CHARLES RIVER LABORATORIES INTERNATIONAL, INC. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2019. 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" included elsewhere within this Form 10-Q. 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, bothGood 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. 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, Research Model Services, and Research Products businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of our clients' research operations (including recruitment, training, staffing, and management services). Research Products supplies controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. 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; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens. COVID-19 Overview OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The COVID-19 pandemic is dynamic and expanding, and its ultimate scope, duration and effects are uncertain. This pandemic has had and continues to result in direct and indirect adverse effects on our industry and customers, which in turn has impacted our business, results of operations, and financial condition. Further, the COVID-19 pandemic may also affect our operating and financial results in ways that are and are not presently known to us, or that we currently do not expect to present significant risks to our operations or financial results but which may in fact turn out to negatively affect us to a magnitude greater than anticipated. Refer to Item 1A, Risk Factors, included herein for risk factors reflecting the impact of the COVID-19 pandemic. Giving consideration to each of these risk factors, the following is our current estimate and belief of the impact of the COVID-19 pandemic during the first quarter of fiscal 2020 and how it may continue to affect us in subsequent periods. Business continuity To date, we generally have not experienced significant challenges in implementing our business continuity plans. Many government agencies have provided guidance permitting "essential" or "critical" business operations to remain open. As of the date of this quarterly report, in the geographies where business restrictions have been imposed, we believe all of our business operations have satisfied the requirements to be designated to be "essential" or "critical" according to the guidance provided by 30 -------------------------------------------------------------------------------- government, health and other regulatory agencies with authority over such matters. As a result, all of our operating sites remain open and adequately staffed as of the date of this quarterly report. For certain operations or sites experiencing logistical delays, we have experienced some inefficiencies as it relates to completing work or fulfilling orders; however, we do not believe material expenditures will be required or material resource constraints will occur. Logistical delays include a small number of sites that have experienced reduced operations (including as a result of increased employee absenteeism) or voluntarily closed, as well as delays in transportation activities. We have comprehensive business continuity plans in place for each site globally and are continuously updating these to address the evolving COVID-19 pandemic situation. We implemented our initial plans inChina beginning inJanuary 2020 , and have continuously refined our plans for other regions as the virus has spread. We have encouraged and expressed our expectations that employees work remotely whenever possible; and for those employees who need to come into our sites to fulfill their responsibilities, we are adhering to guidelines from government, health, and other regulatory agencies. This includes social distancing, flexible scheduling such as split shifts, restricting visitors, enhanced cleaning, and providing personal protective equipment (PPE), such as masks and gloves, to employees. Due to the nature of our business, many employees already work in biosecure environments that require PPE and adhere to other procedures to safely accomplish their daily responsibilities. Accordingly, to date, we believe we have been able to efficiently implement the additional safety precautions. Supply chain We are focused on ensuring that we have adequate inventory and supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain. Accordingly, we have and expect to continue to increase inventory and supplies through the second quarter of 2020 and beyond as deemed appropriate. We proactively engaged with our suppliers beginning inJanuary 2020 to limit any potential disruption to our supply chain. However, notwithstanding generally successful efforts to maintain supply chain continuity, we have experienced and expect to experience increased costs and potential delays throughout our supply chain during the pandemic. Financial condition and results of our global operations We are a global company that operates in over 90 facilities across over 20 countries worldwide. As we perform business across various borders, we are experiencing a continuum of impacts in each location as the COVID-19 pandemic has impacted the global economy in different phases. We are continuing to see demand for products and services across all of our businesses, although as described below the impact of the COVID-19 pandemic on the level of demand varies with our different businesses. While there is uncertainty, our clients are still in need of the products and