Charles River Laboratories International 10-Q 2022-03-26

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
(Mark One)
☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 26, 2022

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

Commission File No. 001-15943

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware												06-1397316
(State or Other Jurisdiction of Incorporation or Organization)												(I.R.S. Employer Identification No.)
251 Ballardvale Street			Wilmington			Massachusetts						01887
(Address of Principal Executive Offices)												(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class			Ticker symbol(s)			Name of each exchange on which registered
Common stock, $0.01 par value			CRL			New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☑ No ☐

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

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

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of April 22, 2022, there were 50,804,860 shares of the Registrant’s common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 26, 2022

TABLE OF CONTENTS

Item						Page
PART I - FINANCIAL INFORMATION
1			Financial Statements
			Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 26, 2022 and March 27, 2021			3
			Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 26, 2022 and March 27, 2021			4
			Condensed Consolidated Balance Sheets (Unaudited) as of March 26, 2022 and December 25, 2021			5
			Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 26, 2022 and March 27, 2021			6
			Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three months ended March 26, 2022 and March 27, 2021			7
			Notes to Unaudited Condensed Consolidated Financial Statements			8
2			Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
3			Quantitative and Qualitative Disclosure About Market Risk			32
4			Controls and Procedures			33
PART II - OTHER INFORMATION
1			Legal Proceedings			34
1A			Risk Factors			34
2			Unregistered Sales of Equity Securities and Use of Proceeds			34
6			Exhibits			35
Signatures						36

Special Note on Factors Affecting Future Results

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could,” and other similar expressions which are predictions of, indicate future events and trends or which do not relate to historical matters, are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties and assumptions that are difficult to predict.

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

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

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 25, 2021, under the sections entitled “Our Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in this Quarterly Report on Form 10-Q, under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” in our press releases, and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or risks. New information, future events, or risks may cause the forward-looking events we discuss in this report not to occur.

PART I. FINANCIAL INFORMATION

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

									Three Months Ended
															March 26, 2022						March 27, 2021
Service revenue															$	720,485					$	626,581
Product revenue															193,444						197,985
Total revenue															913,929						824,566
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)															486,864						423,975
Cost of products sold (excluding amortization of intangible assets)															90,247						92,313
Selling, general and administrative															150,033						155,733
Amortization of intangible assets															38,007						28,842
Operating income															148,778						123,703
Other income (expense):
Interest income															127						35
Interest expense															(9,434)						(29,719)
Other expense, net															(28,625)						(27,717)
Income before income taxes															110,846						66,302
Provision for income taxes															15,620						2,367
Net income															95,226						63,935
Less: Net income attributable to noncontrolling interests															2,204						2,405
Net income attributable to common shareholders															$	93,022					$	61,530
Earnings per common share
Net income attributable to common shareholders:
Basic															$	1.84					$	1.23
Diluted															$	1.81					$	1.20
Weighted-average number of common shares outstanding:
Basic															50,640						49,980
Diluted															51,325						51,075
See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

									Three Months Ended
															March 26, 2022						March 27, 2021
Net income															$	95,226					$	63,935
Other comprehensive income (loss):
Foreign currency translation adjustment															(12,952)						9,829
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans															746						988
Comprehensive income, before income taxes related to items of other comprehensive income															83,020						74,752
Less: Income tax benefit related to items of other comprehensive income															(2,018)						(1,025)
Comprehensive income, net of income taxes															85,038						75,777
Less: Comprehensive income related to noncontrolling interests, net of income taxes															2,209						2,390
Comprehensive income attributable to common shareholders, net of income taxes															$	82,829					$	73,387
See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)

			March 26, 2022						December 25, 2021
Assets
Current assets:
Cash and cash equivalents			$	241,869					$	241,214
Trade receivables and contract assets, net of allowances for credit losses of $6,154 and $7,180, respectively			697,843						642,881
Inventories			221,175						199,146
Prepaid assets			90,496						93,543
Other current assets			81,703						97,311
Total current assets			1,333,086						1,274,095
Property, plant and equipment, net			1,321,618						1,291,068
Operating lease right-of-use assets, net			304,758						292,941
Goodwill			2,695,994						2,711,881
Client relationships, net			948,830						981,398
Other intangible assets, net			70,707						79,794
Deferred tax assets			43,404						40,226
Other assets			356,652						352,889
Total assets			$	7,075,049

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The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2021. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” included elsewhere within this Form 10-Q. Certain percentage changes may not recalculate due to rounding.

