CHARLES RIVER LABORATORIES INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

The following discussion should be read in conjunction with our consolidated
financial statements and related notes appearing in Item 8, "Financial
Statements and Supplementary Data" in this Annual Report on Form 10-K. The
following discussion contains forward-looking statements. Actual results may
differ significantly from those projected in the forward-looking statements.
Factors that might cause future results to differ materially from those
projected in the forward-looking statements include, but are not limited to,
those discussed in Item 1A, "Risk Factors" and elsewhere in this Annual Report
on Form 10-K. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, early-stage contract research organization (CRO). For
over 70 years, we have been in the business of providing the research models
required in research and development of new drugs, devices, and therapies. Over
this time, we have built upon our original core competency of laboratory animal
medicine and science (research model technologies) to develop a diverse
portfolio of discovery and safety assessment services, both Good Laboratory
Practice (GLP) and non-GLP, that enable us to support our clients from target
identification through non-clinical development. We also provide a suite of
products and services to support our clients' manufacturing activities.
Utilizing our broad portfolio of products and services enables our clients to
create a more flexible drug development model, which reduces their costs,
enhances their productivity and effectiveness, and increases speed to market.
Our client base includes all major global biopharmaceutical companies, many
biotechnology companies, CROs, agricultural and industrial chemical companies,
life science companies, veterinary medicine companies, contract manufacturing
companies, medical device companies, and diagnostic and other commercial
entities, as well as leading hospitals, academic institutions, and government
agencies around the world. We currently operate in over 90 facilities and over
20 countries worldwide, which numbers exclude our Insourcing Solutions (IS)
sites.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery
and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). Our RMS
reportable segment includes the Research Models and Research Model Services
businesses. Research Models includes the commercial production and sale of small
research models, as well as the supply of large research models. Research Model
Services includes: Genetically Engineered Models and Services (GEMS), which
performs contract breeding and other services associated with genetically
engineered research models; Research Animal Diagnostic Services (RADS), which
provides health monitoring and diagnostics services related to research models;
and Insourcing Solutions (IS), which provides colony management of our clients'
research operations (including recruitment, training, staffing, and management
services). Our DSA reportable segment includes services required to take a drug
through the early development process including discovery services, which are
non-regulated services to assist clients with the identification, screening, and
selection of a lead compound for drug development, and regulated and
non-regulated (GLP and non-GLP) safety assessment services. Our Manufacturing
reportable segment includes Microbial Solutions, which provides in vitro
(non-animal) lot-release testing products, microbial detection products, and
species identification services; Biologics Testing Services (Biologics), which
performs specialized testing of biologics; Avian Vaccine Services (Avian), which
supplies specific-pathogen-free chicken eggs and chickens; and contract
development and manufacturing (CDMO) services, which, until we divested this
business on February 10, 2017, allowed us to provide formulation design and
development, manufacturing, and analytical and stability testing for small
molecules.
Recent Acquisitions and Divestiture
Our strategy is to augment internal growth of existing businesses with
complementary acquisitions. We continued to make strategic acquisitions designed
to expand our portfolio of services to support the drug discovery and
development continuum and position us as a market leader in the outsourced
discovery services market. Our recent acquisitions and divestiture are described
below.
On January 3, 2020, we acquired HemaCare Corporation (HemaCare), a business
specializing in the production of human-derived cellular products for the cell
therapy market. The acquisition of HemaCare will expand our comprehensive
portfolio of early-stage research and manufacturing support solutions to
encompass the production and customization of high-quality, human derived
cellular products to better support clients' cell therapy programs. The
preliminary purchase price of HemaCare was approximately $380 million in cash.
The acquisition was funded through a combination of cash on hand and proceeds
from our Credit Facility under the multi-currency revolving facility. This
business will be reported as part of our RMS reportable segment.

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On August 28, 2019, we acquired an 80% ownership interest in a supplier that
supports our DSA reportable segment. The remaining 20% interest is a redeemable
non-controlling interest. The preliminary purchase price was $23.4 million, net
of a $4.0 million pre-existing relationship for a supply agreement settled upon
acquisition, and subject to certain post-closing adjustments that may change the
purchase price. The acquisition was funded through a combination of cash on hand
and proceeds from our Credit Facility under the multi-currency revolving
facility. The business is reported as part of our DSA reportable segment.
On April 29, 2019, we acquired Citoxlab, a non-clinical CRO, specializing in
regulated safety assessment services, non-regulated discovery services, and
medical device testing. With operations in Europe and North America, the
acquisition of Citoxlab further strengthens our position as a leading, global,
early-stage CRO by expanding our scientific portfolio and geographic footprint,
which enhances our ability to partner with clients across the drug discovery and
development continuum. The preliminary purchase price for Citoxlab was $527.7
million in cash, subject to certain post-closing adjustments that may change the
purchase price. The acquisition was funded through a combination of cash on hand
and proceeds from our Credit Facility under the multi-currency revolving
facility. Citoxlab is reported as part of our DSA reportable segment.
On April 3, 2018, we acquired MPI Research, a non-clinical CRO providing
comprehensive testing services to biopharmaceutical and medical device companies
worldwide. The acquisition enhances our position as a leading global early-stage
CRO by strengthening our ability to partner with clients across the drug
discovery and development continuum. The purchase price for MPI Research was
$829.7 million in cash. The acquisition was funded by borrowings on our Credit
Facility as well as the issuance of $500.0 million of 5.5% Senior Notes due 2026
(2026 Senior Notes) in an unregistered offering. MPI Research is reported as
part of our DSA reportable segment.
On January 11, 2018, we acquired KWS BioTest Limited (KWS BioTest), a CRO
specializing in in vitro and in vivo discovery testing services for
immuno-oncology, inflammatory and infectious diseases. The acquisition enhances
our discovery expertise, with complementary offerings that provide our customers
with additional tools in the active therapeutic research areas of oncology and
immunology. The purchase price for KWS BioTest was $20.3 million in cash. In
addition to the initial purchase price, the transaction included aggregate,
undiscounted contingent payments of up to £3.0 million based on future
performance. During the three months ended September 29, 2018, the terms of
these contingent payments were amended, resulting in a fixed payment of £2.0
million, or $2.6 million, which was paid during the three months ended March 30,
2019. The KWS BioTest business is reported as part of our DSA reportable
segment.
On August 4, 2017, we acquired Brains On-Line, a CRO providing critical data
that advances novel therapeutics for the treatment of central nervous system
(CNS) diseases. Brains On-Line strategically expands our existing CNS
capabilities and establishes us as a single-source provider for a broad
portfolio of discovery CNS services. The purchase price for Brains On-Line was
$21.3 million in cash. In addition to the initial purchase price, the
transaction included aggregate, undiscounted contingent payments of up to €6.7
million based on future performance. During the first quarter of fiscal year
2019, the terms of these contingent payments were amended, resulting in a fixed
payment of $2.6 million, which was paid during the three months ended June 29,
2019. The Brains On-Line business is reported as part of our DSA reportable
segment.
On February 10, 2017, we completed the divestiture of our CDMO business to
Quotient Clinical Ltd., based in London, England for $75.0 million in proceeds,
net of cash, cash equivalents, and working capital adjustments. The CDMO
business was acquired in April 2016 as part of the acquisition of WIL Research
and was reported in our Manufacturing reportable segment.
Fiscal Quarters
Our fiscal year is typically based on 52-weeks, with each quarter composed of 13
weeks ending on the last Saturday on, or closest to, March 31, June 30,
September 30, and December 31. A 53rd week was included in the fourth quarter of
fiscal year 2016, which is occasionally necessary to align with a December 31
calendar year-end.
Business Trends
The demand for our products and services continued to increase meaningfully in
fiscal year 2019. Our pharmaceutical and biotechnology clients continued to
intensify their use of strategic outsourcing to improve their operating
efficiency and to access capabilities that they do not maintain internally.
Small and mid-size biotechnology clients continued to be the primary driver of
revenue growth as these clients benefited from the continued strength in the
biotechnology funding environment in fiscal year 2019, from capital markets,
partnering with large biopharmaceutical companies, and investment by venture
capital. Many of our large biopharmaceutical clients have continued to increase
investments in their drug discovery and early-stage development efforts and have
strengthened their relationships with both CROs, like Charles River, and
biotechnology

