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MarketScreener Homepage  >  Equities  >  Nyse  >  Charles River Laboratories International, Inc.    CRL

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

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

11/09/2020 | 04:48pm EST
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, 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.
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
On March 11, 2020, the World 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 may continue 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 three and nine months ended September
26, 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 government, health and other
regulatory agencies with authority over such matters. As a result, all of our
operating sites remain
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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 in China beginning in January 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 2020 and beyond as deemed appropriate. We
proactively engaged with our suppliers beginning in January 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 meaningfully impacted by the COVID-19 pandemic during the
nine months ended September 26, 2020. The impact accelerated during March 2020
and continued during the three months ended June 27, 2020. Demand for research
models declined 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 experienced a slowdown, initially in
China in January 2020, and then across Europe and North America later in the
three months ended March 28, 2020, as measures were implemented by various
governments to slow the spread of the COVID-19 pandemic. This trend of reduced
demand for research models continued during the three months ended June 27,
2020, which negatively impacted revenue, operating income, operating income
margins, and cash flows. During the three months ended September 26, 2020, we
experienced an increase in demand as our clients reopened impacted sites and
resumed their research activity, which positively impacted revenue, operating
income, operating income margins, and cash flows. Research models services,
specifically our GEMS and Insourcing Solutions businesses, experienced higher
revenues in the nine months ended September 26, 2020 compared to the
corresponding prior period and were not as adversely impacted by the COVID-19
pandemic.
Our DSA business was not significantly impacted by the COVID-19 pandemic during
the nine months ended September 26, 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 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
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world begin to reopen. Costs of supply have and may continue to increase as we
procure the materials required to perform our work.
Our Manufacturing business was not significantly impacted by the COVID-19
pandemic during the nine months ended September 26, 2020, however, some of our
customers experienced disruptions in their manufacturing operations, which
resulted in delays in instrument installations in our Microbial Solutions
business. 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 income 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 $2.1 billion. As of September 26, 2020, we had $2.0
billion of debt and finance leases outstanding, of which $47.9 million is
current. Available on the revolving line of credit (Revolver) is $1.2 billion,
which matures on March 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 due March 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 ended March
28, 2020 to protect against any prolonged adverse impacts on liquidity markets.
While there remains uncertainty for the remainder of 2020, we currently do not
anticipate needing to use these borrowings to fund operations and these funds
were repaid during the three months ended September 26, 2020. 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 incurred immaterially higher
interest expense. 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. Beginning in the third fiscal quarter
of 2020, we reinstated certain annual compensation increases, which had
previously been delayed from the beginning of the second quarter of 2020.
Additionally, we had temporarily slowed our investment activity, including
acquisitions and capital projects, but have since resumed certain of those
activities, including the acquisition of Cellero, LLC (Cellero) during the third
fiscal quarter of 2020.
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 of September 26, 2020 and
through the issuance of these unaudited condensed consolidated financial
statements, we did not
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have any material changes to our internal controls over financial reporting. For
personnel responsible for internal control activities 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.
On August 6, 2020, we acquired Cellero, a provider of cellular products for cell
therapy developers and manufacturers worldwide. The addition of Cellero enhances
