Item 1. Financial Statements

114K characters. Original on sec.gov · Markdown

Item 1. Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Service revenue	$	782,827	$	715,320	$	1,503,312	$	1,341,901
Product revenue	190,304		199,287		383,748		397,272
Total revenue	973,131		914,607		1,887,060		1,739,173
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)	522,623		476,762		1,009,487		900,737
Cost of products sold (excluding amortization of intangible assets)	93,782		95,824		184,029		188,137
Selling, general and administrative	131,711		171,501		281,744		327,234
Amortization of intangible assets	37,604		32,970		75,611		61,812
Operating income	187,411		137,550		336,189		261,253
Other income (expense):
Interest income	188		171		315		206
Interest expense	(3,703)		(16,190)		(13,137)		(45,909)
Other (expense) income, net	(39,783)		5,965		(68,408)		(21,752)
Income before income taxes	144,113		127,496		254,959		193,798
Provision for income taxes	33,449		37,580		49,069		39,947
Net income	110,664		89,916		205,890		153,851
Less: Net income attributable to noncontrolling interests	1,343		1,468		3,547		3,873
Net income attributable to common shareholders	$	109,321	$	88,448	$	202,343	$	149,978

Earnings per common share
Net income attributable to common shareholders:
Basic	$	2.15	$	1.76	$	3.99	$	2.99
Diluted	$	2.13	$	1.72	$	3.94	$	2.93

Weighted-average number of common shares outstanding:
Basic	50,823		50,297		50,732		50,138
Diluted	51,283		51,334		51,293		51,225

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				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Net income	$	110,664	$	89,916	$	205,890	$	153,851
Other comprehensive income (loss):
Foreign currency translation adjustment	(93,857)		20,827		(106,809)		30,656
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans	741		993		1,487		1,981
Comprehensive income, before income taxes related to items of other comprehensive income	17,548		111,736		100,568		186,488
Less: Income tax (benefit) expense related to items of other comprehensive income	(6,876)		2,449		(8,894)		1,424
Comprehensive income, net of income taxes	24,424		109,287		109,462		185,064
Less: Comprehensive (loss) income related to noncontrolling interests, net of income taxes	(1,275)		1,843		934		4,233
Comprehensive income attributable to common shareholders, net of income taxes	$	25,699	$	107,444	$	108,528	$	180,831







See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)


	June 25, 2022		December 25, 2021
Assets
Current assets:
Cash and cash equivalents	$	200,321	$	241,214
Trade receivables and contract assets, net of allowances for credit losses of $7,928 and $7,180, respectively	747,605		642,881
Inventories	256,765		199,146
Prepaid assets	80,939		93,543
Other current assets	107,456		97,311
Total current assets	1,393,086		1,274,095
Property, plant and equipment, net	1,383,422		1,291,068
Operating lease right-of-use assets, net	382,121		292,941
Goodwill	2,860,258		2,711,881
Client relationships, net	965,206		981,398
Other intangible assets, net	67,166		79,794
Deferred tax assets	42,467		40,226
Other assets	435,635		352,889
Total assets	$	7,529,361	$	7,024,292
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases	$	2,364	$	2,795
Accounts payable	211,381		198,130
Accrued compensation	202,962		246,119
Deferred revenue	242,084		219,703
Accrued liabilities	199,234		228,797
Other current liabilities	190,110		137,641
Total current liabilities	1,048,135		1,033,185
Long-term debt, net and finance leases	2,997,221		2,663,564
Operating lease right-of-use liabilities	365,775		252,972
Deferred tax liabilities	230,051		239,720
Other long-term liabilities	195,075		242,859
Total liabilities	4,836,257		4,432,300
Commitments and contingencies (Notes 2, 9, 11 and 13)
Redeemable noncontrolling interests	40,177		53,010
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; 50,990 shares issued and 50,861 shares outstanding as of June 25, 2022, and 50,480 shares issued and outstanding as of December 25, 2021	510		505
Additional paid-in capital	1,761,125		1,718,304
Retained earnings	1,183,094		980,751
Treasury stock, at cost, 129 and 0 shares, as of June 25, 2022 and December 25, 2021, respectively	(38,468)		—
Accumulated other comprehensive loss	(258,555)		(164,740)
Total equity attributable to common shareholders	2,647,706		2,534,820
Noncontrolling interest	5,221		4,162
Total equity	2,652,927		2,538,982
Total liabilities, redeemable noncontrolling interests and equity	$	7,529,361	$	7,024,292
See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Six Months Ended
	June 25, 2022		June 26, 2021
Cash flows relating to operating activities
Net income	$	205,890	$	153,851
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	151,720		129,613
Stock-based compensation	29,549		30,266
Loss on debt extinguishment and other financing costs	1,987		27,980
Deferred income taxes	(14,684)		8,891
Loss on venture capital and strategic equity investments, net	23,515		6,910
Contingent consideration, fair value changes	(15,420)		—
Other, net	13,520		(475)
Changes in assets and liabilities:
Trade receivables and contract assets, net	(117,642)		(5,224)
Inventories	(63,725)		(7,107)
Accounts payable	31,466		(13,383)
Accrued compensation	(38,173)		13,932
Deferred revenue	27,641		502
Customer contract deposits	16,100		(2,032)
Other assets and liabilities, net	360		13,095
Net cash provided by operating activities	252,104		356,819
Cash flows relating to investing activities
Acquisition of businesses and assets, net of cash acquired	(283,392)		(1,000,505)
Capital expenditures	(163,316)		(74,461)
Purchases of investments and contributions to venture capital investments	(108,842)		(23,266)
Proceeds from sale of investments	205		5,204
Other, net	(4,774)		839
Net cash used in investing activities	(560,119)		(1,092,189)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit facility	2,180,511		4,999,942
Proceeds from exercises of stock options	15,571		35,298
Payments on long-term debt, revolving credit facility, and finance lease obligations	(1,856,262)		(4,241,772)
Purchase of treasury stock	(38,468)		(40,297)
Payment of debt extinguishment and financing costs	—		(38,166)
Payment of contingent considerations	(10,356)		—
Other, net	(32,843)		(2,330)
Net cash provided by financing activities	258,153		712,675
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	10,756		17,066
Net change in cash, cash equivalents, and restricted cash	(39,106)		(5,629)
Cash, cash equivalents, and restricted cash, beginning of period	246,314		233,119
Cash, cash equivalents, and restricted cash, end of period	$	207,208	$	227,490