services we provide to biomedical research to advance discovery and develop new therapies for the treatment of disease, including the COVID-19 pandemic. Due to certain restrictions in place at the various sites of our clients and suppliers (including client and supplier site closures), there have been challenges relating to timely receiving and shipping products globally in all businesses. Should these restrictions continue, demand/supply issues may persist and could impact revenue growth, operating income (including operating income margins) and cash flows. We have observed some impact due to constraints from internal site restrictions, remote work, resources, and productivity. However, we believe the impact to us has not been as significant as to companies in many other industries because of the nature of our businesses, the classification of our businesses as essential or critical, as the case may be, and our business continuity plans. Our RMS business was moderately impacted by the COVID-19 pandemic during the three months endedMarch 28, 2020 , although the impact accelerated during the final month of the quarter. Demand for research models began to decline due primarily to the physical shutdown of our client's facilities, principally academic institutions. While many of our clients are deemed essential businesses as well, we began to experience a slowdown, initially inChina inJanuary 2020 , and then acrossEurope andNorth America later in the period, as measures were implemented by various governments to slow the spread of the COVID-19 pandemic. We expect this trend of reduced demand for research models to continue in upcoming quarters, which will negatively impact revenue, operating income, operating income margins, and cash flows. An increase in demand is not expected until our clients reopen impacted sites and resume their research activity. Research models services, specifically our GEMS and Insourcing Solutions businesses, experienced higher revenues in the three month period endedMarch 28, 2020 compared to the corresponding prior period. Our DSA business was not significantly impacted by the COVID-19 pandemic during the three months endedMarch 28, 2020 . Towards the end of the first fiscal quarter of 2020, we experienced some client work shifting towards subsequent quarters of fiscal year 2020 due to the various actions and restrictions put in place by governments around the world intended to slow the spread of the COVID-19 pandemic. The work performed in our Discovery Services and Safety Assessment businesses are largely dependent on our internal sites being open. Therefore, to the extent that clients require work to be completed, we have been able to maintain the ability to continue to meet client demands and perform the work so long as our work force at the specific site the work is done is not significantly adversely impacted by the COVID-19 pandemic. This trend is expected to continue as government actions to slow the spread of the COVID-19 pandemic begin to subside, employees return to work, and economies across the world begin to reopen. Costs of supply are expected to increase as we procure the materials required to 31 --------------------------------------------------------------------------------
perform our work. We expect a small-to-modest adverse impact to our revenue growth, operating income, operating margin and cash flow through the rest of the year.
Our Manufacturing business was not significantly impacted by the COVID-19 pandemic during the three months endedMarch 28, 2020 . We expect to see a minor negative impact due to the COVID-19 pandemic as our customers experience minor disruptions in their manufacturing operations. We expect Manufacturing products, such as Microbial Solutions endotoxin products and avian products, to see continued demand through the remainder of fiscal 2020. Our Biologics testing facilities remain open and performing services for our clients. Similar to our other services businesses, our ability to perform work is contingent on our internal facilities and our work force not being significantly adversely impacted by the COVID-19 pandemic. We expect a small adverse impact to our revenue growth, operating income, operating margin and cash flows through the rest of the year. Liquidity, capital and financial resources We require cash to fund working capital needs as well as capital expansion, acquisitions, venture capital and strategic investments, debt obligations, leases, and pension obligations. The principal sources of liquidity have been cash flows from operations, supplemented by long-term borrowings. In fiscal year 2019, we issued$500 million Senior Notes, repaid part of our term loan for$500 million , and increased our multi-currency revolving facility by$500 million , from$1.55 billion to$2.05 billion . As ofMarch 28, 2020 , we had$2.4 billion of debt outstanding, of which$44.7 million is current. Available on the revolving line of credit (Revolver) is approximately$900 million , which matures onMarch 26, 2023 and does not require scheduled payments before that date should additional borrowings occur. The term loan facility matures in 19 quarterly installments with the last installment dueMarch 26, 2023 . The Senior Notes become due in 2026 and 2028. Due to the uncertainty resulting from the COVID-19 pandemic, we borrowed an additional$150 million from the Revolver during the three months endedMarch 28, 2020 . While there remains uncertainty for the