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 JUNE 30, 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 001-15943


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(Exact Name of Registrant as specified in its Charter)

DELAWARE

 

06-1397316

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

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 August 1, 2007, there were 67,906,564 shares of the registrant’s common stock outstanding.

 




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2007
Table of Contents

 

 

 

Page

 

Part I.

 

Financial Information

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

4

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) for the three months ended June 30, 2007 and July 1, 2006

 

 

4

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) for the six months ended June 30, 2007 and July 1, 2006

 

 

5

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2007 and December 30, 2006

 

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2007 and July 1, 2006

 

 

7

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the six months ended June 30, 2007

 

 

8

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

 

 

9

 

 

 

 

Item 2.

Management’ Dicussion and Analysis of Financial Condition and Results of Operations       

 

 

28

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

37

 

 

 

 

Item 4.

Controls and Procedures

 

 

38

 

 

Part II.

 

Other Information

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

 

39

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

39

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

40

 

 

 

 

Item 6.

Exhibits

 

 

40

 

 

 

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

2




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.

3




Part I.   Financial Information

Item 1.   Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)

 

 

Three Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

Net sales related to products

 

$

111,008

 

$

96,593

 

Net sales related to services

 

196,427

 

171,266

 

Total net sales

 

307,435

 

267,859

 

Costs and expenses

 

 

 

 

 

Cost of products sold

 

60,689

 

53,411

 

Cost of services provided

 

125,790

 

107,338

 

Selling, general and administrative

 

56,092

 

50,031

 

Amortization of intangibles

 

8,139

 

9,377

 

Operating income

 

56,725

 

47,702

 

Other income (expense)

 

 

 

 

 

Interest income

 

2,304

 

957

 

Interest expense

 

(4,899

)

(4,618

)

Other, net

 

(1,069

)

(736

)

Income before income taxes and minority interests

 

53,061

 

43,305

 

Provision for income taxes

 

15,101

 

9,870

 

Income before minority interests

 

37,960

 

33,435

 

Minority interests

 

(119

)

(654

)

Income from continuing operations

 

37,841

 

32,781

 

Income (loss) from operations of discontinued businesses, net of taxes

 

115

 

(7,032

)

Net income

 

$

37,956

 

$

25,749

 

Basic earnings (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.57

 

$

0.46

 

Discontinued operations

 

 

(0.10

)

Net income

 

$

0.57

 

$

0.36

 

Diluted earnings (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.55

 

$

0.46

 

Discontinued operations

 

 

(0.10

)

Net income

 

$

0.55

 

$

0.36

 

 

See Notes to Condensed Consolidated Interim Financial Statements

4




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)

 

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

Net sales related to products

 

$

216,485

 

$

191,908

 

Net sales related to services

 

382,149

 

330,092

 

Total net sales

 

598,634

 

522,000

 

Costs and expenses

 

 

 

 

 

Cost of products sold

 

116,823

 

104,235

 

Cost of services provided

 

245,282

 

215,150

 

Selling, general and administrative

 

109,109

 

92,765

 

Amortization of intangibles

 

15,994

 

18,452

 

Operating income

 

111,426

 

91,398

 

Other income (expense)

 

 

 

 

 

Interest income

 

4,591

 

1,735

 

Interest expense

 

(9,245

)

(8,412

)

Other, net

 

(920

)

(688

)

Income before income taxes and minority interests

 

105,852

 

84,033

 

Provision for income taxes

 

30,411

 

21,681

 

Income before minority interests

 

75,441

 

62,352

 

Minority interests

 

(373

)

(1,056

)

Income from continuing operations

 

75,068

 

61,296

 

Income (loss) from operations of discontinued businesses, net of taxes

 

(349

)

(135,662

)

Net income (loss)

 

$

74,719

 

$

(74,366

)

Basic earnings (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

1.13

 

$

0.86

 

Discontinued operations

 

(0.01

)

(1.89

)

Net income (loss)

 

$

1.12

 

$

(1.04

)

Diluted earnings (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

1.10

 

$

0.84

 

Discontinued operations

 

(0.01

)

(1.86

)

Net income (loss)

 

$

1.10

 