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companies to assist them in bringing new drugs to market. Our full service,
early-stage portfolio continued to lead to additional client discussions and new
business opportunities in fiscal year 2019, as clients seek to outsource larger
portions of their early-stage drug research programs to us.
The primary result of these trends was robust revenue growth within our DSA
reportable segment in fiscal year 2019, particularly from biotechnology clients.
In addition to the acquisition of Citoxlab in April 2019, increased demand and
pricing contributed to robust Safety Assessment revenue growth in fiscal year
2019. Our Safety Assessment facilities remained well utilized in fiscal year
2019. Recent acquisitions (most notably Citoxlab and MPI) added modest amounts
of available capacity to accommodate increasing client demand. We believe the
breadth and depth of our scientific expertise, quality, and responsiveness
remain key criteria when our clients make the decision to outsource to us. As
biotechnology funding remains robust and our clients continue to pursue their
goal of more efficient and effective drug research to bring innovative new
therapies to market, they are evaluating outsourcing more of their research
programs, such as discovery services. We have enhanced our Discovery Services
capabilities to provide clients with a comprehensive portfolio that enables them
to start working with us at the earliest stages of the discovery process. We
have accomplished this through acquisitions, including Citoxlab's discovery
services, KWS BioTest in January 2018 and Brains On-Line in August 2017, and
through adding cutting-edge capabilities to our discovery toolkit through
partnerships, such as Distributed Bio, BitBio, and Fios Genomics. In fiscal year
2019, demand in our Discovery Services business also increased meaningfully,
driven by biotechnology clients as many of these clients either initiated or
continued to work with us on integrated programs and other projects. Our efforts
to enhance our sales strategies, provide clients with flexible partnering
models, and become a trusted scientific partner for our clients' early-stage
programs have been successful, and enabled us to attract new clients. Demand
from large biopharmaceutical companies also increased. These clients continue to
have significant internal discovery capabilities, on which they can choose to
rely. In order for large biopharmaceutical clients to increasingly outsource
more work to us, we must continue to demonstrate that our services can augment
and accelerate our clients' drug discovery processes.
Demand for our products and services that support our clients' manufacturing
activities was also robust in fiscal year 2019. Demand for our Microbial
Solutions business remained strong as manufacturers continued to increase their
use of our rapid microbial testing solutions. Our Biologics business continued
to benefit from increased demand for services associated with the growing
proportion of biologic drugs in the pipeline and on the market. To support this
increased demand, we continued to expand the capacity of our Biologics business.
Demand for our Research Models and Services increased in fiscal year 2019,
driven by strong demand for research models in China, higher revenue for
research model services, and improved pricing. Demand for research models in
China continued to be robust in fiscal year 2019, as clients in this growing
market continue to value our high-quality research models. Demand for research
models services also improved in fiscal year 2019, particularly for our IS and
GEMS businesses. The IS business further benefited from a five-year, $95.7
million contract from the National Institute of Allergy and Infectious Diseases,
or NIAID, that commenced in September 2018. The continued effect of the
consolidation of internal infrastructure within our large biopharmaceutical
clients and a longer-term trend towards more efficient use of research models
has led to reduced demand for research models outside of China. We are confident
that research models and services will remain essential tools for our clients'
drug discovery and early-stage development efforts, and the RMS business will
continue to be an important source of cash flow generation for us. In addition,
in January 2020, we enhanced the RMS business' growth profile and portfolio of
critical research tools that we are able to supply through the acquisition of
HemaCare, a premier provider of human-derived cellular products used in cell
therapies.
Overview of Results of Operations and Liquidity
Revenue for fiscal year 2019 was $2.6 billion compared to $2.3 billion in fiscal
year 2018. The 2019 increase as compared to the corresponding period in 2018 was
$355.1 million, or 15.7%, and was primarily due to both growth in our DSA and
Manufacturing segments, as discussed in the above "Business Trends" section, as
well as the recent acquisitions of Citoxlab and MPI Research; partially offset
by the negative effect of changes in foreign currency exchange rates which
decreased revenue by $36.1 million, or 1.5%, when compared to the corresponding
period in 2018.
In fiscal year 2019, our operating income and operating income margin were
$351.2 million and 13.4%, respectively, compared with $331.4 million and 14.6%,
respectively, in fiscal year 2018. The increase in operating income was
primarily due to increased revenues discussed above and contributions from our
recent acquisitions of Citoxlab and MPI Research; partially offset by the
following, which decreased the operating income margin: increased amortization
expense and costs related to our recent acquisition activity; increased costs
incurred in connection with certain global restructuring initiatives, continued
investments to support future growth of the businesses, which includes increased
investments in personnel (staffing levels and hourly wage increases) and
facility expansions (primarily in the RMS and Biologics businesses), and
company-wide IT and

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infrastructure projects. Offsetting the decreases in operating income margin
were the realization of improved volume, mix, and pricing across our products
and services portfolio as well as the impact of recent productivity initiatives
across all businesses.
Net income attributable to common shareholders increased to $252.0 million in
fiscal year 2019, from $226.4 million in the corresponding period of 2018. The
increase in net income attributable to common shareholders of $25.6 million was
primarily due to the increase in operating income described above, as well as a
lower income tax rate due to recognizing a $20.6 million deferred tax asset in
fiscal year 2019 for net operating losses expected to be utilized in the future
due to changes in the Company's international financing structure.
During fiscal year 2019, our cash flows from operations was $480.9 million
compared with $441.1 million for fiscal year 2018. The increase was primarily
driven by the increase to net income and the favorable timing of vendor and
supplier payments compared to the same period in 2018, partially offset by
unfavorable changes in operating assets and liabilities, specifically related to
the timing of net contract balances from contracts with customers (collectively
trade receivables, net; deferred revenue; and customer contract deposits),
increases in inventory levels in response to customer demand, and higher
compensation payments compared to the prior year period.
On October 23, 2019, we issued $500.0 million of 4.25% Senior Notes due in 2028
(2028 Senior Notes) in an unregistered offering. Interest on the 2028 Senior
Notes is payable semi-annually on May 1 and November 1, beginning on May 1,
2020. Net proceeds from the 2028 Senior Notes of approximately $494 million,
along with available cash, was used to prepay $500.0 million of our term loan
under our Credit Facility. Additionally, on November 4, 2019, we amended and
restated our Credit Facility by increasing the amount of our multi-currency
revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. Under
specified circumstances, we have the ability to increase the term loan and/or
revolving facility by up to $1.0 billion in the aggregate.
In March 2019, we detected unauthorized access into portions of our information
systems and commenced an investigation into the incident, coordinated with U.S.
federal law enforcement and leading cyber security experts, and promptly
implemented a comprehensive containment and remediation plan. In December 2019,
we completed our remediation of this incident. The financial impact of the March
2019 event is not material. Refer to Part I, Item 1A. Risk Factors in this
Annual Report on Form 10-K for further details on the results of the remediation
efforts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States (U.S.). The
preparation of these financial statements requires us to make certain estimates
and assumptions that may affect the reported amounts of assets and liabilities,
the reported amounts of revenues and expenses during the reported periods and
related disclosures. These estimates and assumptions are monitored and analyzed
by us for changes in facts and circumstances, and material changes in these
estimates could occur in the future. We base our estimates on our historical
experience, trends in the industry, and various other factors that are believed
to be reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions.
We believe that the application of our accounting policies, each of which
require significant judgments and estimates on the part of management, are the
most critical to aid in fully understanding and evaluating our reported
financial results. Our significant accounting policies are more fully described
in Note 1, "Description of Business and Summary of Significant Accounting
Policies", to our consolidated financial statements contained in Item 8,
"Financial Statements and Supplementary Data" in this Annual Report on Form
10-K.
We believe the following represent our critical accounting policies and
estimates used in the preparation of our financial statements:
Revenue Recognition
Accounting Standard Codification Topic 606, "Revenue from Contracts with
Customers" (ASC 606) became effective for us on December 31, 2017 and was
adopted using the modified retrospective method for all contracts not completed
as of the date of adoption. For contracts that were modified before the
effective date, we reflected the aggregate effect of all modifications when
identifying performance obligations and allocating transaction price in
accordance with the practical expedient, which did not have a material effect on
the cumulative impact of adopting ASC 606. The reported results for fiscal years
2019 and 2018 reflect the application of ASC 606 guidance while the historical
results for fiscal year 2017 was prepared under the guidance of ASC 605,
"Revenue Recognition" (ASC 605). There is no material difference in the
reporting of revenue during fiscal years 2019 and 2018 in accordance with ASC
606 when compared to fiscal year 2017 in accordance with ASC 605.

