filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Charles River Laboratories International, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Charles River Laboratories International, Inc. and its subsidiaries (the “Company”) as of December 30, 2023 and December 31, 2022, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 30, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Noveprim Group (“Noveprim”) from its assessment of internal control over financial reporting as of December 30, 2023, because it was acquired by the Company in a purchase business combination during 2023. We have also excluded Noveprim from our audit of internal control over financial reporting. Noveprim is a subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent less than 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 30, 2023.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of Noveprim – Valuation of Biological Assets
As described in Notes 1 and 2 to the consolidated financial statements, on November 30, 2023, the Company completed the acquisition of Noveprim, resulting in a 90% controlling interest. Of the acquired long-term assets, $167.8 million of biological assets were recorded. The determination of the fair value of biological assets requires the use of significant judgment using management’s best estimates of inputs and assumptions that a market participant would use. To determine the fair value, management utilized the multiple period excess earnings model, which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue, cost of revenue, operating income margins, and productivity rates, as well as the discount rate based on market participant’s weighted average cost of capital.
The principal considerations for our determination that performing procedures relating to the valuation of biological assets acquired in the acquisition of Noveprim is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the biological assets acquired; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the cost of revenue, productivity rates, and discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the biological assets acquired. These procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for developing the fair value estimate of the biological assets acquired; (iii) evaluating the appropriateness of the multiple period excess earnings model; (iv) testing the completeness and accuracy of the underlying data used in the multiple period excess earnings model; and (v) evaluating the reasonableness of the significant assumptions used by management related to the cost of revenue, productivity rates, and discount rate. Evaluating management’s assumptions related to the cost of revenue and productivity rates involved considering (i) the past performance of Noveprim; (ii) the consistency with external research data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the multiple period excess earnings model and (ii) the reasonableness of the discount rate assumption.
Discovery and Safety Assessment Service Revenue Recognized Over Time Using the Input Method
As described in Notes 1 and 3 to the consolidated financial statements, the Company recognized Discovery and Safety Assessment (DSA) revenue from services and products transferred over time of $2,611.6 million for the year-ended December 30, 2023, of which the majority relates to services that are delivered to the customer based on the extent of progress towards completion of the performance obligation that management
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
measures using the cost-to-cost (input method). Management uses the input method measure of progress when it best depicts the transfer of value to the customer, which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the input method measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The cost calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred.
The principal considerations for our determination that performing procedures relating to DSA service revenue recognized over time using the input method is a critical audit matter are a high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to DSA service revenue recognized over time using the input method, including controls over the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation, review of contracts, testing of budget versus actual costs incurred, and testing of revenue recognition. These procedures also included, among others (i) reading contracts and reports describing the results of services provided for a sample of DSA service contracts; (ii) testing management’s process for determining the amount of DSA service revenue recognized over time for a sample of DSA service contracts; (iii) evaluating the appropriateness of the input method used by management; (iv) evaluating the reasonableness of the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations through performing a retrospective comparison of actual costs incurred to historical estimated costs for completed service contracts; and (v) testing actual costs incurred for a sample of in-progress service contracts by examining evidence of costs incurred.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 14, 2024
We have served as the Company’s auditor since 1999.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Service revenue | $ | 3,440,019 | $ | 3,216,904 | $ | 2,755,579 | |||||||||||
| Product revenue | 689,390 | 759,156 | 784,581 | ||||||||||||||
| Total revenue | 4,129,409 | 3,976,060 | 3,540,160 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of services provided (excluding amortization of intangible assets) | 2,295,983 | 2,143,318 | 1,837,487 | ||||||||||||||
| Cost of products sold (excluding amortization of intangible assets) | 330,870 | 370,091 | 368,035 | ||||||||||||||
| Selling, general and administrative | 747,855 | 665,098 | 619,919 | ||||||||||||||
| Amortization of intangible assets | 137,440 | 146,578 | 124,857 | ||||||||||||||
| Operating income | 617,261 | 650,975 | 589,862 | ||||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest income | 5,196 | 780 | 652 | ||||||||||||||
| Interest expense | (136,710) | (59,291) | (73,910) | ||||||||||||||
| Other income (expense), net | 95,537 | 30,523 | (35,894) | ||||||||||||||
| Income before income taxes | 581,284 | 622,987 | 480,710 | ||||||||||||||
| Provision for income taxes | 100,914 | 130,379 | 81,873 | ||||||||||||||
| Net income | 480,370 | 492,608 | 398,837 | ||||||||||||||
| Less: Net income attributable to noncontrolling interests | 5,746 | 6,382 | 7,855 | ||||||||||||||
| Net income attributable to common shareholders | $ | 474,624 | $ | 486,226 | $ | 390,982 | |||||||||||
| Earnings per common share | |||||||||||||||||
| Net income attributable to common shareholders: | |||||||||||||||||
| Basic | $ | 9.27 | $ | 9.57 | $ | 7.77 | |||||||||||
| Diluted | $ | 9.22 | $ | 9.48 | $ | 7.60 | |||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||
| Basic | 51,227 | 50,812 | 50,293 | ||||||||||||||
| Diluted | 51,451 | 51,301 | 51,425 | ||||||||||||||
| See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Net income | $ | 480,370 | $ | 492,608 | $ | 398,837 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustment | 70,651 | (129,091) | (29,493) | ||||||||||||||
| Pension and other post-retirement benefit plans (Note 14): | |||||||||||||||||
| Prior service cost and (losses) gains arising during the period | (5,376) | 24,471 | (1,193) | ||||||||||||||
| Amortization of net loss, settlement losses, and prior service benefit included in total cost for pension and other post-retirement benefit plans | 736 | 3,337 | 1,678 | ||||||||||||||
| Unrealized gains (losses) on hedging instruments | 2,490 | (1,523) | — | ||||||||||||||
| Other comprehensive income (loss), before income taxes | 68,501 | (102,806) | (29,008) | ||||||||||||||
| Less: Income tax (benefit) expense related to items of other comprehensive income (Note 12) | 4,071 | (1,905) | (3,965) | ||||||||||||||
| Comprehensive income, net of income taxes | 544,800 | 391,707 | 373,794 | ||||||||||||||
| Less: Comprehensive income related to noncontrolling interests, net of income taxes | 4,546 | 2,798 | 8,678 | ||||||||||||||
| Comprehensive income attributable to common shareholders, net of income taxes | $ | 540,254 | $ | 388,909 | $ | 365,116 | |||||||||||
| See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| December 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 276,771 | $ | 233,912 | |||||||
| Trade receivables and contract assets, net of allowances for credit losses of $25,722 and $11,278, respectively | 780,375 | 752,390 | |||||||||
| Inventories | 380,259 | 255,809 | |||||||||
| Prepaid assets | 87,879 | 89,341 | |||||||||
| Other current assets | 83,378 | 107,580 | |||||||||
| Total current assets | 1,608,662 | 1,439,032 | |||||||||
| Property, plant and equipment, net | 1,639,741 | 1,465,655 | |||||||||
| Venture capital and strategic equity investments | 243,811 | 311,602 | |||||||||
| Operating lease right-of-use assets, net | 394,029 | 391,762 | |||||||||
| Goodwill | 3,095,045 | 2,849,903 | |||||||||
| Intangible assets, net | 864,051 | 955,275 | |||||||||
| Deferred tax assets | 40,279 | 41,262 | |||||||||
| Other assets | 309,383 | 148,279 | |||||||||
| Total assets | $ | 8,195,001 | $ | 7,602,770 | |||||||
| Liabilities, Redeemable Noncontrolling Interests and Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 168,937 | $ | 205,915 | |||||||
| Accrued compensation | 213,290 | 197,078 | |||||||||
| Deferred revenue | 241,820 | 264,259 | |||||||||
| Accrued liabilities | 227,825 | 219,758 | |||||||||
| Other current liabilities | 203,210 | 204,575 | |||||||||
| Total current liabilities | 1,055,082 | 1,091,585 | |||||||||
| Long-term debt, net and finance leases | 2,647,147 | 2,707,531 | |||||||||
| Operating lease right-of-use liabilities | 419,234 | 389,745 | |||||||||
| Deferred tax liabilities | 191,349 | 215,582 | |||||||||
| Other long-term liabilities | 223,191 | 174,822 | |||||||||
| Total liabilities | 4,536,003 | 4,579,265 | |||||||||
| Commitments and contingencies (Notes 2, 11, 13, 14 and 18) | |||||||||||
| Redeemable noncontrolling interest | 56,722 | 42,427 | |||||||||
| Equity: | |||||||||||
| Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding | — | — | |||||||||
| Common stock, $0.01 par value; 120,000 shares authorized; 51,338 shares issued and outstanding as of December 30, 2023 and 50,944 shares issued and outstanding as of December 31, 2022 | 513 | 509 | |||||||||
| Additional paid-in capital | 1,905,578 | 1,804,940 | |||||||||
| Retained earnings | 1,887,218 | 1,432,901 | |||||||||
| Treasury stock, at cost, zero shares as of December 30, 2023 and December 31, 2022 | — | — | |||||||||
| Accumulated other comprehensive loss | (196,427) | (262,057) | |||||||||
| Total equity attributable to common shareholders | 3,596,882 | 2,976,293 | |||||||||
| Noncontrolling interests (nonredeemable) | 5,394 | 4,785 | |||||||||
| Total equity | 3,602,276 | 2,981,078 | |||||||||
| Total liabilities, redeemable noncontrolling interests and equity | $ | 8,195,001 | $ | 7,602,770 | |||||||
| See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Cash flows relating to operating activities | |||||||||||||||||
| Net income | $ | 480,370 | $ | 492,608 | $ | 398,837 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 314,124 | 303,870 | 265,540 | ||||||||||||||
| Stock-based compensation | 72,048 | 73,617 | 71,474 | ||||||||||||||
| Loss on debt extinguishment and amortization of other financing costs | 3,967 | 4,118 | 29,964 | ||||||||||||||
| Deferred income taxes | (50,903) | (35,884) | (24,006) | ||||||||||||||
| Long-lived asset impairment charges | 41,911 | 5,816 | 733 | ||||||||||||||
| (Gain) loss on venture capital and strategic equity investments, net | (97,827) | 26,775 | 30,420 | ||||||||||||||
| Provision for credit losses | 18,225 | 6,706 | 1,657 | ||||||||||||||
| Loss (gain) on divestitures, net | 961 | (123,405) | (25,026) | ||||||||||||||
| Changes in fair value of contingent consideration arrangements | 1,810 | (3,753) | (34,303) | ||||||||||||||
| Other, net | 1,592 | 21,726 | 2,567 | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Trade receivables and contract assets, net | (33,434) | (150,570) | (26,633) | ||||||||||||||
| Inventories | (62,301) | (78,523) | (25,159) | ||||||||||||||
| Accounts payable | (20,427) | (2,652) | 44,901 | ||||||||||||||
| Accrued compensation | 12,447 | (42,164) | 44,304 | ||||||||||||||
| Deferred revenue | (21,743) | 57,658 | (13,402) | ||||||||||||||
| Customer contract deposits | (15,564) | 30,457 | 16,925 | ||||||||||||||
| Other assets and liabilities, net | 38,642 | 33,240 | 2,006 | ||||||||||||||
| Net cash provided by operating activities | 683,898 | 619,640 | 760,799 | ||||||||||||||
| Cash flows relating to investing activities | |||||||||||||||||
| Acquisition of businesses and assets, net of cash acquired | (194,785) | (283,392) | (1,293,095) | ||||||||||||||
| Capital expenditures | (318,528) | (324,733) | (228,772) | ||||||||||||||
| Purchases of investments and contributions to venture capital investments | (54,215) | (158,274) | (45,555) | ||||||||||||||
| Proceeds from sale of investments | 6,667 | 4,549 | 6,532 | ||||||||||||||
| Proceeds from sale of businesses, net | — | 163,275 | 122,694 | ||||||||||||||
| Other, net | (2,294) | (9,347) | 264 | ||||||||||||||
| Net cash used in investing activities | (563,155) | (607,922) | (1,437,932) | ||||||||||||||
| Cash flows relating to financing activities | |||||||||||||||||
| Proceeds from long-term debt and revolving credit facility | 776,353 | 2,952,430 | 6,951,113 | ||||||||||||||
| Proceeds from exercises of stock options | 25,597 | 25,110 | 45,652 | ||||||||||||||
| Payments on long-term debt, revolving credit facility, and finance lease obligations | (851,676) | (2,932,636) | (6,242,877) | ||||||||||||||
| Purchase of treasury stock | (24,155) | (38,651) | (40,707) | ||||||||||||||
| Payment of debt extinguishment and financing costs | — | — | (38,255) | ||||||||||||||
| Payments of contingent consideration | (2,711) | (10,356) | (2,328) | ||||||||||||||
| Purchases of additional equity interests, net | (4,784) | (30,533) | — | ||||||||||||||
| Other, net | (4,145) | (7,761) | — | ||||||||||||||
| Net cash (used in) provided by financing activities | (85,521) | (42,397) | 672,598 | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 8,044 | 25,579 | 17,730 | ||||||||||||||
| Net change in cash, cash equivalents, and restricted cash | 43,266 | (5,100) | 13,195 | ||||||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 241,214 | 246,314 | 233,119 | ||||||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 284,480 | $ | 241,214 | $ | 246,314 | |||||||||||
| See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
| Common stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Equity Attributable to Common Shareholders | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 26, 2020 | 49,767 | $ | 498 | $ | 1,627,564 | $ | 625,414 | $ | (138,874) | — | $ | — | $ | 2,114,602 | $ | 3,567 | $ | 2,118,169 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 390,982 | — | — | — | 390,982 | 2,480 | 393,462 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | — | — | — | — | (25,866) | — | — | (25,866) | — | (25,866) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared to noncontrolling interest | — | — | — | — | — | — | — | — | (1,885) | (1,885) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to noncontrolling interest fair value | — | — | (21,312) | — | — | — | — | (21,312) | — | (21,312) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock under employee compensation plans | 861 | 8 | 45,639 | — | — | — | — | 45,647 | — | 45,647 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | — | — | 148 | (40,707) | (40,707) | — | (40,707) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (148) | (1) | (5,061) | (35,645) | — | (148) | 40,707 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 71,474 | — | — | — | — | 71,474 | — | 71,474 | |||||||||||||||||||||||||||||||||||||||||||||||||
| December 25, 2021 | 50,480 | 505 | 1,718,304 | 980,751 | (164,740) | — | — | 2,534,820 | 4,162 | 2,538,982 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 486,226 | — | — | — | 486,226 | 2,362 | 488,588 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | — | — | — | — | (97,317) | — | — | (97,317) | — | (97,317) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared to noncontrolling interest | — | — | — | — | — | — | — | — | (1,739) | (1,739) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of redeemable noncontrolling interest to redemption value | — | — | (7,507) | — | — | — | — | (7,507) | — | (7,507) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock under employee compensation plans | 594 | 5 | 25,100 | — | — | — | — | 25,105 | — | 25,105 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | — | — | 130 | (38,651) | (38,651) | — | (38,651) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (130) | (1) | (4,574) | (34,076) | — | (130) | 38,651 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 73,617 | 73,617 | — | 73,617 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | 50,944 | 509 | 1,804,940 | 1,432,901 | (262,057) | — | — | 2,976,293 | 4,785 | 2,981,078 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 474,624 | — | — | — | 474,624 | 2,254 | 476,878 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 65,630 | — | — | 65,630 | — | 65,630 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared to noncontrolling interest | — | — | — | — | — | — | — | — | (1,645) | (1,645) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of redeemable noncontrolling interest to redemption value | — | — | 5,694 | — | — | — | — | 5,694 | — | 5,694 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on purchase of remaining equity interest of Vital River redeemable noncontrolling interest | — | — | 1,151 | — | — | — | — | 1,151 | — | 1,151 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock under employee compensation plans | 499 | 5 | 25,592 | — | — | — | — | 25,597 | — | 25,597 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | — | — | 105 | (24,155) | (24,155) | — | (24,155) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (105) | (1) | (3,847) | (20,307) | — | (105) | 24,155 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 72,048 | 72,048 | — | 72,048 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 30, 2023 | 51,338 | $ | 513 | $ | 1,905,578 | $ | 1,887,218 | $ | (196,427) | — | $ | — | $ | 3,596,882 | $ | 5,394 | $ | 3,602,276 | |||||||||||||||||||||||||||||||||||||||||
| See Notes to Consolidated Financial Statements. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Charles River Laboratories International, Inc. (the Company), together with its subsidiaries, is a full service, non-clinical global drug development partner. The Company has built upon its core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that enable the Company to support its clients from target identification through non-clinical development. The Company also provides a suite of products and services to support its clients’ manufacturing activities.