$

(1.02

)

 

See Notes to Condensed Consolidated Interim Financial Statements

5




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

 

 

June 30,
2007

 

December 30
2006

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

162,050

 

$

175,380

 

Trade receivables, net

 

228,622

 

202,658

 

Inventories

 

77,169

 

72,362

 

Other current assets

 

58,583

 

44,363

 

Current assets of discontinued operations

 

1,123

 

6,330

 

Total current assets

 

527,547

 

501,093

 

Property, plant and equipment, net

 

622,492

 

534,745

 

Goodwill, net

 

1,119,350

 

1,119,309

 

Other intangibles, net

 

158,442

 

160,204

 

Deferred tax asset

 

96,121

 

107,498

 

Other assets

 

135,910

 

133,944

 

Long term assets of discontinued operations

 

4,217

 

751

 

Total assets

 

$

2,664,079

 

$

2,557,544

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

 

$

24,098

 

$

24,977

 

Accounts payable

 

35,707

 

28,223

 

Accrued compensation

 

42,804

 

41,651

 

Deferred revenue

 

94,963

 

93,197

 

Accrued liabilities

 

53,976

 

41,991

 

Other current liabilities

 

18,017

 

25,625

 

Current liabilities of discontinued operations

 

116

 

3,667

 

Total current liabilities

 

269,681

 

259,331

 

Long-term debt and capital lease obligations

 

511,816

 

547,084

 

Other long-term liabilities

 

149,294

 

146,695

 

Total liabilities

 

930,791

 

953,110

 

Commitments and contingencies

 

 

 

 

 

Minority interests

 

3,420

 

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; 74,674,428 shares issued and 67,987,228 outstanding at June 30, 2007 and 73,416,303 issued and 66,919,634 shares outstanding at December 30, 2006

 

747

 

734

 

Capital in excess of par value

 

1,865,868

 

1,818,138

 

Accumulated earnings

 

97,842

 

23,123

 

Treasury stock, at cost, 6,687,200 and 6,496,669 shares at June 30, 2007 and December 30, 2006, respectively

 

(276,930

)

(267,955

)

Accumulated other comprehensive income

 

42,341

 

21,171

 

Total shareholders’ equity

 

1,729,868

 

1,595,211

 

Total liabilities and shareholders’ equity

 

$

2,664,079

 

$

2,557,544

 

 

See Notes to Condensed Consolidated Interim Financial Statements

6




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)

 

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

Cash flows relating to operating activities

 

 

 

 

 

Net income (loss)

 

$

74,719

 

$

(74,366

)

Less: Loss from discontinued operations

 

(349

)

(135,662

)

Income from continuing operations

 

75,068

 

61,296

 

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

41,145

 

40,185

 

Impairment charge

 

1,583

 

1,960

 

Amortization of debt issuance costs and discounts

 

1,319

 

907

 

Amortization of premiums on marketable securities

 

17

 

24

 

Provision for doubtful accounts

 

75

 

16

 

Minority interests

 

373

 

1,056

 

Deferred income taxes

 

(584

)

2,373

 

(Gain) loss on disposal of property, plant, and equipment

 

(144

)

58

 

Net purchase, proceeds and gains on trading securities

 

4,065

 

 

Non-cash compensation

 

12,531

 

11,349

 

Changes in assets and liabilities:

 

 

 

 

 

Trade receivables

 

(21,082

)

(780

)

Inventories

 

(4,253

)

(2,554

)

Other current assets

 

(8,650

)

(8,287

)

Other assets

 

(8,277

)

5,147

 

Accounts payable

 

(103

)

(2,752

)

Accrued compensation

 

496

 

(3,966

)

Deferred revenue

 

1,766

 

(13,206

)

Accrued liabilities

 

4,913

 

(8,412

)

Other current liabilities

 

(8,624

)

(19,422

)

Other long-term liabilities

 

1,754

 

(4,818

)

Net cash provided by operating activities

 

93,388

 

60,174

 

Cash flows relating to investing activities

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(11,404

)

 

Capital expenditures

 

(87,336

)

(56,790

)

Purchases of marketable securities

 

(161,660

)

(47,557

)