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Revenue is recognized when, or as, obligations under the terms of a contract are
satisfied, which occurs when control of the promised products or services is
transferred to customers. Revenue is measured as the amount of consideration we
expect to receive in exchange for transferring products or services to a
customer ("transaction price").
To the extent the transaction price includes variable consideration, we estimate
the amount of variable consideration that should be included in the transaction
price utilizing the amount to which we expect to be entitled. Variable
consideration is included in the transaction price if, in our judgment, it is
probable that a significant future reversal of cumulative revenue under the
contract will not occur. Estimates of variable consideration and determination
of whether to include estimated amounts in the transaction price are based
largely on an assessment of our anticipated performance and all information
(historical, current and forecasted) that is reasonably available. Sales, value
add, and other taxes collected on behalf of third parties are excluded from
revenue.
When determining the transaction price of a contract, an adjustment is made if
payment from a customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. Generally, we
do not extend payment terms beyond one year. Applying the practical expedient,
we do not assess whether a significant financing component exists if the period
between when we perform our obligations under the contract and when the customer
pays is one year or less. Our contracts do not generally contain significant
financing components.
Contracts with customers may contain multiple performance obligations. For such
arrangements, the transaction price is allocated to each performance obligation
based on the estimated relative standalone selling prices of the promised
products or services underlying each performance obligation. We determine
standalone selling prices based on the price at which the performance obligation
is sold separately. If the standalone selling price is not observable through
past transactions, we estimate the standalone selling price taking into account
available information such as market conditions and internally approved pricing
guidelines related to the performance obligations.
Contracts are often modified to account for changes in contract specifications
and requirements. Contract modifications exist when the modification either
creates new, or changes existing, enforceable rights and obligations. Generally,
when contract modifications create new performance obligations, the modification
is considered to be a separate contract and revenue is recognized prospectively.
When contract modifications change existing performance obligations, the
existing transaction price and measure of progress for the performance
obligation to which it relates is generally recognized as an adjustment to
revenue (either as an increase in or a reduction of revenue) on a cumulative
catch-up basis.
Product revenue is generally recognized when the customer obtains control of our
product, which occurs at a point in time, and may be upon shipment or upon
delivery based on the contractual shipping terms of a contract. Service revenue
is generally recognized over time as the services are delivered to the customer
based on the extent of progress towards completion of the performance
obligation. The selection of the method to measure progress towards completion
requires judgment and is based on the nature of the products or services to be
provided. Depending on which better depicts the transfer of value to the
customer, we generally measure our progress using either cost-to-cost (input
method) or right-to-invoice (output method). We use the cost-to-cost measure of
progress when it best depicts the transfer of value to the customer which occurs
as we incur costs on our contract, generally related to fixed fee service
contracts. Under the cost-to-cost measure of progress, the extent of progress
towards completion is measured based on the ratio of costs incurred to date to
the total estimated costs at completion of the performance obligation. The costs
calculation includes variables such as labor hours, allocation of overhead
costs, research model costs, and subcontractor costs. Revenue is recorded
proportionally as costs are incurred. The right-to-invoice measure of progress
is generally related to rate per unit contracts, as the extent of progress
towards completion is measured based on discrete service or time-based
increments, such as samples tested or labor hours incurred. Revenue is recorded
in the amount invoiced since that amount corresponds directly to the value of
our performance to date. During fiscal year 2019, $1.6 billion, or approximately
60%, of our total revenue recognized ($2.6 billion) is DSA service revenue
transferred over time.
Income Taxes
We prepare and file income tax returns based on our interpretation of each
jurisdiction's tax laws and regulations. In preparing our consolidated financial
statements, we estimate our income tax liability in each of the jurisdictions in
which we operate by estimating our actual current tax expense together with
assessing temporary differences resulting from differing treatment of items for
tax and financial reporting purposes. These differences result in deferred tax
assets and liabilities, which are included in our consolidated balance sheets.
Significant management judgment is required in assessing the realizability of
our deferred tax assets. In performing this assessment, we consider whether it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. In making this determination, under the
applicable financial accounting standards, we are allowed to consider the
scheduled reversal of deferred tax liabilities, projected

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future taxable income, and the effects of tax planning strategies. In the event
that actual results differ from our estimates, we adjust our estimates in future
periods and we may need to establish a valuation allowance, which could
materially impact our financial position and results of operations.
Our valuation allowance increased by $300.2 million from $9.8 million as of
December 29, 2018 to $310.0 million as of December 28, 2019. The increase is
primarily related to the recognition of $315.5 million of net operating loss
deferred tax assets due to changes in our financing structure, $294.9 million of
which we do not believe is more likely than not to be utilized.
We account for uncertain tax positions using a "more-likely-than-not" threshold
for recognizing and resolving uncertain tax positions. We evaluate uncertain tax
positions on a quarterly basis and consider various factors, that include, but
are not limited to, changes in tax law, the measurement of tax positions taken
or expected to be taken in tax returns, the effective settlement of matters
subject to audit, information obtained during in process audit activities and
changes in facts or circumstances related to a tax position. We adjust the level
of the liability to reflect any subsequent changes in the relevant facts
surrounding the uncertain positions. Our liabilities for uncertain tax positions
can be relieved only if the contingency becomes legally extinguished through
either payment to the taxing authority or the expiration of the statute of
limitations, the recognition of the benefits associated with the position meet
the "more-likely-than-not" threshold or the liability becomes effectively
settled through the controversy process. We consider matters to be effectively
settled once the taxing authority has completed all of its required or expected
examination procedures, including all appeals and administrative reviews; we
have no plans to appeal or litigate any aspect of the tax position; and we
believe that it is highly unlikely that the taxing authority would re-examine
the related tax position. We also accrue for potential interest and penalties
related to unrecognized tax benefits in income tax expense.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation
commonly referred to as U.S. Tax Reform. U.S. Tax Reform made broad and complex
changes to the U.S. tax code, including, but not limited to, (i) reducing the
U.S. federal statutory tax rate from 35% to 21%; (ii) requiring companies to pay
a one-time transition tax (Transition Tax) on certain unrepatriated earnings of
foreign subsidiaries; (iii) generally eliminating U.S federal income taxes on
dividends from foreign subsidiaries; (iv) requiring a current inclusion in U.S.
federal taxable income of certain earnings of controlled foreign corporations;
(v) eliminating the corporate alternative minimum tax (AMT) and changing how
existing AMT credits can be realized; (vi) subjecting certain foreign earnings
to U.S. taxation through base erosion anti-abuse tax (BEAT) and global
intangible low-taxed income (GILTI); (vii) creating a new limitation on
deductible interest expense; (viii) changing rules related to uses and
limitations of net operating loss carryforwards created in tax years beginning
after December 31, 2017, and (ix) modifying the officer's compensation
limitation.
Our accounting for the elements of U.S. Tax Reform is complete. We have made an
accounting policy election to treat taxes due on the GILTI inclusion as a
current period expense. See Note 11, "Income Taxes" for further discussion.
Goodwill and Intangible Assets
We use assumptions and estimates in determining the fair value of assets
acquired and liabilities assumed in a business combination. The determination of
the fair value of intangible assets, which represent a significant portion of
the purchase price in many of our acquisitions, requires the use of significant
judgment with regard to (i) the fair value; and (ii) whether such intangibles
are amortizable or non-amortizable and, if the former, the period and the method
by which the intangible asset will be amortized. We utilize commonly accepted
valuation techniques, such as the income approach and the cost approach, as
appropriate, in establishing the fair value of intangible assets. Typically, key
assumptions include projections of cash flows that arise from identifiable
intangible assets of acquired businesses as well as discount rates based on an
analysis of the weighted average cost of capital, adjusted for specific risks
associated with the assets.
In our recent acquisitions, customer relationship intangible assets (also
referred to as client relationships) have been the most significant identifiable
assets acquired. To determine the fair value of the acquired client
relationships, we utilized the multiple period excess earnings model (a commonly
accepted valuation technique), which includes the following key assumptions:
projections of cash flows from the acquired entities, which included future
revenue growth rates, operating income margins, and customer attrition rates; as
well as discount rates based on an analysis of the acquired entities' weighted
average cost of capital. The value of client relationships acquired were $134.6
million for Citoxlab in fiscal year 2019 and $264.9 million for MPI Research in
fiscal year 2018.
We review definite-lived intangible assets for impairment when indication of
potential impairment exists, such as a significant reduction in cash flows
associated with the assets. Actual cash flows arising from a particular
intangible asset could vary from

