# CHARLES RIVER LABORATORIES INTERNATIONAL, INC. (CRL) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from CHARLES RIVER LABORATORIES INTERNATIONAL, INC.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1100682/000110068222000007/crl-20211225.htm Accession: 0001100682-22-000007 Filing date: 2022-02-16 Report date: 2021-12-25 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/CRL/ All MD&A years: /company/CRL/mda/ Next year: /company/CRL/mda/fy2022/ (FY 2022) Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. A discussion of our results of operations for the fiscal year ended December 26, 2020 and a comparison of our results for the fiscal years ended December 26, 2020 and December 28, 2019 was included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended December 26, 2020, filed with the SEC on February 17, 2021. In addition to historical consolidated financial information, the following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Certain percentage changes may not recalculate due to rounding. Overview We are a full service, non-clinical contract research organization (CRO). For 75 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, 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 newly 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. We currently operate in over 110 locations and in over 20 countries worldwide, which numbers exclude our Insourcing Solutions (IS) sites. Segment Reporting Our three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing 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. COVID-19 Overview On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The COVID-19 pandemic is dynamic, and its ultimate scope, duration and effects are uncertain. This pandemic has and continues to result in, and any future epidemic or pandemic crises may potentially result in, direct and indirect adverse effects on our industry and customers, which in turn has (with respect to COVID-19) and may (with respect to future epidemics or crises) impact our business, results of operations and financial condition. Further, the COVID-19 pandemic may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our operations or financial results. Refer to Item 1A, “Risk Factors”, included herein for risk factors reflecting the impact of the COVID-19 pandemic. Giving consideration to each of these risk factors, the following 38 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. is our current estimate and belief of the impact of the COVID-19 pandemic during fiscal year 2021 and how it may continue to affect us in subsequent periods. Business continuity To date, we generally have not experienced significant challenges in implementing our business continuity plans. All of our operating sites remain open and adequately staffed as of the date of this annual report. For certain operations or sites experiencing logistical delays, we have experienced some inefficiencies as it relates to completing work or fulfilling orders; however, we do not believe material expenditures will be required or material resource constraints will occur. Logistical delays include a small number of sites that have experienced reduced operations (including as a result of increased employee absenteeism) or voluntarily closed, as well as delays in transportation activities. We have comprehensive business continuity plans in place for each site globally and are continuously updating these to address the evolving COVID-19 pandemic situation. We have continuously refined our plans as the virus has spread and have encouraged and expressed our expectations that employees work remotely whenever possible. We are adhering to guidelines from government, health, and other regulatory agencies for those employees who need to come into our sites to fulfill their responsibilities. Due to the nature of our business, many employees already work in biosecure environments that require personal protective equipment (PPE) and adhere to other procedures to safely accomplish their daily responsibilities. Accordingly, to date, we believe we have been able to efficiently implement the additional safety precautions. Supply chain We are focused on ensuring that we have adequate inventory and supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain. Accordingly, we have and expect to continue to increase inventory and supplies in 2022. We continuously engage with our suppliers to limit any potential disruption to our supply chain. However, notwithstanding generally successful efforts to maintain supply chain continuity, we have experienced increased costs and delays throughout our supply chain during the pandemic. Financial condition and results of our global operations We are a global company that operates in over 110 locations and in over 20 countries worldwide. As we perform business across various borders, we are experiencing a continuum of impacts in each location as the COVID-19 pandemic has impacted the global economy in different phases. We are continuing to see demand for products and services across all of our businesses, although as described below within Results of Operations, the impact of the COVID-19 pandemic on the level of demand varies with our different businesses. While there is uncertainty, our clients are still in need of the products and services we provide to biomedical research to advance discovery and develop new therapies for the treatment of disease, including the COVID-19 pandemic. Due to certain restrictions in place at the various sites of our clients and suppliers (including client and supplier site closures), there have been challenges relating to timely receiving and shipping products globally in all businesses. Should these restrictions continue, demand/supply issues may persist and could impact revenue growth, operating income (including operating income margins) and cash flows. We