Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                                   TO                                   
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
06-1397316
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
251 Ballardvale Street
Wilmington, Massachusetts
(Address of Principal Executive Offices)
 
01887
(Zip Code)
 
(Registrant’s telephone number, including area code): (781) 222-6000
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes þ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if smaller
reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of July 18, 2016, there were 47,293,493 shares of the Registrant’s common stock outstanding.



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2016

TABLE OF CONTENTS
Item
 
Page
 
PART I

 
1
Financial Statements
 
 
Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended June 25, 2016 and June 27, 2015
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 25, 2016 and June 27, 2015
 
Condensed Consolidated Balance Sheets (Unaudited) as of June 25, 2016 and December 26, 2015
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 25, 2016 and June 27, 2015
 
Notes to Unaudited Condensed Consolidated Financial Statements
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Quantitative and Qualitative Disclosure About Market Risk
4
Controls and Procedures
 
PART II
 
1A
Risk Factors
2
Unregistered Sales of Equity Securities and Use of Proceeds
6
Exhibits
 
 
 
Signatures

1


Special Note on Factors Affecting Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could” and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties and assumptions that are difficult to predict. For example, we may use forward-looking statements when addressing topics such as: goodwill and asset impairments still under review; future demand for drug discovery and development products and services, including the outsourcing of these services; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy, business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical companies and venture capital investments and opportunities for future similar arrangements; our cost structure; the impact of acquisitions including Sunrise, Celsis, Oncotest, WIL Research and Blue Stream; our expectations with respect to revenue growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure), including gains and losses attributable to businesses we plan to close, consolidate or divest; changes in our expectations regarding future stock option, restricted stock, performance share units and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our liquidity. In addition, these statements include the impact of economic and market conditions on us and our clients; the effects of our cost saving actions and the steps to optimize returns to shareholders on an effective and timely basis and our ability to withstand the current market conditions. You should not rely on forward-looking statements because they are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 26, 2015 under the sections entitled “Our Strategy,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and 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.




2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
Service revenue
$
292,847

 
$
214,380

 
$
513,548

 
$
411,160

Product revenue
141,208

 
125,193

 
275,375

 
248,827

Total revenue
434,055

 
339,573

 
788,923

 
659,987

Costs and expenses:
 
 
 
 
 
 
 
Cost of services provided (excluding amortization of intangible assets)
196,121

 
144,143

 
343,470

 
280,449

Cost of products sold (excluding amortization of intangible assets)
68,187

 
62,647

 
134,938

 
127,095

Selling, general and administrative
100,473

 
71,331

 
183,417

 
142,728

Amortization of intangible assets
11,213

 
5,717

 
17,565

 
10,975

Operating income
58,061

 
55,735

 
109,533

 
98,740

Other income (expense):
 
 
 
 
 
 
 
Interest income
222

 
297

 
485

 
581

Interest expense
(8,909
)
 
(4,376
)
 
(13,120
)
 
(7,400
)
Other income (expense), net
5,016

 
8,672

 
9,042

 
359

Income from continuing operations, before income taxes
54,390

 
60,328

 
105,940

 
92,280

Provision for income taxes
18,845

 
11,076

 
32,820

 
11,407

Income from continuing operations, net of income taxes
35,545

 
49,252

 
73,120

 
80,873

Income (loss) from discontinued operations, net of income taxes
12

 
(7
)
 
(14
)
 
(14
)
Net income
35,557

 
49,245

 
73,106

 
80,859

Less: Net income attributable to noncontrolling interests
350

 
736

 
756

 
809

Net income attributable to common shareholders
$
35,207


$
48,509

 
$
72,350

 
$
80,050

Earnings (loss) per common share
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.75

 
$
1.04

 
$
1.54

 
$
1.71

Discontinued operations
$

 
$

 
$

 
$

Net income attributable to common shareholders
$
0.75

 
$
1.04

 
$
1.54

 
$
1.71

Diluted:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.73

 
$
1.02

 
$
1.51

 
$
1.68

Discontinued operations
$

 
$

 
$

 
$

Net income attributable to common shareholders
$
0.73

 
$
1.02

 
$
1.51

 
$
1.68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

3


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
Net income
$
35,557

 
$
49,245

 
$
73,106

 
$
80,859

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment and other
(8,114
)
 
17,953

 
(15,910
)
 
(14,716
)
Cumulative translation adjustment related to intercompany loan forgiveness

 

 

 
(2,341
)
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans
395

 
761

 
785

 
1,490

Other comprehensive income, before income taxes
27,838

 
67,959

 
57,981

 
65,292

Income tax expense related to items of other comprehensive income (Note 9)
142

 
263

 
284

 
480

Comprehensive income, net of income taxes
27,696

 
67,696

 
57,697

 
64,812

Less: Comprehensive income (loss) related to noncontrolling interests
(136
)
 
805

 
(9
)
 
878

Comprehensive income attributable to common shareholders
$
27,832


$
66,891


$
57,706


$
63,934

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts)
 
June 25, 2016
 
December 26, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
154,585


$
117,947

Trade receivables, net
345,539


270,068

Inventories
98,116


93,735

Prepaid assets
36,698

 
30,198

Other current assets
66,609


47,286

Total current assets
701,547


559,234

Property, plant and equipment, net
783,678


677,959

Goodwill
754,925


438,829

Client relationships, net
332,901

 
213,374

Other intangible assets, net
82,295


67,430

Deferred tax assets
22,954


40,028

Other assets
84,687


71,643

Total assets
$
2,762,987


$
2,068,497

Liabilities, Redeemable Noncontrolling Interest and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital leases
$
33,939

