UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO

 

Commission file number 333-92383

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its Charter)

 

251 BALLARDVALE STREET, WILMINGTON, MASSACHUSETTS 01887
(Address of Principal Executive Offices) (Zip Code)

978-658-6000
(Registrant’s Telephone Number, Including Area Code)

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 x   No o

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

Large Accelerated Filer x         Accelerated Filer o         Non-accelerated Filer o

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

As of May 1, 2007, there were 67,303,504 shares of the registrant’s common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2007
Table of Contents

				Page
Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2007 and April 1, 2006		3
		Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2007 and December 30, 2006		4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2007 and April 1, 2006		5
		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2007		6
		Notes to Unaudited Condensed Consolidated Interim Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28
	Item 4.	Controls and Procedures		28
Part II.	Other Information
	Item 1A	Risk Factors		29
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
	Item 6.	Exhibits		29

 

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. (Charles River) that are based on current expectations, estimates, forecasts, and projections about the industries in which Charles River operates 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 current expectations and beliefs of Charles River 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:  future demand for drug discovery and development products and services, including the outsourcing of these services; future actions by our management; the outcome of contingencies; changes in our business strategy; changes in our 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; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; the timing of the opening of new and expanded facilities; our expectations with respect to sales growth, efficiency improvements and operating synergies; changes in our expectations regarding future stock option, restricted stock and other equity grants to employees and directors; changes in our expectations regarding our stock repurchases; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our cash flow and liquidity. 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 30, 2006 under the section entitled “Risks Related to Our Business and Industry,” the section of this Quarterly Report on Form 10-Q entitled “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 OPERATIONS (UNAUDITED)
(dollars in thousands, except per share amounts)

		Three Months Ended
		March 31, 2007			April 1, 2006
Net sales related to products		$	105,477		$	95,315
Net sales related to services		185,722			158,826
Total net sales		291,199			254,141
Costs and expenses
Cost of products sold		56,134			50,824
Cost of services provided		119,492			107,812
Selling, general and administrative		53,017			42,734
Amortization of intangibles		7,855			9,075
Operating income		54,701			43,696
Other income (expense)
Interest income		2,287			778
Interest expense		(4,346		)	(3,794		)
Other, net		149			48
Income before income taxes and minority interests		52,791			40,728
Provision for income taxes		15,310			11,811
Income before minority interests		37,481			28,917
Minority interests		(254		)	(402		)
Income from continuing operations		37,227			28,515
(Loss) from discontinued businesses, net of tax		(464		)	(128,630		)
Net income (loss)		$	36,763		$	(100,115	)
Earnings (loss) per common share
Basic:
Continuing operations		$	0.56		$	0.40
Discontinued operations		$	(0.01	)	$	(1.80	)
Net income		$	0.55		$	(1.40	)
Diluted:
Continuing operations		$	0.55		$	0.39
Discontinued operations		$	(0.01	)	$	(1.76	)
Net income		$	0.54		$	(1.37	)

 

See Notes to Condensed Consolidated Interim Financial Statements

3

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)

		March 31, 2007			December 30 2006
Assets
Current assets
Cash and cash equivalents		$	136,537		$	175,380
Trade receivables, net		210,166			202,658
Inventories		75,681			72,362
Other current assets		54,186			44,363
Current assets of discontinued operations		5,669			6,330
Total current assets		482,239			501,093
Property, plant and equipment, net		566,145			534,745
Goodwill, net		1,119,389			1,119,309
Other intangibles, net		159,368			160,204
Deferred tax asset		98,599			107,498
Other assets		142,320			133,944
Long term assets of discontinued operations		334			751
Total assets		$	2,568,394		$	2,557,544
Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt and capital lease obligations		$	25,759		$	24,977
Accounts payable		37,256			28,223
Accrued compensation		29,992			41,651
Deferred revenue		88,526			93,197
Accrued liabilities		43,986			41,991
Other current liabilities		20,322			25,625
Current liabilities of discontinued operations		449			3,667
Total current liabilities		246,290			259,331
Long-term debt and capital lease obligations		527,555			547,084
Other long-term liabilities		149,911			146,695
Total liabilities		923,756			953,110
Commitments and contingencies
Minority interests		2,420			9,223
Shareholders’ equity
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 73,875,045 shares issued and 67,238,836 outstanding at March 31, 2007 and 73,416,303 issued and 66,919,634 shares outstanding at December 30, 2006		739			734
Capital in excess of par value		1,830,213			1,818,138
Accumulated earnings		59,886			23,123
Treasury stock, at cost, 6,636,209 and 6,496,669 shares and at March 31, 2007 and December 30, 2006, respectively		(274,249		)	(267,955		)
Accumulated other comprehensive income		25,629			21,171
Total shareholders’ equity		1,642,218			1,595,211
Total liabilities and shareholders’ equity		$	2,568,394		$	2,557,544

