CHARLES RIVER LABORATORIES INTERNATIONAL, INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - CHARLES RIVER LABORATORIES INTERNATIONAL, INC.	crl9302017ex321.htm
EX-31.2 - EXHIBIT 31.2 - CHARLES RIVER LABORATORIES INTERNATIONAL, INC.	crl9302017ex312.htm
EX-31.1 - EXHIBIT 31.1 - CHARLES RIVER LABORATORIES INTERNATIONAL, INC.	crl9302017ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
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 (Address of Principal Executive Offices)		01887 (Zip Code)

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

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes þ 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 þ	Accelerated filer ¨	Non-accelerated filer ¨ (Do not check if smaller reporting company)
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 þ

As of October 27, 2017, there were 47,361,523 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, 2017

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, 2017 and September 24, 2016	3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2017 and September 24, 2016	4
	Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2017 and December 31, 2016	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and September 24, 2016	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
3	Quantitative and Qualitative Disclosure About Market Risk	36
4	Controls and Procedures	37
PART II - OTHER INFORMATION
1	Legal Proceedings	38
1A	Risk Factors	38
2	Unregistered Sales of Equity Securities and Use of Proceeds	38
6	Exhibits	39

Signatures		40

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 that are predictions of or 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: goodwill and asset impairments still under review; future demand for drug discovery and development products and services, including the outsourcing of these services; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy, business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical companies and venture capital investments and opportunities for future similar arrangements; our cost structure; the impact of acquisitions; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure), including gains and losses attributable to businesses we plan to close, consolidate, or divest (including our Maryland research model production site); changes in our expectations regarding future stock option, restricted stock, performance share units, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our liquidity. In addition, these statements include the impact of economic and market conditions on us and our clients; the effects of our cost saving actions and the steps to optimize returns to shareholders on an effective and timely basis; and our ability to withstand the current market conditions. You should not rely on forward-looking statements because they are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document, or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, under the sections entitled “Our Strategy,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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, 2017			September 24, 2016			September 30, 2017			September 24, 2016
Service revenue	$	326,711		$	292,849		$	960,640		$	806,397
Product revenue	137,521			132,871			418,484			408,246
Total revenue	464,232			425,720			1,379,124			1,214,643
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)	219,368			200,118			640,904			543,588
Cost of products sold (excluding amortization of intangible assets)	67,660			69,332			203,655			204,270
Selling, general and administrative	92,863			85,650			278,886			269,067
Amortization of intangible assets	10,357			11,825			30,913			29,390
Operating income	73,984			58,795			224,766			168,328
Other income (expense):
Interest income	134			523			497			1,008
Interest expense	(7,667		)	(7,079		)	(22,053		)	(20,199		)
Other income, net	6,488			1,017			24,692			10,059
Income from continuing operations, before income taxes	72,939			53,256			227,902			159,196
Provision for income taxes	19,945			15,565			73,272			48,385
Income from continuing operations, net of income taxes	52,994			37,691			154,630			110,811
Income (loss) from discontinued operations, net of income taxes	(39		)	342			(114		)	328
Net income	52,955			38,033			154,516			111,139
Less: Net income attributable to noncontrolling interests	481			298			1,312			1,054
Net income attributable to common shareholders	$	52,474		$	37,735		$	153,204		$	110,085
Earnings per common share
Basic:
Continuing operations attributable to common shareholders	$	1.11		$	0.79		$	3.23		$	2.34
Discontinued operations	$	—		$	0.01		$	—		$	—
Net income attributable to common shareholders	$	1.11		$	0.80		$	3.22		$	2.34
Diluted:
Continuing operations attributable to common shareholders	$	1.09		$	0.78		$	3.17		$	2.29
Discontinued operations	$	—		$	0.01		$	—		$	0.01
Net income attributable to common shareholders	$	1.08		$	0.79		$	3.16		$	2.30






See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three Months Ended					Nine Months Ended
	September 30, 2017		September 24, 2016			September 30, 2017		September 24, 2016
Net income	$	52,955	$	38,033		$	154,516	$	111,139
Other comprehensive income (loss):
Foreign currency translation adjustment and other	24,570		(16,888		)	69,242		(32,798		)
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans	883		1,176			2,638		1,961
Comprehensive income, before income taxes	78,408		22,321			226,396		80,302
Income tax expense related to items of other comprehensive income (Note 9)	153		140			776		424
Comprehensive income, net of income taxes	78,255		22,181			225,620		79,878
Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes	766		—			1,964		(9		)
Comprehensive income attributable to common shareholders, net of income taxes	$	77,489	$	22,181		$	223,656	$	79,887






























