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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

(Mark One) 

ý


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 27, 200831, 2011

OR

o


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                                    TO                                   

Commission File No. 001-15943

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 06-1397316
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

251 Ballardvale Street
Wilmington, Massachusetts
(Address of Principal Executive Offices)

 

01887
(Zip Code)



(Registrant's telephone number, including area code):(781) 222-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange
on which registered
Common Stock, $0.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes 

ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if smaller
reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso    Noý

On June 28, 2008,25, 2011, the aggregate market value of the Registrant's voting common stock held by non-affiliates of the Registrant was approximately $4,303,090,433.

$1,994,509,735. As of February 13, 2009,17, 2012, there were outstanding 66,789,79948,886,858 shares of the Registrant's common stock outstanding, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for its 20092012 Annual Meeting of StockholdersShareholders scheduled to be held on May 7, 2009,8, 2012, which will be filed with the Securities and Exchange Commission not later than 120 days after December 27, 2008,31, 2011, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the 20092012 Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Form 10-K.




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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K

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Item Page
 PART I 
1
1A
1B
2
3
4Not Applicable
  
 PART II 
5
6
7
7A
8
9
9A
9B
 PART III 
10
11
12
13
14
 PART IV 
15


Item  
 Page 

 

PART I

    

1

 

Business

  
1
 

1A

 

Risk Factors

  16 

1B

 

Unresolved Staff Comments

  26 

2

 

Properties

  26 

3

 

Legal Proceedings

  27 

4

 

Submission of Matters to a Vote of Security Holders

  27 

 

Supplementary Item. Executive Officers of the Registrant pursuant to Instruction 3 to Item 401 (b) of Regulation S-K

  27 

 

PART II

    

5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  
28
 

6

 

Selected Consolidated Financial Data

  32 

7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  33 

7A

 

Quantitative and Qualitative Disclosures About Market Risk

  47 

8

 

Financial Statements and Supplementary Data

  49 

9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  103 

9A

 

Controls and Procedures

  103 

9B

 

Other Information

  103 

 

PART III

    

10

 

Directors and Executive Officers of the Registrant

  
104
 

11

 

Executive Compensation

  104 

12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

  105 

13

 

Certain Relationships and Related Transactions

  105 

14

 

Principal Accountant Fees and Services

  105 

 

PART IV

    

15

 

Exhibits

  
105
 

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PART I

Item 1.    Business

General

This Annual Report on Form 10-K contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. that are based on our current expectations, estimates, forecasts, and projections about the industries in which Charles River operateswe operate and the beliefs and assumptions of our management. Words such as "expect," "anticipate," "target," "goal," "project," "intend," "plan," "believe," "seek," "estimate," "will," "likely," "may," "designed," "would," "future," "can," "could"“expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could” and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward-looking statements. These statements are based on our current expectations and beliefs of Charles River and involve a number of risks, uncertainties, and assumptions that are difficult to predict. For example, we may use forward-looking statements when addressing topics such as: the pursuit of our initiatives to optimize returns for stockholders, including efforts to improve our operating margins, improve free cash flow, invest in growth businesses and return value to shareholders; goodwill and asset impairments still under review; future demand for drug discovery and development products and services, and in particular non-regulated discovery, including the outsourcing of these services;services and spending trends by our clients; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; present spending trends and other cost reduction activities by our customers (particularly in light of the challenging economic environment);clients; future actions by our management; the outcome of contingencies; changes in our business strategy; changes in our business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; the timing of the opening of new and expanded facilities; our expectations with respect to sales growth efficiency improvements and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure); changes in our expectations regarding future stock option, restricted stock, performance awards and other equity grants to employees and directors; changes in our expectations regarding our stock repurchases; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our cash flow and liquidity. In addition, these statements include the availability of funding for our customers and the impact of economic and market conditions on them generallyour clients; the effects of our first quarter 2009 cost-saving actions and other actions designedthe steps to manage expenses, operating costsoptimize returns to shareholders on an effective and capital spending and to streamline efficiency, the timing of our repatriation of accumulated income earned outside the United Statestimely basis and the ability of Charles River to withstand the current market conditions. You should not rely on forward-looking statements because they are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K under the section entitled "Our“Our Strategy," the section entitled "Risks“Risks Related to Our Business and Industry," the section entitled "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations” and in our press releases and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur.

Corporate History

        Charles River has been

We began operating sincein 1947 and during that time,since then, we have undergone several changes to our business structure. Charles River Laboratories International, Inc. was incorporated in 1994. In1994 and in 2000, we completed theour initial public offering of Charles River Laboratories International, Inc.offering. Our stock is traded on the New York Stock Exchange under the symbol "CRL "and“CRL” and is included in the Standard & Poor's MidCap 400 1000 and Composite 1500 Indices,indices, the Dow Jones US Biotechnology Index, the NYSE Composite Index and the NYSE Healthcare Sector Index,indices, and many of the Russell indices, among others. We are


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headquartered in Wilmington, Massachusetts. Our headquarters mailing address is 251 Ballardvale Street, Wilmington, MA, 01887, and the telephone number at that location is (781) 222-6000. Our Internet site iswww.criver.com. Material contained on our Internet site is not incorporated by reference into this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to "Charles“Charles River," "we," "us"” “we,” “us” or "our"“our” refer to Charles River Laboratories International, Inc. and its subsidiaries.

This Form 10-K, as well as all other reports filed with the Securities and Exchange Commission, are available free of charge through the Investor Relations section of our Internet site as soon as practicable after we electronically file such material with, or furnish it to, the SEC. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, you may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports,

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proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Overview
Overview

We are a leading global provider of solutions that accelerate the early-stage drug discovery and development process, includingprocess. The focus of our business is in vivo biology; our portfolio includes research models and associated services required to enable in vivo drug discovery and outsourceddevelopment.

Discovery represents the earliest stages of research in the life sciences, directed at the identification, screening and selection of a lead compound for future drug development. Discovery activities typically extend anywhere from 4-6 years in conventional pharmaceutical research and development timelines.
Development activities, which follow, and which can take up to 7-10 years, are directed at demonstrating the safety, tolerability and clinical efficacy of the selected drug candidates. During the preclinical services. The drugstage of the development process, continuesa drug candidate is tested in vitro (typically on a cellular or sub-cellular level in a test tube or multi-well petri plate) and in vivo (in research models) to requiresupport planned or on-going human trials.
The development of new drugs requires the steadily increasing investment of time and money—money; various studies and reports estimate it takes between 10-1510-16 years, between $800 million and $1up to $2.0 billion, and exploration of more than 10,000 drug compounds to produce a single FDA approvedFDA-approved drug. Charles River isWe are positioned to leverage our core competenciescompetency in laboratory animal medicine and science, and regulatory-compliant preclinical servicesin vivo biology in an efficient and cost-effective way to aid our customersclients in bringing their drugs to market faster.