have observed some impact due to constraints from internal site restrictions, remote work, resources, and productivity. However, we believe the impact to us has not been as significant as to companies in many other industries because of the nature of our businesses, the classification of our businesses as essential or critical, as the case may be, and our business continuity plans. Recoverability and/or impairment of assets The COVID-19 pandemic did not, and is not expected to, impact the ability to timely account for assets on our balance sheet. There are judgments involved as it relates to reviewing our allowance for credit losses, valuation of inventory, and valuations/recovery of investments. We believe we have the necessary support for estimates derived for these account balances. We have reviewed the collectability and valuation of the assets through the date of financial statement issuance, noting no significant recoverability concerns or any impairments identified. We did not identify any triggering events when reviewing impairment indicators for our goodwill and long-lived assets (tangible and intangible) that would indicate an impairment may exist. Should a prolonged disruption occur where there is a material change from our current expectation of future cash flows, we could experience additional write-offs of client receivables or impairments to certain asset balances due to collectability and valuation issues. Review of impairment indicators and quantifying any impact will continue to be a focus throughout fiscal year 2022. Internal controls over financial reporting in a remote work environment Internal controls over financial reporting are a focus for us to ensure they continue to be designed and operating effectively. As of December 25, 2021 and through the issuance of these financial statements, we did not have any material changes to our internal controls over financial reporting. For personnel responsible for internal control activities and working remote, the ability to work effectively enabled us to continue to maintain effective internal control over financial reporting. System and efficiency programs implemented in recent years, as well as those implemented as part of business continuity plans, have enabled us to effectively complete our financial reporting process in a similar way we completed it prior to the COVID-19 39 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. pandemic despite a largely remote working environment. Although there is uncertainty over the duration of the COVID-19 pandemic disruption, we do not anticipate any adverse impact to relevant systems or to the operating effectiveness of internal controls over financial reporting. Recent Acquisitions Our strategy is to augment internal growth of existing businesses with complementary acquisitions. We continue to make strategic acquisitions designed to expand our portfolio of products and services to support the drug discovery and development continuum. Our recent acquisitions are described below. On 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 preliminary 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 preliminary purchase price of Cognate was $879.0 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 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 $14.0 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. 40 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. 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 $73.5 million, which included $8.2 million in cash, $3.6 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. 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 fiscal year 2022. Business Trends The COVID-19 pandemic continued in 2021, but the global economy endured the challenges of the pandemic and recovered, as did biopharmaceutical research activity. Our ability to continue to deliver our leading suite of research and non-clinical development solutions has endeavored our clients to increasingly choose to partner with us for our flexible and efficient outsourcing solutions, broad scientific capabilities, and global scale, as well as our resilience throughout the pandemic. Most of our businesses rebounded from the impact of the COVID-19 pandemic by early 2021, subsequently resulting in unprecedented client demand throughout the year. The strength of the demand environment was further reinforced by strong biotech funding and continued scientific innovation, resulting in robust revenue growth across all three of our reportable segments in fiscal year 2021. Many of our pharmaceutical and biotechnology clients intensified their use of strategic outsourcing during 2021 to move their early-stage research programs forward in an efficient and cost-effective manner. Small and mid-size biotechnology clients continued to be the primary driver of revenue growth as these clients benefited from the sustained strength of the biotechnology funding environment in fiscal year 2021, from capital markets, partnering with large biopharmaceutical companies, and investment by venture capital, as well as the enhanced global focus on scientific innovation and emphasized greater investment in their preclinical pipelines. Many of our large biopharmaceutical clients have continued to increase investments in their drug discovery and early-stage development efforts and have strengthened their relationships with both CROs, like us, and biotechnology companies to assist them in bringing new drugs to market. Clients continue to seek to outsource larger portions of their early-stage drug research programs to us, which is leading to new business opportunities as clients adopt more flexible and efficient research and development models. Our DSA reportable segment continued to benefit from these trends in fiscal year 2021. Robust Safety Assessment revenue growth was primarily driven by unprecedented