remainder of 2020, we currently do not anticipate needing to use these borrowings to fund operations. The purpose of borrowing the additional funds was to protect against any prolonged adverse impacts on liquidity markets that are currently unforeseeable. We expect to generate cash inflows from our operating activities sufficient to satisfy our working capital needs as well as to service our debt, pension, and venture capital obligations. Due to this higher debt, we do expect an increase to interest expense, however, this additional charge is not expected to materially adversely impact us. We do not currently anticipate we will need to borrow additional funds during 2020. However, we have analyzed the cash flows and debt balances noting there is significant capacity on the remaining Revolver assuming we achieve the results of operations consistent with what we have described herein. Accordingly, we do not anticipate a material risk of non-compliance with our debt covenants based on our current estimate of future earnings. Our debt levels consist of a combination of fixed and variable debt, which include$1.0 billion of fixed senior notes (2026 and 2028 Senior Notes). To protect against adverse liquidity concerns, there are various mechanisms for us to improve cash flows. To date we have implemented cost reduction plans including delaying compensation related increases, implementing hiring restrictions, reducing working hours, reducing all non-essential travel, and reducing certain discretionary spending. Additionally, we have reduced our investment activity, including planned acquisitions and capital projects. As of the date these unaudited condensed consolidated financial statements are issued, based on our current and expected liquidity position, we do not believe there is significant uncertainty in our ability to continue as a going concern. Recoverability and/or impairment of assets The COVID-19 pandemic did not, nor is expected to impact, the ability to timely account for assets on our balance sheet. There are judgments involved as it relates to reviewing our allowance for doubtful accounts, valuation of inventory, and valuations/recovery of investments. We believe we have the necessary support for estimates derived for these account balances. We have reviewed the collectability and valuation of the assets through the date of financial statement issuance, noting no significant recoverability concerns or any impairments identified. Gains and losses on certain investments in venture capital funds are recorded on a quarterly lag due to the availability of the funds' financial information, which is consistent with our venture capital investment accounting policy described in our Annual Report on Form 10-K for fiscal 2019. We did not identify any triggering events when reviewing impairment indicators for our goodwill and long-lived assets (tangible and intangible) that would indicate an impairment may exist. Review of impairment indicators and quantifying any impact will continue to be a focus throughout fiscal year 2020. Should a prolonged disruption occur where there is a material change from our current expectation of future cash flows, we could experience additional write-offs of client receivables or impairments to certain asset balances due to collectability and valuation issues. Internal controls over financial reporting in a remote work environment Internal controls over financial reporting are a focus for us to ensure they continue to be designed and operating effectively. As ofMarch 28, 2020 and through the issuance of these unaudited condensed consolidated financial statements, we did not have any material changes to our internal controls over financial reporting. For personnel responsible for internal control activities 32 -------------------------------------------------------------------------------- and working remote, the ability to work effectively enabled us to continue to maintain effective internal control over financial reporting. System and efficiency programs implemented in recent years, as well as those implemented as part of business continuity plans, have enabled us to effectively complete our financial reporting process in a similar way we completed it prior to the COVID-19 pandemic despite a largely remote working environment. Although there is uncertainty over the duration of the COVID-19 pandemic disruption, we do not anticipate any adverse impact to relevant systems or to the operating effectiveness of internal controls over financial reporting. Recent Acquisitions Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below. OnJanuary 3, 2020 , we acquiredHemaCare Corporation (HemaCare ), a business specializing in the production of human-derived cellular products for the cell therapy market. The acquisition ofHemaCare expands 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 purchase price ofHemaCare was$379.8 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 is reported as part of our RMS reportable segment. OnAugust 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 purchase price was$23.4 million , net of a$4.0 million pre-existing relationship for a supply agreement settled upon acquisition. 