Utilizing our broad portfolio of products and services enables our clients to reduce costs, increase speed and enhance their productivity and effectiveness in early-stage drug discovery and development.

We currently have two reporting segments: Research Models and Services (RMS) and Preclinical Services (PCS). We providebeen in the animalbusiness of providing the research models required in research and development of new drugs, devices and therapies and have been infor 65 years. Over this business for 60 years. Wetime, we have built upon our core competenciescompetency of in vivo biology to develop a diverse and growing portfolio of products and services. Our wide array of tools and services enables our customers to reduce costs, increase speed and enhance their productivity and effectiveness in drug discovery and development. Our customerclient base includes global pharmaceutical companies, biotechnology companies, as well as government agencies, and leading hospitals and academic institutions around the world. We currently operate approximately 7064 facilities in 1715 countries worldwide. Our products and services, supported by our global infrastructure and deep scientific expertise, enable our customersclients to meet many of the challenges of early-stage life sciences research. In 2008,2011, our net sales from continuing operations were $1.34$1.1 billion and while we had a netour operating loss of $521.8 million, this included a $700.0 million goodwill impairment charge.

        In recent years, weincome from continuing operations was $174.3 million.

We have completed a number of acquisitions that have broadened our present portfolio of high-end services to include general toxicology, specialty toxicology, discovery and imaging services, biopharmaceutical services and Phase I clinical services. In addition, these acquisitions:

        These acquisitions, which include the acquisitions of NewLab BioQuality AG and MIR Preclinical Services in 2008, have been critical in our continuing mission to support our key pharmaceutical and biotechnology customers, who are increasingly seeking full service, global partners to whom they can outsource more of their preclinical research and development efforts. By some estimates, the outsourced drug development services market is approximately $5.0 billion annually. It is thought that this represents only 20-25% of all of the drug development work currently performed, and is expected to increase over time as outsourcing trends continue.


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        In 2008, much of our focus has been dedicated towards our continued positioning of ourselves to take advantage of long-term opportunities to support our clients as they continue to outsource drug development services. The major elements of our capacity expansion program, which has been underway for three years and included the replacement of two of our larger existing PCS facilities with new, state-of-the-art facilities, are drawing to a close. We opened the first of the replacement sites in Massachusetts in 2007 and the second in Nevada in 2008. In addition, we opened a new PCS facility in China in late 2008, which we anticipate will be one of the first GLP-compliant facilities in China by the end of the first half of 2009, bolstering our efforts to become the partner of choice for our global pharmaceutical customers as they establish and expand research and development activities in China. We expect to open a new PCS facility in Sherbrooke (Canada) in the first quarter of 2009 in order to relieve capacity constraints at our Montreal facility. However, as a result of certain market factors which emerged in the second half of 2008 and negatively affected our sales growth, we evaluated our expansion plans and determined that we have sufficient capacity to accommodate our clients' current demand. Accordingly, we have delayed the expansion of our Ohio facility until 2010 when the industry will be better positioned to absorb additional capacity. In addition to our PCS capacity expansions, in 2008 we opened a new RMS facility in Maryland, in part to support the 10-year agreement with the National Cancer Institute to manage its research model colonies.

reporting segments: Research Models and Services (RMS) and Preclinical Services (PCS).    Charles River has

Through our RMS segment, we have been supplying research models to the drug development industry since 1947. With approximatelyover 150 different strains, we continue to maintain our position as the global leader in the production and sale of the most widely used rodent research models,model strains, principally genetically and virallymicrobiologically defined purpose-bred rats and mice. We also provide a variety of related services that are designed to assist our customersclients in supporting the use of research models in drug discovery and development. With multiple facilities located on three continents (North America, Europe and Asia (Japan))Asia), we maintain production centers, including a total of approximately 180 barrier rooms and/or isolator facilities, strategically located near our customers.clients. In 2008,2011, RMS accounted for 49%61.7% of our total net sales from continuing operations and approximately 41%51% of our employees including approximately 128100 science professionals with advanced scientific degrees.
Services provided by our PCS business segment enables our clients to outsource their critical, regulatory-required safety assessment and related drug development activities to us. The demand for these services has historically been driven by preclinical development programs of biotechnology companies, which traditionally have been outsourced, and also by the selective outsourcing strategy of larger global pharmaceutical companies. The basis for global pharmaceutical and biotechnology companies choosing to outsource their development activities is traced to the significant investments in personnel, facilities and other capital resources required in order to efficiently and effectively conduct these activities. Outsourcing allows them to focus on their core competencies of innovation and early drug discovery and, particularly for pharmaceutical companies, promotion and market distribution.
We are one of the two largest providers of preclinical (including both discovery and development) services worldwide and offer particular expertise in the design, execution and reporting of safety assessment studies, especially those dealing with large molecule (biologics) and other innovative therapies. We currently provide preclinical services at multiple facilities located in the United States, Canada, and Europe. Our PCS segment represented 38.3% of our total net sales from continuing operations in 2011 and employed 45% of our employees including approximately 295 science professionals with advanced scientific degrees.

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We provide non-regulated (or non-GLP) discovery services in both the RMS and PCS business segments. As they have continued to reduce infrastructure and search for more efficient and cost effective models of drug discovery and development, large pharmaceutical and biotechnology companies are choosing to outsource more discovery services, which they historically considered core competencies. These services, which are generally non-regulated, are used by sponsors to screen molecules and make earlier “go-no go” decisions as to which molecules should be selected for continued investment.
Over the past three years, we have focused our efforts on unifying our businesses and improving the efficiency of our global operations. These actions were intended to enhance our ability to support our key pharmaceutical and biotechnology clients, who are increasingly seeking full service, global partners to whom they can outsource more of their early-stage drug research and development efforts. By some estimates, the outsourced

in vivo discovery and drug development services markets in which we currently participate, ranging from research model production to non-regulated discovery services to regulated safety assessment, has a current size of approximately $6.0 billion and in the aggregate is expected to increase over time as outsourcing trends continue. It is estimated that the market for regulated safety assessment services is approximately 40% outsourced, while emerging growth areas such as in vivo discovery and certain research model services are believed to be less outsourced currently.

Research Models and Services (RMS). Our RMS segment is comprised of (1) Research Models, (2) Research Model Services and (3) other related products and services.