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projected cash flows which could imply different carrying values from those
established at the dates of acquisition and which could result in impairment of
such asset. No impairments were recognized during 2019, 2018 or 2017.
We evaluate goodwill for impairment annually, during the fourth quarter, and
when events occur or circumstances change that may reduce the fair value of the
asset below its carrying amount. Events or circumstances that might require an
interim evaluation include unexpected adverse business conditions, economic
factors, unanticipated technological changes or competitive activities, loss of
key personnel and acts by governments and courts. Estimates of future cash flows
require assumptions related to revenue and operating income growth,
asset-related expenditures, working capital levels and other factors. Different
assumptions from those made in our analysis could materially affect projected
cash flows and our evaluation of goodwill for impairment.
We have the option to first assess qualitative factors to determine whether it
is necessary to perform the two-step goodwill impairment test. If we elect this
option and believe, as a result of the qualitative assessment, that it is
more-likely-than-not that the carrying value of goodwill is not recoverable, the
quantitative two-step impairment test is required; otherwise, no further testing
is required. Alternatively, we may elect to not first assess qualitative factors
and immediately perform the quantitative two-step impairment test. In the first
step, we compare the fair value of our reporting units to their carrying values.
If the carrying values of the net assets assigned to the reporting units exceed
the fair values of the reporting units, then the second step of the impairment
test is performed in order to determine the implied fair value of our goodwill.
If the carrying value of the reporting unit's goodwill exceeds its implied fair
value, then we would record an impairment loss equal to the difference.
In fiscal years 2019, 2018 and 2017, we elected to perform the quantitative
first step of the two-step goodwill impairment test for our reporting units.
Fair value was determined by using a weighted combination of a market-based
approach and an income approach, as this combination was deemed to be the most
indicative of our fair value in an orderly transaction between market
participants. Under the market-based approach, we utilized information about our
Company as well as publicly available industry information to determine earnings
multiples and sales multiples that are used to value our reporting units. Under
the income approach, we determined fair value based on the estimated future cash
flows of each reporting unit, discounted by an estimated weighted-average cost
of capital, which reflects the overall level of inherent risk of the reporting
unit and the rate of return an outside investor would expect to earn.
Our 2019, 2018 and 2017 impairment tests indicated that goodwill was not
impaired.
Valuation and Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property, plant, and equipment,
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets or asset group may not be recoverable.
Factors we consider important that could trigger an impairment review include,
but are not limited to, the following:
•         significant underperformance relative to expected historical or

projected future operating results;

• significant negative industry or economic trends; or

•         significant changes or developments in strategy or operations that
          negatively affect the utilization of our long-lived assets.


Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset, net of any sublease income, if
applicable, and its eventual disposition. In the event that such cash flows are
not expected to be sufficient to recover the carrying amount of the assets, the
assets are written-down to their fair values. We measure any impairment based on
a projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in our current business
model. Significant judgments are required to estimate future cash flows,
including the selection of appropriate discount rates and other assumptions. We
may also estimate fair value based on market prices for similar assets, as
appropriate. Changes in these estimates and assumptions could materially affect
the determination of fair value for these assets.
In fiscal 2017, we recognized $17.7 million of asset impairment and accelerated
depreciation charges on the RMS facility in Frederick, Maryland in connection
with our 2017 RMS restructuring initiatives.
Pension and Other Post-Retirement Benefit Plans
Several of our U.S. and non-U.S. subsidiaries sponsor defined benefit pension
and other post-retirement benefit plans. We recognize the funded status of our
defined benefit pension and other postretirement benefit plans as an asset or
liability. This

                                       38
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amount is defined as the difference between the fair value of plan assets and
the benefit obligation. We measure plan assets and benefit obligations as of the
date of our fiscal year end.
The cost and obligations of these arrangements are calculated using many
assumptions to estimate the benefits that the employee earns while working, the
amount of which cannot be completely determined until the benefit payments
cease. Major assumptions used in the accounting for these employee benefit plans
include the expected return on plan assets, withdrawal and mortality rates,
discount rate, and rate of increase in employee compensation levels. Assumptions
are determined based on our data and appropriate market indicators, and are
evaluated each year as of the plans' measurement date. Should any of these
assumptions change, they would have an effect on net periodic pension costs and
the unfunded benefit obligation.
The expected long-term rate of return on plan assets reflects the average rate
of earnings expected on the funds invested, or to be invested, to provide for
the benefits included in the projected benefit obligations. In determining the
expected long-term rate of return on plan assets, we consider the relative
weighting of plan assets, the historical performance of total plan assets and
individual asset classes and economic and other indicators of future
performance.
The discount rate reflects the rate we would have to pay to purchase
high-quality investments that would provide cash sufficient to settle our
current pension obligations. A 25 basis point change in the discount rate
changes the projected benefit obligation by approximately $20 million for all
our plans.
The rate of compensation increase reflects the expected annual salary increases
for the plan participants based on historical experience and the current
employee compensation strategy.
In fiscal year 2019, new mortality improvement scales were issued in the U.S.
and U.K reflecting a decline in longevity projection from the 2018 releases that
we adopted, which decreased our benefit obligations by $2.8 million as of
December 28, 2019. In fiscal year 2018, new mortality improvement scales were
issued in the U.S. and U.K. reflecting a decline in longevity projection from
the 2017 releases that we adopted, which decreased our benefit obligations by
$1.7 million as of December 29, 2018.
On January 31, 2019, we commenced the process to terminate the Charles River
Laboratories, Inc. Pension Plan (U.S. Pension Plan) and expect to complete the
termination process during the second half of fiscal year 2020. As part of the
planned termination, we re-balanced assets to better match the characteristics
of the liabilities. At December 28, 2019, the U.S Pension Plan has a benefit
obligation of $94.4 million and plan assets of $91.2 million. The benefit
obligation has been valued at the amount expected to be required to settle the
obligations. Assumptions utilized considered the portion of obligations expected
to be settled through participant acceptance of lump sum payments or annuities
and the cost to purchase annuities, which are subject to change upon actual plan
settlement. Increasing the U.S Pension Plan's obligations to reflect the
expected settlement value resulted in an actuarial loss of approximately $6
million, which was recorded within Other comprehensive income as part of the
annual revaluation for fiscal year 2019. Upon settlement of the benefit
obligation, pension losses currently deferred and recorded within Accumulated
other comprehensive loss on our consolidated balance sheets will be reclassified
to Other expense, net within our consolidated statement of income. As of
December 28, 2019, we had unrecognized losses related to the U.S. Pension Plan
of approximately $14 million.
Stock-Based Compensation
We grant stock options, restricted stock, restricted stock units (RSUs), and
performance share units (PSUs) to employees, and stock options, restricted
stock, and RSUs to non-employee directors under stock-based compensation plans.
We make certain assumptions in order to value and record expense associated with
awards made under our stock-based compensation arrangements. Changes in these
assumptions may lead to variability with respect to the timing and amount of
expense we recognize in connection with share-based payments. Stock-based
compensation is recognized as an expense in the consolidated statements of
income based on the grant date fair value, adjusted for forfeitures when they
occur, over the requisite service period.
Determining the appropriate valuation model and related assumptions requires
judgment. The fair value of stock options granted is calculated using the
Black-Scholes option-pricing model and the fair value of PSUs is estimated using
a lattice model with a Monte Carlo simulation, both of which require the use of
subjective assumptions including volatility and expected term, among others.
Determining the appropriate amount to expense based on the anticipated
achievement of PSU's performance targets requires judgment, including
forecasting the achievement of future financial targets. The estimate of expense
is revised periodically based on the probability of achieving the required
performance targets. The cumulative impact of any changes to our estimates is
reflected in the period of change.

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New Accounting Pronouncements
For a discussion of new accounting pronouncements, refer to Note 1, "Description
of Business and Summary of Significant Accounting Policies" to our consolidated
financial statements contained in Item 8, "Financial Statements and
Supplementary Data," in this Annual Report on Form 10-K.

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Results of Operations
Fiscal Year 2019 Compared to Fiscal Year 2018
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable
segment:
                      Fiscal Year
                   2019         2018       $ change     % change
                        (in millions, except percentages)

Service revenue $ 2,029.4 $ 1,687.9 $ 341.5 20.2 % Product revenue 591.8 578.2 13.6 2.4 % Total revenue $ 2,621.2 $ 2,266.1 $ 355.1 15.7 %

                    Fiscal Year
                 2019         2018       $ change     % change    Impact of FX
                              (in millions, except percentages)
RMS           $   537.1    $   519.7    $     17.4        3.3 %       (1.9 )%
DSA             1,619.0      1,316.9         302.1       22.9 %       (1.1 )%
Manufacturing     465.1        429.5          35.6        8.3 %       (2.7 )%
Total revenue $ 2,621.2    $ 2,266.1    $    355.1       15.7 %       (1.5 )%

The following table presents operating income by reportable segment:

                                   Fiscal Year
                                2019        2018       $ change     % change
                                     (in millions, except percentages)
RMS                           $ 133.9     $ 136.5     $    (2.6 )     (1.9 )%
DSA                             258.9       227.6          31.3       13.8  %
Manufacturing                   145.4       136.2           9.2        6.8  %
Unallocated corporate          (187.0 )    (168.9 )       (18.1 )     10.8  %
Total operating income        $ 351.2     $ 331.4     $    19.8        6.0  %
Operating income % of revenue    13.4 %      14.6 %                   (1.2 

)%

The following presents and discusses our consolidated financial results by each
of our reportable segments:
RMS
                                    Fiscal Year
                               2019             2018           $ change      % change     Impact of FX
                                                (in millions, except percentages)
Revenue                   $      537.1     $       519.7     $     17.4          3.3  %       (1.9 )%
Cost of revenue
(excluding amortization
of intangible assets)            333.7             319.8           13.9          4.3  %
Selling, general and
administrative                    68.1              61.8            6.3         10.1  %
Amortization of
intangible assets                  1.4               1.6           (0.2 )      (12.9 )%
Operating income          $      133.9     $       136.5     $     (2.6 )       (1.9 )%
Operating income % of
revenue                           24.9 %            26.3 %                      (1.4 )%


RMS revenue increased $17.4 million, or 3.3%, due primarily to higher research
model services revenue and higher research model product revenue in China.
Research model services benefited from a large government contract in the IS
business and strong client demand in the GEMS business resulting from increased
research and development activity conducted across biotechnology and academic
institutional clients. Partially offsetting these increases were the effect of
changes in foreign currency exchange rates and lower research model product
revenue outside of China, particularly from large biopharmaceutical clients.