Proceeds from sales of property, plant and equipment

 

 

19

 

Proceeds from sale of marketable securities

 

167,343

 

13,968

 

Net cash used in investing activities

 

(93,057

)

(90,360

)

Cash flows relating to financing activities

 

 

 

 

 

Proceeds from long-term debt and revolving credit agreement

 

 

440,196

 

Payments on long-term debt, capital lease obligation and revolving credit agreement

 

(38,003

)

(132,616

)

Purchase of call option

 

 

(98,108

)

Proceeds from exercises of warrants

 

 

79

 

Proceeds from issuance of warrants

 

 

65,423

 

Proceeds from exercises of employee stock options

 

30,585

 

17,533

 

Excess tax benefit from exercises of employee stock options

 

2,639

 

2,542

 

Dividends paid to minority interests

 

(1,357

)

(1,916

)

Purchase of treasury stock

 

(8,975

)

(171,426

)

Payment of deferred financing costs

 

 

(7,591

)

Net cash (used in) provided by financing activities

 

(15,111

)

114,116

 

Discontinued operations

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(2,157

)

473

 

Net cash provided by investing activities

 

 

1,450

 

Net cash used in financing activities

 

 

(182

)

Net cash (used in) provided by discontinued operations

 

(2,157

)

1,741

 

Effect of exchange rate changes on cash and cash equivalents

 

3,607

 

(7,425

)

Net change in cash and cash equivalents

 

(13,330

)

78,246

 

Cash and cash equivalents, beginning of period

 

175,380

 

114,821

 

Cash and cash equivalents, end of period

 

$

162,050

 

$

193,067

 

Supplemental cash flow information

 

 

 

 

 

Capitalized interest

 

$

2,578

 

$

1,626

 

 

See Notes to Condensed Consolidated Interim Financial Statements

7




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

 

$

74,719

 

 

$

74,719

 

 

 

$

 

 

 

$

 

 

$

 

$

 

Foreign currency translation adjustment

 

20,837

 

 

 

 

 

20,837

 

 

 

 

 

 

 

Amortization of pension gains (losses) and prior service (cost) credits

 

401

 

 

 

 

 

401

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

(68

)

 

 

 

 

(68

)

 

 

 

 

 

 

Total comprehensive income

 

95,889

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit associated with stock issued under employee compensation plans

 

4,627

 

 

 

 

 

 

 

 

 

 

4,627

 

 

Issuance of stock under employee compensation plans

 

30,585

 

 

 

 

 

 

 

 

13

 

 

30,572

 

 

Acquisition of treasury shares

 

(8,975

)

 

 

 

 

 

 

 

 

 

 

(8,975

)

Stock-based compensation

 

11,436

 

 

 

 

 

 

 

 

 

 

11,436

 

 

Performance based
compensation

 

1,095

 

 

 

 

 

 

 

 

 

 

1,095

 

 

Balance at June 30, 2007

 

$

1,729,868

 

 

$

97,842

 

 

 

$

42,341

 

 

 

$

747

 

 

$

1,865,868

 

$

(276,930

)

 

See Notes to Condensed Consolidated Interim Financial Statements

8




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED 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. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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

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

 

Six Months Ended

 

 

 

June 30, 2007

 

July 1, 2006

 

June 30, 2007

 

July 1, 2006

 

Net sales

 

 

$

174

 

 

 

$

30,927

 

 

 

$

546

 

 

$

60,556

 

Income (loss) from operations of discontinued businesses, before income taxes

 

 

$

169

 

 

 

$

(6,668

)

 

 

$

(510

)

 

$

(135,070

)

Provision for income taxes

 

 

54

 

 

 

364

 

 

 

(161

)

 

592

 

Income (loss) from operations of discontinued businesses, net of taxes

 

 

$

115

 

 

 

$

(7,032

)

 

 

$

(349

)

 

$

(135,662

)

 

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

 

 

June 30,
2007

 

December 30,
2006

 

Current assets

 

 

$

1,123

 

 

 

$

6,330

 

 

Long-term assets

 

 

4,217

 

 

 

751

 

 

Total assets

 

 

$

5,340

 

 

 