Supplemental cash flow information:
Cash and cash equivalents	$	200,321	$	222,969
Restricted cash included in Other current assets	5,797		3,118
Restricted cash included in Other assets	1,090		1,403
Cash, cash equivalents, and restricted cash, end of period	$	207,208	$	227,490

See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(in thousands)


	Common Stock				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total Equity Attributable to Common Shareholders		Noncontrolling Interest		Total Equity
Shares		Amount					Shares		Amount
December 25, 2021	50,480		$	505	$	1,718,304	$	980,751	$	(164,740)	—	$	—	$	2,534,820	$	4,162	$	2,538,982
Net income	—		—		—		93,022		—		—	—		93,022		560		93,582
Other comprehensive loss	—		—		—		—		(10,193)		—	—		(10,193)		—		(10,193)
Adjustment of redeemable noncontrolling interest to redemption value	—		—		(1,161)		—		—		—	—		(1,161)		—		(1,161)
Issuance of stock under employee compensation plans	431		4		13,067		—		—		—	—		13,071		—		13,071
Purchase of treasury shares	—		—		—		—		—		111	(33,994)		(33,994)		—		(33,994)
Stock-based compensation	—		—		14,619		—		—		—	—		14,619		—		14,619
March 26, 2022	50,911		509		1,744,829		1,073,773		(174,933)		111	(33,994)		2,610,184		4,722		2,614,906
Net income	—		—		—		109,321		—		—	—		109,321		499		109,820
Other comprehensive income	—		—		—		—		(83,622)		—	—		(83,622)		—		(83,622)
Adjustment of redeemable noncontrolling interest to redemption value	—		—		(1,132)		—		—		—	—		(1,132)		—		(1,132)
Issuance of stock under employee compensation plans	79		1		2,498		—		—		—	—		2,499		—		2,499
Purchase of treasury shares	—		—		—		—		—		18	(4,474)		(4,474)		—		(4,474)
Stock-based compensation	—		—		14,930		—		—		—	—		14,930		—		14,930
June 25, 2022	50,990		$	510	$	1,761,125	$	1,183,094	$	(258,555)	129	$	(38,468)	$	2,647,706	$	5,221	$	2,652,927









	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	—		—		—		61,530		—		—	—		61,530		690		62,220
Other comprehensive income	—		—		—		—		11,857		—	—		11,857		—		11,857
Adjustment of redeemable noncontrolling interest to redemption value	—		—		(835)		—		—		—	—		(835)		—		(835)
Issuance of stock under employee compensation plans	583		6		19,606		—		—		—	—		19,612		—		19,612
Purchase of treasury shares	—		—		—		—		—		134	(36,028)		(36,028)		—		(36,028)
Stock-based compensation	—		—		13,189		—		—		—	—		13,189		—		13,189
March 27, 2021	50,350		504		1,659,524		686,944		(127,017)		134	(36,028)		2,183,927		4,257		2,188,184
Net income	—		—		—		88,448		—		—	—		88,448		583		89,031
Other comprehensive income	—		—		—		—		18,996		—	—		18,996		—		18,996
Adjustment of redeemable noncontrolling interest to redemption value	—		—		(1,506)		—		—		—	—		(1,506)		—		(1,506)
Issuance of stock under employee compensation plans	188		1		15,766		—		—		—	—		15,767		—		15,767
Purchase of treasury shares	—		—		—		—		—		13	(4,269)		(4,269)		—		(4,269)
Stock-based compensation	—		—		17,077		—		—		—	—		17,077		—		17,077
June 26, 2021	50,538		$	505	$	1,690,861	$	775,392	$	(108,021)	147	$	(40,297)	$	2,318,440	$	4,840	$	2,323,280







See Notes to Unaudited Condensed Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal year 2021. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Newly Issued Accounting Pronouncements

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 sets disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The ASU also clarifies that contractual sale restrictions should not be considered when measuring fair value of equity securities. The ASU is effective for fiscal years beginning after December 15, 2023 and will be applied on a prospective basis. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements and related disclosures, but does not believe there will be a material impact.