Research Models. A significant portion of this business is comprised of the commercial production and sale of research models, principally purpose-bred rats mice and other speciesmice for use by researchers. We provide our rodent models to numerous customersclients around the world, including most pharmaceutical companies, a broad range of biotechnology companies, many government agencies, and leading hospitals and academic institutions. We have approximately 2320 production facilities located in 97 countries worldwide, which are strategically located to be in close proximity to our customers.clients. Our research models include both standard strains and disease models such as those with compromised immune systems, which are increasingly in demand as early-stage research tools. The United States Food and Drug Administration (FDA) and foreign regulatory bodies typically require that the safety and efficacy of new drug candidates be tested on research models like ours prior to testing in humans. As a result, our research models are an essential part of the drug discovery and development process.

Our rodent species have been and continue to be some of the most extensively used research models in the world, largely as a result of our continuous commitment to innovation and quality inassociated with the breeding process.products. Our research models are bred and maintained in controlled environments which are designed to ensure that the animalsmodels are free of specific viral and bacterial agents and other contaminants that can disrupt research operations and distort results. With our barrier room production capabilities, we are able to deliver consistently high-quality research models worldwide.

Our small research models include:

outbred, animals, which are genetically heterogeneous;

inbred, animals, which are genetically identical;

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models.

We also offer proprietary, disease-specific mouse and rat models used to find new treatments for diseases such as diabetes, obesity, and cardiovascular and kidney disease. We are presently focusing our disease model program on fourfive areas of research: oncology, central nervous system, metabolic, cardiovascular metabolic,and renal and oncology which, in addition to providing overlapping disease modalities that support multiple uses of certain models, also permits us to concentrate on focused sales and marketing efforts.

diseases.

In addition to our small research models, we also are a premier provider of high-quality purpose-bred, specific pathogen-freehigh quality, purpose bred, specific-pathogen-free (SPF) or disease free, large research models to the biomedical research community, principally for use in their drug discovery and development studies.

community.

Research Model Services. RMS also offers a variety of services described below, designed to assistsupport our customersclients use of research models in screening drug candidates faster.candidates. These services capitalize on the technologies and relationships developed through our research model business, and address the need among pharmaceutical and biotechnology companies to outsource the non-core aspects of their drug discovery activities. These services include those which are related to genetically definedthe maintenance and monitoring of research

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models, for in-house research, as well as those services designed to implement efficacy screening protocols to improve the customer'sclient's drug evaluation process. We currently offer four major categories of research models services—Geneticallyservices-Genetically Engineered Models and Services, Insourcing Solutions (f/k/a Consulting and Staffing Services), Discovery Services and Research Animal Diagnostics, and Discovery and ImagingDiagnostic Services.

Genetically Engineered Models and Services (GEMS). In this area of our business, we assist our customersclients in validating, maintaining, improving, breeding and testingmaintenance of research models purchased or purposefully created by our customersclients for biomedical research activities. While the creation of a genetically engineered model (GEM) can be a critical scientific event, it is only the first step in the discovery process. Productive utilization of GEMs requires significant additional technical expertise.expertise in order to properly support early discovery research. We provide breeding expertise model characterization (including genotyping and phenotyping) and colony development, quarantine, embryohealth monitoring, germplasm cryopreservation, embryo transfer and healthrederivation including assisted reproduction and genetic monitoring. We provide these services to over 500 laboratoriesclients around the world from pharmaceutical and biotechnology companies to hospitals and universities and maintain more than 1,000 different types of naturally occurring or genetically engineered models for our customers.universities.

        Consulting and Staffing Services.Insourcing Solutions. Building upon our core capability as the leading provider of high-quality research models, we manage animalresearch model care operations (including recruitment, training, staffing and management services) on behalf of government and academic organizations, as well as commercial customers.clients. Demand for our services results fromhas been driven by the growing trend by thesefor research institutions to choose to retain certain elements of their research efforts in-house, but prefer to outsource internal functions or activities that are not critical to the core scientific innovation process, or for which they do not maintain the necessary resources in-house.staffing and management of those elements. In addition, we believe that our expertise in animalin vivo biology, and in particular research model care, and facility operations, and discovery and development services, enhances the productivity and quality of our customers' animal careclients' research model programs.
Discovery Services. Augmenting our traditional model production and use programs.GEMS, we believe there are emerging opportunities to assist our clients in a variety of discovery, research, development and imaging areas. Expediting the development process of investigational agents by providing products and services to clients extends their internal capabilities, complements their internal expertise and helps reduce product development timelines. In addition, our

in vivo biology expertise positions us to provide complementary disease model services, which include surgical procedures, pre-conditioning and aging. Our discovery and research and development capabilities include facilities in North Carolina (focusing on therapeutic efficacy studies in oncology, inflammation and metabolic disease) and Finland (focusing on therapeutic efficacy studies for the evaluation of investigational agents for the treatment of diseases of the central nervous system). In addition, we offer therapeutic efficacy expertise in inflammation, metabolic, cardiovascular and oncologic pharmacology.

Research Animal Diagnostics.Diagnostic Services. We assist our customersclients in monitoring and analyzing the health and geneticsprofiles of the research models and cell lines used in their research protocols. We developed this capability internally by building upon the scientific foundation created by the diagnostic laboratory needs of our research model business. Depending upon a customer'sclient's needs, we may serve as its sole-source testing laboratory, or as an alternative source supporting its internal laboratory capabilities. We believe that the continued growth in model development anduse, characterization and utilization of specific disease models and GEMs will drive our future growth asallows us to be well positioned to be the reference laboratory of choice for health and genetic testing of laboratory animals.


Tableresearch models and an industry leader in the field of Contentsanimal diagnostics.

        Discovery and Imaging Services.    Augmenting our traditional model production and GEMS described above, we believe there are emerging opportunities to assist our customers in a variety of discovery and imaging areas, such as by speeding the development process by providing services that prepare models to be used in studies immediately upon arrival at the customer's facility, rather than requiring time and effort on the part of the customer to prepare the models. As a result of our veterinary medicine expertise, we are well positioned to provide such services, which include surgical procedures, feeding and aging, and biological and chemical modification. In addition, through our acquisition of MIR Preclinical Services, we now offer extensivein vivo imaging capabilities, as well as expertise in oncology and inflammation pharmacology. The Discovery and Imaging Services that we offer through our RMS business are complimentary to the Discovery Support services that we offer through our PCS business.

Other Related Research Model Products and Services. We also offer two other categories of products and services within RMS—endotoxin and microbial detectionRMS: in vitro products and avian vaccine support.services.