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, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	123,618		$	117,626
Trade receivables, net	422,335			364,050
Inventories	107,372			95,833
Prepaid assets	42,695			34,315
Other current assets	86,358			45,008
Total current assets	782,378			656,832
Property, plant and equipment, net	767,192			755,827
Goodwill	800,247			787,517
Client relationships, net	304,382			320,157
Other intangible assets, net	71,065			74,291
Deferred tax assets	30,856			28,746
Other assets	109,798			88,430
Total assets	$	2,865,918		$	2,711,800
Liabilities, Redeemable Noncontrolling Interest and Equity
Current liabilities:
Current portion of long-term debt and capital leases	$	27,090		$	27,313
Accounts payable	66,232			68,485
Accrued compensation	86,402			93,471
Deferred revenue	108,984			127,731
Accrued liabilities	91,783			84,470
Other current liabilities	33,614			26,500
Current liabilities of discontinued operations	1,650			1,623
Total current liabilities	415,755			429,593
Long-term debt, net and capital leases	1,155,998			1,207,696
Deferred tax liabilities	81,783			55,717
Other long-term liabilities	167,493			159,239
Long-term liabilities of discontinued operations	4,395			5,771
Total liabilities	1,825,424			1,858,016
Commitments and contingencies (Note 13)
Redeemable noncontrolling interest	15,785			14,659
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; 87,417 shares issued and 47,324 shares outstanding as of September 30, 2017, and 86,301 shares issued and 47,363 shares outstanding as of December 31, 2016	874			863
Additional paid-in capital	2,545,351			2,477,371
Retained earnings	318,507			165,303
Treasury stock, at cost 40,093 shares and 38,938 shares as of September 30, 2017, and December 31, 2016, respectively	(1,659,907		)	(1,553,005		)
Accumulated other comprehensive loss	(183,312		)	(253,764		)
Total equity attributable to common shareholders	1,021,513			836,768
Noncontrolling interests	3,196			2,357
Total equity	1,024,709			839,125
Total liabilities, redeemable noncontrolling interest and equity	$	2,865,918		$	2,711,800

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, 2017			September 24, 2016
Cash flows relating to operating activities
Net income	$	154,516		$	111,139
Less: Income (loss) from discontinued operations, net of income taxes	(114		)	328
Income from continuing operations, net of income taxes	154,630			110,811
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	97,675			91,116
Stock-based compensation	32,902			32,647
Deferred income taxes	18,176			(270		)
Gain on divestiture	(10,577		)	—
Other, net	(3,579		)	92
Changes in assets and liabilities:
Trade receivables, net	(42,712		)	(43,260		)
Inventories	(9,500		)	(4,352		)
Accounts payable	(6,160		)	17,184
Accrued compensation	(10,548		)	8,163
Other assets and liabilities, net	(26,469		)	(13,879		)
Net cash provided by operating activities	193,838			198,252
Cash flows relating to investing activities
Acquisition of businesses and assets, net of cash acquired	(22,474		)	(597,607		)
Capital expenditures	(53,928		)	(29,609		)
Purchases of investments	(42,135		)	(20,278		)
Proceeds from sale of investments and distributions from venture capital investments	6,604			26,035
Proceeds from divestiture	72,462			—
Other, net	(288		)	3,790
Net cash used in investing activities	(39,759		)	(617,669		)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit facility	229,255			926,781
Proceeds from exercises of stock options	35,089			21,643
Payments on long-term debt, revolving credit facility and capital lease obligations	(309,258		)	(526,983		)
Purchase of treasury stock	(106,902		)	(12,226		)
Other, net	(3,650		)	(4,533		)
Net cash (used in) provided by financing activities	(155,466		)	404,682
Discontinued operations
Net cash used in operating activities from discontinued operations	(1,489		)	(1,434		)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	9,135			4,325
Net change in cash, cash equivalents, and restricted cash	6,259			(11,844		)
Cash, cash equivalents, and restricted cash, beginning of period	119,894			119,963
Cash, cash equivalents, and restricted cash, end of period	$	126,153		$	108,119


Supplemental cash flow information:
Cash and cash equivalents	$	123,618		$	105,722
Restricted cash included in Other current assets	591			572
Restricted cash included in Other assets	1,944			1,825
Cash, cash equivalents, and restricted cash, end of period	$	126,153		$	108,119

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. 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 2016. 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.

The Company has reclassified certain amounts in the unaudited condensed consolidated statements of cash flows for prior periods to conform to the current year presentation. See “Newly Adopted Accounting Pronouncements” below.

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, redeemable noncontrolling interest, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Consolidation

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

The Company’s fiscal year is typically based on a 52-week year, 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 53^rd week was included in the fourth quarter of fiscal year 2016, which is occasionally necessary to align with a December 31 calendar year end.

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 2016.

Newly Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, “Restricted Cash.” The standard addresses the classification and presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The Company elected to early adopt this standard in fiscal year 2017 and applied the changes retrospectively to all prior periods presented in its unaudited condensed consolidated statements of cash flows.

The Company historically excluded restricted cash balances, recorded in current and long-term other assets, from cash and cash equivalents within the unaudited condensed consolidated statements of cash flows, reflecting transfers between cash, cash equivalents, and restricted cash as a cash flow classified within cash flows relating to operating activities. As a result of the adoption of this standard, the Company combined restricted cash balances of $2.4 million and $2.0 million as of September 24, 2016, and December 26, 2015, respectively, with cash and cash equivalents when reconciling the beginning and ending balances within the unaudited condensed consolidated statements of cash flows for the nine months ended September 24, 2016.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard addresses the classification of certain transactions within the statement of cash flows, including cash payments for debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investments. The Company elected to early adopt this standard in fiscal year 2017 and applied the changes retrospectively to all prior periods presented within its unaudited condensed consolidated statements of cash flows. As a result of the adoption of this standard, the Company reclassified $2.2 million from investing activities to operating activities within the unaudited condensed consolidated statements of cash flows for the nine months ended September 24, 2016.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

consequences, classification of awards as either equity or liabilities, and classification within the statement of cash flows. The Company adopted this standard in fiscal year 2017, and applied the changes as required by each amendment to its unaudited condensed consolidated financial statements and related disclosures.

