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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2020. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” included elsewhere within this Form 10-Q. Certain percentage changes may not recalculate due to rounding.
Overview
We are a full service, early-stage contract research organization (CRO). For over 70 years, we have been in the business of providing the research models required in research and development of new drugs, devices, and therapies. Over this time, we have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that enable us to support our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.
Our client base includes all major global biopharmaceutical companies, many biotechnology companies, CROs, agricultural and industrial chemical companies, life science companies, veterinary medicine companies, contract manufacturing companies, medical device companies, and diagnostic and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world.
Segment Reporting
Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (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 Solutions (Biologics), which performs specialized testing of biologics as well as contract development and manufacturing; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.
COVID-19
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 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 disclosed in our Annual Report on Form 10-K for fiscal 2020 for risk factors reflecting the impact of the COVID-19 pandemic. Additionally, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosed in our Annual Report on Form 10-K for fiscal 2020 for our assessment of the impact of the COVID-19 pandemic experienced during fiscal 2020 regarding our business continuity plans and actions taken; supply chain; financial condition and results of global operations; liquidity, capital and financial resources; recoverability and/or impairment of assets; and internal controls over financial reporting in a remote work environment. There have been no material changes to our assessment of the COVID-19 pandemic during the nine months ended September 25, 2021 and how it may continue to affect us in subsequent periods.
Recent Acquisitions
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.
On June 28, 2021 (third fiscal quarter of 2021), we acquired Vigene Biosciences, Inc. (Vigene), a gene therapy contract development and manufacturing organization (CDMO), providing viral vector-based gene delivery solutions. The acquisition enables clients to seamlessly conduct analytical testing, process development, and manufacturing for advanced modalities with the same scientific partner. The preliminary purchase price of Vigene was $326.1 million, net of $2.7 million in cash, subject to customary closing adjustments, and includes $34.5 million of contingent consideration (maximum contingent payments of up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our Manufacturing reportable segment.
On March 30, 2021, we acquired Retrogenix Limited (Retrogenix), an early-stage CRO providing specialized bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances our scientific expertise with additional large molecule and cell therapy discovery capabilities. The purchase price of Retrogenix was $53.9 million, net of $8.5 million in cash. Included in the purchase price are additional payments up to $6.9 million, which are contingent on future performance. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.
On March 29, 2021, we acquired Cognate BioServices, Inc. (Cognate), a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the production of plasmid DNA and other inputs in the CDMO value chain. The acquisition of Cognate establishes us as a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research and discovery through cGMP production. The preliminary purchase price of Cognate was $876.1 million, net of $70.5 million in cash, subject to certain post-closing adjustments and includes $15.7 million of consideration for an approximate 2% ownership interest not acquired. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility and recently issued Senior Notes. This business is reported as part of our Manufacturing reportable segment.
On March 3, 2021, we acquired certain assets from a distributor that supports our DSA reportable segment. The purchase price was $35.4 million, which includes $19.5 million in cash paid ($5.5 million of which was paid in fiscal 2020), and $15.9 million of contingent consideration (the maximum contingent contractual payments are up to $17.5 million). The business is reported as part of our DSA reportable segment.
On December 31, 2020, 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 $97.0 million, net of $0.8 million in cash, subject to certain post-closing adjustments. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously invested by us during prior fiscal years, and $14.0 million of contingent consideration (the maximum contingent contractual payments are up to $21.0 million). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is 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 $36.9 million, net of $0.5 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 $376.7 million, net of $3.1 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.
Recent Divestitures
On October 12, 2021, we completed two separate divestitures. We sold our RMS Japan operations to The Jackson Laboratory for approximately $63 million in cash, subject to customary closing adjustments. We also sold our gene therapy CDMO site in Sweden to a private investor group for approximately $52 million in cash with potential contingent payments of up to an additional $25 million, subject to certain adjustments. We are in the process of evaluating the transactions and the impact on our financial statements, including evaluating any resulting gains or losses that will be recognized. As of September 25, 2021, these
businesses and the related assets and liabilities were classified as held-for-sale on the condensed consolidated balance sheet in Other current assets and Other current liabilities, respectively. No changes were made to prior periods.
