sold (excluding amortization of intangible assets) | 77,223 | | | 88,228 | | | 246,326 | | | 272,257 | |
Selling, general and administrative | 176,109 | | | 183,714 | | | 550,713 | | | 465,458 | |
Amortization of intangible assets | 34,229 | | | 35,533 | | | 103,419 | | | 111,144 | |
Operating income | 151,502 | | | 150,976 | | | 484,339 | | | 487,165 | |
Other income (expense): | | | | | | | |
Interest income | 1,373 | | | 122 | | | 3,605 | | | 437 | |
Interest expense | (33,742) | | | (11,375) | | | (103,166) | | | (24,512) | |
Other expense, net | (6,260) | | | (16,616) | | | (12,200) | | | (85,024) | |
Income before income taxes | 112,873 | | | 123,107 | | | 372,578 | | | 378,066 | |
Provision for income taxes | 24,852 | | | 25,495 | | | 81,160 | | | 74,564 | |
Net income | 88,021 | | | 97,612 | | | 291,418 | | | 303,502 | |
Less: Net income attributable to noncontrolling interests | 632 | | | 1,139 | | | 3,878 | | | 4,686 | |
Net income attributable to common shareholders | $ | 87,389 | | | $ | 96,473 | | | $ | 287,540 | | | $ | 298,816 | |
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Earnings per common share | | | | | | | |
Net income attributable to common shareholders: | | | | | | | |
Basic | $ | 1.70 | | | $ | 1.90 | | | $ | 5.62 | | | $ | 5.88 | |
Diluted | $ | 1.69 | | | $ | 1.88 | | | $ | 5.58 | | | $ | 5.83 | |
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Weighted-average number of common shares outstanding: | | | | | | | |
Basic | 51,283 | | | 50,870 | | | 51,199 | | | 50,778 | |
Diluted | 51,607 | | | 51,283 | | | 51,493 | | | 51,285 | |
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See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
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| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Net income | $ | 88,021 | | | $ | 97,612 | | | $ | 291,418 | | | $ | 303,502 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment and other | (63,997) | | | (151,294) | | | (17,457) | | | (258,103) | |
Amortization of net loss, settlement losses, and prior service benefit included in total cost for pension and other post-retirement benefit plans | 177 | | | 731 | | | 521 | | | 2,218 | |
Unrealized gains on hedging instruments | 539 | | | — | | | 5,183 | | | — | |
Other comprehensive loss, before income taxes | (63,281) | | | (150,563) | | | (11,753) | | | (255,885) | |
Less: Income tax expense related to items of other comprehensive income | (3,292) | | | (11,201) | | | (3,393) | | | (20,095) | |
Comprehensive income (loss), net of income taxes | 28,032 | | | (41,750) | | | 283,058 | | | 67,712 | |
Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes | 440 | | | (1,170) | | | 1,527 | | | (236) | |
Comprehensive income (loss) attributable to common shareholders, net of income taxes | $ | 27,592 | | | $ | (40,580) | | | $ | 281,531 | | | $ | 67,948 | |
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See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts) | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | $ | 157,174 | | | $ | 233,912 | | |
Trade receivables and contract assets, net of allowances for credit losses of $21,187 and $11,278, respectively | 799,310 | | | 752,390 | | |
Inventories | 292,972 | | | 255,809 | | |
Prepaid assets | 101,555 | | | 89,341 | | |
Other current assets | 93,314 | | | 107,580 | | |
Total current assets | 1,444,325 | | | 1,439,032 | | |
Property, plant and equipment, net | 1,525,485 | | | 1,465,655 | | |
Venture capital and strategic equity investments | 301,847 | | | 311,602 | | |
Operating lease right-of-use assets, net | 375,322 | | | 391,762 | | |
Goodwill | 2,884,602 | | | 2,849,903 | | |
Intangible assets, net | 886,286 | | | 955,275 | | |
Deferred tax assets | 34,264 | | | 41,262 | | |
Other assets | 154,876 | | | 148,279 | | |
Total assets | $ | 7,607,007 | | | $ | 7,602,770 | | |
Liabilities, Redeemable Noncontrolling Interests and Equity | | | | |
Current liabilities: | | | | |
Accounts payable | $ | 136,341 | | | $ | 205,915 | | |
Accrued compensation | 224,183 | | | 197,078 | | |
Deferred revenue | 250,485 | | | 264,259 | | |
Accrued liabilities | 198,062 | | | 219,758 | | |
Other current liabilities | 184,745 | | | 204,575 | | |
Total current liabilities | 993,816 | | | 1,091,585 | | |
Long-term debt, net and finance leases | 2,514,217 | | | 2,707,531 | | |
Operating lease right-of-use liabilities | 390,437 | | | 389,745 | | |
Deferred tax liabilities | 185,310 | | | 215,582 | | |
Other long-term liabilities | 172,518 | | | 174,822 | | |
Total liabilities | 4,256,298 | | | 4,579,265 | | |
Commitments and contingencies (Notes 2, 8, 10, and 14) | | | | |
Redeemable noncontrolling interest | 39,948 | | | 42,427 | | |
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; 51,400 shares issued and 51,296 shares outstanding as of September 30, 2023, and 50,944 shares issued and outstanding as of December 31, 2022 | 514 | | | 509 | | |
Additional paid-in capital | 1,877,120 | | | 1,804,940 | | |
Retained earnings | 1,720,441 | | | 1,432,901 | | |
Treasury stock, at cost, 104 and zero shares, as of September 30, 2023 and December 31, 2022, respectively | (24,016) | | | — | | |
Accumulated other comprehensive loss | (268,066) | | | (262,057) | | |
Total equity attributable to common shareholders | 3,305,993 | | | 2,976,293 | | |
Noncontrolling interests (nonredeemable) | 4,768 | | | 4,785 | | |
Total equity | 3,310,761 | | | 2,981,078 | | |
Total liabilities, redeemable noncontrolling interests and equity | $ | 7,607,007 | | | $ | 7,602,770 | | |
See Notes to Unaudited Condensed Consolidated Financial Statements. | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
Cash flows relating to operating activities | | | |
Net income | $ | 291,418 | | | $ | 303,502 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 233,610 | | | 226,325 | |
Stock-based compensation | 52,527 | | | 51,548 | |
Loss on debt extinguishment and amortization of other financing costs | 2,975 | | | 3,054 | |
Deferred income taxes | (28,251) | | | (26,323) | |
Loss on venture capital and strategic equity investments, net | 9,246 | | | 20,068 | |
Long-lived asset impairment charges | 26,202 | | | — | |
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Loss on divestitures, net | 995 | | | — | |
Changes in fair value of contingent consideration arrangements | 1,810 | | | (15,420) | |
Other, net | 13,192 | | | 31,574 | |
Changes in assets and liabilities: | | | |
Trade receivables and contract assets, net | (59,081) | | | (174,169) | |
Inventories | (44,126) | | | (76,283) | |
Accounts payable | (26,531) | | | 5,979 | |
Accrued compensation | 28,438 | | | (32,734) | |
Deferred revenue | (9,997) | | | 53,565 | |
Customer contract deposits | (21,534) | | | 16,234 | |
Other assets and liabilities, net | (7,938) | | | (2,037) | |
Net cash provided by operating activities | 462,955 | | | 384,883 | |
Cash flows relating to investing activities | | | |
Acquisition of businesses and assets, net of cash acquired | (50,166) | | | (283,392) | |
Capital expenditures | (240,205) | | | (235,709) | |
Purchases of investments and contributions to venture capital investments | (36,322) | | | (129,363) | |
Proceeds from sale of investments | 3,953 | | | 3,104 | |
Other, net | (2,044) | | | (6,945) | |
Net cash used in investing activities | (324,784) | | | (652,305) | |
Cash flows relating to financing activities | | | |
Proceeds from long-term debt and revolving credit facility | 333,034 | | | 2,798,665 | |
Proceeds from exercises of stock options | 19,658 | | | 17,710 | |
Payments on long-term debt, revolving credit facility, and finance lease obligations | (530,909) | | | (2,524,387) | |
Purchase of treasury stock | (24,016) | | | (38,492) | |
Payments of contingent consideration | (2,711) | | | (10,356) | |
Purchases of additional equity interests, net | — | | | (30,533) | |
Other, net | (4,145) | | | (6,048) | |
Net cash (used in) provided by financing activities | (209,089) | | | 206,559 | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (4,680) | | | 10,726 | |
Net change in cash, cash equivalents, and restricted cash | (75,598) | | | (50,137) | |
Cash, cash equivalents, and restricted cash, beginning of period | 241,214 | | | 246,314 | |
Cash, cash equivalents, and restricted cash, end of period | $ | 165,616 | | | $ | 196,177 | |
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See Notes to Unaudited Condensed Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(in thousands)
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| 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 31, 2022 | 50,944 | | | $ | 509 | | | $ | 1,804,940 | | | $ | 1,432,901 | | | $ | (262,057) | | | — | | | $ | — | | | $ | 2,976,293 | | | $ | 4,785 | | | $ | 2,981,078 | |
Net income | — | | | — | | | — | | | 103,131 | | | — | | | — | | | — | | | 103,131 | | | 501 | | | 103,632 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 22,933 | | | — | | | — | | | 22,933 | | | — | | | 22,933 | |
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Issuance of stock under employee compensation plans | 316 | | | 3 | | | 11,789 | | | — | | | — | | | — | | | — | | | 11,792 | | | — | | | 11,792 | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 78 | | | (19,012) | | | (19,012) | | | — | | | (19,012) | |
Stock-based compensation | — | | | — | | | 13,460 | | | — | | | — | | | — | | | — | | | 13,460 | | | — | | | 13,460 | |
April 1, 2023 | 51,260 | | | 512 | | | 1,830,189 | | | 1,536,032 | | | (239,124) | | | 78 | | | (19,012) | | | 3,108,597 | | | 5,286 | | | 3,113,883 | |
Net income | — | | | — | | | — | | | 97,020 | | | — | | | — | | | — | | | 97,020 | | | 566 | | | 97,586 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 30,855 | | | — | | | — | | | 30,855 | | | — | | | 30,855 | |
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Issuance of stock under employee compensation plans | 110 | | | 1 | | | 3,926 | | | — | | | — | | | — | | | — | | | 3,927 | | | — | | | 3,927 | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 26 | | | (4,966) | | | (4,966) | | | — | | | (4,966) | |
Stock-based compensation | — | | | — | | | 16,270 | | | — | | | — | | | — | | | — | | | 16,270 | | | — | | | 16,270 | |
July 1, 2023 | 51,370 | | | 513 | | | 1,850,385 | | | 1,633,052 | | | (208,269) | | | 104 | | | (23,978) | | | 3,251,703 | | | 5,852 | | | 3,257,555 | |
Net income | — | | | — | | | — | | | 87,389 | | | — | | | — | | | — | | | 87,389 | | | 561 | | | 87,950 | |
Other comprehensive income | — | | | — | | | — | | | — | | | (59,797) | | | — | | | — | | | (59,797) | | | — | | | (59,797) | |