 
$
17,033

Accounts payable
66,198

 
36,675

Accrued compensation
81,839

 
72,832

Deferred revenue
118,837

 
81,343

Accrued liabilities
86,841

 
89,494

Other current liabilities
23,871

 
12,544

Current liabilities of discontinued operations
1,868

 
1,840

Total current liabilities
413,393

 
311,761

Long-term debt, net and capital leases
1,331,053

 
845,997

Deferred tax liabilities
53,243

 
48,223

Other long-term liabilities
96,219

 
89,062

Long-term liabilities of discontinued operations
7,094

 
7,890

Total liabilities
1,901,002

 
1,302,933

Commitments and contingencies

 

Redeemable noncontrolling interest
25,824

 
28,008

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; 86,219 shares issued and 47,282 shares outstanding as of June 25, 2016 and 85,464 shares issued and 46,698 shares outstanding at December 26, 2015
862

 
855

Additional paid-in capital
2,450,726

 
2,397,960

Retained earnings
82,888

 
10,538

Treasury stock, at cost 38,937 shares and 38,766 shares as of June 25, 2016 and December 26, 2015, respectively
(1,552,936
)
 
(1,540,738
)
Accumulated other comprehensive loss
(150,192
)
 
(135,548
)
Total equity attributable to common shareholders
831,348

 
733,067

Noncontrolling interests
4,813

 
4,489

Total equity
836,161

 
737,556

Total liabilities, redeemable noncontrolling interest and equity
$
2,762,987

 
$
2,068,497

 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

5


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
Cash flows relating to operating activities
 
 
 
Net income
$
73,106

 
$
80,859

Less: Loss from discontinued operations, net of income taxes
(14
)
 
(14
)
Income from continuing operations
73,120

 
80,873

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,008

 
45,516

Amortization of debt issuance costs and discounts
2,291

 
1,572

Stock-based compensation
22,047

 
19,873

Deferred income taxes
(1,848
)
 
934

Gain on venture capital investments
(8,076
)
 
(364
)
Gain on bargain purchase
16

 
(9,878
)
Other, net
(2,169
)
 
(198
)
Changes in assets and liabilities:
 
 
 
Trade receivables, net
(27,636
)
 
(24,574
)
Inventories
(1,685
)
 
(1,662
)
Other assets
(3,502
)
 
5,871

Accounts payable
19,723

 
1,752

Accrued compensation
(4,243
)
 
(12,757
)
Deferred revenue
1,025

 
422

Accrued liabilities
(5,893
)
 
8,795

Taxes payable and prepaid taxes
(3,075
)
 
(6,696
)
Other liabilities
(586
)
 
(11,873
)
Net cash provided by operating activities
116,517

 
97,606

Cash flows relating to investing activities
 
 
 
Acquisition of businesses and assets, net of cash acquired
(578,772
)
 
(10,680
)
Capital expenditures
(20,041
)
 
(24,556
)
Purchases of investments
(18,111
)
 
(15,174
)
Proceeds from sale of investments and distributions from venture capital investments
8,074

 
11,356

Other, net
4,074

 
2,566

Net cash used in investing activities
(604,776
)
 
(36,488
)
Cash flows relating to financing activities
 
 
 
Proceeds from long-term debt and revolving credit facility
881,975

 
294,213

Proceeds from exercises of stock options
19,823

 
35,641

Payments on long-term debt, capital lease obligations and revolving credit facility
(375,209
)
 
(301,283
)
Purchase of treasury stock
(12,198
)
 
(99,486
)
Other, net
4,989

 
7,188

Net cash provided by (used in) financing activities
519,380

 
(63,727
)
Discontinued operations
 
 
 
Net cash used in operating activities from discontinued operations
(782
)
 
(927
)
Effect of exchange rate changes on cash and cash equivalents
6,299

 
(5,680
)
Net change in cash and cash equivalents
36,638

 
(9,216
)
Cash and cash equivalents, beginning of period
117,947

 
160,023

Cash and cash equivalents, end of period
$
154,585

 
$
150,807

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

6

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


1.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Charles River Laboratories International, Inc. (the Company) in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year 2015. The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.
The Company’s fiscal year is typically based on a 52-week year, with each quarter composed of 13 weeks. A 53-week year will occur during the fiscal year 2016, with an additional week included in the fourth quarter.
Segment Reporting
The Company reports its results in three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing).
During the three months ended June 25, 2016, the Company acquired WRH, Inc. (WIL Research), a provider of safety assessment and contract development and manufacturing (CDMO) services. WIL Research’s safety assessment business is reported in the Company’s DSA reportable segment and its CDMO business created a new operating segment, Contract Manufacturing, that is reported as part of the Company’s Manufacturing reportable segment. In addition, a change in the Company’s market strategy for certain services and resulting information provided to the Chief Operating Decision Maker, totaling $1.4 million of revenue and $0.2 million of operating income for the six months ended June 27, 2015, were reclassified from the Company’s RMS reportable segment to its Manufacturing reportable segment. The Company reported segment results on this basis for all periods presented.
The revised reportable segments are as follows:
Research Models and Services
Discovery and Safety Assessment
Manufacturing Support
Research Models
Discovery Services
Microbial Solutions
Research Model Services
Safety Assessment
Avian
 
 
Biologics
 
 
Contract Manufacturing
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, redeemable noncontrolling interest, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Consolidation
The Company’s 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.
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 the fiscal year 2015.
Newly Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after