Principles of Consolidation
The Company’s consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Redeemable noncontrolling interests, where the noncontrolling interest holders have the ability to require the Company to purchase the remaining interests, are classified in the mezzanine section of the consolidated balance sheets, which is presented above the equity section and below liabilities. Intercompany balances and transactions are eliminated in consolidation.
The Company’s fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which occurred in fiscal year 2022.
Segment Reporting
The Company reports its results in three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing). The Company’s RMS reportable segment includes the Research Models, Research Model Services, and Cell Solutions businesses.
Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services) within our clients’ facilities and utilizing our Charles River Accelerator and Development Lab (CRADL™) offering, which provides vivarium space to clients, Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models, and Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Cell Solutions, which supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood and bone marrow.
The Company’s DSA reportable segment includes two businesses: Discovery Services and Safety Assessment. The Company provides regulated and non-regulated DSA services to support the research, development, and regulatory-required safety testing of potential new drugs, including therapeutic discovery and optimization plus in vitro and in vivo studies, laboratory support services, and strategic non-clinical consulting and program management to support product development.
The Company’s Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services and Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO). In December of 2022, the Company sold the Avian Vaccine Services business (Avian), reported in the Manufacturing segment, which supplied specific-pathogen-free chicken eggs and chickens.
Use of Estimates
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP) requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of the date of issuance of these consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s consolidated financial statements.
Newly Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” ASU 2022-04 requires quantitative and qualitative disclosures about the use of supplier finance programs. The ASU is effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years for selected disclosures, and will be applied on a prospective basis. The Company participates in certain supplier finance programs that are immaterial to the consolidated financial statements and related disclosures.
Newly Issued Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, “Improvements to Reportable Segment Disclosures (Topic 280)”. ASU 2023-07 modifies reportable segment disclosure requirements, primarily through enhanced disclosures about segment expenses categorized as significant or regularly provided to the Chief Operating Decision Maker (CODM). In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, and contain other disclosure requirements. The purpose of the amendments is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. This ASU is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the related disclosures in the consolidated financial statements, but does not believe there will be a material impact.
In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures (Topic 740)”. ASU 2023-09 requires enhanced disclosures on income taxes paid, adds disaggregation of continuing operations before income taxes between foreign and domestic earnings and defines specific categories for the reconciliation of jurisdictional tax rate to effective tax rate. This ASU is effective for fiscal years beginning after December 15, 2024, and can be applied on a prospective basis. The Company is currently evaluating the impact this new standard will have on the related disclosures in the consolidated financial statements.
Cash, Cash Equivalents, and Investments
Cash equivalents include money market funds, time deposits and other investments with remaining maturities at the purchase date of three months or less. Time deposits with original maturities of greater than three months are reported as short-term investments.
Trade Receivables and Contract Assets, Net
The Company records trade receivables and contract assets, net of an allowance for credit losses. An allowance for credit losses is established based on historical collection information, a review of major client accounts receivable balances, current economic conditions in the geographies in which it operates, and the Company’s expectations of future economic conditions that may affect the collectability of the recorded amounts. Amounts determined to be uncollectible are charged or written off against the allowance.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, trade receivables and contract assets. The Company places cash and cash equivalents and investments in various financial institutions with high credit rating and limits the amount of credit exposure to any one financial institution. Trade receivables and contract assets are primarily from clients in the pharmaceutical and biotechnology industries, as well as academic and government institutions. Concentrations of credit risk with respect to trade receivables and contract assets, which are typically unsecured, are limited due to the wide variety of customers using the Company’s products and services as well as their dispersion across many geographic areas. No single client accounted for more than 3.5% of revenue in fiscal years 2023, 2022, or 2021 or trade receivables as of December 30, 2023 or December 31, 2022.
Fair Value Measurements
The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and requires certain disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
participants at the measurement date. The Company has certain financial assets and liabilities recorded at fair value, which have been classified as Level 1, 2 or 3 within the fair value hierarchy:
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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,
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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 rate yield curves and foreign currency spot rates,
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Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The fair value hierarchy level is determined by asset and class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
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Cash equivalents - Valued at market prices determined through third-party pricing services;
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Foreign currency forward contracts - Valued using market observable inputs, such as forward foreign exchange points and foreign exchanges rates;
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Interest rate swap contracts - Valued using market observable inputs, such as interest rate yield curves;
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Life insurance policies - Valued at cash surrender value based on the fair value of underlying investments;
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Debt instruments - The book value of the Company’s revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. The book values of the Company’s Senior Notes, which are fixed rate debt, are carried at amortized cost. Fair values of the Senior Notes are based on quoted market prices and on borrowing rates available to the Company; and
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Contingent consideration - Valued based on a probability weighting of the future cash flows associated with the potential outcomes and certain option pricing models.
Inventories
The Company’s inventories consist of raw materials, work in process and finished product related primarily to small models, large models, cell solutions, microbial solutions, and CDMO products. Inventories are stated at the lower of cost or net realizable value. Inventory value is generally based on the standard cost method for all businesses. Standard costs are trued-up to reflect actual cost. For small models inventory, costs include direct materials such as feed and bedding, costs of personnel directly involved in the care of the models, and an allocation of facility overhead. For the large models inventory, costs are primarily the external cost paid to acquire the model along with certain direct materials, costs of personnel directly involved in the care of the models, and allocation of facility overhead costs. For cell solutions inventory, costs include direct materials, costs of personnel directly involved in the processing of products sold, and an allocation of facility overhead. For the microbial solutions and CDMO inventory, costs include direct materials, cost of personnel directly involved in the manufacturing and assembly of products sold, and an allocation of facility overhead. Inventory costs are charged to cost of revenue in the period the products are sold to an external party. The Company analyzes its inventory levels on a quarterly basis and writes down inventory that is determined to be damaged, obsolete or otherwise unmarketable, with a corresponding charge to cost of products sold.
Property, Plant and Equipment, Net
Property, plant and equipment, net, including improvements that significantly add to productive capacity or extend useful life, are carried at cost and are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. The cost of normal, recurring, or periodic repairs and maintenance activities related to property, plant and equipment is expensed as incurred. In addition, the Company capitalizes certain internal use computer software development costs. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.
Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company generally depreciates the cost of its property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets as follow:
| Estimated Useful Lives | |||||
| (in years) | |||||
| Land | Indefinite | ||||
| Buildings and building improvements | 10 - 40 | ||||
| Machinery and equipment | 3 - 20 | ||||
| Furniture and fixtures | 5 - 10 | ||||
| Computer hardware and software | 3 - 8 | ||||
| Vehicles | 3 - 5 |
Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Finance lease assets are amortized over the lease term, however, if ownership is transferred by the end of the finance lease, or there is a bargain purchase option, such finance lease assets are amortized over the useful life that would be assigned if such assets were owned.
When the Company disposes of property, plant and equipment, it removes the associated cost and accumulated depreciation from the related accounts on its consolidated balance sheet and includes any resulting gain or loss recorded in Other (expense) income, net in the accompanying consolidated statements of income.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The Company allocates the amounts that it pays for each acquisition to the assets it acquires and liabilities it assumes based on their fair values at the dates of acquisition, including identifiable intangible assets and certain biological assets, which can represent a significant portion of the purchase price. The determination of the fair value of intangible and certain biological assets requires the use of significant judgment using management’s best estimates of inputs and assumptions that a market participant would use. Significant judgments include (i) the fair value; and (ii) whether such assets are amortizable or non-amortizable and, if the former, the period and the method by which the asset will be amortized. The Company utilizes commonly accepted valuation techniques, such as the income, cost, and market approaches as appropriate, in establishing the fair value of assets. Typically, key assumptions include projections of cash flows that arise from identifiable assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets.
In recent acquisitions, customer relationship intangible assets (also referred to as client relationships) and certain biological assets are the most significant identifiable asset acquired. To determine the fair value of these acquired assets, the Company typically utilizes the multiple period excess earnings model (a commonly accepted valuation technique), which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue, cost of revenue, operating income margins, customer attrition rates, and productivity rates; as well as discount rates based on a market participant’s weighted average cost of capital.
Contingent Consideration
The consideration for the Company’s acquisitions may include future payments that are contingent upon the occurrence of a particular event. The Company records an obligation for such contingent payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models, such as probability-weighted and option pricing models, that incorporate probability adjusted assumptions and simulations related to the achievement of the milestones and the likelihood of making related payments. The Company revalues these contingent consideration obligations each reporting period. Changes in the fair value of the contingent consideration obligations are recognized in the Company’s consolidated statements of income as a component of selling, general and administrative expenses. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates and changes in the assumed probabilities of successful achievement of certain financial targets.
Discount rates in the Company’s valuation models represent a measure of the credit risk associated with settling the liability. The period over which the Company discounts its contingent obligations is typically based on when the contingent payments would be triggered. These fair value measurements are based on significant inputs not observable in the market.
Divestitures
The Company records divestitures at fair value less cost to sell with any related gain or loss from sale recorded within Other income (expense) on the Company’s consolidated statements of income. If the sale price includes contingent payments, these
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are fair valued using a probability weighted model. If the business divested is part of a reporting unit, goodwill from the reporting unit is reallocated based on the fair value of the divested business compared to the fair value of the reporting unit.
Goodwill and Intangible Assets
Goodwill represents the difference between the purchase price and the fair value of assets acquired and liabilities assumed when accounted for using the acquisition method of accounting. Goodwill is not amortized, but reviewed for impairment on an annual basis, during the fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting units below their carrying amounts.
The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative impairment test. In the quantitative test, the Company compares the fair value of its reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units an impairment loss equal to the difference would be recorded.
Definite-lived intangible assets, including client relationships, are amortized over the pattern in which the economic benefits of the intangible assets are utilized and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset group. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the definite-lived intangible assets, the definite-lived intangible assets are written-down to their fair values.
Valuation and Impairment of Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values.
Long-lived assets to be disposed of are carried at fair value less costs to sell.
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 less than 1% to approximately 12%. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity method of accounting. For publicly-held investments in the LPs, the Company adjusts for changes in fair market value based on reported share holdings at the end of each fiscal quarter. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LPs’ economic performance.
Under the equity method of accounting, the Company’s portion of the investment gains and losses, as reported in the fund’s financial statements on a quarterly lag each reporting period, is recorded in Other (expense) income, net in the accompanying consolidated statements of income. In addition, the Company adjusts the carrying value of these investments to reflect its estimate of changes to fair value since the fund’s financial statements are based on information from the fund’s management team, market prices of known public holdings of the fund, and other information.
Strategic Equity Investments
The Company invests, with minority positions, directly in equity of predominantly privately-held companies that are reported either at fair value or under the equity method of accounting, as appropriate. Equity investments that do not have readily determinable fair values are generally recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same investee. Gains and losses from strategic equity investments are recorded in Other (expense) income, net in the accompanying consolidated statements of income.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Contracts
The Company is exposed to certain risks relating to its ongoing business operations including changes to interest rates and currency exchange rates. The company uses derivative instruments primarily to manage currency exchange and interest rate risks. The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive items until the hedged item is recognized in earnings. Derivatives that are not designated as hedges are recorded at fair value through earnings.
For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative is reported as a component of other comprehensive items and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The Company uses an interest rate swap to manage interest rate fluctuation related to floating rate borrowings under the Credit Facility.
The Company uses short-term forward currency exchange contracts primarily to hedge certain balance sheet and operational exposures resulting from changes in currency exchange rates, predominantly intercompany loans. The currency-exchange contracts principally hedge transactions denominated in Canadian dollars and euros. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.
Life Insurance Contracts
Investments in life insurance contracts are recorded at cash surrender value. The initial investment is remeasured based on fair value of underlying investments or contractual value each reporting period. Gains and losses from life insurance contracts are recorded in Other income (expense), net in the accompanying consolidated statements of income. Investments in and redemptions of these life insurance contracts are reported as cash flows from investing activities in the consolidated statement of cash flows. The Company held 44 contracts at December 30, 2023 with a face value of $82.4 million and 44 contracts with a face value of $74.5 million at December 31, 2022, which are recorded in Other assets.
Leases
At inception of a contract, the Company determines if a contract meets the definition of a lease. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if the contract conveys the right to control the use of an identified asset for a period of time. The Company assesses throughout the period of use whether the Company has both of the following: (1) the right to obtain substantially all of the economic benefits from use of the identified asset, and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments.
The Company leases laboratory, production, and office space (real estate), as well as land, vehicles and certain equipment under non-cancellable operating and finance leases. The carrying value of the Company’s right-of-use lease assets is substantially concentrated in its real estate leases, while the volume of lease agreements is primarily concentrated in vehicles and equipment leases. The Company’s policy is to not record leases with an original term of twelve months or less on the consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term.
Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period in which the obligation for these payments was incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use asset and liability. Only when lease components and their associated non-lease components are fixed are they accounted for as a single lease component and are recognized as part of a right-of-use asset and liability. Total contract consideration is allocated to the combined fixed lease and non-lease component. This policy election applies consistently to all asset classes under lease agreements.