 

See Notes to Condensed Consolidated Interim Financial Statements

4

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

		Three Months Ended
		March 31, 2007			April 1, 2006
Cash flows relating to operating activities
Net income (loss)		$	36,763		$	(100,115	)
Less: Loss from discontinued operations		(464		)	(128,630		)
Income from continuing operations		37,227			28,515
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		19,913			19,659
Impairment charge		719			—
Amortization of debt issuance costs and discounts		690			356
Amortization of premiums on marketable securities		11			15
Provision for doubtful accounts		(164		)	(124		)
Minority interests		254			402
Deferred income taxes		(213		)	(1,766		)
Loss on disposal of property, plant, and equipment		105			47
Non-cash compensation		5,455			5,073
Net purchases, proceeds and gains on trading securities		(162		)	—
Changes in assets and liabilities:
Trade receivables		(6,220		)	181
Inventories		(3,044		)	(2,634		)
Other current assets		(2,954		)	(7,503		)
Other assets		(947		)	(610		)
Accounts payable		8,001			2,362
Accrued compensation		(11,808		)	(13,471		)
Deferred revenue		(4,672		)	(12,049		)
Accrued liabilities		1,290			(4,467		)
Other current liabilities		(5,458		)	(16,440		)
Other long-term liabilities		1,071			245
Net cash provided by (used in) operating activities		39,094			(2,209		)
Cash flows relating to investing activities
Acquisition of minority interest		(10,899		)	—
Capital expenditures		(37,924		)	(39,387		)
Purchases of marketable securities		(92,083		)	—
Proceeds from sales of property, plant and equipment		—			9
Proceeds from sale of marketable securities		84,746			13,606
Net cash used in investing activities		(56,160		)	(25,772		)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit agreement		—			27,900
Payments on long-term debt, capital lease obligation and revolving credit agreement		(18,914		)	(17,165		)
Proceeds from exercises of employee stock options		4,939			15,250
Excess tax benefit from exercises of employee stock options		1,824			1,833
Dividends paid to minority interests		(1,357		)	(1,916		)
Purchase of treasury stock		(6,294		)	(13,766		)
Payment of deferred financing costs		—			(94		)
Net cash provided by (used in) financing activities		(19,802		)	12,042
Discontinued operations
Net cash (used in) provided by operating activities		(2,605		)	2,535
Net cash used in investing activities		—			(253		)
Net cash used in financing activities		—			(48		)
Net cash (used in) provided by discontinued operations		(2,605		)	2,234
Effect of exchange rate changes on cash and cash equivalents		630			340
Net change in cash and cash equivalents		(38,843		)	(13,365		)
Cash and cash equivalents, beginning of period		175,380			114,821
Cash and cash equivalents, end of period		$	136,537		$	101,456

 

See Notes to Condensed Consolidated Interim Financial Statements

5

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(dollars in thousands)