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RMS operating income decreased $2.6 million, or 1.9%, compared to the
corresponding period in 2018. RMS operating income as a percentage of revenue
for fiscal year 2019 was 24.9%, a decrease of 1.4% from 26.3% for the
corresponding period in 2018. Operating income and operating income as a
percentage of revenue decreased primarily due to higher cost of revenue and
selling, general, and administrative expenses to support the growth of the
businesses, which included the following: a $2.2 million charge recorded within
selling, general and administrative costs in fiscal year 2019 in connection with
the modification of the option to purchase the remaining 8% equity interest in
Vital River, increased investments in personnel (staffing levels and hourly wage
increases), higher severance charges in connection with certain global
restructuring initiatives, and facility expansions (primarily in China). In
addition, operating income as a percentage of revenue decreased due to lower
operating income margins on the aforementioned large government contract, and
lower sales volume for research models outside of China.
DSA
                                    Fiscal Year
                               2019             2018           $ change      % change     Impact of FX
                                                (in millions, except percentages)
Revenue                   $    1,619.0     $     1,316.9     $    302.1         22.9  %       (1.1 )%
Cost of revenue
(excluding amortization
of intangible assets)          1,104.1             903.9          200.2         22.2  %
Selling, general and
administrative                   176.9             131.2           45.7         34.8  %
Amortization of
intangible assets                 79.1              54.2           24.9         45.9  %
Operating income          $      258.9     $       227.6     $     31.3         13.8  %
Operating income % of
revenue                           16.0 %            17.3 %                      (1.3 )%


DSA revenue increased $302.1 million, or 22.9%, due primarily to the recent
acquisitions of Citoxlab and MPI Research, which contributed $123.7 million and
$73.0 million, respectively, to service revenue growth. Additionally, service
revenue increased in both the Safety Assessment and Discovery Services
businesses due to demand from biotechnology clients and increased pricing of
services. These increases were partially offset by the effect of changes in
foreign currency exchange rates.
DSA operating income increased $31.3 million, or 13.8%, compared to the
corresponding period in 2018. DSA operating income as a percentage of revenue
for fiscal year 2019 was 16.0%, a decrease of 1.3% from 17.3% for the
corresponding period in 2018. The increase to operating income was primarily
attributable to contributions from our recent acquisitions of Citoxlab and MPI
Research. This increase was partially offset by increased costs in both cost of
revenue and selling, general, and administrative expenses to support the growth
of the businesses, which included the following: increased investments in
personnel (staffing levels and hourly wage increases); increased investments
related to facility expansions; higher severance charges in connection with
certain global restructuring initiatives, and higher amortization of intangible
assets and acquisition and integration costs associated with our recent
acquisitions. These increased costs collectively decreased operating income as a
percentage of revenue in 2019 compared to 2018.
Manufacturing
                                    Fiscal Year
                               2019             2018           $ change      % change     Impact of FX
                                                (in millions, except percentages)
Revenue                   $      465.1     $       429.5     $     35.6          8.3  %       (2.7 )%
Cost of revenue
(excluding amortization
of intangible assets)            225.0             202.3           22.7         11.2  %
Selling, general and
administrative                    85.6              82.0            3.6          4.4  %
Amortization of
intangible assets                  9.1               9.0            0.1          0.3  %
Operating income          $      145.4     $       136.2     $      9.2          6.8  %
Operating income % of
revenue                           31.3 %            31.7 %                      (0.4 )%


Manufacturing revenue increased $35.6 million, or 8.3%, due primarily to higher
demand for endotoxin products, bioburden products and services, and species
identification services in the Microbial Solutions business and higher service
revenue in the Biologics business; partially offset by the effect of changes in
foreign currency exchange rates.
Manufacturing operating income increased $9.2 million, or 6.8%, compared to the
corresponding period in 2018. Manufacturing operating income as a percentage of
revenue for fiscal year 2019 was 31.3%, a decrease of 0.4% from 31.7% for the
corresponding period in 2018. The increase to operating income was due primarily
to the increase in revenue. This increase

                                       42
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was partially offset by increased costs in both cost of revenue and selling,
general, and administrative expenses to support the growth of the businesses,
which included the following: increased investments in process improvements to
further enhance Microbial Solutions' operating efficiency; increased investments
in personnel (staffing levels and hourly wage increases), and increased
investments related to facility expansions (primarily in Biologics), and certain
site consolidation costs. These increased costs collectively decreased operating
income as a percentage of revenue in 2019 compared to 2018.
Unallocated Corporate
                                        Fiscal Year
                                     2019        2018       $ change     % change
                                          (in millions, except percentages)
Unallocated corporate              $ 187.0     $ 168.9     $     18.1      10.8  %
Unallocated corporate % of revenue     7.1 %       7.5 %                   

(0.4 )%

Unallocated corporate costs consist of selling, general and administrative
expenses that are not directly related or allocated to the reportable
segments. The increase in unallocated corporate costs of $18.1 million, or
10.8%, compared to the corresponding period in 2018 is related to an increase in
compensation, benefits, and other employee-related expenses; costs associated
with the evaluation and integration of our recent acquisition activity; and
costs related to the remediation of the unauthorized access into our information
systems. Costs as a percentage of revenue for fiscal year 2019 was 7.1%, a
decrease of 0.4% from 7.5% for the corresponding period in 2018.
Interest Income Interest income, which represents earnings on cash, cash
equivalents, and time deposits was $1.5 million and $0.8 million for fiscal
years 2019 and 2018, respectively. The increase of $0.7 million was primarily
due to higher average cash balances in 2019 as compared to 2018.
Interest Expense Interest expense for fiscal year 2019 was $60.9 million, a
decrease of $2.9 million, or 4.5%, compared to $63.8 million for fiscal year
2018. The decrease was due primarily to a foreign currency gain recognized in
connection with a debt-related foreign exchange forward contract and lower debt
issuance costs incurred compared to the corresponding period in 2018; partially
offset by higher interest expense from increased debt to fund our recent
acquisitions.
Other Income, Net Other income, net, was $12.3 million for fiscal year 2019, a
decrease of $1.0 million, or 7.3%, compared to $13.3 million for fiscal year
2018. The decrease was due to higher foreign currency losses recognized in
connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity
with a different functional currency compared to the corresponding period in
2018 and higher pension-related costs as compared to the corresponding period in
2018; partially offset by higher net gains on our venture capital investments
and our life insurance policy investments compared to the corresponding period
in 2018.
Income Taxes Income tax expense was $50.0 million for fiscal year 2019, a
decrease of $4.5 million, compared to $54.5 million for fiscal year 2018. Our
effective tax rate was 16.5% for fiscal year 2019, compared to 19.3% for fiscal
year 2018. The decrease in our effective tax rate in the 2019 period compared to
the 2018 period was primarily due to recognizing a $20.6 million deferred tax
asset in fiscal year 2019 for net operating losses expected to be utilized in
the future due to changes in our international financing structure.
Fiscal Year 2018 Compared to Fiscal Year 2017
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable
segment:
                      Fiscal Year
                   2018         2017       $ change     % change
                        (in millions, except percentages)

Service revenue $ 1,687.9    $ 1,298.3    $    389.6       30.0 %
Product revenue     578.2        559.3          18.9        3.4 %
Total revenue   $ 2,266.1    $ 1,857.6    $    408.5       22.0 %