        Endotoxin and Microbial Detection (EMD or In Vitro).Vitro. Our EMDIn Vitro business provides non-animal, orin vitro, methods for lot release testing of medical devices and injectable drugs for endotoxin contamination. We are committed to being the leader in providing our customers within vitro alternatives as these methods become scientifically validated and commercially feasible, and toward that goal we work with and support the European Center for Validation of Alternative Methods in these efforts. Endotoxin testing uses a processed extract from the blood of the horseshoe crab, known as limulus amebocyte lysate (LAL). The LAL test is the first and only majormost successful FDA-validatedin vitro alternative to an animal model test.test to date. The processextraction of extracting blood is generallydoes not harmful toharm the crabs, which are subsequently returned to their natural ocean environment. Ourin vitroIn Vitro technology business produces and distributes endotoxin testing kits, reagents, software, accessories, instruments and associated services to pharmaceutical and biotechnology companies worldwide. We are a market leader in endotoxin testing products and services, which isare used for FDA-required quality control testing of injectable drugs and medical devices, their components and the processes by which they are manufactured.

        We have developed

Our growth in theIn Vitro business is driven by our FDA approved line of next generation of the endotoxin testing platform, known asproducts, which are based on the Endosafe Portable Testing System (Endosafe®(Endosafe®-PTS™). The PTS is a portable endotoxin testing platform which technology that allows rapid endotoxin testing in the central laboratory or in the field, affording researchers accurate and timely results.manufacturing environment. In 2006,recent years, we received FDA approval for the sale and marketing ofhave expanded the PTS product portfolio to include a multiple sample testing system for FDA-required lot release endotoxin testing. The PTS can also be used for non-regulated applications, ranging from drug research and development to environmental monitoring. The PTS system has recently expanded into markets suchknown as cell transplant and dialysis clinics, and, especially, nuclear pharmacies, where PTS is being adopted for lot release testing of nuclear medicinesthe Endosafe-MCS (multi cartridge system) in response to pending FDA regulations.the demand of our higher testing volume clients. We are anticipating other opportunities developinganticipate continued adoption of rapid methods as our customers reactclients respond to the FDA's Process Analytical Technology (PAT) Initiative. In addition, over the next few years we look towards exploring other applicationsare planning to introduce a fully automated MCS in 2012, which will assist in penetrating our client's high-volume central testing laboratories. We also expect to see expanded use of this rapid endotoxin testing technology in non-traditional areas such as the environmental contaminant markets (pesticidesrenal dialysis, nuclear and hazardous materials)compounding pharmacies, and cellular therapy. We are currently exploring obtaining 510(k) medical device approval of this technology for clinical diagnostics (infectious disease at pointdiagnostic

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applications.
Avian Vaccine Support.Services. We are the global leaderfor the supply of specific pathogen-free,specific-pathogen-free, or SPF, chickens and fertile chicken eggs.eggs and chickens. SPF chicken embryos are used by animal health companies as self-contained "bioreactors"“bioreactors” for the manufacture of live viruses. These viruses are used as a raw material primarily in poultry, as well as human, vaccine applications. The production of SPF eggs is doneperformed under biosecure conditions, similar in many ways to our research model production. We have a worldwide presence, in North America with several SPF egg production facilities in the United States, and contracted production capabilities in Hungary, and franchise operations in India, China and Australia.India. We also operate a specialized avian laboratory in the United States, which provides in-house testing quality control testing of the SPF flocks, offers testing services to vaccine companies and commercial poultry operations, and manufactures poultry diagnostics and bulk antigens for poultry vaccines.


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Preclinical Services (PCS).

    Our PCS customers are principally engaged in the discovery and development of new drugs, devices and therapies.

        The development services portion of our PCS business enables our customers to outsource their critical, regulatory-required drug and toxicology disposition activities to us. The demand for these services was historically driven by preclinical development programs of biotechnology companies, which traditionally have been outsourced, and also by the selective outsourcing strategy of larger global pharmaceutical companies. The necessary significant investments in personnel, facilities and other capital resources required in order to efficiently conduct and perform these activities means that global pharmaceutical companies and biotechnology companies are frequently choosing to outsource their development activities, allowing them to focus on their core competencies of innovation and early drug discovery and, particularly for pharmaceutical companies, promotion and market distribution.

        We are one of the two largest providers of preclinical services worldwide and offer particular expertise in the design, execution and reporting of general and specialty toxicology studies, especially those dealing with innovative therapies and biologicals. We currently provide preclinical services at multiple facilities located in the United States, Canada, Europe and Asia (China). We have recently completed significant expansions at our preclinical facilities in Massachusetts and Nevada, and are nearing completion of an expansion of capacity in Canada. In recognition of the current market conditions, we are postponing the expansion of our Ohio facility until such time as our available capacity is filled, which we target as 2010. Our PCS segment represented 51% of our total net sales in 2008 and employed 59% of our employees including approximately 450 science professionals with advanced scientific degrees.

We currently offer the following preclinical services, in which we include bothin vivo andin vitro studies, supportive laboratory services, and strategic preclinical consulting and program management to support product development from inceptiondevelopment:

Discovery Support. At the earliest stages of lead compound identification, our scientists are engaged in evaluating the pharmacology of drug candidates in several important therapeutic areas, including:
bone disease (using our state-of-the-art imaging and pathology capabilities);
ophthalmology (using our models of neovascularization);
general cardiovascular and device testing (using our surgical models); and
oncology.
We also offer lead optimization strategies including early pharmacokinetic, metabolism, and toxicology support to proof of concept.

help in early integrative drug selection criteria. The Discovery Support services that we offer through our PCS business are complementary to the Discovery Services that we offer through our RMS business.

        Toxicology.Safety Assessment.     Toxicology is one of our core preclinical competencies andWe offer a competitive strength. Once a lead molecule is selected, the stagefull range of preclinical development begins where appropriate toxicology studies are conducted to support initial clinical trials. These studies are performed on animal models to understand the toxic effects that a compound has on an organism over a variety of doses and over various time periods, and focus on safety and potential harmful effects. Our toxicology services feature:


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Our toxicology facilities operate in compliance with Good Laboratory Practices (GLPs) as required by the FDA as well as other international regulatory bodies. Our facilities are regularly inspected by U.S. and other GLP compliance monitoring authorities, as well as our own and our customers' Quality Assurance departments.

global basis.

        Pathology Services.    In the drug development process, the ability to identify and characterize clinical and anatomic pathologic change is critical in determining the safety of a new compound. We employ a large number of highly trained pathologists who use state-of-the-art techniques to identify potential compound-related changes within tissues, fluids and cells, as well as at the molecular level. Pathology support is critical for regulatory driven safety studies, but also for specialized investigative studies, discovery support, and stand-alone immunohistochemistry evaluations for monoclonal antibodies. Key "go/no-go" decisions regarding continued product development are typically dependent on the identification, characterization and evaluation of gross and microscopic pathology findings we perform for our clients.