		Total			Accumulated Earnings			Accumulated Other Comprehensive Income			Common  Stock			Capital in Excess of Par			Treasury Stock
Balance at December 30, 2006		$	1,595,211		$	23,123		$	21,171		$	734		$	1,818,138		$	(267,955	)
Components of comprehensive income, net of tax:
Net income		$	36,763		$	36,763		$	—		$	—		$	—		$	—
Foreign currency translation adjustment		4,212			—			4,212			—			—			—
Amortization of pension gains (losses) and prior service (cost) credits		242			—			242			—			—			—
Unrealized gain on marketable securities		4			—			4			—			—			—
Total comprehensive income		41,221			—			—			—			—			—
Tax benefit associated with stock issued under employee compensation plans		1,686			—			—			—			1,686			—
Issuance of stock under employee compensation plans		4,939			—			—			5			4,934			—
Acquisition of treasury shares		(6,294		)	—			—			—			—			(6,294		)
Stock-based compensation		5,152			—			—			—			5,152			—
Performance based compensation		303			—			—			—			303			—
Balance at March 31, 2007		$	1,642,218		$	59,886		$	25,629		$	739		$	1,830,213		$	(274,249	)

 

See Notes to Condensed Consolidated Interim Financial Statements

6

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

1.             Basis of Presentation

The condensed consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) considered necessary to state fairly the financial position and results of operations of Charles River Laboratories International, Inc. (the “Company”). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

Certain amounts in prior-year financial statements and related notes have been reclassified to conform with the current year presentation.

2.             Discontinued Operations

During 2006, the Company sold Phase II-IV of its clinical services business.  Actions to initiate this sale began during the first quarter of fiscal 2006.  Accordingly, management performed appropriate goodwill impairment and asset impairment tests for the clinical business segment.  As a result, the Company recorded charges of $129,187 to write-down the value of the goodwill associated with the clinical business in the first quarter of 2006.  In addition, during 2006, the Company made a decision to close its Interventional and Surgical Services (ISS) business, which was formerly included in the Preclinical Services segment.

The consolidated financial statements have been reclassified to segregate, as discontinued operations, the assets and liabilities, operating results and cash flows, of the businesses being discontinued for all periods presented. Operating results from discontinued operations are as follows:

		Three Months Ended
		March 31, 2007			April 1, 2006
Net sales		$	372		$	29,628
Loss from operations of discontinued businesses, before income taxes		(679		)	(128,401		)
Provision for income taxes		(215		)	229
Loss from operations of discontinued businesses, net of taxes		$	(464	)	$	(128,630	)

 

Assets and liabilities of discontinued operations at March 31, 2007 and December 30, 2006 consisted of the following:

		March 31, 2007			December 30, 2006
Current assets		$	5,669		$	6,330
Long-term assets		334			751
Total assets		$	6,003		$	7,081
Current liabilities		$	449		$	3,667
Total liabilities		$	449		$	3,667

 

7

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Current assets included accounts receivable, prepaid income taxes, deferred income taxes and other current assets. Non-current assets included property, plant and equipment, goodwill and other intangible assets and deferred income taxes. Current liabilities consisted of accounts payable, deferred income and accrued expenses.

3.             Business Acquisitions

On January 4, 2007, the Company acquired the remaining 15% of the equity (319,199 common shares) of Charles River Laboratories Japan, Inc. from Ajinomoto Company, Inc., the minority interest partner. As of the effective date of this transaction, the Company owns 100% of Charles River Japan. The purchase price for the equity was 1.3 billion yen, or approximately $10,899, which was paid in cash.  The preliminary purchase price allocation is as follows:

Minority interest acquired		$	5,624
Property, plant and equipment		3,394
Deferred tax liability		(4,187		)
Intangible asset (customer relationships with 15 year estimated amortization life)		6,068
		$	10,899

 

On October 30, 2006, the Company acquired all of the capital stock of privately held Tacoma, Washington based Northwest Kinetics for $29,500 in cash. Northwest Kinetics runs clinical trials, primarily in Phase I, in a 150 bed facility with a focus on high end clinical pharmacology studies.