In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance.” ASU 2021-10 requires disclosures about transactions with a government that have been accounted for by a grant or contribution accounting model to increase transparency about the types of transactions, the accounting for the transactions, and the effect on the financial statements. The ASU is an annual disclosure effective for fiscal years beginning after December 15, 2021 and will be applied on a prospective basis. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements and related disclosures, but does not believe there will be a material impact.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for fiscal year 2021.

Consolidation

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

The Company’s fiscal year is typically based on 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.

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 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; Insourcing Solutions (IS), which provides colony management

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of its clients’ research operations (including recruitment, training, staffing, and management services); and Research and GMP-Compliant Cells, which supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. The Company’s DSA reportable segment includes 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 nonregulated (GLP and non-GLP) safety assessment services. 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; Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO); Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.

2. ACQUISITIONS AND DIVESTITURES

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 preliminary purchase price of Explora BioLabs was $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from the Company’s credit facility (Credit Facility). This business is reported as part of the Company’s RMS reportable segment.

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 June 25, 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 early-stage contract research organization providing specialized 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.

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 acquired, which was 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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 the three months ended June 25, 2022, $7.0 million of contingent consideration was paid as certain operational milestones were achieved. 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 June 25, 2022, the fair value of the contingent consideration was zero as certain operational targets were not achieved.

Purchase price information

The purchase price allocation was as follows:


	Explora (1)		Vigene		Retrogenix		Cognate		Distributed Bio
	April 5, 2022		June 28, 2021		March 30, 2021		March 29, 2021		December 31, 2020
	(in thousands)
Trade receivables	$	7,679	$	3,548	$	2,266	$	18,566	$	2,722
Other current assets (excluding cash)	1,067		1,657		209		14,128		221
Property, plant and equipment	37,369		7,649		400		52,082		2,382
Operating lease right-of-use asset, net	48,613		22,507		1,385		34,349		1,586
Goodwill (2)	216,324		239,681		34,489		611,555		71,585
Definite-lived intangible assets	70,100		93,900		22,126		270,900		24,540
Other long-term assets	556		694		—		6,098		469
Deferred revenue	(3,507)		(4,260)		(434)		(20,539)		(1,319)
Other current liabilities (3)	(15,507)		(6,319)		(1,141)		(45,388)		(1,504)
Operating lease right-of-use liabilities (Long-term)	(57,193)		(21,220)		(1,205)		(31,383)		(1,123)
Deferred tax liabilities	(19,173)		(13,958)		(4,174)		(32,503)		(2,529)
Other long-term liabilities	(1,807)		—		—		—		—
Total purchase price allocation	$	284,521	$	323,879	$	53,921	$	877,865	$	97,030

(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 and obligations. 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 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 not deductible for tax purposes.
(3) 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 the three months ended June 25, 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.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The definite-lived intangible assets acquired were as follows:


	Explora BioLabs		Vigene		Retrogenix		Cognate		Distributed Bio
Definite-Lived Intangible Assets	(in thousands)
Client relationships	$	64,000	$	87,500	$	17,340	$	257,200	$	16,080
Other intangible assets	6,100		6,400		4,786		13,700		8,460
Total definite-lived intangible assets	$	70,100	$	93,900	$	22,126	$	270,900	$	24,540

Weighted Average Amortization Life	(in years)
Client relationships	13		12		13		13		9
Other intangible assets	4		2		3		2		4
Total definite-lived intangible assets	12		11		11		13		7


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
Transaction and Integration Costs
Selling, general and administrative expenses	$	4,426	$	14,694	$	11,539	$	23,411

Pro forma information

The following selected unaudited pro forma consolidated results of operations are presented as if the Cognate and Vigene acquisitions had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 29, 2019, after giving effect to certain adjustments. For the three and six months ended June 26, 2021, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $4.0 million and $13.3 million, additional interest expense on borrowing of $2.2 million and $5.6 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. All other acquisitions have not been included because that information is not material to the consolidated financial statements.


	June 26, 2021
	Three Months Ended		Six Months Ended
	(in thousands)
	(unaudited)
Revenue	$	923,859	$	1,782,659
Net income attributable to common shareholders	94,984		132,559

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

RMS Japan Divestiture

On October 12, 2021, the Company sold its RMS Japan operations to The Jackson Laboratory for a preliminary purchase price of $70.6 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments.

The RMS Japan business was reported in the Company’s RMS reportable segment. The Company determined that the RMS Japan business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.

