filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 2021. 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, non-clinical contract research organization (CRO). 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, which is able 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, including our recently acquired contract development and manufacturing organization (CDMO) business. 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 major global biopharmaceutical companies, many biotechnology companies; agricultural and industrial chemical, life science, veterinary medicine, medical device, diagnostic and consumer product companies; contract research and contract manufacturing organizations; 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 and GMP-Compliant Cells 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 and GMP-Compliant Cells 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 (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO); and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens.
Russia-Ukraine Conflict
In February 2022, the Russian Federation launched an invasion of the country of Ukraine resulting in conflict in the region and a variety of sanctions against the Russian Federation enacted by several governments, including the U.S, United Kingdom, Canada and European Union. The conflict has had and continues to have, direct and indirect adverse effects on financial markets and global supply chain disruptions. We do not have any direct operations in either Russia or Ukraine and there were no material impacts to our financial statements for the three months ended March 26, 2022 as a result of the situation. We will continue to monitor the situation as it evolves for potential impacts to our operating and financial results such as increased inflationary, supply chain, or cybersecurity risks in subsequent periods. Refer to Item 1A, Risk Factors disclosed herein and in our Annual Report on Form 10-K for fiscal 2021 for our assessment of risk factors surrounding inflationary, supply chain and cybersecurity risks.
Recent Acquisitions
Our strategy is to augment internal growth of existing businesses with complementary acquisitions. Our recent acquisitions are described below.
Fiscal Year 2022 Acquisition
On April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements our existing IS business, specifically our CRADL (Charles River Accelerator and Development Lab) footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The preliminary purchase price of Explora BioLabs was approximately $295 million in cash, subject to customary closing adjustments. The acquisition was funded through proceeds from our Credit Facility. This business will be reported as part of our RMS segment.
Fiscal Year 2021 Acquisitions
On June 28, 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 purchase price of Vigene was $323.9 million, net of $2.7 million in cash, 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 purchase price of Cognate was $877.9 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 Senior Notes issued in fiscal 2021. 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 purchase price of Distributed Bio was $97.0 million, net of $0.8 million in cash. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously issued by us during prior fiscal years, and $14.1 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.
Recent Divestitures
On October 12, 2021, we completed two separate divestitures. We sold our RMS Japan operations to The Jackson Laboratory for a preliminary purchase price of $73.1 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments. We also sold our gene therapy CDMO site in Sweden to a private investor group for a preliminary purchase price of $59.6 million, net of $0.2 million in cash and certain post-closing adjustments. Included in the purchase price are contingent payments fair valued at $15.3 million, (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10 million between the parties. We routinely evaluate the strategic fit and fundamental performance of our acquisitions integrated within our global infrastructure. As part of this assessment, we determined that the above capital could be better deployed in other long-term growth opportunities.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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 in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which will occur in this fiscal year 2022.
Overview of Results of Operations and Liquidity
Revenue for the three months ended March 26, 2022 increased $89.3 million, or 10.8%, to $913.9 million compared to $824.6 million in the corresponding period in 2021. The increase in revenue was primarily due to increases in our DSA segment, as well as the recent acquisitions, principally within our Manufacturing segment; partially offset by the divestiture of RMS Japan and the negative effect of changes in foreign currency exchange rates when compared to the corresponding three month period in 2021.
In the three months ended March 26, 2022, our operating income and operating income margin were $148.8 million and 16.3%, respectively, compared with $123.7 million and 15.0%, respectively, in the corresponding period of 2021. The increases in operating income and operating income margin for the three months ended March 26, 2022 was primarily due to the contribution of higher revenue described above compared to the corresponding period in 2021.
Net income attributable to common shareholders increased to $93.0 million in the three months ended March 26, 2022, from $61.5 million in the corresponding period of 2021. The increase in Net income attributable to common shareholders was primarily due to the increase in operating income described above and by the absence of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in 2021.
During the first three months of 2022, our cash flows from operations was $102.6 million compared with $170.2 million for the same period in 2021. The decrease was driven by timing of our working capital balances, principally variable compensation payments and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits); partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.