Under ASU 2016-09, the Company adopted the amendment to recognize excess tax benefits and tax deficiencies in the consolidated statements of income on a prospective basis, to present excess tax benefits within operating activities within the unaudited condensed consolidated statements of cash flows on a retrospective basis, and elected to change its accounting policy to account for forfeitures as they occur on a modified retrospective basis.

The adoption to recognize excess tax benefits and tax deficiencies within the unaudited condensed consolidated statements of income on a prospective basis could result in fluctuations in the effective tax rate period-over-period, depending on how many awards vest and the volatility of the Company’s stock price. During the three months ended September 30, 2017, the impact to the provision for income taxes within the unaudited condensed consolidated statements of income was an excess tax benefit of $0.9 million. During the nine months ended September 30, 2017, the impact on the provision for income taxes within the unaudited condensed consolidated statements of income was an excess tax benefit of $9.7 million. Further, for the three and nine months ended September 30, 2017, the Company excluded the effect of windfall tax benefits from the hypothetical proceeds used to calculate the repurchase of shares under the treasury stock method for the calculation of diluted earnings per share.

The adoption of the amendment to present excess tax benefits within operating activities within the unaudited condensed consolidated statements of cash flows on a retrospective basis resulted in the reclassification of a cash inflow of $9.5 million from cash provided by financing activities to cash provided by operating activities for the nine months ended September 24, 2016. The Company had previously classified cash paid for tax withholding purposes as a financing activity within the unaudited condensed consolidated statements of cash flows; therefore, there was no change related to this requirement under the amendment.

The Company’s election to change its accounting policy to account for forfeitures when they occur on a modified retrospective basis resulted in an immaterial impact on its unaudited condensed consolidated financial statements and related disclosures.

Newly Issued Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. It also creates more transparency around how economic results are presented, both on the face of the financial statements and in the disclosures. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and requires the modified retrospective approach. Early adoption is permitted. This update applies to all existing hedging relationships on the date of adoption with the cumulative effect of adoption being reflected as of the beginning of the fiscal year of adoption. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The standard requires an employer to disaggregate the service cost component from the other components of net benefit cost and provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the statements of income. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the statements of income. Early adoption is permitted within the first interim period of the fiscal year. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain transactions. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects for an intra-entity asset transfer other than inventory. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the full impact this standard will have on its consolidated financial statements and related disclosures, but expects to recognize substantially all of its leases on the balance sheet by recording a right-to-use asset and a corresponding lease liability.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a modified retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. The Company formed an implementation team during fiscal year 2016 to oversee adoption of the new standard. The implementation team has completed its initial assessment of the new standard, including a detailed review of the Company’s contract portfolio, revenue streams to identify potential differences in accounting as a result of the new standard, and selected the modified retrospective transition method. The Company continues to assess the impact on the existing revenue accounting policies, newly required financial statement disclosures, and executing on the project plan. Currently, the Company is finalizing contract reviews, working through anticipated changes to systems and business processes, and internal controls to support the adoption of the new standard. The Company preliminarily expects certain changes in the timing of revenue recognition within the Manufacturing reportable segment, specifically within the Biologics business where revenue from certain studies will shift to recognition at a point in time instead of the current recognition over time. Other isolated changes to the timing of revenue recognition may be necessary in other businesses.

2. BUSINESS ACQUISITIONS AND DIVESTITURE

Brains On-Line

On August 4, 2017, the Company acquired Brains On-Line, a leading contract research organization (CRO) providing critical data that advances novel therapeutics for the treatment of central nervous system (CNS) diseases. Brains On-Line strategically expands the Company’s existing CNS capabilities and establishes the Company as a single-source provider for a broad portfolio of discovery CNS services. The purchase price for Brains On-Line was $21.3 million in cash, subject to certain post-closing adjustments that may change the purchase price, and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction includes aggregate, undiscounted contingent payments of up to €6.7 million (approximately $7.9 million based on current exchange rates), based on future performance. The Brains On-Line business is reported as part of the Company’s DSA reportable segment.

The contingent payments become payable based on the achievement of certain revenue and earnings targets. If achieved, the payments become due in the first quarter of fiscal year 2019. The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.

The purchase price allocation of $20.6 million, net of $0.7 million of cash acquired, was as follows:



	August 4, 2017
	(in thousands)
Trade receivables (contractual amount of $1,146)	$	1,146
Other current assets (excluding cash)	670
Property, plant and equipment	664
Other long-term assets	13
Definite-lived intangible assets	9,300
Goodwill	12,324
Current liabilities	(863		)
Deferred revenue	(405		)
Long-term liabilities	(2,203		)
Total purchase price allocation	$	20,646

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.