$

7,081

 

 

Current liabilities

 

 

$

116

 

 

 

$

3,667

 

 

Total liabilities

 

 

$

116

 

 

 

$

3,667

 

 

 

9




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

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

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 the second quarter of 2006, taking into account the planned divestiture of the Phase II-IV Clinical Services business, the Company performed an impairment test on the long-lived assets of the Clinical Phase II-IV business. Based on this analysis, the Company determined that the book value of assets assigned to the Clinical Phase II-IV business exceeded its future cash flows, which included the proceeds from the sale of the business, and therefore, recorded an impairment of the assets of $3,900 in the second quarter of 2006.

In addition, during the second quarter of 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 Company performed an impairment test on the long-lived assets of the ISS business and based on that analysis, determined that the book value of the ISS assets exceeded the future cash flows of the ISS business. Accordingly, an impairment charge of $1,070 was recorded in the second quarter of 2006.

3.   Impairment and Other Charges

During the second quarter of 2006, the Company recorded charges of $5,300 associated with actions designed to improve operating efficiency and profitability. In the Research Models and Services segment the charges were $2,334 for closure of two small vaccine facilities and a management consolidation in the Transgenic Services business. In the Preclinical Services segment, the charges were $2,966 for headcount reductions, primarily in the Montréal facility and closure of a small Interventional and Surgical Services operation in Ireland.

4.   Business Acquisitions

On June 14, 2007, the Company closed its joint venture with Shanghai BioExplorer Co., Ltd., a Shanghai, China-based provider of preclinical services, to form Charles River Laboratories Preclinical Services—China. The Company paid $2,400 in cash for a 75% ownership interest in the joint venture. Additionally, as part of the agreement, the joint venture purchased the net assets of Shanghai BioExoplorer for a purchase price of $1,350 including transaction costs of $550. Intangible assets of $870 were recorded by the joint venture based on the preliminary purchase price allocation.

10




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

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

 

 

 

 

 

 

11




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

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

 

Six Months Ended

 

 

 

June 30, 2007

 

July 1, 2006

 

June 30, 2007

 

July 1, 2006

 

 

 

(as reported)

 

(proforma)

 

(as reported)

 

(proforma)

 

Net sales

 

 

$

307,435

 

 

 

$

271,746

 

 

 

$

598,634

 

 

 

$

528,699

 

 

Operating income

 

 

56,725

 

 

 

47,446

 

 

 

111,426

 

 

 

90,194

 

 

Income from continuing operations

 

 

37,841

 

 

 

32,447

 

 

 

75,068

 

 

 

60,335

 

 

Earnings per common share for continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.57

 

 

 

$

0.46

 

 

 

$

1.13

 

 

 

$

0.84

 

 

Diluted

 

 

$

0.55

 

 

 

$

0.45

 

 

 

$

1.10

 

 

 

$

0.83

 

 

 

Refer to Note 9 for further discussion of the method of computation of earnings per share.

5.   Supplemental Balance Sheet Information

The composition of trade receivables is as follows:

 

 

June 30,
2007

 

December 30,
2006

 

Customer receivables

 

$

175,915

 

 

$

156,411

 

 

Unbilled revenue

 

55,913

 

 

49,356

 

 

Total

 

231,828

 

 

205,767

 

 

Less allowance for doubtful accounts

 

(3,206

)

 

(3,109

)

 

Net trade receivables

 

$

228,622

 

 

$

202,658

 

 

 

The composition of inventories is as follows:

 

 

June 30,
2007

 

December 30,
2006

 

Raw materials and supplies

 

$

12,769

 

 

$

11,715

 

 

Work in process

 

8,026

 

 

6,107

 

 

Finished products

 

56,374

 

 

54,540

 

 

Inventories

 

$

77,169

 

 

$

72,362

 

 

 

12




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The composition of other current assets is as follows:

 

 

June 30,
2007

 

December 30,
2006

 

Prepaid assets

 

$

28,708

 

 

$

19,686

 

 

Deferred tax asset

 

15,925

 

 

10,176

 

 

Prepaid income tax

 

10,530

 

 

7,051

 

 

Marketable securities

 

3,330

 