Most real estate leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 5 years. Certain lease agreements contain options to purchase the leased property and options to terminate the lease. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when it is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised, or is not at the Company’s option. The Company determines whether the reasonably certain threshold is met by considering contract-, asset-, market-, and entity-based factors.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A portfolio approach is applied to certain lease contracts with similar characteristics. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases.
The Company subleases a limited number of lease arrangements. Sublease activity is not material to the consolidated financial statements.
Stock-Based Compensation
The Company grants stock options, restricted stock units (RSUs), and performance share units (PSUs) to employees and stock options, and RSUs to non-employee directors under stock-based compensation plans. Stock-based compensation is recognized as an expense in the consolidated statements of income based on the grant date fair value, adjusted for forfeitures when they occur, over the requisite service period.
For stock options and RSUs that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. Where awards are made with non-substantive vesting periods and a portion of the award continues to vest after the employee’s eligible retirement, the Company recognizes expense based on the period from the grant date to the date on which the employee is retirement eligible. The Company records the expense for PSU grants subject to performance and/or market conditions using the accelerated attribution method over the remaining service period when management determines that achievement of the performance-based milestone is probable.
The fair value of stock options granted is calculated using the Black-Scholes option-pricing model and the fair value of PSUs is estimated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others. The expected volatility assumption is typically determined using the historical volatility of the Company’s common stock over the expected life of the stock-based award. The expected term is determined using historical option exercise activity. The fair value of RSUs is based on the market value of the Company’s common stock on the date of grant.
Revenue Recognition
Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”).
To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, the Company does not extend payment terms beyond one year. Applying the practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. The Company’s contracts do not generally contain significant financing components.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
As part of the Company’s service offerings, the Company has identified performance obligations related to leasing Company owned assets. In certain arrangements, customers obtain substantially all of the economic benefits of the identified assets, which may include manufacturing suites and related equipment, and have the right to direct the assets’ use over the term of the contract. The associated revenue is recognized on a straight-line basis over the term of the lease, which is generally less than one year, and recorded within service revenue. Due to the nature of these arrangements and timing of the contractual lease term, the remaining revenue to be recognized related to these lease performance obligations is not material to the consolidated financial statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the impact on the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, the Company generally measures its progress using either cost-to-cost (input method) or right-to-invoice (output method). The Company uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.
The timing of revenue recognition, billings and cash collections results in billed receivables (client receivables), contract assets (unbilled revenue), and contract liabilities (current and long-term deferred revenue and customer contract deposits) on the consolidated balance sheets. The Company’s payment terms are generally 30 days in the United States and consistent with prevailing practice in international markets. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a customer is conditioned other than the passage of time. Client receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. Cumulative catch-up adjustments to revenue are periodically recorded that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration), or a contract modification.
Income Taxes
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements carrying amounts and their respective tax basis. The Company measures deferred tax assets and liabilities using the enacted tax rates in effect when the temporary differences are expected to be settled. The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in-process audit activities and changes in facts or circumstances related to a tax position. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
Foreign Currency Contracts
Foreign currency contracts are recorded at fair value in the Company’s consolidated balance sheets and are not designated as hedging instruments. Any gains or losses on forward contracts associated with intercompany loans are recognized immediately in Other (expense) income, net and are largely offset by the remeasurement of the underlying intercompany loan. Any gains or losses on forward contracts associated with the Company’s U.S. dollar denominated loan borrowed by a non-U.S. entity under the Company’s Credit Facility are recognized immediately in Interest expense. Gains or losses incurred on the remeasurement of the Company’s U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency is recorded in Other (expense) income, net.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Translation of Foreign Currencies
For the Company’s subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average foreign exchange rates for the period. Adjustments resulting from the translation of the financial statements of the Company’s foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive loss, a separate component of equity.
Pension and Other Post-Retirement Benefit Plans
The Company recognizes the funded status of its defined benefit pension and other post-retirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. The Company measures plan assets and benefit obligations as of its fiscal year end.
The key assumptions used to calculate benefit obligations and related pension costs include expected long-term rate of return on plan assets, withdrawal and mortality rates, expected rate of increase in employee compensation levels and a discount rate. Assumptions are determined based on the Company’s data and appropriate market indicators, and evaluated each year as of the plan’s measurement date.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.
The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.
The Company is required to recognize as a component of Other comprehensive income, net of tax, the actuarial gains or losses and prior service costs or credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive income is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.
The Company records the service cost component of the net periodic benefit cost within Cost of services provided and Selling, general, and administrative expenses and all other components of net periodic benefit cost within Other (expense) income, net in the consolidated statements of income.
The Company recognizes pension settlement gains or losses in the period when all of the following settlement criteria are met: there is an irrevocable action, the Company is relieved of primary responsibility for a benefit obligation, and significant risks related to the obligation and the assets used to effect the settlement are eliminated.
Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share is computed using the treasury stock method, assuming the exercise of stock options and the vesting of RSUs, or evaluating the performance conditions for PSUs to assess whether the conditions have been met, as well as their related income tax effects.
Treasury Shares
The Company periodically retires treasury shares acquired through share repurchases and returns those shares to the status of authorized but unissued. The Company accounts for treasury stock transactions under the cost method. For each reacquisition of common stock, the number of shares and the acquisition price for those shares is added to the existing treasury stock count and total value. Thus, the average cost per share is re-averaged each time shares are acquired. When treasury shares are retired, the Company allocates the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in-capital. The portion allocated to additional paid-in-capital is determined by applying a percentage, determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in-capital as of the retirement date.
2. ACQUISITIONS AND DIVESTITURES
Fiscal 2023 Acquisition
Noveprim Group
On November 30, 2023, the Company completed the acquisition of an additional 41% equity interest of Noveprim Group (Noveprim), a leading supplier of non-human primates (NHPs) located in Mauritius, resulting in a 90% controlling interest. The
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company had previously acquired a 49% equity interest in 2022 for $90.0 million plus additional contingent payments up to $5.0 million based on future performance. The total consideration allocable to the Noveprim acquisition is $374.8 million, which includes $144.6 million additional cash paid for the 41% equity interest, elimination of historical activity and intercompany balances of $198.8 million which includes a remeasurement gain on the 49% equity investment of $103.2 million, contingent consideration of $33.3 million, deferred purchase price of $12.0 million payable from 2024 through 2027, offset by estimated post-closing adjustments for working capital of $13.8 million. The contingent consideration fair value is estimated using a Monte Carlo Simulation model and the maximum contingent contractual payments are up to $55.0 million based on future performance and milestone achievements from in fiscal years 2023 through 2025. The Company has the call option right to purchase the remaining 10% equity interest up until one month after the sixth anniversary of closing the 41% equity interest. On the first anniversary of the expiration of the call option, a 12-month put option will be triggered giving the seller the right to require the Company to acquire the remaining shares of the seller. The redemption price for the call/put is fixed and ranges from $47.0 million to $54.0 million depending on when exercised. The noncontrolling interest is classified as a redeemable noncontrolling interest in the mezzanine section of the consolidated balance sheet. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment for NHPs vertically integrated into the DSA supply chain and the RMS reportable segment for those NHPs sold to third party customers.
SAMDI Tech, Inc.
On January 27, 2023, the Company acquired SAMDI Tech, Inc., (SAMDI), a leading provider of high-quality, label-free high-throughput screening (HTS) solutions for drug discovery research. The acquisition of SAMDI will provide clients with seamless access to the premier, label-free HTS MS platform and create a comprehensive, library of drug discovery solutions. The purchase price of SAMDI was $62.8 million, net of $0.4 million in cash, inclusive of a 20% strategic equity interest previously owned by the Company of $12.6 million. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment.
Fiscal 2022 Acquisition
Explora BioLabs Holdings, Inc.
On April 5, 2022, the Company acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements the Company’s existing Insourcing Solutions business, specifically the CRADL™ (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The purchase price of Explora BioLabs was $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s RMS reportable segment.
Fiscal 2021 Acquisitions
Vigene Biosciences, Inc.
On June 28, 2021, the Company acquired Vigene Biosciences, Inc. (Vigene), a gene therapy CDMO, providing viral vector-based gene delivery solutions. The acquisition enables clients to seamlessly conduct analytical testing, process development, and manufacturing for advanced modalities with the same scientific partner. The purchase price of Vigene was $323.9 million, net of $2.7 million in cash. Included in the purchase price are contingent payments fair valued at $34.5 million, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s Manufacturing reportable segment. As of December 30, 2023 and December 31, 2022 the fair value of the contingent consideration was zero as certain financial targets have not and are not expected to be achieved.
Retrogenix Limited
On March 30, 2021, the Company acquired Retrogenix Limited (Retrogenix), an outsourced discovery services provider specializing in bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances the Company’s scientific expertise with additional large molecule and cell therapy discovery capabilities. The purchase price of Retrogenix was $53.9 million, net of $8.5 million in cash. Included in the purchase price are contingent payments fair valued at $6.9 million, which is the maximum potential payout, and was based on a probability-weighted approach. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cognate BioServices, Inc.
On March 29, 2021, the Company acquired Cognate BioServices, Inc. (Cognate), a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the production of plasmid DNA and other inputs in the CDMO value chain. The acquisition of Cognate establishes the Company as a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research and discovery through cGMP production. The purchase price of Cognate was $877.9 million, net of $70.5 million in cash and includes $15.7 million of consideration for an approximate 2% ownership interest not initially acquired, but redeemed in April 2022 with the ultimate payout tied to performance in 2021. The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility and senior notes (Senior Notes) issued in fiscal 2021. This business is reported as part of the Company’s Manufacturing reportable segment.
Distributed Bio, Inc.
On December 31, 2020, the Company acquired Distributed Bio, Inc. (Distributed Bio), a next-generation antibody discovery company with technologies specializing in enhancing the probability of success for delivering high-quality, readily formattable antibody fragments to support antibody and cell and gene therapy candidates to biopharmaceutical clients. The acquisition of Distributed Bio expands the Company’s capabilities with an innovative, large-molecule discovery platform, and creates an integrated, end-to-end platform for therapeutic antibody and cell and gene therapy discovery and development. The purchase price of Distributed Bio was $97.0 million, net of $0.8 million in cash. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously issued by the Company during prior fiscal years, and $14.1 million of contingent consideration, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $21.0 million based on future performance and milestone achievements over a one-year period). The acquisition was funded through a combination of available cash and proceeds from the Company’s Credit Facility. This business is reported as part of the Company’s DSA reportable segment. During fiscal year 2022, $7.0 million of contingent consideration was paid as certain operational milestones were achieved. As of December 30, 2023, other financial targets associated with the contingent consideration were not met and the fair value of the remaining contingent consideration is zero.
Other Acquisition
On March 3, 2021, the Company acquired certain assets from a distributor that supports the Company’s DSA reportable segment. The purchase price was $35.4 million, which includes $19.5 million in cash paid ($5.5 million of which was paid in fiscal 2020), and $15.9 million of contingent consideration, which was estimated using a Monte Carlo Simulation model (the maximum contingent contractual payments are up to $17.5 million based on future performance over a three-year period). The fair value of the net assets acquired included $17.3 million of goodwill, $15.2 million attributed to supplier relationships (to be amortized over a 4-year period), and $3.0 million of property, plant, and equipment. The business is reported as part of the Company’s DSA reportable segment. As of December 30, 2023, the fair value of the contingent consideration was zero as certain operational targets were not achieved.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchase price information
The purchase price allocation for acquisitions during fiscal years 2023 and 2022 was as follows:
| Noveprim Group**(1)** | SAMDI Tech, Inc. | Explora BioLabs | |||||||||||||||
| November 30, 2023 | January 27, 2023 | April 5, 2022 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Trade receivables | $ | 1,308 | $ | 513 | $ | 7,679 | |||||||||||
| Inventories | 66,500 | — | — | ||||||||||||||
| Other current assets (excluding cash) | 3,965 | 75 | 1,067 | ||||||||||||||
| Property, plant and equipment | 35,831 | 593 | 37,369 | ||||||||||||||
| Operating lease right-of-use asset, net | 104 | — | 48,613 | ||||||||||||||
| Goodwill (2) | 172,349 | 37,129 | 215,752 | ||||||||||||||
| Definite-lived intangible assets | 9,500 | 33,070 | 70,100 | ||||||||||||||
| Other long-term assets (3) | 167,907 | 6 | 556 | ||||||||||||||
| Deferred revenue | — | (43) | (3,507) | ||||||||||||||
| Other current liabilities | (16,378) | (351) | (15,507) | ||||||||||||||
| Operating lease right-of-use liabilities (Long-term) | (97) | — | (57,193) | ||||||||||||||
| Deferred tax liabilities | (12,984) | (8,191) | (18,601) | ||||||||||||||
| Other long-term liabilities | (7,797) | — | (1,807) | ||||||||||||||
| Redeemable noncontrolling interest (4) | (45,374) | — | — | ||||||||||||||
| Total purchase price allocation | $ | 374,834 | $ | 62,801 | $ | 284,521 | |||||||||||
| (1) Purchase price allocation is preliminary and subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts, obligations, and finalization of any working capital adjustments. 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. | |||||||||||||||||
| (2) The goodwill resulting from these transactions is primarily attributable to the potential growth of the Company’s segments from new customers introduced to the acquired businesses or synergies to be realized from acquiring an internal supplier servicing the DSA business and the assembled workforce of the acquirees, thus is not deductible for tax purposes. Explora BioLabs had $5.0 million of goodwill due to a prior asset acquisition that is deductible for tax purposes. | |||||||||||||||||
| (3) Other long-term assets acquired from the Noveprim acquisition include $167.8 million of biological assets, which will be amortized over an estimated eight year useful life. | |||||||||||||||||
| (4) Refer to Note 12. Equity and Noncontrolling Interests for further a description of the 10% noncontrolling interest fair value. |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation for acquisitions during fiscal years 2021 was as follows:
| Vigene | Retrogenix | Cognate | Distributed Bio | ||||||||||||||||||||
| June 28, 2021 | March 30, 2021 | March 29, 2021 | December 31, 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Trade receivables | $ | 3,548 | $ | 2,266 | $ | 18,566 | $ | 2,722 | |||||||||||||||
| Other current assets (excluding cash) | 1,657 | 209 | 14,128 | 221 | |||||||||||||||||||
| Property, plant and equipment | 7,649 | 400 | 52,082 | 2,382 | |||||||||||||||||||
| Operating lease right-of-use asset, net | 22,507 | 1,385 | 34,349 | 1,586 | |||||||||||||||||||
| Goodwill (1) | 239,681 | 34,489 | 611,555 | 71,585 | |||||||||||||||||||
| Definite-lived intangible assets | 93,900 | 22,126 | 270,900 | 24,540 | |||||||||||||||||||
| Other long-term assets | 694 | — | 6,098 | 469 | |||||||||||||||||||
| Deferred revenue | (4,260) | (434) | (20,539) | (1,319) | |||||||||||||||||||
| Other current liabilities (2) | (6,319) | (1,141) | (45,388) | (1,504) | |||||||||||||||||||
| Operating lease right-of-use liabilities (Long-term) | (21,220) | (1,205) | (31,383) | (1,123) | |||||||||||||||||||
| Deferred tax liabilities | (13,958) | (4,174) | (32,503) | (2,529) | |||||||||||||||||||
| Total purchase price allocation | $ | 323,879 | $ | 53,921 | $ | 877,865 | $ | 97,030 | |||||||||||||||
| (1) The goodwill resulting from these transactions is primarily attributable to the potential growth of the Company’s segments from new customers introduced to the acquired businesses and the assembled workforce of the acquirees, thus is not deductible for tax purposes. | |||||||||||||||||||||||
| (2) In connection with its acquisitions of businesses, the Company routinely records liabilities related to indirect state and local taxes for preacquisition periods when such liabilities are estimable and deemed probable. The Company may or may not be indemnified for such indirect tax liabilities under terms of the acquisitions. As these indirect tax contingencies are resolved, actual obligations, and any indemnifications, may differ from the recorded amounts and any differences are reflected in reported results in the period in which these are resolved. Specifically for Cognate, as of March 29, 2021, the Company recorded an estimated liability of $17 million pertaining to indirect state sales taxes. During fiscal year 2022, the Company received a favorable ruling from the applicable state in which the indirect state sales tax liability arose and, accordingly, this liability was reduced in full, resulting in a gain recorded through selling, general and administrative expenses in the period. |
The definite-lived intangible assets acquired during fiscal years 2023 and 2022 were as follows:
| Noveprim Group | SAMDI Tech, Inc. | Explore BioLabs | |||||||||||||||
| Definite-Lived Intangible Assets | (in thousands) | ||||||||||||||||
| Client relationships | $ | — | $ | 23,400 | $ | 64,000 | |||||||||||
| Other intangible assets | 9,500 | 9,670 | 6,100 | ||||||||||||||
| Total definite-lived intangible assets | $ | 9,500 | $ | 33,070 | $ | 70,100 | |||||||||||
| Weighted Average Amortization Life | (in years) | ||||||||||||||||
| Client relationships | — | 15 | 13 | ||||||||||||||
| Other intangible assets | 7 | 7 | 4 | ||||||||||||||
| Total definite-lived intangible assets | 7 | 12 | 12 |
The definite-lived intangible assets acquired during fiscal years 2021 were as follows:
| Vigene | Retrogenix | Cognate | Distributed Bio | ||||||||||||||||||||
| Definite-Lived Intangible Assets | (in thousands) | ||||||||||||||||||||||
| Client relationships | $ | 87,500 | $ | 17,340 | $ | 257,200 | $ | 16,080 | |||||||||||||||
| Other intangible assets | 6,400 | 4,786 | 13,700 | 8,460 | |||||||||||||||||||
| Total definite-lived intangible assets | $ | 93,900 | $ | 22,126 | $ | 270,900 | $ | 24,540 | |||||||||||||||
| Weighted Average Amortization Life | (in years) | ||||||||||||||||||||||
| Client relationships | 12 | 13 | 13 | 9 | |||||||||||||||||||
| Other intangible assets | 2 | 3 | 2 | 4 | |||||||||||||||||||
| Total definite-lived intangible assets | 11 | 11 | 13 | 7 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The transaction and integration costs incurred for fiscal years 2023, 2022 and 2021 were as follows:
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Transaction and Integration Costs | |||||||||||||||||
| Selling, general and administrative expenses | $ | 12,379 | $ | 8,470 | $ | 39,099 | |||||||||||
Divestitures
The Company routinely evaluates the strategic fit and fundamental performance of its global businesses, divesting operations that do not meet key business criteria. As part of this ongoing assessment, the Company determined that certain capital could be better deployed in other long-term growth opportunities.