7

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


December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the full impact this standard will have on its consolidated financial statements and related disclosures but expects to recognize substantially all of its leases on the balance sheet, by recording a right-to-use asset and a corresponding lease liability.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” that simplifies the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method and is evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.
2. BUSINESS ACQUISITIONS
Blue Stream Laboratories
On June 27, 2016, the Company acquired Blue Stream Laboratories, Inc. (Blue Stream), an analytical contract research organization (CRO) supporting the development of complex biologics and biosimilars. Combining Blue Stream with the Company’s existing discovery, safety assessment, and biologics capabilities creates a leading provider with the ability to support biologic and biosimilar development from characterization through clinical testing and commercialization. The preliminary purchase price for Blue Stream was approximately $9.2 million in cash, and up to an additional amount of $3.0 million in contingent consideration, and is subject to certain customary adjustments. Due to the limited time between the acquisition date and the filing of this Quarterly Report on Form 10-Q, it is not practicable for the Company to disclose the preliminary allocation of purchase price to assets acquired and liabilities assumed.
WIL Research
On April 4, 2016, the Company acquired WIL Research, a provider of safety assessment and CDMO services to biopharmaceutical and agricultural and industrial chemical companies worldwide. The acquisition enhanced the Company’s position as a leading global early-stage CRO by strengthening its ability to partner with global clients across the drug discovery and development continuum. The purchase price for WIL Research was approximately $604.8 million, including assumed liabilities of $0.4 million. The purchase price includes payment for estimated working capital, which was subject to final adjustment based on the actual working capital of the acquired business. The acquisition was funded by cash on hand and borrowings on the Company’s amended credit facility. See Note 7, “Long-Term Debt and Capital Lease Obligations.” WIL Research’s safety assessment and CDMO businesses are reported in the Company’s DSA and Manufacturing reportable segments, respectively.

8

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


The purchase price allocation of $577.4 million, net of $27.4 million of cash acquired, was as follows (in thousands):
 
April 4, 2016
 
(in thousands)
Trade receivables (contractual amount of $48,625)
$
48,157

Inventories
2,296

Other current assets (excluding cash)
4,021

Property, plant and equipment
129,066

Other long term assets
218

Definite-lived intangible assets
167,400

Goodwill
328,778

Deferred revenue
(39,103
)
Other current liabilities
(27,828
)
Long-term liabilities
(35,614
)
Total purchase price allocation
$
577,391

The purchase price allocations were prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The breakout of definite-lived intangible assets acquired was as follows:
 
Definite-Lived Intangible Assets
 
Weighted Average Amortization Life
 
(in thousands)
 
(in years)
Client relationships
$
141,400

 
15
Developed technology
20,700

 
3
Backlog
5,300

 
1
Total definite-lived intangible assets
$
167,400

 
 
The goodwill resulting from the transaction, $19.0 million of which is deductible for tax purposes due to a prior asset acquisition, is primarily attributed to the potential growth of the Company’s DSA and Manufacturing businesses from clients introduced through WIL Research, the assembled workforce of the acquired business and expected cost synergies.
The Company incurred transaction and integration costs in connection with the acquisition of $8.4 million and $12.4 million for the three and six months ended June 25, 2016, respectively, which were included in selling, general and administrative expenses.
WIL Research revenue and operating income for both the three and six months ended June 25, 2016 were $55.2 million and $1.0 million, respectively, since WIL Research was acquired on April 4, 2016.
The following selected pro forma consolidated results of operations are presented as if the WIL Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments. For the six months ended June 25, 2016, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $2.7 million, reversal of interest expense on borrowings of $2.6 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For the six months ended June 27, 2015, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $3.4 million, reversal of interest expense on borrowings of $5.5 million, inclusion of acquisition-related transaction costs of $8.4 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.

9

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


 
Three Months Ended
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
 
(in thousands)
Revenue
$
434,917

 
$
390,887

 
$
849,455

 
$
763,723

Net income attributable to common shareholders
44,159

 
51,164

 
89,222

 
77,813

Earnings per common share
 
 
 
 
 
 
 
Basic
0.94

 
1.10

 
1.90

 
1.67

Diluted
0.92

 
1.08

 
1.87

 
1.63

These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future. No effect has been given for synergies, if any, that may have been realized through the acquisition.
Oncotest
On November 18, 2015, the Company acquired Oncotest GmbH (Oncotest), a German CRO providing discovery services for oncology, one of the largest therapeutic areas for biopharmaceutical research and development spending. With this acquisition, the Company expanded its oncology services capabilities, enabling it to provide clients with access to a more comprehensive portfolio of technologies, including patient-derived xenograft (PDX) and syngeneic models.  The purchase price for Oncotest was approximately $36.0 million, including $0.3 million in contingent consideration. The acquisition was funded by borrowings on the Company's revolving credit facility. The business is reported in the Company’s DSA reportable segment.
The contingent consideration is a one-time payment that could become payable based on the achievement of a revenue target for the fiscal year 2016. If achieved, the payment will become due in the first quarter of the fiscal year 2017. The aggregate, undiscounted amount of contingent consideration that the Company may pay is €2.0 million ($2.2 million as of June 25, 2016). The Company estimated the fair value of this contingent consideration based on a probability-weighted set of outcomes.
The purchase price allocation of $35.4 million, net of $0.6 million of cash acquired, was as follows:
 
November 18, 2015
 
(in thousands)
Trade receivables (contractual amount of $3,546)
$
3,520

Inventories
129

Other current assets (excluding cash)
706

Property, plant and equipment
2,528

Definite-lived intangible assets
13,330

Goodwill
22,894

Other long-term assets
250

Current liabilities
(3,456
)
Long-term liabilities
(4,470
)
Total purchase price allocation
$
35,431

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

10

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


The breakout of definite-lived intangible assets acquired was as follows:
 
Definite-Lived Intangible Assets
 
Weighted Average Amortization Life
 
(in thousands)
 