Overview of Results of Operations and Liquidity
Revenue for the three months ended September 25, 2021 increased $152.6 million, or 20.5%, to $895.9 million compared to $743.3 million in the corresponding period in 2020. Revenue for the nine months ended September 25, 2021 increased $502.2 million, or 23.5%, to $2.6 billion compared to $2.1 billion in the corresponding period in 2020. The increase in revenue in both periods was primarily due to the increased demand across all of our reporting segments, principally within DSA and the impact of RMS recovering from the affects of the COVID-19 pandemic in the prior periods; the impact of our recent acquisitions, principally within our Manufacturing reporting segment; and by the positive effect of changes in foreign currency exchange rates which increased revenue by $8.3 million, or 1.0%, when compared to the corresponding three month period in 2020 and increased revenue by $55.8 million, or 2.6%, when compared to the corresponding nine month period in 2020.
In the three months ended September 25, 2021, our operating income and operating income margin were $155.8 million and 17.4%, respectively, compared with $132.8 million and 17.9%, respectively, in the corresponding period of 2020. The changes in operating income and operating income margin were principally due to the contribution of the higher revenue described above, partially offset by higher amortization and increased costs associated with the evaluation and integration of our recent acquisitions.
In the nine months ended September 25, 2021, our operating income and operating income margin were $417.1 million and 15.8%, respectively, compared with $303.8 million and 14.2%, respectively, in the corresponding period of 2020. The increase in operating income and operating income margin for the nine months ended September 25, 2021 was primarily due to the contribution of higher revenue described above and the recovery from the affects from the COVID-19 pandemic.
Net income attributable to common shareholders increased to $103.4 million in the three months ended September 25, 2021, from $102.9 million in the corresponding period of 2020. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above as well as a lower income tax provision recognized due to higher research and development tax credits, as well as an increased benefit from stock-based compensation deductions in the three months ended September 25, 2021 as compared to the corresponding period of 2020, partially offset by venture capital investment losses in the three months ended September 25, 2021 as compared to gains incurred for the corresponding period in 2020.
Net income attributable to common shareholders increased to $253.4 million in the nine months ended September 25, 2021, from $221.1 million in the corresponding period of 2020. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above, partially offset by debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs, as compared to the corresponding period in 2020, and venture capital investment losses in the nine months ended September 25, 2021 as compared to gains incurred for the corresponding period in 2020.
During the first nine months of 2021, our cash flows from operations was $531.5 million compared with $408.2 million for the same period in 2020. The increase was driven by higher net income and certain favorable changes in working capital items, including the timing of vendor and supplier payments and collections of net contract balances from contracts with customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits) compared to the same period in 2020.
During the first nine months of 2021, we issued $1 billion of debt split between $500 million of 3.75% Senior Notes due in 2029 (2029 Senior Notes), and $500 million of 4.00% Senior Notes due in 2031 (2031 Senior Notes), in an unregistered offering. Interest on the 2029 and 2031 Senior Notes is payable semi-annually on March 15 and September 15. Proceeds from the 2029 and 2031 Senior Notes were used as follows: prepay the $500 million 2026 Senior Notes, $21 million of debt extinguishment costs, and $13 million of accrued interest; prepay the $146.9 million remaining term loan; pay down $135 million of the revolving facility; and pay for a portion of the Cognate acquisition. Additionally, in April, 2021, we amended and restated our Credit Facility by extending the maturity date to April 2026 and increasing the amount of our multi-currency revolving facility from $2.05 billion to $3.0 billion.