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. OnApril 29, 2019 , we acquiredCitoxlab , a non-clinical CRO, specializing in regulated safety assessment services, non-regulated discovery services, and medical device testing. With operations inEurope andNorth America , the acquisition ofCitoxlab 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 purchase price forCitoxlab was$527.1 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.Citoxlab is reported as part of our DSA reportable segment. Overview of Results of Operations and Liquidity Revenue for the three months endedMarch 28, 2020 was$707.1 million compared to$604.6 million in the corresponding period in 2019. This increase of$102.5 million , or 17.0%, was primarily due to the recent acquisitions ofCitoxlab andHemaCare as well as growth in our DSA and Manufacturing segments; partially offset by a reduction in RMS product revenue due to the impact of the COVID-19 pandemic, and by the negative effect of changes in foreign currency exchange rates which decreased revenue by$4.6 million , or 0.7%, when compared to the corresponding period in 2019. In the three months endedMarch 28, 2020 , our operating income and operating income margin were$94.3 million and 13.3%, respectively, compared with$69.8 million and 11.5%, respectively, in the corresponding period of 2019. The increases in operating income and operating income margin were primarily due to contributions from our DSA segment, partially offset by lower RMS operating income and operating income margin due to the impact of the COVID-19 pandemic, as well as increased costs related to our recent acquisition ofHemaCare . Net income attributable to common shareholders decreased to$50.8 million in the three months endedMarch 28, 2020 , from$55.1 million in the corresponding period of 2019. The decrease in Net income attributable to common shareholders was primarily due to net losses on our venture capital investments and life insurance policy investments for the three months endedMarch 28, 2020 as compared to net gains for both investments in the corresponding period in 2019; partially offset by higher operating income mentioned above compared to the corresponding period in 2019. During the first three months of 2020, our cash flows from operations was$68.6 million compared with$14.9 million for the same period in 2019. The increase was driven by higher net income adjusted for non-cash items and certain favorable changes in working capital items, including favorable timing of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits), and lower compensation payments compared to the prior year period; partially offset by the unfavorable timing of vendor and supplier payments compared to the same period in 2019. 33 -------------------------------------------------------------------------------- Results of Operations Three Months EndedMarch 28, 2020 Compared to the Three Months EndedMarch 30, 2019 Revenue and Operating Income The following tables present consolidated revenue by type and by reportable segment: Three Months Ended March 28, 2020 March 30, 2019 $ change % change (in millions, except percentages) Service revenue$ 546.6 $ 451.0 $ 95.6 21.2 % Product revenue 160.5 153.6 6.9 4.5 % Total revenue$ 707.1 $ 604.6 $ 102.5 17.0 % Three Months Ended March 28, 2020 March 30, 2019 $ change % change Impact of FX (in millions, except percentages) RMS$ 146.0 $ 137.2 $ 8.8 6.4 % (0.9) % DSA 438.7 354.2 84.5 23.9 % (0.5) % Manufacturing 122.4 113.2 9.2 8.1 % (1.5) % Total revenue$ 707.1 $ 604.6 $ 102.5 17.0 % (0.7) %
The following table presents operating income by reportable segment:
Three Months Ended
March 28, 2020 March 30, 2019 $ change % change
(in millions, except percentages)
RMS $ 27.4 $ 37.8 $ (10.4) (27.6) %
DSA 72.3 46.7 25.6 54.8 %
Manufacturing 41.1 31.5 9.6 30.5 %
Unallocated corporate (46.5) (46.2) (0.3) 0.5 %
Total operating income $ 94.3 $ 69.8 $ 24.5 35.1 %
Operating income % of revenue 13.3 % 11.5 % 1.8 %
The following presents and discusses our consolidated financial results by each
of our reportable segments:
RMS
Three Months Ended
March 28, 2020 March 30, 2019 $ change % change Impact of FX
(in millions, except percentages)
Revenue $ 146.0 $ 137.2 $ 8.8 6.4 % (0.9) %
Cost of revenue (excluding
amortization of intangible
assets) 95.9 82.8 13.1 15.7 %
Selling, general and
administrative 19.1 16.2 2.9 18.6 %
Amortization of intangible
assets 3.6 0.4 3.2 923.6 %
Operating income $ 27.4 $ 37.8 $ (10.4) (27.6) %
Operating income % of revenue 18.7 % 27.6 % (8.9) %
RMS revenue increased $8.8 million due primarily to the recent acquisition of
HemaCare which contributed $12.3 million to revenue growth; and higher research
model services revenue, specifically our Insourcing Solutions and GEMS
businesses. Partially offsetting these increases were lower research model
product revenue across the majority of our locations due to the
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impact of the COVID-19 pandemic, largely driven by many closures of academic
clients, and the effect of changes in foreign currency exchange rates.
RMS operating income decreased $10.4 million compared to the corresponding
period in 2019. RMS operating income as a percentage of revenue for the three
months ended March 28, 2020 was 18.7%, a decrease of 8.9% from 27.6% for the
corresponding period in 2019. Operating income and operating income as a
percentage of revenue decreased primarily due to lower operating income on lower
sales volume for research model products due to the COVID-19 pandemic as
described above and due to the recent acquisition of HemaCare , which increased
amortization of intangible assets and an inventory fair value adjustment;
partially offset by higher revenue described above.