Bioanalysis, Pharmacokinetics, and Drug Metabolism. In support of preclinical drug safety testing, our customersclients are required to demonstrate ample drug exposure, stability in the collected sample, kinetics of their drug or compound in circulation, the presence of metabolites, and with recombinant proteins and peptides, the presence or absence of anti-drug antibodies. We have scientific depth in the sophisticated analyticalbioanalytical techniques required to satisfy these requirements for a number of drug classes (including oligonucleotide and inhibitory RNAs). In the event that theclasses. After performing sample analysis for preclinical study support, translates to opportunities to analyze clinical samples for the same drug once human testing begins, we have opportunitiesthe opportunity to capture the benefits of bridging the preclinical bioanalysis with latersubsequent clinical development. Once the analysis is complete, our scientists evaluate the data to provide information on the pharmacokinetics and/or toxicokinetics of the exposure to the drug, as well as complete evaluation of the distribution of the drug or metabolites by radio-labeled techniques.metabolites. Pharmacokinetics refers to understanding what the body does to a drug or compound once administered, including the process by which the drug is absorbed, distributed in the body, metabolized, and excreted (ADME); toxicokinetics refers to the same understanding as applied to potential toxic substances.higher doses that may result in adverse effects. Our clients require these studies for the full preclinical assessment of the disposition of the drug, the results of which are used in the final preclinical safety evaluation of the compound.

Toxicology. Toxicology is one of our core preclinical competencies and a competitive strength. Once a lead molecule is selected, appropriate toxicology studies are conducted in support of clinical trials in humans. These toxicology studies are typically performed in laboratory models to elucidate the potential adverse effects that a compound has on an organism over a variety of doses and over various time periods, and focus on safety and assessment of harmful effects. Our toxicology services feature:
all the standard protocols for general toxicity testing (genotoxicity, safety pharmacology, acute, sub-acute, chronic toxicity and carcinogenicity bioassays) required for regulatory submissions supporting “first-in-human” to “first-to-the-market” strategies;
expertise in specialty routes of administration and modes of administration (e.g., infusion, intravitreal, intrathecal, and inhalation), which are important not only for the testing of potential pharmaceuticals, but also for the safety testing of medical devices, industrial chemicals, food additives, agrochemicals, biocides, nutraceuticals, animal

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        Discovery Support.    At


health products and other materials;
expertise in the earliest stagesconduct and assessment of lead compound identification,reproductive and developmental toxicology studies (in support of larger scale and later-stage human clinical trials);
services in important specialty areas such as ocular, bone, juvenile/neonatal, immuno-toxicity, photobiology and dermal testing;
work in all major therapeutic areas;
study design and strategic advice to our scientists are engagedclients based on our wealth of experience and scientific expertise in evaluating the activity and efficacysupport of drug candidatesdevelopment; and
a strong history of assisting our clients in several important therapeutic areas, including:

Our preclinical facilities operate in compliance with Good Laboratory Practices (GLPs) to the extent required by the FDA as well as other international regulatory bodies. Our facilities are regularly inspected by U.S. and other regulatory compliance monitoring authorities, our clients' Quality Assurance departments and our own internal quality assessment program.
Pathology Services. In the drug development process, the ability to identify and characterize clinical and anatomic pathologic changes is critical in determining the safety of potential new therapeutics. We employ a large number of highly trained veterinary pathologists and other scientists who use state-of-the-art techniques to identify potential test article-related changes within tissues, fluids and cells, as well as at the molecular level. Pathology support is critical not only for regulatory safety assessment studies, but also for specialized disease model colonies);

bone disease (using our state-of-the-art imaging and pathology capabilities);

ophthalmology (using our models of neovascularization);

general cardiovascular and device testing (using our surgical models); and

early drug formulation and bioanalysisinvestigative studies, discovery support, and method development.

We also offer lead optimization strategies including early pharmacokinetic, metabolism,stand-alone immunohistochemistry evaluations for monoclonal antibodies. Key “go/no-go” decisions regarding continued product development are typically dependent on the identification, characterization and toxicology support to help in early integrative drug selection criteria. The Discovery Support services thatevaluation of gross and microscopic pathology findings we offer throughperform for our PCS business are complimentary to the Discovery and Imaging Services that we offer through our RMS business.

Biopharmaceutical Services.

We provide specialized characterization, identity and safety testing of biologicalsbiologics and devices frequently outsourced by global pharmaceutical and biotechnology developers.companies. Our laboratories in the United States, Germany, (acquired in 2008 through our purchase of NewLab BioQuality AG), Scotland and Ireland provide timely, compliant molecular biology, virology, bioanalytical, immunochemistry, microbiology and related services. Our services in this areaWe confirm that biological processes and the drug candidates produced are consistent, correctly defined, stable and essentially contaminant free. This type of testing is required by the FDA and other global regulatory authorities for our customersclients to obtain new drug approvals, to maintain government licensed manufacturing facilities and to release approved therapeutic products for patient treatment.

Our manufacturing services group grows and stores well-characterized early-stage client cell lines for later development or manufacture of therapeutic proteins and vaccines for clinical trials. We also collaborate with clients on process development, validation, and manufacturing scale-up and biological testing.

        Phase I clinical trials are usually short duration studies conducted on a small number (20-100) of healthy human subjects (although special populations can be used) under highly controlled conditions. Testing is usually performed where trial participants can be closely monitored in a secure environment, such as at a clinic-type facility or hospital.

        Our clinical services capabilities are centered around our premier Phase I clinic in Tacoma, Washington with a capacity of 250 beds. We focus our clinical services business on high-end clinical pharmacology studies in healthy participants. From a strategic perspective, we believe that our clinical services business benefits from pull-through from our preclinical and laboratory services (particularly with our biotechnology customers). Correspondingly, our preclinical and laboratory services businesses benefit from the presence of our Phase I clinical offerings as we can take advantage of enhanced economies of scale as well as "pull-down" from existing clinical customers.

        We offer a wide range of Phase I clinical research services designed to move lead pharmaceutical candidates rapidly from preclinical development through Phase I pharmacokinetic tolerability and pharmacodynamic assessment to explore human pharmacology. We can conduct studies across a wide range of therapeutic areas, and have demonstrated experience in complex dose tolerance, radio-labeled, cardiac safety, pharmacokinetics, pharmacodynamics and bioavailability studies. In addition, we provide customers with high-end "first-in-human" studies for novel compounds, and expertise in complex drug-drug interaction studies. Participants at our clinics are evaluated through an intensive screening

scale-up.

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process to ensure study suitability. We employ clinical regulatory compliance staff to monitor the conduct and reporting of Phase I trials and to assure management that these trials are conducted in compliance with appropriate regulatory requirements.