our unique, comprehensive solutions for the high-growth cell therapy market,
strengthening our ability to help accelerate clients' critical programs from
basic research and proof-of-concept to regulatory approval and
commercialization. It also expands our access to high-quality, human-derived
biomaterials with Cellero's donor sites in the United States. The purchase price
for Cellero was $37.5 million in cash. The acquisition was funded through cash
on hand. This business is reported as part of our RMS reportable segment.
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 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 of HemaCare
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.
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 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.
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 purchase price for Citoxlab 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 ended September 26, 2020 was $743.3 million
compared to $668.0 million in the corresponding period in 2019. This increase of
$75.3 million, or 11.3%, was primarily due to the recent acquisition of HemaCare
as well as growth in our DSA and Manufacturing segments, and by the positive
effect of changes in foreign currency exchange rates which increased revenue by
$8.4 million, or 1.3%, when compared to the corresponding period in 2019.
Revenue for the nine months ended September 26, 2020 was $2.1 billion compared
to $1.9 billion in the corresponding period in 2019. The increase of $202.8
million, or 10.5%, was primarily due to the reasons described above and was
partially offset by a reduction in RMS product revenue due to the impact of the
COVID-19 pandemic when compared to the corresponding period in 2019.
In the three months ended September 26, 2020, our operating income and operating
income margin were $132.8 million and 17.9%, respectively, compared with $92.8
million and 13.9%, respectively, in the corresponding period of 2019. The
increases in operating income and operating income margin were primarily due to
higher DSA and Manufacturing operating income and operating income margins,
partially offset by increased amortization of intangible assets related to our
recent acquisition of HemaCare. In the nine months ended September 26, 2020, our
operating income and operating margin were $303.8 million and 14.2%,
respectively, compared with $242.4 million and 12.6%, respectively, in the
corresponding period of 2019. The increases in operating income and operating
income margin were primarily due to contributions from our DSA and Manufacturing
segments and lower acquisition related costs compared to the corresponding
period in 2019, partially offset by lower RMS operating income and operating
income margin due to the impact of the COVID-19 pandemic, as well as increased
amortization of intangible assets related to our recent acquisition of HemaCare.
Net income attributable to common shareholders increased to $102.9 million in
the three months ended September 26, 2020, from $72.8 million in the
corresponding period of 2019. The increase in Net income attributable to common
shareholders was primarily due the increase in operating income described above,
as well as higher net gains on our venture capital investments
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in 2020 as compared to net losses on our venture capital investments in the
corresponding period in 2019. Net income attributable to common shareholders
increased to $221.1 million in the nine months ended September 26, 2020, from
$171.7 million in the corresponding period of 2019. The increase in Net income
attributable to common shareholders was primarily due to higher operating income
mentioned above and higher net gains on our venture capital investments compared
to the corresponding period in 2019.
During the first nine months of 2020, our cash flows from operations was $408.2
million compared with $300.3 million for the same period in 2019. The increase
was driven by higher net income and certain favorable changes in working capital
items, including favorable timing of certain government deferrals of income and
payroll tax payments, and deferrals of certain compensation related items in
response to the COVID-19 pandemic; partially offset by the timing of vendor and
supplier payments compared to the same period in 2019.
Results of Operations
Three Months Ended September 26, 2020 Compared to the Three Months Ended
September 28, 2019
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable
segment:
                               Three Months Ended
                   September 26, 2020      September 28, 2019       $ change       % change
                                      (in millions, except percentages)
Service revenue   $        580.8          $             523.2      $    57.6         11.0  %
Product revenue            162.5                        144.8           17.7         12.3  %
Total revenue     $        743.3          $             668.0      $    75.3         11.3  %