CDMO Sweden Divestiture

On October 12, 2021, the Company sold its 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 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.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The CDMO Sweden business was acquired in March 2021 as part of the acquisition of Cognate and was reported in the Company’s Manufacturing reportable segment. The Company routinely evaluates the strategic fit and fundamental performance of our acquisitions integrated within our global infrastructure. As part of this assessment, the Company determined that this capital could be better deployed in other long-term growth opportunities.

The carrying amounts of the major classes of assets and liabilities associated with the divestitures of the businesses were as follows:


	October 12, 2021
	RMS Japan		CDMO Sweden
	(in thousands)
Assets
Current assets	$	26,524	$	8,187
Property, plant, and equipment, net	17,379		14,339
Operating lease right-of-use assets, net	—		19,733
Goodwill	4,129		27,764
Intangible assets, net	—		14,089
Other assets	3,695		—
Total assets	$	51,727	$	84,112

Liabilities
Current liabilities	$	8,705	$	6,386
Operating lease right-of-use liabilities	—		18,221
Long-term liabilities	94		—
Total liabilities	$	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:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
Timing of Revenue Recognition:
RMS
Services and products transferred over time	$	85,803	$	66,334	$	155,727	$	131,230
Services and products transferred at a point in time	100,607		110,360		207,225		222,374
Total RMS revenue	186,410		176,694		362,952		353,604
DSA
Services and products transferred over time	589,371		539,790		1,131,707		1,040,258
Services and products transferred at a point in time	2,546		304		4,469		1,014
Total DSA revenue	591,917		540,094		1,136,176		1,041,272
Manufacturing
Services and products transferred over time	92,811		95,974		187,820		146,542
Services and products transferred at a point in time	101,993		101,845		200,112		197,755
Total Manufacturing revenue	194,804		197,819		387,932		344,297
Total revenue	$	973,131	$	914,607	$	1,887,060	$	1,739,173

RMS

The RMS business generates revenue through the commercial production and sale of research models, research and GMP-compliant cells (cell supply), and the provision of services related to the maintenance and monitoring of research models and management of clients’ research operations. Revenue from the sale of research models and cell supply is recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the shipping

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

terms of a contract. Revenue generated from research models services is recognized over time and is typically based on a right-to-invoice measure of progress (output method) as invoiced amounts correspond directly to the value of the Company’s performance to date.

DSA

The DSA business provides a full suite of integrated drug discovery services directed at the identification, screening and selection of a lead compound for drug development and offers a full range of safety assessment services including bioanalysis, drug metabolism, pharmacokinetics, toxicology and pathology. DSA services revenue is generally recognized over time using the cost-to-cost or right to invoice measures of progress, primarily representing fixed fee service contracts and per unit service contracts, respectively.

Manufacturing

The Manufacturing business 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. Species identification service revenue is generally recognized at a point in time as identifications are completed by the Company. Biologics service revenue is generally recognized over time using the cost-to-cost measure of progress. Microbial Solutions and Avian product sales are generally recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the contractual shipping terms of a contract.

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 June 25, 2022. Excluded from the disclosure is the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed and (iii) service revenue recognized in accordance with ASC 842, “Leases” (see additional disclosure for Other Performance Obligations).

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of June 25, 2022:


	Revenue Expected to be Recognized in Future Periods
	Less than 1 Year		1 to 3 Years		4 to 5 Years		Beyond 5 Years		Total
	(in thousands)
DSA	$	499,945	$	429,944	$	52,543	$	3,083	$	985,515
Manufacturing	1,621		—		—		—		1,621
Total	$	501,566	$	429,944	$	52,543	$	3,083	$	987,136

Contract Balances from Contracts with Customers

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 unaudited condensed 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.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:


	June 25, 2022		December 25, 2021
	(in thousands)
Balances from contracts with customers:
Client receivables	$	564,719	$	489,452
Contract assets (unbilled revenue)	190,814		160,609
Contract liabilities (current and long-term deferred revenue)	262,850		240,281
Contract liabilities (customer contract deposits)	77,038		59,512

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 $49 million and $36 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of June 25, 2022 and December 25, 2021, respectively. Advanced client payments of approximately $77 million and $60 million have been presented as customer contract deposits within other current liabilities in the accompanying unaudited condensed consolidated balance sheets as of June 25, 2022 and December 25, 2021, respectively.

Other changes in the contract asset and the contract liability balances during the six months ended June 25, 2022 and June 26, 2021 were as follows:

(i) Changes due to acquisitions and divestitures:

See Note 2 “Acquisitions and Divestitures” for the Company’s recent acquisitions.

(ii) Cumulative catch-up adjustments to revenue 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 is constrained), or a contract modification:

During the six months ended June 25, 2022 and June 26, 2021, immaterial cumulative catch-up adjustments to revenue were recorded.

(iii) A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be recorded as a client receivable):

Approximately 75% of unbilled revenue as of December 25, 2021, which was $161 million, was billed during the six months ended June 25, 2022. Approximately 80% of unbilled revenue as of December 26, 2020, which was $135 million, was billed during the six months ended June 26, 2021.