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



	Definite-Lived Intangible Assets		Weighted Average Amortization Life
	(in thousands)		(in years)
Client relationships	$	7,000	13
Other intangible assets	2,300		10
Total definite-lived intangible assets	$	9,300	12

The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers and technology introduced through Brains On-Line and the assembled workforce of the acquired business. The goodwill attributable to Brains On-Line is not deductible for tax purposes.

The Company incurred transaction and integration costs in connection with the acquisition of $1.2 million and $2.1 million for the three and nine months ended September 30, 2017, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.

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

Agilux

On September 28, 2016, the Company acquired Agilux Laboratories, Inc. (Agilux), a CRO that provides a suite of integrated discovery bioanalytical services for small and large molecules, drug metabolism and pharmacokinetic services, and pharmacology services. The acquisition supports the Company’s strategy to offer clients a broader, integrated portfolio that provides services continuously from the earliest stages of drug research through the non-clinical development process. The purchase price for Agilux was $64.9 million in cash and was funded by borrowings on the Company’s revolving credit facility. The business is reported as part of the Company’s DSA reportable segment.

The purchase price allocation of $62.0 million, net of $2.9 million of cash acquired, was as follows:



	September 28, 2016
	(in thousands)
Trade receivables (contractual amount of $4,799)	$	4,799
Other current assets (excluding cash)	794
Property, plant and equipment	3,907
Other long-term assets	11
Definite-lived intangible assets	21,900
Goodwill	44,517
Current liabilities	(3,812		)
Long-term liabilities	(10,091		)
Total purchase price allocation	$	62,025

From the date of the acquisition through September 30, 2017, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	Definite-Lived Intangible Assets		Weighted Average Amortization Life
	(in thousands)		(in years)
Client relationships	$	16,700	17
Other intangible assets	5,200		4
Total definite-lived intangible assets	$	21,900	14

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

The Company incurred zero and $0.3 million in transaction and integration costs in connection with the acquisition during the three and nine months ended September 30, 2017, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income. The Company incurred $1.1 million in transaction and integration costs in connection with the acquisition during the three and nine months ended September 24, 2016, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.

Blue Stream

On June 27, 2016, the Company acquired Blue Stream Laboratories, Inc. (Blue Stream), an analytical CRO supporting the development of complex biologics and biosimilars. Combining Blue Stream with the Company’s existing discovery, safety assessment, and biologics capabilities created a leading CRO that has the ability to support biologic and biosimilar development from characterization through clinical testing and commercialization. The purchase price for Blue Stream was $11.7 million, including $3.0 million in contingent consideration, and was subject to certain customary adjustments. The acquisition was funded by borrowings on the Company’s revolving credit facility. The business is reported in the Company’s Manufacturing reportable segment.

The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes. The contingent consideration is a one-time payment payable based on the achievement of a revenue target. The target was achieved and the Company paid the contingent consideration in the third quarter of fiscal year 2017.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The purchase price allocation of $11.7 million, net of a non-significant amount of cash acquired, was as follows:



	June 27, 2016
	(in thousands)
Trade receivables (contractual amount of $1,104)	$	1,104
Other current assets (excluding cash)	15
Property, plant and equipment	912
Other long-term assets	187
Definite-lived intangible assets	1,230
Goodwill	10,334
Current liabilities	(1,132		)
Long-term liabilities	(901		)
Total purchase price allocation	$	11,749

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



	Definite-Lived Intangible Assets		Weighted Average Amortization Life
	(in thousands)		(in years)
Client relationships	$	650	10
Other intangible assets	580		5
Total definite-lived intangible assets	$	1,230	7

The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s Manufacturing segment from customers and technology introduced through Blue Stream, the assembled workforce of the acquired business, expected synergies, and the development of future proprietary processes. The goodwill attributable to Blue Stream is not deductible for tax purposes.

The Company incurred non-significant transaction and integration costs in connection with the acquisition during the three and nine months ended September 30, 2017, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income. The Company incurred a non-significant amount and $0.4 million of transaction and integration costs during the three and nine months ended September 24, 2016, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.

WIL Research

On April 4, 2016, the Company acquired WIL Research, a provider of safety assessment and CDMO services to biopharmaceutical, agricultural and industrial chemical companies worldwide. The acquisition enhanced the Company’s position as a leading, global, early-stage CRO by strengthening its ability to partner with clients across the drug discovery and development continuum. The purchase price for WIL Research was $604.8 million, including assumed liabilities of $0.4 million. The purchase price included payment for actual working capital of the acquired business. The acquisition was funded by cash on hand and borrowings on the Company’s $1.65B Credit Facility. See Note 7, “Long-Term Debt and Capital Lease Obligations.” WIL Research’s safety assessment and CDMO businesses are reported in the Company’s DSA and Manufacturing reportable segments, respectively. On February 10, 2017, the Company divested the CDMO business.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The purchase price allocation of $577.4 million, net of $27.4 million of cash acquired, was as follows:



	April 4, 2016
	(in thousands)
Trade receivables (contractual amount of $48,625)	$	48,157
Inventories	2,296
Other current assets (excluding cash)	3,814
Property, plant and equipment	129,066
Other long-term assets	1,060
Definite-lived intangible assets	164,800
Goodwill	330,175
Deferred revenue	(39,103		)
Other current liabilities	(27,386		)
Long-term liabilities	(35,488		)
Total purchase price allocation	$	577,391

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



	Definite-Lived Intangible Assets		Weighted Average Amortization Life
	(in thousands)		(in years)
Client relationships	$	137,500	15
Developed technology	20,700		3
Backlog	6,600		1
Total definite-lived intangible assets	$	164,800	13

The goodwill resulting from the transaction, $19.0 million of which was deductible for tax purposes due to a prior asset acquisition, was primarily attributed to the potential growth of the Company’s DSA and Manufacturing businesses from clients introduced through WIL Research, the assembled workforce of the acquired business, and expected cost synergies. Subsequent to the divestiture of the CDMO business on February 10, 2017, $14.8 million of the goodwill was deductible for tax purposes.

The Company incurred transaction and integration costs in connection with the acquisition of $0.4 million and $1.3 million for the three months ended September 30, 2017 and September 24, 2016, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income. The Company incurred transaction and integration costs in connection with the acquisition of $1.6 million and $13.7 million for the nine months ended September 30, 2017 and September 24, 2016, respectively, which were included in selling, general and administrative expenses, within the unaudited condensed consolidated statements of income.

WIL Research revenue and operating income for the three months ended September 24, 2016 were $57.4 million and $3.6 million, respectively. WIL Research revenue and operating income for the nine months ended September 24, 2016 were $112.6 million and $4.6 million, respectively.

The following selected pro forma consolidated results of operations are presented as if the WIL Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments. For the nine months ended September 24, 2016, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $1.4 million, reversal of interest expense on borrowings of $2.7 million, elimination of intercompany activity, and other one-time costs, and the tax impacts of these adjustments.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	September 24, 2016
	Three Months Ended		Nine Months Ended
	(in thousands, except per share amounts)
Revenue	$	425,720	$	1,275,175
Net income attributable to common shareholders	39,530		129,050
Earnings per common share
Basic	$	0.84	$	2.75
Diluted	$	0.82	$	2.70

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

Contract Manufacturing

On February 10, 2017, the Company completed the divestiture of its CDMO business to Quotient Clinical Ltd., based in London, England, for $75.0 million in proceeds, net of $0.6 million in cash and cash equivalents transferred in conjunction with the sale and $0.3 million of working capital adjustments.

The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and was reported in the Company’s Manufacturing reportable segment. Following a strategic review that was finalized subsequent to December 31, 2016, the Company determined that the CDMO business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.

During the three months ended April 1, 2017, the Company recorded a gain on the divestiture of the CDMO business of $10.6 million, which was included in other income, net within the Company’s unaudited condensed consolidated statements of income. As of February 10, 2017, the carrying amounts of the major classes of assets and liabilities associated with the divestiture of the CDMO business were as follows (in thousands):



Assets
Current assets	$	5,505
Property, plant and equipment, net	11,174
Goodwill	35,857
Long-term assets	17,154
Total assets	$	69,690
Liabilities
Deferred revenue	$	4,878
Other current liabilities	1,158
Total liabilities	$	6,036

3. SUPPLEMENTAL BALANCE SHEET INFORMATION

The composition of trade receivables, net is as follows:



	September 30, 2017			December 31, 2016
	(in thousands)
Client receivables	$	321,472		$	283,997
Unbilled revenue	103,389			82,203
Total	424,861			366,200
Less: Allowance for doubtful accounts	(2,526		)	(2,150		)
Trade receivables, net	$	422,335		$	364,050

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of inventories is as follows:



	September 30, 2017		December 31, 2016
	(in thousands)
Raw materials and supplies	$	19,256	$	18,893
Work in process	13,163		13,681
Finished products	74,953		63,259
Inventories	$	107,372	$	95,833

The composition of other current assets is as follows:



	September 30, 2017		December 31, 2016
	(in thousands)
Investments	$	30,351	$	3,771
Prepaid income taxes	55,416		40,705
Restricted cash	591		532
Other current assets	$	86,358	$	45,008

The composition of other assets is as follows:



	September 30, 2017		December 31, 2016
	(in thousands)
Life insurance policies	$	32,739	$	29,456
Venture capital investments	59,511		45,331
Restricted cash	1,944		1,736
Other	15,604		11,907
Other assets	$	109,798	$	88,430

The composition of other current liabilities is as follows:



	September 30, 2017		December 31, 2016
	(in thousands)
Accrued income taxes	$	32,931	$	25,621
Other	683		879
Other current liabilities	$	33,614	$	26,500

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



	September 30, 2017		December 31, 2016
	(in thousands)
Long-term pension liability	$	91,991	$	89,984
Accrued executive supplemental life insurance retirement plan and deferred compensation plan	33,926		32,880
Other	41,576		36,375
Other long-term liabilities	$	167,493	$	159,239

4. VENTURE CAPITAL INVESTMENTS

The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from 0.7% to 12.1%. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity or cost method of accounting. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LPs’ economic

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.