Overview

We are a full service, non-clinical contract research organization (CRO). We have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, which is able to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities, including our recently acquired contract development and manufacturing organization (CDMO) business. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.

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

Segment Reporting

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

Russia-Ukraine Conflict

In February 2022, the Russian Federation launched an invasion of the country of Ukraine resulting in conflict in the region and a variety of sanctions against the Russian Federation enacted by several governments, including the U.S, United Kingdom, Canada and European Union. The conflict has had and continues to have, direct and indirect adverse effects on financial markets and global supply chain disruptions. We do not have any direct operations in either Russia or Ukraine and there were no material impacts to our financial statements for the three months ended March 26, 2022 as a result of the situation. We will continue to monitor the situation as it evolves for potential impacts to our operating and financial results such as increased inflationary, supply chain, or cybersecurity risks in subsequent periods. Refer to Item 1A, Risk Factors disclosed herein and in our Annual Report on Form 10-K for fiscal 2021 for our assessment of risk factors surrounding inflationary, supply chain and cybersecurity risks.

Recent Acquisitions

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

Fiscal Year 2022 Acquisition

On April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements our existing IS business, specifically our CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The preliminary purchase price of Explora BioLabs was approximately $295 million in cash, subject to customary closing adjustments. The acquisition was funded through proceeds from our Credit Facility. This business will be reported as part of our RMS segment.

Fiscal Year 2021 Acquisitions

On June 28, 2021, we acquired Vigene Biosciences, Inc. (Vigene), a gene therapy contract development and manufacturing organization (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, and includes $34.5 million of contingent consideration (maximum contingent payments of up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our Manufacturing reportable segment.

On March 30, 2021, we acquired Retrogenix Limited (Retrogenix), an early-stage CRO providing specialized bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances our 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 additional payments up to $6.9 million, which are contingent on future performance. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.

On March 29, 2021, we 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 us 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, subject to certain post-closing adjustments and includes $15.7 million of consideration for an approximate 2% ownership interest not acquired. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility and Senior Notes issued in fiscal 2021. This business is reported as part of our Manufacturing reportable segment.

On March 3, 2021, we acquired certain assets from a distributor that supports our 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 (the maximum contingent contractual payments are up to $17.5 million). The business is reported as part of our DSA reportable segment.

On December 31, 2020, we 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 our 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 us during prior fiscal years, and $14.1 million of contingent consideration (the maximum contingent contractual payments are up to $21.0 million). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.

Recent Divestitures

On October 12, 2021, we completed two separate divestitures. We sold our RMS Japan operations to The Jackson Laboratory for a preliminary purchase price of $73.1 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments. We also sold our gene therapy CDMO site in Sweden to a private investor group for a preliminary purchase price of $59.6 million, net of $0.2 million in cash and certain post-closing adjustments. Included in the purchase price are contingent payments fair valued at $15.3 million, (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10 million between the parties. We routinely evaluate the strategic fit and fundamental performance of our acquisitions integrated within our global infrastructure. As part of this assessment, we determined that the above capital could be better deployed in other long-term growth opportunities.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Fiscal Quarters

Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which will occur in this fiscal year 2022.

Overview of Results of Operations and Liquidity

Revenue for the three months ended March 26, 2022 increased $89.3 million, or 10.8%, to $913.9 million compared to $824.6 million in the corresponding period in 2021. The increase in revenue was primarily due to increases in our DSA segment, as well as the recent acquisitions, principally within our Manufacturing segment; partially offset by the divestiture of RMS Japan and the negative effect of changes in foreign currency exchange rates when compared to the corresponding three month period in 2021.

In the three months ended March 26, 2022, our operating income and operating income margin were $148.8 million and 16.3%, respectively, compared with $123.7 million and 15.0%, respectively, in the corresponding period of 2021. The increases in operating income and operating income margin for the three months ended March 26, 2022 was primarily due to the contribution of higher revenue described above compared to the corresponding period in 2021.

Net income attributable to common shareholders increased to $93.0 million in the three months ended March 26, 2022, from $61.5 million in the corresponding period of 2021. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above and by the absence of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in 2021.