                                          Three Months Ended
                                                          September 28,
                                September 26, 2020             2019              $ change               % change              Impact of FX
                                                                     (in millions, except percentages)
RMS                            $        151.9$     132.6$     19.3                     14.6  %                 1.5  %
DSA                                     461.2                   420.1                41.1                      9.8  %                 1.2  %
Manufacturing                           130.2                   115.3                14.9                     12.9  %                 1.4  %
Total revenue                  $        743.3$     668.0$     75.3                     11.3  %                 1.3  %

The following table presents operating income by reportable segment:

                                                        Three Months Ended
                                          September 26, 2020          September 28, 2019            $ change                 % change
                                                                         (in millions, except percentages)
RMS                                      $             37.1          $           34.4            $        2.7                        7.9  %
DSA                                                    90.4                      65.0                    25.4                       39.0  %
Manufacturing                                          48.2                      39.2                     9.0                       22.9  %
Unallocated corporate                                 (42.9)                    (45.8)                    2.9                       (6.3) %
Total operating income                   $            132.8          $           92.8            $       40.0                       43.0  %
Operating income % of revenue                          17.9  %                   13.9    %                                           4.0  %


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The following presents and discusses our consolidated financial results by each
of our reportable segments:
RMS
                                            Three Months Ended
                                                            September 28,
                                  September 26, 2020             2019              $ change               % change               Impact of FX
                                                                       (in millions, except percentages)
Revenue                          $           151.9          $     132.6$     19.3                      14.6  %                 1.5  %
Cost of revenue (excluding
amortization of intangible
assets)                                       89.3                 81.9                 7.4                       9.1  %
Selling, general and
administrative                                21.5                 16.0                 5.5                      34.8  %
Amortization of intangible
assets                                         4.0                  0.3                 3.7                   1,076.2  %
Operating income                 $            37.1          $      34.4$      2.7                       7.9  %
Operating income % of revenue                 24.4  %              25.9  %                                       (1.5) %


RMS revenue increased $19.3 million due primarily to the acquisitions of
HemaCare and Cellero which contributed $12.8 million and $1.9 million,
respectively, to research model product revenue; higher research model services
revenue, specifically our GEMS and Insourcing Solutions businesses; and the
effect of changes in foreign currency exchange rates. Partially offsetting these
increases were lower research model product revenue in North America due to the
impact of the COVID-19 pandemic.
RMS operating income increased $2.7 million compared to the corresponding period
in 2019. RMS operating income as a percentage of revenue for the three months
ended September 26, 2020 was 24.4%, a decrease of 1.5% from 25.9% for the
corresponding period in 2019. Operating income increased primarily due to higher
revenue described above. Operating income as a percentage of revenue decreased
primarily due to increased amortization of intangible assets in connection with
our recent acquisitions of HemaCare and Cellero.
DSA
                                            Three Months Ended
                                                            September 28,
                                  September 26, 2020             2019              $ change               % change              Impact of FX
                                                                       (in millions, except percentages)
Revenue                          $           461.2          $     420.1$     41.1                      9.8  %                 1.2  %
Cost of revenue (excluding
amortization of intangible
assets)                                      306.4                285.8                20.6                      7.2  %
Selling, general and
administrative                                42.4                 48.0                (5.6)                   (11.7) %
Amortization of intangible
assets                                        22.0                 21.3                 0.7                      3.8  %
Operating income                 $            90.4          $      65.0$     25.4                     39.0  %
Operating income % of revenue                 19.6  %              15.5  %                                       4.1  %


DSA revenue increased $41.1 million due primarily to service revenue which
increased in both the Safety Assessment and Discovery Services businesses due to
demand from biotechnology clients and 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 September 26, 2020.
DSA operating income increased $25.4 million during the three months ended
September 26, 2020 compared to the corresponding period in 2019. DSA operating
income as a percentage of revenue for the three months ended September 26, 2020
was 19.6%, an increase of 4.1% from 15.5% for the corresponding period in 2019.
Operating income and operating income as a percentage of revenue increased
primarily due to the higher revenue described above, realizing the benefit from
operating efficiency initiatives; implementing cost controls associated with the
COVID-19 pandemic; and lower acquisition related and severance costs compared to
the same period in 2019, primarily impacting selling, general and administrative
costs.
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Manufacturing
                                            Three Months Ended
                                                            September 28,
                                  September 26, 2020             2019              $ change               % change              Impact of FX
                                                                       (in millions, except percentages)
Revenue                          $           130.2          $     115.3$     14.9                     12.9  %                 1.4  %
Cost of revenue (excluding
amortization of intangible
assets)                                       58.4                 54.1                 4.3                      7.8  %
Selling, general and
administrative                                21.4                 19.7                 1.7                      8.7  %
Amortization of intangible
assets                                         2.2                  2.3                (0.1)                    (2.4) %
Operating income                 $            48.2          $      39.2$      9.0                     22.9  %
Operating income % of revenue                 37.1  %              34.0  %                                       3.1  %