Dividends declared to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,645) | | | (1,645) | |
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Issuance of stock under employee compensation plans | 30 | | | 1 | | | 3,938 | | | — | | | — | | | — | | | — | | | 3,939 | | | — | | | 3,939 | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | — | | | (38) | | | (38) | | | — | | | (38) | |
Stock-based compensation | — | | | — | | | 22,797 | | | — | | | — | | | — | | | — | | | 22,797 | | | — | | | 22,797 | |
September 30, 2023 | 51,400 | | | $ | 514 | | | $ | 1,877,120 | | | $ | 1,720,441 | | | $ | (268,066) | | | 104 | | | $ | (24,016) | | | $ | 3,305,993 | | | $ | 4,768 | | | $ | 3,310,761 | |
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| 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 25, 2021 | 50,480 | | | 505 | | | 1,718,304 | | | 980,751 | | | (164,740) | | | — | | | — | | | 2,534,820 | | | 4,162 | | | 2,538,982 | |
Net income | — | | | — | | | — | | | 93,022 | | | — | | | — | | | — | | | 93,022 | | | 560 | | | 93,582 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (10,193) | | | — | | | — | | | (10,193) | | | — | | | (10,193) | |
Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | (1,161) | | | — | | | — | | | — | | | — | | | (1,161) | | | — | | | (1,161) | |
Issuance of stock under employee compensation plans | 431 | | | 4 | | | 13,067 | | | — | | | — | | | — | | | — | | | 13,071 | | | — | | | 13,071 | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 111 | | | (33,994) | | | (33,994) | | | — | | | (33,994) | |
Stock-based compensation | — | | | — | | | 14,619 | | | — | | | — | | | — | | | — | | | 14,619 | | | — | | | 14,619 | |
March 26, 2022 | 50,911 | | | 509 | | | 1,744,829 | | | 1,073,773 | | | (174,933) | | | 111 | | | (33,994) | | | 2,610,184 | | | 4,722 | | | 2,614,906 | |
Net income | — | | | — | | | — | | | 109,321 | | | — | | | — | | | — | | | 109,321 | | | 499 | | | 109,820 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (83,622) | | | — | | | — | | | (83,622) | | | — | | | (83,622) | |
Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | (1,132) | | | — | | | — | | | — | | | — | | | (1,132) | | | — | | | (1,132) | |
Issuance of stock under employee compensation plans | 79 | | | 1 | | | 2,498 | | | — | | | — | | | — | | | — | | | 2,499 | | | — | | | 2,499 | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | 18 | | | (4,474) | | | (4,474) | | | — | | | (4,474) | |
Stock-based compensation | — | | | — | | | 14,930 | | | — | | | — | | | — | | | — | | | 14,930 | | | — | | | 14,930 | |
June 25, 2022 | 50,990 | | | 510 | | | 1,761,125 | | | 1,183,094 | | | (258,555) | | | 129 | | | (38,468) | | | 2,647,706 | | | 5,221 | | | 2,652,927 | |
Net income | — | | | — | | | — | | | 96,473 | | | — | | | — | | | — | | | 96,473 | | | 664 | | | 97,137 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (137,053) | | | — | | | — | | | (137,053) | | | — | | | (137,053) | |
Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | (4,388) | | | — | | | — | | | — | | | — | | | (4,388) | | | — | | | (4,388) | |
Issuance of stock under employee compensation plans | 16 | | | — | | | 2,140 | | | — | | | — | | | — | | | — | | | 2,140 | | | — | | | 2,140 | |
Purchase of treasury shares | — | | | — | | | — | | | — | | | — | | | — | | | (24) | | | (24) | | | — | | | (24) | |
Stock-based compensation | — | | | — | | | 21,999 | | | — | | | — | | | — | | | — | | | 21,999 | | | — | | | 21,999 | |
September 24, 2022 | 51,006 | | | $ | 510 | | | $ | 1,780,876 | | | $ | 1,279,567 | | | $ | (395,608) | | | 129 | | | $ | (38,492) | | | $ | 2,626,853 | | | $ | 5,885 | | | $ | 2,632,738 | |
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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 2022. 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.
Newly Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” ASU 2022-04 requires quantitative and qualitative disclosures about the use of supplier finance programs. The ASU is effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years for selected disclosures, and will be applied on a prospective basis. The Company participates in certain supplier finance programs that are immaterial to the unaudited condensed consolidated financial statements and related disclosures.
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 2022.
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 unaudited condensed consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Redeemable noncontrolling interests, where the noncontrolling interest holders have the ability to sell the remaining interests, are classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. Intercompany balances and transactions are eliminated in consolidation.
The Company’s fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which occurred in fiscal year 2022.
Segment Reporting
The Company reports its results in three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing).
The Company’s RMS reportable segment includes the Research Models, Research Model Services, and Cell Solutions 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; Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services) within our clients’ facilities and utilizing both our Charles River Accelerator and Development Lab (CRADL™) and our Explora BioLabs options, in which we provide vivarium space to our clients; and Cell Solutions, which
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 two businesses: Discovery Services and Safety Assessment. The Company provides regulated and non-regulated DSA services to support the research, development, and regulatory-required safety testing of potential new drugs, including therapeutic discovery and optimization plus in vitro and in vivo studies, laboratory support services, and strategic non-clinical consulting and program management to support product development.
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 services and Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO). In December of 2022, the Company sold the Avian Vaccine Services business (Avian), previously reported in the Manufacturing segment, which supplied specific-pathogen-free chicken eggs and chickens.
2. ACQUISITIONS AND DIVESTITURES
Fiscal 2023 Acquisition
SAMDI Tech, Inc.
On January 27, 2023, the Company acquired SAMDI Tech, Inc., (SAMDI), a leading provider of high-quality, label-free high-throughput screening (HTS) solutions for drug discovery research. The acquisition of SAMDI will provide clients with seamless access to the premier, label-free HTS MS platform and create a comprehensive, library of drug discovery solutions. The purchase price of SAMDI was $62.8 million, net of $0.4 million in cash, inclusive of a 20% strategic equity interest previously owned by the Company of $12.6 million. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment.
Fiscal 2022 Acquisition
Explora BioLabs Holdings, Inc.
On April 5, 2022, the Company acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements the Company’s existing Insourcing Solutions business, specifically the CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The purchase price of Explora BioLabs was $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from the Company’s credit facility (Credit Facility). This business is reported as part of the Company’s RMS reportable segment.
Purchase price information
The purchase price allocation was as follows:
| | | | | | | | | | | |
| SAMDI | | Explora BioLabs |
| January 27, 2023 | | April 5, 2022 |
| (in thousands) |
Trade receivables | $ | 513 | | | $ | 7,679 | |
Other current assets (excluding cash) | 75 | | | 1,067 | |
Property, plant and equipment | 593 | | | 37,369 | |
Operating lease right-of-use asset, net | — | | | 48,613 | |
Goodwill (1) | 37,129 | | | 215,752 | |
Definite-lived intangible assets | 33,070 | | | 70,100 | |
Other long-term assets | 6 | | | 556 | |
Deferred revenue | (43) | | | (3,507) | |
Other current liabilities | (351) | | | (15,507) | |
Operating lease right-of-use liabilities (Long-term) | — | | | (57,193) | |
Deferred tax liabilities | (8,191) | | | (18,601) | |
Other long-term liabilities | — | | | (1,807) | |
Total purchase price allocation | $ | 62,801 | | | $ | 284,521 | |
| | | |
|
(1) The goodwill resulting from these transactions is primarily attributable to the potential growth of the Company’s segments from new customers introduced to the acquired businesses and the assembled workforce of the acquirees, thus is not deductible for tax purposes. Explora BioLabs had $5.0 million of goodwill due to a prior asset acquisition that is deductible for tax purposes. |
|
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The definite-lived intangible assets acquired were as follows:
| | | | | | | | | | | | | | | | |
| SAMDI | Explora BioLabs | | | | | | | | |
Definite-Lived Intangible Assets | (in thousands) | | | | | | | | |
Client relationships | $ | 23,400 | | $ | 64,000 | | | | | | | | | |
Other intangible assets | 9,670 | | 6,100 | | | | | | | | | |
Total definite-lived intangible assets | $ | 33,070 | | $ | 70,100 | | | | | | | | | |
| | | | | | | | | | |
Weighted Average Amortization Life | (in years) | | | | | | | | |
Client relationships | 15 | 13 | | | | | | | | |
Other intangible assets | 7 | 4 | | | | | | | | |
Total definite-lived intangible assets | 12 | 12 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Transaction and Integration Costs | | | | | | | |
Selling, general and administrative expenses | $ | 1,040 | | | $ | 3,065 | | | $ | 3,328 | | | $ | 14,604 | |
| | | | | | | |
Divestitures
The Company routinely evaluates the strategic fit and fundamental performance of its global businesses, divesting operations that do not meet key business criteria. As part of this ongoing assessment, the Company determined that certain capital could be better deployed in other long-term growth opportunities.
Avian Vaccine Services
On December 20, 2022, the Company sold its Avian Vaccine Services business (Avian) to a private investor group for a purchase price of $167.3 million in cash. The Company may also earn up to $30.0 million of contingent payments, which are tied to certain annual results of the Avian business from January 2024 through December 2027. The contingent payments have been fair valued at $10.3 million using a discounted probability weighted model. The Avian business was reported in the Company’s Manufacturing reportable segment. During fiscal year 2022, the Company recorded a gain on the divestiture of Avian of $123.4 million within Other income (expense) on the Company’s condensed consolidated statements of income.