(iv) A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability):

Approximately 75% of contract liabilities as of December 25, 2021, which was $240 million, were recognized as revenue during the six months ended June 25, 2022. Approximately 75% of contract liabilities as of December 26, 2020, which was $227 million, were recognized as revenue during the six months ended June 26, 2021.

Other Performance Obligation****s

As part of the Company’s service offerings, primarily in the Manufacturing and RMS segments, 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. For the three months ended June 25, 2022 and June 26, 2021, the Company recognized lease revenue of $13.9 million and $6.3 million, which is recorded within service revenue, which is transferred over time, within the unaudited condensed consolidated statements of income. For the six months ended June 25, 2022 and June 26, 2021, the Company recognized lease revenue of $21.8 million and $6.3 million within the unaudited condensed consolidated statements of income. 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 unaudited condensed consolidated financial statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. SEGMENT INFORMATION

The following table presents revenue and other financial information by reportable segment:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
RMS
Revenue	$	186,410	$	176,694	$	362,952	$	353,604
Operating income	39,526		42,580		87,408		87,515
Depreciation and amortization	13,228		9,844		22,697		19,523
Capital expenditures	13,850		8,512		22,496		11,495
DSA
Revenue	$	591,917	$	540,094	$	1,136,176	$	1,041,272
Operating income	128,793		104,514		233,779		195,463
Depreciation and amortization	44,626		43,588		91,415		88,196
Capital expenditures	41,578		20,473		90,508		37,513
Manufacturing
Revenue	$	194,804	$	197,819	$	387,932	$	344,297
Operating income	62,503		56,717		108,871		106,154
Depreciation and amortization	18,000		13,952		36,482		20,521
Capital expenditures	24,431		13,602		47,259		20,712

The following tables present reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts:


	Operating Income				Depreciation and Amortization				Capital Expenditures
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
Three Months Ended:
Total reportable segments	$	230,822	$	203,811	$	75,854	$	67,384	$	79,859	$	42,587
Unallocated corporate	(43,411)		(66,261)		567		721		2,993		3,844
Total consolidated	$	187,411	$	137,550	$	76,421	$	68,105	$	82,852	$	46,431

Six Months Ended
Total reportable segments	$	430,058	$	389,132	$	150,594	$	128,240	$	160,263	$	69,720
Unallocated corporate	(93,869)		(127,879)		1,126		1,373		3,053		4,741
Total consolidated	$	336,189	$	261,253	$	151,720	$	129,613	$	163,316	$	74,461

Revenue for each significant product or service offering is as follows:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
RMS	$	186,410	$	176,694	$	362,952	$	353,604
DSA	591,917		540,094		1,136,176		1,041,272
Manufacturing	194,804		197,819		387,932		344,297
Total revenue	$	973,131	$	914,607	$	1,887,060	$	1,739,173

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of unallocated corporate expense consists of the following:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
Stock-based compensation	$	8,531	$	10,417	$	17,034	$	18,059
Compensation, benefits, and other employee-related expenses	20,507		25,924		49,143		53,286
External consulting and other service expenses	4,727		6,301		9,046		13,657
Information technology	3,079		4,117		5,553		8,212
Depreciation	567		721		1,126		1,373
Acquisition and integration	3,014		15,036		8,840		25,596
Other general unallocated corporate	2,986		3,745		3,127		7,696
Total unallocated corporate expense	$	43,411	$	66,261	$	93,869	$	127,879

Other general unallocated corporate expense consists of costs associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations.

Revenue by geographic area is as follows:


	U.S.		Europe		Canada		Asia Pacific		Other		Consolidated
	(in thousands)
Three Months Ended:
June 25, 2022	$	566,917	$	263,584	$	93,694	$	46,239	$	2,697	$	973,131
June 26, 2021	491,619		275,706		90,565		55,133		1,584		914,607

Six Months Ended:
June 25, 2022	$	1,093,466	$	514,671	$	178,940	$	95,185	$	4,798	$	1,887,060
June 26, 2021	940,101		513,241		167,672		114,579		3,580		1,739,173

Included in the Other category above are operations located in Brazil and Israel. Revenue represents sales originating in entities physically located in the identified geographic area.