The preliminary purchase price allocation associated with the Northwest Kinetics acquisition, including transaction costs of $265 incurred by the Company and net of $812 of cash acquired, is as follows:

Current assets (excluding cash)		$	6,741
Property, plant and equipment		2,983
Non-current assets		100
Current liabilities		(6,378		)
Non-current liabilities		(7,493		)
Goodwill and other intangibles acquired		32,857
Total purchase price allocation		$	28,810

 

In conjunction with the purchase of Northwest Kinetics, the Company utilized $2,076 of available cash to prepay Northwest Kinetics’ existing debt.

The breakout of goodwill and other intangibles acquired with the Northwest Kinetics acquisition was as follows:

					Weighted average amortization life (years)
Customer relationships		$	13,700		12
Participant list		1,300			12
Non-compete covenants		200			5
Trademarks and trade names		40			1
Goodwill		17,617			—
Total goodwill and other intangibles		$	32,857

 

8

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The following selected unaudited pro forma consolidated results of operations are presented as if the above acquisitions had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments including the amortization of intangibles. The pro forma data is for informational purposes only and does not necessarily reflect the results of operations had the companies operated as one during the periods reported. No effect has been given for synergies, if any, that may have been realized through the acquisitions.

		Three Months Ended
		March 31, 2007			April 1, 2006
		(as reported)			(proforma)
Net sales		$	291,199		$	256,953
Operating income		54,701			42,748
Income from continuing operations		37,227			27,888
Earnings per common share for continuing operations
Basic		$	0.56		$	0.39
Diluted		$	0.55		$	0.38

 

Refer to Note 8 for further discussion of the method of computation of earnings per share.

4.             Supplemental Balance Sheet Information

The composition of trade receivables is as follows:

		March 31, 2007			December 30, 2006
Customer receivables		$	160,433		$	156,411
Unbilled revenue		52,674			49,356
Total		213,107			205,767
Less allowance for doubtful accounts		(2,941		)	(3,109		)
Net trade receivables		$	210,166		$	202,658

 

The composition of inventories is as follows:

		March 31, 2007			December 30, 2006
Raw materials and supplies		$	11,883		$	11,715
Work in process		7,244			6,107
Finished products		56,554			54,540
Inventories		$	75,681		$	72,362

 

The composition of other current assets is as follows:

		March 31, 2007			December 30, 2006
Prepaid assets		$	22,813		$	19,686
Deferred tax asset		15,925			10,176
Prepaid income tax		8,521			7,051
Marketable securities		6,927			7,450
Other current assets		$	54,186		$	44,363

 

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The composition of net property, plant and equipment is as follows:

		March 31, 2007			December 30, 2006
Land		$	16,307		$	16,173
Buildings		349,453			339,786
Machinery and equipment		286,062			280,126
Leasehold improvements		16,494			16,248
Furniture and fixtures		6,969			6,790
Vehicles		4,922			4,843
Construction in progress		214,770			186,105
Total		894,977			850,071
Less accumulated depreciation		(328,832		)	(315,326		)
Net property, plant and equipment		$	566,145		$	534,745

 

Depreciation expense for the three months ended March 31, 2007 and April 1, 2006 was $12,058 and $10,584, respectively.

The composition of other assets is as follows:

		March 31, 2007			December 30, 2006
Deferred financing costs		$	10,430		$	11,120
Cash surrender value of life insurance policies		14,470			14,360
Long-term marketable securities		112,015			103,922
Other assets		5,405			4,542
Other assets		$	142,320		$	133,944

 

The composition of other current liabilities is as follows:

		March 31, 2007			December 30, 2006
Accrued income taxes		$	15,698		$	23,048
Current deferred tax liability		2,148			2,149
Accrued interest		2,476			428
Other current liabilities		$	20,322		$	25,625

 

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

		March 31, 2007			December 30, 2006
Deferred tax liability		$	58,567		$	56,372
Long-term pension liability		47,972			49,553
Accrued Executive Supplemental Life Insurance Retirement Plan		30,272			29,262
Other long-term liabilities		13,100			11,508
Other long-term liabilities		$	149,911		$	146,695

 