Our Strategy

Our objective is to be the preferred strategic global partner for our clients in acceleratingclients. We aim to provide flexible, tailored solutions to help them accelerate and enhance the search for drugs, devicesefficiency of their drug research and therapies. From discovery through proof of concept,development efforts, and thereby drive our goalgrowth. Our strategy is to deliver a fullcomprehensive and integrated portfolio of early-stage products and services which supports our clients' goal to maintain the flexible infrastructure they need in order to bring new therapies to market faster and more cost effectively. We believe we have certain competitive advantages in executing this strategy, as a result of our continuing focus on the following:
Integrated Early-Stage Portfolio. We are the only large, global contract research organization (CRO) with a portfolio of products and services forthat focuses almost exclusively on the early-stage drug development platform (from research models and associated services, to non-regulated discovery services, to regulated safety assessment). As such, we are able to collaborate with clients at the earliest stages, when critical decisions are made regarding which molecules will remain in development, and to work alongside them as drug candidates move downstream through the nonclinical development process. In particular, our recognized expertise in in vivo biology provides us with a competitive advantage in understanding our client's molecules, and the challenges faced during the discovery and development (whichprocess, including non-GLP efficacy and safety assessment testing critical for making “go/no-go” decisions.

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Deep Scientific Expertise. We are almost entirely mandatedable to provide extensive scientific expertise which may be too costly for our clients to build and/or maintain in-house. Our capabilities allow us to address our clients' demands for “non-core” but strategically important in vivo biology activities and specialty services, such as certain specialty toxicology offerings that are prohibitive for clients to maintain in-house. We have also increasingly aligned our services portfolio along therapeutic lines to simulate many of our clients' internal drug development organizations, particularly in therapeutic areas subject to major research funding or focus, such as oncology, metabolism and obesity, autoimmune/inflammation, cardiovascular, infectious disease and central nervous system.

Superior Quality and Client Support. We maintain high quality standards through rigorous management of key performance indicators and an intense focus on biosecurity. These standards allow clients to access products and services throughout our global network, with the confidence that they will obtain consistent results no matter where they choose to obtain their products or conduct their research.

Flexible and Customized Solutions. We recognize that clients have individual needs and specific requirements, which increases the importance of flexibility when working with them. We deliver that flexibility through relationships that may take various and customized forms, and which tap into the broad array of physical and/or service resources that we provide. We can help clients better balance their workload/staff requirements by law)drawing upon the higher utilization and efficiencies of our facilities, often allowing them to reduce their internal capacity and/or staff. We can leverage the expertise embedded in our integrated early-stage portfolio to provide customized arrangements tailored to fit the specific need or therapeutic area focus of a particular client. We are also able to provide additional value to those clients who choose broad based, multi-year partnerships across the breadth of our early-stage portfolio.

Large, Global Partner. We believe there is a particular advantage in being a full service, high-quality provider of non-clinical in vivo products and services on a global scale. Many of our clients, especially large pharmaceutical companies, have limited the number of suppliers with which they work, preferring to partner with Tier 1 CROs with a full breadth of capabilities. Large CROs, like Charles River, can present clients with access to greater value through the benefits of economies of scale and scope, extensive therapeutic area expertise, a global footprint, and simplified communications and relationship management. We are focused on leveraging our competitive advantages to ensure we are recognized as a premier preferred provider and building broader and deeper long-term strategic partnerships with our clients.

This strategy and focus has been developed in recognition of the needs of our clients, who are increasingly facing pressure to createmanage their research and development costs, while at the greatest valuesame time maintain or develop a strong pipeline of innovative new drugs, conduct research and development in multiple countries simultaneously, and identify, hire and retain a breadth of scientific and technical experts. In order to convert what has historically been largely fixed costs into variable expenses and to facilitate and speed their research, our pharmaceutical and biotechnology clients are making strategic benefitdecisions to them.outsource a portfolio of services to high quality, full-service providers like us. Our business isprospects are driven primarily drivenby this trend towards the virtualization of our clients through outsourcing, as well as by the continued growthlevel of research and development spending by pharmaceutical and biotechnology companies, the federal government and academic institutions, and of outsourced services. According to reports by the Biomedical Industry Advisory Group, it takes 11 to 16 years and costs in the range of $180 million to $1.65 billion, with an average cost of approximately $900 million, to bring a new drug to market. Similarly, a separate report by the Pharmaceutical Research and Manufacturers of America estimate that it takes 10 to 15 years and costs in excess of $800 million to develop a drug ($1.2 billion for a biologic).

        As the pressure to develop a strong pipeline of innovative new drugs increases, so does the pressure to contain costs, to implement research in multiple countries simultaneously and to identify, hire and retain a breadth of scientific and technical experts. These pressures are becoming more intense as patent expiries approach for many of our customers, leading them to increasingly rationalize their portfolios around therapeutic areas, streamline their operations, and look to outside partners to manage their non-core activities. In order to facilitate and speed their research (as well as to convert largely fixed costs into variable expenses), our pharmaceutical and biotechnology customers are increasingly making strategic decisions to outsource services which can be provided by high-quality full service providers like us. For instance, many of our larger customers—particularly those in the pharmaceutical industry—have announced plans to rationalize their workforce and facilities and/or increase outsourcing in order to concentrate on their core businesses and new product research and identification. These challenges are also leading to an increase in the role of procurement for cost control purposes, resulting in more bundled services and unique and deeper partnership arrangements from the perspective of both facility management and breadth of service. Over the past several years, we believe that the increase in these actions and the necessary growth of outsourcing is being driven by a unique confluence of events, including:


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institutions. Outsourcing allows our customersclients to concentrate their internal expertise and resources on early drug discovery in areas such as lead identification and optimization (and for more mature companies, post-approval marketing), while continuing to advance their most promising products through the development pipeline. This creates opportunities for companies such as ours who can help optimize our clients' programs and assist in accelerating thetheir drug discovery and development process. Our strategy is to capitalize on these opportunities by continuing to build our portfolio of premium, value-added products

In recent years, the pharmaceutical and services through internal development and investment, augmented by strategic "bolt-on" transactions.