client demand and increased pricing, which was supported by record backlog levels. We believe the acquisitions of Citoxlab (2019), MPI Research (2018), and WIL Research (2016) have solidified our scientific capabilities and global scale, and the breadth and depth of our scientific expertise, quality, and responsiveness remain key criteria when our clients make the decision to outsource to us. As biotechnology funding remains robust and our clients continue to pursue their goal of more efficient and effective drug research to bring innovative new therapies to market, they are evaluating outsourcing more of their research programs, such as discovery services. We continued to enhance our Discovery Services capabilities to provide clients with a comprehensive portfolio that enables them to start working with us at the earliest stages of the discovery process. We have accomplished this through acquisitions, including Retrogenix and Distributed Bio in fiscal year 2021, Citoxlab’s discovery services, KWS BioTest in 2018 and Brains On-Line in 2017, and through adding cutting-edge capabilities to our discovery toolkit through partnerships, such as BitBio, Cypre, Fios Genomics, and most recently, discovery artificial intelligence (AI) partners Valence Discovery and Valo. In fiscal year 2021, demand in our Discovery Services business also increased significantly, as our efforts to enhance our scientific capabilities, provide clients with flexible partnering models, and become a trusted scientific partner for our clients’ early-stage programs have been successful. Overall, demand for our products and services that support our clients’ manufacturing activities intensified in fiscal year 2021. Demand for our Microbial Solutions significantly rebounded in fiscal year 2021 from last year’s COVID-19 restrictions that limited access to certain client sites, and the business completed the delayed instrument installations. Demand for our Biologics Solutions business continued to meaningfully accelerate driven by our analytical testing services to address the rapidly growing proportion of biologic drugs in the pipeline and on the market, including cell and gene therapies and COVID-19 therapeutics. In 2021, we continued to enhance our Biologics Solutions portfolio with the acquisitions of Cognate (March 2021) and Vigene (June 2021) to expand our scientific capabilities into the cell and gene therapy CDMO sector. We believe these businesses enable Charles River to be a premier scientific partner for development, testing, and manufacturing of advanced drug modalities and further enhance our presence in the high-growth cell and gene therapy sector. 41 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Demand for our Research Models and Services returned to pre-pandemic levels as clients returned to their research sites and resumed their biomedical research efforts in earnest, which drove robust revenue growth in fiscal year 2021. This was particularly true in China, as the resurgence in demand outpaced North America and Europe due in part to an expanded product offering and ongoing efforts to enhance the geographic reach in China. Demand for research model services continued to perform very well, particularly for our IS and GEMS businesses. We are confident that research models and services will remain essential tools for our clients’ drug discovery and early-stage development efforts. In 2020, we enhanced the RMS business’ growth profile and portfolio of critical research tools that we are able to supply through the acquisitions of HemaCare and Cellero, premier providers of human-derived cellular products used in cell therapies. While the performance of these cell supply businesses continued to be impacted by COVID-19-related disruptions to donor availability in fiscal year 2021, we believe that we are taking the necessary actions to enable these businesses to achieve their full growth potential and capitalize on the robust, underlying demand from cell therapy developers and manufacturers in the near future. Overview of Results of Operations and Liquidity Revenue for fiscal year 2021 was $3.5 billion compared to $2.9 billion in fiscal year 2020. The 2021 increase as compared to the corresponding period in 2020 was $616.3 million, or 21.1%, and was primarily due to the increased demand across all of our reporting segments, principally within DSA and the impact of RMS recovering from the effects of the COVID-19 pandemic in the prior period, as discussed in the above “Business Trends” section, as well as the recent acquisitions, principally within our Manufacturing reporting segment; and by the positive effect of changes in foreign currency exchange rates when compared to the corresponding period in 2020. In fiscal year 2021, our operating income and operating income margin were $589.9 million and 16.7%, respectively, compared with $432.7 million and 14.8%, respectively, in fiscal year 2020. The increases in operating income and operating income margin were primarily due to the contribution of higher revenue described above and the recovery from the effects from the COVID-19 pandemic compared to the corresponding period in 2020. Net income attributable to common shareholders increased to $391.0 million in fiscal year 2021, from $364.3 million in the corresponding period of 2020. The increase in net income attributable to common shareholders of $26.7 million was primarily due to the increase in operating income described above, partially offset by venture capital investment losses in fiscal year 2021 as compared to gains incurred for the corresponding period in 2020. During fiscal year 2021, our cash flows from operations was $760.8 million compared with $546.6 million for fiscal year 2020. The increase was driven by higher net income and improvements from our working capital initiatives, 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 fiscal year 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. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S.). The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies”, to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. 42 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. We believe the following represent our critical accounting policies and estimates used in the preparation of our financial statements: Revenue Recognition Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the amount to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, we do not extend payment terms beyond one year. Applying the practical expedient, we do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Our contracts do not generally contain significant financing components. Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the impact on the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. Product revenue is generally recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, we generally measure our progress using either cost-to-cost (input method) or right-to-invoice (output method). We use the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as we incur costs on our contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of our performance to date. During fiscal year 2021, $2.1 billion, or approximately 60%, of our total revenue recognized ($3.5 billion) is DSA service revenue transferred over time. Income Taxes We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected 43 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. future taxable income, and the effects of tax planning strategies. Our valuation allowance was $315.6 million as of December 25, 2021. In the event actual results differ from our estimates, we will adjust our estimates in future periods and may establish additional allowances or reversals as necessary. We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the controversy process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense. We generally receive a tax deduction upon the exercise of non-qualified stock options by employees, or the vesting of restricted stock and performance share units held by employees. The stock price, timing, and amount of vesting and exercising of stock-based compensation could materially impact our current tax expense. Goodwill and Intangible Assets We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets. In our recent acquisitions, customer relationship intangible assets (also referred to as client relationships) have been the most significant identifiable assets acquired. To determine the fair value of the acquired client relationships, we utilized the multiple period excess earnings model (a commonly accepted valuation technique), which includes the following key assumptions: projections of cash flows from the acquired entities, which included future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital. The value of client relationships acquired were $257.2 million for Cognate, $87.5 million for Vigene, $17.3 million for Retrogenix and $16.1 million for Distributed Bio in fiscal year 2021. Client relationships acquired for fiscal year 2020 were valued at $170.4 million for HemaCare and $14.7 million for Cellero. We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No impairments were recognized during fiscal years 2021 and 2020. We evaluate goodwill for impairment annually, during the fourth quarter, and when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts. Estimates of future cash flows require assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill for impairment. We perform the quantitative impairment test where we compare the fair value of our reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, then we would record an impairment loss equal to the difference. In fiscal years 2021 and 2020 we performed the quantitative goodwill impairment test for our reporting units. Fair value was determined by using a weighted combination of a market-based approach and an income approach, as this combination was deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilized information about our company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. 44 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Under the income approach, we determined fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Our 2021 and 2020 impairment tests indicated that goodwill was not impaired. Valuation and Impairment of Long-Lived Assets Long-lived assets to be held and used, including property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, the following: •significant underperformance relative to expected historical or projected future operating results; •significant negative industry or economic trends; or •significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, net of any sublease income, if applicable, and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. We measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Significant judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. We may also estimate fair value based on market prices for similar assets, as appropriate. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets. No impairments were recognized during fiscal years 2021 and 2020. Pension and Other Post-Retirement Benefit Plans Several of our U.S. and non-U.S. subsidiaries sponsor defined benefit pension and other post-retirement benefit plans. We recognize the funded status of our defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. We measure plan assets and benefit obligations as of the date of our fiscal year end. The cost and obligations of these arrangements are calculated using many assumptions to estimate the benefits that the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease. Major assumptions used in the accounting for these employee benefit plans include the expected return on plan assets, withdrawal and mortality rates, discount rate, and rate of increase in employee compensation levels. Assumptions are determined based on our data and appropriate market indicators, and are evaluated each year as of the plans’ measurement date. Should any of these assumptions change, they would have an effect on net periodic pension costs and the unfunded benefit obligation. The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. The discount rate reflects the rate we would have to pay to purchase high-quality investments that would provide cash sufficient to settle our current pension obligations. A 25-basis point change in the discount rate changes the projected benefit obligation by approximately $17 million for all our plans. The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy. The Charles River Laboratories, Inc. Pension Plan (U.S. Pension Plan) was a qualified, non-contributory defined benefit plan covering certain U.S. employees. The U.S. Pension Plan was amended in 2002 to exclude new participants and in 2008 the accrual of benefits was frozen. In January 2019, we commenced the process to terminate this plan and received regulatory approval in April 2020. In October 2020, we settled all remaining benefits directly with vested participants through either lump sum payouts or the purchase of a group annuity contract from a qualified insurance company to administer all future payments. Prior to the settlement, the U.S. Pension Plan was underfunded with a benefit obligation of approximately $94 million and plan assets of approximately $93 million. In the fourth quarter of fiscal year 2020, we made a contribution of approximately $1 million to fully fund this plan to cover the lump sum payments, purchase the group annuity contract, and settle remaining termination costs. Upon settlement of the pension liability, we recognized a non-cash settlement charge of approximately $10 million related to pension losses, reclassified from accumulated other comprehensive loss to other expense in the consolidated statement of income. 45 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Stock-Based Compensation We grant stock options, restricted stock, restricted stock units (RSUs), and performance share units (PSUs) to employees, and stock options, restricted stock, and RSUs to non-employee directors under stock-based compensation plans. We make certain assumptions in order to value and record expense associated with awards made under our stock-based compensation arrangements. Changes in these assumptions may lead to variability with respect to the timing and amount of expense we recognize in connection with share-based payments. Stock-based compensation is recognized as an expense in the consolidated statements of income based on the grant date fair value, adjusted for forfeitures when they occur, over the requisite service period. Determining the appropriate valuation model and related assumptions requires judgment. The fair value of stock options granted is calculated using the Black-Scholes option-pricing model and the fair value of PSUs is estimated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others. Determining the appropriate amount to expense based on the anticipated achievement of PSU’s performance targets requires judgment, including forecasting the achievement of future financial targets. The estimate of expense is revised periodically based on the probability of achieving the required performance targets. The cumulative impact of any changes to our estimates is reflected in the period of change. New Accounting Pronouncements For a discussion of new accounting pronouncements, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies” to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K. 46 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Results of Operations Fiscal Year 2021 Compared to Fiscal Year 2020 Revenue and Operating Income The following tables present consolidated revenue by type and by reportable segment: [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change"],["","(in millions, except percentages)"],["Service revenue","$","2,755.6","","","$","2,296.1","","","$","459.5","","","20.0","%"],["Product revenue","784.6","","","627.8","","","156.8","","","25.0","%"],["Total revenue","$","3,540.2","","","$","2,923.9","","","$","616.3","","","21.1","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change","","Impact of FX"],["","(in millions, except percentages)"],["RMS","$","690.5","","","$","571.1","","","$","119.4","","","20.9","%","","2.2","%"],["DSA","2,107.2","","","1,837.4","","","269.8","","","14.7","%","","1.4","%"],["Manufacturing","742.5","","","515.4","","","227.1","","","44.1","%","","2.2","%"],["Total revenue","$","3,540.2","","","$","2,923.9","","","$","616.3","","","21.1","%","","1.8","%"]] [[/GREPCENT_TABLE]] The following table presents operating income by reportable segment: [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change"],["","(in millions, except percentages)"],["RMS","$","166.8","","","$","102.7","","","$","64.1","","","62.4","%"],["DSA","407.0","","","325.9","","","81.1","","","24.9","%"],["Manufacturing","246.4","","","181.5","","","64.9","","","35.8","%"],["Unallocated corporate","(230.3)","","","(177.4)","","","(52.9)","","","29.8","%"],["Total operating income","$","589.9","","","$","432.7","","","$","157.2","","","36.3","%"],["Operating income % of revenue","16.7","%","","14.8","%","","","","190 bps"]] [[/GREPCENT_TABLE]] The following presents and discusses our consolidated financial results by each of our reportable segments: RMS [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change","","Impact of FX"],["","(in millions, except percentages)"],["Revenue","$","690.5","","","$","571.1","","","$","119.4","","","20.9","%","","2.2","%"],["Cost of revenue (excluding