Results of Operations
Three Months Ended September 25, 2021 Compared to the Three Months Ended September 26, 2020
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Three Months Ended | |||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 703.8 | $ | 580.8 | $ | 123.0 | 21.2 | % | |||||||||||||||
| Product revenue | 192.1 | 162.5 | 29.6 | 18.2 | % | ||||||||||||||||||
| Total revenue | $ | 895.9 | $ | 743.3 | $ | 152.6 | 20.5 | % |
| Three Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 171.3 | $ | 151.9 | $ | 19.4 | 12.7 | % | 1.4 | % | |||||||||||||||||||
| DSA | 531.8 | 461.2 | 70.6 | 15.3 | % | 0.9 | % | ||||||||||||||||||||||
| Manufacturing | 192.8 | 130.2 | 62.6 | 48.1 | % | 1.1 | % | ||||||||||||||||||||||
| Total revenue | $ | 895.9 | $ | 743.3 | $ | 152.6 | 20.5 | % | 1.0 | % |
The following table presents operating income by reportable segment:
| Three Months Ended | |||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| RMS | $ | 39.1 | $ | 37.1 | $ | 2.0 | 5.4 | % | |||||||||||||||
| DSA | 116.5 | 90.4 | 26.1 | 29.0 | % | ||||||||||||||||||
| Manufacturing | 48.6 | 48.2 | 0.4 | 0.7 | % | ||||||||||||||||||
| Unallocated corporate | (48.4) | (42.9) | (5.5) | 12.7 | % | ||||||||||||||||||
| Total operating income | $ | 155.8 | $ | 132.8 | $ | 23.0 | 17.4 | % | |||||||||||||||
| Operating income % of revenue | 17.4 | % | 17.9 | % | (50) bps |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| Three Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 171.3 | $ | 151.9 | $ | 19.4 | 12.7 | % | 1.4 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 103.8 | 89.3 | 14.5 | 16.2 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 24.3 | 21.5 | 2.8 | 13.0 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 4.1 | 4.0 | 0.1 | 1.5 | % | ||||||||||||||||||||||||
| Operating income | $ | 39.1 | $ | 37.1 | $ | 2.0 | 5.4 | % | |||||||||||||||||||||
| Operating income % of revenue | 22.8 | % | 24.4 | % | (160) bps |
RMS revenue increased $19.4 million due primarily to higher research model product revenue in China and North America, as we recovered from the impact of the COVID-19 pandemic compared to the corresponding period in 2020 when many of our academic clients experienced closures; higher research model services revenue, specifically our GEMS business; the acquisition of Cellero, which contributed $0.9 million to product revenue; and the effect of changes in foreign currency exchange rates.
RMS operating income increased $2.0 million compared to the corresponding period in 2020 due to the contribution of revenue described above. RMS operating income as a percentage of revenue for the three months ended September 25, 2021 was 22.8%, a decrease of (160) bps from 24.4% for the corresponding period in 2020. Operating income as a percentage of revenue decreased primarily due to mix of products sold and services rendered in different geographies as well as increased costs of production.
DSA
| Three Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 531.8 | $ | 461.2 | $ | 70.6 | 15.3 | % | 0.9 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 356.6 | 306.4 | 50.2 | 16.4 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 37.8 | 42.4 | (4.6) | (10.9) | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 20.9 | 22.0 | (1.1) | (5.3) | % | ||||||||||||||||||||||||
| Operating income | $ | 116.5 | $ | 90.4 | $ | 26.1 | 29.0 | % | |||||||||||||||||||||
| Operating income % of revenue | 21.9 | % | 19.6 | % | 230 bps |
DSA revenue increased $70.6 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due to demand from biotechnology and global biopharmaceutical clients; increased pricing of services; the acquisitions of Retrogenix and Distributed Bio, which contributed $3.2 million and $2.6 million to Discovery Services revenue, respectively; and the effect of changes in foreign currency exchange rates. DSA revenue was not significantly impacted by the COVID-19 pandemic during the three months ended September 25, 2021 and September 26, 2020.
DSA operating income increased $26.1 million during the three months ended September 25, 2021 compared to the corresponding period in 2020. DSA operating income as a percentage of revenue for the three months ended September 25, 2021 was 21.9%, an increase of 230 bps from 19.6% for the corresponding period in 2020. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as gains on contingent consideration arrangements related to certain acquisitions, which are recorded within Selling, general, and administrative costs, and lower amortization of intangible assets, partially offset by the impact of foreign currency.
Manufacturing
| Three Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 192.8 | $ | 130.2 | $ | 62.6 | 48.1 | % | 1.1 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 98.2 | 58.4 | 39.8 | 68.3 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 38.2 | 21.4 | 16.8 | 78.0 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 7.8 | 2.2 | 5.6 | 266.9 | % | ||||||||||||||||||||||||
| Operating income | $ | 48.6 | $ | 48.2 | $ | 0.4 | 0.7 | % | |||||||||||||||||||||
| Operating income % of revenue | 25.2 | % | 37.1 | % | (1190) bps |
Manufacturing revenue increased $62.6 million due primarily to the acquisitions of Cognate and Vigene, which contributed $30.3 million and $6.0 million, respectively, and higher service revenue within our Biologics business; increased demand for endotoxin products in our Microbial Solutions business; and the effect of changes in foreign currency exchange rates. Overall, Manufacturing revenue was not significantly impacted by the COVID-19 pandemic during the three months ended September 25, 2021 and September 26, 2020.
Manufacturing operating income increased $0.4 million during the three months ended September 25, 2021 compared to the corresponding period in 2020. Manufacturing operating income as a percentage of revenue for the three months ended September 25, 2021 was 25.2%, a decrease of (1190) bps from 37.1% for the corresponding period in 2020. The decrease in operating income as a percentage of revenue was due to the acquisitions of Cognate and Vigene, principally due to the higher amortization of intangible assets and higher production costs associated with the acquisitions, as well as higher production costs in our Microbial Solutions business during the three months ended September 25, 2021 compared to the corresponding period in 2020.
Unallocated Corporate
| Three Months Ended | |||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Unallocated corporate | $ | 48.4 | $ | 42.9 | $ | 5.5 | 12.7 | % | |||||||||||||||
| Unallocated corporate % of revenue | 5.4 | % | 5.8 | % | (40) bps |
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 $5.5 million, or 12.7%, compared to the corresponding period in 2020 is primarily related to increased costs associated with the evaluation and integration of our recent acquisition activity. Costs as a percentage of revenue for the three months ended September 25, 2021 was 5.4%, a decrease of (40) bps from 5.8% for the corresponding period in 2020.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.1 million and $0.2 million for the three months ended September 25, 2021 and the corresponding period in 2020, respectively.
Interest Expense
Interest expense for the three months ended September 25, 2021 was $16.5 million, a decrease of $2.4 million, or 12.8%, compared to $18.9 million for the corresponding period in 2020. The decrease was due primarily to a foreign currency gain recognized in connection with a debt-related foreign exchange forward contract in the three months ended September 25, 2021, partially offset by higher interest expense in connection with our debt in the three months ended September 25, 2021 as compared to the corresponding period in 2020.
Other (Expense) Income, Net
Other expense, net, was $16.2 million for the three months ended September 25, 2021, a decrease of $37.4 million compared to Other income, net of $21.2 million for the corresponding period in 2020. The decrease was due primarily to venture capital investment losses of $10.3 million in the three months ended September 25, 2021 as compared to gains of $19.9 million incurred for the corresponding period in 2020, lower life insurance investment gains in the three months ended September 25, 2021 as compared to the corresponding period in 2020, and a foreign currency loss of $4.4 million recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency in the three months ended September 25, 2021.
Income Taxes
Income tax expense for the three months ended September 25, 2021 was $18.1 million, a decrease of $14.6 million compared to $32.7 million for the corresponding period in 2020. Our effective tax rate was 14.7% for the three months ended September 25, 2021, compared to 24.1% for the corresponding period in 2020. The decrease in our effective tax rate in the 2021 period compared to the 2020 period was primarily attributable to higher research and development tax credits, as well as an increased benefit from stock-based compensation deductions.
Nine Months Ended September 25, 2021 Compared to the Nine Months Ended September 26, 2020
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Nine Months Ended | |||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 2,045.8 | $ | 1,677.9 | $ | 367.9 | 21.9 | % | |||||||||||||||
| Product revenue | 589.3 | 455.0 | 134.3 | 29.5 | % | ||||||||||||||||||
| Total revenue | $ | 2,635.1 | $ | 2,132.9 | $ | 502.2 | 23.5 | % |
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 524.9 | $ | 414.4 | $ | 110.5 | 26.6 | % | 3.5 | % | |||||||||||||||||||
| DSA | 1,573.1 | 1,342.4 | 230.7 | 17.2 | % | 2.1 | % | ||||||||||||||||||||||
| Manufacturing | 537.1 | 376.1 | 161.0 | 42.8 | % | 3.5 | % | ||||||||||||||||||||||
| Total revenue | $ | 2,635.1 | $ | 2,132.9 | $ | 502.2 | 23.5 | % | 2.6 | % |
The following table presents operating income by reportable segment:
| Nine Months Ended | |||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| RMS | $ | 126.6 | $ | 68.3 | $ | 58.3 | 85.3 | % | |||||||||||||||
| DSA | 312.0 | 234.9 | 77.1 | 32.8 | % | ||||||||||||||||||
| Manufacturing | 154.7 | 132.3 | 22.4 | 17.0 | % | ||||||||||||||||||
| Unallocated corporate | (176.2) | (131.7) | (44.5) | 33.9 | % | ||||||||||||||||||
| Total operating income | $ | 417.1 | $ | 303.8 | $ | 113.3 | 37.3 | % | |||||||||||||||
| Operating income % of revenue | 15.8 | % | 14.2 | % | 160 bps |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 524.9 | $ | 414.4 | $ | 110.5 | 26.6 | % | 3.5 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 315.2 | 274.2 | 41.0 | 14.9 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 70.9 | 60.5 | 10.4 | 17.2 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 12.2 | 11.4 | 0.8 | 6.4 | % | ||||||||||||||||||||||||
| Operating income | $ | 126.6 | $ | 68.3 | $ | 58.3 | 85.3 | % | |||||||||||||||||||||
| Operating income % of revenue | 24.1 | % | 16.5 | % | 760 bps |
RMS revenue increased $110.5 million due primarily to higher research model product revenue across all geographies, most notably North America and China, as we recovered from the impact of the COVID-19 pandemic compared to the corresponding period in 2020 when many of our academic clients experienced closures; higher research model services revenue, which includes our GEMS, Insourcing Solutions and RADS businesses; the acquisition of Cellero, which contributed $5.7 million to product revenue; and the effect of changes in foreign currency exchange rates.
RMS operating income increased $58.3 million compared to the corresponding period in 2020. RMS operating income as a percentage of revenue for the nine months ended September 25, 2021 was 24.1%, an increase of 760 bps from 16.5% for the corresponding period in 2020. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as we recovered from the affects of the COVID-19 pandemic.
DSA
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,573.1 | $ | 1,342.4 | $ | 230.7 | 17.2 | % | 2.1 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 1,062.6 | 910.4 | 152.2 | 16.7 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 134.0 | 131.4 | 2.6 | 2.0 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 64.5 | 65.7 | (1.2) | (1.9) | % | ||||||||||||||||||||||||
| Operating income | $ | 312.0 | $ | 234.9 | $ | 77.1 | 32.8 | % | |||||||||||||||||||||
| Operating income % of revenue | 19.8 | % | 17.5 | % | 230 bps |
DSA revenue increased $230.7 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due to demand from biotechnology and global biopharmaceutical clients; increased pricing of services; the acquisitions of Retrogenix and Distributed Bio, which contributed $6.3 million and $4.8 million to Discovery Services revenue, respectively; and the effect of changes in foreign currency exchange rates. DSA revenue was not significantly impacted by the COVID-19 pandemic during the nine months ended September 25, 2021 and September 26, 2020.
DSA operating income increased $77.1 million during the nine months ended September 25, 2021 compared to the corresponding period in 2020. DSA operating income as a percentage of revenue for the nine months ended September 25, 2021 was 19.8%, an increase of 230 bps from 17.5% for the corresponding period in 2020. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as gains on contingent consideration arrangements related to certain acquisitions, which are recorded within Selling, general, and administrative costs, partially offset by the impact of foreign currency. These increases were also attributable to decreased costs
in both cost of revenue and selling, general, and administrative expenses related to certain 2020 site closures, which resulted in lower severance costs, site consolidation costs, and asset impairments during the nine months ended September 25, 2021 compared to the corresponding period in 2020.
Manufacturing
| Nine Months Ended | |||||||||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 537.1 | $ | 376.1 | $ | 161.0 | 42.8 | % | 3.5 | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 269.6 | 174.8 | 94.8 | 54.2 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 94.9 | 62.4 | 32.5 | 52.2 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 17.9 | 6.6 | 11.3 | 170.8 | % | ||||||||||||||||||||||||
| Operating income | $ | 154.7 | $ | 132.3 | $ | 22.4 | 17.0 | % | |||||||||||||||||||||
| Operating income % of revenue | 28.8 | % | 35.2 | % | (640) bps |
Manufacturing revenue increased $161.0 million due primarily to the acquisitions of Cognate and Vigene, which contributed $65.1 million and $6.0 million, respectively, and higher service revenue within our Biologics business; increased demand for endotoxin products in our Microbial Solutions business; and the effect of changes in foreign currency exchange rates. Overall, Manufacturing revenue was not significantly impacted by the COVID-19 pandemic during the nine months ended September 25, 2021 and September 26, 2020.
Manufacturing operating income increased $22.4 million during the nine months ended September 25, 2021 compared to the corresponding period in 2020. The increase in operating income was due primarily to the contribution of higher revenue in our Biologics business in the nine months ended September 25, 2021 compared to the same period in 2020. Manufacturing operating income as a percentage of revenue for the nine months ended September 25, 2021 was 28.8%, a decrease of (640) bps from 35.2% for the corresponding period in 2020. The decrease in operating income as a percentage of revenue was due to the acquisitions of Cognate and Vigene, principally due to the higher amortization of intangible assets and higher production costs associated with the acquisitions, as well as higher production costs in our Microbial Solutions business during the nine months ended September 25, 2021 compared to the corresponding period in 2020.
Unallocated Corporate
| Nine Months Ended | |||||||||||||||||||||||
| September 25, 2021 | September 26, 2020 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Unallocated corporate | $ | 176.2 | $ | 131.7 | $ | 44.5 | 33.9 | % | |||||||||||||||
| Unallocated corporate % of revenue | 6.7 | % | 6.2 | % | 50 bps |
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 $44.5 million, or 33.9%, compared to the corresponding period in 2020 is primarily related to increased costs associated with the evaluation and integration of our recent acquisition activity, and an increase in compensation, benefits, and other employee-related expenses. Costs as a percentage of revenue for the nine months ended September 25, 2021 was 6.7%, an increase of 50 bps from 6.2% for the corresponding period in 2020.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.3 million and $0.8 million for the nine months ended September 25, 2021 and the corresponding period in 2020, respectively.
Interest Expense
Interest expense for the nine months ended September 25, 2021 was $62.4 million, an increase of $9.1 million, or 17.0%, compared to $53.3 million for the corresponding period in 2020. The increase was due primarily to $26 million of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs
incurred in the nine months ended September 25, 2021, partially offset by a higher foreign currency gain recognized in connection with a debt-related foreign exchange forward contract in the nine months ended September 25, 2021 compared to the corresponding period in 2020.
Other (Expense) Income, Net
Other expense, net, was $38.0 million for the nine months ended September 25, 2021, a decrease of $61.4 million compared to other income, net of $23.4 million for the corresponding period in 2020. The decrease was due primarily to venture capital investment losses of $15.6 million in the nine months ended September 25, 2021 as compared to gains of $31.6 million incurred for the corresponding period in 2020, and 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 in the nine months ended September 25, 2021 as compared to the corresponding period in 2020; partially offset by higher gains on our life insurance investments for the nine months ended September 25, 2021 as compared to losses incurred during the corresponding period in 2020.
Income Taxes
Income tax expense for the nine months ended September 25, 2021 was $58.1 million, an increase of $4.5 million compared to $53.6 million for the corresponding period in 2020. Our effective tax rate was 18.3% for the nine months ended September 25, 2021 compared to 19.5% for the corresponding period in 2020. The decrease in our effective tax rate in the 2021 period compared to the 2020 period was primarily attributable to higher research and development tax credits, as well as an increased benefit from stock-based compensation deductions; partially offset by deferred tax impact of tax law changes enacted in the nine months ended September 25, 2021 and higher non-deductible transaction costs incurred during the nine months ended September 25, 2021 compared to the corresponding period in 2020.
Liquidity and Capital Resources
We currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future.
The following table presents our cash, cash equivalents and short-term investments :
| September 25, 2021 | December 26, 2020 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Held in U.S. entities | $ | 17.2 | $ | 11.8 | |||||||
| Held in non-U.S. entities1 | 195.3 | 216.6 | |||||||||
| Total cash and cash equivalents | 212.5 | 228.4 | |||||||||
| Short-term investments: | |||||||||||
| Held in non-U.S. entities | 1.0 | 1.0 | |||||||||
| Total cash, cash equivalents and short-term investments | $ | 213.5 | $ | 229.4 | |||||||
| 1 Excludes $8.6 million of cash classified as assets held for sale as of September 25, 2021 related to two divestitures that occurred on October 12, 2021. |
Borrowings
As of March 27, 2021, we had a Credit Facility, which consisted of a $750.0 million term loan, which was fully repaid as of March 27, 2021, and a $2.05 billion multi-currency revolving facility. The term loan facility matured in 19 quarterly installments with the last installment due March 26, 2023. The revolving facility had a maturity date of March 26, 2023, and required no scheduled payment before that date.
During the three months ended June 26, 2021, we amended and restated the Credit Facility creating a $3.0 billion multi-currency revolving facility, which extends the maturity date to April 2026 with no required scheduled payment before that date. The Credit Facility provides for a $3.0 billion multi-currency revolving facility.
We also have certain indentures that allow for senior notes offerings:
-
In 2018, we raised $500.0 million of 5.5% Senior Notes due in 2026 (2026 Senior Notes) in an unregistered offering. Interest on the 2026 Senior Notes was payable semi-annually on April 1 and October 1. On March 23, 2021, we repaid the $500.0 million 2026 Senior Notes with proceeds from our 2029 and 2031 Senior Notes (see below).
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In 2019, we raised $500.0 million of 4.25% Senior Notes due in 2028 (2028 Senior Notes) in an unregistered offering. Interest on the 2028 Senior Notes is payable semi-annually on May 1 and November 1.
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In March 2021, we raised $1.0 billion of senior notes split between $500 million of 3.75% Senior Notes due in 2029 (2029 Senior Notes), and $500 million of 4.00% Senior Notes due in 2031 (2031 Senior Notes) in an unregistered offering. Interest on the 2029 and 2031 Senior Notes is payable semi-annually on March 15 and September 15.
Amounts outstanding under our Credit Facility and our Senior Notes were as follows:
| September 25, 2021 | December 26, 2020 | ||||||||||
| (in millions) | |||||||||||
| Term loans | $ | — | $ | 146.9 | |||||||
| Revolving facility | 1,390.3 | 814.8 | |||||||||
| 5.5% Senior Notes due 2026 | — | 500.0 | |||||||||
| 4.25% Senior Notes due 2028 | 500.0 | 500.0 | |||||||||
| 3.75% Senior Notes due 2029 | 500.0 | — | |||||||||
| 4.0% Senior Notes due 2031 | 500.0 | — | |||||||||
| Total | $ | 2,890.3 | $ | 1,961.7 |
The interest rates applicable to the amended and restated revolving facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, 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%) or the adjusted LIBOR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio.
Repurchases of Common Stock
During the nine months ended September 25, 2021, we did not repurchase any shares under our authorized stock repurchase program. As of September 25, 2021, we had $129.1 million remaining on the authorized $1.3 billion stock repurchase program and we do not intend to repurchase shares for the remainder of 2021. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During the nine months ended September 25, 2021, we acquired 0.1 million shares for $40.4 million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
| Nine Months Ended | |||||||||||
| September 25, 2021 | September 26, 2020 | ||||||||||
| (in millions) | |||||||||||
| Net income | $ | 259.0 | $ | 221.1 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | 273.6 | 196.6 | |||||||||
| Changes in assets and liabilities | (1.1) | (9.5) | |||||||||
| Net cash provided by operating activities | $ | 531.5 | $ | 408.2 |
Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, debt extinguishment and financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. For the nine months ended September 25, 2021, compared to the nine months ended September 26, 2020, the increase in net cash provided by operating activities was driven by higher net income and certain favorable changes in working capital items, including the timing of vendor and supplier payments and collections of net contract balances from contracts with customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits) compared to the same period in 2020.
The following table presents our net cash used in investing activities:
| Nine Months Ended | |||||||||||
| September 25, 2021 | September 26, 2020 | ||||||||||
| (in millions) | |||||||||||
| Acquisitions of businesses and assets, net of cash acquired | $ | (1,292.1) | $ | (419.1) | |||||||
| Capital expenditures | (130.0) | (78.7) | |||||||||
| Investments, net | (26.0) | (14.1) | |||||||||
| Other, net | 0.9 | (1.2) | |||||||||
| Net cash used in investing activities | $ | (1,447.2) | $ | (513.1) |
For the nine months ended September 25, 2021, the primary use of cash used in investing activities related to the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix, and certain assets from a distributor, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments. For the nine months ended September 26, 2020, the primary use of cash used in investing activities related to the acquisitions of HemaCare and Cellero, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments.