5. SUPPLEMENTAL BALANCE SHEET INFORMATION

The composition of trade receivables and contract assets, net is as follows:


	June 25, 2022		December 25, 2021
	(in thousands)
Client receivables	$	564,719	$	489,452
Unbilled revenue	190,814		160,609
Total	755,533		650,061
Less: Allowance for credit losses	(7,928)		(7,180)
Trade receivables and contract assets, net	$	747,605	$	642,881

The composition of inventories is as follows:


	June 25, 2022		December 25, 2021
	(in thousands)
Raw materials and supplies	$	37,237	$	33,118
Work in process	43,615		40,268
Finished products	175,913		125,760
Inventories	$	256,765	$	199,146

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of other current assets is as follows:


	June 25, 2022		December 25, 2021
	(in thousands)
Prepaid income tax	$	92,909	$	84,725
Short-term investments	1,012		1,063
Restricted cash	5,797		4,023
Other receivables	7,738		7,500
Other current assets	$	107,456	$	97,311

The composition of other assets is as follows:


	June 25, 2022		December 25, 2021
	(in thousands)
Venture capital investments	$	127,864	$	149,640
Strategic equity investments	151,207		51,712
Life insurance policies	42,116		51,048
Other long-term income tax assets	16,412		18,690
Restricted cash	1,090		1,077
Long-term pension assets	37,357		39,582
Other	59,589		41,140
Other assets	$	435,635	$	352,889

The composition of other current liabilities is as follows:


	June 25, 2022		December 25, 2021
	(in thousands)
Current portion of operating lease right-of-use liabilities	$	48,937	$	33,267
Accrued income taxes	46,226		26,161
Customer contract deposits	77,038		59,512
Other	17,909		18,701
Other current liabilities	$	190,110	$	137,641

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


	June 25, 2022		December 25, 2021
	(in thousands)
U.S. Transition Tax	$	32,324	$	43,057
Long-term pension liability, accrued executive supplemental life insurance retirement plan and deferred compensation plans	103,245		104,944
Long-term deferred revenue	20,766		20,578
Other	38,740		74,280
Other long-term liabilities	$	195,075	$	242,859

6. VENTURE CAPITAL AND STRATEGIC EQUITY INVESTMENTS

Venture capital investments were $127.9 million and $149.6 million as of June 25, 2022 and December 25, 2021, respectively. The Company’s total commitment to the venture capital funds as of June 25, 2022 was $192.7 million, of which the Company funded $119.7 million through that date. The Company received distributions totaling $2.7 million and $18.2 million for the three months ended June 25, 2022 and June 26, 2021, respectively. The Company received distributions totaling $4.0 million and $27.5 million for the six months ended June 25, 2022 and June 26, 2021, respectively.

The Company recognized net losses on venture capital investments of $9.7 million for the three months ended June 25, 2022 and net gains of $11.1 million for the three months ended June 26, 2021, both of which were driven primarily by publicly-held investments. The Company recognized net losses on venture capital investments of $23.1 million for the six months ended June

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25, 2022, driven by the decrease in the fair value of publicly-held investments offset by increases from private investments, and net losses of $5.3 million for the six months ended June 26, 2021, which were driven by publicly-held and private investments.

The Company also invests, with minority positions, directly in equity of privately-held companies. Strategic equity investments were $151.2 million and $51.7 million as of June 25, 2022 and December 25, 2021, respectively. In April 2022, the Company acquired a 49% equity interest in a supplier supporting the DSA reportable segment (the Investee) for $90.0 million up front and an additional future contingent payment of up to $5.0 million based upon the Investee’s future performance. The total allocable basis of the investment exceeds the proportional interest in the Investee’s underlying net assets by $86.7 million, which has been allocated primarily to goodwill, intangible assets (client relationships and backlog), and deferred tax liabilities in the amount of $26.2 million and $71.2 million, and $10.7 million respectively. The Company recognizes its proportional share of the Investee’s earnings, adjusted for the amortization of the intangible assets over their useful lives and any intra-entity eliminations, under the equity method of accounting on a three-month lag within other income (expense), net in the accompanying consolidated statements of income. Summarized financial information for this equity method Investee is not presented as such information is not material to the Company’s financial statements. The Company purchased additional strategic equity investments of $12.2 million during the six months ended June 25, 2022 and recognized insignificant gains and losses for the three and six months ended June 25, 2022 and June 26, 2021.

Additionally, as of June 25, 2022 the Company has a $25 million commitment to purchase an additional interest in an existing strategic equity investment.

7. FAIR VALUE

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


	June 25, 2022
	Level 1		Level 2		Level 3		Total
Current assets measured at fair value:	(in thousands)
Cash equivalents	$	—	$	77	$	—	$	77
Other assets:
Life insurance policies	—		34,882		—		34,882
Total assets measured at fair value	$	—	$	34,959	$	—	$	34,959

Accrued liabilities measured at fair value:
Contingent consideration	$	—	$	—	$	9,550	$	9,550


Total liabilities measured at fair value	$	—	$	—	$	9,550	$	9,550

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the six months ended June 25, 2022, there were no transfers between levels.


	December 25, 2021
	Level 1		Level 2		Level 3		Total
Current assets measured at fair value:	(in thousands)
Cash equivalents	$	—	$	893	$	—	$	893
Other assets:
Life insurance policies	—		42,918		—		42,918
Total assets measured at fair value	$	—	$	43,811	$	—	$	43,811

Accrued liabilities measured at fair value:
Contingent consideration	$	—	$	—	$	11,794	$	11,794
Other long-term liabilities measured at fair value:
Contingent consideration	—		—		25,450		25,450
Total liabilities measured at fair value	$	—	$	—	$	37,244	$	37,244

During the year ended December 25, 2021, there were no transfers between levels.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contingent Consideration

The following table provides a rollforward of the contingent consideration related to the Company’s acquisitions.