Avian Vaccine Services
On December 20, 2022, the Company sold its Avian Vaccine Services business (Avian) to a private investor group for a purchase price of $167.3 million in cash, subject to certain customary closing adjustments. The Company may also earn up to $30.0 million of contingent payments, which are tied to certain annual results of the Avian business from January 2024 through December 2027. The contingent payments have been fair valued at $10.3 million using a discounted probability weighted model. The Avian business was reported in the Company’s Manufacturing reportable segment. During the fiscal year 2022, the Company recorded a gain on the divestiture of Avian of $123.4 million within Other income (expense) on the Company’s consolidated statements of income.
RMS Japan
On October 12, 2021, the Company sold its RMS Japan operations to The Jackson Laboratory for a purchase price of $70.9 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments. During the three months ended December 25, 2021, the Company recorded a gain on the divestiture of the RMS Japan business of $20.0 million, net of costs to sell, a currency translation adjustment, and other adjustments related to certain ongoing arrangements with the buyer, which was included in Other income (expense), net within the Company’s consolidated statements of income. The RMS Japan business was reported in the Company’s RMS reportable segment.
CDMO Sweden
On October 12, 2021, the Company sold its gene therapy CDMO site in Sweden to a private investor group for a purchase price of $59.6 million, net of $0.2 million in cash and other post-closing adjustments that may impact the purchase price. Included in the purchase price are contingent payments fair valued at $15.3 million, which were estimated using a probability weighted model (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10.0 million between the parties. During fiscal year 2022 the fair value of the contingent payments receivable was reduced from $15.3 million to $7.5 million, which was the balance as of December 30, 2023, as certain financial targets are not expected to be achieved. CDMO Sweden was acquired in March 2021 as part of the acquisition of Cognate and was reported in the Company’s Manufacturing reportable segment.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of the major classes of assets and liabilities associated with these divestitures were as follows:
| December 19, 2022 | October 12, 2021 | ||||||||||||||||
| Avian | RMS Japan | CDMO Sweden | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Assets | |||||||||||||||||
| Current assets | $ | 30,545 | $ | 26,524 | $ | 8,187 | |||||||||||
| Property, plant, and equipment, net | 24,602 | 17,379 | 14,339 | ||||||||||||||
| Operating lease right-of-use assets, net | 611 | — | 19,733 | ||||||||||||||
| Goodwill | 3,168 | 4,129 | 27,764 | ||||||||||||||
| Client relationships, net | 1,629 | — | 14,089 | ||||||||||||||
| Other assets | 10 | 3,695 | — | ||||||||||||||
| Total assets | $ | 60,565 | $ | 51,727 | $ | 84,112 | |||||||||||
| Liabilities | |||||||||||||||||
| Current liabilities | $ | 8,139 | $ | 8,705 | $ | 6,386 | |||||||||||
| Operating lease right-of-use liabilities | 331 | — | 18,221 | ||||||||||||||
| Long-term liabilities | — | 94 | — | ||||||||||||||
| Total liabilities | $ | 8,470 | $ | 8,799 | $ | 24,607 |
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major business line and timing of transfer of products or services:
| Timing of Revenue Recognition: | 2023 | 2022 | 2021 | ||||||||||||||
| (in thousands) | |||||||||||||||||
| RMS | |||||||||||||||||
| Services and products transferred over time | $ | 377,947 | $ | 340,708 | $ | 263,659 | |||||||||||
| Services and products transferred at a point in time | 414,396 | 398,467 | 426,778 | ||||||||||||||
| Total RMS revenue | 792,343 | 739,175 | 690,437 | ||||||||||||||
| DSA | |||||||||||||||||
| Services and products transferred over time | 2,611,564 | 2,440,646 | 2,103,415 | ||||||||||||||
| Services and products transferred at a point in time | 4,059 | 6,670 | 3,816 | ||||||||||||||
| Total DSA revenue | 2,615,623 | 2,447,316 | 2,107,231 | ||||||||||||||
| Manufacturing | |||||||||||||||||
| Services and products transferred over time | 381,942 | 371,500 | 335,745 | ||||||||||||||
| Services and products transferred at a point in time | 339,501 | 418,069 | 406,747 | ||||||||||||||
| Total Manufacturing revenue | 721,443 | 789,569 | 742,492 | ||||||||||||||
| Total revenue | $ | 4,129,409 | $ | 3,976,060 | $ | 3,540,160 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract Balances from Contracts with Customers
The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Assets from contracts with customers | |||||||||||
| Client receivables | $ | 578,077 | $ | 559,410 | |||||||
| Unbilled revenue | 228,020 | 204,258 | |||||||||
| Total | 806,097 | 763,668 | |||||||||
| Less: Allowance for credit losses | (25,722) | (11,278) | |||||||||
| Trade receivables and contract assets, net | $ | 780,375 | $ | 752,390 | |||||||
| Liabilities from contracts with customers | |||||||||||
| Current deferred revenue | $ | 241,820 | $ | 264,259 | |||||||
| Long term deferred revenue (included in Other long-term liabilities) | 30,919 | 25,795 | |||||||||
| Customer contract deposits (included in Other current-liabilities) | 85,554 | 91,640 |
The Company recognized substantially all of the current contract assets and liabilities balances at December 31, 2022 and December 25, 2021 in revenues during fiscal years 2023 and 2022, respectively.
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $41 million and $54 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying consolidated balance sheets as of December 30, 2023 and December 31, 2022, respectively. Net provisions were $18.2 million, $6.7 million, and $1.7 million in fiscal years 2023, 2022, and 2021, respectively.
Transaction Price Allocated to Future Performance Obligations
The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of December 30, 2023. Excluded from the disclosure is the value of unsatisfied performance obligations for contracts with an original expected length of one year or less, contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed and service revenue recognized in accordance with ASC 842, “Leases”. The aggregate amount of transaction price allocated to the remaining performance obligations for all open customer contracts as of December 30, 2023 was $986.0 million. The Company will recognize revenues for these performance obligations as they are satisfied, approximately 50% of which is expected to occur within the next twelve months and the remainder recognized thereafter during the remaining contract term.
Other Performance Obligations
As part of the Company’s service offerings, the Company has identified performance obligations related to leasing Company owned assets. In certain arrangements, customers obtain substantially all of the economic benefits of the identified assets, which may include manufacturing suites and related equipment, and have the right to direct the assets’ use over the term of the contract. The associated revenue is recognized on a straight-line basis over the term of the lease, which is generally less than one year.
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||
| (in thousands) | Affected Line Item in the Consolidated Statements of Income | |||||||||||||||||||||||||
| Lease revenue | $ | 93,103 | $ | 60,118 | $ | 18,118 | Service revenue |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s three reportable segments are RMS, DSA, and Manufacturing. Asset information on a reportable segment basis is not disclosed as this information is not separately identified and internally reported to the Company’s Chief Operating Decision Maker.