                                       43

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                    Fiscal Year
                 2018         2017       $ change     % change    Impact of FX
                              (in millions, except percentages)
RMS           $   519.7    $   493.6    $     26.1        5.3 %         1.6 %
DSA             1,316.9        980.0         336.9       34.4 %         1.1 %
Manufacturing     429.5        384.0          45.5       11.9 %         1.4 %
Total revenue $ 2,266.1    $ 1,857.6    $    408.5       22.0 %         1.3 %

The following table presents operating income by reportable segment:

                                   Fiscal Year
                                2018        2017       $ change     % change
                                     (in millions, except percentages)
RMS                           $ 136.5     $ 114.6     $    21.9       19.1  %
DSA                             227.6       182.8          44.8       24.5  %
Manufacturing                   136.2       123.9          12.3        9.9  %
Unallocated corporate          (168.9 )    (133.0 )       (35.9 )     27.0  %
Total operating income        $ 331.4     $ 288.3     $    43.1       15.0  %
Operating income % of revenue    14.6 %      15.5 %                   (0.9 

)%

The following presents and discusses our consolidated results by each of our
reportable segments:
RMS
                                    Fiscal Year
                               2018             2017           $ change      % change     Impact of FX
                                                (in millions, except percentages)
Revenue                   $      519.7     $       493.6     $     26.1          5.3  %         1.6 %
Cost of revenue
(excluding amortization
of intangible assets)            319.8             317.1            2.7          0.9  %
Selling, general and
administrative                    61.8              60.2            1.6          2.7  %
Amortization of
intangible assets                  1.6               1.7           (0.1 )       (5.4 )%
Operating income          $      136.5     $       114.6     $     21.9         19.1  %
Operating income % of
revenue                           26.3 %            23.2 %                       3.1  %


RMS revenue increased $26.1 million, or 5.3%, due primarily to higher research
model product revenue in China and higher revenue for research model services.
Research model services benefited from a large government contract in the IS
business and strong client demand in the GEMS business resulting from increased
research and development activity conducted across biotechnology, global
biopharmaceutical, and academic institutional clients, and the effect of changes
in foreign currency exchange rates; partially offset by lower research model
product revenue outside of China.
RMS operating income increased $21.9 million, or 19.1%, compared to the
corresponding period in 2017. RMS operating income as a percentage of revenue
for fiscal year 2018 was 26.3%, an increase of 3.1% from 23.2% for the
corresponding period in 2017. Operating income and operating income as a
percentage of revenue increased due primarily to lower amount of costs
associated with the realignment of our research model production site in
Maryland in 2018 compared to 2017. Restructuring costs (recorded primarily
within cost of revenue) incurred during 2017 were $18.1 million, which primarily
related to non-cash asset impairments and accelerated depreciation charges.
Restructuring costs incurred during 2018 were $2.0 million, which primarily
related to cash payments for severance and transition costs. Additionally,
operating income and operating income as a percentage of revenue increased due
to the increased revenue discussed above; partially offset by continued
investments to support future growth, including increased investments in
personnel (staffing levels and hourly wage increases), and facility expansions
(primarily in China) as well as lower operating income margins on the
aforementioned large government contract.
DSA

                                       44
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                                    Fiscal Year
                               2018             2017           $ change      % change     Impact of FX
                                                (in millions, except percentages)
Revenue                   $    1,316.9     $       980.0     $    336.9         34.4  %         1.1 %
Cost of revenue
(excluding amortization
of intangible assets)            903.9             661.7          242.2         36.6  %
Selling, general and
administrative                   131.2             105.6           25.6         24.3  %
Amortization of
intangible assets                 54.2              29.9           24.3         81.4  %
Operating income          $      227.6     $       182.8     $     44.8         24.5  %
Operating income % of
revenue                           17.3 %            18.7 %                      (1.4 )%


DSA revenue increased $336.9 million, or 34.4%, due primarily to the recent
acquisitions of MPI Research, KWS BioTest, and Brains On-Line, which contributed
$209.5 million, $8.6 million and $6.0 million to service revenue growth,
respectively. Additionally, service revenue increased in both the Safety
Assessment and Discovery Services businesses due to demand from both
biotechnology and global biopharmaceutical clients and favorable pricing and mix
of services. The effect of changes in foreign currency exchange rates also
increased revenue.
DSA operating income increased $44.8 million, or 24.5%, compared to the
corresponding period in 2017. DSA operating income as a percentage of revenue
for fiscal year 2018 was 17.3%, a decrease of 1.4% from 18.7% for the
corresponding period in 2017. The increase to operating income was primarily
attributable to contributions from recent acquisitions of MPI Research, KWS
BioTest, and Brains On-Line. These increases were partially offset by increased
costs to support the growth of the Company, which include costs due to the
acquisitions, including a higher service cost base, an increase in compensation,
benefits, and other employee-related expenses recorded within both cost of
revenue and selling, general, and administrative expense, and higher
amortization of intangible assets as substantially all of our acquisitions in
fiscal year 2018 are included within the DSA reportable segment. These increased
costs collectively decreased operating income as a percentage of revenue in 2018
compared to 2017.
Manufacturing
                                    Fiscal Year
                               2018             2017           $ change      % change     Impact of FX
                                                (in millions, except percentages)
Revenue                   $      429.5     $       384.0     $     45.5         11.9  %         1.4 %
Cost of revenue
(excluding amortization
of intangible assets)            202.3             177.8           24.5         13.8  %
Selling, general and
administrative                    82.0              72.5            9.5         13.0  %
Amortization of
intangible assets                  9.0               9.8           (0.8 )       (7.9 )%
Operating income          $      136.2     $       123.9     $     12.3          9.9  %
Operating income % of
revenue                           31.7 %            32.3 %                      (0.6 )%


Manufacturing revenue increased $45.5 million, or 11.9%, due primarily to higher
demand for endotoxin products and species identification services in the
Microbial Solutions business, higher service revenue in the Biologics business,
higher product revenue in the Avian business, and the effect of changes in
foreign currency exchange rates; partially offset by the absence of $1.8 million
of service revenue related to the CDMO business.
Manufacturing operating income increased $12.3 million, or 9.9%, compared to the
corresponding period in 2017. Manufacturing operating income as a percentage of
revenue for fiscal year 2018 was 31.7%, a decrease of 0.6% from 32.3% for the
corresponding period in 2017. The increase to operating income was due primarily
to the increase in revenue. This increase was partially offset by increased
costs to support the growth of the Company, including increased investments in
personnel (staffing levels and hourly wage increase), facility expansions
(primarily in Microbial Solutions and Biologics), and increased investments in
technology to support research and development efforts (primarily in Microbial
Solutions). Increased costs are recorded in cost of revenue and selling,
general, and administrative expenses and these higher costs decreased operating
income as a percentage of revenue in 2018 compared to 2017.
Unallocated Corporate

                                       45
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                                        Fiscal Year
                                     2018        2017       $ change     % change
                                          (in millions, except percentages)
Unallocated corporate              $ 168.9     $ 133.0     $     35.9       27.0 %
Unallocated corporate % of revenue     7.5 %       7.2 %                    

0.3 %

The increase in unallocated corporate costs of $35.9 million, or 27.0%, is
consistent with the allocated selling, general, and administrative expense
increases discussed above and are primarily related to an increase in
compensation, benefits, and other employee-related expenses and an increase in
costs associated with the evaluation and integration of our recent acquisitions
to support the growth of the Company. Costs as a percentage of revenue for
fiscal year 2018 was 7.5%, an increase of 0.3% from 7.2% for the corresponding
period in 2017.
Interest Income Interest income, which represents earnings on cash, cash
equivalents, and time deposits remained consistent at $0.8 million and $0.7
million for fiscal years 2018 and 2017, respectively.
Interest Expense Interest expense for fiscal year 2018 was $63.8 million, an
increase of $34.0 million, or 114.2%, compared to $29.8 million for fiscal year
2017. The increase was due primarily to higher debt to fund our recent
acquisitions.
Other Income, Net Other income, net, was $13.3 million for fiscal year 2018, a
decrease of $24.5 million, or 64.9%, compared to $37.8 million for fiscal year
2017. The decrease in other income, net was driven by a decrease of $7.0 million
in gains recognized related to our venture capital investments, a decrease of
$6.0 million in gains related to certain life insurance policies, and the
absence of a $10.6 million gain recognized as a result of the CDMO business.
Income Taxes Income tax expense was $54.5 million for fiscal year 2018, a
decrease of $116.9 million, compared to $171.4 million for fiscal year 2017. Our
effective tax rate was 19.3% for fiscal year 2018, compared to 57.7% for fiscal
year 2017. The decrease was primarily driven by the net effects of U.S. Tax
Reform, including the reduction of the U.S. federal statutory tax rate from 35%
in 2017 to 21% in 2018, as well as the impact of the one-time Transition Tax and
change of our assertion of indefinite reinvestment of foreign earnings in 2017.
In addition, 2017 includes the impact of the gain on the divestiture of the CDMO
business.
Liquidity and Capital Resources
We currently require cash to fund our working capital needs, capital expansion,
acquisitions, and to pay our debt, lease, venture capital investment, and
pension obligations. Our principal sources of liquidity have been our cash flows
from operations, supplemented by long-term borrowings. Based on our current
business plan, we believe that our existing funds, when combined with cash
generated from operations and our access to financing resources, are sufficient
to fund our operations for the foreseeable future.
The following table presents our cash, cash equivalents and short-term
investments:
                                                  December 28, 2019       December 29, 2018
                                                                (in millions)
Cash and cash equivalents:
Held in U.S. entities                           $              56.5     $              67.3
Held in non-U.S. entities                                     181.5                   128.1
Total cash and cash equivalents                               238.0         