Manufacturing revenue increased $14.9 million due primarily to 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; higher product revenue in our Microbial
Solutions business; higher demand for products in our Avian business; and the
effect of changes in foreign currency exchange rates; partially offset by delays
in instrument installations caused by the COVID-19 pandemic. Overall,
Manufacturing revenue was not significantly impacted by the COVID-19 pandemic
during the three months ended September 26, 2020.
Manufacturing operating income increased $9.0 million during the three months
ended September 26, 2020 compared to the corresponding period in 2019.
Manufacturing operating income as a percentage of revenue for the three months
ended September 26, 2020 was 37.1%, an increase of 3.1% from 34.0% for the
corresponding period in 2019. The increases were due primarily to higher revenue
as well as improved production efficiencies, including the absence of
duplicative Biologics facilities in 2020 compared to 2019, and the impact of
operating efficiencies in the three months ended September 26, 2020 compared to
the same period in 2019.
Unallocated Corporate
                                                 Three Months Ended
                                   September 26, 2020         September 28, 2019            $ change                 % change
                                                                  (in millions, except percentages)
Unallocated corporate             $           42.9           $           45.8            $       (2.9)                      (6.3) %
Unallocated corporate % of
revenue                                        5.8   %                    6.9    %                                          (1.1) %


Unallocated corporate costs consist of selling, general and administrative
expenses that are not directly related or allocated to the reportable segments.
The decrease in unallocated corporate costs of $2.9 million, or 6.3%, compared
to the corresponding period in 2019 is predominantly associated with decreased
costs associated with the evaluation and integration of our recent acquisition
activity. Costs as a percentage of revenue for the three months ended September
26, 2020 was 5.8%, a decrease of 1.1% from 6.9% for the corresponding period in
2019.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time
deposits was $0.2 million and $0.4 million for the three months ended September
26, 2020 and the corresponding period in 2019, respectively.
Interest Expense
Interest expense for the three months ended September 26, 2020 was $18.9
million, an increase of $13.2 million, or 231.1%, compared to $5.7 million for
the corresponding period in 2019. The increase results from a foreign currency
gain recognized in connection with a debt-related foreign exchange forward
contract in the three months ended September 28, 2019 that did not recur in the
three months ended September 26, 2020.
Other Income (Expense), Net
Other income, net, was $21.2 million for the three months ended September 26,
2020, an increase of $35.5 million, compared to Other expense, net of $14.3
million for the corresponding period in 2019. The increase was due primarily to
net gains on our venture capital investments for the three months ended
September 26, 2020 as compared to net losses for these investments in
                                       39
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the corresponding period in 2019. The increase was also due to 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 in the three months ended
September 28, 2019 that did not recur in the three months ended September 26,
2020.
Income Taxes
Income tax expense for the three months ended September 26, 2020 was $32.7
million, an increase of $33.0 million compared to an income tax benefit of $0.3
million for the corresponding period in 2019. Our effective tax rate was 24.1%
for the three months ended September 26, 2020, compared to (0.4)% for the
corresponding period in 2019. The increase in our effective tax rate in the 2020
period compared to the 2019 period was primarily related to the recognition of
$20.4 million of deferred tax assets expected to be utilized as a result of
changes to the Company's international financing structure during the three
months ended September 28, 2019.
Nine Months Ended September 26, 2020 Compared to the Nine Months Ended September
28, 2019
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable
segment:
                               Nine Months Ended
                   September 26, 2020      September 28, 2019      $ change      % change
                                     (in millions, except percentages)
Service revenue   $          1,677.9      $          1,480.0      $  197.9         13.4  %
Product revenue                455.0                   450.1           4.9          1.1  %
Total revenue     $          2,132.9      $          1,930.1      $  202.8         10.5  %