DSA
Three Months Ended
March 28, 2020 March 30, 2019 $ change % change Impact of FX
(in millions, except percentages)
Revenue $ 438.7 $ 354.2 $ 84.5 23.9 % (0.5) %
Cost of revenue (excluding
amortization of intangible
assets) 301.1 252.2 48.9 19.4 %
Selling, general and
administrative 43.3 38.6 4.7 12.1 %
Amortization of intangible
assets 22.0 16.7 5.3 31.6 %
Operating income $ 72.3 $ 46.7 $ 25.6 54.8 %
Operating income % of revenue 16.5 % 13.2 % 3.3 %
DSA revenue increased $84.5 million due primarily to the recent acquisition of
Citoxlab which contributed $45.3 million 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 revenue was not
significantly impacted by the COVID-19 pandemic during the three months ended
March 28, 2020 .
DSA operating income increased $25.6 million during the three months ended March
28, 2020 compared to the corresponding period in 2019. DSA operating income as a
percentage of revenue for the three months ended March 28, 2020 was 16.5%, an
increase of 3.3% from 13.2% for the corresponding period in 2019. These
increases were primarily attributable to higher revenues described above,
realizing the favorable impact of recent cost saving efficiencies, and lower
acquisitions related costs, partially offset by higher amortization of
intangible assets related to our recent acquisitions.
Manufacturing
Three Months Ended
March 28, 2020 March 30, 2019 $ change % change Impact of FX
(in millions, except percentages)
Revenue $ 122.4 $ 113.2 $ 9.2 8.1 % (1.5) %
Cost of revenue (excluding
amortization of intangible
assets) 58.0 57.8 0.2 0.4 %
Selling, general and
administrative 21.0 21.6 (0.6) (2.7) %
Amortization of intangible
assets 2.3 2.3 - (3.3) %
Operating income $ 41.1 $ 31.5 $ 9.6 30.5 %
Operating income % of revenue 33.6 % 27.8 % 5.8 %
Manufacturing revenue increased $9.2 million due primarily to higher demand for
products in both our Microbial Solutions' Endotoxin business and our Avian
business, and higher service revenue in the Biologics business due to our
facility in Pennsylvania being fully operational in 2020 compared to 2019 where
work continued to be transitioned from a legacy facility; partially offset by
lower product revenue in our Microbial Solutions' Bioburden business,
specifically due to the timing of a large stocking order from a strategic
partner in 2019, which did not recur in 2020 and the effect of changes in
foreign currency
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exchange rates. Manufacturing revenue was not significantly impacted by the
COVID-19 pandemic during the three months ended March 28, 2020 .
Manufacturing operating income increased $9.6 million during the three months
ended March 28, 2020 compared to the corresponding period in 2019. Manufacturing
operating income as a percentage of revenue for the three months ended March 28,
2020 was 33.6%, an increase of 5.8% from 27.8% for the corresponding period in
2019. The increases were due primarily to higher revenues as well as improved
production efficiencies and the impact of certain cost savings initiatives in
the three months ended March 28, 2020 compared to the same period in 2019.
Unallocated Corporate
Three Months Ended
March 28, 2020 March 30, 2019 $ change % change
(in millions, except percentages)
Unallocated corporate $ 46.5 $ 46.2 $ 0.3 0.5 %
Unallocated corporate % of
revenue 6.6 % 7.6 % (1.0) %
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 $0.3 million , or 0.5%, compared
to the corresponding period in 2019 is 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, partially
offset by a net decrease in compensation, benefits, and other employee-related
expenses. Costs as a percentage of revenue for the three months ended March 28,
2020 was 6.6%, a decrease of 1.0% from 7.6% for the corresponding period in
2019.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time
deposits was $0.3 million and $0.2 million for the three months ended March 28,
2020 and the corresponding period in 2019, respectively.
Interest Expense
Interest expense for the three months ended March 28, 2020 was $15.1 million , an
increase of $5.1 million , or 50.9%, compared to $10.0 million for the
corresponding period in 2019. The increase was due primarily to higher interest
expense from increased debt to fund our recent acquisitions and a lower foreign
currency gain recognized in connection with a debt-related foreign exchange
forward contract.
Other (Expense) Income, Net
Other expense, net, was $24.1 million for the three months ended March 28, 2020 ,
a decrease of $30.4 million , or 481.7%, compared to Other income, net of $6.3
million for the corresponding period in 2019. The decrease was due primarily to
net losses on our venture capital investments and life insurance policy
investments for the three months ended March 28, 2020 as compared to net gains
for both investments in the corresponding period in 2019.