amortization of intangible assets)","414.1","","","368.9","","","45.2","","","12.2","%"],["Selling, general and administrative","93.3","","","84.0","","","9.3","","","10.9","%"],["Amortization of intangible assets","16.3","","","15.5","","","0.8","","","5.4","%"],["Operating income","$","166.8","","","$","102.7","","","$","64.1","","","62.4","%"],["Operating income % of revenue","24.2","%","","18.0","%","","","","620 bps"]] [[/GREPCENT_TABLE]] RMS revenue increased $119.4 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 fiscal year 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 for the partial year prior to the acquisition’s anniversary date; and the effect of changes in foreign currency exchange rates; partially offset by the divestiture of RMS Japan, which decreased revenue by $10.5 million. RMS operating income increased $64.1 million compared to fiscal year 2020. RMS operating income as a percentage of revenue for fiscal year 2021 was 24.2%, an increase of 620 bps from 18.0% for fiscal year 2020. Operating income and 47 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as we recovered from the effects of the COVID-19 pandemic. DSA [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change","","Impact of FX"],["","(in millions, except percentages)"],["Revenue","$","2,107.2","","","$","1,837.4","","","$","269.8","","","14.7","%","","1.4","%"],["Cost of revenue (excluding amortization of intangible assets)","1,422.8","","","1,245.2","","","177.6","","","14.3","%"],["Selling, general and administrative","192.1","","","178.6","","","13.5","","","7.6","%"],["Amortization of intangible assets","85.3","","","87.7","","","(2.4)","","","(2.7)","%"],["Operating income","$","407.0","","","$","325.9","","","$","81.1","","","24.9","%"],["Operating income % of revenue","19.3","%","","17.7","%","","","","160 bps"]] [[/GREPCENT_TABLE]] DSA revenue increased $269.8 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 collectively contributed $18.3 million to Discovery Services revenue; and the effect of changes in foreign currency exchange rates. DSA revenue was not significantly impacted by the COVID-19 pandemic during fiscal years 2021 and 2020. DSA operating income increased $81.1 million compared to fiscal year 2020. DSA operating income as a percentage of revenue for fiscal year 2021 was 19.3%, an increase of 160 bps from 17.7% for fiscal year 2020. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as adjustments to contingent consideration arrangements related to certain acquisitions, which are recorded within selling, general, and administrative costs, partially offset by the impact of foreign currency. These increases in operating income and operating income as a percentage of revenue were also attributable to decreased costs in both cost of revenue and selling, general, and administrative expenses related to certain 2020 site closures, which resulted in lower severance costs, site consolidation costs, and asset impairments during fiscal year 2021 compared to fiscal year 2020. Manufacturing [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change","","Impact of FX"],["","(in millions, except percentages)"],["Revenue","$","742.5","","","$","515.4","","","$","227.1","","","44.1","%","","2.2","%"],["Cost of revenue (excluding amortization of intangible assets)","368.2","","","236.2","","","132.0","","","55.8","%"],["Selling, general and administrative","104.6","","","88.9","","","15.7","","","17.7","%"],["Amortization of intangible assets","23.3","","","8.8","","","14.5","","","166.1","%"],["Operating income","$","246.4","","","$","181.5","","","$","64.9","","","35.8","%"],["Operating income % of revenue","33.2","%","","35.2","%","","","","(200) bps"]] [[/GREPCENT_TABLE]] Manufacturing revenue increased $227.1 million due primarily to our Biologics Solutions business, which included the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $109.9 million, and higher service revenue within our Biologics Testing Solutions business; increased demand for endotoxin products in our Microbial Solutions business as we completed the delayed instrument installations from last year’s COVID-19 restrictions that limited access to certain client sites; and the effect of changes in foreign currency exchange rates. Manufacturing operating income increased $64.9 million compared to fiscal year 2020. The increase in operating income was due primarily to the contribution of higher revenue in our Biologics business in fiscal year 2021 compared to fiscal year 2020. Manufacturing operating income as a percentage of revenue for fiscal year 2021 was 33.2%, a decrease of (200) bps from 35.2% for fiscal year 2020. The decrease in operating income as a percentage of revenue was due to the acquisitions of Cognate and Vigene, principally due to the higher amortization of intangible assets and higher operating costs associated with the acquisitions, as well as higher operating costs in our Microbial Solutions business during fiscal year 2021 compared to fiscal year 2020; partially offset by adjustments to contingent consideration arrangements related to certain acquisitions, which are recorded within selling, general, and administrative costs during fiscal year 2021 compared to fiscal year 2020. 