 

7,450

 

 

Restricted cash

 

90

 

 

 

 

Other current assets

 

$

58,583

 

 

$

44,363

 

 

 

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

 

 

June 30,
2007

 

December 30,
2006

 

Land

 

$

23,916

 

 

$

16,173

 

 

Buildings

 

456,071

 

 

339,786

 

 

Machinery and equipment

 

310,192

 

 

280,126

 

 

Leasehold improvements

 

17,036

 

 

16,248

 

 

Furniture and fixtures

 

7,627

 

 

6,790

 

 

Vehicles

 

4,946

 

 

4,843

 

 

Construction in progress

 

146,397

 

 

186,105

 

 

Total

 

966,185

 

 

850,071

 

 

Less accumulated depreciation

 

(343,693

)

 

(315,326

)

 

Net property, plant and equipment

 

$

622,492

 

 

$

534,745

 

 

 

Depreciation expense for the six months ended June 30, 2007 and July 1, 2006 was $25,151 and $21,733, respectively.

The composition of other assets is as follows:

 

 

June 30,
2007

 

December 30,
2006

 

Deferred financing costs

 

$

9,824

 

 

$

11,120

 

 

Cash surrender value of life insurance policies

 

21,896

 

 

14,360

 

 

Long-term marketable securities

 

98,920

 

 

103,922

 

 

Other assets

 

5,270

 

 

4,542

 

 

Other assets

 

$

135,910

 

 

$

133,944

 

 

 

13




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The composition of other current liabilities is as follows:

 

 

June 30,
2007

 

December 30,
2006

 

Accrued income taxes

 

$

15,363

 

 

$

23,048

 

 

Current deferred tax liability

 

2,149

 

 

2,149

 

 

Accrued interest

 

505

 

 

428

 

 

Other current liabilities

 

$

18,017

 

 

$

25,625

 

 

 

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

 

 

June 30,
2007

 

December 30,
2006

 

Deferred tax liability

 

$

56,847

 

 

$

56,372

 

 

Long-term pension liability

 

47,557

 

 

49,553

 

 

Accrued Executive Supplemental Life Insurance Retirement Plan

 

30,297

 

 

29,262

 

 

Other long-term liabilities

 

14,593

 

 

11,508

 

 

Other long-term liabilities

 

$

149,294

 

 

$

146,695

 

 

 

6.   Marketable Securities

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

 

 

June 30, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Auction rate securities

 

$

91,400

 

 

$

 

 

 

$

 

 

$

91,400

 

Mutual funds

 

2,105

 

 

340

 

 

 

 

 

2,445

 

Government securities and obligations

 

3,478

 

 

 

 

 

(80

)

 

3,398

 

Corporate debt securities

 

5,105

 

 

 

 

 

(98

)

 

5,007

 

 

 

$

102,088

 

 

$

340

 

 

 

$

(178

)

 

$

102,250

 

 

 

 

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

 

 

14




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

Maturities of corporate debt securities and government securities and obligations were as follows:

 

 

June 30, 2007

 

December 30, 2006

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Due less than one year

 

 

$

3,032

 

 

$

3,330

 

 

$

7,416

 

 

$

7,450

 

Due after one year through five years

 

 

99,056

 

 

98,920

 

 

103,979

 

 

103,922

 

 

 

 

$

102,088

 

 

$

102,250

 

 

$

111,395

 

 

$

111,372

 

 

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

7.                 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:

 

 

June 30, 2007

 

December 30, 2006

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Goodwill

 

$

1,132,142

 

 

$

(12,792

)

 

$

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

 

58,551

 

 

(58,521

)

 

54,734

 

 

(54,718

)

 

Customer relationships

 

213,856

 

 

(65,347

)

 

197,302

 

 

(47,407

)

 

Customer contracts

 

1,655

 

 

(1,655

)

 

1,655

 

 

(1,655

)

 

Trademarks and trade names

 

3,278

 

 

(2,148

)

 

3,278

 

 

(2,012

)

 

Standard operating procedures

 

1,357

 

 

(1,313

)

 

1,357

 

 

(1,263

)

 

Other identifiable intangible assets

 

11,135

 