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5.             Marketable Securities

The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:

		March 31, 2007
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Auction rate securities		$	105,012		$	—		$	—		$	105,012
Mutual funds		5,083			193			—			5,276
Government securities and obligations		4,868			50			(92		)	4,826
Corporate debt securities		3,851			11			(34		)	3,828
		$	118,814		$	254		$	(126	)	$	118,942

 

		December 30, 2006
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Auction rate securities		$	96,976		$	—		$	—		$	96,976
Mutual funds		5,069			101			(47		)	5,123
Government securities and obligations		5,958			54			(108		)	5,904
Corporate debt securities		3,392			2			(25		)	3,369
		$	111,395		$	157		$	(180	)	$	111,372

 

Maturities of corporate debt securities and government securities and obligations classified as available for sale were as follows:

		March 31, 2007						December 30, 2006
		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Due less than one year		$	6,742		$	6,927		$	7,416		$	7,450
Due after one year through five years		112,065			112,015			103,979			103,922
		$	118,807		$	118,942		$	111,395		$	111,372

 

Marketable securities due after one year are included in other assets on the consolidated balance sheets.

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6.             Goodwill and Other Intangible Assets

The following table displays goodwill and other intangible assets not subject to amortization and other intangible assets that continue to be subject to amortization:

		March 31, 2007						December 30, 2006
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Goodwill		$	1,132,167		$	(12,778	)	$	1,132,074		$	(12,765	)
Other intangible assets not subject to amortization:
Research models		3,438			—			3,438			—
Other intangible assets subject to amortization:
Backlog		55,176			(54,804		)	54,734			(54,718		)
Customer relationships		206,409			(55,537		)	197,302			(47,407		)
Customer contracts		1,655			(1,655		)	1,655			(1,655		)
Trademarks and trade names		3,040			(2,083		)	3,278			(2,012		)
Standard operating procedures		1,277			(1,301		)	1,357			(1,263		)
Other identifiable intangible assets		9,228			(5,475		)	10,599			(5,104		)
Total other intangible assets		$	280,223		$	(120,855	)	$	272,363		$	(112,159	)

 

The changes in the gross carrying amount and accumulated amortization of goodwill are as follows:

		Balance at December 30,			Adjustments to Goodwill						Balance at
		2006			Acquisitions			Other			March 31, 2007
Research Models and Services
Gross carrying amount		$	16,924		$	—		$	(72	)	$	16,852
Accumulated amortization		(4,837		)	—			(13		)	(4,850		)
Preclinical Services
Gross carrying amount		1,115,150			—			165			1,115,315
Accumulated amortization		(7,928		)	—			—			(7,928		)
Total
Gross carrying amount		$	1,132,074		$	—		$	93		$	1,132,167
Accumulated amortization		(12,765		)	—			(13		)	(12,778		)

 

7.                 Long-Term Debt

Long-Term Debt

On July 31, 2006, the Company amended and restated its then-existing $660,000 credit agreement to reduce the current interest rate, modify certain restrictive covenants and extend the term. The now $428,000 credit agreement provides for a $156,000 U.S. term loan facility, a $200,000 U.S. revolving facility, a C$57,800 term loan facility and a C$12,000 revolving facility for a Canadian subsidiary, and a GBP 6,000 revolving facility for a U.K. subsidiary. The $156,000 term loan facility matures in 20 quarterly installments with the last installment due June 30, 2011. The $200,000 U.S. revolving facility matures on July 31, 2011 and requires no scheduled payment before that date. Under specified circumstances, the $200,000 U.S. revolving facility may be increased by $100,000. The Canadian term loan is repayable in full by June 30, 2011 and requires no scheduled prepayment before that date. The Canadian and UK revolving facilities mature on July 31, 2011 and require no scheduled prepayment before that date. The interest rate applicable to the Canadian term loan and the Canadian and U.K. revolving loans under the credit agreement is the adjusted LIBOR rate in its relevant currency plus an interest rate margin based upon the Company’s leverage ratio. The interest rates applicable to term loans and revolving loans under the credit agreement are, at the Company’s