48 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Unallocated Corporate [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020","","$ change","","% change"],["","(in millions, except percentages)"],["Unallocated corporate","$","230.3","","","$","177.4","","","$","52.9","","","29.8","%"],["Unallocated corporate % of revenue","6.5","%","","6.1","%","","","","40 bps"]] [[/GREPCENT_TABLE]] 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 $52.9 million, or 29.8%, compared to fiscal year 2020 is primarily related to an increase in compensation, benefits, and other employee-related expenses, and increased costs associated with the evaluation and integration of our recent acquisition activity. Costs as a percentage of revenue for fiscal year 2021 was 6.5%, an increase of 40 bps from 6.1% for fiscal year 2020. Interest Income Interest income, which represents earnings on cash, cash equivalents, and time deposits was $0.7 million and $0.8 million for fiscal years 2021 and 2020, respectively. Interest Expense Interest expense for fiscal year 2021 was $73.9 million, a decrease of $12.5 million, or 14.5%, compared to $86.4 million for fiscal year 2020. The decrease was due primarily to foreign currency gains recognized in connection with debt-related foreign exchange forward contracts in fiscal year 2021 as compared to foreign currency losses recognized in fiscal year 2020, partially offset by $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 fiscal year 2021. Other (Expense) Income, Net Other expense, net, was $35.9 million for fiscal year 2021, a decrease of $135.9 million compared to other income, net of $100.0 million for fiscal year 2020. The decrease was due primarily to venture capital and strategic equity investment losses of $30.4 million in fiscal year 2021 as compared to gains of $100.9 million incurred in fiscal year 2020, and 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 fiscal year 2021 as compared to foreign currency gains recognized in fiscal year 2020; partially offset by a gain on the divestiture of our RMS Japan business of $22.7 million during the three months ended December 25, 2021, and the $10.3 million settlement loss for the termination of the U.S. Pension Plan in fiscal year 2020. Income Taxes Income tax expense for fiscal year 2021 was $81.9 million, an increase of $0.1 million compared to $81.8 million for fiscal year 2020. Our effective tax rate was 17.0% for fiscal year 2021 compared to 18.3% for fiscal year 2020. The decrease in our effective tax rate in fiscal year 2021 compared to fiscal year 2020 was primarily due to higher tax benefits from stock-based compensation deductions and a non-taxable gain on divestiture; partially offset by the impact of enacted tax rate changes. 49 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Liquidity and Capital Resources We currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital investment, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future. Our liquidity and capital resources have not been materially impacted by the COVID-19 pandemic. The following table presents our cash, cash equivalents and short-term investments: [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020"],["","(in millions)"],["Cash and cash equivalents:"],["Held in U.S. entities","$","28.2","","","$","11.8"],["Held in non-U.S. entities","213.0","","","216.6"],["Total cash and cash equivalents","241.2","","","228.4"],["Short-term investments:"],["Held in non-U.S. entities","1.1","","","1.0"],["Total cash, cash equivalents and short-term investments","$","242.3","","","$","229.4"]] [[/GREPCENT_TABLE]] Borrowings During March 2021, we fully repaid our term loan and subsequently amended and restated our Credit Facility creating a $3.0 billion multi-currency revolving facility (increasing the capacity from $2.05 billion), which extends the maturity date to April 2026 (previously March 2023) with no required scheduled payment before that date. 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). •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. •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 $500 million of 4.00% Senior Notes due in 2031 (2031 Senior Notes) in an unregistered offering. Interest on the 2029 and 2031 Senior Notes is payable semi-annually on March 15 and September 15. Amounts outstanding under our Credit Facility and our Senior Notes were as follows: [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020"],["","(in millions)"],["Term loans","$","\u2014","","","$","146.9"],["Revolving facility","1,161.4","","","814.8"],["5.5% Senior Notes due 2026","\u2014","","","500.0"],["4.25% Senior Notes due 2028","500.0","","","500.0"],["3.75% Senior Notes due 2029","500.0","","","\u2014"],["4.0% Senior Notes due 2031","500.0","","","\u2014"],["Total","$","2,661.4","","","$","1,961.7"]] [[/GREPCENT_TABLE]] 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. We entered into foreign exchange forward contracts during fiscal years 2021 and 2020 to limit our foreign currency exposure related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under the Credit Facility. Our off-balance sheet commitments related to our outstanding letters of credit as of December 25, 2021 were $17.7 million. 50 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Repurchases of Common Stock During fiscal year 2021, we did not repurchase any shares under our authorized $1.3 billion stock repurchase program. As of December 25, 2021, we had $129.1 million remaining on the authorized stock repurchase program. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During fiscal year 2021, we acquired 0.1 million shares for $40.7 million through such netting. Cash Flows The following table presents our net cash provided by operating activities: [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020"],["","(in millions)"],["Net income","$","398.8","","","$","365.3"],["Adjustments to reconcile net income to net cash provided by operating activities","319.0","","","207.5"],["Changes in assets and liabilities","43.0","","","(26.2)"],["Net cash provided by operating activities","$","760.8","","","$","546.6"]] [[/GREPCENT_TABLE]] Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, contingent consideration, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. For fiscal year 2021, compared to fiscal year 2020, the increase in net cash provided by operating activities was driven by higher net income and improvements from our working capital