During the first three months of 2022, our cash flows from operations was $102.6 million compared with $170.2 million for the same period in 2021. The decrease was driven by timing of our working capital balances, principally variable compensation payments and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits); partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.

Results of Operations

Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021

Revenue and Operating Income

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

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change
			(in millions, except percentages)
Service revenue			$	720.5					$	626.6					$	93.9					15.0		%
Product revenue			193.4						198.0						(4.6)						(2.3)		%
Total revenue			$	913.9					$	824.6					$	89.3					10.8		%

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change						Impact of FX
			(in millions, except percentages)
RMS			$	176.5					$	176.9					$	(0.4)					(0.2)		%				(1.2)		%
DSA			544.3						501.2						43.1						8.6		%				(1.6)		%
Manufacturing			193.1						146.5						46.6						31.8		%				(2.7)		%
Total revenue			$	913.9					$	824.6					$	89.3					10.8		%				(1.7)		%

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

The following table presents operating income by reportable segment:

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change
			(in millions, except percentages)
RMS			$	47.9					$	44.9					$	3.0					6.6		%
DSA			105.0						91.0						14.0						15.4		%
Manufacturing			46.4						49.4						(3.0)						(6.2)		%
Unallocated corporate			(50.5)						(61.6)						11.1						(18.1)		%
Total operating income			$	148.8					$	123.7					$	25.1					20.3		%
Operating income % of revenue			16.3		%				15.0		%										130 bps

The following presents and discusses our consolidated financial results by each of our reportable segments:

RMS

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change						Impact of FX
			(in millions, except percentages)
Revenue			$	176.5					$	176.9					$	(0.4)					(0.2)		%				(1.2)		%
Cost of revenue (excluding amortization of intangible assets)			102.4						105.3						(2.9)						(2.7)		%
Selling, general and administrative			22.4						22.6						(0.2)						(0.9)		%
Amortization of intangible assets			3.8						4.1						(0.3)						(5.7)		%
Operating income			$	47.9					$	44.9					$	3.0					6.6		%
Operating income % of revenue			27.1		%				25.4		%										170 bps

RMS revenue decreased $0.4 million compared to the corresponding period in 2021. The reduction of revenue was due primarily to the divestiture of RMS Japan, which decreased revenue by $12.7 million and the effect of changes in foreign currency exchange rates; partially offset by higher research model product revenue in North America; and higher research model services revenue, principally our Insourcing Solutions business compared to the corresponding period in 2021.

RMS operating income increased $3.0 million compared to the corresponding period in 2021. RMS operating income as a percentage of revenue for the three months ended March 26, 2022 was 27.1%, an increase of 170 bps from 25.4% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher research model revenue described above as well as lower amortization of intangible assets related to our acquisitions during the three months ended March 26, 2022 compared to the same period in 2021.

DSA

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change						Impact of FX
			(in millions, except percentages)
Revenue			$	544.3					$	501.2					$	43.1					8.6		%				(1.6)		%
Cost of revenue (excluding amortization of intangible assets)			373.1						340.1						33.0						9.7		%
Selling, general and administrative			43.9						47.6						(3.7)						(7.9)		%
Amortization of intangible assets			22.3						22.5						(0.2)						(1.3)		%
Operating income			$	105.0					$	91.0					$	14.0					15.4		%
Operating income % of revenue			19.3		%				18.1		%										120 bps

DSA revenue increased $43.1 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased pricing of services; and the acquisition of Retrogenix which contributed $3.1 million to Discovery Services revenue; partially offset by the effect of changes in foreign currency exchange rates.

DSA operating income increased $14.0 million during the three months ended March 26, 2022 compared to the corresponding period in 2021. DSA operating income as a percentage of revenue for the three months ended March 26, 2022 was 19.3%, an

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

increase of 120 bps from 18.1% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as lower acquisition related costs and adjustments to contingent consideration arrangements related to certain acquisitions; offset by higher staffing costs compared to the same period in 2021.