The Company’s total commitments to the venture capital funds as of September 30, 2017, were $87.7 million, of which the Company funded $48.0 million through that date. During the three and nine months ended September 30, 2017, the Company received dividends of $3.3 million and $7.7 million, respectively, from the funds. During each of the three and nine months ended September 24, 2016, the Company received dividends of $2.3 million from the funds. The Company recognized gains of $5.8 million and $0.4 million related to these investments for the three months ended September 30, 2017 and September 24, 2016, respectively. The Company recognized gains of $12.5 million and $8.5 million related to these investments for the nine months ended September 30, 2017 and September 24, 2016, respectively.

5. FAIR VALUE

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


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


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


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

The fair value hierarchy level is determined by asset and liability class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the nine months ended September 30, 2017 and September 24, 2016, there were no transfers between levels.

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


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


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


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


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


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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents	$	—	$	21	$	—	$	21
Other assets:
Life insurance policies	—		25,218		—		25,218
Total assets measured at fair value	$	—	$	25,239	$	—	$	25,239

Other current liabilities:
Contingent consideration	$	—	$	—	$	296	$	296
Total liabilities measured at fair value	$	—	$	—	$	296	$	296



	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents	$	—	$	21	$	—	$	21
Other assets:
Life insurance policies	—		22,121		—		22,121
Total assets measured at fair value	$	—	$	22,142	$	—	$	22,142

Other current liabilities:
Contingent consideration	$	—	$	—	$	3,621	$	3,621
Total liabilities measured at fair value	$	—	$	—	$	3,621	$	3,621

Contingent Consideration

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



	Nine Months Ended
	September 30, 2017			September 24, 2016
	(in thousands)
Beginning balance	$	3,621		$	1,370
Additions	296			3,600
Payments	(3,606		)	(874		)
Total gains or losses (realized/unrealized):
Reversal of previously recorded contingent liability and change in fair value	(15		)	30
Ending balance	$	296		$	4,126

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

Debt Instruments

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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



			Adjustments to Goodwill
	December 31, 2016		Acquisitions / (Divestitures)			Foreign Exchange		September 30, 2017
	(in thousands)
RMS	$	56,397	$	—		$	1,262	$	57,659
DSA	563,476		12,523			26,072		602,071
Manufacturing	167,644		(36,000		)	8,873		140,517
Total	$	787,517	$	(23,477	)	$	36,207	$	800,247

The increase in goodwill during the nine months ended September 30, 2017 related primarily to the acquisition of Brains On-Line in the DSA reportable segment, and the favorable impact of foreign exchange, partially offset by the divestiture of the CDMO business in the Manufacturing reportable segment.

Intangible Assets, Net

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



	September 30, 2017							December 31, 2016
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
	(in thousands)
Backlog	$	8,065	$	(7,751	)	$	314	$	8,370	$	(6,390	)	$	1,980
Technology	80,256		(23,865		)	56,391		71,425		(14,314		)	57,111
Trademarks and trade names	8,617		(4,417		)	4,200		8,177		(4,124		)	4,053
Other	17,404		(7,244		)	10,160		16,775		(5,628		)	11,147
Other intangible assets	114,342		(43,277		)	71,065		104,747		(30,456		)	74,291
Client relationships	535,814		(231,432		)	304,382		519,123		(198,966		)	320,157
Intangible assets	$	650,156	$	(274,709	)	$	375,447	$	623,870	$	(229,422	)	$	394,448

During the nine months ended September 30, 2017, the Company divested the CDMO business, which resulted in a net decrease of $16.8 million and $0.3 million to client relationships and backlog, respectively. During the three months ended March 26, 2016, the Company determined that the carrying values of certain DSA intangible assets were not recoverable and recorded an impairment charge of $1.9 million, which was included in costs of services provided (excluding amortization of intangible assets) within the unaudited condensed consolidated statements of income.

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-Term Debt

Long-term debt, net consists of the following:



	September 30, 2017			December 31, 2016
	(in thousands)
Term loans	$	609,375		$	633,750
Revolving credit facility	545,373			578,759
Other long-term debt	3,675			185
Total debt	1,158,423			1,212,694
Less: current portion of long-term debt	(24,481		)	(24,560		)
Long-term debt	1,133,942			1,188,134
Debt discount and debt issuance costs	(6,233		)	(7,633		)
Long-term debt, net	$	1,127,709		$	1,180,501

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2017 and December 31, 2016, the weighted average interest rate on the Company’s debt was 2.26% and 1.89%, respectively.

On March 30, 2016, the Company amended and restated its credit facility creating a $1.65 billion credit facility ($1.65B Credit Facility). In connection with the amendment and restatement, the Company expensed $1.0 million of debt issuance costs in the nine months ended September 24, 2016.

The $1.65B Credit Facility provides for a $650.0 million term loan and a $1.0 billion multi-currency revolving facility. The term loan facility matures in 19 quarterly installments with the last installment due March 30, 2021. The revolving facility matures on March 30, 2021, and requires no scheduled payment before that date. Under specified circumstances, the Company has the ability to increase the term loan and/or revolving facility by up to $500.0 million in the aggregate.