The following table presents revenue and other financial information by reportable segment:
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| RMS | |||||||||||||||||
| Revenue | $ | 792,343 | $ | 739,175 | $ | 690,437 | |||||||||||
| Operating income | 154,666 | 160,410 | 166,814 | ||||||||||||||
| Depreciation and amortization | 55,570 | 49,274 | 39,123 | ||||||||||||||
| Capital expenditures | 52,819 | 44,136 | 61,188 | ||||||||||||||
| DSA | |||||||||||||||||
| Revenue | $ | 2,615,623 | $ | 2,447,316 | $ | 2,107,231 | |||||||||||
| Operating income | 606,076 | 532,889 | 406,978 | ||||||||||||||
| Depreciation and amortization | 174,719 | 179,465 | 177,254 | ||||||||||||||
| Capital expenditures | 204,891 | 189,563 | 101,477 | ||||||||||||||
| Manufacturing | |||||||||||||||||
| Revenue | $ | 721,443 | $ | 789,569 | $ | 742,492 | |||||||||||
| Operating income | 88,329 | 167,084 | 246,390 | ||||||||||||||
| Depreciation and amortization | 79,982 | 72,950 | 46,195 | ||||||||||||||
| Capital expenditures | 58,134 | 87,084 | 58,877 | ||||||||||||||
| Unallocated corporate | |||||||||||||||||
| Operating income (1) | $ | (231,810) | $ | (209,408) | $ | (230,320) | |||||||||||
| Depreciation and amortization | 3,853 | 2,181 | 2,968 | ||||||||||||||
| Capital expenditures | 2,684 | 3,950 | 7,230 | ||||||||||||||
| Consolidated | |||||||||||||||||
| Revenue | $ | 4,129,409 | $ | 3,976,060 | $ | 3,540,160 | |||||||||||
| Operating income | 617,261 | 650,975 | 589,862 | ||||||||||||||
| Depreciation and amortization | 314,124 | 303,870 | 265,540 | ||||||||||||||
| Capital expenditures | 318,528 | 324,733 | 228,772 | ||||||||||||||
| (1) Operating income for unallocated corporate consists of costs associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations. |
Revenue and long-lived assets by geographic area are as follows:
| U.S. | Europe | Canada | Asia Pacific | Other | Consolidated | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 2,347,486 | $ | 1,076,937 | $ | 487,305 | $ | 200,833 | $ | 16,848 | $ | 4,129,409 | |||||||||||||||||||||||
| Long-lived assets | 964,176 | 407,375 | 157,483 | 74,605 | 36,102 | 1,639,741 | |||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 2,342,158 | $ | 1,032,125 | $ | 398,982 | $ | 192,837 | $ | 9,958 | $ | 3,976,060 | |||||||||||||||||||||||
| Long-lived assets | 896,235 | 349,361 | 135,300 | 82,778 | 1,981 | 1,465,655 | |||||||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 1,934,404 | $ | 1,036,465 | $ | 339,098 | $ | 222,902 | $ | 7,291 | $ | 3,540,160 | |||||||||||||||||||||||
| Long-lived assets | 755,400 | 323,405 | 145,274 | 64,864 | 2,125 | 1,291,068 |
Included in the Other category above are operations located in Brazil, Israel, and Mauritius. Revenue represents sales originating in entities physically located in the identified geographic area. Long-lived assets consist of property, plant, and equipment, net.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. SUPPLEMENTAL CASH FLOW INFORMATION
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Cash paid for income taxes | $ | 90,374 | $ | 75,909 | $ | 75,441 | |||||||||||
| Cash paid for interest | 132,101 | 100,754 | 70,775 | ||||||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Purchases of Property, plant and equipment included in Accounts payable and Accrued liabilities | $ | 69,139 | $ | 88,612 | $ | 72,043 | |||||||||||
| Assets acquired under finance leases | — | 8,179 | 1,567 |
Cash, cash equivalents and restricted cash is included in the accompanying balance sheet as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Supplemental cash flow information: | |||||||||||
| Cash and cash equivalents | $ | 276,771 | $ | 233,912 | |||||||
| Restricted cash included in Other current assets | 5,803 | 6,192 | |||||||||
| Restricted cash included in Other assets | 1,906 | 1,110 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 284,480 | $ | 241,214 |
6. INVENTORY
The composition of inventories is as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Raw materials and supplies | $ | 42,296 | $ | 38,892 | |||||||
| Work in process | 59,727 | 48,367 | |||||||||
| Finished products | 278,236 | 168,550 | |||||||||
| Inventories | $ | 380,259 | $ | 255,809 |
7. PROPERTY, PLANT AND EQUIPMENT, NET
The composition of property, plant and equipment, net is as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Land | $ | 79,546 | $ | 58,192 | |||||||
| Buildings (1) | 1,053,915 | 963,717 | |||||||||
| Machinery and equipment (1) | 984,867 | 850,353 | |||||||||
| Leasehold improvements | 366,556 | 294,275 | |||||||||
| Furniture and fixtures | 31,284 | 27,317 | |||||||||
| Computer hardware and software (1) | 254,413 | 227,797 | |||||||||
| Vehicles (1) | 6,746 | 5,421 | |||||||||
| Construction in progress | 197,723 | 199,713 | |||||||||
| Total | 2,975,050 | 2,626,785 | |||||||||
| Less: Accumulated depreciation | (1,335,309) | (1,161,130) | |||||||||
| Property, plant and equipment, net | $ | 1,639,741 | $ | 1,465,655 | |||||||
| (1) These balances include assets under finance leases. See Note 17. Leases. |
Depreciation expense in fiscal years 2023, 2022 and 2021 was $176.7 million, $157.3 million and $140.7 million, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. VENTURE CAPITAL AND STRATEGIC EQUITY INVESTMENTS
Venture capital investments are summarized below:
| December 30, 2023 | December 31, 2022 | December 25, 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Beginning balance | $ | 129,012 | $ | 149,640 | $ | 197,100 | |||||||||||
| Capital contributions | 17,410 | 14,485 | 18,023 | ||||||||||||||
| Distributions | (15,685) | (9,861) | (40,205) | ||||||||||||||
| Gain (loss) | (10,263) | (24,398) | (23,201) | ||||||||||||||
| Foreign currency translation | 684 | (854) | (2,077) | ||||||||||||||
| Ending balance | $ | 121,158 | $ | 129,012 | $ | 149,640 |
The Company also invests, with minority positions, directly in equity of predominantly privately-held companies. Strategic investments are summarized below:
| December 30, 2023 | December 31, 2022 | December 25, 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Beginning balance | $ | 182,590 | $ | 51,712 | $ | 24,704 | |||||||||||
| Purchase of investments | 34,028 | 142,477 | 35,540 | ||||||||||||||
| Distributions | (9,381) | (2,732) | (789) | ||||||||||||||
| Gain (loss) (1) | 108,090 | (2,377) | (7,219) | ||||||||||||||
| Reduction for acquisition of entities (1) | (197,753) | — | — | ||||||||||||||
| Foreign currency translation | 5,079 | (6,490) | (524) | ||||||||||||||
| Ending balance | $ | 122,653 | $ | 182,590 | $ | 51,712 | |||||||||||
| (1) Refer to Note 2. Acquisitions for further discussion on the Noveprim and SAMDI acquisitions |
9. FAIR VALUE
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| December 30, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current assets measured at fair value: | (in thousands) | ||||||||||||||||||||||
| Cash equivalents | $ | — | $ | 29 | $ | — | $ | 29 | |||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Life insurance policies | — | 40,912 | 40,912 | ||||||||||||||||||||
| Interest rate swap | — | 966 | — | 966 | |||||||||||||||||||
| Total assets measured at fair value | $ | — | $ | 41,907 | $ | — | $ | 41,907 | |||||||||||||||
| Other long-term liabilities measured at fair value: | |||||||||||||||||||||||
| Contingent consideration | — | — | 33,265 | 33,265 | |||||||||||||||||||
| Interest rate swap | — | — | — | — | |||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | — | $ | 33,265 | $ | 33,265 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current assets measured at fair value: | (in thousands) | ||||||||||||||||||||||
| Cash equivalents | $ | — | $ | 78 | $ | — | $ | 78 | |||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Life insurance policies | — | 34,527 | — | 34,527 | |||||||||||||||||||
| Total assets measured at fair value | $ | — | $ | 34,605 | $ | — | $ | 34,605 | |||||||||||||||
| Accrued liabilities measured at fair value: | |||||||||||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 13,431 | $ | 13,431 | |||||||||||||||
| Other long-term liabilities measured at fair value: | |||||||||||||||||||||||
| Contingent consideration | — | — | — | — | |||||||||||||||||||
| Interest rate swap | — | 1,523 | — | 1,523 | |||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 1,523 | $ | 13,431 | $ | 14,954 |
During fiscal years 2023 and 2022, there were no transfers between fair value levels.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to the Company’s acquisitions.
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Beginning balance | $ | 13,431 | $ | 37,244 | $ | 2,328 | |||||||||||
| Additions | 33,265 | 3,838 | 71,559 | ||||||||||||||
| Payments | (15,130) | (11,476) | (2,889) | ||||||||||||||
| Total gains or losses (realized/unrealized): | |||||||||||||||||
| Adjustment of previously recorded contingent liability | 1,810 | (15,340) | (33,386) | ||||||||||||||
| Foreign currency translation | (111) | (835) | (368) | ||||||||||||||
| Ending balance | $ | 33,265 | $ | 13,431 | $ | 37,244 |
The Company estimates the fair value of contingent consideration obligations through valuation models, such as probability-weighted and option pricing models, that incorporate probability adjusted assumptions and simulations related to the achievement of the milestones and the likelihood of making related payments. The unobservable inputs used in the fair value measurements include the probabilities of successful achievement of certain financial targets, forecasted results or targets, volatility, and discount rates. The remaining maximum potential payments are approximately $98 million, of which the value accrued as of December 30, 2023 is approximately $33 million. The weighted average probability of achieving the maximum target is approximately 34%. The average volatility and weighted average cost of capital are approximately 30% and 12%, respectively.
Cash Flow Hedge
The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In November 2022, the Company entered into an interest rate swap with a notional amount of $500 million to manage interest rate fluctuation related to floating rate borrowings under the Credit Facility, at a fixed rate of 4.700%.
In March 2023 and in conjunction with an amendment of the Credit Agreement (Second Amendment), the Company modified the variable rate on its interest rate swap from 1-month LIBOR to 1-month adjusted term SOFR. Effective with the modification, the Company will pay a fixed rate of 4.65% on its swap maturing November 2, 2024. The Company elected to apply the optional expedient in ASC 848, Reference Rate Reform, in connection with modifying its interest rate swap from LIBOR to SOFR that enabled it to consider the modification a continuation of the existing contract. As a result, the transition did not have an impact on the Company’s hedge accounting or a material impact to the Company’s financial statements.
Debt Instruments
The book value of the Company’s 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
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2 within the fair value hierarchy.
The book value of the Company’s Senior Notes are fixed rate obligations carried at amortized cost. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy. The book value and fair value of the Company’s Senior Notes is summarized below:
| December 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Book Value | Fair Value | Book Value | Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| 4.25% Senior Notes due 2028 | $ | 500,000 | $ | 478,100 | $ | 500,000 | $ | 460,450 | |||||||||||||||
| 3.75% Senior Notes due 2029 | 500,000 | 458,100 | 500,000 | 442,200 | |||||||||||||||||||
| 4.00% Senior Notes due 2031 | 500,000 | 449,350 | 500,000 | 432,500 |
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the changes in the carrying amount of the Company’s goodwill:
| RMS | DSA**(1)** | Manufacturing | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| December 25, 2021 | $ | 283,524 | $ | 1,472,506 | $ | 955,851 | $ | 2,711,881 | |||||||||||||||
| Acquisitions | 215,752 | — | (592) | 215,160 | |||||||||||||||||||
| Divestitures | — | — | (3,168) | (3,168) | |||||||||||||||||||
| Foreign exchange | (1,566) | (38,905) | (33,499) | (73,970) | |||||||||||||||||||
| December 31, 2022 | 497,710 | 1,433,601 | 918,592 | 2,849,903 | |||||||||||||||||||
| Acquisitions | — | 209,478 | — | 209,478 | |||||||||||||||||||
| Divestitures | — | — | — | — | |||||||||||||||||||
| Foreign exchange | (236) | 19,355 | 16,545 | 35,664 | |||||||||||||||||||
| December 30, 2023 | $ | 497,474 | $ | 1,662,434 | $ | 935,137 | $ | 3,095,045 | |||||||||||||||
| (1) DSA includes accumulated impairment losses of $1 billion, which were recognized in fiscal years 2008 and 2010. |
Based on the Company’s quantitative goodwill impairment test, which was performed in the fourth quarter for each of the fiscal years 2023, 2022 and 2021, the fair value of each reporting unit exceeded the reporting unit’s book value and, therefore, goodwill was not impaired. After completing the quantitative testing for fiscal year 2023, all reporting units exceeded the carrying value by a significant amount except for the Biologics Solutions reporting unit which had a fair value that exceeded its carrying value by approximately 20%.
The increase in goodwill during fiscal year 2023 related to the acquisitions of Noveprim and SAMDI in the DSA reportable segment. The increase in goodwill during fiscal year 2022 related to the acquisition of Explora in the RMS reportable segment, partially offset by a decrease due to the Avian divestiture impacting the Manufacturing reportable segment.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets, Net
The following table displays intangible assets, net by major class:
| December 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Client relationships | $ | 1,528,780 | $ | (721,322) | $ | 807,458 | $ | 1,491,926 | $ | (591,417) | $ | 900,509 | |||||||||||||||||||||||
| Technology | 142,190 | (111,764) | 30,426 | 129,626 | (101,655) | 27,971 | |||||||||||||||||||||||||||||
| Backlog | $ | 3,100 | $ | (2,177) | $ | 923 | $ | 15,236 | $ | (12,512) | $ | 2,724 | |||||||||||||||||||||||
| Trademarks and trade names | 11,878 | (4,568) | 7,310 | 12,617 | (4,410) | 8,207 | |||||||||||||||||||||||||||||
| Other | 43,611 | (25,677) | 17,934 | 37,985 | (22,121) | 15,864 | |||||||||||||||||||||||||||||
| Intangible assets | $ | 1,729,559 | $ | (865,508) | $ | 864,051 | $ | 1,687,390 | $ | (732,115) | $ | 955,275 |
The decrease in intangible assets, net during fiscal year 2023 related primarily to normal amortization over the useful lives, partially offset by the acquisitions of Noveprim and SAMDI.
Amortization expense of definite-lived intangible assets, including client relationships, for fiscal years 2023, 2022 and 2021 was $137.4 million, $146.6 million and $124.9 million, respectively. As of December 30, 2023, estimated amortization expense for intangible assets for each of the next five fiscal years is expected to be as follows:
| Fiscal Year | Amortization Expense | |||||||
| (in thousands) | ||||||||
| 2024 | $ | 129,153 | ||||||
| 2025 | $ | 120,995 | ||||||
| 2026 | $ | 115,757 | ||||||
| 2027 | $ | 103,164 | ||||||
| 2028 | $ | 91,315 |
11. DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt, net and finance leases consists of the following:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Revolving facility | $ | 1,129,243 | $ | 1,197,586 | |||||||
| 4.25% Senior Notes due 2028 | 500,000 | 500,000 | |||||||||
| 3.75% Senior Notes due 2029 | 500,000 | 500,000 | |||||||||
| 4.00% Senior Notes due 2031 | 500,000 | 500,000 | |||||||||
| Other debt | 9,575 | 1,594 | |||||||||
| Finance leases | 28,550 | 30,646 | |||||||||
| Total debt and finance leases | 2,667,368 | 2,729,826 | |||||||||
| Less: | |||||||||||
| Current portion of long-term debt | 3,172 | 1,347 | |||||||||
| Current portion of finance leases | 2,398 | 2,330 | |||||||||
| Current portion of long-term debt and finance leases | 5,570 | 3,677 | |||||||||
| Long-term debt and finance leases | 2,661,798 | 2,726,149 | |||||||||
| Debt discount and debt issuance costs | (14,651) | (18,618) | |||||||||
| Long-term debt, net and finance leases | $ | 2,647,147 | $ | 2,707,531 |
As of December 30, 2023 and December 31, 2022, the weighted average interest rate on the Company’s debt was 4.93% and 4.58%, respectively. In fiscal year 2021, the Company prepaid $500 million of Senior Notes due in 2026 along with $21 million of related debt extinguishment costs and $13 million of accrued interest using proceeds from additional senior notes issued on the same day. The payment of the 2026 Senior Notes was accounted for as a debt extinguishment. Approximately $21 million
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of debt extinguishment costs and $5 million of deferred financing costs write-offs were recorded in Interest expense during fiscal year 2021.
Revolving facility (Credit Facility)
The Company has a revolving credit facility “Credit Facility” that provides for up to $3.0 billion of multi-currency revolving credit. The Credit Facility has a maturity date of April 2026, with no required scheduled payment before that date. The interest rates applicable to the revolving facility are equal to (A) for revolving loans denominated in U.S. dollars, at the Company’s option, either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted SOFR rate plus 1.0%) or the adjusted SOFR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon the Company’s leverage ratio. In March 2023 and in conjunction with the Second Amendment the Company modified the variable rate on the Credit Facility from adjusted LIBOR to adjusted term SOFR. All outstanding U.S. dollar borrowings remained at adjusted LIBOR through their respective interest reset periods in April 2023 and were then set to term SOFR.
The Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants. These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than 3.50 to 1.0 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than 4.25 to 1.0. As of December 30, 2023 and December 31, 2022, the Company was compliant with all financial covenants under the Credit Facility. The obligations of the Company under the Credit Facility are collateralized by substantially all of the assets of the Company.
2028 Senior Notes
In fiscal year 2019, the Company issued $500 million of 4.25% Senior Notes due in 2028 (2028 Senior Notes) in an unregistered offering. Interest on the 2028 Senior Notes is payable semi-annually on May 1 and November 1.
2029 Senior Notes and 2031 Senior Notes
In fiscal year 2021, the Company issued $1 billion of debt split between $500 million of 3.75% Senior Notes due in 2029 (2029 Senior Notes), and $500 million of 4.00% Senior Notes due in 2031 (2031 Senior Notes), in an unregistered offering. Interest on the 2029 and 2031 Senior Notes is payable semi-annually on March 15 and September 15. Approximately $10 million of deferred financing costs were capitalized as part of this debt issuance. Proceeds from the 2029 and 2031 Senior Notes were used as follows: prepay the $500 million 2026 Senior Notes, $21 million of debt extinguishment costs, and $13 million of accrued interest; prepay the $146.9 million remaining term loan; pay down $135 million of the revolving facility; and pay for a portion of the Cognate acquisition, which occurred on March 29, 2021.