        Our customersbiotechnology industries have faced a challenging market environment toward the endchallenges that negatively affected demand (and pricing) for outsourced preclinical development services. These challenges included:

patent expirations of 2008 and start of 2009. Among the factors that have affected them, we have seen the following have the most material impact:


intensified their cost-savingscost-saving and efficiency actions and have announced significant initiativesdesigned to improve their research and development productivityproductivity;

a stronger emphasis on later-stage programs to accelerate drugs in clinical trials to market;

increased pharmaceutical merger activity and enhance theirthe associated integration issues;

rationalization of drug pipelines. Thispipelines to focus has been manifested through reductions in infrastructure and by spending constraints. In the short term, we have seen large pharmaceuticals slow down their preclinical and Phase I studies in favor of their later-stage products as they reprioritize compound pipelines (focusing on the back-end of their pipelines in the near-term) and moderate their spending per drug candidate;

Biotechnology customers, particularly those that are cash-negative, have been highly focused on rationing their liquid assets in a challenging funding environment. In general, funding for biotechnology companies has been compromised by the current economic crisis;

Many customers are narrowing their pipeline focus to a smaller number of similar, high potentialhigh-potential therapeutic areas where they may yield the greatest returns;areas;


Many larger customers have diversified their technology platform bases and have focused their portfolios across biologics (therapeutic proteins, antibodies, RNAi and vaccines) while retaining their core expertise in small molecules;

Our customers generally have been focused on near-term cost constraints as they contend with the challenges of the global economic slowdown; and

Senior management turnover and structural realignment has resulted in some internal turmoil and slower decision-making in some of our larger customers while they finalize and roll-out their restructuring plans.

        While the short term consequences of these actions have temporarily mitigated the outsourcing growth rate trends, we believe that

fluctuations in the mid-term there is nobiotech funding environment; and

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an uncertain global economy.

The result has been a fundamental change in our clients' research and development models, particularly with regard to the large pharmaceutical industry. First, these clients are increasingly emphasizing shorter term, non-regulated efficacy studies designed to eliminate non-viable molecules earlier in the development process. This results in a more limited number of molecules undergoing regulated safety assessment, and a greater focus on discovery services, including non-regulated testing such as DMPK (drug metabolism and pharmacokinetics) and in vivo pharmacology. Second, these clients are choosing to outsource more discovery services in order to increase the efficiency and effectiveness of their drug development activities and strategies, and in factresearch processes.
We believe that these changes will provide enhanced outsourcing opportunities for us going forward. In particular,fact, we remain optimistic that their receptiveness towards increased discovery services outsourcing and the stabilization of other factors addressed above, including the successful launch of new therapies currently in late-stage development and the subsequent need to replenish early-stage pipelines, will eventually drive the pharmaceutical industry to re-focus on their early-stage development efforts. Also, we believe that as larger pharmaceutical companies become leaner and more efficient, they will also become more conservative in their staffing, lose experienced personnel, and generally focusfocusing on their core competencies of fundamental research and development and commercialization.commercialization, they will also continue to be conservative in their staffing and further reduce their in-house expertise. This should lead to resumptiona reinvigoration of outsourcing as they assesschoose to utilize external resources rather than invest in internal infrastructure. In the aggregate, we believe that the evolving large pharmaceutical research and development model will make our essential products and services even more relevant to our clients, and allows them to leverage our integrated offerings and expertise to drive their R&D efficiency and cost effectiveness.
To address the challenging market conditions which have persisted over the last few years, we have taken significant steps to better support our clients, identify new strategies to enhance client satisfaction, improve operating efficiency, and generally strengthen our business model. In 2009, we realigned our sales force in order to enhance our ability to support our clients and to focus on three particular client segments: global biopharmaceutical companies; mid-tier biopharmaceutical companies; and academic/government institutions. Also in 2009, we realigned our PCS business along functional lines in order to continue the process of standardizing and harmonizing our procedures, which has enabled clients to place work with us at multiple locations with the knowledge that procedures are consistently performed and data delivered in standard formats. In 2010, we began the implementation of an ERP system in order to improve availability of and access to data. In October 2011, we took the next step to further integrate our businesses by unifying RMS and PCS globally. We took this action to strengthen the linkage between the businesses, which enables us to offer clients more seamless access to our broad portfolio and scientific expertise.
We also began to take decisive actions in 2009 to reduce costs and improve operating efficiency through a combination of Lean Six Sigma initiatives and cost-savings actions. These actions were intended to right-size our infrastructure and to identify opportunities to operate more efficiently. In 2011, in addition to our Six Sigma initiative, we undertook a project to identify and implement additional operating efficiencies. These actions were designed to streamline our operating infrastructure, reduce process cycle times, and eliminate non-value added steps so that we could support our clients more efficiently and at a lower cost.
In December 2010, we announced an intensified focus on four key internal priorities. Charles River is positioned to address our customers' future needs, as we can:

future business environment. We made significant progress in 2011 on these key initiatives:


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Initiative2011 Progress
Improve our consolidated operating marginImproved consolidated operating margin from continuing operations achieved due to:
Ÿ    increased RMS margin,
Ÿ    stable Corporate costs,
Ÿ    November 2010 cost-savings actions, and
Ÿ six-sigma and other process improvement initiatives
Improve our free cash flow generation
Ÿ Free cash flow increased in 2011 to a per-share yield we believe was the highest among public CROs.
Ÿ Divested non-strategic / underperforming PCS assets (U.S. Phase 1 clinical and China preclinical facility)
Disciplined investment in growth businessesCapital projects invested in growth business:
Ÿ    Diagnostic laboratories opening in 2012,
Ÿ In Vitro production facility in China, and
Ÿ Capacity expansion in Finland Discovery Services business.
Return value to shareholders
Ÿ Repurchased 8.4 million shares of common stock for a total purchase price of approximately $300 million.

In today's business environment, we believe there is a particular advantage in being a global, full service, high-quality provider of services throughout the drug discovery and development continuum. Manylight of our customers, especially large pharmaceutical companies, are attracted to Tier 1 contract research organizations with a full breadth of capabilities,actions and choose to establish preferred provider relationships with only a small number, which allows them to simplify their relationship management as well as access greater value from their outsourcing partner. Recent trends suggest that large pharmaceutical restructurings, with increasedintensified focus, on key therapeutic areas, may favor larger contract research organizations who can present customers with the benefits of economies of scale and scope, global footprint and simplified communications and coordination. Those companies with critical mass and financial stability are likely to have an advantage, as we expect that customers will gravitate towards placing long-term studies with providers they can rely upon. We are focused on being recognized as a premier preferred provider and building broader and deeper long-term strategic partnerships with our customers. Accordingly, with many of our largest customers, we enter into global preferred provider agreements that span both segments of our business. And as the role of the procurement department of our customers in selecting outsourcing partners increases, we expect that global reach and the availability of value-added services will become essential, which will aid Charles River in capitalizing on future opportunities. In addition, in response to individual customer needs, we have also been flexible in entering into broad-based multi-year partnering arrangements, generally involving financial commitments from the customer, which tap into the broad array of physical and/or service resources that we provide, such as reserving dedicated space within existing facilities, building out space to a particular specification, working within our clients' infrastructure, or even establishing a new facility.