                               Nine Months Ended
                   September 26, 2020      September 28, 2019      $ change      % change      Impact of FX
                                              (in millions, except percentages)
RMS               $            414.4      $            405.8      $    8.6          2.1  %              -  %
DSA                          1,342.4                 1,179.8         162.6         13.8  %              -  %
Manufacturing                  376.1                   344.5          31.6          9.2  %           (0.5) %
Total revenue     $          2,132.9      $          1,930.1      $  202.8         10.5  %              -  %

The following table presents operating income by reportable segment:

                                                        Nine Months Ended
                                          September 26, 2020         September 28, 2019           $ change                 % change
                                                                        (in millions, except percentages)
RMS                                      $           68.3           $           103.7          $      (35.4)                     (34.1) %
DSA                                                 234.9                       175.2                  59.7                       34.0  %
Manufacturing                                       132.3                       103.9                  28.4                       27.3  %
Unallocated corporate                              (131.7)                     (140.4)                  8.7                       (6.3) %
Total operating income                   $          303.8           $           242.4          $       61.4                       25.4  %
Operating income % of revenue                        14.2   %                    12.6  %                                           1.6  %


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The following presents and discusses our consolidated financial results by each
of our reportable segments:
RMS
                                             Nine Months Ended
                                                            September 28,
                                  September 26, 2020             2019              $ change               % change               Impact of FX
                                                                       (in millions, except percentages)
Revenue                          $          414.4           $     405.8$      8.6                       2.1  %                   -  %
Cost of revenue (excluding
amortization of intangible
assets)                                     274.2                 248.8                25.4                      10.2  %
Selling, general and
administrative                               60.5                  52.2                 8.3                      15.9  %
Amortization of intangible
assets                                       11.4                   1.1                10.3                   1,002.1  %
Operating income                 $           68.3           $     103.7$    (35.4)                    (34.1) %
Operating income % of revenue                16.5   %              25.6  %                                       (9.1) %


RMS revenue increased $8.6 million due primarily to the recent acquisitions of
HemaCare and Cellero, which contributed $31.5 million and $1.9 million,
respectively, 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 in North America,
Europe, and Asia due to the impact of the COVID-19 pandemic.

RMS operating income decreased $35.4 million compared to the corresponding
period in 2019. RMS operating income as a percentage of revenue for the nine
months ended September 26, 2020 was 16.5%, a decrease of 9.1% from 25.6% for the
corresponding period in 2019. Operating income and operating income as a
percentage of revenue decreased primarily due to the lower sales volume for
research model products due to the COVID-19 pandemic as described above and due
to the recent acquisition of HemaCare and Cellero, which increased amortization
of intangible assets and an inventory fair value adjustment within cost of
revenue.

DSA
                                          Nine Months Ended
                                 September 26,        September 28,
                                      2020                 2019               $ change               % change               Impact of FX
                                                                     (in millions, except percentages)
Revenue                          $   1,342.4$   1,179.8$     162.6                      13.8  %                    -  %
Cost of revenue (excluding
amortization of intangible
assets)                                910.4                815.5                 94.9                      11.6  %
Selling, general and
administrative                         131.4                131.3                  0.1                         -  %
Amortization of intangible
assets                                  65.7                 57.8                  7.9                      13.9  %
Operating income                 $     234.9$     175.2$      59.7                      34.0  %
Operating income % of revenue           17.5  %              14.9  %                                         2.6  %

DSA revenue increased $162.6 million due primarily to the acquisition of Citoxlab which contributed $60.2 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. DSA revenue was not significantly impacted by the COVID-19 pandemic during the nine months ended September 26, 2020.