195.4

Short-term investments:
Held in non-U.S. entities                                       1.0                     0.9
Total cash, cash equivalents and short-term
investments                                     $             239.0     $             196.3


Borrowings
On March 26, 2018, we amended and restated our $1.65 billion credit facility,
which extended the maturity date and provided for a $750.0 million term loan and
a $1.55 billion multi-currency revolving facility (Credit Facility). The term
loan facility matures in 19 quarterly installments with the last installment due
March 26, 2023. The revolving facility matures on March 26, 2023, and requires
no scheduled payment before that date. On October 23, 2019, we prepaid $500.0
million of the term loan with proceeds from a $500.0 million unregistered
private offering (see 2028 Senior Notes below). Additionally, on November 4,
2019, we further amended and restated the Credit Facility to increase the
multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05
billion. Under specified circumstances, we have the ability to increase the term
loan and/or revolving facility by up to $1.0 billion in the aggregate.

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On April 3, 2018, we entered into an indenture (Base Indenture) with MUFG Union
Bank, N.A. to allow for senior notes offerings under supplemental indentures.
Concurrently on April 3, 2018, we entered into our first supplemental indenture
and raised $500.0 million in aggregate principal amount of 5.5% Senior Notes due
in 2026 (2026 Senior Notes) in an unregistered offering. Under the terms of the
first supplemental indenture, interest on the 2026 Senior Notes is payable
semi-annually on April 1 and October 1, beginning on October 1, 2018. On
October 23, 2019, we entered into our second supplemental indenture and raised
an additional $500.0 million in aggregate principal amount of 4.25% Senior Notes
due in 2028 (2028 Senior Notes) in an unregistered offering. Under the terms of
the second supplemental indenture, interest on the 2028 Senior Notes is payable
semi-annually on May 1 and November 1, beginning on May 1, 2020.
Amounts outstanding under our credit facilities and both the 2026 Senior Notes
and the 2028 Senior Notes were as follows:
                    December 28, 2019      December 29, 2018

                                  (in millions)
Term loans         $             193.8    $             731.3
Revolving facility               676.1                  397.5
2026 Senior Notes                500.0                  500.0
2028 Senior Notes                500.0                      -
Total              $           1,869.9    $           1,628.8


The interest rates applicable to the term loan and revolving facility under the
Credit Facility are, at our option, equal to either the base rate (which is the
higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the
one-month adjusted LIBOR rate plus 1.0%) or the adjusted LIBOR rate, plus an
interest rate margin based upon our leverage ratio.
We entered into foreign exchange forward contracts during fiscal years 2019 and
2018 to limit our foreign currency exposure related to a U.S. dollar denominated
loan borrowed by a non-U.S. Euro functional currency entity under the Credit
Facility.
The acquisition of Citoxlab on April 29, 2019 for $527.7 million in cash was
funded through a combination of cash on hand and proceeds from our Credit
Facility under the multi-currency revolving facility.
The acquisition of HemaCare on January 3, 2020 for approximately $380 million in
cash was funded through a combination of cash on hand and proceeds from our
Credit Facility under the multi-currency revolving facility.
Repurchases of Common Stock
On May 9, 2017, our Board of Directors increased the stock repurchase
authorization by $150.0 million, to an aggregate amount of $1.3 billion. During
fiscal year 2019, we did not repurchase any shares under our authorized stock
repurchase program. As of December 28, 2019, we had $129.1 million remaining on
the authorized stock repurchase program. Our stock-based compensation plans
permit the netting of common stock upon vesting of restricted stock, restricted
stock units, and performance share units in order to satisfy individual
statutory tax withholding requirements. During fiscal year 2019, we acquired 0.1
million shares for $18.1 million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
                                                             Fiscal Year
                                                2019             2018       

2017

                                                            (in millions)
Income from continuing operations, net of
income taxes                               $      254.1     $      227.2     $      125.6
Adjustments to reconcile income from
continuing operations, net of income
taxes, to net cash provided by operating
activities                                        220.7            199.1    

186.6

Changes in assets and liabilities                   6.1             14.8    

5.9

Net cash provided by operating activities $ 480.9 $ 441.1

$ 318.1

Net cash provided by cash flows from operating activities represents the cash
receipts and disbursements related to all of our activities other than investing
and financing activities. Operating cash flow is derived by adjusting our income
from continuing operations for (1) non-cash operating items such as depreciation
and amortization, stock-based compensation, deferred income taxes, gains on
venture capital investments and divestiture, and impairment charges, as well as
(2) changes in operating assets and liabilities, which reflect timing
differences between the receipt and payment of cash associated with transactions
and when they are recognized in our results of operations. For fiscal year 2019,
compared to fiscal year 2018, the increase in net cash provided by operating
activities was primarily driven by an increase in income from continuing
operations, net of income taxes

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and the favorable timing of vendor and supplier payments compared to the same
period in 2018; partially offset by unfavorable changes in operating assets and
liabilities, specifically related to the timing of net contract balances from
contracts with customers (collectively trade receivables, net; deferred revenue;
and customer contract deposits), increases in inventory levels in response to
customer demand, and higher compensation payments compared to the prior year
period. The increase in net cash provided by operating activities from fiscal
year 2017 to 2018 was primarily driven by an increase in income from continuing
operations and positive changes in operating assets and liabilities resulting
from an increase in our deferred revenue (primarily due to a one-time up-front
payment received in connection with a strategic agreement), an increase in
customer contract deposits, as well as improved collections of our receivables.
The following table presents our net cash used in investing activities:
                                                            Fiscal Year
                                             2019              2018         

2017

                                                           (in millions)
Acquisition of businesses and assets,   $      (515.7 )   $      (824.9 )   $       (25.0 )
net of cash acquired
Capital expenditures                           (140.5 )          (140.1 )           (82.4 )
Investments, net                                (21.4 )            10.7             (37.2 )
Proceeds from divestiture                           -                 -              72.5
Other, net                                       (3.9 )            (0.7 )  

(0.5 ) Net cash used in investing activities $ (681.5 ) $ (955.0 ) $ (72.6 )

The primary use of cash used in investing activities in fiscal year 2019 related
to the acquisition of Citoxlab, the acquisition of a supplier, capital
expenditures to support the growth of the business, and investments in certain
venture capital and other equity investments. The primary use of cash in fiscal
year 2018 related to our acquisitions of MPI Research and KWS BioTest, and our
capital expenditures to support the growth of the business; partially offset by
proceeds from net investments, which primarily relate to short-term investments
held by our U.K. operations. The primary use of cash in fiscal year 2017 related
to our capital expenditures to support the growth of the business, net
investment activity, and our acquisition of Brains On-Line, partially offset by
the proceeds from the divestiture of the CDMO business.
The following table presents our net cash provided by (used in) financing
activities:
                                                            Fiscal Year
                                             2019              2018              2017
                                                           (in millions)
Proceeds from long-term debt and
revolving credit facility               $     3,358.5     $     2,755.0     $       236.8
Payments on long-term debt, revolving
credit facility, and finance lease
obligations                                  (3,124.6 )        (2,201.0 )          (372.4 )
Proceeds from exercises of stock
options                                          34.5              37.7     

38.9

Payments on debt financing costs                 (6.6 )           (18.3 )               -
Purchase of treasury stock                      (18.1 )           (13.8 )          (106.9 )
Other, net                                      (11.8 )            (1.5 )            (4.9 )
Net cash provided by (used in)
financing activities                    $       231.9     $       558.1

$ (208.5 )

For fiscal year 2019, net cash provided by financing activities reflected the
net proceeds of $233.9 million on our long-term debt, revolving credit facility,
and finance lease obligations. Included in the net proceeds are the following
amounts:
•      Proceeds of $494 million received from the issuance of the 2028 Senior

Notes on October 23, 2019, proceeds of approximately $581 million from our

revolving credit facility to fund our recent acquisitions; and $98 million

       of proceeds from our revolving credit facility to fund activities in the
       normal course of business; partially offset by,

• Payments of $537.5 million on our term loan, which included the $500.0

million prepayment on November 4, 2019, and approximately $151 million of

       repayments to our revolving credit facility in the normal course of
       business;

• Additionally, we had $2.4 billion of gross payments, partially offset by

$2.2 billion of gross proceeds in connection with a non-U.S. Euro

functional currency entity repaying Euro loans and replacing the Euro

loans with U.S. dollar denominated loans. A series of forward currency

contracts were executed to mitigate any foreign currency gains or losses

       on the U.S. dollar denominated loans. These proceeds and payments are
       presented as gross financing activities.