Manufacturing

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change						Impact of FX
			(in millions, except percentages)
Revenue			$	193.1					$	146.5					$	46.6					31.8		%				(2.7)		%
Cost of revenue (excluding amortization of intangible assets)			101.5						70.9						30.6						43.2		%
Selling, general and administrative			33.3						24.0						9.3						38.8		%
Amortization of intangible assets			11.9						2.2						9.7						437.4		%
Operating income			$	46.4					$	49.4					$	(3.0)					(6.2)		%
Operating income % of revenue			24.0		%				33.8		%										(980) bps

Manufacturing revenue increased $46.6 million due primarily to our Biologics Solutions business, which included the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $35.8 million, and higher service revenue within our Biologics Testing Solutions business, as well as Microbial Solutions revenue also increasing; partially offset by the effect of changes in foreign currency exchange rates.

Manufacturing operating income decreased $3.0 million during the three months ended March 26, 2022 compared to the corresponding period in 2021. Manufacturing operating income as a percentage of revenue for the three months ended March 26, 2022 was 24.0%, a decrease of (980) bps from 33.8% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue decreased principally due to higher amortization of intangible assets and acquisition related costs during the three months ended March 26, 2022 compared to the corresponding period in 2021 and due to higher operating costs associated with our CDMO acquisitions.

Unallocated Corporate

			Three Months Ended
			March 26, 2022						March 27, 2021						$ change						% change
			(in millions, except percentages)
Unallocated corporate			$	50.5					$	61.6					$	(11.1)					(18.1)		%
Unallocated corporate % of revenue			5.5		%				7.5		%										(200) bps

Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $11.1 million, or (18.1)%, compared to the corresponding period in 2021 is primarily related to decreased costs associated with the evaluation and integration of our recent acquisition activity. Costs as a percentage of revenue for the three months ended March 26, 2022 was 5.5%, a decrease of (200) bps from 7.5% for the corresponding period in 2021.

Interest Income

Interest income, which represents earnings on cash, cash equivalents, and time deposits was approximately $0.1 million for both the three months ended March 26, 2022 and the corresponding period in 2021.

Interest Expense

Interest expense for the three months ended March 26, 2022 was $9.4 million, a decrease of $20.3 million, or 68.3%, compared to $29.7 million for the corresponding period in 2021. The decrease was due primarily to $26 million of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in the three months ended March 27, 2021, partially offset by a lower foreign currency gain recognized in connection with a debt-related foreign exchange forward contract, and higher interest rates on our variable debt in the three months ended March 26, 2022 compared to the corresponding period in 2021.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Other Expense, Net

Other expense, net, was $28.6 million for the three months ended March 26, 2022, an increase of $0.9 million compared to $27.7 million for the corresponding period in 2021. The increase was due primarily to losses on our life insurance investments for the three months ended March 26, 2022 as compared to gains incurred during the corresponding period in 2021; partially offset by lower foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency in the three months ended March 26, 2022 as compared to the corresponding period in 2021 and lower venture capital investment losses in the three months ended March 26, 2022 as compared to the corresponding period in 2021.

Income Taxes

Income tax expense for the three months ended March 26, 2022 was $15.6 million, an increase of $13.2 million compared to $2.4 million for the corresponding period in 2021. Our effective tax rate was 14.1% for the three months ended March 26, 2022 compared to 3.6% for the corresponding period in 2021. The increase in our effective tax rate in the 2022 period compared to the 2021 period was primarily attributable to a decreased tax benefit from stock-based compensation deductions in the three months ended March 26, 2022.

Liquidity and Capital Resources

We currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future.

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

			March 26, 2022						December 25, 2021
			(in millions)
Cash and cash equivalents:
Held in U.S. entities			$	15.1					$	28.2
Held in non-U.S. entities			226.8						213.0
Total cash and cash equivalents			241.9						241.2
Short-term investments:
Held in non-U.S. entities			1.1						1.1
Total cash, cash equivalents and short-term investments			$	243.0					$	242.3

Borrowings

Amounts outstanding under our Credit Facility and our Senior Notes were as follows:

			March 26, 2022						December 25, 2021
			(in millions)
Revolving facility			$	1,174.2					$	1,161.4
4.25% Senior Notes due 2028			500.0						500.0
3.75% Senior Notes due 2029			500.0						500.0
4.00% Senior Notes due 2031			500.0						500.0
Total			$	2,674.2					$	2,661.4

The interest rates applicable to the Credit Facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio.