DSA operating income increased $59.7 million during the nine months ended
September 26, 2020 compared to the corresponding period in 2019. DSA operating
income as a percentage of revenue for the nine months ended September 26, 2020
was 17.5%, an increase of 2.6% from 14.9% for the corresponding period in 2019.
These increases were primarily attributable to the higher revenue described
above, realizing the benefit from operating efficiency initiatives; implementing
cost controls associated with the COVID-19 pandemic; and lower acquisition
related costs, primarily impacting selling, general and administrative costs.
These increases were partially offset by increased costs in both cost of revenue
and selling, general, and
                                       41
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administrative expenses related to recent site closures, which increased
severance costs, site consolidation costs, and asset impairments; and higher
amortization of intangible assets associated with our recent acquisitions.
Manufacturing
                                                Nine Months Ended
                                  September 26, 2020         September 28, 2019          $ change               % change               Impact of FX
                                                                           (in millions, except percentages)
Revenue                          $          376.1           $           344.5          $     31.6                       9.2  %                 (0.5) %
Cost of revenue (excluding
amortization of intangible
assets)                                     174.8                       169.8                 5.0                       3.0  %
Selling, general and
administrative                               62.4                        64.0                (1.6)                     (2.6) %
Amortization of intangible
assets                                        6.6                         6.8                (0.2)                     (2.7) %
Operating income                 $          132.3           $           103.9          $     28.4                      27.3  %
Operating income % of revenue                35.2   %                    30.2  %                                        5.0  %


Manufacturing revenue increased $31.6 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 delays in instrument
installations caused by the COVID-19 pandemic; and the effect of changes in
foreign currency exchange rates. Overall, Manufacturing revenue was not
significantly impacted by the COVID-19 pandemic during the nine months ended
September 26, 2020.

Manufacturing operating income increased $28.4 million during the nine months
ended September 26, 2020 compared to the corresponding period in 2019.
Manufacturing operating income as a percentage of revenue for the nine months
ended September 26, 2020 was 35.2%, an increase of 5.0% from 30.2% for the
corresponding period in 2019. The increases were due primarily to higher revenue
as well as improved production efficiencies, including the absence of
duplicative Biologics facilities in 2020 compared to 2019, and the impact of
operating efficiencies in the nine months ended September 26, 2020 compared to
the same period in 2019.

Unallocated Corporate
                                                 Nine Months Ended
                                   September 26, 2020         September 28, 2019           $ change                 % change
                                                                 (in millions, except percentages)
Unallocated corporate             $          131.7           $           140.4          $       (8.7)                      (6.3) %
Unallocated corporate % of
revenue                                        6.2   %                     7.3  %                                          (1.1) %


Unallocated corporate costs consist of selling, general and administrative
expenses that are not directly related or allocated to the reportable
segments. The decrease in unallocated corporate costs of $8.7 million is
predominantly associated with decreased costs associated with the evaluation and
integration of our recent acquisition activity. Costs as a percentage of revenue
for the nine months ended September 26, 2020 was 6.2%, a decrease of 1.1% from
7.3% for the corresponding period in 2019.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time
deposits was $0.8 million for both the nine months ended September 26, 2020 and
the corresponding period in 2019.
Interest Expense
Interest expense for the nine months ended September 26, 2020 was $53.3 million,
an increase of $16.8 million, or 45.9%, compared to $36.5 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 in the nine months ended September 26, 2020 compared to the
corresponding period in 2019.
                                       42
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Other Income (Expense), Net
Other income, net, was $23.4 million for the nine months ended September 26,
2020, an increase of $31.6 million, or 386.7%, compared to other expense, net of
$8.2 million for the corresponding period in 2019. The increase was due to
higher net gains on our venture capital investments and lower 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 for the nine months ended
September 26, 2020 as compared to the corresponding period in 2019.
Income Taxes
Income tax expense for the nine months ended September 26, 2020 was $53.6
million, an increase of $28.6 million compared to $25.0 million for the
corresponding period in 2019. Our effective tax rate was 19.5% for the nine
months ended September 26, 2020 compared to 12.6% for the corresponding period
in 2019. The increase in our effective tax rate in the 2020 period compared to
the 2019 period was primarily related to the recognition of $20.4 million of
deferred tax assets expected to be utilized as a result of changes to the
Company's international financing structure during the three months ended
September 28, 2019, partially offset by an increased tax benefit from
stock-based compensation deductions in 2020 compared to the corresponding period
in 2019.
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.
The following table presents our cash, cash equivalents and short-term
investments:
                                                              September 26,
                                                                   2020               December 28, 2019
                                                                            (in millions)
Cash and cash equivalents:
Held in U.S. entities                                        $        40.0          $             56.5
Held in non-U.S. entities                                            202.9                       181.5
Total cash and cash equivalents                                      242.9                       238.0
Short-term investments:
Held in non-U.S. entities                                              0.9                         1.0

Total cash, cash equivalents and short-term investments $ 243.8

        $            239.0



Borrowings
We have a credit facility, which consists of a $750.0 million term loan, of
which $160.9 million remains outstanding as of September 26, 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 due
March 26, 2023. The revolving facility matures on March 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 on April 1 and October 1, beginning on October 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 on May 1 and November 1, beginning on May 1, 2020.
                                       43
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Amounts outstanding under our credit facilities and both the 2026 Senior Notes and the 2028 Senior Notes were as follows:

                      September 26, 2020      December 28, 2019
                                    (in millions)
Term loans           $            160.9      $            193.8
Revolving facility                836.8                   676.1
2026 Senior Notes                 500.0                   500.0
2028 Senior Notes                 500.0                   500.0
Total                $          1,997.7      $          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 nine months ended September 26, 2020, we did not repurchase any
shares under our authorized stock repurchase program. As of September 26, 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
nine months ended September 26, 2020, we acquired 0.1 million shares for $23.9
million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
                                                                          Nine Months Ended
                                                                 September 26,          September 28,
                                                                      2020                  2019
                                                                            (in millions)
Net income                                                      $      

221.1 $ 173.5 Adjustments to reconcile net income to net cash provided by operating activities

                                                    196.6                 163.8
Changes in assets and liabilities                                        (9.5)                (37.0)
Net cash provided by operating activities                       $       

408.2 $ 300.3



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 and strategic equity 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 nine months ended September 26, 2020, compared to
the nine months ended September 28, 2019, the increase in net cash provided by
operating activities was driven by higher net income and certain favorable
changes in working capital items, including favorable timing of certain
government deferrals of income and payroll tax payments, and deferrals of
certain compensation related items in response to the COVID-19 pandemic;
partially offset by the timing of vendor and supplier payments compared to the
same period in 2019.

The following table presents our net cash used in investing activities:

Nine Months Ended

                                                                                             September 28,
                                                                 September 26, 2020              2019
                                                                               (in millions)
Acquisitions of businesses and assets, net of cash acquired     $           (419.1)         $     (515.6)
Capital expenditures                                                         (78.7)                (76.7)
Investments, net                                                             (14.1)                (17.6)
Other, net                                                                    (1.2)                 (0.7)
Net cash used in investing activities                           $           

(513.1) $ (610.6)

                                       44
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For the nine months ended September 26, 2020, the primary use of cash used in
investing activities related to the acquisitions of HemaCare and Cellero,
capital expenditures to support the growth of the business, and investments in
certain venture capital and strategic equity investments. For the nine months
ended September 28, 2019, the primary use of cash used in investing activities
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 strategic equity investments.
The following table presents our net cash provided by financing activities:
                                                                        Nine Months Ended
                                                               September 26,        September 28,
                                                                    2020                 2019
                                                                          (in millions)
Proceeds from long-term debt and revolving credit facility     $   1,412.0

$ 2,071.2 Payments on long-term debt, revolving credit facility, and finance lease obligations

                                         (1,321.0)            (1,798.6)
Proceeds from exercises of stock options                              43.8                 27.0
Purchase of treasury stock                                           (23.9)               (18.0)
Other, net                                                            (4.4)               (10.6)
Net cash provided by financing activities                      $     106.5