 

(5,844

)

 

10,599

 

 

(5,104

)

 

Total other intangible assets

 

$

293,270

 

 

$

(134,828

)

 

$

272,363

 

 

$

(112,159

)

 

 

15




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

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  

 

June 30, 2007

 

Research Models and Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

 

$

16,924

 

 

 

$

 

 

 

$

(201

)

 

 

$

16,723

 

 

Accumulated amortization

 

 

(4,837

)

 

 

 

 

 

(27

)

 

 

(4,864

)

 

Preclinical Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

 

1,115,150

 

 

 

 

 

 

269

 

 

 

1,115,419

 

 

Accumulated amortization

 

 

(7,928

)

 

 

 

 

 

 

 

 

(7,928

)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

 

$

1,132,074

 

 

 

$

 

 

 

$

68

 

 

 

$

1,132,142

 

 

Accumulated amortization

 

 

(12,765

)

 

 

 

 

 

(27

)

 

 

(12,792

)

 

 

8.                 Long-Term Debt

On July 31, 2006, the Company amended and restated its $660,000 credit agreement to reduce the current interest rate, modify certain restrictive covenants and extend the term. The amount of debt outstanding under the original $660,000 credit agreement remained the same at the time of amendment. 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 U.K. 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 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 June 30, 2007 and is secured by the stock of certain subsidiaries as well as certain U.S. assets. The $428,000 credit agreement includes certain customary representations and warranties, events of default and negative and affirmative covenants including the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated interest expense, for any period of four consecutive fiscal quarters, of no less than 3.5 to 1.0. The Company had $5,388 outstanding under letters of credit as of June 30, 2007 and December 30, 2006.

During the first six months of 2007, the Company did not borrow under its revolving credit facility. As of June 30, 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

16




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

the same modifications made to the covenants in the $660,000 and $428,000 credit agreements, respectively. On June 15, 2007, the Company executed a third amendment to the $50,000 credit agreement to extend the maturity date and reduce the interest rate. The $50,000 credit agreement provides for a $50,000 term loan facility which matures on June 22, 2010. Prior to the amendment, the interest rate applicable to term loans under the credit agreement was, at the Company’s option, equal to either the base rate (which was the higher of the prime rate or the federal funds rate plus 0.50%) or the LIBOR rate plus 0.75%. Between June 15, 2007 through June 21, 2008, the interest rates applicable to term loans under the credit agreement was, 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%) minus 2.25% or the LIBOR rate plus 0.50%. Commencing June 22, 2008 through June 22, 2010, the applicable interest rates are 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 on the Company’s leverage ratio. The $50,000 credit agreement includes certain customary representations and warranties, negative and affirmative covenants and events of default. As of June 30, 2007, the entire balance of the $50,000 credit agreement was outstanding and classified as long-term debt.

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 June 30, 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.

17




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

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 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 June 30, 2007, the fair value of the outstanding 2013 Notes was approximately $421,750, based on their quoted market value.

9.                 Shareholders’ Equity

Earnings (Loss) per Share

Basic earnings per share for the three and six months ended June 30, 2007 and July 1, 2006 were computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods. Diluted earnings per share was computed upon the weighted average number of common shares outstanding in the three months ended June 30, 2007 and July 1, 2006 and the six months ended June 30, 2007 and July 1, 2006 and dilutive common stock equivalents outstanding. Potential common shares outstanding principally include stock options under our stock option plans, warrants and the assumed conversion of our 2013 Notes.

Options to purchase 1,439,767 and 2,403,536 shares were outstanding in each of the three respective months ended June 30, 2007 and July 1, 2006, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase 2,174,418 and 1,479,150 shares were outstanding in each of the respective six months ended June 30, 2007 and July 1, 2006, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.

Basic weighted average shares outstanding for the three and six months ended June 30, 2007 and July 1, 2006 excluded the weighted average impact of 1,066,410 and 393,840 shares, respectively, of non-vested fixed restricted stock awards.