Income Taxes
Income tax expense for the three months ended March 28, 2020 was $4.6 million , a
decrease of $6.0 million compared to $10.6 million for the corresponding period
in 2019. Our effective tax rate was 8.3% for the three months ended March 28,
2020 , compared to 16.0% for the corresponding period in 2019. The decrease in
our effective tax rate in the 2020 period compared to the 2019 period was
primarily attributable to increased tax benefits from stock-based compensation
deductions.
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 as previously discussed in our
section on the COVID-19 pandemic impacts.
36
--------------------------------------------------------------------------------The following table presents our cash, cash equivalents and short-term investments:
March 28 ,
2020
(in millions)
Cash and cash equivalents:
Held in U.S. entities $ 197.8 $ 56.5
Held in non-U.S. entities 174.6 181.5
Total cash and cash equivalents 372.4 238.0
Short-term investments:
Held in non-U.S. entities 1.0 1.0
Total cash, cash equivalents and short-term investments
$ 239.0
Borrowings
We have a credit facility, which consists of a$750.0 million term loan, of which$184.4 million remains outstanding as ofMarch 28, 2020 , and a$2.05 billion multi-currency revolving facility (Credit Facility). The term loan facility matures in 19 quarterly installments with the last installment dueMarch 26, 2023 . The revolving facility matures onMarch 26, 2023 , and requires no scheduled payment before that date. 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. We also have an indenture that allows for senior notes offerings under supplemental indentures. In 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 onApril 1 andOctober 1 , beginning onOctober 1, 2018 . In 2019, we entered into our second supplemental indenture and raised an additional$500.0 million in aggregate principal amount of 4.25% Senior Notes due in 2028 (2028 Senior Notes) in an unregistered offering. Under the terms of the second supplemental indenture, interest on the 2028 Senior Notes is payable semi-annually onMay 1 andNovember 1 , beginning onMay 1, 2020 . Amounts outstanding under our credit facilities and both the 2026 Senior Notes and the 2028 Senior Notes were as follows: March 28, 2020 December 28, 2019 (in millions) Term loans$ 184.4 $ 193.8 Revolving facility 1,168.1 676.1 2026 Senior Notes 500.0 500.0 2028 Senior Notes 500.0 500.0 Total$ 2,352.5 $ 1,869.9 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. Repurchases of Common Stock During the three months endedMarch 28, 2020 , we did not repurchase any shares under our authorized stock repurchase program. As ofMarch 28, 2020 , we had$129.1 million remaining on the authorized$1.3 billion stock repurchase program and we do not intend to repurchase shares for the remainder of 2020. 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 the three months endedMarch 28, 2020 , we acquired 0.1 million shares for$23.7 million through such netting. 37 -------------------------------------------------------------------------------- Cash Flows The following table presents our net cash provided by operating activities: Three Months Ended March 28, 2020 March 30, 2019 (in millions) Net income$ 50.8 $ 55.7
Adjustments to reconcile net income to net cash provided by operating activities
87.8 55.1
Changes in assets and liabilities (70.0) (95.9)
Net cash provided by operating activities $ 68.6 $ 14.9
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 net
income for (1) non-cash operating items such as depreciation and amortization,
stock-based compensation, deferred income taxes, gains and/or losses on venture
capital investments, 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 the three months ended March 28, 2020 , compared to the three
months ended March 30, 2019 , the increase in net cash provided by operating
activities was driven by higher net income adjusted for non-cash items. While
net income was slightly less compared to the prior year, the non-cash items
adjusting net income were higher, specifically venture capital and life
insurance investment losses of approximately $18 million in three months ended
March 28, 2020 compared to gains of approximately $13 million in the
corresponding period in 2019. We experienced certain favorable changes in
working capital items, including favorable timing of net contract balances from
contracts with customers (collectively trade receivables, net; deferred revenue;
and customer contract deposits), and lower compensation payments compared to the
prior year period; partially offset by the unfavorable timing of vendor and
supplier payments compared to the same period in 2019.