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option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) or the adjusted LIBOR rate plus an interest rate margin based upon the Company’s leverage ratio. Based on the Company’s leverage ratio, the margin range for LIBOR based loans is 0.625% to 0.875%. The interest rate margin was 0.75% as of March 31, 2007. The Company has pledged the stock of certain subsidiaries as well as certain U.S. assets as security for the $428,000 credit agreement. The $428,000 credit agreement includes certain customary representations and warranties, negative and affirmative covenants and events of default. The Company had $5,388 outstanding under letters of credit as of March 31, 2007 and December 30, 2006.

During the first quarter of 2007, the Company did not borrow under our revolving credit facility.  As of March 31, 2007, there was no outstanding balance on the revolving facility.

On July 27, 2005 the Company entered into a $50,000 credit agreement ($50,000 credit agreement), which was subsequently amended on December 20, 2005 and again on July 31, 2006 to reflect substantially the same modifications made to the covenants in the $660,000 and $428,000 credit agreements respectively. The $50,000 credit agreement provides for a $50,000 term loan facility which matures on July 27, 2007 and can be extended for an additional 7 years. The interest rates applicable to term loans under the credit agreement are, at the Company’s option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) or the LIBOR rate plus 0.75%. The $50,000 credit agreement includes certain customary representations and warranties, negative and affirmative covenants and events of default. If the Company chooses to extend the term loan for an additional 7 years, the applicable interest rates after the extension date are equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) plus 0.25% or the LIBOR rate plus 1.25%.

As of March 31, 2007, the entire balance of the $50,000 credit agreement was outstanding and classified as long-term as the Company has the ability and intent to refinance this loan.

On June 12, 2006, the Company issued $300,000 aggregate principal amount of convertible senior notes (the 2013 Notes) in a private placement with net proceeds to the Company of approximately $294,000. On June 20, 2006, the initial purchasers associated with this convertible debt offering exercised an option to purchase an additional $50,000 of the 2013 Notes for additional net proceeds to the Company of approximately $49,000. The 2013 Notes bear interest at 2.25% per annum, payable semi-annually, and mature on June 15, 2013. The 2013 Notes are convertible into cash and shares of the Company’s common stock (or, at the Company’s election, cash in lieu of some or all of such common stock), if any, based on an initial conversion rate, subject to adjustment, of 20.4337 shares of the Company’s common stock per $1,000 principal amount of notes (which represents an initial conversion price of $48.94 per share), only in the following circumstances and to the following extent: (i) during any fiscal quarter beginning after July 1, 2006 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the  immediately preceding fiscal quarter is more than 130% of the conversion price on the last day of such preceding fiscal quarter; (ii) during the five business-day period after any five consecutive trading-day period, or the measurement period, in which the trading price per note for each day of that measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 2013 Notes; and (iv) at the option of the holder at any time beginning on the date that is two months prior to the stated maturity date and ending on the close of business on the second trading-day immediately preceding the maturity date. Upon conversion, the Company will pay cash and shares of its common stock (or, at its election, cash in lieu of some or all of such common stock), if any. As of March 31, 2007, no conversion triggers were met. If the Company undergoes a fundamental change as described in the indenture for the 2013 Notes, holders will have the option to require the Company to purchase all or any portion of their notes for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the purchase date. The related debt issuance costs of $7,000 were deferred and are being amortized on a straight-line basis over a seven-year term.

Concurrently with the sale of the 2013 Notes, the Company entered into convertible note hedge transactions with respect to its obligation to deliver common stock under the notes. The convertible note hedges give the Company the

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right to receive, for no additional consideration, the number of shares of common stock that it is obligated to deliver upon conversion of the notes (subject to anti-dilution adjustments substantially identical to those in the 2013 Notes), and expire on June 15, 2013. The aggregate cost of these convertible note hedges was $98,293.