18




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The following table illustrates the reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computations for income from continuing operations and income (loss) from operations of discontinued businesses:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations for purposes of calculating earnings per share

 

$

37,841

 

$

32,781

 

$

75,068

 

$

61,296

 

Income (loss) from discontinued businesses

 

$

115

 

$

(7,032

)

$

(349

)

$

(135,662

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding—
Basic

 

66,830,155

 

70,851,430

 

66,587,863

 

71,615,867

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

2.25% senior convertible debentures

 

203,034

 

 

 

 

Stock options and contingently issued restricted stock

 

1,350,004

 

851,925

 

1,250,385

 

1,043,535

 

Warrants

 

134,464

 

131,811

 

133,650

 

139,430

 

Weighted average shares outstanding—Diluted

 

68,517,657

 

71,835,166

 

67,971,898

 

72,798,832

 

Basic earnings per share from continuing operations

 

$

0.57

 

$

0.46

 

$

1.13

 

$

0.86

 

Basic loss per share from discontinued operations

 

$

 

$

(0.10

)

$

(0.01

)

$

(1.89

)

Diluted earnings per share from continuing operations

 

$

0.55

 

$

0.46

 

$

1.10

 

$

0.84

 

Diluted loss per share from discontinued operations

 

$

 

$

(0.10

)

$

(0.01

)

$

(1.86

)

 

The sum of the earnings per share from continuing operations and the loss per share from discontinued operations does not necessarily equal the earnings (loss) per share from net income in the condensed consolidation statements of operations for the three and six months ended June 30, 2007 and July 1, 2006 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. On August 1, 2007, the Board of Directors authorized an additional increase of

19




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

the Company’s share repurchase program by $100,000. 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 June 30, 2007, approximately $28,563 remained authorized for share repurchases prior to the new $100,000 authorization.

Share repurchases during the three and six months ended June 30, 2007 and July 1, 2006 were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Number of shares of common stock repurchased

 

48,000

 

3,921,300

 

143,200

 

4,168,200

 

Total cost of repurchase

 

$

2,538

 

$

157,458

 

$

6,748

 

$

168,886

 

 

Additionally, the Company’s 2000 Incentive Plan and 2007 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the six months ended June 30, 2007 and July 1, 2006, the Company acquired 47,331 shares for $2,227 and 52,020 shares for $2,539, respectively, as a result of such withholdings. During the three months ended June 30, 2007 and July 1,2006, the Company acquired 2,991 shares for $143 and 4,319 shares for $202, respectively.

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

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 were $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 June 30, 2007. The warrants expire on October 1, 2009.

20




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

10.          Income Taxes

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

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Income before income taxes and minority interest

 

$

53,061

 

$

43,305

 

$

105,852

 

$

84,033

 

Effective tax rate

 

28.5

%

22.8

%

28.7

%

25.8

%

Provision for income tax

 

$

15,101

 

$

9,870

 

$

30,411

 

$

21,681

 

 

The Company’s overall effective tax rate was 28.5% in the second quarter of 2007. The increase from the 22.8% effective tax rate in the second quarter of 2006 is primarily due to the recording of a favorable discrete tax event related to Canadian federal tax rate reduction during the second quarter of 2006.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”), an interpretation of FASB Statement No. 109 (“SFAS 109”) on December 31, 2006. As a result of the implementation of FIN48, 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. At June 30, 2007 the amount recorded for income tax uncertainties was $20,236. The increase from the date of adoption is primarily due to the continuing evaluation of uncertain tax positions conducted in the current period. The amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate was $8,260 at the date of adoption and $10,671 as of June 30, 2007.

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 June 30, 2007 was $617 and $1,163, 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 and the Internal Revenue Service in the United States. In regards to the Internal Revenue Service examinations of the 2004 tax returns of the Company and an acquired subsidiary, the Company filed its formal protests of certain proposed income tax adjustments with the Appeals Division on July 2, 2007. The Company does not believe that the ultimate settlement of these proposed adjustments will have a material impact to the financial statements. It is likely that the examination phase of the Canadian audit may conclude in 2007. The Company believes it has appropriately provided for all uncertain tax positions.

21




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

During the period ended June 30, 2007, the Company settled audits with HM Revenue and Customs in the United Kingdom. The settlements had no significant impact to the uncertain tax positions or effective tax rate.