(in years)
Client relationships
$
7,146

 
19
Developed technology
5,960

 
19
Other intangible assets
224

 
3
Total definite-lived intangible assets
$
13,330

 
 
The goodwill resulting from the transaction is primarily attributed to the potential growth in the Company's DSA businesses from customers and technology introduced through Oncotest, the assembled workforce of the acquired business and expected cost synergies. The goodwill attributable to Oncotest is not deductible for tax purposes.
The Company incurred insignificant transaction and integration costs in connection with the acquisition for the three and six months ended June 25, 2016 and June 27, 2015, which were included in selling, general and administrative expenses.
Celsis
On July 24, 2015, the Company acquired Celsis Group Limited (Celsis), a leading provider of rapid testing systems for non-sterile bacterial contamination for the biopharmaceutical and consumer products industries. The purpose of this acquisition was to enhance the Company’s portfolio of rapid microbial detection products and services with the addition of a rapid bioburden testing product. The purchase price for Celsis was $214.5 million, including assumed debt and certain liabilities of $10.3 million. The acquisition was funded by cash on hand and borrowings on the Company’s revolving credit facility. The business is reported in the Company’s Manufacturing reportable segment.
The purchase price allocation of $212.2 million, net of $2.3 million of cash acquired, was as follows:
 
July 24, 2015
 
(in thousands)
Trade receivables (contractual amount of $5,410)
$
5,288

Inventories
10,103

Other current assets (excluding cash)
13,269

Property, plant and equipment
4,639

Definite-lived intangible assets
118,140

Goodwill
105,550

Other long-term assets
537

Short-term debt
(9,766
)
Other current liabilities
(7,136
)
Long-term liabilities
(28,388
)
Total purchase price allocation
$
212,236


The breakout of definite-lived intangible assets acquired was as follows:
 
Definite-Lived Intangible Assets
 
Weighted Average Amortization Life
 
(in thousands)
 
(in years)
Client relationships
$
71,000

 
16
Developed technology
39,140

 
14
Trademark and trade names
5,200

 
14
Non-compete
2,800

 
5
Total definite-lived intangible assets
$
118,140

 
 
The goodwill resulting from the transaction is primarily attributed to the potential growth of the Company’s Manufacturing business from clients introduced through Celsis, the assembled workforce of the acquired business and expected cost synergies. The goodwill attributable to Celsis is not deductible for tax purposes.

11

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


The Company incurred transaction and integration costs in connection with the acquisition of $0.6 million and $0.9 million for the three and six months ended June 25, 2016, respectively, and of $3.5 million for both the three and six months ended June 27, 2015, which were included in selling, general and administrative expenses.
Sunrise
On May 5, 2015, the Company acquired Sunrise Farms, Inc. (Sunrise), a producer of specific-pathogen-free fertile chicken eggs and chickens used in the manufacture of live viruses. The purpose of this business acquisition was to expand the capabilities of the Company’s existing Avian Vaccine Services business. The purchase price of the acquisition was $9.6 million and was funded by cash on hand and borrowings on the Company's revolving credit facility. The business is reported in the Company's Manufacturing reportable segment.
The Company recorded a bargain purchase gain of $9.8 million, which represents the excess of the estimated fair value of the net assets acquired over the preliminary purchase price. The bargain purchase gain was recorded in other income (expense), net, in the Company’s consolidated statement of income and was not recognized for tax purposes. The Company believes there were several factors that contributed to this transaction resulting in a bargain purchase gain, including the highly specialized nature of Sunrise’s business falling outside of the seller’s core activities and a limited pool of potential buyers.
Before recognizing the gain from the bargain purchase, the Company reassessed its initial identification and valuation of assets acquired and liabilities assumed to validate that all assets and liabilities that the Company was able to identify at the acquisition date were properly recognized.
The purchase price allocation of $9.6 million, net of less than $0.1 million of cash acquired, was as follows:
 
May 5, 2015
 
(in thousands)
Trade receivables (contractual amount of $995)
$
965

Inventories
1,518

Other current assets (excluding cash)
973

Property, plant and equipment
13,698

Definite-lived intangible assets
3,400

Current liabilities
(925
)
Long-term liabilities
(250
)
Fair value of net assets acquired
19,379

Bargain purchase gain
(9,821
)
Total purchase price allocation
$
9,558

The identifiable definite-lived intangible assets acquired represent the client relationships intangible, which is being amortized over the estimated useful life of approximately 15 years.
The Company incurred insignificant transaction and integration costs in connection with the acquisition for the three and six months ended June 25, 2016 and June 27, 2015, which were included in selling, general and administrative expenses.
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of trade receivables, net is as follows:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Client receivables
$
270,334

 
$
230,010

Unbilled revenue
77,505

 
45,996

Total
347,839

 
276,006

Less: Allowance for doubtful accounts
(2,300
)
 
(5,938
)
Trade receivables, net
$
345,539

 
$
270,068


12

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


The composition of inventories is as follows:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Raw materials and supplies
$
17,616

 
$
15,998

Work in process
13,331

 
12,101

Finished products
67,169

 
65,636

Inventories
$
98,116

 
$
93,735

The composition of other current assets is as follows:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Investments
$
25,046

 
$
20,516

Prepaid income taxes
40,854

 
26,350

Restricted cash
561

 
271

Other
148

 
149

Other current assets
$
66,609

 
$
47,286

The composition of other assets is as follows:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Life insurance policies
$
27,604

 
$
27,554

Venture capital investments
45,920

 
32,730

Restricted cash
1,763

 
1,745

Other
9,400

 
9,614

Other assets
$
84,687

 
$
71,643

The composition of other current liabilities is as follows:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Accrued income taxes
$
22,595