	Six Months Ended
	June 25, 2022		June 26, 2021
	(in thousands)
Beginning balance	$	37,244	$	2,328
Additions	—		37,983
Payments	(11,476)		(2,889)
Total gains or losses (realized/unrealized):
Adjustment of previously recorded contingent liability	(15,340)		—
Foreign currency translation	(878)		(115)
Ending balance	$	9,550	$	37,307

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 $53 million, of which the value accrued as of June 25, 2022 is approximately $10 million. The weighted average probability of achieving the maximum target is approximately 18%. The average volatility and weighted average cost of capital are approximately 40% and 16%, respectively. Increases or decreases in these assumptions may result in a higher or lower fair value measurement, respectively.

Debt Instruments

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


	June 25, 2022				December 25, 2021
	Book Value		Fair Value		Book Value		Fair Value
4.25% Senior Notes due 2028	$	500,000	$	453,100	$	500,000	$	521,250
3.75% Senior Notes due 2029	500,000		437,500		500,000		506,700
4.0% Senior Notes due 2031	500,000		438,100		500,000		507,500

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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


			Adjustments to Goodwill
	December 25, 2021		Acquisition Related		Foreign Exchange		June 25, 2022
	(in thousands)
RMS	$	283,524	$	216,324	$	(1,152)	$	498,696
DSA	1,472,506		—		(36,509)		1,435,997
Manufacturing	955,851		(592)		(29,694)		925,565
Goodwill	$	2,711,881	$	215,732	$	(67,355)	$	2,860,258

The increase in goodwill during the six months ended June 25, 2022 related primarily to the acquisition of Explora BioLabs in the RMS reportable segment.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Intangible Assets, Net

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


	June 25, 2022						December 25, 2021
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
	(in thousands)
Backlog	$	15,295	$	(11,862)	$	3,433	$	12,577	$	(9,517)	$	3,060
Technology	130,236		(98,132)		32,104		135,764		(95,454)		40,310
Trademarks and trade names	12,680		(3,982)		8,698		13,086		(3,448)		9,638
Other	38,153		(15,222)		22,931		35,231		(8,445)		26,786
Other intangible assets	196,364		(129,198)		67,166		196,658		(116,864)		79,794
Client relationships	1,504,441		(539,235)		965,206		1,475,757		(494,359)		981,398
Intangible assets	$	1,700,805	$	(668,433)	$	1,032,372	$	1,672,415	$	(611,223)	$	1,061,192

The increase in intangible assets, net during the six months ended June 25, 2022 related primarily to the acquisition of Explora BioLabs, offset by normal amortization over the useful lives.

9. DEBT AND OTHER FINANCING ARRANGEMENTS

Long-term debt, net and finance leases consists of the following:


	June 25, 2022		December 25, 2021
	(in thousands)

Revolving facility	$	1,486,976	$	1,161,431
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	350		368
Finance leases	32,961		27,223
Total debt and finance leases	3,020,287		2,689,022
Less:
Current portion of long-term debt	95		101
Current portion of finance leases	2,269		2,694
Current portion of long-term debt and finance leases	2,364		2,795
Long-term debt and finance leases	3,017,923		2,686,227
Debt discount and debt issuance costs	(20,702)		(22,663)
Long-term debt, net and finance leases	$	2,997,221	$	2,663,564

As of June 25, 2022 and December 25, 2021, the weighted average interest rate on the Company’s debt was 3.15% and 2.78%, respectively. During the six months ended June 26, 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 of debt extinguishment costs and $5 million of deferred financing costs write-offs were recorded in Interest expense for the six months ended June 26, 2021.

Foreign currency transactions

During the three and six months ended June 25, 2022 and June 26, 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 approximately

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

$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:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021		Affected Line Item in the Consolidated Statements of Income
	(in thousands)
Gain (loss) on foreign debt remeasurement	$	(19,423)	$	(4,907)	$	(30,523)	$	(18,263)	Other (expense) income
Gain (loss) on foreign exchange forward contract	20,522		5,355		32,306		19,332		Interest expense

Letters of Credit

As of June 25, 2022 and December 25, 2021, the Company had $17.7 million in outstanding letters of credit.