The following table presents our net cash used in investing activities:
Three Months Ended
March 28 ,
2020
(in millions)
Acquisitions of businesses and assets, net of cash acquired $ (382.3) $ (1.0)
Capital expenditures (25.7) (16.7)
Investments, net (4.6) (2.4)
Other, net (1.1) (0.7)
Net cash used in investing activities $
(413.7)
For the three months endedMarch 28, 2020 , the primary use of cash used in investing activities related to the acquisition ofHemaCare , capital expenditures to support the growth of the business, and investments in certain venture capital and other equity investments. For the three months endedMarch 30, 2019 , the primary use of cash used in investing activities related to our capital expenditures to support the growth of the business. The following table presents our net cash provided by (used in) financing activities: Three Months Ended March 28, 2020 March 30, 2019 (in millions) Proceeds from long-term debt and revolving credit facility$ 1,409.8 $ 290.1 Payments on long-term debt, revolving credit facility, and finance lease obligations (925.1) (360.7) Proceeds from exercises of stock options 22.6 21.8 Purchase of treasury stock (23.7) (17.8) Other, net (4.4) (2.5) Net cash provided by (used in) financing activities $
479.2
For the three months endedMarch 28, 2020 , net cash provided by financing activities reflected the net proceeds of$484.7 million on our Credit Facility and finance lease obligations. Included in the net proceeds are the following amounts: •Proceeds of approximately$415 million from our revolving Credit Facility to fund our recent acquisitions. Additionally, towards the end of the fiscal quarter, we borrowed an additional$150 million from our revolving Credit Facility to secure cash on hand in response to uncertainties due to the COVID-19 pandemic; partially offset by, 38 -------------------------------------------------------------------------------- •Payments of approximately$10 million on our term loan and payments of$70 million to our revolving Credit Facility in the normal course of business throughout the fiscal quarter; •Additionally, we had$798 million of gross payments, partially offset by$794 million of gross proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans withU.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on theU.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$22.6 million , offset by treasury stock purchases of$23.7 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 the three months endedMarch 30, 2019 , net cash used in financing activities reflected the net payments of$70.6 million on our Credit Facility and finance lease obligations. Included in the net proceeds are the following amounts: •Payments of$9 million on our term loan and payments of$3 million to our revolving Credit Facility in the normal course of business throughout the fiscal quarter; •Additionally, we had$343 million of gross payments, partially offset by$285 million of gross proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans withU.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on theU.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities. Net cash used in financing activities also reflected treasury stock purchases of$17.8 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements; partially offset by proceeds from exercises of employee stock options of$21.8 million . Contractual Commitments and Obligations The disclosure of our contractual commitments and obligations was reported in our Annual Report on Form 10-K for fiscal 2019. There have been no material changes from the contractual commitments and obligations previously disclosed in our Annual Report on Form 10-K for fiscal 2019 other than the changes described in Note 2, "Business Combinations," Note 7, "Fair Value," Note 9, "Long-Term Debt and Finance Lease Obligations," Note 16, "Leases," and Note 17, "Commitments and Contingencies" in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements As ofMarch 28, 2020 , 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 ofMarch 28, 2020 was$128.4 million , of which we funded$82.9 million throughMarch 28, 2020 . Refer to Note 6, "Venture Capital and Other Investments" in this Quarterly Report on Form 10-Q for additional information. Letters of Credit Our off-balance sheet commitments related to our outstanding letters of credit as ofMarch 28, 2020 were$8.3 million . 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 theU.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 described in Note 1, "Description of Business and Summary of Significant Accounting Policies" to our Annual Report on Form 10-K for fiscal year 2019. 39 -------------------------------------------------------------------------------- Recent Accounting Pronouncements For a discussion of recent accounting pronouncements please refer to Note 1, "Basis of Presentation," in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, "Basis of Presentation," we did not adopt any other new accounting pronouncements during the three months endedMarch 28, 2020 that had a significant effect on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Item 3. 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 ofMarch 28, 2020 , 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$13.5 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 inU.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 the three months endedMarch 28, 2020 , 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, Chinese Yuan Renminbi, Brazilian real, and Euro. 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 theU.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 inU.S. dollars. The impact to net income as a result of aU.S. dollar strengthening will be partially mitigated by the value of non-U.S. expenses, which will decline when reported inU.S. dollars. As theU.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 inU.S. dollars. For the three months endedMarch 28, 2020 , our revenue would have increased by$21.9 million and our operating income would have decreased by$1.1 million , if theU.S. dollar exchange rate had strengthened by 10.0%, 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 the three months endedMarch 28, 2020 , we entered into foreign exchange forward contracts to limit our foreign currency exposure related to both intercompany loans and aU.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" in this Quarterly Report on Form 10-Q for additional information regarding these types of forward contracts. 40
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