Our off-balance sheet commitments related to our outstanding letters of credit as of March 26, 2022 were $17.7 million.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Repurchases of Common Stock

During the three months ended March 26, 2022, we did not repurchase any shares under our authorized stock repurchase program. As of March 26, 2022, we had $129.1 million remaining on the authorized $1.3 billion stock repurchase program and we do not intend to repurchase shares for the remainder of 2022. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During the three months ended March 26, 2022, we acquired 0.1 million shares for $34.0 million through such netting.

Cash Flows

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

			Three Months Ended
			March 26, 2022						March 27, 2021
			(in millions)
Net income			$	95.2					$	63.9
Adjustments to reconcile net income to net cash provided by operating activities			99.0						109.7
Changes in assets and liabilities			(91.6)						(3.4)
Net cash provided by operating activities			$	102.6					$	170.2

Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, contingent consideration, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. For the three months ended March 26, 2022, compared to the three months ended March 27, 2021, the decrease in net cash provided by operating activities was driven by timing of our working capital balances, principally variable compensation payments and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits); partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.

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

			Three Months Ended
			March 26, 2022						March 27, 2021
			(in millions)
Acquisition of businesses and assets, net of cash acquired			$	—					$	(94.2)
Capital expenditures			(80.5)						(28.0)
Investments, net			(13.1)						(16.6)
Other, net			(4.4)						0.8
Net cash used in investing activities			$	(98.0)					$	(138.0)

For the three months ended March 26, 2022, the primary use of cash used in investing activities related to capital expenditures to support the growth of the business and investments in certain venture capital and strategic equity investments. For the three months ended March 27, 2021, the primary use of cash used in investing activities related to the acquisition of Distributed Bio and certain assets from a distributor, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

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

			Three Months Ended
			March 26, 2022						March 27, 2021
			(in millions)
Proceeds from long-term debt and revolving credit facility			$	962.0					$	1,954.0
Payments on long-term debt, revolving credit facility, and finance lease obligations			(948.3)						(1,714.2)
Proceeds from exercises of stock options			12.2						19.6
Purchase of treasury stock			(34.0)						(36.0)
Payment of debt extinguishment and financing costs			—						(28.7)
Other, net			(5.2)						—
Net cash (used in) provided by financing activities			$	(13.3)					$	194.7

For the three months ended March 26, 2022, net cash used in financing activities reflected the net proceeds of $13.7 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:

• Net borrowings of $52 million made to our Credit Facility throughout the three months ended March 26, 2022;

• Payments of $796 million partially offset by $759 million of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.

Net cash used in financing activities also reflected treasury stock purchases of $34.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, partially offset by proceeds from exercises of employee stock options of $12.2 million.

For the three months ended March 27, 2021, net cash provided by financing activities reflected the net proceeds of $239.8 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:

• Proceeds of $1 billion from the issuance of the 2029 and 2031 Senior Notes, which were used to prepay our $500 million 2026 Senior Notes;

• Payments of approximately $147 million on our term loan and net payments of $85 million to our revolving credit facility throughout the three months ended March 27, 2021;

• Payments of $766 million partially offset by $739 million of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.

Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $19.6 million, offset by treasury stock purchases of $36.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. Additionally we paid $21 million of debt extinguishment costs associated with the 2026 Senior Notes repayment and $8 million of debt financing costs associated with the 2029 and 2031 Senior Notes issuances.

Off-Balance Sheet and Other Arrangements

There have been no material changes from the off-balance sheet and other arrangements previously disclosed in our Annual Report on Form 10-K for fiscal 2021 other than the changes described in Note 2, “Acquisitions and Divestitures,” Note 7, “Fair Value,” Note 9, “Debt and Other Financing Arrangements,”, and Note 13, “Commitments and Contingencies,” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Venture Capital Investments

We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to the funds as of March 26, 2022 was $173.9 million, of which we funded $116.6 million through March 26, 2022. Refer to Note 6, “Venture Capital and Strategic Equity Investments” in this Quarterly Report on Form 10-Q for additional information.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for fiscal year 2021.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements please refer to Note 1, “Basis of Presentation,” in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, “Basis of Presentation,” we did not adopt any other new accounting pronouncements during the three months ended March 26, 2022 that had a significant effect on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

We are exposed to market risk from changes in interest rates and currency exchange rates, which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.

Interest Rate Risk

We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of March 26, 2022, our debt portfolio was comprised primarily of floating interest rate borrowings. A 100-basis point increase in interest rates would increase our annual pre-tax interest expense by $11.7 million.