10. EQUITY AND NONCONTROLLING INTERESTS

Earnings Per Share

The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
	(in thousands)
Numerator:
Net income	$	110,664	$	89,916	$	205,890	$	153,851
Less: Net income attributable to noncontrolling interests	1,343		1,468		3,547		3,873
Net income attributable to common shareholders	$	109,321	$	88,448	$	202,343	$	149,978

Denominator:
Weighted-average shares outstanding - Basic	50,823		50,297		50,732		50,138
Effect of dilutive securities:
Stock options, restricted stock units and performance share units	460		1,037		561		1,087
Weighted-average shares outstanding - Diluted	51,283		51,334		51,293		51,225

Anti-dilutive common stock equivalents(1)	597		159		550		159

(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

During the six months ended June 25, 2022 and June 26, 2021, the Company did not repurchase any shares under its authorized stock repurchase program. As of June 25, 2022, 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. During the six months ended June 25, 2022 and June 26, 2021, the Company acquired 0.1 million shares for $38.5 million and 0.1 million shares for $40.3 million, respectively, from such netting.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED 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		Total
	(in thousands)
December 25, 2021	$	(98,173)	$	(66,567)	$	(164,740)
Other comprehensive loss before reclassifications	(104,196)		—		(104,196)
Amounts reclassified from accumulated other comprehensive income	—		1,487		1,487
Net current period other comprehensive (loss) income	(104,196)		1,487		(102,709)
Income tax (benefit) expense	(9,264)		370		(8,894)
June 25, 2022	$	(193,105)	$	(65,450)	$	(258,555)

Nonredeemable Noncontrolling Interest

The Company has an investment in an entity whose financial results are consolidated in the Company’s unaudited condensed consolidated financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest within Equity in the accompanying unaudited condensed consolidated balance sheets. The activity within the nonredeemable noncontrolling interest was not significant during the three and six months ended June 25, 2022 and June 26, 2021.

Redeemable Noncontrolling Interests

The Company has a 92% equity interest in Vital River with an 8% redeemable noncontrolling interest. The Company has the right to purchase, and the noncontrolling interest holders have the right to sell, the remaining 8% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($24.3 million as of June 25, 2022) 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 8% interest, the noncontrolling interest is classified in the mezzanine section of the unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. The amount that the Company could be required to pay to purchase the remaining 8% equity interest is not limited.

Prior to June 2022, the Company had an 80% equity interest in a subsidiary with a 20% redeemable noncontrolling interest. In June 2022, the Company purchased an additional 10% interest in the subsidiary for $15.0 million. Beginning in 2024, the Company has the right to purchase, and the noncontrolling interest holders have the right to sell (Put/call option), the remaining 10% equity interest at its appraised value ($15.9 million as of June 25, 2022). 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 or a predetermined floor value. 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 unaudited condensed consolidated balance sheets, which is presented above the equity section and below liabilities. 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:


	Six Months Ended
	June 25, 2022		June 26, 2021
	(in thousands)
Beginning balance	$	53,010	$	25,499
Purchase of a 10% redeemable noncontrolling interest	(15,000)		—
Adjustments of noncontrolling interests to redemption values	2,293		2,341
Net income attributable to noncontrolling interests	2,487		2,599
Foreign currency translation	(2,613)		360
Ending balance	$	40,177	$	30,799

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. INCOME TAXES

The Company’s effective tax rates for the three months ended June 25, 2022 and June 26, 2021 were 23.2% and 29.5%, respectively. The Company’s effective tax rates for the six months ended June 25, 2022 and June 26, 2021 were 19.2% and 20.6%, respectively. The decrease in the effective tax rates from the prior year period was primarily attributable to the deferred tax impact of tax law changes enacted during the three months ended June 26, 2021, partially offset by a decreased tax benefit from stock-based compensation deductions in the six months ended June 25, 2022.

For the three months ended June 25, 2022, the Company’s unrecognized tax benefits increased by $0.3 million to $34.5 million, primarily due to increases in research & development tax credit reserves. For the three months ended June 25, 2022, the amount of unrecognized income tax benefits that would impact the effective tax rate increased by $0.1 million to $31.1 million for the same reasons discussed above. The accrued interest on unrecognized tax benefits was $0.9 million as of June 25, 2022. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $11.4 million over the next twelve-month period, primarily due to audit settlements and expiring statutes of limitations.

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 2018.

The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., Canada, France, the Netherlands, and India. The Company does not anticipate resolution of these audits will have a material impact on its consolidated financial statements.

12. RESTRUCTURING AND ASSET IMPAIRMENTS

In recent fiscal years, the Company has undertaken productivity improvement initiatives within all reportable segments at various locations across the U.S., Canada, and Europe. This includes workforce right-sizing and scalability initiatives, resulting in severance and transition costs; and cost related to the consolidation of facilities, resulting in asset impairment and accelerated depreciation charges. The Company does not have any significant remaining lease obligations for facilities associated with restructuring activities. The following table presents a summary of restructuring costs related to these initiatives within the unaudited condensed consolidated statements of income:


	Three Months Ended				Six Months Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
					(in Thousands)
RMS	$	453	$	—	$	1,127	$	7
DSA	473		1,074		616		1,633
Manufacturing	271		535		378		869
Unallocated corporate	167		—		1,254		(151)
Total	$	1,364	$	1,609	$	3,375	$	2,358

As of June 25, 2022 and June 26, 2021, $3.3 million and $2.8 million, respectively, of severance and other personnel related costs liabilities and lease obligation liabilities were included in accrued compensation and accrued liabilities within the Company’s unaudited condensed consolidated balance sheets.

13. COMMITMENTS AND CONTINGENCIES

Litigation

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations