filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, early-stage contract research organization (CRO). For over 70 years, we have been in the business of providing the research models required in research and development of new drugs, devices, and therapies. Over this time, we have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that enable us to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.
Our client base includes all major global biopharmaceutical companies, many biotechnology companies, CROs, agricultural and industrial chemical companies, life science companies, veterinary medicine companies, contract manufacturing companies, medical device companies, and diagnostic and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world. We currently operate in over 100 facilities and in over 20 countries worldwide, which numbers exclude our Insourcing Solutions (IS) sites.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). Our RMS reportable segment includes the Research Models, 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 fiscal year 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 annual 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 open and adequately staffed as of the date of this annual 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 in 2021. 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 increased costs and 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 100 facilities and in 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 fiscal year 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 first fiscal quarter of 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 second fiscal quarter of 2020, which negatively impacted revenue, operating income, operating income margins, and cash flows. During the third fiscal quarter of 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, which continued through the fourth fiscal quarter of 2020. Research models services, specifically our GEMS and Insourcing Solutions businesses, experienced higher revenues during fiscal year 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 fiscal year 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 continues to subside, employees return to work, and economies across the world 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 fiscal year 2020, however, some of our customers experienced disruptions in their manufacturing operations. This resulted in delays in instrument installations in our Microbial Solutions business, which began during the first half of fiscal 2020 and continued, to a lesser extent, during the second half of fiscal 2020. Demand for certain Manufacturing products was not significantly impacted, such as Microbial Solutions endotoxin products and Avian products. 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.
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 December 26, 2020, we had $2.0 billion of debt and finance leases outstanding, of which $50.2 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 first fiscal quarter of 2020 to protect against any prolonged adverse impacts on liquidity markets. While there remained uncertainty throughout fiscal 2020, we did not need to use these borrowings to fund operations and these funds were repaid during the third fiscal quarter of 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 did not need to borrow additional funds during 2020. As of December 26, 2020 there is significant capacity on the remaining Revolver. Accordingly, we do not anticipate a material risk of non-compliance with our debt covenants based on our current estimate of future earnings.
To protect against adverse liquidity concerns, there are various mechanisms for us to improve cash flows. During the second fiscal quarter of 2020 we implemented certain 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 acquisitions of Cellero, LLC (Cellero) during the third fiscal quarter of 2020 and Distributed Bio during the first fiscal quarter of 2021.
As of the date these 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, and is not 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 this annual report. 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. 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. Review of impairment indicators and quantifying any impact will continue to be a focus throughout fiscal year 2021.
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 December 26, 2020 and through the issuance of these financial statements, we did not 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. We continued to make strategic acquisitions designed to expand our portfolio of products and services to support the drug discovery and development continuum. Our recent acquisitions are described below.
On February 17, 2021, we announced that we signed a definitive agreement to acquire Cognate BioServices, Inc. for approximately $875 million in cash, subject to customary closing adjustments. Cognate BioServices, Inc. is a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the development and production of plasmid DNA and viral vectors for gene therapies. The planned acquisition of Cognate BioServices, Inc. will create a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research through cGMP production. The proposed transaction is expected to close by the end of the first quarter of 2021. The proposed acquisition and associated fees are expected to be financed through a combination of available cash and proceeds from our Credit Facility under the multi-currency revolving facility. This business is expected to be reported as part of our Manufacturing reportable segment.
On December 31, 2020 (fiscal year 2021), we acquired Distributed Bio, Inc (Distributed Bio), a next-generation antibody discovery company with technologies specializing in enhancing the probability of success for delivering high-quality, readily formattable antibody fragments to support antibody and cell and gene therapy candidates to biopharmaceutical clients. The acquisition of Distributed Bio expands our capabilities with an innovative, large-molecule discovery platform, and creates an integrated, end-to-end platform for therapeutic antibody and cell and gene therapy discovery and development. The preliminary purchase price of Distributed Bio was approximately $83 million in cash, with additional contingent payments of up to $21 million based on future performance. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business will be reported as part of our DSA reportable segment.
On August 6, 2020, we acquired Cellero, LLC (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 $37.4 million in cash. The acquisition was funded through available cash. 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 available cash and proceeds from our Credit Facility. This business is reported as part of our RMS 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 available cash and proceeds from our Credit Facility. Citoxlab is reported as part of our DSA reportable segment.
On April 3, 2018, we acquired MPI Research, a non-clinical CRO providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. The acquisition enhances our position as a leading global early-stage CRO by strengthening our ability to partner with clients across the drug discovery and development continuum. The purchase price for MPI Research was $829.7 million in cash. The acquisition was funded by borrowings on our Credit Facility as well as the issuance of $500.0 million of 5.5% Senior Notes due 2026 (2026 Senior Notes) in an unregistered offering. MPI Research is reported as part of our DSA reportable segment.
Fiscal Quarters
Our fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week was included in the fourth quarter of fiscal year 2016, which is occasionally necessary to align with a December 31 calendar year-end.
Business Trends
The global economy faced unprecedented challenges in 2020 due to the COVID-19 pandemic, as did our Company, but we believe the resilience of our business model has enabled us to weather these challenges extremely well. This resilience was the result of comprehensive business continuity plans that enabled us to keep our operating sites open and adequately staffed; the global scale, broad scientific capabilities, and flexible outsourcing solutions that we are able to offer clients; and the commitment of our global employees. While several of our businesses experienced a significant, short-term decline in demand associated with COVID-19-related disruptions at our clients’ sites, primarily in the RMS reportable segment and principally in the second quarter of 2020, we also benefited from persistent client demand across many of our businesses, including in our DSA reportable segment, driven by robust biotech funding and continued innovation that is generating scientific breakthroughs across multiple therapeutic areas, including for COVID-19 therapeutics.
Many of our pharmaceutical and biotechnology clients intensified their use of strategic outsourcing during 2020 to overcome challenges at their own sites and move their early-stage research programs forward during the pandemic. Small and mid-size biotechnology clients continued to be the primary driver of revenue growth as these clients benefited from record biotechnology funding levels in fiscal year 2020, from capital markets, partnering with large biopharmaceutical companies, and investment by venture capital, as the COVID-19 pandemic enhanced the global focus on scientific innovation and emphasized greater investment in their preclinical pipelines. Many of our large biopharmaceutical clients have continued to increase investments in their drug discovery and early-stage development efforts and have strengthened their relationships with both CROs, like us, and biotechnology companies to assist them in bringing new drugs to market. Clients continue to seek to outsource larger portions of their early-stage drug research programs to us, which is leading to new business opportunities as clients adopt more flexible and efficient research and development models.
The primary result of these trends was robust revenue growth within our DSA reportable segment in fiscal year 2020, which experienced only a limited impact related to COVID-19 and benefited from incremental outsourcing activity from our clients as they sought a reliable CRO partner to help move their programs forward amidst the challenges of COVID-19. Robust Safety Assessment revenue growth in fiscal year 2020 was primarily driven by increased demand and pricing. We believe the acquisitions of Citoxlab (2019), MPI Research (2018), and WIL Research (2016) have solidified our scientific capabilities and global scale, and the breadth and depth of our scientific expertise, quality, and responsiveness remain key criteria when our clients make the decision to outsource to us. As biotechnology funding remains robust and our clients continue to pursue their goal of more efficient and effective drug research to bring innovative new therapies to market, they are evaluating outsourcing more of their research programs, such as discovery services. We continued to enhance our Discovery Services capabilities to provide clients with a comprehensive portfolio that enables them to start working with us at the earliest stages of the discovery process. We have accomplished this through acquisitions, including Distributed Bio in December 2020 (fiscal year 2021), Citoxlab’s discovery services, KWS BioTest in January 2018 and Brains On-Line in August 2017, and through adding cutting-edge capabilities to our discovery toolkit through partnerships, such as BitBio, Cypre, and Fios Genomics. In fiscal year 2020, demand in our Discovery Services business also increased significantly, as our efforts to enhance our scientific capabilities, provide clients with flexible partnering models, and become a trusted scientific partner for our clients’ early-stage programs have been successful.
Overall, demand for our products and services that support our clients’ manufacturing activities was strong in fiscal year 2020. Our Biologics business continued to benefit from increased demand for services associated with the growing proportion of biologic drugs in the pipeline and on the market, including cell and gene therapies, as well as COVID-19 therapeutics. Demand for our Microbial Solutions was affected by delayed instrument installations, as certain client sites were inaccessible due to
COVID-19 restrictions. We were able to complete additional instrument installations and the revenue growth rate for Microbial Solutions did improve as the year progressed.
Demand for our Research Models and Services was negatively impacted in fiscal year 2020, particularly during the second quarter. Worldwide demand for research models declined sharply, principally in the second quarter, as COVID-19-related restrictions, such as stay-at-home orders, disrupted our clients’ research activities. Many academic clients closed their research sites temporarily, and there was also a significant reduction in order activity from both large biopharmaceutical and smaller biotechnology clients as these clients reduced their on-site activities. Clients began to resume more normalized research activities in the third quarter, and demand for research models began to rebound. Demand for research models services experienced very little impact from COVID-19 in fiscal year 2020, and these businesses performed very well, particularly for our IS and GEMS businesses. We are confident that research models and services will remain essential tools for our clients’ drug discovery and early-stage development efforts. In 2020, we enhanced the RMS business’ growth profile and portfolio of critical research tools that we are able to supply through the acquisitions of HemaCare and Cellero, premier providers of human-derived cellular products used in cell therapies. HemaCare and Cellero together generated revenue of $48.1 million in fiscal year 2020, as robust, underlying client demand in the cell therapy market was partially offset by COVID-19-related disruptions.
Overview of Results of Operations and Liquidity
Revenue for fiscal year 2020 was $2.9 billion compared to $2.6 billion in fiscal year 2019. The 2020 increase as compared to the corresponding period in 2019 was $302.7 million, or 11.5%, and was primarily due to both growth in our DSA and Manufacturing segments, as discussed in the above “Business Trends” section, as well as the recent acquisitions of HemaCare and Cellero in our RMS segment, and by the positive effect of changes in foreign currency exchange rates when compared to the corresponding period in 2019; 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 fiscal year 2020, our operating income and operating income margin were $432.7 million and 14.8%, respectively, compared with $351.2 million and 13.4%, respectively, in fiscal year 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 acquisitions of HemaCare and Cellero.
Net income attributable to common shareholders increased to $364.3 million in fiscal year 2020, from $252.0 million in the corresponding period of 2019. The increase in net income attributable to common shareholders of $112.3 million 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 fiscal year 2020, our cash flows from operations was $546.6 million compared with $480.9 million for fiscal year 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 payroll tax payments, and compensation related items; partially offset by the timing of vendor and supplier payments and collections of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits); and certain pension related payments compared to the same period in 2019.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S.). The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 1, “Description of Business and Summary of Significant
Accounting Policies”, to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
We believe the following represent our critical accounting policies and estimates used in the preparation of our financial statements:
Revenue Recognition
Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer (“transaction price”).
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the amount to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, we do not extend payment terms beyond one year. Applying the practical expedient, we do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Our contracts do not generally contain significant financing components.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the impact on the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Product revenue is generally recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, we generally measure our progress using either cost-to-cost (input method) or right-to-invoice (output method). We use the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as we incur costs on our contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of our performance to date. During fiscal year 2020, $1.8 billion, or approximately 60%, of our total revenue recognized ($2.9 billion) is DSA service revenue transferred over time.
Income Taxes
We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of
items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and the effects of tax planning strategies. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Our valuation allowance increased by $24.9 million from $310.0 million as of December 28, 2019 to $334.8 million as of December 26, 2020. The increase is primarily a result of foreign exchange impact on net operating losses and corresponding valuation allowances relating to the Company’s 2019 financing structure changes.
We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the controversy process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
We generally receive a tax deduction upon the exercise of non-qualified stock options by employees, or the vesting of restricted stock and performance share units held by employees. The stock price, timing, and amount of vesting and exercising of stock-based compensation could materially impact our current tax expense.
In 2017, significant U.S. tax law changes from the Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform) went into effect and reduced the U.S. federal statutory tax rate, broadened the corporate tax base through the elimination or reduction of deductions, exclusions and credits, limited the ability of U.S. corporations to deduct interest expense and allowed for the repatriation of foreign earnings to the U.S. with a 100% federal dividends received deduction prospectively. In addition, U.S. Tax Reform required a one-time transitional tax on foreign cash equivalents and previously unremitted earnings.
Our accounting for the elements of U.S. Tax Reform is complete. We have made an accounting policy election to treat taxes due on the GILTI inclusion as a current period expense.
Goodwill and Intangible Assets
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets.
In our recent acquisitions, customer relationship intangible assets (also referred to as client relationships) have been the most significant identifiable assets acquired. To determine the fair value of the acquired client relationships, we utilized the multiple period excess earnings model (a commonly accepted valuation technique), which includes the following key assumptions: projections of cash flows from the acquired entities, which included future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital. The value of client relationships acquired were $170.4 million for HemaCare and $14.7 million for Cellero in fiscal year 2020, $134.6 million for Citoxlab in fiscal year 2019 and $264.9 million for MPI Research in fiscal year 2018.
We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No impairments were recognized during 2020, 2019 or 2018.
We evaluate goodwill for impairment annually, during the fourth quarter, and when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts. Estimates of future cash flows require assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill for impairment.
We perform the quantitative impairment test where we compare the fair value of our reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, then we would record an impairment loss equal to the difference. In fiscal 2020 we adopted ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the quantitative goodwill impairment test, which previously required a hypothetical purchase price allocation to determine the amount of a goodwill impairment loss.
In fiscal years 2020, 2019 and 2018, we performed the quantitative goodwill impairment test for our reporting units. Fair value was determined by using a weighted combination of a market-based approach and an income approach, as this combination was deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilized information about our company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determined fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn.
Our 2020, 2019 and 2018 impairment tests indicated that goodwill was not impaired.
Valuation and Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, the following:
-
significant underperformance relative to expected historical or projected future operating results;
-
significant negative industry or economic trends; or
-
significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, net of any sublease income, if applicable, and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. We measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Significant judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. We may also estimate fair value based on market prices for similar assets, as appropriate. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets.
Pension and Other Post-Retirement Benefit Plans
Several of our U.S. and non-U.S. subsidiaries sponsor defined benefit pension and other post-retirement benefit plans. We recognize the funded status of our defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. We measure plan assets and benefit obligations as of the date of our fiscal year end.
The cost and obligations of these arrangements are calculated using many assumptions to estimate the benefits that the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease. Major assumptions used in the accounting for these employee benefit plans include the expected return on plan assets, withdrawal and mortality rates, discount rate, and rate of increase in employee compensation levels. Assumptions are determined based on our data and appropriate market indicators, and are evaluated each year as of the plans’ measurement date. Should any of these assumptions change, they would have an effect on net periodic pension costs and the unfunded benefit obligation.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.
The discount rate reflects the rate we would have to pay to purchase high-quality investments that would provide cash sufficient to settle our current pension obligations. A 25-basis point change in the discount rate changes the projected benefit obligation by approximately $17 million for all our plans.
The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.
The Charles River Laboratories, Inc. Pension Plan (U.S. Pension Plan) is a qualified, non-contributory defined benefit plan covering certain U.S. employees. The U.S. Pension Plan was amended in 2002 to exclude new participants and in 2008 the accrual of benefits was frozen. In January 2019, we commenced the process to terminate this plan and received regulatory approval in April 2020. In October 2020, we settled all remaining benefits directly with vested participants through either lump sum payouts or the purchase of a group annuity contract from a qualified insurance company to administer all future payments. Prior to the settlement, the U.S. Pension Plan was underfunded with a benefit obligation of approximately $94 million and plan assets of approximately $93 million. In the fourth quarter of fiscal year 2020, we made a contribution of approximately $1 million to fully fund this plan to cover the lump sum payments, purchase the group annuity contract, and settle remaining termination costs. Upon settlement of the pension liability, we recognized a non-cash settlement charge of approximately $10 million related to pension losses, reclassified from accumulated other comprehensive loss to other expense in the consolidated statement of income.
Stock-Based Compensation
We grant stock options, restricted stock, restricted stock units (RSUs), and performance share units (PSUs) to employees, and stock options, restricted stock, and RSUs to non-employee directors under stock-based compensation plans. We make certain assumptions in order to value and record expense associated with awards made under our stock-based compensation arrangements. Changes in these assumptions may lead to variability with respect to the timing and amount of expense we recognize in connection with share-based payments. Stock-based compensation is recognized as an expense in the consolidated statements of income based on the grant date fair value, adjusted for forfeitures when they occur, over the requisite service period.
Determining the appropriate valuation model and related assumptions requires judgment. The fair value of stock options granted is calculated using the Black-Scholes option-pricing model and the fair value of PSUs is estimated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others.
Determining the appropriate amount to expense based on the anticipated achievement of PSU’s performance targets requires judgment, including forecasting the achievement of future financial targets. The estimate of expense is revised periodically based on the probability of achieving the required performance targets. The cumulative impact of any changes to our estimates is reflected in the period of change.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies” to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K.
Results of Operations
Fiscal Year 2020 Compared to Fiscal Year 2019
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Fiscal Year | |||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 2,296.1 | $ | 2,029.4 | $ | 266.7 | 13.1 | % | |||||||||||||||
| Product revenue | 627.8 | 591.8 | 36.0 | 6.1 | % | ||||||||||||||||||
| Total revenue | $ | 2,923.9 | $ | 2,621.2 | $ | 302.7 | 11.5 | % |
| Fiscal Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 571.1 | $ | 537.1 | $ | 34.0 | 6.3 | % | 0.6 | % | |||||||||||||||||||
| DSA | 1,837.4 | 1,619.0 | 218.4 | 13.5 | % | 0.4 | % | ||||||||||||||||||||||
| Manufacturing | 515.4 | 465.1 | 50.3 | 10.8 | % | 0.4 | % | ||||||||||||||||||||||
| Total revenue | $ | 2,923.9 | $ | 2,621.2 | $ | 302.7 | 11.5 | % | 0.4 | % |
The following table presents operating income by reportable segment:
| Fiscal Year | |||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| RMS | $ | 102.7 | $ | 133.9 | $ | (31.2) | (23.3) | % | |||||||||||||||
| DSA | 325.9 | 258.9 | 67.0 | 25.9 | % | ||||||||||||||||||
| Manufacturing | 181.5 | 145.4 | 36.1 | 24.8 | % | ||||||||||||||||||
| Unallocated corporate | (177.4) | (187.0) | 9.6 | (5.2) | % | ||||||||||||||||||
| Total operating income | $ | 432.7 | $ | 351.2 | $ | 81.5 | 23.2 | % | |||||||||||||||
| Operating income % of revenue | 14.8 | % | 13.4 | % | 1.4 | % |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| Fiscal Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 571.1 | $ | 537.1 | $ | 34.0 | 6.3 | % | 0.6 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 368.9 | 333.7 | 35.2 | 10.6 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 84.0 | 68.1 | 15.9 | 23.5 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 15.5 | 1.4 | 14.1 | 1,019.3 | % | ||||||||||||||||||||||||
| Operating income | $ | 102.7 | $ | 133.9 | $ | (31.2) | (23.3) | % | |||||||||||||||||||||
| Operating income % of revenue | 18.0 | % | 24.9 | % | (6.9) | % |
RMS revenue increased $34.0 million, or 6.3%, due primarily to the recent acquisitions of HemaCare and Cellero, which contributed $43.0 million and $5.1 million, respectively; 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 and Europe due to the impact of the COVID-19 pandemic.
RMS operating income decreased $31.2 million, or 23.3%, compared to the corresponding period in 2019. RMS operating income as a percentage of revenue for fiscal year 2020 was 18.0%, a decrease of 6.9% from 24.9% 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 an increase in amortization of intangible assets associated with the recent acquisitions of HemaCare and Cellero.
DSA
| Fiscal Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,837.4 | $ | 1,619.0 | $ | 218.4 | 13.5 | % | 0.4 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 1,245.2 | 1,104.1 | 141.1 | 12.8 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 178.6 | 176.9 | 1.7 | 1.0 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 87.7 | 79.1 | 8.6 | 10.8 | % | ||||||||||||||||||||||||
| Operating income | $ | 325.9 | $ | 258.9 | $ | 67.0 | 25.9 | % | |||||||||||||||||||||
| Operating income % of revenue | 17.7 | % | 16.0 | % | 1.7 | % |
DSA revenue increased $218.4 million, or 13.5%, due primarily to service revenue increases in both the Safety Assessment and Discovery Services businesses due to demand from biotechnology clients and increased pricing of services; the acquisition of Citoxlab, which contributed $60.2 million to service revenue growth; and the effect of changes in foreign currency exchange rates. Additionally, DSA revenue was not significantly impacted by the COVID-19 pandemic during fiscal year 2020.
DSA operating income increased $67.0 million, or 25.9%, compared to the corresponding period in 2019. DSA operating income as a percentage of revenue for fiscal year 2020 was 17.7%, an increase of 1.7% from 16.0% for the corresponding period in 2019. These increases were primarily attributable to the higher revenue described above, realizing the benefit from operating efficiency and cost control initiatives, and lower acquisition related costs and severance 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 administrative expenses related to recent site closures, and higher amortization of intangible assets associated with our recent acquisitions.
Manufacturing
| Fiscal Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 515.4 | $ | 465.1 | $ | 50.3 | 10.8 | % | 0.4 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 236.2 | 225.0 | 11.2 | 5.0 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 88.9 | 85.6 | 3.3 | 3.8 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 8.8 | 9.1 | (0.3) | (3.3) | % | ||||||||||||||||||||||||
| Operating income | $ | 181.5 | $ | 145.4 | $ | 36.1 | 24.8 | % | |||||||||||||||||||||
| Operating income % of revenue | 35.2 | % | 31.3 | % | 3.9 | % |
Manufacturing revenue increased $50.3 million, or 10.8%, 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 demand for products in both our Microbial Solutions’ Endotoxin business and our Avian business; and the effect of changes in foreign currency exchange rates; 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. Overall, Manufacturing revenue was not significantly impacted by the COVID-19 pandemic during fiscal year 2020.
Manufacturing operating income increased $36.1 million, or 24.8%, compared to the corresponding period in 2019. Manufacturing operating income as a percentage of revenue for fiscal year 2020 was 35.2%, an increase of 3.9% from 31.3%
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 realized during fiscal year 2020 compared to fiscal year 2019.
Unallocated Corporate
| Fiscal Year | |||||||||||||||||||||||
| 2020 | 2019 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Unallocated corporate | $ | 177.4 | $ | 187.0 | $ | (9.6) | (5.2) | % | |||||||||||||||
| Unallocated corporate % of revenue | 6.1 | % | 7.1 | % | (1.0) | % |
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 $9.6 million, or 5.2%, compared to the corresponding period in 2019 is predominantly associated with decreased costs associated with the evaluation and integration of our recent acquisition activity, as we temporarily slowed our acquisition activity during fiscal year 2020 in response to the COVID-19 pandemic. Costs as a percentage of revenue for fiscal year 2020 was 6.1%, a decrease of 1.0% from 7.1% for the corresponding period in 2019.
Interest Income Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.8 million and $1.5 million for fiscal years 2020 and 2019, respectively. The decrease of $0.7 million was primarily due to lower interest rates on invested funds in 2020 as compared to 2019.
Interest Expense Interest expense for fiscal year 2020 was $86.4 million, an increase of $25.5 million, or 42.0%, compared to $60.9 million for fiscal year 2019. The increase was due primarily to foreign currency losses recognized in connection with debt-related foreign exchange forward contracts in fiscal year 2020 compared to foreign currency gains recognized in fiscal year 2019.
Other Income, Net Other income, net, was $100.0 million for fiscal year 2020, an increase of $87.7 million, or 713.3%, compared to $12.3 million for fiscal year 2019. The increase was due to net gains on our venture capital and strategic equity investments of $100.9 million in fiscal year 2020 compared to $20.7 million in fiscal year 2019, resulting primarily from increases in fair value from our publicly-held investments, which included initial public offerings of certain portfolio companies; and foreign currency gains recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency in fiscal year 2020 as compared to foreign currency losses recognized in fiscal year 2019; partially offset by higher pension related costs recognized during fiscal year 2020, including a settlement loss of $10.3 million for the termination of the U.S. Pension Plan, as compared to fiscal year 2019.
Income Taxes Income tax expense was $81.8 million for fiscal year 2020, an increase of $31.8 million, compared to $50.0 million for fiscal year 2019. Our effective tax rate was 18.3% for fiscal year 2020, compared to 16.5% for fiscal year 2019. The increase in our effective tax rate in the 2020 period compared to the 2019 period was primarily due to the recognition of $20.6 million of net operating loss deferred tax assets due to foreign finance structure changes in 2019, partially offset by state tax benefits from amended state tax returns and higher tax benefits from stock-based compensation deductions in 2020 compared to the corresponding period in 2019.
Fiscal Year 2019 Compared to Fiscal Year 2018
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Fiscal Year | |||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 2,029.4 | $ | 1,687.9 | $ | 341.5 | 20.2 | % | |||||||||||||||
| Product revenue | 591.8 | 578.2 | 13.6 | 2.4 | % | ||||||||||||||||||
| Total revenue | $ | 2,621.2 | $ | 2,266.1 | $ | 355.1 | 15.7 | % |
| Fiscal Year | |||||||||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 537.1 | $ | 519.7 | $ | 17.4 | 3.3 | % | (1.9) | % | |||||||||||||||||||
| DSA | 1,619.0 | 1,316.9 | 302.1 | 22.9 | % | (1.1) | % | ||||||||||||||||||||||
| Manufacturing | 465.1 | 429.5 | 35.6 | 8.3 | % | (2.7) | % | ||||||||||||||||||||||
| Total revenue | $ | 2,621.2 | $ | 2,266.1 | $ | 355.1 | 15.7 | % | (1.5) | % |
The following table presents operating income by reportable segment:
| Fiscal Year | |||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| RMS | $ | 133.9 | $ | 136.5 | $ | (2.6) | (1.9) | % | |||||||||||||||
| DSA | 258.9 | 227.6 | 31.3 | 13.8 | % | ||||||||||||||||||
| Manufacturing | 145.4 | 136.2 | 9.2 | 6.8 | % | ||||||||||||||||||
| Unallocated corporate | (187.0) | (168.9) | (18.1) | 10.8 | % | ||||||||||||||||||
| Total operating income | $ | 351.2 | $ | 331.4 | $ | 19.8 | 6.0 | % | |||||||||||||||
| Operating income % of revenue | 13.4 | % | 14.6 | % | (1.2) | % |
The following presents and discusses our consolidated results by each of our reportable segments:
RMS
| Fiscal Year | |||||||||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 537.1 | $ | 519.7 | $ | 17.4 | 3.3 | % | (1.9) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 333.7 | 319.8 | 13.9 | 4.3 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 68.1 | 61.8 | 6.3 | 10.1 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 1.4 | 1.6 | (0.2) | (12.9) | % | ||||||||||||||||||||||||
| Operating income | $ | 133.9 | $ | 136.5 | $ | (2.6) | (1.9) | % | |||||||||||||||||||||
| Operating income % of revenue | 24.9 | % | 26.3 | % | (1.4) | % |
RMS revenue increased $17.4 million, or 3.3%, due primarily to higher research model services revenue and higher research model product revenue in China. Research model services benefited from a large government contract in the IS business and strong client demand in the GEMS business resulting from increased research and development activity conducted across biotechnology and academic institutional clients. Partially offsetting these increases were the effect of changes in foreign currency exchange rates and lower research model product revenue outside of China, particularly from large biopharmaceutical clients.
RMS operating income decreased $2.6 million, or 1.9%, compared to the corresponding period in 2018. RMS operating income as a percentage of revenue for fiscal year 2019 was 24.9%, a decrease of 1.4% from 26.3% for the corresponding period in 2018. Operating income and operating income as a percentage of revenue decreased primarily due to higher cost of revenue and selling, general, and administrative expenses to support the growth of the businesses, which included the following: a $2.2 million charge recorded within selling, general and administrative costs in fiscal year 2019 in connection with the modification of the option to purchase the remaining 8% equity interest in Vital River, increased investments in personnel (staffing levels and hourly wage increases), higher severance charges in connection with certain global restructuring initiatives, and facility expansions (primarily in China). In addition, operating income as a percentage of revenue decreased due to lower operating income margins on the aforementioned large government contract, and lower sales volume for research models outside of China.
DSA
| Fiscal Year | |||||||||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,619.0 | $ | 1,316.9 | $ | 302.1 | 22.9 | % | (1.1) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 1,104.1 | 903.9 | 200.2 | 22.2 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 176.9 | 131.2 | 45.7 | 34.8 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 79.1 | 54.2 | 24.9 | 45.9 | % | ||||||||||||||||||||||||
| Operating income | $ | 258.9 | $ | 227.6 | $ | 31.3 | 13.8 | % | |||||||||||||||||||||
| Operating income % of revenue | 16.0 | % | 17.3 | % | (1.3) | % |
DSA revenue increased $302.1 million, or 22.9%, due primarily to the recent acquisitions of Citoxlab and MPI Research, which contributed $123.7 million and $73.0 million, respectively, to service revenue growth. Additionally, service revenue increased in both the Safety Assessment and Discovery Services businesses due to demand from biotechnology clients and increased pricing of services. These increases were partially offset by the effect of changes in foreign currency exchange rates.
DSA operating income increased $31.3 million, or 13.8%, compared to the corresponding period in 2018. DSA operating income as a percentage of revenue for fiscal year 2019 was 16.0%, a decrease of 1.3% from 17.3% for the corresponding period in 2018. The increase to operating income was primarily attributable to contributions from our recent acquisitions of Citoxlab and MPI Research. This increase was partially offset by increased costs in both cost of revenue and selling, general, and administrative expenses to support the growth of the businesses, which included the following: increased investments in personnel (staffing levels and hourly wage increases); increased investments related to facility expansions; higher severance charges in connection with certain global restructuring initiatives, and higher amortization of intangible assets and acquisition and integration costs associated with our recent acquisitions. These increased costs collectively decreased operating income as a percentage of revenue in 2019 compared to 2018.
Manufacturing
| Fiscal Year | |||||||||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 465.1 | $ | 429.5 | $ | 35.6 | 8.3 | % | (2.7) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 225.0 | 202.3 | 22.7 | 11.2 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 85.6 | 82.0 | 3.6 | 4.4 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 9.1 | 9.0 | 0.1 | 0.3 | % | ||||||||||||||||||||||||
| Operating income | $ | 145.4 | $ | 136.2 | $ | 9.2 | 6.8 | % | |||||||||||||||||||||
| Operating income % of revenue | 31.3 | % | 31.7 | % | (0.4) | % |
Manufacturing revenue increased $35.6 million, or 8.3%, due primarily to higher demand for endotoxin products, bioburden products and services, and species identification services in the Microbial Solutions business and higher service revenue in the Biologics business; partially offset by the effect of changes in foreign currency exchange rates.
Manufacturing operating income increased $9.2 million, or 6.8%, compared to the corresponding period in 2018. Manufacturing operating income as a percentage of revenue for fiscal year 2019 was 31.3%, a decrease of 0.4% from 31.7% for the corresponding period in 2018. The increase to operating income was due primarily to the increase in revenue. This increase was partially offset by increased costs in both cost of revenue and selling, general, and administrative expenses to support the growth of the businesses, which included the following: increased investments in process improvements to further enhance Microbial Solutions’ operating efficiency; increased investments in personnel (staffing levels and hourly wage increases), and increased investments related to facility expansions (primarily in Biologics), and certain site consolidation costs. These increased costs collectively decreased operating income as a percentage of revenue in 2019 compared to 2018.
Unallocated Corporate
| Fiscal Year | |||||||||||||||||||||||
| 2019 | 2018 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Unallocated corporate | $ | 187.0 | $ | 168.9 | $ | 18.1 | 10.8 | % | |||||||||||||||
| Unallocated corporate % of revenue | 7.1 | % | 7.5 | % | (0.4) | % |
Unallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The increase in unallocated corporate costs of $18.1 million, or 10.8%, compared to the corresponding period in 2018 is related to an increase in compensation, benefits, and other employee-related expenses; costs associated with the evaluation and integration of our recent acquisition activity; and costs related to the remediation of the unauthorized access into our information systems. Costs as a percentage of revenue for fiscal year 2019 was 7.1%, a decrease of 0.4% from 7.5% for the corresponding period in 2018.
Interest Income Interest income, which represents earnings on cash, cash equivalents, and time deposits was $1.5 million and $0.8 million for fiscal years 2019 and 2018, respectively. The increase of $0.7 million was primarily due to higher average cash balances in 2019 as compared to 2018.
Interest Expense Interest expense for fiscal year 2019 was $60.9 million, a decrease of $2.9 million, or 4.5%, compared to $63.8 million for fiscal year 2018. The decrease was due primarily to a foreign currency gain recognized in connection with a debt-related foreign exchange forward contract and lower debt issuance costs incurred compared to the corresponding period in 2018; partially offset by higher interest expense from increased debt to fund our recent acquisitions.
Other Income, Net Other income, net, was $12.3 million for fiscal year 2019, a decrease of $1.0 million, or 7.3%, compared to $13.3 million for fiscal year 2018. The decrease was due to higher foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency compared to the corresponding period in 2018 and higher pension-related costs as compared to the corresponding period in 2018; partially offset by higher net gains on our venture capital investments and our life insurance policy investments compared to the corresponding period in 2018.
Income Taxes Income tax expense was $50.0 million for fiscal year 2019, a decrease of $4.5 million, compared to $54.5 million for fiscal year 2018. Our effective tax rate was 16.5% for fiscal year 2019, compared to 19.3% for fiscal year 2018. The decrease in our effective tax rate in the 2019 period compared to the 2018 period was primarily due to recognizing a $20.6 million deferred tax asset in fiscal year 2019 for net operating losses expected to be utilized in the future due to changes in our international financing structure.
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:
| December 26, 2020 | December 28, 2019 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Held in U.S. entities | $ | 11.8 | $ | 56.5 | |||||||
| Held in non-U.S. entities | 216.6 | 181.5 | |||||||||
| Total cash and cash equivalents | 228.4 | 238.0 | |||||||||
| Short-term investments: | |||||||||||
| Held in non-U.S. entities | 1.0 | 1.0 | |||||||||
| Total cash, cash equivalents and short-term investments | $ | 229.4 | $ | 239.0 |
Borrowings
On March 26, 2018, we amended and restated our $1.65 billion credit facility, which extended the maturity date and provided for a $750.0 million term loan and a $1.55 billion multi-currency revolving facility (Credit Facility). The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. The revolving facility matures on March 26, 2023, and requires no scheduled payment before that date. On October 23, 2019, we prepaid $500.0 million of the term loan with proceeds from a $500.0 million unregistered private offering (see 2028 Senior Notes below). Additionally, on November 4, 2019, we further amended and restated the Credit Facility to increase the multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. Under specified circumstances, we have the ability to increase the term loan and/or revolving facility by up to $1.0 billion in the aggregate.
On April 3, 2018, we entered into an indenture (Base Indenture) with MUFG Union Bank, N.A. to allow for senior notes offerings under supplemental indentures. Concurrently on April 3, 2018, we entered into our first supplemental indenture and raised $500.0 million in aggregate principal amount of 5.5% Senior Notes due in 2026 (2026 Senior Notes) in an unregistered offering. Under the terms of the first supplemental indenture, interest on the 2026 Senior Notes is payable semi-annually on April 1 and October 1, beginning on October 1, 2018. On October 23, 2019, we entered into our second supplemental indenture and raised an additional $500.0 million in aggregate principal amount of 4.25% Senior Notes due in 2028 (2028 Senior Notes) in an unregistered offering. Under the terms of the second supplemental indenture, interest on the 2028 Senior Notes is payable semi-annually on May 1 and November 1, beginning on May 1, 2020.
Amounts outstanding under our credit facilities and both the 2026 Senior Notes and the 2028 Senior Notes were as follows:
| December 26, 2020 | December 28, 2019 | ||||||||||
| (in millions) | |||||||||||
| Term loans | $ | 146.9 | $ | 193.8 | |||||||
| Revolving facility | 814.8 | 676.1 | |||||||||
| 2026 Senior Notes | 500.0 | 500.0 | |||||||||
| 2028 Senior Notes | 500.0 | 500.0 | |||||||||
| Total | $ | 1,961.7 | $ | 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.
We entered into foreign exchange forward contracts during fiscal years 2020 and 2019 to limit our foreign currency exposure related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under the Credit Facility.
The acquisition of HemaCare on January 3, 2020 for $379.8 million in cash was funded through a combination of available cash and proceeds from our Credit Facility under the multi-currency revolving facility.
The acquisition of Distributed Bio on December 31, 2020 (fiscal year 2021) for approximately $83 million in cash was funded through a combination of available cash and proceeds from our Credit Facility under the multi-currency revolving facility.
The intended acquisition of Cognate BioServices, Inc. along with the associated fees are expected to be funded through a combination of available cash and proceeds from our Credit Facility under the multi-currency revolving facility.
Repurchases of Common Stock
During fiscal year 2020, we did not repurchase any shares under our authorized $1.3 billion stock repurchase program. As of December 26, 2020, we had $129.1 million remaining on the authorized stock repurchase program. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During fiscal year 2020, we acquired 0.1 million shares for $24.0 million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Income from continuing operations, net of income taxes | $ | 365.3 | $ | 254.1 | $ | 227.2 | |||||||||||
| Adjustments to reconcile income from continuing operations, net of income taxes, to net cash provided by operating activities | 207.5 | 220.7 | 199.1 | ||||||||||||||
| Changes in assets and liabilities | (26.2) | 6.1 | 14.8 | ||||||||||||||
| Net cash provided by operating activities | $ | 546.6 | $ | 480.9 | $ | 441.1 |
Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our income from continuing operations for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, deferred income taxes, gains 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 fiscal year 2020, compared to fiscal year 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 payroll tax payments, and compensation related items; partially offset by the timing of vendor and supplier payments and collections of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits); and certain pension related payments compared to the same period in 2019. For fiscal year 2019, compared to fiscal year 2018, the increase in net cash provided by operating activities was primarily driven by an increase in income from continuing operations, net of income taxes and the favorable timing of vendor and supplier payments compared to the same period in 2018; partially offset by unfavorable changes in working capital items, specifically related to the timing of net contract balances from contracts with customers (collectively trade receivables, net; deferred revenue; and customer contract deposits), increases in inventory levels in response to customer demand, and higher compensation payments compared to the prior year period.
The following table presents our net cash used in investing activities:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Acquisitions of businesses and assets, net of cash acquired | $ | (418.6) | $ | (515.7) | $ | (824.9) | |||||||||||
| Capital expenditures | (166.6) | (140.5) | (140.1) | ||||||||||||||
| Investments, net | (15.3) | (21.4) | 10.7 | ||||||||||||||
| Other, net | (1.0) | (3.9) | (0.7) | ||||||||||||||
| Net cash used in investing activities | $ | (601.5) | $ | (681.5) | $ | (955.0) |
The primary use of cash used in investing activities in fiscal year 2020 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. The primary use of cash in fiscal year 2019 related to the acquisition of Citoxlab, the acquisition of a supplier, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments. The primary use of cash in fiscal year 2018 related to our acquisitions of MPI Research and KWS BioTest, and our capital expenditures to support the growth of the business; partially offset by proceeds from net investments, which primarily relate to short-term investments held by our U.K. operations.
The following table presents our net cash provided by financing activities:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Proceeds from long-term debt and revolving credit facility | $ | 2,231.0 | $ | 3,358.5 | $ | 2,755.0 | |||||||||||
| Payments on long-term debt, revolving credit facility, and finance lease obligations | (2,200.4) | (3,124.6) | (2,201.0) | ||||||||||||||
| Proceeds from exercises of stock options | 46.6 | 34.5 | 37.7 | ||||||||||||||
| Payments on debt financing costs | — | (6.6) | (18.3) | ||||||||||||||
| Purchase of treasury stock | (24.0) | (18.1) | (13.8) | ||||||||||||||
| Other, net | (6.0) | (11.8) | (1.5) | ||||||||||||||
| Net cash provided by financing activities | $ | 47.2 | $ | 231.9 | $ | 558.1 |
For fiscal year 2020, net cash provided by financing activities reflected the net proceeds of $30.6 million on our long-term debt, revolving 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 available cash in response to uncertainties due to the COVID-19 pandemic; partially offset by,
-
Payments of approximately $47 million on our term loan and net payments of $476 million to our revolving Credit Facility throughout fiscal year 2020, which included the repayment of the $150 million additional borrowings during the first fiscal quarter of 2020;
-
Additionally, we had $1.6 billion of gross payments, partially offset by $1.6 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 $46.6 million, partially offset by treasury stock purchases of $24.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements.
For fiscal year 2019, net cash provided by financing activities reflected the net proceeds of $233.9 million on our long-term debt, revolving credit facility, and finance lease obligations. Included in the net proceeds are the following amounts:
-
Proceeds of $494 million received from the issuance of the 2028 Senior Notes on October 23, 2019, proceeds of approximately $581 million from our revolving credit facility to fund our recent acquisitions; and $98 million of proceeds from our revolving credit facility to fund activities in the normal course of business; partially offset by,
-
Payments of $537.5 million on our term loan, which included the $500.0 million prepayment on November 4, 2019, and approximately $151 million of repayments to our revolving credit facility in the normal course of business;
-
Additionally, we had $2.4 billion of gross payments, partially offset by $2.2 billion of gross proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $34.5 million. Net cash provided by financing activities was partially offset by treasury stock purchases of $18.1 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements and the purchase of an additional 5% equity interest in Vital River for $7.9 million which is included in Other, net.
For fiscal year 2018, net cash provided by financing activities reflected the incremental proceeds from the refinancing of our previous $1.65 Billion Credit Facility to the $2.3 Billion Credit Facility and the proceeds from our $500.0 million 2026 Senior Notes. Subsequent to refinancing our $2.3 Billion Credit Facility, we repaid €300 million of our revolving facility borrowed by a non-U.S. Euro functional currency entity and replaced the borrowing with a $343 million U.S. dollar denominated loan. A forward currency contract was then executed to mitigate any foreign currency gains or losses on the $343 million U.S. dollar denominated loan. Additionally, proceeds from exercises of employee stock options of $37.7 million; partially offset by payments on debt financing costs of $18.3 million, and treasury stock purchases of $13.8 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements.
Contractual Commitments and Obligations
Minimum future payments of our contractual obligations as of December 26, 2020 are as follows:
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Notes payable (1) | $ | 1,965.1 | $ | 47.2 | $ | 915.2 | $ | 0.7 | $ | 1,002.0 | |||||||||||||||||||
| Operating leases (2) | 345.4 | 33.5 | 68.0 | 66.3 | 177.6 | ||||||||||||||||||||||||
| Finance leases | 38.1 | 4.2 | 7.0 | 6.0 | 20.9 | ||||||||||||||||||||||||
| Redeemable noncontrolling interests (3) | 23.1 | 16.3 | 6.8 | — | — | ||||||||||||||||||||||||
| Venture capital investment commitments (4) | 44.6 | 36.5 | 8.1 | — | — | ||||||||||||||||||||||||
| Contingent payments (5) | 2.3 | — | 2.3 | — | — | ||||||||||||||||||||||||
| Unconditional purchase obligations (6) | 197.4 | 166.1 | 30.6 | 0.7 | — | ||||||||||||||||||||||||
| Total contractual cash obligations | $ | 2,616.0 | $ | 303.8 | $ | 1,038.0 | $ | 73.7 | $ | 1,200.5 |
(1)Notes payable includes the principal payments on our debt, which include our $2.3B Credit Facility, our Senior Notes and Other debt.
(2)We lease properties and equipment for use in our operations. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance, and other operating expenses. Amounts reflected within the table detail future minimum rental commitments under non-cancellable operating leases, net of income from subleases, for each of the periods presented. Approximately $130 million of contractually committed lease payments are reflected in the table for which leases have not yet commenced, as we do not yet control the underlying assets.
(3)The estimated cash obligation for redeemable noncontrolling interests are based on the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value as of December 26, 2020.
(4)The timing of the remaining capital commitment payments to venture capital funds is subject to the procedures of the limited liability partnerships and limited liability companies; the above table reflects the earliest possible date the payment can be required under the relevant agreements.
(5)In connection with certain business and asset acquisitions, we agreed to make additional payments aggregating to $2.3 million based upon the achievement of certain financial targets in connection with the respective acquisition. The contingent payment obligations included in the table above have not been probability adjusted or discounted.
(6)Unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty.
The above table excludes obligations related to our pension and other post-retirement benefit plans. Refer to Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for more details.
Tax Related Obligations
We excluded liabilities pertaining to uncertain tax positions from our summary of contractual obligations presented above, as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 26, 2020, we had $25.0 million of liabilities associated with uncertain tax positions.
Additionally, we excluded federal and state income tax liabilities of $48.8 million from our summary of contractual obligations presented above, relating to the one-time Transition Tax on unrepatriated earnings under U.S. Tax Reform. The Transition Tax will be paid, interest free, over an eight-year period through 2026.
Off-Balance Sheet Arrangements
As of December 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 December 26, 2020 was $139.9 million, of which we funded $95.3 million through December 26, 2020. Refer to Note 6, “Venture Capital and Strategic Equity Investments,” to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for further details.
Letters of Credit
Our off-balance sheet commitments related to our outstanding letters of credit as of December 26, 2020 were $16.0 million.
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