Foreign currency transactions
During fiscal years 2022 and 2021, the Company had multiple U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility, which were between $250 million and $400 million each. To limit this foreign currency exposure, the Company entered into foreign exchange forward contracts, which are not designated as hedging instruments. The gains and losses incurred on these transactions were as follows:
| December 31, 2022 | December 25, 2021 | Affected Line Item in the Consolidated Statements of Income | ||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||
| Gain (loss) on foreign exchange forward contract | $ | 49,712 | $ | 34,131 | Interest expense | |||||||||||||||||||||
| Gain (loss) on foreign debt remeasurement | (46,529) | (31,830) | Other income (expense) |
The Company did not have any U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility during fiscal year 2023.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Principal Maturities
Principal maturities of existing debt for the periods set forth in the table below, are as follows:
| Principal | |||||
| (in thousands) | |||||
| 2024 | $ | 3,172 | |||
| 2025 | 589 | ||||
| 2026 | 1,129,772 | ||||
| 2027 | 1,947 | ||||
| 2028 | 501,947 | ||||
| Thereafter | 1,001,391 | ||||
| Total | $ | 2,638,818 |
Letters of Credit
As of December 30, 2023 and December 31, 2022, the Company had $21.6 million and $18.6 million, respectively, in outstanding letters of credit.
12. EQUITY AND NONCONTROLLING INTERESTS
Earnings Per Share
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income | $ | 480,370 | $ | 492,608 | $ | 398,837 | |||||||||||
| Less: Net income attributable to noncontrolling interests | 5,746 | 6,382 | 7,855 | ||||||||||||||
| Net income attributable to common shareholders | $ | 474,624 | $ | 486,226 | $ | 390,982 | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted-average shares outstanding—Basic | 51,227 | 50,812 | 50,293 | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| Stock options, restricted stock units and performance share units | 224 | 489 | 1,132 | ||||||||||||||
| Weighted-average shares outstanding—Diluted | 51,451 | 51,301 | 51,425 | ||||||||||||||
| Anti-dilutive common stock equivalents(1) | 652 | 560 | 152 | ||||||||||||||
| (1) These common stock equivalents were outstanding for the periods presented, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect. |
Treasury Shares
The Company’s Board of Directors has authorized a $1.3 billion stock repurchase program. As of December 30, 2023, the Company had $129.1 million remaining on the authorized stock repurchase program.
The Company’s stock-based compensation plans permit the netting of common stock upon vesting of RSUs and PSUs in order to satisfy individual statutory tax withholding requirements. The Company acquired shares of 0.1 million in fiscal years 2023 and 2022, for $24.2 million and $38.7 million, respectively, from such netting.
Prior to the end of fiscal years 2023, 2022 and 2021, the Company’s Board of Directors approved the cancellation and return to the Company’s authorized and unissued capital stock, reducing treasury stock on the Company’s consolidated balance sheet. The Company allocated the excess of the repurchase price over the par value of shares acquired to reduce both retained earnings and additional paid-in capital.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:
| Foreign Currency Translation Adjustment and Other | Pension and Other Post-Retirement Benefit Plans | Net Unrealized Gain (Loss) on Cash Flow Hedge | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| December 26, 2020 | $ | (73,884) | $ | (64,990) | $ | — | $ | (138,874) | |||||||||||||||
| Other comprehensive income before reclassifications (1) | (30,316) | (1,193) | — | (31,509) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 1,678 | — | 1,678 | |||||||||||||||||||
| Net current period other comprehensive (loss) income | (30,316) | 485 | — | (29,831) | |||||||||||||||||||
| Income tax (benefit) expense | (6,027) | 2,062 | — | (3,965) | |||||||||||||||||||
| December 25, 2021 | (98,173) | (66,567) | — | (164,740) | |||||||||||||||||||
| Other comprehensive income before reclassifications (1) | (125,507) | 24,471 | (1,523) | (102,559) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 3,337 | — | 3,337 | |||||||||||||||||||
| Net current period other comprehensive (loss) income | (125,507) | 27,808 | (1,523) | (99,222) | |||||||||||||||||||
| Income tax (benefit) expense | (5,895) | 4,355 | (365) | (1,905) | |||||||||||||||||||
| December 31, 2022 | (217,785) | (43,114) | (1,158) | (262,057) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications (1) | 71,851 | (5,376) | 2,490 | 68,965 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 736 | — | 736 | |||||||||||||||||||
| Net current period other comprehensive (loss) income | 71,851 | (4,640) | 2,490 | 69,701 | |||||||||||||||||||
| Income tax (benefit) expense | 4,065 | (587) | 593 | 4,071 | |||||||||||||||||||
| December 30, 2023 | $ | (149,999) | $ | (47,167) | $ | 739 | $ | (196,427) | |||||||||||||||
| (1) The impact of the foreign currency translation adjustment to other comprehensive income (loss) before reclassifications was primarily due to the effect of changes in foreign currency exchange rates of the Japanese Yen, Euro, British Pound, Canadian Dollar, Chinese Yuan Renminbi, and Hungarian Forint and to a lesser extent due to the impact of changes in the Brazilian Real. |
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 within Equity in the accompanying consolidated balance sheets. The activity within the nonredeemable noncontrolling interest (net income less dividends declared) during fiscal years 2023, 2022, and 2021 was not significant.
Redeemable Noncontrolling Interests
The Company holds a 90% ownership interest in Noveprim. The Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 10% equity interest at a fixed redemption value that ranges from $47.0 million to $54.0 million depending on when exercised, which represents a derivative embedded within the equity instrument. The Company has the call option right to purchase the remaining 10% equity up until one month after the sixth anniversary of closing the 41% equity stake (December 2029). On the first anniversary of the expiration of the call option (December 2030), a 12-month put option will be triggered giving the seller the right to require the Company to acquire the remaining shares of the seller for $54.0 million. Additionally, the 10% noncontrolling interest holders may receive a dividend disproportionate to their equity ownership, which has an approximate fair value of $8 million. 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 accreted redemption value using the interest method and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 10% interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets, which is presented above the equity section and below liabilities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company held a 92% ownership interest in Vital River, a commercial provider of research models and related services in China as of December 31, 2022. The Company had the right to purchase, and the noncontrolling interest holders had the right to sell, the remaining 8% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. The redeemable noncontrolling interest was measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. The amount that the Company could be required to pay to purchase the remaining 8% equity interest was not limited. During the fourth quarter of fiscal 2023, the Company acquired the remaining 8% and as of December 2023, has paid $4.8 million of the total $24.4 million due. The remaining purchase price payable has been reclassified from the mezzanine section to Accrued liabilities on the consolidated balance sheet and is expected to be paid during fiscal year 2024.
In 2020, the Company acquired an 80% equity interest in a subsidiary, which included a 20% redeemable noncontrolling interest. In June 2022, the Company purchased an additional 10% interest in the subsidiary for $15.0 million, resulting in a remaining noncontrolling interest of 10%. Beginning in 2024, the Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 10% equity interest at its appraised value. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the appraised value and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest ($11.0 million as of December 30, 2023) or a predetermined floor, which represents a derivative embedded within the equity instrument. The amount that the Company could be required to pay to purchase the remaining 10% equity interest is not limited.
The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Beginning balance | $ | 42,427 | $ | 53,010 | $ | 25,499 | |||||||||||
| Acquisition resulting in a 10% noncontrolling interest | 45,374 | — | — | ||||||||||||||
| Additional purchases reducing noncontrolling interest percentage | (24,148) | (15,000) | — | ||||||||||||||
| Adjustments to redemption value | (5,694) | 7,506 | 21,312 | ||||||||||||||
| Net income | 3,492 | 4,020 | 5,375 | ||||||||||||||
| Dividends | (2,378) | (3,525) | — | ||||||||||||||
| Foreign currency translation | (1,200) | (3,584) | 824 | ||||||||||||||
| Other | (1,151) | — | — | ||||||||||||||
| Ending balance | $ | 56,722 | $ | 42,427 | $ | 53,010 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. INCOME TAXES
The components of income from operations before income taxes and the related provision for income taxes are presented below:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Income before income taxes: | |||||||||||||||||
| U.S. | $ | 185,667 | $ | 280,075 | $ | 129,598 | |||||||||||
| Non-U.S. | 395,617 | 342,912 | 351,112 | ||||||||||||||
| Total income before income taxes | $ | 581,284 | $ | 622,987 | $ | 480,710 | |||||||||||
| Income tax provision (benefit): | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 49,090 | $ | 75,052 | $ | 32,728 | |||||||||||
| Foreign | 85,356 | 68,644 | 60,197 | ||||||||||||||
| State | 17,817 | 19,790 | 9,257 | ||||||||||||||
| Total current | 152,263 | 163,486 | 102,182 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (42,987) | (27,230) | (27,486) | ||||||||||||||
| Foreign | 779 | (1,134) | 13,891 | ||||||||||||||
| State | (9,141) | (4,743) | (6,714) | ||||||||||||||
| Total deferred | (51,349) | (33,107) | (20,309) | ||||||||||||||
| Total provision for income taxes | $ | 100,914 | $ | 130,379 | $ | 81,873 |
Reconciliations of the statutory U.S. federal income tax rate to effective tax rates are as follows:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| U.S. statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Foreign tax rate differences | 1.5 | 0.4 | 0.1 | ||||||||||||||
| State income taxes, net of federal tax benefit | 1.7 | 2.3 | 0.8 | ||||||||||||||
| Non-deductible compensation | 0.8 | 0.9 | 1.2 | ||||||||||||||
| Research tax credits and enhanced deductions | (5.0) | (3.8) | (5.0) | ||||||||||||||
| Stock-based compensation | (0.1) | (1.4) | (4.3) | ||||||||||||||
| Enacted tax rate changes | (0.1) | 0.4 | 3.0 | ||||||||||||||
| Tax on unremitted earnings | 1.7 | 1.6 | 1.8 | ||||||||||||||
| Impact of tax uncertainties | (0.3) | (1.3) | 0.7 | ||||||||||||||
| Impact of acquisitions and restructuring | (4.2) | 2.0 | (1.6) | ||||||||||||||
| Net operating loss deferred tax asset recognition, net of valuation allowance (NOL DTA) | 0.2 | (0.8) | — | ||||||||||||||
| Global intangible low-taxed income | 1.5 | 0.8 | 1.3 | ||||||||||||||
| Foreign-derived intangible income | (1.4) | (1.4) | (1.2) | ||||||||||||||
| Other | 0.1 | 0.2 | (0.8) | ||||||||||||||
| Effective income tax rate | 17.4 | % | 20.9 | % | 17.0 | % |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of deferred tax assets and liabilities are as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Compensation | $ | 30,167 | $ | 26,341 | |||||||
| Accruals and reserves | 19,121 | 16,938 | |||||||||
| Net operating loss and credit carryforwards | 379,959 | 382,932 | |||||||||
| Operating lease liability | 117,449 | 100,156 | |||||||||
| Capitalized R&D Expenditures | 35,673 | 18,616 | |||||||||
| Other | 12,190 | 8,516 | |||||||||
| Valuation allowance | (304,248) | (294,753) | |||||||||
| Total deferred tax assets | 290,311 | 258,746 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Goodwill and other intangibles | (231,020) | (256,234) | |||||||||
| Depreciation related | (57,791) | (48,965) | |||||||||
| Venture capital investments | (8,350) | (12,007) | |||||||||
| Tax on unremitted earnings | (25,080) | (16,407) | |||||||||
| Right-of-use assets | (102,620) | (91,716) | |||||||||
| Other | (16,520) | (7,737) | |||||||||
| Total deferred tax liabilities | (441,381) | (433,066) | |||||||||
| Net deferred taxes | $ | (151,070) | $ | (174,320) |
The Company has recognized its deferred tax assets on the belief that it is more likely than not that they will be realized. Exceptions primarily relate to deferred tax assets for net operating losses in Luxembourg, Sweden, state research and development tax credits, certain capital losses, and fixed assets in the U.K.
A reconciliation of the Company’s beginning and ending valuation allowance are as follows:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Beginning balance | $ | 294,753 | $ | 315,645 | $ | 334,845 | |||||||||||
| Additions (reductions) charged to income tax provision, net | 963 | 1,929 | 1,023 | ||||||||||||||
| Additions due to acquisitions | — | — | 7,747 | ||||||||||||||
| Reductions due to divestitures, restructuring | — | (5,337) | (4,706) | ||||||||||||||
| Currency translation and other | 8,532 | (17,484) | (23,264) | ||||||||||||||
| Ending balance | $ | 304,248 | $ | 294,753 | $ | 315,645 |
As of December 30, 2023, the Company had tax-effected deferred tax assets for net operating loss carryforwards of $336.0 million, as compared to $336.6 million as of December 31, 2022. Of this amount, $25.9 million are definite-lived and begin to expire in 2027, and the remainder of $310.1 million can be carried forward indefinitely. The Company has deferred tax assets for tax credit carryforwards of $41.5 million. The entire $41.5 million are definite-lived and begin to expire after 2039. Additionally, the Company records a benefit to operating income for research and development and other credits in Quebec, France, the Netherlands, and the U.K. related to its DSA facilities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the Company’s beginning and ending unrecognized income tax benefits is as follows:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Beginning balance | $ | 23,242 | $ | 32,592 | $ | 24,970 | |||||||||||
| Additions to tax positions for current year | 3,093 | 4,756 | 9,544 | ||||||||||||||
| Additions to tax positions for prior years | 721 | 962 | 2,476 | ||||||||||||||
| Reductions to tax positions for prior years | (4,058) | (1,420) | (1,330) | ||||||||||||||
| Settlements | — | (10,514) | (1,870) | ||||||||||||||
| Expiration of statute of limitations | (296) | (3,134) | (1,198) | ||||||||||||||
| Ending balance | $ | 22,702 | $ | 23,242 | $ | 32,592 |
The $0.5 million decrease in unrecognized income tax benefits during fiscal year 2023 as compared to the corresponding period in 2022 is primarily attributable to prior year reductions to Canadian Scientific Research and Experimental Development (SR&ED) credits, partially offset by an additional year of SR&ED credit additions. The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $20.3 million as of December 30, 2023 and $20.3 million as of December 31, 2022. It is reasonably possible as of December 30, 2023 that the liability for unrecognized tax benefits for the uncertain tax position will decrease by approximately $5.2 million over the next twelve-month period. The Company continues to recognize interest and penalties related to unrecognized income tax benefits in income tax expense. The total amount of cumulative accrued interest related to unrecognized income tax benefits as of December 30, 2023 and December 31, 2022 was $1.3 million and $1.4 million, respectively. Interest expense recorded as a component of income taxes was immaterial for all periods. There were no accrued penalties related to unrecognized income tax benefits as of December 30, 2023 or as of December 31, 2022.
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the U.S., the U.K., China, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2019.
The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., Canada, France, and India. The Company does not anticipate resolution of these audits will have a material impact on its consolidated financial statements.
Prepaid income tax of $59.7 million and $88.6 million has been presented within Other current assets in the accompanying consolidated balance sheets as of December 30, 2023 and December 31, 2022, respectively. Accrued income taxes of $38.8 million and $39.9 million have been presented within Other current liabilities in the accompanying consolidated balance sheets as of December 30, 2023 and December 31, 2022, respectively.