$ 271.0



For the nine months ended September 26, 2020, net cash provided by financing
activities reflected the net proceeds of $91.0 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 first 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,
•Payments of approximately $33 million on our term loan and net payments of $434
million to our revolving Credit Facility throughout the nine months ended
September 26, 2020, which included the repayment of the $150 million additional
borrowings during the first fiscal quarter of 2020;
•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 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 $43.8 million, partially offset by treasury stock
purchases of $23.9 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 nine months ended September 28, 2019, net cash provided by financing
activities reflected the net proceeds of $272.6 million on our Credit Facility
and finance lease obligations. Included in the net proceeds are the following
amounts:
•Borrowings of $581 million, which were primarily used for the purchase of
Citoxlab and an 80% ownership interest in a supplier that supports the Company's
DSA reportable segment; partially offset by,
•Payments of approximately $28 million on our term loan and net payments of $44
million to our revolving Credit Facility course of business throughout the nine
months ended September 28, 2019;
•Additionally, we had $1.6 billion of gross payments, partially offset by $1.4
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 $27.0 million. Net cash provided by financing
activities was partially offset by treasury stock purchases of $18.0 million
made due to the 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.
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
                                       45
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Contingencies" in our notes to the unaudited condensed consolidated financial
statements in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of September 26, 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 of
September 26, 2020 was $130.8 million, of which we funded $92.0 million through
September 26, 2020. Refer to Note 6, "Venture Capital and Strategic Equity
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 of September 26, 2020 were $8.1 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 the 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 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.
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 nine months ended September 26, 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 of September 26,
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 $10.0 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, Canadian Dollar, British Pound and Chinese
Yuan Renminbi. During the nine months ended September 26, 2020, the most
significant drivers of foreign currency translation adjustment the Company
recorded as part of Other comprehensive income (loss) were the British Pound,
Canadian Dollar, Hungarian Forint, Chinese Yuan Renminbi, Euro, Brazilian real,
Japanese Yen, and Danish Krone.
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
                                       46
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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 the nine months ended September 26, 2020, our
revenue would have increased by $68.6 million and our operating income would
have decreased by $0.7 million, if the U.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 nine months ended September 26, 2020, 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" in this Quarterly Report on Form 10-Q for
additional information regarding these types of forward contracts.
Item 4. Controls and Procedures
(a)  Evaluation of Disclosure Controls and Procedures
Based on their evaluation, required by paragraph (b) of Rules 13a-15 or 15d-15,
promulgated by the Securities Exchange Act of 1934, as amended (Exchange Act),
the Company's principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act, are effective, at a
reasonable assurance level, as of September 26, 2020, to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
our management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in designing and evaluating the controls and procedures.
(b) Changes in Internal Controls
The Company continued to execute a plan to centralize certain accounting
transaction processing functions to internal shared service centers during the
three months ended September 26, 2020. There were no other material changes in
the Company's internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15
or 15d-15 that occurred during the quarter ended September 26, 2020 that
materially affected, or were reasonably likely to materially affect, the
Company's internal control over financial reporting.
                                       47

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01/14CHARLES RIVER LABORATORIES INTERNATI : Partners with JADE Biomedical to Expand B..
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01/12CHARLES RIVER LABORATORIES INTERNATI : at J.P. Morgan Healthcare Conference Pres..
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01/11CHARLES RIVER LABORATORIES INTERNATI : to Present at J.P. Morgan Healthcare Conf..
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01/11Kavango Resources Appoints New Chairman
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01/06CHARLES RIVER LABORATORIES INTERNATI : Insider at Charles River Labs Internation..
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01/05INSIDER TRENDS : 90-Day Insider Buying Trend at Charles River Labs International..
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01/04CHARLES RIVER LABORATORIES INTERNATI : Purchases Distributed Bio For $83 Million..
MT
01/04CHARLES RIVER LABORATORIES INTERNATI : Acquires Distributed Bio
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