Document

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 28, 2019



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 25, 2019, there were 48,838,925 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 28, 2019

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

Signatures		54

Special Note on Factors Affecting Future Results

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

For example, we may use forward-looking statements when addressing topics such as: 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 investment in, and the development and performance of, our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical and biotechnology companies, venture capital investments, and opportunities for future similar arrangements; our cost structure; the impact of acquisitions, including Citoxlab; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure), including gains and losses attributable to businesses we plan to close, consolidate, divest or repurpose; changes in our expectations regarding future stock option, restricted stock, performance share units, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our liquidity. In addition, these statements include the impact of economic and market conditions on us and our clients; the effects of our cost saving actions and the steps to optimize returns to shareholders on an effective and timely basis; and our ability to withstand the current market conditions.

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)



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

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

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

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Net income	$	73,552		$	60,902		$	173,549		$	168,526
Other comprehensive income (loss):
Foreign currency translation adjustment and other	(15,889		)	(6,805		)	(9,075		)	(14,524		)
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans	365			615			1,113			1,864
Comprehensive income, before income taxes	58,028			54,712			165,587			155,866
Less: Income tax expense (benefit) related to items of other comprehensive income	(2,511		)	257			(1,381		)	(341		)
Comprehensive income, net of income taxes	60,539			54,455			166,968			156,207
Less: Comprehensive income (loss) related to noncontrolling interests, net of income taxes	(37		)	(74		)	1,064			886
Comprehensive income attributable to common shareholders, net of income taxes	$	60,576		$	54,529		$	165,904		$	155,321






























See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)



	September 28, 2019			December 29, 2018
Assets
Current assets:
Cash and cash equivalents	$	164,759		$	195,442
Trade receivables, net	524,074			472,248
Inventories	155,526			127,892
Prepaid assets	51,274			53,447
Other current assets	76,774			48,807
Total current assets	972,407			897,836
Property, plant and equipment, net	1,008,047			932,877
Operating lease right-of-use assets, net	140,359			—
Goodwill	1,521,619			1,247,133
Client relationships, net	620,868			537,945
Other intangible assets, net	81,257			72,943
Deferred tax assets	44,831			23,386
Other assets	193,174			143,759
Total assets	$	4,582,562		$	3,855,879
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases	$	33,611		$	31,416
Accounts payable	107,231			66,250
Accrued compensation	130,292			137,212
Deferred revenue	166,095			145,139
Accrued liabilities	130,015			106,925
Other current liabilities	114,402			71,280
Total current liabilities	681,646			558,222
Long-term debt, net and finance leases	1,882,593			1,636,598
Operating lease right-of-use liabilities	116,868			—
Deferred tax liabilities	165,480			143,635
Other long-term liabilities	171,243			179,121
Total liabilities	3,017,830			2,517,576
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	28,345			18,525
Equity:
Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.01 par value; 120,000 shares authorized; 48,976 shares issued and 48,837 shares outstanding as of September 28, 2019, and 48,210 shares issued and 48,209 shares outstanding as of December 29, 2018	490			482
Additional paid-in capital	1,514,620			1,447,512
Retained earnings	213,767			42,096
Treasury stock, at cost, 139 and 1 shares, as of September 28, 2019 and December 29, 2018, respectively	(18,094		)	(55		)
Accumulated other comprehensive loss	(178,470		)	(172,703		)
Total equity attributable to common shareholders	1,532,313			1,317,332
Noncontrolling interest	4,074			2,446
Total equity	1,536,387			1,319,778
Total liabilities, redeemable noncontrolling interests, and equity	$	4,582,562		$	3,855,879
See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



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



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











See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(in thousands)



	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
	Shares	Amount		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Shares	Amount			Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
December 29, 2018	48,210	$	482	$	1,447,512		$	42,096	$	(172,703	)	1	$	(55	)	$	1,317,332		$	2,446	$	1,319,778
Net income	—	—		—			55,133		—			—	—			55,133			469		55,602
Other comprehensive income	—	—		—			—		9,903			—	—			9,903			—		9,903
Adjustment of redeemable noncontrolling interest to redemption value	—	—		(1,451		)	—		—			—	—			(1,451		)	—		(1,451		)
Issuance of stock under employee compensation plans	674	7		22,051			—		—			—	—			22,058			—		22,058
Acquisition of treasury shares	—	—		—			—		—			136	(17,760		)	(17,760		)	—		(17,760		)
Stock-based compensation	—	—		12,899			—		—			—	—			12,899			—		12,899
March 30, 2019	48,884	489		1,481,011			97,229		(162,800		)	137	(17,815		)	1,398,114			2,915		1,401,029
Net income	—	—		—			43,728		—			—	—			43,728			383		44,111
Other comprehensive loss	—	—		—			—		(3,436		)	—	—			(3,436		)	—		(3,436		)
Purchase of additional equity interest in and modification of Vital River redeemable noncontrolling interest	—	—		(1,870		)	—		—			—	—			(1,870		)	—		(1,870		)
Issuance of stock under employee compensation plans	53	—		2,148			—		—			—	—			2,148			—		2,148
Acquisition of treasury shares	—	—		—			—		—			1	(123		)	(123		)	—		(123		)
Stock-based compensation	—	—		16,505			—		—			—	—			16,505			—		16,505
June 29, 2019	48,937	489		1,497,794			140,957		(166,236		)	138	(17,938		)	1,455,066			3,298		1,458,364
Net income	—	—		—			72,810		—			—	—			72,810			776		73,586
Other comprehensive loss	—	—		—			—		(12,234		)	—	—			(12,234		)	—		(12,234		)
Issuance of stock under employee compensation plans	39	1		2,801			—		—			—	—			2,802			—		2,802
Acquisition of treasury shares	—	—		—			—		—			1	(156		)	(156		)	—		(156		)
Stock-based compensation	—	—		14,025			—		—			—	—			14,025			—		14,025
September 28, 2019	48,976	$	490	$	1,514,620		$	213,767	$	(178,470	)	139	$	(18,094	)	$	1,532,313		$	4,074	$	1,536,387



	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
	Shares	Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Shares	Amount			Total Equity Attributable to Common Shareholders			Noncontrolling Interest		Total Equity
December 30, 2017	87,495	$	875	$	2,560,192	$	288,658	$	(144,731	)	40,093	$	(1,659,914	)	$	1,045,080		$	2,327	$	1,047,407
Net income	—	—		—		52,631		—			—	—			52,631			464		53,095
Other comprehensive income	—	—		—		—		23,604			—	—			23,604			—		23,604
Reclassification due to adoption of ASU 2018-02 Reclass	—	—		—		3,330		(3,330		)	—	—			—			—		—
Adjustment due to adoption of ASU 2016-01	—	—		—		1,424		—			—	—			1,424			—		1,424
Issuance of stock under employee compensation plans	630	6		20,088		—		—			—	—			20,094			—		20,094
Acquisition of treasury shares	—	—		—		—		—			126	(13,549		)	(13,549		)	—		(13,549		)
Stock-based compensation	—	—		10,541		—		—			—	—			10,541			—		10,541
March 31, 2018	88,125	881		2,590,821		346,043		(124,457		)	40,219	(1,673,463		)	1,139,825			2,791		1,142,616
Net income	—	—		—		53,709		&