Net cash provided by financing activities also reflected proceeds from exercises
of employee stock options of $34.5 million. Net cash provided by financing
activities was partially offset by treasury stock purchases of $18.1 million
made due to the

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netting of common stock upon vesting of stock-based awards in order to satisfy
individual statutory tax withholding requirements and the purchase of an
additional 5% equity interest in Vital River for $7.9 million which is included
in Other, net.
For fiscal year 2018, net cash provided by financing activities reflected the
incremental proceeds from the refinancing of our previous $1.65 Billion Credit
Facility to the $2.3 Billion Credit Facility and the proceeds from our $500.0
million 2026 Senior Notes. Subsequent to refinancing our $2.3 Billion Credit
Facility, we repaid €300 million of our revolving facility borrowed by a
non-U.S. Euro functional currency entity and replaced the borrowing with a $343
million U.S. dollar denominated loan. A forward currency contract was then
executed to mitigate any foreign currency gains or losses on the $343 million
U.S. dollar denominated loan. Additionally, proceeds from exercises of employee
stock options of $37.7 million; partially offset by payments on debt financing
costs of $18.3 million, and treasury stock purchases of $13.8 million made due
to the netting of common stock upon vesting of stock-based awards in order to
satisfy individual statutory tax withholding requirements.
For fiscal year 2017, cash used in financing activities reflected net payments
of $135.6 million on long-term debt, revolving credit facility, and finance
lease obligations; and treasury stock purchases of $106.9 million made pursuant
to our authorized stock repurchase program and the netting of common stock upon
vesting of stock-based awards in order to satisfy individual statutory tax
withholding requirements; partially offset by proceeds from exercises of
employee stock options of $38.9 million.
Contractual Commitments and Obligations
Minimum future payments of our contractual obligations as of December 28, 2019
are as follows:
                                                         Payments Due by Period
                                             Less than                                           More Than
                               Total          1 Year         1 - 3 Years       3 - 5 Years        5 Years
                                                             (in millions)
Notes payable (1)           $  1,875.7     $      35.5     $       155.1     $       683.1     $   1,002.0
Operating leases (2)             222.0            27.1              52.4              41.2           101.3
Finance leases                    40.7             4.3               7.7               5.1            23.6
Redeemable noncontrolling
interests (3)                     26.3             4.0              22.3                 -               -
Venture capital investment
commitments (4)                   48.1            34.8              13.3                 -               -
Contingent payments (5)            0.9             0.9                 -                 -               -
Unconditional purchase
obligations (6)                  154.0           106.1              45.0               2.9               -
Total contractual cash
obligations                 $  2,367.7     $     212.7     $       295.8

$ 732.3 $ 1,126.9

(1) Notes payable includes the principal payments on our debt, which include our

$2.3B Credit Facility, our Senior Notes and Other debt.

(2) We lease properties and equipment for use in our operations. In addition to

rent, the leases may require us to pay additional amounts for taxes,

insurance, maintenance, and other operating expenses. Amounts reflected

within the table detail future minimum rental commitments under

non-cancellable operating leases, net of income from subleases, for each of

the periods presented. Approximately $57 million of contractually committed

     lease payments are reflected in the table for which leases have not yet
     commenced, as we do not yet control the underlying assets.


(3)  The estimated cash obligation for redeemable noncontrolling interests are
     based on the amount that would be paid if settlement occurred as of the

balance sheet date based on the contractually defined redemption value as of

December 28, 2019.

(4) The timing of the remaining capital commitment payments to venture capital

funds is subject to the procedures of the limited liability partnerships and

limited liability companies; the above table reflects the earliest possible

     date the payment can be required under the relevant agreements.


(5)  In connection with certain business and asset acquisitions, we agreed to
     make additional payments aggregating to $0.9 million based upon the

achievement of certain financial targets in connection with the respective

acquisition. The contingent payment obligations included in the table above

have not been probability adjusted or discounted.

(6) Unconditional purchase obligations include agreements to purchase goods or

services that are enforceable and legally binding and that specify all

significant terms, including fixed or minimum quantities to be purchased,

fixed, minimum or variable price provisions, and the approximate timing of

the transaction. Purchase obligations exclude agreements that are

cancellable at any time without penalty.

The above table excludes obligations related to our pension and other
post-retirement benefit plans. Refer to Item 8, "Financial Statements and
Supplementary Data," in this Annual Report on Form 10-K for more details.
Tax Related Obligations
We excluded liabilities pertaining to uncertain tax positions from our summary
of contractual obligations presented above, as we cannot make a reliable
estimate of the period of cash settlement with the respective taxing
authorities. As of December 28, 2019, we had $19.7 million of liabilities
associated with uncertain tax positions.

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Additionally, we excluded federal and state income tax liabilities of $52.1
million from our summary of contractual obligations presented above, relating to
the one-time Transition Tax on unrepatriated earnings under U.S. Tax Reform. The
Transition Tax will be paid, interest free, over an eight-year period through
2026.
Off-Balance Sheet Arrangements
As of December 28, 2019, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated
under the Exchange Act, except as disclosed below.
Venture Capital Investments
We invest in several venture capital funds that invest in start-up companies,
primarily in the life sciences industry. Our total commitment to the funds as of
December 28, 2019 was $128.4 million, of which we funded $80.3 million through
December 28, 2019. Refer to Note 6, "Venture Capital Investments and Other
Investments," to our consolidated financial statements contained in Item 8,
"Financial Statements and Supplementary Data," in this Annual Report on Form
10-K for further details.
Letters of Credit
Our off-balance sheet commitments related to our outstanding letters of credit
as of December 28, 2019 were $7.5 million.
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and currency
exchange rates, which could affect our future results of operations and
financial condition. We manage our exposure to these risks through our regular
operating and financing activities.
Interest Rate Risk
We are exposed to changes in interest rates while conducting normal business
operations as a result of ongoing financing activities. As of December 28, 2019,
our debt portfolio was comprised primarily of floating interest rate borrowings.
A 100-basis point increase in interest rates would increase our annual pre-tax
interest expense by $8.7 million.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange
rate fluctuations for our financial position, results of operations, and cash
flows.
While the financial results of our global activities are reported in U.S.
dollars, our foreign subsidiaries typically conduct their operations in their
respective local currency. The principal functional currencies of the Company's
foreign subsidiaries are the Euro, British Pound, Canadian Dollar, and Chinese
Yuan Renminbi. During fiscal year 2019, the most significant drivers of foreign
currency translation adjustment the Company recorded as part of other
comprehensive income (loss) were the Canadian Dollar, British Pound, Hungarian
Forint, Euro, and Chinese Yuan Renminbi.
Fluctuations in the foreign currency exchange rates of the countries in which we
do business will affect our financial position, results of operations, and cash
flows. As the U.S. dollar strengthens against other currencies, the value of our
non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally
decline when reported in U.S. dollars. The impact to net income as a result of a
U.S. dollar strengthening will be partially mitigated by the value of non-U.S.
expenses, which will decline when reported in U.S. dollars. As the U.S. dollar
weakens versus other currencies, the value of the non-U.S. revenue, expenses,
assets, liabilities, and cash flows will generally increase when reported in
U.S. dollars. For fiscal year 2019, our revenue would have increased by $90.5
million and our operating income would have increased by $2.0 million, if the
U.S. dollar exchange rate had strengthened by 10%, with all other variables held
constant.
We attempt to minimize this exposure by using certain financial instruments in
accordance with our overall risk management and our hedge policy. We do not
enter into speculative derivative agreements.
During fiscal years 2019 and 2018, we entered into foreign exchange forward
contracts to limit our foreign currency exposure related to both intercompany
loans and a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional
currency entity under our Credit Facility. Refer to Note 14, "Foreign Currency
Contracts," to our consolidated financial statements contained in Item 8,
"Financial Statements and Supplementary Data," in this Annual Report on Form
10-K for further details regarding these types of forward contracts.

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