The carrying amounts of the major classes of assets and liabilities associated with the divestitures of the businesses were as follows:
| | | | | |
| December 19, 2022 |
| Avian |
| (in thousands) |
Assets | |
Current assets | $ | 30,545 | |
Property, plant, and equipment, net | 24,602 | |
Operating lease right-of-use assets, net | 611 | |
Goodwill | 3,168 | |
Intangible assets, net | 1,629 | |
Other assets | 10 | |
Total assets | $ | 60,565 | |
| |
Liabilities | |
Current liabilities | $ | 8,139 | |
Operating lease right-of-use liabilities | 331 | |
Total liabilities | $ | 8,470 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major business line and timing of transfer of products or services:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Timing of Revenue Recognition: | | | | | | | |
RMS | | | | | | | |
Services and products transferred over time | $ | 94,883 | | | $ | 88,174 | | | $ | 282,980 | | | $ | 243,901 | |
Services and products transferred at a point in time | 91,965 | | | 91,940 | | | 313,582 | | | 299,165 | |
Total RMS revenue | 186,848 | | | 180,114 | | | 596,562 | | | 543,066 | |
DSA | | | | | | | |
Services and products transferred over time | 663,128 | | | 618,270 | | | 1,987,617 | | | 1,749,977 | |
Services and products transferred at a point in time | 900 | | | 1,193 | | | 2,221 | | | 5,662 | |
Total DSA revenue | 664,028 | | | 619,463 | | | 1,989,838 | | | 1,755,639 | |
Manufacturing | | | | | | | |
Services and products transferred over time | 94,446 | | | 89,173 | | | 280,992 | | | 276,993 | |
Services and products transferred at a point in time | 81,301 | | | 100,407 | | | 248,541 | | | 300,519 | |
Total Manufacturing revenue | 175,747 | | | 189,580 | | | 529,533 | | | 577,512 | |
Total revenue | $ | 1,026,623 | | | $ | 989,157 | | | $ | 3,115,933 | | | $ | 2,876,217 | |
Contract Balances from Contracts with Customers
The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Assets from contracts with customers | | | |
Client receivables | $ | 591,979 | | | $ | 559,410 | |
Unbilled revenue | 228,518 | | | 204,258 | |
Total | 820,497 | | | 763,668 | |
Less: Allowance for credit losses | (21,187) | | | (11,278) | |
Trade receivables and contract assets, net | $ | 799,310 | | | $ | 752,390 | |
| | | |
Liabilities from contracts with customers | | | |
Current deferred revenue | $ | 250,485 | | | $ | 264,259 | |
Long-term deferred revenue (included in Other long-term liabilities) | 29,391 | | | 25,795 | |
Customer contract deposits (included in Other current liabilities) | 69,847 | | | 91,640 | |
Approximately 90% of unbilled revenue as of December 31, 2022, which was $204 million, was billed during the nine months ended September 30, 2023. Approximately 85% of unbilled revenue as of December 25, 2021, which was $161 million, was billed during the nine months ended September 24, 2022.
Approximately 80% of contract liabilities as of December 31, 2022, which was $290 million, were recognized as revenue during the nine months ended September 30, 2023. Approximately 85% of contract liabilities as of December 25, 2021, which was $240 million, were recognized as revenue during the nine months ended September 24, 2022.
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $52 million and $54 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively. Net provisions of $10.2 million and $4.4 million were recorded to the allowance for credit losses for the nine months ended September 30, 2023 and September 24, 2022, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 30, 2023. Excluded from the disclosure is the value of unsatisfied performance obligations for contracts with an original expected length of one year or less, contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed, and service revenue recognized in accordance with ASC 842, “Leases”. The aggregate amount of transaction price allocated to the remaining performance obligations for all open customer contracts as of September 30, 2023 was $957.7 million. The Company will recognize revenues for these performance obligations as they are satisfied, approximately 50% of which is expected to occur within the next twelve months and the remainder recognized thereafter during the remaining contract term.
Other Performance Obligations
As part of the Company’s service offerings, the Company has identified performance obligations related to leasing Company owned assets. In certain arrangements, customers obtain substantially all of the economic benefits of the identified assets, which may include manufacturing suites and related equipment, and have the right to direct the assets’ use over the term of the contract. The associated revenue is recognized on a straight-line basis over the term of the lease, which is generally less than one year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 | | |
| (in thousands) | Affected Line Item in the Unaudited Condensed Consolidated Statements of Income |
Lease revenue | $ | 22,254 | | | $ | 15,790 | | | $ | 70,235 | | | $ | 37,558 | | | Service revenue |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. SEGMENT AND GEOGRAPHIC INFORMATION
The following table presents revenue and other financial information by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (in thousands) |
RMS | | | | | | | |
Revenue | $ | 186,848 | | | $ | 180,114 | | | $ | 596,562 | | | $ | 543,066 | |
Operating income | 28,326 | | | 35,891 | | | 117,653 | | | 123,299 | |
Depreciation and amortization | 13,872 | | | 13,128 | | | 41,310 | | | 35,825 | |
Capital expenditures | 9,192 | | | 10,743 | | | 35,769 | | | 33,239 | |
DSA | | | | | | | |
Revenue | $ | 664,028 | | | $ | 619,463 | | | $ | 1,989,838 | | | $ | 1,755,639 | |
Operating income | 146,819 | | | 142,143 | | | 479,788 | | | 375,922 | |
Depreciation and amortization | 44,088 | | | 43,913 | | | 129,662 | | | 135,328 | |
Capital expenditures | 41,967 | | | 43,400 | | | 155,477 | | | 133,908 | |
Manufacturing | | | | | | | |
Revenue | $ | 175,747 | | | $ | 189,580 | | | $ | 529,533 | | | $ | 577,512 | |
Operating income | 26,275 | | | 31,479 | | | 52,784 | | | 140,350 | |
Depreciation and amortization | 20,070 | | | 17,005 | | | 59,677 | | | 53,487 | |
Capital expenditures | 14,349 | | | 18,137 | | | 46,949 | | | 65,396 | |
Unallocated Corporate | | | | | | | |
Operating income (1) | $ | (49,918) | | | $ | (58,537) | | | $ | (165,886) | | | $ | (152,406) | |
Depreciation and amortization | 840 | | | 559 | | | 2,961 | | | 1,685 | |
Capital expenditures | 439 | | | 113 | | | 2,010 | | | 3,166 | |
Consolidated | | | | | | | |
Revenue | $ | 1,026,623 | | | $ | 989,157 | | | $ | 3,115,933 | | | $ | 2,876,217 | |
Operating income | 151,502 | | | 150,976 | | | 484,339 | | | 487,165 | |
Depreciation and amortization | 78,870 | | | 74,605 | | | 233,610 | | | 226,325 | |
Capital expenditures | 65,947 | | | 72,393 | | | 240,205 | | | 235,709 | |
| | | | | | | |
(1) Operating income for 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 30, 2023 | $ | 590,316 | | | $ | 264,787 | | | $ | 129,023 | | | $ | 40,233 | | | $ | 2,264 | | | $ | 1,026,623 | |
September 24, 2022 | 595,265 | | | 245,928 | | | 101,601 | | | 43,803 | | | 2,560 | | | 989,157 | |
| | | | | | | | | | | |
Nine Months Ended: | | | | | | | | | | | |
September 30, 2023 | $ | 1,802,532 | | | $ | 805,466 | | | $ | 357,276 | | | $ | 142,910 | | | $ | 7,749 | | | $ | 3,115,933 | |
September 24, 2022 | 1,688,731 | | | 760,599 | | | 280,541 | | | 138,988 | | | 7,358 | | | 2,876,217 | |
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
5. INVENTORY
Inventories
The composition of inventories is as follows:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Raw materials and supplies | $ | 40,669 | | | $ | 38,892 | |
Work in process | 46,544 | | | 48,367 | |
Finished products | 205,759 | | | 168,550 | |
Inventories | $ | 292,972 | | | $ | 255,809 | |
6. VENTURE CAPITAL AND STRATEGIC EQUITY INVESTMENTS
Venture capital investments are summarized below:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Beginning balance | $ | 129,012 | | | $ | 149,640 | |
Capital contributions | 12,056 | | | 11,815 | |
Distributions | (12,972) | | | (7,733) | |
Losses | (14,258) | | | (20,063) | |
Foreign currency translation | 260 | | | (2,149) | |
Ending balance | $ | 114,098 | | | $ | 131,510 | |
The Company also invests, with minority positions, directly in equity of predominantly privately held companies. Strategic investments are summarized below:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Beginning balance | $ | 182,590 | | | $ | 51,712 | |
Purchase of investments | 21,489 | | | 117,220 | |
Distributions | (7,493) | | | (1,710) | |
Gain (loss) | 5,012 | | | (5) | |
Reduction for acquisition of entity | (12,635) | | | — | |
Foreign currency translation | (1,214) | | | (8,636) | |
Ending balance | $ | 187,749 | | | $ | 158,581 | |
In April 2022, the Company acquired a 49% equity interest in a supplier supporting the DSA reportable segment (the Investee) for $90.0 million up front and an additional future contingent payment of up to $5.0 million based upon the Investee’s future performance. In August 2023, a contingent payment of $2.5 million was made to the Investee, with an additional $2.5 million to be earned based on future performance. The total allocable basis of the investment exceeded the proportional interest in the Investee’s underlying net assets by $86.7 million, which has been allocated primarily to goodwill, intangible assets (client relationships and backlog), and deferred tax liabilities in the amount of $26.2 million, $71.2 million, and $10.7 million respectively. On July 28, 2023, the Company signed an agreement to acquire an additional 41% equity stake in the supplier, which upon closing, will result in ownership of 90%. The preliminary purchase price for the 41% equity is $143 million in cash, subject to customary closing adjustments, with additional contingent payments of up to $55 million based on future performance over a 3-year period. The Company will have the call option right to purchase the remaining 10% equity up until one month after the sixth anniversary of closing. On the first anniversary of the expiration of the call option, a 12-month put option will be triggered giving the seller the right to require the Company to acquire shares of the Investee from the seller. The consummation of the acquisition of the additional 41% equity is subject to regulatory approval and closing conditions being satisfied. Accordingly, the timing of close is uncertain.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Current assets measured at fair value: | (in thousands) |
Cash equivalents | $ | — | | | $ | 564 | | | $ | — | | | $ | 564 | |
Other assets: | | | | | | | |
Life insurance policies | — | | | 36,672 | | | — | | | 36,672 | |
Interest rate swap | — | | | 3,660 | | | — | | | 3,660 | |
Total assets measured at fair value | $ | — | | | $ | 40,896 | | | $ | — | | | $ | 40,896 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the nine months ended September 30, 2023, there were no transfers between levels.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Current assets measured at fair value: | (in thousands) |
Cash equivalents | $ | — | | | $ | 78 | | | $ | — | | | $ | 78 | |
Other assets: | | | | | | | |
Life insurance policies | — | | | 34,527 | | | — | | | 34,527 | |
Total assets measured at fair value | $ | — | | | $ | 34,605 | | | $ | — | | | $ | 34,605 | |
| | | | | | | |
Accrued liabilities measured at fair value: | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 13,431 | | | $ | 13,431 | |
Other long-term liabilities measured at fair value: | | | | | | | |
Interest rate swap | — | | | 1,523 | | | — | | | 1,523 | |
Total liabilities measured at fair value | $ | — | | | $ | 1,523 | | | $ | 13,431 | | | $ | 14,954 | |
During the year ended December 31, 2022, there were no transfers between levels.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to the Company’s acquisitions.