Results of Operations
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021
Revenue and Operating Income
The following tables present consolidated revenue by type and by reportable segment:
| Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Service revenue | $ | 720.5 | $ | 626.6 | $ | 93.9 | 15.0 | % | |||||||||||||||
| Product revenue | 193.4 | 198.0 | (4.6) | (2.3) | % | ||||||||||||||||||
| Total revenue | $ | 913.9 | $ | 824.6 | $ | 89.3 | 10.8 | % |
| Three Months Ended | |||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| RMS | $ | 176.5 | $ | 176.9 | $ | (0.4) | (0.2) | % | (1.2) | % | |||||||||||||||||||
| DSA | 544.3 | 501.2 | 43.1 | 8.6 | % | (1.6) | % | ||||||||||||||||||||||
| Manufacturing | 193.1 | 146.5 | 46.6 | 31.8 | % | (2.7) | % | ||||||||||||||||||||||
| Total revenue | $ | 913.9 | $ | 824.6 | $ | 89.3 | 10.8 | % | (1.7) | % |
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
The following table presents operating income by reportable segment:
| Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| RMS | $ | 47.9 | $ | 44.9 | $ | 3.0 | 6.6 | % | |||||||||||||||
| DSA | 105.0 | 91.0 | 14.0 | 15.4 | % | ||||||||||||||||||
| Manufacturing | 46.4 | 49.4 | (3.0) | (6.2) | % | ||||||||||||||||||
| Unallocated corporate | (50.5) | (61.6) | 11.1 | (18.1) | % | ||||||||||||||||||
| Total operating income | $ | 148.8 | $ | 123.7 | $ | 25.1 | 20.3 | % | |||||||||||||||
| Operating income % of revenue | 16.3 | % | 15.0 | % | 130 bps |
The following presents and discusses our consolidated financial results by each of our reportable segments:
RMS
| Three Months Ended | |||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 176.5 | $ | 176.9 | $ | (0.4) | (0.2) | % | (1.2) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 102.4 | 105.3 | (2.9) | (2.7) | % | ||||||||||||||||||||||||
| Selling, general and administrative | 22.4 | 22.6 | (0.2) | (0.9) | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 3.8 | 4.1 | (0.3) | (5.7) | % | ||||||||||||||||||||||||
| Operating income | $ | 47.9 | $ | 44.9 | $ | 3.0 | 6.6 | % | |||||||||||||||||||||
| Operating income % of revenue | 27.1 | % | 25.4 | % | 170 bps |
RMS revenue decreased $0.4 million compared to the corresponding period in 2021. The reduction of revenue was due primarily to the divestiture of RMS Japan, which decreased revenue by $12.7 million and the effect of changes in foreign currency exchange rates; partially offset by higher research model product revenue in North America; and higher research model services revenue, principally our Insourcing Solutions business compared to the corresponding period in 2021.
RMS operating income increased $3.0 million compared to the corresponding period in 2021. RMS operating income as a percentage of revenue for the three months ended March 26, 2022 was 27.1%, an increase of 170 bps from 25.4% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher research model revenue described above as well as lower amortization of intangible assets related to our acquisitions during the three months ended March 26, 2022 compared to the same period in 2021.
DSA
| Three Months Ended | |||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 544.3 | $ | 501.2 | $ | 43.1 | 8.6 | % | (1.6) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 373.1 | 340.1 | 33.0 | 9.7 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 43.9 | 47.6 | (3.7) | (7.9) | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 22.3 | 22.5 | (0.2) | (1.3) | % | ||||||||||||||||||||||||
| Operating income | $ | 105.0 | $ | 91.0 | $ | 14.0 | 15.4 | % | |||||||||||||||||||||
| Operating income % of revenue | 19.3 | % | 18.1 | % | 120 bps |
DSA revenue increased $43.1 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased pricing of services; and the acquisition of Retrogenix which contributed $3.1 million to Discovery Services revenue; partially offset by the effect of changes in foreign currency exchange rates.
DSA operating income increased $14.0 million during the three months ended March 26, 2022 compared to the corresponding period in 2021. DSA operating income as a percentage of revenue for the three months ended March 26, 2022 was 19.3%, an
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
increase of 120 bps from 18.1% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as lower acquisition related costs and adjustments to contingent consideration arrangements related to certain acquisitions; offset by higher staffing costs compared to the same period in 2021.
Manufacturing
| Three Months Ended | |||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | Impact of FX | |||||||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||||
| Revenue | $ | 193.1 | $ | 146.5 | $ | 46.6 | 31.8 | % | (2.7) | % | |||||||||||||||||||
| Cost of revenue (excluding amortization of intangible assets) | 101.5 | 70.9 | 30.6 | 43.2 | % | ||||||||||||||||||||||||
| Selling, general and administrative | 33.3 | 24.0 | 9.3 | 38.8 | % | ||||||||||||||||||||||||
| Amortization of intangible assets | 11.9 | 2.2 | 9.7 | 437.4 | % | ||||||||||||||||||||||||
| Operating income | $ | 46.4 | $ | 49.4 | $ | (3.0) | (6.2) | % | |||||||||||||||||||||
| Operating income % of revenue | 24.0 | % | 33.8 | % | (980) bps |
Manufacturing revenue increased $46.6 million due primarily to our Biologics Solutions business, which included the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $35.8 million, and higher service revenue within our Biologics Testing Solutions business, as well as Microbial Solutions revenue also increasing; partially offset by the effect of changes in foreign currency exchange rates.
Manufacturing operating income decreased $3.0 million during the three months ended March 26, 2022 compared to the corresponding period in 2021. Manufacturing operating income as a percentage of revenue for the three months ended March 26, 2022 was 24.0%, a decrease of (980) bps from 33.8% for the corresponding period in 2021. Operating income and operating income as a percentage of revenue decreased principally due to higher amortization of intangible assets and acquisition related costs during the three months ended March 26, 2022 compared to the corresponding period in 2021 and due to higher operating costs associated with our CDMO acquisitions.
Unallocated Corporate
| Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ change | % change | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Unallocated corporate | $ | 50.5 | $ | 61.6 | $ | (11.1) | (18.1) | % | |||||||||||||||
| Unallocated corporate % of revenue | 5.5 | % | 7.5 | % | (200) bps |
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 $11.1 million, or (18.1)%, compared to the corresponding period in 2021 is primarily related to decreased costs associated with the evaluation and integration of our recent acquisition activity. Costs as a percentage of revenue for the three months ended March 26, 2022 was 5.5%, a decrease of (200) bps from 7.5% for the corresponding period in 2021.
Interest Income
Interest income, which represents earnings on cash, cash equivalents, and time deposits was approximately $0.1 million for both the three months ended March 26, 2022 and the corresponding period in 2021.
Interest Expense
Interest expense for the three months ended March 26, 2022 was $9.4 million, a decrease of $20.3 million, or 68.3%, compared to $29.7 million for the corresponding period in 2021. The decrease 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 three months ended March 27, 2021, partially offset by a lower foreign currency gain recognized in connection with a debt-related foreign exchange forward contract, and higher interest rates on our variable debt in the three months ended March 26, 2022 compared to the corresponding period in 2021.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Other Expense, Net
Other expense, net, was $28.6 million for the three months ended March 26, 2022, an increase of $0.9 million compared to $27.7 million for the corresponding period in 2021. The increase was due primarily to losses on our life insurance investments for the three months ended March 26, 2022 as compared to gains incurred during the corresponding period in 2021; partially offset by lower foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency in the three months ended March 26, 2022 as compared to the corresponding period in 2021 and lower venture capital investment losses in the three months ended March 26, 2022 as compared to the corresponding period in 2021.
Income Taxes
Income tax expense for the three months ended March 26, 2022 was $15.6 million, an increase of $13.2 million compared to $2.4 million for the corresponding period in 2021. Our effective tax rate was 14.1% for the three months ended March 26, 2022 compared to 3.6% for the corresponding period in 2021. The increase in our effective tax rate in the 2022 period compared to the 2021 period was primarily attributable to a decreased tax benefit from stock-based compensation deductions in the three months ended March 26, 2022.
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:
| March 26, 2022 | December 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Held in U.S. entities | $ | 15.1 | $ | 28.2 | |||||||
| Held in non-U.S. entities | 226.8 | 213.0 | |||||||||
| Total cash and cash equivalents | 241.9 | 241.2 | |||||||||
| Short-term investments: | |||||||||||
| Held in non-U.S. entities | 1.1 | 1.1 | |||||||||
| Total cash, cash equivalents and short-term investments | $ | 243.0 | $ | 242.3 |
Borrowings
Amounts outstanding under our Credit Facility and our Senior Notes were as follows:
| March 26, 2022 | December 25, 2021 | ||||||||||
| (in millions) | |||||||||||
| Revolving facility | $ | 1,174.2 | $ | 1,161.4 | |||||||
| 4.25% Senior Notes due 2028 | 500.0 | 500.0 | |||||||||
| 3.75% Senior Notes due 2029 | 500.0 | 500.0 | |||||||||
| 4.00% Senior Notes due 2031 | 500.0 | 500.0 | |||||||||
| Total | $ | 2,674.2 | $ | 2,661.4 |
The interest rates applicable to the Credit 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.