The interest rates applicable to the term loan and revolving facility under the $1.65B Credit Facility are, at the Company’s option, equal to either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.

The $1.65B Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants. These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than 3.50 to 1.0 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than 3.75 to 1.0 with step downs to 3.50 to 1.0 by the last day of the three months ended December 30, 2017. As of September 30, 2017, the Company was compliant with all covenants.

The obligations of the Company under the $1.65B Credit Facility are collateralized by substantially all of the assets of the Company.

Letters of Credit

As of September 30, 2017 and December 31, 2016, the Company had $4.9 million in outstanding letters of credit.

Capital Lease Obligations

The Company’s capital lease obligations amounted to $30.9 million and $29.9 million as of September 30, 2017 and December 31, 2016, respectively.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

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, 2017			September 24, 2016		September 30, 2017			September 24, 2016
	(in thousands)
Numerator:
Income from continuing operations, net of income taxes	$	52,994		$	37,691	$	154,630		$	110,811
Income (loss) from discontinued operations, net of income taxes	(39		)	342		(114		)	328
Less: Net income attributable to noncontrolling interests	481			298		1,312			1,054
Net income attributable to common shareholders	$	52,474		$	37,735	$	153,204		$	110,085

Denominator:
Weighted-average shares outstanding - Basic	47,451			47,160		47,530			46,954
Effect of dilutive securities:
Stock options, restricted stock units, performance share units and restricted stock	939			874		910			884
Weighted-average shares outstanding - Diluted	48,390			48,034		48,440			47,838

Options to purchase 0.4 million and 0.6 million shares for the three months ended September 30, 2017 and September 24, 2016, respectively, as well as an insignificant number of restricted shares, restricted stock units (RSUs), and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase 0.6 million and 0.9 million shares for the nine months ended September 30, 2017 and September 24, 2016, respectively, as well as an insignificant number of restricted shares, RSUs, and PSUs, were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted-average shares outstanding for both the nine months ended September 30, 2017 and September 24, 2016 excluded the impact of 1.1 million shares of non-vested restricted stock and RSUs.

Treasury Shares

During the nine months ended September 30, 2017, the Company repurchased 1.0 million shares totaling $90.6 million under its authorized stock repurchase program. No shares were repurchased in the nine months ended September 24, 2016. On May 9, 2017, the Company’s Board of Directors increased the stock repurchase authorization by $150 million, to an aggregate amount of $1.3 billion. As of September 30, 2017, 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 restricted stock, RSUs, and PSUs in order to satisfy individual statutory tax withholding requirements. During the nine months ended September 30, 2017 and September 24, 2016, the Company acquired 0.2 million shares for $16.3 million and 0.2 million shares for $12.2 million, respectively, from such netting.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Income

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



	Foreign Currency Translation Adjustment and Other			Pension and Other Post-Retirement Benefit Plans			Total
	(in thousands)
December 31, 2016	$	(154,595	)	$	(99,169	)	$	(253,764	)
Other comprehensive loss before reclassifications	68,590			—			68,590
Amounts reclassified from accumulated other comprehensive income (loss)	—			2,638			2,638
Net current period other comprehensive income	68,590			2,638			71,228
Income tax expense	—			776			776
September 30, 2017	$	(86,005	)	$	(97,307	)	$	(183,312	)

Nonredeemable Noncontrolling Interest

The Company has an investment in an entity whose financial results are consolidated in the Company’s 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. The activity within the nonredeemable noncontrolling interest during the three months ended September 30, 2017 and September 24, 2016 was $0.3 million and $0.1 million, respectively. The activity within the nonredeemable noncontrolling interest during the nine months ended September 30, 2017 and September 24, 2016 was $0.8 million and $0.4 million, respectively.

Redeemable Noncontrolling Interest

The Company’s redeemable noncontrolling interest resulted from an acquisition of a 75% ownership interest in Vital River in January 2013 and a purchase of an additional 12% equity interest in Vital River in July 2016, totaling an ownership of 87%. Prior to the purchase of an additional 12% equity interest on July 7, 2016, the redeemable noncontrolling interest was reported at fair value.

Concurrent with the purchase of an additional equity interest, the original agreement was amended providing the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 13% equity interest at a contractually defined redemption value, subject to a redemption floor (embedded derivative). These rights are exercisable beginning in 2019 and are accelerated in certain events. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($15.0 million as of September 30, 2017) and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 13% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining 13% equity interest.

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



	Nine Months Ended
	September 30, 2017		September 24, 2016
	(in thousands)
Beginning balance	$	14,659	$	28,008
Purchase of 12% equity interest	—		(12,360		)
Total gains or losses (realized/unrealized):
Net income attributable to noncontrolling interest	474		462
Foreign currency translation	652		(875		)
Modification of 13% purchase option	—		1,495
Change in fair value, included in additional paid-in capital	—		(1,690		)
Ending balance	$	15,785	$	15,040

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES

The Company’s effective tax rate for the three months ended September 30, 2017 and September 24, 2016 was 27.3% and 29.2%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2017 and September 24, 2016 was 32.2% and 30.4%, respectively. For the three months ended September 30, 2017, the decrease was primarily attributable to a tax benefit of $1.2 million related to the settlement of competent authority proceedings, and the excess tax benefit associated with stock compensation of $0.9 million as a result of the adoption of ASU 2016-09. For the nine months ended September 30, 2017, the increase was primarily attributable to the tax on the gain on the divestiture of the CDMO business of $18.0 million, offset by the excess tax benefit associated with stock compensation of $9.7 million as a result of the adoption of ASU 2016-09.