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Beginning balance | $ | 13,431 | | | $ | 37,244 | |
| | | |
Payments | (15,130) | | | (11,476) | |
Total gains or losses (realized/unrealized): | | | |
Adjustment of previously recorded contingent liability | 1,810 | | | (15,340) | |
Foreign currency translation | (111) | | | (1,767) | |
Ending balance | $ | — | | | $ | 8,661 | |
The Company estimates the fair value of contingent consideration obligations through valuation models, such as probability-weighted and option pricing models, which incorporate probability adjusted assumptions and simulations related to the achievement of the milestones and the likelihood of making related payments. The unobservable inputs used in the fair value measurements include the probabilities of successful achievement of certain financial targets, forecasted results or targets, volatility, and discount rates. The remaining maximum potential payments are approximately $43 million, of which the value accrued as of September 30, 2023 is zero as the probability of achieving the maximum target is estimated to be 0%. The volatility and weighted average cost of capital is approximately 40% and 16%, respectively. Increases or decreases in these assumptions may result in a higher or lower fair value measurement, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Flow Hedge
The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In November 2022, the Company entered into an interest rate swap with a notional amount of $500 million to manage interest rate fluctuation related to floating rate borrowings under the Credit Facility, at a fixed rate of 4.700%.
In March 2023 and in conjunction with an amendment of the Credit Agreement (Second Amendment), the Company modified the variable rate on its interest rate swap from 1-month LIBOR to 1-month adjusted term SOFR. Effective with the modification, the Company will pay a fixed rate of 4.65% on its swap maturing November 2, 2024. The Company elected to apply the optional expedient in ASC 848, Reference Rate Reform, in connection with modifying its interest rate swap from LIBOR to SOFR that enabled it to consider the modification a continuation of the existing contract. As a result, the transition did not have an impact on the Company’s hedge accounting or a material impact to the Company’s financial statements.
Debt Instruments
The book value of the Company’s revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2 within the fair value hierarchy.
The book value of the Company’s Senior Notes are fixed rate obligations carried at amortized cost. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy. The book value and fair value of the Company’s Senior Notes is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Book Value | | Fair Value | | Book Value | | Fair Value |
| (in thousands) |
4.25% Senior Notes due 2028 | $ | 500,000 | | | $ | 448,350 | | | $ | 500,000 | | | $ | 460,450 | |
3.75% Senior Notes due 2029 | 500,000 | | | 427,500 | | | 500,000 | | | 442,200 | |
4.00% Senior Notes due 2031 | 500,000 | | | 423,100 | | | 500,000 | | | 432,500 | |
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
| | | | | | | | | | | | | | | | | | | | | | | |
| RMS | | DSA (1) | | Manufacturing | | Total |
| (in thousands) |
December 31, 2022 | $ | 497,710 | | | $ | 1,433,601 | | | $ | 918,592 | | | $ | 2,849,903 | |
Acquisitions | — | | | 37,129 | | | — | | | 37,129 | |
| | | | | | | |
Foreign exchange | (893) | | | (3,518) | | | 1,981 | | | (2,430) | |
September 30, 2023 | $ | 496,817 | | | $ | 1,467,212 | | | $ | 920,573 | | | $ | 2,884,602 | |
(1) DSA includes accumulated impairment losses of $1 billion, which were recognized in fiscal years 2008 and 2010. |
The increase in goodwill during the nine months ended September 30, 2023 related to the acquisition of SAMDI in the DSA reportable segment.
Intangible Assets, Net
The following table displays intangible assets, net by major class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| (in thousands) |
Client relationships | $ | 1,515,254 | | | $ | (679,587) | | | $ | 835,667 | | | $ | 1,491,926 | | | $ | (591,417) | | | $ | 900,509 | |
Technology | 139,124 | | | (107,488) | | | 31,636 | | | 129,626 | | | (101,655) | | | 27,971 | |
Backlog | 15,272 | | | (14,041) | | | 1,231 | | | 15,236 | | | (12,512) | | | 2,724 | |
Trademarks and trade names | 12,655 | | | (5,183) | | | 7,472 | | | 12,617 | | | (4,410) | | | 8,207 | |
Other | 37,994 | | | (27,714) | | | 10,280 | | | 37,985 | | | (22,121) | | | 15,864 | |
Intangible assets | $ | 1,720,299 | | | $ | (834,013) | | | $ | 886,286 | | | $ | 1,687,390 | | | $ | (732,115) | | | $ | 955,275 | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The decrease in intangible assets, net during the nine months ended September 30, 2023 related primarily to normal amortization over the useful lives, offset by the acquisition of SAMDI.
9. DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt, net and finance leases consists of the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Revolving facility | $ | 1,003,744 | | | $ | 1,197,586 | |
4.25% Senior Notes due 2028 | 500,000 | | | 500,000 | |
3.75% Senior Notes due 2029 | 500,000 | | | 500,000 | |
4.00% Senior Notes due 2031 | 500,000 | | | 500,000 | |
Other debt | 797 | | | 1,594 | |
Finance leases | 27,995 | | | 30,646 | |
Total debt and finance leases | 2,532,536 | | | 2,729,826 | |
Less: | | | |
Current portion of long-term debt | 797 | | | 1,347 | |
Current portion of finance leases | 1,880 | | | 2,330 | |
Current portion of long-term debt and finance leases | 2,677 | | | 3,677 | |
Long-term debt and finance leases | 2,529,859 | | | 2,726,149 | |
Debt discount and debt issuance costs | (15,642) | | | (18,618) | |
Long-term debt, net and finance leases | $ | 2,514,217 | | | $ | 2,707,531 | |
As of September 30, 2023 and December 31, 2022, the weighted average interest rate on the Company’s debt was 4.88% and 4.58%, respectively.
During the three and nine months ended September 24, 2022, the Company had multiple U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility, which were between $250 million and $400 million each. To limit this foreign currency exposure, the Company entered into foreign exchange forward contracts, which were not designated as hedging instruments. The Company did not have any U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility during the three and nine months ended September 30, 2023.
The gains and losses incurred on these transactions were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | |
| | | | September 24, 2022 | | | | September 24, 2022 | | Affected Line Item in the Unaudited Condensed Consolidated Statements of Income |
| | | (in thousands) | | |
Loss on foreign debt remeasurement | | | | (16,006) | | | | | (46,529) | | | Other expense, net |
Gain on foreign exchange forward contract | | | | 17,406 | | | | | 49,712 | | | Interest expense |
Letters of Credit
As of September 30, 2023 and December 31, 2022, the Company had $21.6 million and $18.6 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 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Numerator: | | | | | | | |
Net income | $ | 88,021 | | | $ | 97,612 | | | $ | 291,418 | | | $ | 303,502 | |
Less: Net income attributable to noncontrolling interests | 632 | | | 1,139 | | | 3,878 | | | 4,686 | |
Net income attributable to common shareholders | $ | 87,389 | | | $ | 96,473 | | | $ | 287,540 | | | $ | 298,816 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares outstanding - Basic | 51,283 | | | 50,870 | | | 51,199 | | | 50,778 | |
Effect of dilutive securities: | | | | | | | |
Stock options, restricted stock units and performance share units | 324 | | | 413 | | | 294 | | | 507 | |
Weighted-average shares outstanding - Diluted | 51,607 | | | 51,283 | | | 51,493 | | | 51,285 | |
| | | | | | | |
Anti-dilutive common stock equivalents (1) | 588 | | | 571 | | | 514 | | | 568 | |
| | | | | | | |
(1) These common stock equivalents were outstanding for the periods presented, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect. |
Treasury Shares
The Company’s Board of Directors has authorized a $1.3 billion stock repurchase program. As of September 30, 2023, 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. The Company acquired shares of 0.1 million in the nine months ended September 30, 2023 and nine months ended September 24, 2022, for $24.0 million and $38.5 million, respectively, from such netting.
Accumulated Other Comprehensive Income (Loss)
Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment and Other | | Pension and Other Post-Retirement Benefit Plans | | Net Unrealized (Loss) Gain on Cash Flow Hedge | | Total |
| (in thousands) |
December 31, 2022 | $ | (217,785) | | | $ | (43,114) | | | $ | (1,158) | | | $ | (262,057) | |
Other comprehensive income before reclassifications | (15,106) | | | 521 | | | 5,183 | | | (9,402) | |
| | | | | | | |
Net current period other comprehensive income | (15,106) | | | 521 | | | 5,183 | | | (9,402) | |
Income tax expense (benefit) | (4,883) | | | 248 | | | 1,242 | | | (3,393) | |
September 30, 2023 | $ | (228,008) | | | $ | (42,841) | | | $ | 2,783 | | | $ | (268,066) | |
Nonredeemable Noncontrolling Interest
The Company has an investment in an entity whose financial results are consolidated in the Company’s unaudited condensed consolidated financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest within Equity in the accompanying unaudited condensed consolidated balance sheets. The activity within the nonredeemable noncontrolling interest was not significant during the three and nine months ended September 30, 2023 and September 24, 2022.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Redeemable Noncontrolling Interests
The Company holds a 92% ownership interest in Vital River, a commercial provider of research models and related services in China as of September 30, 2023. The Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 8% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. 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 and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest ($24.7 million as of September 30, 2023). The amount that the Company could be required to pay to purchase the remaining 8% equity interest is not limited. During the fourth quarter of fiscal 2022, the Company exercised its option to acquire the remaining 8%, which is subject to customary closing conditions. The Company expects the transaction to close prior to the end of fiscal year 2023.
In 2019, the Company acquired an 80% equity interest in a subsidiary that is fully consolidated under the voting interest model, which includes a 20% redeemable noncontrolling interest. In June 2022, the Company purchased an additional 10% interest in the subsidiary for $15.0 million, resulting in a remaining noncontrolling interest of 10%. Beginning in 2024, the Company has the right to purchase, and the noncontrolling interest holders have the right to sell (Put/call option), the remaining 10% equity interest at its appraised value. 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 ($15.3 million as of September 30, 2023) or a predetermined floor value. The amount that the Company could be required to pay to purchase the remaining 10% equity interest is not limited.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Beginning balance | $ | 42,427 | | | $ | 53,010 | |
Adjustments to redemption value | — | | | 6,681 | |
Additional purchases | — | | | (15,000) | |
Net income | 2,250 | | | 2,963 | |
Dividends | (2,378) | | | (3,525) | |
Foreign currency translation | (2,351) | | | (4,923) | |
Ending balance | $ | 39,948 | | | $ | 39,206 | |
11. INCOME TAXES
The Company’s effective tax rates for the three months ended September 30, 2023 and September 24, 2022 were 22.0% and 20.7%, respectively. The increase in the three month effective tax rates is attributable primarily to jurisdictional earnings mix and an increase in net U.S. taxation of foreign operations. The Company’s effective tax rates for the nine months ended September 30, 2023 and September 24, 2022 were 21.8% and 19.7%, respectively. The increase in the nine month effective tax rates from the prior year period was primarily attributable to a decreased tax benefit from stock-based compensation deductions in the nine months ended September 30, 2023.
For the three months ended September 30, 2023, the Company’s unrecognized tax benefits increased by $0.4 million to $26.0 million, primarily due to increases in research and development tax credit reserves. For the three months ended September 30, 2023, the amount of unrecognized income tax benefits that would impact the effective tax rate increased by $0.6 million to $22.4 million for the same reasons discussed above. The accrued interest on unrecognized tax benefits was $1.1 million as of September 30, 2023. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $4 million over the next twelve-month period, primarily due to audit settlements and expiring statutes of limitations.