initiatives, including the timing of vendor and supplier payments and collections of net contract balances from contracts with customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits) compared to the same period in 2020. The following table presents our net cash used in investing activities: [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020"],["","(in millions)"],["Acquisitions of businesses and assets, net of cash acquired","$","(1,293.1)","","","$","(418.6)"],["Capital expenditures","(228.8)","","","(166.6)"],["Proceeds from sale of businesses, net","122.7","","","\u2014"],["Investments, net","(39.0)","","","(15.3)"],["Other, net","0.3","","","(1.0)"],["Net cash used in investing activities","$","(1,437.9)","","","$","(601.5)"]] [[/GREPCENT_TABLE]] The primary use of cash used in investing activities in fiscal year 2021 related to the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix, and certain assets from a distributor, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments; partially offset by the proceeds from the recent divestitures of RMS Japan and CDMO Sweden. The primary use of cash used in investing activities in fiscal year 2020 related to the acquisitions of HemaCare and Cellero, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments. 51 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. The following table presents our net cash provided by financing activities: [[GREPCENT_TABLE]] [["","Fiscal Year"],["","2021","","2020"],["","(in millions)"],["Proceeds from long-term debt and revolving credit facility","$","6,951.1","","","$","2,231.0"],["Payments on long-term debt, revolving credit facility, and finance lease obligations","(6,242.9)","","","(2,200.4)"],["Proceeds from exercises of stock options","45.7","","","46.6"],["Payment of debt extinguishment and financing costs","(38.3)","","","\u2014"],["Purchase of treasury stock","(40.7)","","","(24.0)"],["Other, net","(2.3)","","","(6.0)"],["Net cash provided by financing activities","$","672.6","","","$","47.2"]] [[/GREPCENT_TABLE]] For fiscal year 2021, net cash provided by financing activities reflected the net proceeds of $708.2 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 $1.3 billion, which were used primarily for the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix and certain assets from a distributor; •Net payments of $710 million made to our Credit Facility throughout fiscal year 2021; •Gross proceeds and payments of approximately $1.5 billion, but having a net impact of zero, were incurred as part of amending and restating our Credit Facility; •Gross proceeds and payments of approximately $3.0 billion 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 $45.7 million, partially offset by treasury stock purchases of $40.7 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. 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 fiscal year 2020, net cash provided by financing activities reflected the net proceeds of $30.6 million on our long-term debt, revolving credit facility, and finance lease obligations. Included in the net proceeds are the following amounts: •Proceeds of approximately $415 million from our revolving Credit Facility to fund our recent acquisitions. Additionally, towards the end of the first fiscal quarter, we borrowed an additional $150 million from our revolving Credit Facility to secure available cash in response to uncertainties due to the COVID-19 pandemic; partially offset by, •Payments of approximately $47 million on our term loan and net payments of $476 million to our revolving Credit Facility throughout fiscal year 2020, which included the repayment of the $150 million additional borrowings during the first fiscal quarter of 2020; •Additionally, we had $1.6 billion of gross payments, partially offset by $1.6 billion of gross proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities. Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $46.6 million, partially offset by treasury stock purchases of $24.0 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. 52 CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Off-Balance Sheet and Other Arrangements We lease properties and equipment for use in our operations. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance, and other operating expenses. As of December 25, 2021, we had $449.9 million of operating leases inclusive of future minimum rental commitments under non-cancellable operating leases, net of income from subleases as well as $35.2 million of financing leases. In addition to the obligations on the balance sheet at December 25, 2021, we entered into unconditional purchase obligations in the ordinary course of business. Unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty. As of December 25, 2021, we had approximately $260 million of unconditional purchase obligations, the majority of which are expected to be settled during 2022. We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to the funds as of December 25, 2021 was $165.3 million, of which we funded $113.3 million through December 25, 2021. Refer to Note 6, “Venture Capital and Strategic Equity Investments,” to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for further details. In connection with certain business and asset acquisitions, we agreed to make additional payments based upon the achievement of certain financial targets and other milestones in connection with the respective acquisition. As of December 25, 2021 we had approximately $126 million of gross contingent payments, of which $53 million are expected to be paid. We have certain federal and state income tax liabilities of $48.8 million relating to the one-time Transition Tax on unrepatriated earnings under the 2017 Tax Act. The Transition Tax will be paid, interest free, over an eight-year period through 2026. 53 CHARLES RIVER LABORATORIES INTERNATIONAL, INC.