 
$
12,168

Accrued interest and other
1,276

 
376

Other current liabilities
$
23,871

 
$
12,544

The composition of other long-term liabilities is as follows:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Long-term pension liability
$
34,461

 
$
34,604

Accrued executive supplemental life insurance retirement plan and deferred compensation plan
30,906

 
30,188

Other
30,852

 
24,270

Other long-term liabilities
$
96,219

 
$
89,062

4. VENTURE CAPITAL INVESTMENTS AND MARKETABLE SECURITIES
Venture Capital Investments
The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from 2.7% to 12.0%. The Company accounts for the investments in limited liability partnerships (LLP), which are variable interest entities, under the equity or cost method of accounting. The

13

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


Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LLP’s economic performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.
The Company’s total commitments to the entities as of June 25, 2016 were $80.6 million, of which the Company funded $34.0 million through June 25, 2016. During the three and six months ended June 25, 2016, the Company received no dividends from the entities. During the three and six months ended June 27, 2015, the Company received dividends totaling $2.1 million. The Company recognized a gain of $5.0 million and a loss of $0.9 million related to these investments for the three months ended June 25, 2016 and June 27, 2015, respectively.
Marketable Securities
The following is a summary of the Company's marketable securities, all of which are classified as available-for-sale:
 
June 25, 2016
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(in thousands)
Mutual fund
$
4,650

 
$

 
$
(23
)
 
$
4,627

Total
$
4,650

 
$

 
$
(23
)
 
$
4,627

 
December 26, 2015
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(in thousands)
Mutual fund
$
4,650

 
$

 
$
(141
)
 
$
4,509

Total
$
4,650

 
$

 
$
(141
)
 
$
4,509

There were no sales of available-for-sale securities during the six months ended June 25, 2016 or June 27, 2015.
5. FAIR VALUE
The Company has certain assets, liabilities and redeemable noncontrolling interest recorded at fair value, which have been classified as Level 1, 2, or 3 within the fair value hierarchy:
Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves and foreign currency spot rates.
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The fair value hierarchy level is determined by asset, liability and redeemable noncontrolling interest class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the six months ended June 25, 2016 and June 27, 2015, there were no transfers between levels.
Valuation methodologies used for assets, liabilities and the redeemable noncontrolling interest measured or disclosed at fair value are as follows:
Cash equivalents - Valued at market prices determined through third-party pricing services.
Mutual funds - Valued at the unadjusted quoted net asset value of shares held by the Company.
Foreign currency forward contracts - Valued using market observable inputs, such as forward foreign exchange points and foreign exchanges rates.
Life insurance policies - Valued at cash surrender value based on the fair value of underlying investments.
Contingent consideration - Valued based on a probability weighting of the future cash flows associated with the potential outcomes.

14

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


Redeemable noncontrolling interest - Valued using the income approach based on estimated future cash flows of the underlying business discounted by a weighted average cost of capital.
Assets, liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis are summarized below:
 
June 25, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
$

 
$
5,962

 
$

 
$
5,962

Other current assets:
 
 
 
 
 
 
 
Mutual funds
4,627

 

 

 
4,627

Other assets:
 
 
 
 
 
 
 
Life insurance policies

 
20,321

 

 
20,321

Total assets measured at fair value
$
4,627

 
$
26,283

 
$

 
$
30,910

 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
1,309

 
$
1,309

Redeemable noncontrolling interest

 

 
25,824

 
25,824

Total liabilities and redeemable noncontrolling interest measured at fair value
$

 
$

 
$
27,133

 
$
27,133

 
December 26, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
$

 
$
190

 
$

 
$
190

Other current assets:
 
 
 
 
 
 
 
Mutual funds
4,509

 

 

 
4,509

Foreign currency forward contracts

 
15

 

 
15

Other assets:
 
 
 
 
 
 
 
Life insurance policies

 
20,364

 

 
20,364

Total assets measured at fair value
$
4,509

 
$
20,569

 
$

 
$
25,078

 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
1,172

 
$
1,172

Other long-term liabilities:
 
 
 
 
 
 
 
Contingent consideration

 

 
198

 
198

Redeemable noncontrolling interest

 

 
28,008

 
28,008

Total liabilities and redeemable noncontrolling interest measured at fair value
$

 
$

 
$
29,378

 
$
29,378

Redeemable Noncontrolling Interest
The Company’s redeemable noncontrolling interest resulted from the acquisition of a 75% ownership interest in Vital River in January 2013. Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling interest holders that provides the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 25% of the entity for cash at its then appraised value beginning in January 2016. These rights are accelerated if certain conditions are met. As the noncontrolling interest holders can require the Company to purchase the remaining 25% interest, the noncontrolling interest is classified in the mezzanine section of the condensed consolidated balance sheet, which is above the equity section and below liabilities.


15

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


The following table provides a rollforward of the fair value of the Company’s redeemable noncontrolling interest related to the acquisition of Vital River.
 
Six Months Ended

June 25, 2016
 
June 27, 2015
 
(in thousands)
Beginning balance
$
28,008

 
$
28,419

Additions

 

Total gains or losses (realized/unrealized):
 
 
 
Net income attributable to noncontrolling interest
320

 
364

Foreign currency translation
(653
)
 
112

Change in fair value, included in additional paid-in capital
(1,851
)
 
1,081

Ending balance
$
25,824

 
$
29,976

As of June 25, 2016, the significant unobservable inputs used in the fair value measurement of the Company’s redeemable noncontrolling interest are the estimated future cash flows based on projected financial data and a discount rate of 18.0%. Significant changes in the timing or amounts of the estimated future cash flows would result in a significantly higher or lower fair value measurement. Significant increases or decreases in the discount rate would result in a significantly lower or higher fair value measurement, respectively. A 1% increase in the discount rate used would result in a $1.6 million decrease in the fair value of the redeemable noncontrolling interest.
On July 7, 2016, the Company purchased an additional 12% equity interest in Vital River for $10.8 million, resulting in total ownership of 87%. Concurrent with the transaction, the original agreement was amended providing the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 13% equity interest at a contractually defined redemption value. These rights are exercisable beginning in 2019 and are accelerated in certain events.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to the business acquisitions.
 