The Company’s prepaid and accrued tax positions are as follows:
| | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | Affected Line Item in the Unaudited Condensed Consolidated Balance Sheets |
| (in thousands) | |
Prepaid income tax | $ | 76,675 | | | $ | 88,550 | | Other current assets |
Accrued income taxes | 44,873 | | | 39,854 | | Other current liabilities |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the U.S., the U.K., China, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2019.
The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., Canada, and India. The Company does not anticipate resolution of these audits will have a material impact on its consolidated financial statements.
12. RESTRUCTURING AND ASSET IMPAIRMENTS
The Company has undertaken restructuring actions impacting the reportable segments at various locations across North America, Europe and Asia. This includes workforce right-sizing actions resulting in severance and transition costs; and costs related to the consolidation of facilities resulting in asset impairment and accelerated depreciation charges.
The following table presents restructuring costs by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (in thousands) |
RMS | $ | 965 | | | $ | (110) | | | $ | 965 | | | $ | 1,017 | |
DSA | 13,220 | | | 71 | | | 13,218 | | | 687 | |
Manufacturing | 975 | | | 1,165 | | | 7,162 | | | 1,543 | |
Unallocated corporate | — | | | (23) | | | — | | | 1,231 | |
Total | $ | 15,160 | | | $ | 1,103 | | | $ | 21,345 | | | $ | 4,478 | |
The following table presents restructuring costs as included within the Company’s unaudited condensed consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | September 24, 2022 |
| Severance and Transition Costs | | Asset Impairments and Other Costs | | Total | | Severance and Transition Costs | | Asset Impairments and Other Costs | | Total |
| (in thousands) |
Three Months Ended | | | | | | | | | | | |
Cost of services provided (excluding amortization of intangible assets) | $ | 2,160 | | | $ | 11,418 | | | $ | 13,578 | | | $ | 243 | | | $ | 685 | | | $ | 928 | |
Cost of products sold (excluding amortization of intangible assets) | 480 | | | 174 | | | 654 | | | (42) | | | 239 | | | 197 | |
Selling, general and administrative | 937 | | | (9) | | | 928 | | | (129) | | | 107 | | | (22) | |
Total restructuring costs | $ | 3,577 | | | $ | 11,583 | | | $ | 15,160 | | | $ | 72 | | | $ | 1,031 | | | $ | 1,103 | |
| | | | | | | | | | | |
Nine Months Ended | | | | | | | | | | | |
Cost of services provided (excluding amortization of intangible assets) | $ | 5,088 | | | $ | 11,418 | | | $ | 16,506 | | | $ | 876 | | | $ | 685 | | | $ | 1,561 | |
Cost of products sold (excluding amortization of intangible assets) | 534 | | | 2,920 | | | 3,454 | | | 336 | | | 239 | | | 575 | |
Selling, general and administrative | 1,386 | | | (1) | | | 1,385 | | | 1,760 | | | 582 | | | 2,342 | |
Total restructuring costs | $ | 7,008 | | | $ | 14,337 | | | $ | 21,345 | | | $ | 2,972 | | | $ | 1,506 | | | $ | 4,478 | |
As of September 30, 2023 and December 31, 2022, $5.0 million and $1.3 million, respectively, of severance and other personnel related costs liabilities and facilities related costs liabilities were included in accrued compensation and accrued liabilities within the Company’s unaudited condensed consolidated balance sheets.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Non-cash investing activities: | | | |
Purchases of Property, plant and equipment included in Accounts payable and Accrued liabilities | $ | 41,526 | | | $ | 51,772 | |
Cash, cash equivalents and restricted cash is included in the accompanying unaudited balance sheet as follows:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Supplemental cash flow information: | | | |
Cash and cash equivalents | $ | 157,174 | | | $ | 233,912 | |
| | | |
Restricted cash included in Other current assets | 6,586 | | | 6,192 | |
Restricted cash included in Other assets | 1,856 | | | 1,110 | |
Cash, cash equivalents, and restricted cash, end of period | $ | 165,616 | | | $ | 241,214 | |
14. COMMITMENTS AND CONTINGENCIES
Litigation
On February 16, 2023, the Company was informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into the Company’s conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 the Company received a grand jury subpoena requesting certain documents related to such investigation. The Company is aware of a parallel civil investigation being undertaken by the DOJ and USFWS. The Company is cooperating with the DOJ and the USFWS and believes that the concerns raised with respect to the Company’s conduct are without merit. The Company maintains a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates it received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, the Company has voluntarily suspended future shipments of non-human primates from Cambodia to the United States until such time that the Company and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported from Cambodia are purpose-bred. The Company continues to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. On May 16, 2023, the Company received an inquiry from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting it to voluntarily provide information, subsequently augmented by a document subpoena, primarily related to the sourcing of non-human primates, and the Company is cooperating with the request. The Company is not able to predict what action, if any, might be taken in the future by the DOJ, USFWS, SEC or other governmental authorities as a result of the investigations. None of the DOJ, USFWS or SEC has provided the Company with any specific timeline or indication as to when these investigations or, specific to the DOJ and USFWS, discussions regarding future processes and procedures, will be concluded or resolved. The Company cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities.
A putative securities class action was filed on May 19, 2023 against the Company and three of its current/former officers (James Foster, the Chief Executive Officer; David R. Smith, the former Chief Financial Officer; and Flavia Pease, the current Chief Financial Officer) in the United States District Court for the District of Massachusetts. The complaint asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") on behalf of a putative class of purchasers of Company securities from May 5, 2020 through February 21, 2023. The complaint alleges that certain of the Company’s disclosures about its practices with respect to the importation of non-human primates made during the putative class period were materially false or misleading. On August 31, 2023, the court appointed the State Teachers Retirement System of Ohio as lead plaintiff, and the Company intends to file a motion to dismiss. While the Company cannot predict the outcome of this matter, it believes the class action to be without merit and plans to vigorously defend against it. The Company cannot reasonably estimate the maximum potential exposure or the range of possible loss in association with this matter.
Aside from the matter above, the Company believes there are no other matters pending against the Company that could have a material impact on the Company’s business, financial condition, or results of operations.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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 2022. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” included elsewhere within this Form 10-Q. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, leading, non-clinical global drug development partner. For over 75 years, we have been in the business of providing the research models required in the research and development of new drugs, devices, and therapies. Over this time, we have built upon our 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 supports our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities, including our contract development and manufacturing organization (CDMO) business. Utilizing our broad portfolio of products and services enables our clients to create a more efficient and flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.
Our client base includes major global pharmaceutical companies, many biotechnology companies; agricultural and industrial chemical, life science, veterinary medicine, medical device, diagnostic and consumer product companies; contract research and contract manufacturing organizations; and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing).
Our RMS reportable segment includes the Research Models, Research Model Services, and Cell Solutions 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) within our clients’ facilities as well as our own vivarium space, utilizing both our Charles River Accelerator and Development Lab (CRADL) and our Explora BioLabs options. Cell Solutions provides controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood.
Our DSA segment is comprised of two businesses: Discovery Services and Safety Assessment. We provide regulated and non-regulated DSA services to support the research, development, and regulatory-required safety testing of potential new drugs, including therapeutic discovery and optimization plus in vitro and in vivo studies, laboratory support services, and strategic non-clinical consulting and program management to support product development.
Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services and Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO). In December of 2022, we sold the Avian Vaccine Services (Avian) business, reported in the Manufacturing segment, which supplied specific-pathogen-free chicken eggs and chickens.
U.S. Government Investigations into the Non-Human Primate Supply Chain
On February 16, 2023, we were informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into our conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 we received a grand jury subpoena requesting certain documents related to such investigation. We are aware of a parallel civil investigation being undertaken by the DOJ and USFWS. We are cooperating with the DOJ and the USFWS and believe that the concerns raised with respect to our conduct are without merit. We maintain a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and have operated under the belief that all shipments of non-human primates we received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, we have voluntarily suspended future shipments of non-human primates from Cambodia to the United States until such time that we and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported from Cambodia are purpose-bred. We continue to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. On May 16, 2023, we received an inquiry from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting to voluntarily provide information, subsequently augmented with a document subpoena, primarily related to the sourcing of non-human primates, and we are cooperating with the request. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS or other governmental authorities as a result of the investigations. None of the DOJ, USFWS or SEC has provided us with any specific timeline or indication as to when these investigations or, specific to the DOJ and USFWS, discussions regarding future processes and procedures, will be concluded or resolved. We cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities. For our assessment of risk factors surrounding the aforementioned matter refer to Item 1A, “Risk Factors” and Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for fiscal year 2022.
Global Economic Environment
In March 2023, the global economy experienced a series of banking crises, which sparked a period of widespread investor concerns regarding the U.S. and international financial systems, particularly access to capital. We do not hold cash deposits or securities at any of the impacted banks. Our banking relationships are assessed as we believe necessary and appropriate and our access to cash and funding is secure and diversified. We believe there are no material impacts to our Company as of September 30, 2023 based on the current situation. We will continue to monitor the global banking markets as they evolve for potential impacts to our operating and financial results such as increased interest rates, commercial financing terms or costs, and liquidity concerns in the broader market or business partners.
We are seeing a more cautious spending environment from biopharmaceutical clients with a decrease in DSA backlog to $2.60 billion as of September 30, 2023 from $3.15 billion as of December 31, 2022, but continue to see stability in our client’s drug development activity as they are moving their promising drug candidates forward. There was a sequential improvement in our DSA net book-to-bill ratio and study cancellation rate during the third quarter of fiscal year 2023. These trends are supported by external indicators, including stable-to-improving biotech funding. The third quarter was the second consecutive quarterly increase in biotech funding on a trailing-twelve-month basis, led by venture capital investments. We will continue to monitor the market trends carefully for potential impacts to our operating and financial results and there are no material impacts to our Company as of September 30, 2023. In response to recent trends observed, we have undertaken restructuring actions within all reportable segments at various locations across North America, Europe and Asia. This includes workforce right-sizing actions, resulting in severance and transition costs; and costs related to the consolidation of facilities, resulting in asset impairment and accelerated depreciation charges. We expect that the effectuated actions would result in approximately $40 million of cost savings on an annualized basis.
Our global operations make the effective tax rate sensitive to significant tax law changes. Several countries have begun to enact legislation to implement the Organization for Economic Cooperation and Development’s (OECD) international tax framework, including the Pillar II global minimum tax regime with effect from January 1, 2024 or later. We are currently monitoring these developments and are in the process of evaluating the potential impact on our results of operations.