Our off-balance sheet commitments related to our outstanding letters of credit as of March 26, 2022 were $17.7 million.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Repurchases of Common Stock
During the three months ended March 26, 2022, we did not repurchase any shares under our authorized stock repurchase program. As of March 26, 2022, 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 2022. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During the three months ended March 26, 2022, we acquired 0.1 million shares for $34.0 million through such netting.
Cash Flows
The following table presents our net cash provided by operating activities:
| Three Months Ended | |||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||
| (in millions) | |||||||||||
| Net income | $ | 95.2 | $ | 63.9 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | 99.0 | 109.7 | |||||||||
| Changes in assets and liabilities | (91.6) | (3.4) | |||||||||
| Net cash provided by operating activities | $ | 102.6 | $ | 170.2 |
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, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, contingent consideration, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. For the three months ended March 26, 2022, compared to the three months ended March 27, 2021, the decrease in net cash provided by operating activities was driven by timing of our working capital balances, principally variable compensation payments and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits); partially offset by favorable timing of our vendor and supplier payments compared to the same period in 2021.
The following table presents our net cash used in investing activities:
| Three Months Ended | |||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||
| (in millions) | |||||||||||
| Acquisition of businesses and assets, net of cash acquired | $ | — | $ | (94.2) | |||||||
| Capital expenditures | (80.5) | (28.0) | |||||||||
| Investments, net | (13.1) | (16.6) | |||||||||
| Other, net | (4.4) | 0.8 | |||||||||
| Net cash used in investing activities | $ | (98.0) | $ | (138.0) |
For the three months ended March 26, 2022, the primary use of cash used in investing activities related to capital expenditures to support the growth of the business and investments in certain venture capital and strategic equity investments. For the three months ended March 27, 2021, the primary use of cash used in investing activities related to the acquisition of Distributed Bio 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.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
The following table presents our net cash (used in) provided by financing activities:
| Three Months Ended | |||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||
| (in millions) | |||||||||||
| Proceeds from long-term debt and revolving credit facility | $ | 962.0 | $ | 1,954.0 | |||||||
| Payments on long-term debt, revolving credit facility, and finance lease obligations | (948.3) | (1,714.2) | |||||||||
| Proceeds from exercises of stock options | 12.2 | 19.6 | |||||||||
| Purchase of treasury stock | (34.0) | (36.0) | |||||||||
| Payment of debt extinguishment and financing costs | — | (28.7) | |||||||||
| Other, net | (5.2) | — | |||||||||
| Net cash (used in) provided by financing activities | $ | (13.3) | $ | 194.7 |
For the three months ended March 26, 2022, net cash used in financing activities reflected the net proceeds of $13.7 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
-
Net borrowings of $52 million made to our Credit Facility throughout the three months ended March 26, 2022;
-
Payments of $796 million partially offset by $759 million of 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 used in financing activities also reflected treasury stock purchases of $34.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, partially offset by proceeds from exercises of employee stock options of $12.2 million.
For the three months ended March 27, 2021, net cash provided by financing activities reflected the net proceeds of $239.8 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:
-
Proceeds of $1 billion from the issuance of the 2029 and 2031 Senior Notes, which were used to prepay our $500 million 2026 Senior Notes;
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Payments of approximately $147 million on our term loan and net payments of $85 million to our revolving credit facility throughout the three months ended March 27, 2021;
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Payments of $766 million partially offset by $739 million of 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 $19.6 million, offset by treasury stock purchases of $36.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. Additionally we paid $21 million of debt extinguishment costs associated with the 2026 Senior Notes repayment and $8 million of debt financing costs associated with the 2029 and 2031 Senior Notes issuances.
Off-Balance Sheet and Other Arrangements
There have been no material changes from the off-balance sheet and other arrangements previously disclosed in our Annual Report on Form 10-K for fiscal 2021 other than the changes described in Note 2, “Acquisitions and Divestitures,” Note 7, “Fair Value,” Note 9, “Debt and Other Financing Arrangements,”, and Note 13, “Commitments and Contingencies,” in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
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 March 26, 2022 was $173.9 million, of which we funded $116.6 million through March 26, 2022. Refer to Note 6, “Venture Capital and Strategic Equity Investments” in this Quarterly Report on Form 10-Q for additional information.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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 more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for fiscal year 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements please refer to Note 1, “Basis of Presentation,” in this Quarterly Report on Form 10-Q. Other than as discussed in Note 1, “Basis of Presentation,” we did not adopt any other new accounting pronouncements during the three months ended March 26, 2022 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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