Separately and concurrently with the pricing of the 2013 Notes, the Company issued warrants for approximately 7.2 million shares of its common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at the option of the Company) with a value equal to the appreciation in the price of the Company’s shares above $59.925, and expire between September 13, 2013 and January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants was $65,423.

In accordance with Emerging Issues Task Force Issue (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”), SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the Company recorded both the purchase of the convertible note hedges and the sale of the warrants as adjustments to additional paid in capital, and will not recognize subsequent changes in fair value of the agreement. At March 31, 2007, the fair value of the outstanding 2013 Notes was approximately $394,844, based on their quoted market value.

8.             Shareholders’ Equity

Earnings (Loss) per Share

Basic earnings per share for the three months ended March 31, 2007 and April 1, 2006 was computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for the three months ended March 31, 2007 and April 1, 2006 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.

Options to purchase 2,835,244 shares and 1,394,921 shares were outstanding at March 31, 2007 and April 1, 2006, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.  In addition, as of March 31, 2007, no conversion triggers related to the Company’s $350,000 convertible senior notes were met.  Accordingly, the convertible senior notes are not included in the calculation of diluted earnings per share.

Basic weighted average shares outstanding for the three months ended March 31, 2007 and April 1, 2006 excluded the weighted average impact of 948,060 and 575,863 shares, respectively, of non-vested fixed restricted stock awards.

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The following table illustrates the reconciliation of the numerator and denominator in the computations of the basic and diluted earnings (loss) per share:

		Three Months Ended
		March 31, 2007			April 1, 2006
Numerator:
Income from continuing operations for purposes of calculating earnings per share		$	37,227		$	28,515
Loss from discontinued businesses		$	(464	)	$	(128,630	)
Denominator:
Weighted average shares outstanding—Basic		66,346,152			71,505,478
Effect of dilutive securities:
Stock options and contingently issued restricted stock		1,153,912			1,239,254
Warrants		132,716			145,505
Weighted average shares outstanding—Diluted		67,632,780			72,890,237
Basic earnings per share from continuing operations		$	0.56		$	0.40
Basic earnings (loss) per share from discontinued operations		$	(0.01	)	$	(1.80	)
Diluted earnings per share from continuing operations		$	0.55		$	0.39
Diluted earnings (loss) per share from discontinued operations		$	(0.01	)	$	(1.76	)

 

The sum of the earnings per share from continuing operations and the earnings (loss) per share from discontinued operations does not necessarily equal the earnings (loss) per share from net income in the condensed consolidated statements of operations due to rounding.

Treasury Shares

On July 27, 2005, the Board of Directors authorized a share repurchase program to acquire up to $50,000 of common stock. On October 26, 2005, the Board of Directors authorized increasing the share repurchase program by $50,000 to a total of $100,000. On May 9, 2006, the Board of Directors authorized an additional increase of the Company’s share repurchase program by $200,000 to acquire up to a total of $300,000 of common stock. The program does not have a fixed expiration date.  In order to facilitate these share repurchases, the Company entered into Rule 10b5-1 Purchase Plans.

As of March 31, 2007, approximately $31,102 remains authorized for share repurchases.

Share repurchases during the three months ended March 31, 2007 and April 1, 2006 were as follows:

		Three Months Ended
		March 31, 2007			April 1, 2006
Number of shares of common stock repurchased		95,200			246,900
Total cost of repurchase		$	4,210		$	11,429

 

Additionally, the Company’s 2000 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the quarters ended March 31, 2007 and April 1, 2006,  the Company acquired 44,340 shares for $2,084 and 47,701 shares for $2,337, respectively, as a result of such withholdings.

The timing and amount of any future repurchases will depend on market conditions and corporate considerations.

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Warrants

Separately and concurrently with the pricing of the 2013 Notes, the Company issued warrants for approximately 7.2 million shares of its common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at the option of the Company) with a value equal to the appreciation in the price of the Company’s shares above $59.925, and expire between September 13, 2013 and January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants was $65,423.