In February 2022, the Russian Federation launched an invasion of the country of Ukraine resulting in conflict in the region and a variety of sanctions against the Russian Federation enacted by several governments, including the U.S, U.K., Canada and European Union. The conflict has had and continues to have, direct and indirect adverse effects on financial markets and global supply chain disruptions. We do not have any direct operations in either Russia or Ukraine and there were no material impacts to our financial statements during fiscal year 2022 as a result of the situation. We will continue to monitor the situation as it evolves for potential impacts to our operating and financial results such as increased inflation, supply chain, or cybersecurity risks in subsequent periods. Refer to Item 1A, “Risk Factors” of our Annual Report on Form 10-K for fiscal year 2022 for our assessment of risk factors surrounding inflationary, supply chain and cybersecurity risks.
Recent Acquisitions
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.
Fiscal Year 2023 Acquisition
On January 27, 2023, we acquired SAMDI Tech, Inc., (SAMDI), a leading provider of high-quality, label-free high-throughput screening (HTS) solutions for drug discovery research. The acquisition of SAMDI will provide clients with seamless access to the premier, label-free HTS MS platform and create a comprehensive, library of drug discovery solutions. The preliminary purchase price of SAMDI was $62.8 million, inclusive of a 20% strategic equity interest previously owned by us. The
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.
Fiscal Year 2022 Acquisition
On April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements our existing IS business, specifically our CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The purchase price of Explora BioLabs was $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from our Credit Facility. This business is reported as part of our RMS reportable segment.
Recent Divestitures
We routinely evaluate strategic fit and fundamental performance of our global infrastructure and divest operations that do not meet key business criteria or where we believe capital could be better deployed in long-term growth opportunities. On December 20, 2022, we completed the sale of our Avian Vaccine Services (Avian) business to a private investor group for a preliminary purchase price of $167 million in cash, subject to certain customary closing adjustments, and future contingent payments up to an additional $30 million. This business was reported in our Manufacturing reportable segment.
Fiscal Quarters
Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which occurred in fiscal year 2022.
Overview of Results of Operations and Liquidity
Revenue for the three months ended September 30, 2023 increased $37.5 million, or 3.8%, to $1,026.6 million compared to $989.2 million in the corresponding period in 2022. The increase in revenue was primarily due to increased volume and pricing within our Safety Assessment business and the effect of changes in foreign currency exchange rates; partially offset by the divestiture of our Avian business when compared to the corresponding three month period in 2022.
Revenue for the nine months ended September 30, 2023 increased $239.7 million, or 8.3%, to $3,115.9 million compared to $2,876.2 million in the corresponding period in 2022. The increase in revenue was primarily due to increased volume and pricing within our Safety Assessment business and our recent acquisition of Explora BioLabs; partially offset by the divestiture of our Avian business and the effect of changes in foreign currency exchange rates when compared to the corresponding nine month period in 2022.
In the three months ended September 30, 2023, our operating income and operating income margin were $151.5 million and 14.8%, respectively, compared with $151.0 million and 15.3%, respectively, in the corresponding period of 2022. In the nine months ended September 30, 2023, our operating income and operating income margin were $484.3 million and 15.5% respectively, compared with $487.2 million and 16.9%, respectively, in the corresponding of 2022. The decrease in operating income margins for the three and nine months ended September 30, 2023 was primarily due to higher operating costs within our Manufacturing segment, restructuring and asset impairment charges principally in our DSA and Manufacturing segments, and the divestiture of the Avian business; partially offset by contributions of higher revenue described above.
Net income attributable to common shareholders decreased to $87.4 million in the three months ended September 30, 2023, from $96.5 million in the corresponding period of 2022. Net income attributable to common shareholders decreased to $287.5 million in the nine months ended September 30, 2023, from $298.8 million in the corresponding period of 2022. The decrease in Net income attributable to common shareholders for the three and nine months ended September 30, 2023 was primarily due to the higher interest expense due to higher interest rates on our variable debt compared to the corresponding period of 2022.
During the nine months ended September 30, 2023, our cash flows from operations was $463.0 million compared with $384.9 million for the same period in 2022. The increase was driven by lower variable compensation payments and timing of inventory purchases; partially offset by timing of our vendor and supplier payments compared to the same period in 2022.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Results of Operations
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 24, 2022
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
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| Three Months Ended | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Service revenue | $ | 869,759 | | | $ | 812,894 | | | $ | 56,865 | | | 7.0 | % |
Product revenue | 156,864 | | | 176,263 | | | (19,399) | | | (11.0) | % |
Total revenue | $ | 1,026,623 | | | $ | 989,157 | | | $ | 37,466 | | | 3.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
RMS | $ | 186,848 | | | $ | 180,114 | | | $ | 6,734 | | | 3.7 | % | | 0.5 | % |
DSA | 664,028 | | | 619,463 | | | 44,565 | | | 7.2 | % | | 1.5 | % |
Manufacturing | 175,747 | | | 189,580 | | | (13,833) | | | (7.3) | % | | 1.7 | % |
Total revenue | $ | 1,026,623 | | | $ | 989,157 | | | $ | 37,466 | | | 3.8 | % | | 1.4 | % |
The following table presents operating income by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) | | |
RMS | $ | 28,326 | | | $ | 35,891 | | | $ | (7,565) | | | (21.1) | % | | 1.2 | % |
DSA | 146,819 | | | 142,143 | | | 4,676 | | | 3.3 | % | | 1.7 | % |
Manufacturing | 26,275 | | | 31,479 | | | (5,204) | | | (16.5) | % | | 4.4 | % |
Unallocated corporate | (49,918) | | | (58,537) | | | 8,619 | | | (14.7) | % | | 0.3 | % |
Total operating income | $ | 151,502 | | | $ | 150,976 | | | $ | 526 | | | 0.3 | % | | 2.6 | % |
Operating income % of revenue | 14.8 | % | | 15.3 | % | | | | (50) bps | | |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
Revenue | $ | 186,848 | | | $ | 180,114 | | | $ | 6,734 | | | 3.7 | % | | 0.5 | % |
Cost of revenue (excluding amortization of intangible assets) | 126,640 | | | 113,207 | | | 13,433 | | | 11.9 | % | | |
Selling, general and administrative | 26,483 | | | 25,549 | | | 934 | | | 3.7 | % | | |
Amortization of intangible assets | 5,399 | | | 5,467 | | | (68) | | | (1.2) | % | | |
Operating income | $ | 28,326 | | | $ | 35,891 | | | $ | (7,565) | | | (21.1) | % | | 1.2 | % |
Operating income % of revenue | 15.2 | % | | 19.9 | % | | | | (470) bps | | |
RMS revenue increased $6.7 million due primarily to higher research model services revenue, specifically the Insourcing Solutions business, higher small research model sales all geographic regions, and the effect of changes in foreign currency exchange rates; partially offset by lower revenue in the Cell Solutions business and the timing of large research models sales in China.
RMS operating income decreased $7.6 million compared to the corresponding period in 2022. RMS operating income as a percentage of revenue for the three months ended September 30, 2023 was 15.2%, a decrease of (470) bps from 19.9% for the corresponding period in 2022. Operating income and operating income as a percentage of revenue decreased primarily due to
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
higher operating costs associated with our Cell Solutions business, timing of large research model sales in China and the mix of small research models products and services; partially offset by effect of changes in foreign currency exchange rates.
DSA
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| Three Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
Revenue | $ | 664,028 | | | $ | 619,463 | | | $ | 44,565 | | | 7.2 | % | | 1.5 | % |
Cost of revenue (excluding amortization of intangible assets) | 436,174 | | | 400,444 | | | 35,730 | | | 8.9 | % | | |
Selling, general and administrative | 63,369 | | | 56,925 | | | 6,444 | | | 11.3 | % | | |
Amortization of intangible assets | 17,666 | | | 19,951 | | | (2,285) | | | (11.5) | % | | |
Operating income | $ | 146,819 | | | $ | 142,143 | | | $ | 4,676 | | | 3.3 | % | | 1.7 | % |
Operating income % of revenue | 22.1 | % | | 22.9 | % | | | | (80) bps | | |
DSA revenue increased $44.6 million due primarily to service revenue volume and pricing increases within our Safety Assessment business, the acquisition of SAMDI which contributed $2.3 million to service revenue, and the effect of changes in foreign currency rates; partially offset by decreases in our Discovery Services business.
DSA operating income increased $4.7 million during the three months ended September 30, 2023 compared to the corresponding period in 2022 due to contributions from higher revenue. DSA operating income as a percentage of revenue for the three months ended September 30, 2023 was 22.1%, a decrease of (80) bps from 22.9% for the corresponding period in 2022. The decrease was primarily due to asset impairment charges related to a Discovery Services site closure in California; higher legal costs incurred in connection with the investigations by the U.S. government into the non-human primate supply chain; and higher operating and staffing costs associated with our Discovery Services business.
Manufacturing
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| Three Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
Revenue | $ | 175,747 | | | $ | 189,580 | | | $ | (13,833) | | | (7.3) | % | | 1.7 | % |
Cost of revenue (excluding amortization of intangible assets) | 101,968 | | | 105,282 | | | (3,314) | | | (3.1) | % | | |
Selling, general and administrative | 36,338 | | | 42,703 | | | (6,365) | | | (14.9) | % | | |
Amortization of intangible assets | 11,166 | | | 10,116 | | | 1,050 | | | 10.4 | % | | |
Operating income | $ | 26,275 | | | $ | 31,479 | | | $ | (5,204) | | | (16.5) | % | | 4.4% |
Operating income % of revenue | 15.0 | % | | 16.6 | % | | | | (160) bps | | |
Manufacturing revenue decreased $13.8 million due primarily to the divestiture of our Avian business, which decreased revenue by $18.6 million, and lower services revenue from our Biologics Testing and Microbial Solutions businesses; partially offset by higher revenue within our CDMO businesses and the effect of changes in foreign currency exchange rates.
Manufacturing operating income decreased $5.2 million during the three months ended September 30, 2023 compared to the corresponding period in 2022. Manufacturing operating income as a percentage of revenue for the three months ended September 30, 2023 was 15.0%, a decrease of 160 bps from 16.6% for the corresponding period in 2022. Operating income and operating income as a percentage of revenue decreased primarily due to the divestiture of the Avian business, and lower operating income within our Biologics Solutions business, including higher operating costs within both the Biologics Testing and CDMO businesses; partially offset by the effect of changes in foreign currency exchange rates.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Unallocated Corporate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) | | |
Unallocated corporate | $ | 49,918 | | | $ | 58,537 | | | $ | (8,619) | | | (14.7) | % | | 0.3 | % |
Unallocated corporate % of revenue | 4.9 | % | | 5.9 | % | | | | (100) bps | | |
Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $8.6 million, or 14.7%, compared to the corresponding period in 2022 is primarily related to timing of variable compensation expenses, digital investments and positive net settlements on our virtual power purchase agreements. Costs as a percentage of revenue for the three months ended September 30, 2023 was 4.9%, a decrease of (100) bps from 5.9% for the corresponding period in 2022.