Six Months Ended

June 25, 2016
 
June 27, 2015
 
(in thousands)
Beginning balance
$
1,370

 
$
2,828

Additions
600

 
675

Payments
(674
)
 

Total gains or losses (realized/unrealized):
 
 
 
Reversal of previously recorded contingent liability and change in fair value
13

 
(672
)
Ending balance
$
1,309

 
$
2,831

The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement of certain financial targets and a discount rate. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in the discount rate would result in a significantly lower or higher fair value measurement, respectively.
Debt Instruments
The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2.

16

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


6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill:
 
 
 
Adjustments to Goodwill
 
 
 
December 26, 2015
 
Acquisitions
 
Transfers
 
Foreign Exchange
 
June 25, 2016
 
(in thousands)
RMS
$
58,167

 
$

 
$
(342
)
 
$
(409
)
 
$
57,416

DSA
247,050

 
270,272

 

 
(7,283
)
 
510,039

Manufacturing
133,612

 
58,676

 
342

 
(5,160
)
 
187,470

Total
$
438,829

 
$
328,948

 
$


$
(12,852
)
 
$
754,925

During the three months ended June 25, 2016, the Company revised the composition of its reportable segments to align with the view of the business following its acquisition of WIL Research. See Note 1, "Basis of Presentation." As a result of this reorganization, goodwill was allocated from the Company's RMS reportable segment to its Manufacturing reportable segment, as shown in the preceding table within "transfers." The allocation was based on the fair value of each business group within its original reporting unit relative to the fair value of that reporting unit. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.
Intangibles Assets, Net
The following table displays intangible assets, net by major class:
 
June 25, 2016
 
December 26, 2015
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
(in thousands)
Backlog
$
7,050

 
$
(2,886
)
 
$
4,164

 
$
50,568

 
$
(50,554
)
 
$
14

Technology
75,765

 
(9,190
)
 
66,575

 
60,350

 
(5,911
)
 
54,439

Trademarks and trade names
8,709

 
(3,935
)
 
4,774

 
11,495

 
(5,944
)
 
5,551

Other
11,534

 
(4,752
)
 
6,782

 
14,711

 
(7,285
)
 
7,426

Other intangible assets
103,058

 
(20,763
)
 
82,295

 
137,124

 
(69,694
)
 
67,430

Client relationships
528,814

 
(195,913
)
 
332,901

 
396,537

 
(183,163
)
 
213,374

Intangible assets
$
631,872

 
$
(216,676
)
 
$
415,196

 
$
533,661

 
$
(252,857
)
 
$
280,804

During the three months ended March 26, 2016, the Company determined that the carrying values of certain DSA intangible assets were not recoverable and recorded an impairment charge of $1.9 million, which was included in costs of services provided (excluding amortization of intangible assets).
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt, net consists of the following:
 
June 25, 2016
 
December 26, 2015
 
(in thousands)
Term loans
$
650,000

 
$
390,000

Revolving credit facility
692,877

 
446,041

Other long-term debt
195

 
193

Total debt
1,343,072

 
836,234

Less: current portion of long-term debt
(32,695
)
 
(15,193
)
Long-term debt
1,310,377

 
821,041

Debt discount and debt issuance costs
(8,173
)
 
(6,805
)
Long-term debt, net
$
1,302,204

 
$
814,236


17

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


In April 2015, the Company amended and restated the $970M Credit Facility, creating a $1.3 billion facility ($1.3B Credit Facility) that provides for a $400.0 million term loan and a $900.0 million multi-currency revolving facility. The interest rates applicable to term loans and revolving loans under the Company’s $1.3B Credit Facility were, at the Company’s option, equal to either the alternate base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.5% or (3) the one-month adjusted LIBOR rate plus 1%), or the adjusted LIBOR rate plus an interest rate margin based upon the Company’s leverage ratio.
On March 30, 2016, the Company amended and restated its $1.3B credit facility creating a $1.65 billion credit facility ($1.65B Credit Facility) which (1) extends the maturity date for the credit facility and (2) makes certain other amendments in connection with the Company’s acquisition of WIL Research. The amendment was accounted for as a debt modification with a partial extinguishment of debt. In connection with the transaction, the Company capitalized approximately $3.3 million and expensed approximately $1.4 million of debt issuance costs.
The $1.65B Credit Facility provides for a $650.0 million term loan and a $1.0 billion multi-currency revolving facility. The term loan facility matures in 19 quarterly installments with the last installment due March 30, 2021. The revolving facility matures on March 30, 2021, and requires no scheduled payment before that date. Under specified circumstances, the Company has the ability to increase the term loan and/or revolving line of credit by up to $500 million in the aggregate.
The interest rates applicable to term loan and revolving loans under the $1.65B Credit Facility are, at the Company’s option, equal to either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate plus an interest rate margin based upon the Company’s leverage ratio. As of June 25, 2016 and December 26, 2015, the weighted average interest rate on the Company’s debt was 1.86% and 1.33%, respectively.
The $1.65B Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants. These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than 4.25 to 1.0 with step downs to 3.50 to 1.0 by the last day of the fourth fiscal quarter of 2017 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than 3.50 to 1.0. As of June 25, 2016, the Company was compliant with all covenants.
The obligations of the Company under the $1.65B Credit Facility are collateralized by substantially all of the assets of the Company.
Letters of Credit
As of June 25, 2016 and December 26, 2015, the Company had $5.1 million and $4.9 million in outstanding letters of credit, respectively.
Capital Lease Obligations
The Company’s capital lease obligations amounted to $30.1 million and $33.6 million as of June 25, 2016 and December 26, 2015, respectively.