Foreign Currency Exchange Rate Risk

We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our financial position, results of operations, and cash flows.

While the financial results of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations in their respective local currency. The principal functional currencies of the Company’s foreign subsidiaries are the Euro, British Pound and Canadian Dollar. During the three months ended March 26, 2022, the most significant drivers of foreign currency translation adjustment the Company recorded as part of Other comprehensive income (loss) were the Euro, Canadian Dollar, British Pound, and Hungarian Forint.

Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our financial position, results of operations, and cash flows. As the U.S. dollar strengthens against other currencies, the value of our non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expenses, which will decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally increase when reported in U.S. dollars. For the three months ended March 26, 2022, our revenue would have decreased by $28.7 million and our operating income would have decreased by $0.3 million, if the U.S. dollar exchange rate had strengthened by 10%, with all other variables held constant.

We attempt to minimize this exposure by using certain financial instruments in accordance with our overall risk management and our hedge policy. We do not enter into speculative derivative agreements.

During the three months ended March 26, 2022, we entered into foreign exchange forward contracts to limit our foreign currency exposure related to both intercompany loans and a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under our Credit Facility. Refer to Note 9, “Debt and Other Financing Arrangements” in this Quarterly Report on Form 10-Q for additional information regarding these types of forward contracts.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(a) Evaluation of Disclosure Controls and Procedures

Based on their evaluation, required by paragraph (b) of Rules 13a-15 or 15d-15, promulgated by the Securities Exchange Act of 1934, as amended (Exchange Act), the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, are effective, at a reasonable assurance level, as of March 26, 2022, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures.

(b) Changes in Internal Controls Over Financial Reporting

The Company continued to execute a plan to centralize certain accounting transaction processing functions to internal shared service centers during the three months ended March 26, 2022. There were no other material changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended March 26, 2022 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to Note 13, “Commitments and Contingencies” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for fiscal year 2021, which could materially affect our business, financial condition, and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for fiscal year 2021, except as disclosed below.

Our business, results of operations, or financial condition could be adversely affected by disruptions in the global economy caused by the ongoing conflict between the Russian Federation and Ukraine.

In February 2022, the Russian Federation launched an invasion of the country of Ukraine, resulting in negative impacts to the global economy. Furthermore, governments in the U.S., Canada, the United Kingdom, and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. Although we have no operations in Russia or Ukraine, we have ceased doing business with our Russian customers and distributors. Additional risks to our business that may emerge as a result of the armed conflict include, among others, shortages in materials; increased costs for transportation, energy, and raw materials; increased trade barriers or restrictions on global trade; cyberattacks; supply disruptions; lower consumer demand; and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information relating to the purchases of shares of our common stock during the three months ended March 26, 2022.

			Total Number of Shares Purchased						Average Price Paid per Share						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs						Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
																					(in thousands)
December 26, 2021 to January 22, 2022			—						$	—					—						$	129,105
January 23, 2022 to February 19, 2022			84,127						312.35						—						129,105
February 20, 2022 to March 26, 2022			26,720						291.68						—						129,105
Total			110,847												—

Our Board of Directors have authorized up to an aggregate amount of $1.3 billion for our stock repurchase program. During the three months ended March 26, 2022, we did not repurchase any shares of common stock under our stock repurchase program or in open market trading. As of March 26, 2022, we had $129.1 million remaining on the authorized stock repurchase program.

Additionally, our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(a) Exhibits			Description of Exhibits
10.1+			Employment Offer Letter between Charles River Laboratories, Inc. and Flavia Pease, dated as of March 4, 2022
31.1+			Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2+			Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1+			Certification of the Principal Executive Officer and the Principal Financial Officer required by Rule 13a-14(a) of 15d-14(a) of the Exchange Act
101.INS			eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Calculation Linkbase Document
101.DEF			XBRL Taxonomy Definition Linkbase Document
101.LAB			XBRL Taxonomy Label Linkbase Document
101.PRE			XBRL Taxonomy Presentation Linkbase Document
+ Furnished herein.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

						CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
			May 4, 2022			/s/ JAMES C. FOSTER
						James C. Foster Chairman, President and Chief Executive Officer
			May 4, 2022			/s/ DAVID R. SMITH
						David R. Smith Corporate Executive Vice President and Chief Financial Officer