Other Income (Expense)
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| | | | | | | |
| Three Months Ended | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Other income (expense): | | | | | | | |
Interest income | $ | 1,373 | | | $ | 122 | | | $ | 1,251 | | | 1,025.4 | % |
Interest expense | (33,742) | | | (11,375) | | | (22,367) | | | 196.6 | % |
Other income (expense), net | (6,260) | | | (16,616) | | | 10,356 | | | (62.3) | % |
Total other expense, net | $ | (38,629) | | | $ | (27,869) | | | $ | (10,760) | | | 38.6 | % |
Interest expense for the three months ended September 30, 2023 was $33.7 million, an increase of $22.4 million, or 196.6%, compared to $11.4 million in the corresponding period in 2022. The increase was due primarily to higher interest rates, and the absence of $17.4 million of gains recognized in connection with a debt-related foreign exchange forward contract in the corresponding period in 2022.
Other expense, net for the three months ended September 30, 2023 was $6.3 million, a decrease of $10.4 million, or 62.3%, compared to Other expense, net of $16.6 million for the corresponding period in 2022. The decrease was due primarily to the absence of $16.0 million of foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency, and net losses incurred on our venture capital investments as compared to net gains incurred during fiscal year 2022.
Income Taxes
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| Three Months Ended | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Provision for income taxes | $ | 24,852 | | | $ | 25,495 | | | $ | (643) | | | (2.5) | % |
Effective tax rate | 22.0 | % | | 20.7 | % | | | | 130 bps |
Income tax expense for the three months ended September 30, 2023 was $24.9 million, a decrease of $0.6 million compared to $25.5 million for the corresponding period in 2022. Our effective tax rate was 22.0% for the three months ended September 30, 2023 compared to 20.7% for the corresponding period in 2022. The increase was primarily attributable to jurisdictional earnings mix and an increase in net U.S. taxation of foreign operations.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 24, 2022
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Service revenue | $ | 2,602,016 | | | $ | 2,316,206 | | | $ | 285,810 | | | 12.3 | % |
Product revenue | 513,917 | | | 560,011 | | | (46,094) | | | (8.2) | % |
Total revenue | $ | 3,115,933 | | | $ | 2,876,217 | | | $ | 239,716 | | | 8.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
RMS | $ | 596,562 | | | $ | 543,066 | | | $ | 53,496 | | | 9.9 | % | | (1.0) | % |
DSA | 1,989,838 | | | 1,755,639 | | | 234,199 | | | 13.3 | % | | (0.1) | % |
Manufacturing | 529,533 | | | 577,512 | | | (47,979) | | | (8.3) | % | | — | % |
Total revenue | $ | 3,115,933 | | | $ | 2,876,217 | | | $ | 239,716 | | | 8.3 | % | | (0.3) | % |
The following table presents operating income by reportable segment:
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| Nine Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) | | |
RMS | $ | 117,653 | | | $ | 123,299 | | | $ | (5,646) | | | (4.6) | % | | (2.0) | % |
DSA | 479,788 | | | 375,922 | | | 103,866 | | | 27.6 | % | | 2.2 | % |
Manufacturing | 52,784 | | | 140,350 | | | (87,566) | | | (62.4) | % | | 0.7 | % |
Unallocated corporate | (165,886) | | | (152,406) | | | (13,480) | | | 8.8 | % | | (0.3) | % |
Total operating income | $ | 484,339 | | | $ | 487,165 | | | $ | (2,826) | | | (0.6) | % | | 1.5 | % |
Operating income % of revenue | 15.5 | % | | 16.9 | % | | | | (140) bps | | |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
Revenue | $ | 596,562 | | | $ | 543,066 | | | $ | 53,496 | | | 9.9 | % | | (1.0) | % |
Cost of revenue (excluding amortization of intangible assets) | 381,332 | | | 330,455 | | | 50,877 | | | 15.4 | % | | |
Selling, general and administrative | 81,194 | | | 74,535 | | | 6,659 | | | 8.9 | % | | |
Amortization of intangible assets | 16,383 | | | 14,777 | | | 1,606 | | | 10.9 | % | | |
Operating income | $ | 117,653 | | | $ | 123,299 | | | $ | (5,646) | | | (4.6) | % | | (2.0) | % |
Operating income % of revenue | 19.7 | % | | 22.7 | % | | | | (300) bps | | |
RMS revenue increased $53.5 million due primarily to higher research model services revenue, specifically the Insourcing Solutions business, which included the acquisition of Explora BioLabs contributing $15.6 million and higher small research model product revenue in North America and China; partially offset by timing of large research model sales in China and the effect of changes in foreign currency exchange rates.
RMS operating income decreased $5.6 million compared to the corresponding period in 2022. RMS operating income as a percentage of revenue for the nine months ended September 30, 2023 was 19.7%, a decrease of 300 bps from 22.7% for the corresponding period in 2022. Operating income and operating income as a percentage of revenue decreased due to higher amortization, operating, and staffing costs due to the acquisition of Explora BioLabs; lower revenue in our Cell Solutions business; timing of large research model sales in China; mix of small research models products and services; and the effect of changes in foreign currency exchange rates.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
DSA
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| Nine Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
Revenue | $ | 1,989,838 | | | $ | 1,755,639 | | | $ | 234,199 | | | 13.3 | % | | (0.1) | % |
Cost of revenue (excluding amortization of intangible assets) | 1,268,248 | | | 1,164,810 | | | 103,438 | | | 8.9 | % | | |
Selling, general and administrative | 189,076 | | | 151,925 | | | 37,151 | | | 24.5 | % | | |
Amortization of intangible assets | 52,726 | | | 62,982 | | | (10,256) | | | (16.3) | % | | |
Operating income | $ | 479,788 | | | $ | 375,922 | | | $ | 103,866 | | | 27.6 | % | | 2.2 | % |
Operating income % of revenue | 24.1 | % | | 21.4 | % | | | | 270 bps | | |
DSA revenue increased $234.2 million due primarily to service revenue which increased in the Safety Assessment business due to increased demand, principally biopharmaceutical clients, pricing of services, and the acquisition of SAMDI contributing $5.1 million to service revenue; partially offset by decreases in our Discovery Services business and the effect of changes in foreign currency exchange rates.
DSA operating income increased $103.9 million compared to the corresponding period in 2022. DSA operating income as a percentage of revenue for the nine months ended September 30, 2023 was 24.1%, an increase of 270 bps from 21.4% for the corresponding period in 2022. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above and lower amortization of intangible assets; partially offset by higher legal costs incurred in connection with investigations by the U.S government into the non-human primate supply chain, asset impairment charges related to a Discovery Services site closure; and the absence of certain favorable acquisition-related adjustments to contingent consideration arrangements incurred during 2022, which are recorded in selling, general and administrative costs.
Manufacturing
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| Nine Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) |
Revenue | $ | 529,533 | | | $ | 577,512 | | | $ | (47,979) | | | (8.3) | % | | — | % |
Cost of revenue (excluding amortization of intangible assets) | 327,882 | | | 317,184 | | | 10,698 | | | 3.4 | % | | |
Selling, general and administrative | 114,556 | | | 86,590 | | | 27,966 | | | 32.3 | % | | |
Amortization of intangible assets | 34,311 | | | 33,388 | | | 923 | | | 2.8 | % | | |
Operating income | $ | 52,784 | | | $ | 140,350 | | | $ | (87,566) | | | (62.4) | % | | 0.7 | % |
Operating income % of revenue | 10.0 | % | | 24.3 | % | | | | (1,430) bps | | |
Manufacturing revenue decreased $48.0 million due primarily to the divestiture of our Avian business, which decreased revenue by $57.6 million and lower services revenue from our Biologics Testing business; partially offset by increased revenue in our CDMO and Microbial Solutions businesses.
Manufacturing operating income decreased $87.6 million compared to the corresponding period in 2022. Manufacturing operating income as a percentage of revenue for the nine months ended September 30, 2023 was 10.0%, a decrease of 1,430 bps from 24.3% for the corresponding period in 2022. Operating income and operating income as a percentage of revenue decreased primarily due to the divestiture of our Avian business and lower operating income within our Biologics Solutions business which included higher operating costs in both our Biologics Testing and CDMO businesses, an asset impairment charge, and the absence of a $19 million impact of a favorable ruling from tax authorities on certain indirect tax positions recorded within selling, general and administrative expense in the corresponding period in 2022.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Unallocated Corporate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change | | Impact of FX |
| (in thousands, except percentages) | | |
Unallocated corporate | $ | 165,886 | | | $ | 152,406 | | | $ | 13,480 | | | 8.8 | % | | (0.3) | % |
Unallocated corporate % of revenue | 5.3 | % | | 5.3 | % | | | | 0 bps | | |
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 $13.5 million, or 8.8%, compared to the corresponding period in 2022 is primarily related to timing of variable compensation expenses and digital investments. Costs as a percentage of revenue for the nine months ended September 30, 2023 and for the nine months ended September 24, 2022 were 5.3%.
Other Income (Expense)
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| Nine Months Ended | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Other income (expense): | | | | | | | |
Interest income | $ | 3,605 | | | $ | 437 | | | $ | 3,168 | | | 724.9 | % |
Interest expense | (103,166) | | | (24,512) | | | (78,654) | | | 320.9 | % |
Other income (expense), net | (12,200) | | | (85,024) | | | 72,824 | | | (85.7) | % |
Total other expense, net | $ | (111,761) | | | $ | (109,099) | | | $ | (2,662) | | | 2.4 | % |
Interest expense for the nine months ended September 30, 2023 was $103.2 million, an increase of $78.7 million, or 320.9%, compared to $24.5 million in the corresponding period in 2022. The increase was due primarily to higher interest rates, and the absence of $49.7 million of gains recognized in connection with a debt-related foreign exchange forward contract in the corresponding period in 2022.
Other expense, net for the nine months ended September 30, 2023 was $12.2 million, a decrease of $72.8 million, or 85.7%, compared to Other expense, net of $85.0 million for the corresponding period in 2022. The decrease was due primarily to the absence of $46.5 million of foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency, and lower net losses incurred on our venture capital and strategic equity investments as compared to fiscal year 2022.
Income Taxes
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| Nine Months Ended | | | | |
| September 30, 2023 | | September 24, 2022 | | $ change | | % change |
| (in thousands, except percentages) |
Provision for income taxes | $ | 81,160 | | | $ | 74,564 | | | $ | 6,596 | | | 8.8 | % |
Effective tax rate | 21.8 | % | | 19.7 | % | | | | 210 bps |
Income tax expense for the nine months ended September 30, 2023 was $81.2 million, an increase of $6.6 million compared to $74.6 million for the corresponding period in 2022. Our effective tax rate was 21.8% for the nine months ended September 30, 2023 compared to 19.7% for the corresponding period in 2022. The increase in our effective tax rate in the nine months ended September 30, 2023 compared to the corresponding period in 2022 was primarily attributable to a decreased tax benefit from stock-based compensation deductions in the nine months ended September 30, 2023.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Liquidity and Capital Resources
Liquidity and Cash Flows
We currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future.