As part of the recapitalization of the Company in 1999, the Company issued 150,000 units, each comprised of a $1,000 senior subordinated note and a warrant to purchase 7.6 shares of common stock of the Company for total proceeds of $150,000. The Company allocated the $150,000 offering proceeds between the senior subordinated notes ($147,872) and the warrants ($2,128), based upon the estimated fair value. The portion of the proceeds allocated to the warrants is reflected as capital in excess of par in the accompanying consolidated financial statements. Each warrant entitles the holder, subject to certain conditions, to purchase 7.6 shares of common stock of the Company at an exercise price of $5.19 per share of common stock, subject to adjustment under some circumstances. Upon exercise, the holders of warrants would be entitled to purchase 149,910 shares of common stock of the Company as of March 31, 2007. The warrants expire on October 1, 2009.

9.             Income Taxes

The following table provides a reconciliation of the provision for income taxes on the condensed consolidated statement of income:

		Three Months Ended
		March 31, 2007			April 1, 2006
Income before income taxes and minority interest		$	52,791		$	40,728
Effective tax rate		29.0		%	29.0		%
Provision for income tax		$	15,310		$	11,811

 

The Company’s overall effective tax rate was 29.0% in the first quarter of 2007 and the first quarter of 2006.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”) on December 31, 2006. As a result of the implementation of FIN 48, the Company recognized no adjustment in the liability for unrecognized income tax benefits.  The total amount of unrecognized tax benefits as of the date of adoption was $17,514.  Included in this balance is $8,260 of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate.

The Company continues to recognize interest and penalties related to uncertain tax positions in income tax expense.  The total amount of accrued interest relating to uncertain tax positions as of December 31, 2006 and March 31, 2007 is approximately $617 and $897 respectively. The Company has not recorded a provision for penalties associated with uncertain tax positions.

The Company conducts business globally and, as a result, the Company and its subsidiaries file income tax returns in the U.S. and foreign jurisdictions.  In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including but not limited to such major jurisdictions as Canada, the United Kingdom and the United States. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2002.

The Company and certain of its subsidiaries are currently under audit by Canada Revenue Agency, the Internal Revenue Service in the United States and HM Revenue and Customs in the United Kingdom. On May 7, 2007, the Company received, in connection with the Internal Revenue Service (IRS) examinations of the 2004 tax returns of the Company and an acquired subsidiary, two Revenue Agent Reports (RARs). The Company is preparing its formal protest to certain adjustments included in the RARs and does not believe the ultimate settlement of these proposed adjustments will have a material impact to the financial statements. It is also likely that the examination phase of the Canadian and U.K. audits may conclude in 2007. The Company believes it has appropriately provided for all uncertain tax positions.

Due to the extensive protocol involved in finalizing audits with the relevant tax authorities, including potential formal legal proceedings, it is not possible to estimate the impact of any amount of change to previously recorded uncertain tax positions.

 

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10.          Employee Benefits

The following table provides the components of net periodic benefit cost for the Company’s defined benefit plans:

		Pension Benefits						Supplemental Retirement Benefits
		March 31,2007			April 1, 2006			March 31,2007			April 1, 2006
Service cost		$	1,530		$	1,635		$	220		$	290
Interest cost		2,836			2,449			396			317
Expected return on plan assets		(3,080		)	(2,423		)	—			—
Amortization of prior service cost		(132		)	(133		)	125			38
Amortization of net loss (gain)		108			190			143			230
Net periodic benefit cost		$	1,262		$	1,718		$	884		$	875

 

The Company contributed $2,203 and $1,914 to its pension plans during the three months ended March 31, 2007 and April 1, 2006, respectively.

11.          Stock-Based Compensation Plans

Effective January 1, 2006, the Company adopted, on a modified prospective basis, the provisions of SFAS No. 123(R), “Share-Based Payment (Revised 2004),” (“SFAS No. 123(R)”) and related guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and restricted stock awards based on estimated fair values. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period.

The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. The effect of recording stock-based compensation for the three months ended March 31, 2007 and April 1, 2006 was as follows:

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