The following table presents our net cash provided by financing activities:
| Nine Months Ended | |||||||||||
| September 25, 2021 | September 26, 2020 | ||||||||||
| (in millions) | |||||||||||
| Proceeds from long-term debt and revolving credit facility | $ | 6,119.7 | $ | 1,412.0 | |||||||
| Payments on long-term debt, revolving credit facility, and finance lease obligations | (5,190.4) | (1,321.0) | |||||||||
| Proceeds from exercises of stock options | 43.3 | 43.8 | |||||||||
| Purchase of treasury stock | (40.4) | (23.9) | |||||||||
| Payment of debt extinguishment and financing costs | (38.3) | — | |||||||||
| Other, net | (2.3) | (4.4) | |||||||||
| Net cash provided by financing activities | $ | 891.6 | $ | 106.5 |
For the nine months ended September 25, 2021, net cash provided by financing activities reflected the net proceeds of $929.3 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
-
Payments of approximately $147 million on our term loan;
-
Proceeds of $1.0 billion from the issuance of the 2029 and 2031 Senior Notes, which were used to prepay our $500 million 2026 Senior Notes;
-
Borrowings under our Credit Facility of $1.4 billion, which were used primarily for the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix and certain assets from a distributor;
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Payments of $1.5 billion made to our Credit Facility throughout the nine months ended September 25, 2021;
-
Gross proceeds and borrowings of $1.5 billion, but having a net impact of zero, were incurred as part of amending and restating our Credit Facility;
-
Proceeds of $2.2 billion, partially offset by $1.6 billion of payments in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $43.3 million, offset by treasury stock purchases of $40.4 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. Additionally we paid $21 million of debt extinguishment costs associated with the 2026 Senior Notes repayment and $17 million of debt financing costs associated with the 2029 and 2031 Senior Notes issuances and amending and restating the Credit Agreement.
For the nine months ended September 26, 2020, net cash provided by financing activities reflected the net proceeds of $91.0 million on our Credit Facility and finance lease obligations. Included in the net proceeds are the following amounts:
-
Proceeds of approximately $415 million from our revolving Credit Facility to fund our recent acquisitions. Additionally, towards the end of the first fiscal quarter, we borrowed an additional $150 million from our revolving Credit Facility to secure cash on hand in response to uncertainties due to the COVID-19 pandemic; partially offset by,
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Payments of approximately $33 million on our term loan and net payments of $434 million to our revolving Credit Facility throughout the nine months ended September 26, 2020, which included the repayment of the $150 million additional borrowings during the first fiscal quarter of 2020;
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Additionally, we had $798 million of gross payments, partially offset by $794 million of gross proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.
Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $43.8 million, partially offset by treasury stock purchases of $23.9 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements.
Contractual Commitments and Obligations
The disclosure of our contractual commitments and obligations was reported in our Annual Report on Form 10-K for fiscal 2020. There have been no material changes from the contractual commitments and obligations previously disclosed in our Annual Report on Form 10-K for fiscal 2020 other than the changes described in Note 2, “Business Combinations,” Note 7, “Fair Value,” Note 9, “Long-Term Debt and Finance Lease Obligations,” Note 16, “Leases,” and Note 17, “Commitments and Contingencies,” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of September 25, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated under the Exchange Act, except as disclosed below.
Venture Capital Investments
We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to the funds as of September 25, 2021 was $166.2 million, of which we funded $109.8 million through September 25, 2021. Refer to Note 6, “Venture Capital and Strategic Equity Investments” in this Quarterly Report on Form 10-Q for additional information.
Letters of Credit
Our off-balance sheet commitments related to our outstanding letters of credit as of September 25, 2021 were $16.7 million.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for fiscal year 2020.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements please refer to Note 1, “Basis of Presentation,” in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, “Basis of Presentation,” we did not adopt any other new accounting pronouncements during the nine months ended September 25, 2021 that had a significant effect on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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