18

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


8. EQUITY
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, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
 
(in thousands)
Numerator:
 
 
 
 
 
 
 
Income from continuing operations, net of income taxes
$
35,545

 
$
49,252

 
$
73,120

 
$
80,873

Income (loss) from discontinued operations, net of income taxes
12

 
(7
)
 
(14
)
 
(14
)
Less: Net income attributable to noncontrolling interests
350

 
736

 
756

 
809

Net income attributable to common shareholders
$
35,207

 
$
48,509

 
$
72,350

 
$
80,050

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - Basic
47,061

 
46,675

 
46,852

 
46,712

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, restricted stock units, performance share units and restricted stock
858

 
875

 
939

 
1,006

Weighted-average shares outstanding - Diluted
47,919

 
47,550

 
47,791

 
47,718

Options to purchase approximately 0.8 million and 0.5 million shares for the three months ended June 25, 2016 and June 27, 2015, respectively, as well as an insignificant number of restricted stock, restricted stock units (RSUs) and performance share units (PSUs) were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase approximately 0.9 million and 0.5 million shares for the six months ended June 25, 2016 and June 27, 2015, respectively, as well as an insignificant number of restricted stock, RSUs and PSUs were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted average shares outstanding for both the six months ended June 25, 2016 and June 27, 2015 excluded the impact of approximately 1.1 million shares.
Treasury Shares
During the six months ended June 25, 2016, the Company did not repurchase any shares under its authorized stock repurchase program. The Company repurchased approximately 1.2 million shares for $90.8 million in the six months ended June 27, 2015. As of June 25, 2016, the Company had $69.7 million remaining on the authorized stock repurchase program. The Company’s stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, RSUs and PSUs in order to satisfy individual minimum statutory tax withholding requirements. During the six months ended June 25, 2016 and June 27, 2015, the Company acquired approximately 0.2 million shares for $12.2 million and approximately 0.1 million shares for $8.7 million, respectively.
Accumulated Other Comprehensive Income
Changes to each component of accumulated other comprehensive income, net of income taxes, are as follows:
 
Foreign Currency Translation Adjustment
and Other
 
Pension and Other Post-Retirement Benefit Plans
 
Total
 
(in thousands)
December 26, 2015
$
(82,977
)
 
$
(52,571
)
 
$
(135,548
)
Other comprehensive loss before reclassifications
(15,145
)
 

 
(15,145
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
785

 
785

Net current period other comprehensive income
(15,145
)
 
785

 
(14,360
)
Income tax expense

 
284

 
284

June 25, 2016
$
(98,122
)
 
$
(52,070
)
 
$
(150,192
)

19

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


Foreign currency translation and other includes an insignificant amount of unrealized gains (losses) on available-for-sale marketable securities.
Nonredeemable Noncontrolling Interests
The Company has investments in several entities, whose financial results are consolidated in the Company’s financial statements, as it has a controlling financial interest in these entities. The interests of the respective noncontrolling parties in these entities have been recorded as noncontrolling interests. The activity within the nonredeemable noncontrolling interests was insignificant during the three and six months ended June 25, 2016 and June 27, 2015.
9. INCOME TAXES
The Company’s effective tax rate for the three months ended June 25, 2016 and June 27, 2015 was 34.6% and 18.4%, respectively. The Company’s effective tax rate was 31.0% and 12.4% for each of the six months ended June 25, 2016 and June 27, 2015, respectively. For the three months ended June 25, 2016, the increase was primarily attributable to nondeductible transaction costs associated with the acquisition of WIL Research, the accrual of withholding taxes in order to access cash from the Company’s Canadian and Chinese operations for use outside of the U.S., and a prior year non-taxable bargain purchase gain of $9.9 million associated with the acquisition of Sunrise. For the six months ended June 25, 2016, the increase reflects the items above as well as a prior year reduction in unrecognized tax benefits and related interest of $10.4 million due to the expiration of the statute of limitations associated with pre-acquisition tax positions on forgiveness of debt.
During the three months ended June 25, 2016, the Company’s unrecognized tax benefits increased by $1.9 million to $25.3 million, primarily due to pre-acquisition tax positions taken by WIL Research, as well as an additional quarter of Canadian Scientific Research and Experimental Development credit reserves offset by positive foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate increased by $2.1 million to $22.2 million. The amount of accrued interest on unrecognized tax benefits was $1.4 million at June 25, 2016. The Company estimates that it is reasonably possible that the unrecognized tax benefits will decrease by up to $3.0 million over the next twelve-month period, primarily as a result of the outcome of a pending tax ruling and competent authority ruling.
The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits in jurisdictions including the U.S., U.K., China, Japan, France, Germany and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2012.
The Company and certain of its subsidiaries have ongoing tax controversies with various tax authorities in the U.S., Canada, China and France. The Company does not believe that resolution of these controversies will have a material impact on its financial position or results of operations.
In accordance with the Company’s policy, the remaining undistributed earnings of its non-U.S. subsidiaries remain indefinitely reinvested as of the end of the three months ended June 25, 2016 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.
Income tax expense related to change in unrecognized pension gains, losses and prior service costs was $0.1 million and $0.3 million for the three months ended June 25, 2016 and June 27, 2015, respectively. Income tax expense related to change in unrecognized pension gains, losses, and prior service costs was $0.3 million and $0.5 million for the six months ended June 25, 2016 and June 27, 2015, respectively.
10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The following table provides the components of net periodic cost (benefit) for the Company’s pension plans for the three months ended June 25, 2016 and June 27, 2015:
 