14. EMPLOYEE BENEFIT PLANS
Pension Plans
The Charles River Pension Plan (U.K. Pension Plan) is a defined contribution and defined benefit pension plan covering certain U.K. employees. Benefits are based on participants’ final pensionable salary and years of service. Participants’ rights vest immediately. The plan was previously amended to exclude new participants from joining the defined benefit section of the plan and a defined contribution section was established for new entrants. Contributions under the defined contribution plan are determined as a percentage of gross salary. Additionally, the U.K. Pension Plan was amended such that the members of the defined benefit section of the plan ceased to accrue additional benefits; however, their benefits continue to be adjusted for changes in their final pensionable salary or a specified inflation index, as applicable. During fiscal 2023, the Company made no contributions to the U.K. Pension Plan. As of fiscal 2023 year-end, this plan was in a funded status of $35.7 million.
During 2022, the Company terminated a non-contributory defined benefit plan that covered certain employees in Canada (Canada Pension Plan). Upon settlement of the pension liability in fiscal year 2022, the Company recognized a $1.0 million loss related to the net periodic benefit cost recorded in Other expense in the consolidated statements of income.
In addition, the Company has several defined benefit plans in certain other countries in which it maintains an operating presence, including Canada, France, Germany, Italy, Mauritius, Netherlands, and Japan.
The net periodic benefit cost (income) associated with these plans for fiscal years 2023, 2022 and 2021 totaled $2.8 million, $0.1 million and $0.5 million, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Charles River Laboratories Deferred Compensation Plan and Executive Supplemental Life Insurance Retirement Plan
The Company maintains a non-qualified deferred compensation plan, known as the Charles River Laboratories Deferred Compensation Plan (DCP), which allows a select group of eligible employees to defer a portion of their compensation. At the present time, no contributions are credited to the DCP, except as set forth below. Participants must specify the distribution date for deferred amounts at the time of deferral, in accordance with applicable IRS regulations. Generally, amounts may be paid in lump sum or installments upon retirement or termination of employment, or later if the employee terminates employment after age 55 and before age 65. Amounts may also be distributed during employment, subject to a minimum deferral requirement of three years.
The Company provides certain active employees an annual contribution into their DCP account of 10% of the employee’s base salary plus the lesser of their target annual bonus or actual annual bonus.
In addition to the DCP, certain officers and key employees also participate, or in the past participated, in the Company’s Executive Supplemental Life Insurance Retirement Plan (ESLIRP), which is a non-funded, non-qualified arrangement. Annual benefits under this plan will equal a percentage of the highest five consecutive years of compensation, offset by amounts payable under the U.S. Pension Plan and Social Security. In connection with the establishment of the DCP, certain active ESLIRP participants, who agreed to convert their accrued ESLIRP benefit to a comparable deferred compensation benefit, discontinued their direct participation in the ESLIRP. Instead, the present values of the accrued benefits of ESLIRP participants were credited to their DCP accounts, and future accruals are converted to present values and credited to their DCP accounts annually.
The net periodic benefit cost associated with these plans for fiscal years 2023, 2022 and 2021 totaled $2.8 million, $4.3 million and $4.3 million, respectively.
The Company has invested in several corporate-owned key-person life insurance policies with the intention of using these investments to fund the ESLIRP and the DCP. Participants have no interest in any such investments. As of December 30, 2023 and December 31, 2022, the cash surrender value of these life insurance policies were $48.4 million and $41.9 million, respectively.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a reconciliation of benefit obligations and plan assets of the Company’s pension, DCP and ESLIRP plans:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Change in projected benefit obligations: | |||||||||||
| Benefit obligation at beginning of year | $ | 205,551 | $ | 372,599 | |||||||
| Service cost | 2,474 | 3,213 | |||||||||
| Interest cost | 9,941 | 6,140 | |||||||||
| Benefit payments | (6,239) | (6,469) | |||||||||
| Curtailment | — | (2,477) | |||||||||
| Settlements | — | (11,939) | |||||||||
| Transfer in due to acquisition | 1,106 | — | |||||||||
| Actuarial (gain) loss | 3,600 | (134,923) | |||||||||
| Effect of foreign exchange | 8,442 | (20,593) | |||||||||
| Benefit obligation at end of year | $ | 224,875 | $ | 205,551 | |||||||
| Change in fair value of plan assets: | |||||||||||
| Fair value of plan assets at beginning of year | $ | 192,540 | $ | 335,631 | |||||||
| Actual return on plan assets | 5,578 | (105,749) | |||||||||
| Employer contributions | 1,744 | 4,558 | |||||||||
| Settlements | — | (11,939) | |||||||||
| Transfer in due to acquisition | 181 | — | |||||||||
| Benefit payments | (6,239) | (6,469) | |||||||||
| Effect of foreign exchange | 9,853 | (23,492) | |||||||||
| Fair value of plan assets at end of year | $ | 203,657 | $ | 192,540 | |||||||
| Net balance sheet liability | $ | 21,218 | $ | 13,011 | |||||||
| Amounts recognized in balance sheet: | |||||||||||
| Noncurrent assets | $ | 36,957 | $ | 39,185 | |||||||
| Current liabilities | 1,164 | 1,151 | |||||||||
| Noncurrent liabilities | 57,011 | 51,045 |
Actuarial gains and losses are driven by changes in economic assumptions, principally discount rates. Amounts recognized in accumulated other comprehensive loss related to the Company’s pension, DCP and ESLIRP plans are as follows:
| Fiscal Year | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Net actuarial loss | $ | 58,855 | $ | 54,509 | |||||||
| Net prior service cost (credit) | (121) | (585) | |||||||||
| Net amount recognized | $ | 58,734 | $ | 53,924 |
The accumulated benefit obligation and fair value of plan assets for the Company’s pension, DCP and ESLIRP plans with accumulated benefit obligations in excess of plan assets are as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Accumulated benefit obligation | $ | 54,310 | $ | 48,414 | |||||||
| Fair value of plan assets | 2,824 | 2,258 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The projected benefit obligation and fair value of plan assets for the Company’s pension, DCP and ESLIRP plans with projected benefit obligations in excess of plan assets are as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Projected benefit obligation | $ | 61,671 | $ | 55,304 | |||||||
| Fair value of plan assets | 3,496 | 3,108 |
Components of total benefit cost for the Company’s pension, DCP and ESLIRP plans are as follows:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Service cost | $ | 2,474 | $ | 3,213 | $ | 3,455 | |||||||||||
| Interest cost | 9,941 | 6,140 | 5,492 | ||||||||||||||
| Expected return on plan assets | (7,556) | (7,322) | (8,058) | ||||||||||||||
| Amortization of prior service credit | (464) | (506) | (531) | ||||||||||||||
| Amortization of net loss | 1,231 | 2,869 | 4,528 | ||||||||||||||
| Net periodic benefit cost | 5,626 | 4,394 | 4,886 | ||||||||||||||
| Settlement | — | 981 | (2,320) | ||||||||||||||
| Total benefit cost | $ | 5,626 | $ | 5,375 | $ | 2,566 |
Assumptions
Weighted-average assumptions used to determine projected benefit obligations are as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| Discount rate | 4.7 | % | 4.8 | % | |||||||
| Rate of compensation increase | 3.2 | % | 3.2 | % |
The discount rate reflects the rate the Company would have to pay to purchase high-quality investments that would provide cash sufficient to settle its current pension obligations.
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
| December 30, 2023 | December 31, 2022 | December 25, 2021 | |||||||||||||||
| Discount rate | 4.8 | % | 1.8 | % | 1.5 | % | |||||||||||
| Expected long-term return on plan assets | 3.9 | % | 2.4 | % | 2.5 | % | |||||||||||
| Rate of compensation increase | 3.2 | % | 3.7 | % | 3.0 | % |
In fiscal years 2023 and 2022, new mortality improvement scales were issued in the U.S. and the United Kingdom (U.K.) reflecting a decline in longevity projection from previous releases the Company adopted, which decreased the Company’s benefit obligations by $3.5 million and $0.2 million as of December 30, 2023 and December 31, 2022, respectively.
Plan Assets
The Company invests its pension assets with the objective of achieving a total long-term rate of return sufficient to fund future pension obligations and to minimize future pension contributions. The Company is willing to tolerate a commensurate level of risk to achieve this objective. The Company controls its risk by maintaining a diversified portfolio of asset classes. Plan assets did not include any of the Company’s common stock as of December 30, 2023 or December 31, 2022. The weighted-average target asset allocations are 7.0% to equity securities, 84.1% to fixed income securities and 8.9% to other securities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the Company’s pension plan assets by asset category are as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 446 | $ | 798 | $ | — | $ | 1,244 | $ | 362 | $ | 5,153 | $ | — | $ | 5,515 | |||||||||||||||||||||||||||||||
| Equity securities (1) | — | 10,701 | — | 10,701 | — | 9,308 | — | 9,308 | |||||||||||||||||||||||||||||||||||||||
| Debt securities (2) | — | 144,822 | — | 144,822 | — | 123,638 | — | 123,638 | |||||||||||||||||||||||||||||||||||||||
| Mutual funds (3) | 9,207 | 10,368 | — | 19,575 | 8,380 | 9,372 | — | 17,752 | |||||||||||||||||||||||||||||||||||||||
| Other (4) | — | 27,254 | 61 | 27,315 | — | 36,268 | 59 | 36,327 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 9,653 | $ | 193,943 | $ | 61 | $ | 203,657 | $ | 8,742 | $ | 183,739 | $ | 59 | $ | 192,540 | |||||||||||||||||||||||||||||||
| (1) This category comprises equity investments and securities held by non-U.S. pension plans valued at the quoted closing price and translated into U.S. dollars using a foreign currency exchange rate at year end. | |||||||||||||||||||||||||||||||||||||||||||||||
| (2) This category comprises debt investments and securities held by non-U.S. pension plans valued at the quoted closing price and translated into U.S. dollars using a foreign currency exchange rate at year end. Holdings primarily include investment-grade corporate bonds and treasuries at various durations. | |||||||||||||||||||||||||||||||||||||||||||||||
| (3) This category comprises mutual funds valued at the net asset value of shares held by non-U.S. pension plans at year end and translated into U.S. dollars using a foreign currency exchange rate at year end. | |||||||||||||||||||||||||||||||||||||||||||||||
| (4) This category mainly comprises fixed income securities tied to various U.K. government bond yields held by non-US pension plans valued at the net asset value of shares held at year-end and translated into U.S. dollars using a foreign currency exchange rate at year end. |
The activity within the Level 3 pension plan assets was not significant during the periods presented.
During fiscal year 2023, the Company did not contribute to the pension plans and expects to make $2.0 million in contributions in fiscal year 2024. During fiscal year 2023, the Company paid $1.7 million directly to certain participants outside of plan assets.
Expected benefit payments are estimated using the same assumptions used in determining the Company’s benefit obligation as of 2023. Benefit payments will depend on future employment and compensation levels, among other factors, and changes in any of these factors could significantly affect these estimated future benefit payments. Estimated future benefit payments during the next five years and in the aggregate for fiscal years 2029 through 2033, are as follows.
| Fiscal Year | Pension Plans | |||||||
| (in thousands) | ||||||||
| 2024 | $ | 6,558 | ||||||
| 2025 | 6,703 | |||||||
| 2026 | 46,898 | |||||||
| 2027 | 7,633 | |||||||
| 2028 | 8,843 | |||||||
| 2029-2033 | 55,416 |
Charles River Laboratories Employee Savings Plan
The Charles River Laboratories Employee Savings Plan is a defined contribution plan in the form of a qualified 401(k) plan in which substantially all U.S. employees are eligible to participate upon employment. The plan contains a provision whereby the Company matches a percentage of employee contributions. During fiscal years 2023, 2022 and 2021, the costs associated with this defined contribution plan totaled $31.6 million, $28.8 million and $24.0 million, respectively.
15. STOCK-BASED COMPENSATION
The Company has stock-based compensation plans under which employees and non-employee directors are granted stock-based awards such as stock options, RSUs, and PSUs.
During fiscal years 2023, 2022 and 2021, the primary share-based awards and their general terms and conditions are as follows:
- Stock options, which entitle the holder to purchase a specified number of shares of common stock at an exercise price equal to the closing market price of common stock on the date of grant; typically vest over 4 years; and typically expire 5 or 10 years from date of grant.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-
RSUs, which represent an unsecured promise to grant at no cost a set number of shares of common stock upon the completion of the vesting schedule, and principally vest over 4 years. With respect to RSUs, recipients are not entitled to cash dividends and have no voting rights on the stock during the vesting period.
-
PSUs, which entitle the holder to receive at no cost, a specified number of shares of common stock within a range of shares from zero to a specified maximum and typically vest over 3 years. Payout of this award is contingent upon achievement of certain performance and market conditions.
As of December 30, 2023, approximately 4.1 million shares were authorized for future grants under the Company’s share-based compensation plans. The Company settles employee share-based compensation awards with newly issued shares. The following table provides stock-based compensation by the financial statement line item in which it is reflected:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Cost of revenue | $ | 15,052 | $ | 14,853 | $ | 13,087 | |||||||||||
| Selling, general and administrative | 56,996 | 58,764 | 58,387 | ||||||||||||||
| Stock-based compensation, before income taxes | 72,048 | 73,617 | 71,474 | ||||||||||||||
| Provision for income taxes | (10,907) | (10,969) | (10,299) | ||||||||||||||
| Stock-based compensation, net of income taxes | $ | 61,141 | $ | 62,648 | $ | 61,175 |
No stock-based compensation related costs were capitalized in fiscal years 2023, 2022 and 2021.
Stock Options
The following table summarizes stock option activity under the Company’s stock-based compensation plans:
| Number of shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||||||||||||
| (in thousands) | (in years) | (in thousands) | |||||||||||||||||||||
| Options outstanding as of December 31, 2022 | 882 | $ | 204.41 | ||||||||||||||||||||
| Options granted | 130 | $ | 194.27 | ||||||||||||||||||||
| Options exercised | (195) | $ | 130.91 | ||||||||||||||||||||
| Options canceled | (28) | $ | 259.63 | ||||||||||||||||||||
| Options outstanding as of December 30, 2023 | 789 | $ | 218.97 | 6.5 | $ | 28,935 | |||||||||||||||||
| Options exercisable as of December 30, 2023 | 408 | $ | 205.50 | 4.8 | $ | 20,521 | |||||||||||||||||
| Options expected to vest as of December 30, 2023 | 381 | $ | 233.37 | 8.3 | $ | 8,414 |
The fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Expected life (in years) | 6.0 | 6.0 | 6.0 | ||||||||||||||
| Expected volatility | 36 | % | 33 | % | 32 | % | |||||||||||
| Risk-free interest rate | 3.8 | % | 2.7 | % | 1.0 | % | |||||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % |
The weighted-average grant date fair value of stock options granted was $80.98, $90.05 and $108.61 for fiscal years 2023, 2022 and 2021, respectively.