The following table presents our cash, cash equivalents and short-term investments:
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| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Cash and cash equivalents: | | | |
Held in U.S. entities | $ | 4,716 | | | $ | 15,813 | |
Held in non-U.S. entities | 152,458 | | | 218,099 | |
Total cash and cash equivalents | 157,174 | | | 233,912 | |
Short-term investments: | | | |
Held in non-U.S. entities | 944 | | | 998 | |
Total cash, cash equivalents and short-term investments | $ | 158,118 | | | $ | 234,910 | |
The following table presents our net cash provided by operating activities:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Net income | $ | 291,418 | | | $ | 303,502 | |
Adjustments to reconcile net income to net cash provided by operating activities | 312,306 | | | 290,826 | |
Changes in assets and liabilities | (140,769) | | | (209,445) | |
Net cash provided by operating activities | $ | 462,955 | | | $ | 384,883 | |
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 for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, contingent consideration, 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 months ended September 30, 2023, compared to the nine months ended September 24, 2022, the increase in net cash provided by operating activities was driven by lower variable compensation payments and timing of inventory purchases; partially offset by timing of our vendor and supplier payments compared to the same period in 2022.
The following table presents our net cash used in investing activities:
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| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Acquisition of businesses and assets, net of cash acquired | $ | (50,166) | | | $ | (283,392) | |
Capital expenditures | (240,205) | | | (235,709) | |
Investments, net | (32,369) | | | (126,259) | |
Other, net | (2,044) | | | (6,945) | |
Net cash used in investing activities | $ | (324,784) | | | $ | (652,305) | |
For the nine months ended September 30, 2023, the primary use of cash used in investing activities related to capital expenditures to support the growth of the business, the acquisition of SAMDI, and investments in certain venture capital and strategic equity investments. For the nine months ended September 24, 2022, the primary use of cash used in investing activities related to the acquisition of Explora BioLabs, capital expenditures to support the growth of the business and investments in certain venture capital and strategic equity investments.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
The following table presents our net cash used in financing activities:
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| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (in thousands) |
Proceeds from long-term debt and revolving credit facility | $ | 333,034 | | | $ | 2,798,665 | |
Proceeds from exercises of stock options | 19,658 | | | 17,710 | |
Payments on long-term debt, revolving credit facility, and finance lease obligations | (530,909) | | | (2,524,387) | |
Purchase of treasury stock | (24,016) | | | (38,492) | |
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Purchases of additional equity interests, net | — | | | (30,533) | |
Payment of contingent considerations | (2,711) | | | (10,356) | |
Other, net | (4,145) | | | (6,048) | |
Net cash (used in) provided by financing activities | $ | (209,089) | | | $ | 206,559 | |
For the nine months ended September 30, 2023, net cash used in financing activities was primarily driven by net payments of $195 million on our Credit Facility throughout the nine months ended September 30, 2023.
Net cash used in financing activities also reflected treasury stock purchases of $24.0 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 $2.7 million of contingent consideration payments; partially offset by proceeds from exercises of employee stock options of $19.7 million.
For the nine months ended September 24, 2022, net cash provided by financing activities reflected the net proceeds of $274.3 million on our Credit Facility, and finance lease obligations. Included in the net proceeds are the following amounts:
•Borrowings under our Credit Facility of $300 million, which were used primarily for the acquisition of Explora BioLabs;
•Net borrowings of $153 million made to our Credit Facility throughout the nine months ended September 24, 2022;
•Payments of $2.0 billion partially offset by $1.9 billion of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected treasury stock purchases of $38.5 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, approximately $15 million payment to purchase an additional 10% interest in a subsidiary, $15.7 million payment to acquire the remaining 2% ownership interest in Cognate, and $10.4 million of contingent consideration payments; partially offset by proceeds from exercises of employee stock options of $17.7 million.
Financing and 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.
Amounts outstanding under our Credit Facility and our Senior Notes were as follows: | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Revolving facility | $ | 1,003,744 | | | $ | 1,197,586 | |
4.25% Senior Notes due 2028 | 500,000 | | | 500,000 | |
3.75% Senior Notes due 2029 | 500,000 | | | 500,000 | |
4.00% Senior Notes due 2031 | 500,000 | | | 500,000 | |
Total | $ | 2,503,744 | | | $ | 2,697,586 | |
The interest rates applicable to the Credit Facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, 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 term SOFR rate plus 1%) or the adjusted term SOFR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio. In March 2023 and in conjunction with the Second Amendment we modified the
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
variable rate on our Credit Facility from adjusted LIBOR to adjusted term SOFR. All outstanding U.S. dollar borrowings remained at adjusted LIBOR through their respective interest reset periods in April 2023 and were then set to term SOFR.
During the fourth fiscal quarter of 2022, we entered into an interest rate swap with a notional amount of $500 million to manage interest rate fluctuation related to our floating rate borrowings under the Credit Facility, at a fixed rate of 4.700%. In March 2023 and in conjunction with the Second Amendment, we modified the variable rate on our interest rate swap from 1-month LIBOR to 1-month term SOFR. Effective with the modification we will pay a fixed rate of 4.65% on our swap maturing November 2, 2024. The transition did not have an impact on our hedge accounting or a material impact to our financial statements.
Our off-balance sheet commitments related to our outstanding letters of credit as of September 30, 2023 and December 31, 2022 were $21.6 million and $18.6 million, respectively.
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 and Canadian Dollar. During the nine months ended September 30, 2023, the most significant drivers of foreign currency translation adjustment the Company recorded as part of Other comprehensive income (loss) were the British Pound, Euro, Chinese Yuan, and Hungarian Forint.
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 months ended September 30, 2023, our revenue would have decreased by $93.9 million, and our operating income would have decreased by $2.4 million, if the U.S. dollar exchange rate had strengthened by 10%, with all other variables held constant.
We attempt to minimize this exposure by using certain financial instruments in accordance with our overall risk management and our hedge policy. We do not enter into speculative derivative agreements.
During the three months ended September 24, 2022, 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 9, “Debt and Other Financing Arrangements” in this Quarterly Report on Form 10-Q for additional information regarding these types of forward contracts.
Repurchases of Common Stock
During the nine months ended September 30, 2023, we did not repurchase any shares under our authorized stock repurchase program. As of September 30, 2023, we had $129.1 million remaining on the authorized $1.3 billion stock repurchase program. 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 months ended September 30, 2023, we acquired 0.1 million shares for $24.0 million through such netting.
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 the application of 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. Our significant accounting policies are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for fiscal year 2022. There have been no changes in the Company’s critical accounting policies during the nine months ended September 30, 2023.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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 months ended September 30, 2023 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
The Company’s exposure to market risk from changes in interest rates and currency exchange rates has not changed materially from its exposure discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our interest rate and currency exchange rate risks are fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” of our Annual Report on Form 10-K for fiscal year 2022 and in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” herein.
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 30, 2023, 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 Over Financial Reporting
There were no 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 30, 2023 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 16, 2023, the Company was informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into the Company’s conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 the Company received a grand jury subpoena requesting certain documents related to such investigation. The Company is aware of a parallel civil investigation being undertaken by the DOJ and USFWS. The Company is cooperating with the DOJ and the USFWS and believes that the concerns raised with respect to the Company’s conduct are without merit. The Company maintains a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates it received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, the Company has voluntarily suspended future shipments of non-human primates from Cambodia to the United States until such time that the Company and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported from Cambodia are purpose-bred. The Company continues to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. On May 16, 2023, the Company received an inquiry from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting it to voluntarily provide information, subsequently augmented with a document subpoena, primarily related to the sourcing of non-human primates, and the Company is cooperating with the request. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS, SEC or other governmental authorities as a result of the investigations. None of the DOJ, USFWS or SEC has provided the Company with any specific timeline or indication as to when these investigations or, specific to the DOJ and USFWS, discussions regarding future processes and procedures, will be concluded or resolved. The Company cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities.
A putative securities class action was filed on May 19, 2023 against the Company and three of its current/former officers (James Foster, the Chief Executive Officer; David R. Smith, the former Chief Financial Officer; and Flavia Pease, the current Chief Financial Officer) in the United States District Court for the District of Massachusetts. The complaint asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") on behalf of a putative class of purchasers of Company securities from May 5, 2020 through February 21, 2023. The complaint alleges that certain of the Company’s disclosures about its practices with respect to the importation of non-human primates made during the putative class period were materially false or misleading. On August 31, 2023, the court appointed the State Teachers Retirement System of Ohio as lead plaintiff, and the Company intends to file a motion to dismiss. While the Company cannot predict the outcome of this matter, it believes the class action to be without merit and plans to vigorously defend against it. The Company cannot reasonably estimate the maximum potential exposure or the range of possible loss in association with this matter.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for fiscal year 2022, which could materially affect our business, financial condition, and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, 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 2022.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information relating to the purchases of shares of our common stock during the three months ended September 30, 2023. | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
July 2, 2023 to July 29, 2023 | 114 | | | $ | 210.05 | | | — | | | $ | 129,105 | |
July 30, 2023 to August 26, 2023 | 15 | | | 209.54 | | | — | | | 129,105 | |
August 27, 2023 to September 30, 2023 | 31 | | | 206.82 | | | — | | | 129,105 | |
Total | 160 | | | | | — | | | |
Our Board of Directors have authorized up to an aggregate amount of $1.3 billion for our stock repurchase program. During the three months ended September 30, 2023, we did not repurchase any shares of common stock under our stock repurchase program or in open market trading. As of September 30, 2023, we had $129.1 million remaining on the authorized stock repurchase program.
Additionally, our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements.
Item 5. Other Information
During the quarter ended September 30, 2023, none of our officers or directors adopted or terminated any contract, instruction, or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K., except as follows:
•On August 11, 2023, George Massaro, a member of our Board of Directors, adopted a Rule 10b5-1 trading arrangement for the sale of up to 332 shares of our common stock, subject to certain conditions. The arrangement’s expiration date is May 15, 2024.
•On August 16, 2023, Victoria Creamer, our Corporate Executive Vice President and Chief People Officer, adopted a Rule 10b5-1 trading agreement for the sale of up to 5,526 shares of our common stock, subject to certain conditions. The arrangement’s expiration date is February 22, 2024.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Item 6. Exhibits | | | | | |
(a) Exhibits | Description of Exhibits |
31.1+ | |
31.2+ | |
32.1+ | |
101.INS | eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Definition Linkbase Document |
101.LAB | XBRL Taxonomy Label Linkbase Document |
101.PRE | XBRL Taxonomy Presentation Linkbase Document |
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+ Furnished herein. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | CHARLES RIVER LABORATORIES INTERNATIONAL, INC. |
| | |
| November 8, 2023 | /s/ JAMES C. FOSTER |
| | James C. Foster Chairman, President and Chief Executive Officer |
| | |
| November 8, 2023 | /s/ FLAVIA H. PEASE |
| | Flavia H. Pease Corporate Executive Vice President and Chief Financial Officer |