During the three months ended September 30, 2017, the Company’s unrecognized income tax benefits decreased by $0.8 million to $25.2 million, primarily due to the settlement of competent authority proceedings offset by unfavorable foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate increased by $0.3 million to $23.2 million. As of September 30, 2017, the amount of accrued interest and penalties on unrecognized tax benefits was $2.6 million. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by up to $0.9 million over the next twelve-month period, primarily as a result of the outcome of a pending tax ruling.

The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits in jurisdictions including the U.S., U.K., China, Japan, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2013.

The Company and certain of its subsidiaries have ongoing tax controversies with various tax authorities in the U.S., Canada, Germany, and France. The Company does not believe that resolution of these controversies will have a material impact on its financial position or results of operations.

In accordance with the Company’s policy, the remaining undistributed earnings of its non-U.S. subsidiaries remain indefinitely reinvested as of September 30, 2017, as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.

Income tax expense related to changes in unrecognized pension gains, losses, and prior service costs was $0.2 million and $0.1 million for the three months ended September 30, 2017 and September 24, 2016, respectively. Income tax expense related to changes in unrecognized pension gains, losses, and prior service costs was $0.8 million and $0.4 million for the nine months ended September 30, 2017 and September 24, 2016, respectively.

10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

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



	Three Months Ended						Nine Months Ended
	September 30, 2017			September 24, 2016			September 30, 2017			September 24, 2016
	(in thousands)
Service cost	$	749		$	655		$	2,277		$	1,848
Interest cost	2,663			2,773			8,428			9,357
Expected return on plan assets	(3,476		)	(3,038		)	(10,411		)	(11,028		)
Amortization of prior service credit	(134		)	(142		)	(392		)	(430		)
Amortization of net loss	1,017			503			3,030			1,594
Settlements	—			788			—			788
Net periodic cost	$	819		$	1,539		$	2,932		$	2,129

The net periodic cost for the Company’s post-retirement benefit plan for the three and nine months ended September 30, 2017 and September 24, 2016 was not significant.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. STOCK-BASED COMPENSATION

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

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



	Three Months Ended						Nine Months Ended
	September 30, 2017			September 24, 2016			September 30, 2017			September 24, 2016
	(in thousands)
Cost of revenue	$	1,700		$	1,608		$	4,989		$	4,957
Selling, general and administrative	9,826			8,992			27,913			27,690
Stock-based compensation, before income taxes	11,526			10,600			32,902			32,647
Provision for income taxes	(4,099		)	(3,785		)	(11,683		)	(11,653		)
Stock-based compensation, net of income taxes	$	7,427		$	6,815		$	21,219		$	20,994

During the nine months ended September 30, 2017, the Company granted stock options representing 0.6 million common shares with a per-share weighted-average grant date fair value of $18.30, RSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $88.52, and PSUs representing 0.2 million common shares with a per-share weighted-average grant date fair value of $99.24. The maximum number of common shares to be issued upon vesting of PSUs granted during the nine months ended September 30, 2017 is 0.4 million.

12. FOREIGN CURRENCY CONTRACTS

The Company enters into foreign exchange forward contracts to limit its foreign currency exposure related to intercompany loans that are not of a long-term investment nature. These contracts are recorded at fair value in the Company’s unaudited condensed consolidated balance sheets and are not designated as hedging instruments. Any gains or losses on such contracts are immediately recognized in other income, net, and are largely offset by the remeasurement of the underlying intercompany loan balances.

The Company did not have any foreign currency contracts open as of September 30, 2017 and December 31, 2016.

The following table summarizes gains recognized on foreign exchange forward contracts related to intercompany loans denominated in Euros on the Company’s unaudited condensed consolidated statements of income:



	Three Months Ended				Nine Months Ended
Location of Gain	September 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
	(in thousands)
Other income, net	$	—	$	—	$	—	$	3,373

13. COMMITMENTS AND CONTINGENCIES

Litigation

Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.

Lease Commitments

During the nine months ended September 30, 2017, the Company assumed or entered into new lease agreements or exercised options to extend the lease terms for certain existing leases. As a result, the Company’s lease obligations through 2032 increased by $37.9 million during the nine months ended September 30, 2017.

14. RESTRUCTURING AND ASSET IMPAIRMENTS

Workforce Reductions

In recent fiscal years, the Company has been undertaking productivity improvement initiatives at various facilities. The following table provides a rollforward of the Company’s severance and transition costs liabilities related to those initiatives:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended

Nine Months Ended

September 30, 2017

September 24, 2016

September 30, 2017

September 24, 2016

(in thousands)

Beginning balance

CHARLES RIVER LABORATORIES INTERNATIONAL, INC. - FORM 10-Q - November 9, 2017

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