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.

11.          Employee Benefits

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

Pension Benefits

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Service cost

 

$

2,345

 

$

1,211

 

$

3,875

 

$

2,767

 

Interest cost

 

4,880

 

2,095

 

7,716

 

4,496

 

Expected return on plan assets

 

(5,393

)

(1,744

)

(8,473

)

(4,128

)

Amortization of prior service cost

 

(342

)

(210

)

(474

)

(336

)

Amortization of net loss (gain)

 

108

 

42

 

215

 

231

 

Net periodic benefit cost

 

$

1,598

 

$

1,394

 

$

2,859

 

$

3,030

 

Company contributions

 

$

2,253

 

$

2,185

 

$

4,456

 

$

4,099

 

 

Supplemental Retirement Benefits

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
    2007    

 

July 1,
    2006    

 

June 30,
2007

 

July 1,
2006

 

Service cost

 

 

$

220

 

 

 

$

290

 

 

 

$

440

 

 

$

580

 

Interest cost

 

 

396

 

 

 

334

 

 

 

791

 

 

651

 

Amortization of prior service cost

 

 

125

 

 

 

38

 

 

 

249

 

 

76

 

Amortization of net loss (gain)

 

 

143

 

 

 

230

 

 

 

286

 

 

460

 

Net periodic benefit cost

 

 

$

884

 

 

 

$

892

 

 

 

$

1,766

 

 

$

1,767

 

 

The Company expects to contribute $11,313 to these plans during 2007.

12.          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

22




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

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 and six months ended June 30, 2007 and July 1, 2006 was as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2007

 

July 1, 2006

 

June 30, 2007

 

July 1, 2006

 

Stock-based compensation expense by type of award:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

$

2,835

 

 

 

$

3,495

 

 

 

$

5,373

 

 

 

$

6,671

 

 

Restricted stock

 

 

4,241

 

 

 

2,013

 

 

 

7,158

 

 

 

4,070

 

 

Share-based compensation expense before tax

 

 

7,076

 

 

 

5,508

 

 

 

12,531

 

 

 

10,741

 

 

Income tax benefit

 

 

(2,268

)

 

 

(2,071

)

 

 

(3,966

)

 

 

(4,006

)

 

Reduction to income from continuing operations

 

 

4,808

 

 

 

3,437

 

 

 

8,565

 

 

 

6,735

 

 

Share-based compensation expense of discontinued businesses, net of tax

 

 

 

 

 

212

 

 

 

 

 

 

453

 

 

Reduction to net income

 

 

$

4,808

 

 

 

$

3,649

 

 

 

$

8,565

 

 

 

$

7,188

 

 

Reduction to earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.07

 

 

 

$

0.05

 

 

 

$

0.13

 

 

 

$

0.10

 

 

Diluted

 

 

$

0.07

 

 

 

$

0.05

 

 

 

$

0.13

 

 

 

$

0.10

 

 

Effect on income by line item:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

$

2,178

 

 

 

$

1,731

 

 

 

$

3,966

 

 

 

$

3,705

 

 

Selling and administration

 

 

4,898

 

 

 

3,777

 

 

 

8,565

 

 

 

7,036

 

 

Share based compensation expense before tax

 

 

7,076

 

 

 

5,508

 

 

 

12,531

 

 

 

10,741

 

 

Income tax benefit

 

 

(2,268

)

 

 

(2,071

)

 

 

(3,966

)

 

 

(4,006

)

 

Operations of discontinued businesses, net of tax

 

 

 

 

 

212

 

 

 

 

 

 

453

 

 

Reduction to net income

 

 

$

4,808

 

 

 

$

3,649

 

 

 

$

8,565

 

 

 

$

7,188

 

 

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the option’s expected term, the expected annual dividend yield and the expected stock price volatility. The expected stock price volatility assumption was determined using the historical volatility of the Company’s common stock over the expected life of the option. The risk-free interest rate was based on the market yield for the five year U.S. Treasury security. The expected life of options was determined using historical option exercise activity. Management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

23




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The fair values of stock-based awards granted were estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

Options Granted In:

 

 

 

    2007    

 

    2006  &