Pension Plans
 
June 25, 2016
 
June 27, 2015
 
(in thousands)
Service cost
$
639


$
1,150

Interest cost
3,220


3,336

Expected return on plan assets
(3,998
)

(4,382
)
Amortization of prior service credit
(144
)

(150
)
Amortization of net loss
545


911

Net periodic cost
$
262

 
$
865


20

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


The following table provides the components of net periodic cost (benefit) for the Company’s pension plans for the six months ended June 25, 2016 and June 27, 2015:
 
Pension Plans
 
June 25, 2016
 
June 27, 2015
 
(in thousands)
Service cost
$
1,193

 
$
2,299

Interest cost
6,584

 
6,671

Expected return on plan assets
(7,990
)
 
(8,764
)
Amortization of prior service credit
(288
)
 
(301
)
Amortization of net loss
1,091

 
1,791

Net periodic cost
$
590

 
$
1,696

The net periodic cost for the Company’s other post-retirement benefit plan for the three and six months ended June 25, 2016 and June 27, 2015 was insignificant.
11. STOCK-BASED COMPENSATION
The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock, RSUs and PSUs.
The following table provides stock-based compensation by the financial statement line item in which it is reflected:
 
Three Months Ended
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
 
(in thousands)
Cost of revenue
$
1,667

 
$
1,788

 
$
3,349

 
$
3,289

Selling, general and administrative
10,439

 
8,411

 
18,698

 
16,584

Stock-based compensation, before income taxes
12,106

 
10,199

 
22,047

 
19,873

Provision for income taxes
(4,354
)
 
(3,619
)
 
(7,868
)
 
(7,004
)
Stock-based compensation, net of income taxes
$
7,752

 
$
6,580

 
$
14,179

 
$
12,869

During the six months ended June 25, 2016, the Company issued approximately 0.6 million stock options with a per share weighted average grant date fair value of $15.09, approximately 0.2 million RSUs with a per share weighted average grant date fair value of $74.86 and approximately 0.2 million PSUs with a per share weighted average grant date fair value of $79.81. The maximum number of common shares to be issued upon vesting of PSUs granted during the six months ended June 25, 2016 is approximately 0.4 million.
12. FOREIGN CURRENCY CONTRACTS
The Company enters into foreign exchange forward contracts to limit its foreign currency exposure related to intercompany loans that are not of a long-term investment nature. These contracts are recorded at fair value in the Company’s condensed consolidated balance sheet and are not designated as hedging instruments. Any gains or losses on such contracts are immediately recognized in other income (expense), net, and are largely offset by the remeasurement of the underlying intercompany loan balances.
The notional amount and fair value of the Company’s foreign currency forward contracts at December 26, 2015 was as follows:
Notional Amount
 
Fair Value
 
Balance Sheet Location
(in thousands)
$
88,483

 
$
15

 
Other Current Assets
No foreign currency contracts were open at June 25, 2016.

21

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


The following table summarizes gains recognized on foreign exchange forward contracts related to intercompany loans denominated in Euros on the Company’s consolidated statement of income:
 
 
Three Months Ended
 
Six Months Ended
Location of Gain (Loss)
 
June 25, 2016
 
June 25, 2016
 
 
(in thousands)
Other income (expense), net
 
$
1,130

 
$
3,373

The Company had no such contracts during the six months ended June 27, 2015.
13. COMMITMENTS AND CONTINGENCIES
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.
In July 2015, IDEXX Laboratories, Inc. and IDEXX Distribution, Inc. (collectively, IDEXX) filed a complaint in the United States District Court for the District of Delaware alleging the Company has infringed three recently issued patents related to a blood spot sample collection method used in determining the presence or absence of an infectious disease in a population of rodents.  On September 21, 2015, the Company timely filed a motion to dismiss the complaint on the grounds that all of the claims are directed to unpatentable subject matter and therefore are invalid.  On October 7, 2015, IDEXX filed an amended complaint, which substantially asserts the same patents and infringement allegations as asserted in the original complaint, and on October 26, 2015, the Company timely filed a motion to dismiss this amended complaint.  The hearing on the motion to dismiss was held on January 12, 2016. On July 1, 2016, the Court issued an opinion denying the motion to dismiss. The Company filed its answer to the complaint on July 21, 2016. In addition, on July 29, 2016, the Company initiated an inter partes review (IPR) procedure with the United States Patent and Trademark Office challenging the validity of the IDEXX patents. While no prediction may be made as to the outcome of litigation or the IPR, the Company intends to defend against this proceeding vigorously and therefore an estimate of the possible loss or range of loss cannot be made.
In May 2013, the Company commenced an investigation into inaccurate billing with respect to certain government contracts. The Company promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services’ Office of the Inspector General, and the Department of Justice, and the Company is cooperating with these agencies to ensure the proper repayment and resolution of this matter. The Company has identified approximately $1.5 million of excess amounts billed on these contracts since January 1, 2007, and has recorded a liability for such amount as of June 25, 2016, as this represents the Company’s best estimate.  Because of the ongoing discussions with the government and the complex nature of this matter, the Company believes it is reasonably possible that additional losses may be incurred but cannot at this time make a reasonable estimate of the potential range of loss beyond such estimated liability.
Lease Commitments
During the six months ended June 25, 2016, the Company assumed or entered into new lease agreements or exercised options to extend the lease terms for certain existing leases. As a result, the Company’s lease obligations through June 25, 2016 increased by $17.6 million.
14. SEGMENT INFORMATION
The Company revised