As of December 30, 2023, the unrecognized compensation cost related to unvested stock options expected to vest was $18.5 million. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.4 years.
The total intrinsic value of options exercised during fiscal years 2023, 2022 and 2021 was $18.2 million, $33.2 million and $94.4 million, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the exercise price.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Units
The following table summarizes the restricted stock units activity for fiscal year 2023:
| Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||||||||
| (in thousands) | |||||||||||
| December 31, 2022 | 364 | $ | 226.43 | ||||||||
| Granted | 265 | $ | 194.84 | ||||||||
| Vested | (134) | $ | 212.34 | ||||||||
| Canceled | (26) | $ | 231.70 | ||||||||
| December 30, 2023 | 469 | $ | 212.30 |
As of December 30, 2023, the unrecognized compensation cost related to shares of unvested RSUs expected to vest was $65.8 million, which is expected to be recognized over an estimated weighted-average amortization period of 2.8 years. The total fair value of RSU grants that vested during fiscal years 2023, 2022 and 2021 was $28.4 million, $24.8 million and $22.8 million, respectively.
Performance Based Stock Award Program
The Company issues PSUs to certain corporate officers. The number of shares of common stock issued for each PSU is adjusted based on a performance condition linked to the Company’s financial performance. Certain awards are further adjusted based on a market condition, which is calculated based on the Company’s stock performance relative to a peer group over the three-year vesting period. The fair value of the market condition is reflected in the fair value of the award at grant date.
The Company utilizes a Monte Carlo simulation valuation model to value these awards. Information pertaining to the Company’s PSUs and the related estimated weighted-average assumptions used to calculate their fair value were as follows:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (shares in thousands) | |||||||||||||||||
| PSUs granted | 146 | 134 | 64 | ||||||||||||||
| Weighted average grant date fair value | $ | 204.40 | $ | 210.42 | $ | 407.76 | |||||||||||
| Key assumptions: | |||||||||||||||||
| Expected volatility | 37 | % | 39 | % | 37 | % | |||||||||||
| Risk-free interest rate | 4.2 | % | 2.6 | % | 0.2 | % | |||||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % | |||||||||||
| Total shareholder return of 20-trading day average stock price on grant date | (9.8) | % | (32.7) | % | 39.9 | % |
The maximum number of common shares to be issued upon vesting of PSUs is 0.3 million. For fiscal years 2023, 2022 and 2021, the Company recognized stock-based compensation related to PSUs of $28.1 million, $31.2 million and $31.8 million, respectively. The total fair value of PSUs that vested during fiscal years 2023, 2022 and 2021 was $34.4 million, $31.0 million and $26.0 million, respectively.
In fiscal year 2021, the Company also issued approximately 5,000 PSUs using a weighted-average grant date fair value per share of $477.52. These PSUs vest upon the achievement of financial targets and other performance measures.
16. RESTRUCTURING AND ASSET IMPAIRMENTS
The Company has undertaken restructuring actions impacting the reportable segments at various locations across North America, Europe and Asia. This includes workforce right-sizing actions resulting in severance and transition costs; and costs related to the consolidation of facilities resulting in asset impairment and accelerated depreciation charges.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents restructuring costs by reportable segment:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| RMS | $ | 3,479 | $ | 1,007 | $ | 7 | |||||||||||
| DSA | 16,176 | 851 | 3,114 | ||||||||||||||
| Manufacturing | 9,138 | 5,126 | 3,663 | ||||||||||||||
| Unallocated corporate | 889 | 1,229 | 72 | ||||||||||||||
| Total | $ | 29,682 | $ | 8,213 | $ | 6,856 |
The following table presents restructuring costs as included within the Company’s consolidated statements of income for fiscal years 2023, 2022 and 2021:
| Fiscal Year | |||||||||||||||||
| 2023 | |||||||||||||||||
| Severance and Transition Costs | Asset Impairments and Other Costs | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Twelve Months Ended | |||||||||||||||||
| Cost of services provided (excluding amortization of intangible assets) | $ | 7,408 | $ | 14,812 | $ | 22,220 | |||||||||||
| Cost of products sold (excluding amortization of intangible assets) | 1,146 | 3,262 | 4,408 | ||||||||||||||
| Selling, general and administrative | 3,054 | — | 3,054 | ||||||||||||||
| Total restructuring costs | $ | 11,608 | $ | 18,074 | $ | 29,682 |
| Fiscal Year | |||||||||||||||||
| 2022 | |||||||||||||||||
| Severance and Transition Costs | Asset Impairments and Other Costs | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Twelve Months Ended | |||||||||||||||||
| Cost of services provided (excluding amortization of intangible assets) | $ | 928 | $ | 1,784 | $ | 2,712 | |||||||||||
| Cost of products sold (excluding amortization of intangible assets) | 532 | 1,765 | 2,297 | ||||||||||||||
| Selling, general and administrative | 2,441 | 763 | 3,204 | ||||||||||||||
| Total restructuring costs | $ | 3,901 | $ | 4,312 | $ | 8,213 |
| Fiscal Year | |||||||||||||||||
| 2021 | |||||||||||||||||
| Severance and Transition Costs | Asset Impairments and Other Costs | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Twelve Months Ended | |||||||||||||||||
| Cost of services provided (excluding amortization of intangible assets) | $ | 1,898 | $ | 934 | $ | 2,832 | |||||||||||
| Cost of products sold (excluding amortization of intangible assets) | — | — | — | ||||||||||||||
| Selling, general and administrative | 2,819 | 1,205 | 4,024 | ||||||||||||||
| Total restructuring costs | $ | 4,717 | $ | 2,139 | $ | 6,856 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rollforward of Restructuring Activities
The following table provides a rollforward for all of the Company’s severance and transition costs related to all restructuring activities:
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Beginning balance | $ | 1,300 | $ | 4,011 | $ | 5,818 | |||||||||||
| Expense (excluding non-cash charges) | 11,539 | 6,732 | 5,695 | ||||||||||||||
| Payments / utilization | (7,800) | (6,973) | (5,604) | ||||||||||||||
| Other non-cash adjustments | — | (2,350) | (1,831) | ||||||||||||||
| Foreign currency adjustments | 11 | (120) | (67) | ||||||||||||||
| Ending balance | $ | 5,050 | $ | 1,300 | $ | 4,011 |
As of December 30, 2023 and December 31, 2022, $5.1 million and $1.3 million, respectively, of severance and other personnel related costs liabilities were included in accrued compensation and accrued liabilities within the Company’s consolidated balance sheets.
17. LEASES
Operating and Finance Leases
Right-of-use lease assets and lease liabilities are reported in the Company’s consolidated balance sheets as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Operating leases | |||||||||||||||||
| Operating lease right-of-use assets, net | $ | 394,029 | $ | 391,762 | |||||||||||||
| Other current liabilities | $ | 54,908 | $ | 46,526 | |||||||||||||
| Operating lease right-of-use liabilities | 419,234 | 389,745 | |||||||||||||||
| Total operating lease liabilities | $ | 474,142 | $ | 436,271 | |||||||||||||
| Finance leases | |||||||||||||||||
| Property, plant and equipment, net | $ | 29,422 | $ | 31,875 | |||||||||||||
| Current portion of long-term debt and finance leases | $ | 2,398 | $ | 2,330 | |||||||||||||
| Long-term debt, net and finance leases | 26,152 | 28,316 | |||||||||||||||
| Total finance lease liabilities | $ | 28,550 | $ | 30,646 |
The following table presents the components of operating and finance lease costs within the Company’s consolidated statements of income for fiscal years 2023, 2022 and 2021:
| Fiscal Year | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Operating lease costs | $ | 65,380 | $ | 59,671 | $ | 45,728 | |||||||||||||||||||||||
| Finance lease costs: | |||||||||||||||||||||||||||||
| Amortization of right-of-use assets | 2,745 | 3,035 | 3,337 | ||||||||||||||||||||||||||
| Interest on lease liabilities | 1,477 | 1,441 | 1,280 | ||||||||||||||||||||||||||
| Short-term lease costs | 3,581 | 2,954 | 2,441 | ||||||||||||||||||||||||||
| Variable lease costs | 22,159 | 13,965 | 4,623 | ||||||||||||||||||||||||||
| Sublease income | (2,067) | (1,912) | (2,008) | ||||||||||||||||||||||||||
| Total lease costs | $ | 93,275 | $ | 79,154 | $ | 55,401 |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other information related to leases was as follows:
Supplemental cash flow information
| Fiscal Year | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Cash flows included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows from operating leases | $ | 60,239 | $ | 48,360 | $ | 42,576 | |||||||||||
| Operating cash flows from finance leases | 1,476 | 1,442 | 1,282 | ||||||||||||||
| Finance cash flows from finance leases | 2,297 | 2,257 | 3,202 | ||||||||||||||
| Non-cash leases activity: | |||||||||||||||||
| Right-of-use lease assets obtained in exchange for new operating lease liabilities | $ | 75,987 | $ | 189,134 | $ | 142,764 | |||||||||||
| Right-of-use lease assets obtained in exchange for new finance lease liabilities | — | 8,179 | 1,567 |
Lease term and discount rate
| December 30, 2023 | December 31, 2022 | December 25, 2021 | ||||||||||||||||||
| Weighted-average remaining lease term (in years) | ||||||||||||||||||||
| Operating lease | 9.6 | 9.8 | 9.0 | |||||||||||||||||
| Finance lease | 12.7 | 13.6 | 11.7 | |||||||||||||||||
| Weighted-average discount rate | ||||||||||||||||||||
| Operating lease | 4.7 | % | 4.3 | % | 3.6 | % | ||||||||||||||
| Finance lease | 5.3 | % | 5.3 | % | 4.4 | % |
At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate, which is based on the information available at the lease commencement date and represents a rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment.
As of December 30, 2023, maturities of operating and finance lease liabilities for each of the following five years and a total thereafter were as follows:
| Operating Leases | Finance Leases | |||||||||||||
| (in thousands) | ||||||||||||||
| 2024 | $ | 70,578 | $ | 3,796 | ||||||||||
| 2025 | 63,433 | 3,513 | ||||||||||||
| 2026 | 58,494 | 3,038 | ||||||||||||
| 2027 | 59,946 | 2,999 | ||||||||||||
| 2028 | 57,953 | 2,988 | ||||||||||||
| Thereafter | 286,215 | 23,562 | ||||||||||||
| Total minimum future lease payments | 596,619 | 39,896 | ||||||||||||
| Less: Imputed interest | 122,477 | 11,346 | ||||||||||||
| Total lease liabilities | $ | 474,142 | $ | 28,550 |
Total minimum future lease payments (predominantly operating leases) of approximately $161 million for leases that have not commenced as of December 30, 2023, as the Company does not yet control the underlying assets, are not included in the consolidated financial statements. These leases are expected to commence between fiscal years 2024 and 2025 with lease terms of approximately 5 to 15 years.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. COMMITMENTS AND CONTINGENCIES
Insurance
The Company maintains certain insurance policies that maintain large deductibles up to approximately $2 million, some with or without stop-loss limits, depending on market availability. Insurance policies at certain locations are based on a percentage of the insured assets, for which deductibles for certain property may exceed $22.0 million in the event of a catastrophic event. In addition, the Company purchased representation and warranty insurance in support of some acquisitions, in which deductibles could reach $4.0 million.
Litigation
On February 16, 2023, the Company was informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into the Company’s conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 the Company received a grand jury subpoena requesting certain documents related to such investigation. The Company is aware of a parallel civil investigation being undertaken by the DOJ and USFWS. The Company is cooperating with the DOJ and the USFWS and believes that the concerns raised with respect to the Company’s conduct are without merit. The Company maintains a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates it received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, the Company has voluntarily suspended future shipments of non-human primates from Cambodia to the United States until such time that the Company and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported from Cambodia are purpose-bred. The Company continues to care for the Cambodia-sourced non-human primates from certain recent shipments in the United States. The carrying value of the inventory related to these shipments is approximately $27 million as of December 30, 2023, which reflects the value of the shipments in accordance with the Company’s inventory accounting policy. On May 16, 2023, the Company received an inquiry from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting it to voluntarily provide information, subsequently augmented with a document subpoena, primarily related to the sourcing of non-human primates, and the Company is cooperating with the request. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS, SEC or other governmental authorities as a result of the investigations. None of the DOJ, USFWS or SEC has provided the Company with any specific timeline or indication as to when these investigations or, specific to the DOJ and USFWS, discussions regarding future processes and procedures, will be concluded or resolved. The Company cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities.
A putative securities class action was filed on May 19, 2023 against the Company and a number of its current/former officers in the United States District Court for the District of Massachusetts. On August 31, 2023, the court appointed the State Teachers Retirement System of Ohio as lead plaintiff. An amended complaint was filed on November 14, 2023 that, among other things, included only James Foster, the Chief Executive Officer and David R. Smith, the former Chief Financial Officer as defendants along with the Company. The amended complaint asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act) on behalf of a putative class of purchasers of Company securities from May 5, 2020 through February 21, 2023, alleging that certain of the Company’s disclosures about its practices with respect to the importation of non-human primates made during the putative class period were materially false or misleading. The Company filed a motion to dismiss. While the Company cannot predict the outcome of this matter, it believes the class action to be without merit and plans to vigorously defend against it. The Company cannot reasonably estimate the maximum potential exposure or the range of possible loss in association with this matter.
On November 8, 2023, a stockholder filed a derivative lawsuit in the U.S. District Court of the District of Delaware asserting claims on the Company’s behalf against the members of the Company’s Board of Directors and certain of the Company’s current/former officers (James Foster, the Chief Executive Officer; David R. Smith, the former Chief Financial Officer; and Flavia Pease, the current Chief Financial Officer). The complaint alleges that the defendants breached their fiduciary duties to the Company and its stockholders because certain of the Company’s disclosures about its practices with respect to the importation of non-human primates were materially false or misleading. The complaint also alleges that the defendants breached their fiduciary duties by causing the Company to fail to maintain adequate internal controls over securities disclosure and compliance with applicable law and by failing to comply with the company’s Code of Business Conduct and Ethics. The Company intends to file a motion to dismiss. While the Company cannot predict the outcome of this matter, it believes the derivative lawsuit to be without merit and plans to vigorously defend against it. The Company cannot reasonably estimate the maximum potential exposure or the range of possible loss in association with this matter.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aside from the matter above, the Company believes there are no other matters pending against the Company that could have a material impact on the Company’s business, financial condition, or results of operations.
Guarantees
The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically include agreements with directors and officers, business partners, contractors, landlords, and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. However, to date the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these obligations is minimal.
Purchase Obligations
The Company enters into unconditional purchase obligations, in the ordinary course of business, that include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These unconditional purchase obligations exclude agreements that are cancellable at any time without penalty. The aggregate amount of the Company’s unconditional purchase obligations totaled approximately $390 million as of December 30, 2023 and the majority of these obligations are expected to be settled during 2024.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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