        We intend to continue to broaden the scope of the products and services we provide across the drug development continuum primarily through internal development, which will be augmented, as needed, through focused acquisitions and alliances. Our approach to acquisitions is a disciplined one that seeks to target businesses that are a sound strategic fit and that offer the prospect of enhancing stockholder value. This strategy may include geographic expansion of existing core services, strengthening of one of our core services or the addition of a new product or service in a related or adjacent business. In 2008, we completed 6 acquisitions, ranging in size from $48.5 million to $1.4 million.

        We believe that we are well positioned to exploit both existing and new outsourcing opportunities. As strategic outsourcing by our customersclients increases, and in particular by larger biopharmaceutical clients, we believe that our expertise in areas previously addressed by our customers'clients' in-house capabilities allows us to provide a more flexible, efficient and cost-effective alternative for them. In short, because these products and services are the core of our business, we are able to build and maintain expertise and tap intoachieve economies of scale that are difficult for our customersclients to match withwithin their internal capabilities.

infrastructures.

We intend to focuscontinue to broaden the scope of the products and services we provide across the early-stage drug development continuum primarily through internal development, which will be augmented, as needed, through focused acquisitions and alliances. Acquisitions are an integral part of our marketing efforts on, among other things, stimulating demand for further outsourcing across our entire portfolio. We believe that our ability to provide solutions that address all aspects ofin vivo biology are increasingly attractive to our customers, andgrowth strategy, but we are aligningcommitted to a disciplined approach that seeks to target businesses that are a sound strategic fit and that offer the prospect of enhancing shareholder value, typically including the achievement of a hurdle rate on return on invested capital above our commercial activities to deliver flexible, customized programs designed to meetweighted cost of capital. This strategy may include geographic expansion of existing core services, strengthening our client's core services or technical capabilities or the addition of a new product or service in a related or adjacent business. In 2011, we identified and evaluated a number of acquisition opportunities, but none that met our criteria closed during the year.
Customers
We maintain a three-pronged sales organization with a focus on:
global biopharmaceutical companies;
small and site-specific needs, with an increasing emphasis on defining efficiency metricsmid-sized pharmaceutical companies and tangible value. In addition, as our customers narrow their focus toward specific therapeutic areas, we have increasingly aligned our services portfolio along therapeutic lines, particularly those subject to major research areas, such as oncology, metabolism, inflammationbiotechnology companies; and cardiovascular. We have also focused on adding expertise in the biologics development areas. As a result of these collective efforts, we expect to be better positioned to gain market share by taking advantage of these trends, as well as broader based collaboration across thein vivo discovery to first-in-human continuum. In 2007
academic and 2008 we invested heavily in expanding our facilities capacity, which we expect to normalize beginning in 2009. Similarly,

government clients.

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we are investing in our information technology systems and resources in order to better serve our customers, harmonize our data, and streamline our processes.

Customers

Our customersclients continue to consist primarily of all of the major pharmaceutical companies, many biotechnology companies, animal health,contract research organizations (CROs), agricultural and chemical companies, life science, veterinary medicine, contract manufacturing organizations (CMOs), medical device, diagnostic and other life sciences companies, andcommercial entities, as well as leading hospitals, academic institutions, and government agencies. We have stable, long-term relationships with many of our customers.clients. During 2008,2011, no single commercial customerclient accounted for more than 5% of our total net sales.

For information regarding net sales and long-lived assets attributable to both of our business segments for the last three fiscal years, please see Note 1012 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. For information regarding net sales and long-lived assets attributable to operations in the United States, Europe, Canada, Japan and other countries for each of the last three fiscal years, please review Note 1012 included in the Notes to

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Consolidated Financial Statements included elsewhere in this Form 10-K.

Sales, Marketing and Customer Support

We have designated dedicated sales people for each of our three client segments, enhancing our ability to meet client needs by offering customized, tailored solutions across our entire portfolio. In addition, our mid-market pharmaceutical and biotechnology clients will benefit by additional support from a combination of account managers with broad portfolio knowledge and specialists with specific scientific expertise. This allows us to provide comprehensive coverage of all of the market segments among our diverse client population.
We sell our products and services principally through our direct sales force and account management teams, the majority of whom work in North America, with the balance in Europe and the Asia-Pacific countries. OurIn addition to interactions with our direct sales force, our primary promotional activities include organizing scientific symposia, publishing scientific papers and newsletters, webinars, and making presentations and participating at scientific conferences and trade shows in North America, Europe and Asia. We supplement these scientifically based marketing activities with tradeinternet-based marketing, advertising and direct mail and newsletters.mail. In 2008, we launchedcertain locales, our newly designed website. The direct sales force is supplemented by international distributors and agents for our products and services, particularly with respect to our EMDIn Vitro and Biopharmaceutical Services business.

businesses.

Our internal marketing/product management teams support the field sales staff and account management teams while developing and implementing programs to create close working relationships with customersclients in the biomedical research industry. We maintain client/customer service, technical assistance and consulting service departments (in addition to project managers for our service businesses), which address both our customers'clients' routine and more specialized needs.needs and generally serve as a scientific resource for them. We frequently assist our customersclients in solving problems related to animal husbandry, health and genetics, biosecurity, preclinical and clinical study design, regulatory consulting, protocol development and other areas in which our expertise is widely recognized as a valuable resource by our customers.

clients.

Competition

Our strategymarketing efforts are focused on stimulating demand for further outsourcing across our entire portfolio. We believe that our ability to provide solutions that address all aspects of in vivo biology are increasingly attractive to our clients, and we continue to design and market our commercial activities to deliver flexible, customized programs designed by segment to meet our clients' global and site-specific needs.

Competition
Our goal is to be a leader in each of the markets in which we participate. We compete in the marketplace on the basis of quality, reputation, responsiveness, pricing, innovation, breadth ofour therapeutic and scientific expertise timelinessin in vivo biology, quality, reputation, flexibility, responsiveness, pricing, innovation and availability, supported by our professional bench strength in animal science and toxicology, global capabilities and strategically located facilities worldwide.capabilities. We are able to offer a unique portfolio through our broad array of both routineearly-stage products and specialized preclinical services as well as a wide range of research modelsto support drug discovery and research model services.

development.

The competitive landscape for our two business segments varies.

For RMS, our main competitors include three smaller competitorscompanies in North America (each of whom havehas a global scope), and several smaller competitors in Europe and in Japan. Of our main U.S. competitors, two are privately held businesses and the third is a government funded, not-for-profit institution. We believe that none of our main competitors in RMS has our comparable global reach, financial strength, breadth of product and services offerings, technical expertise or pharmaceutical and biotechnology industry relationships.

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We believe that the barriers to entry in certaina majority of our business units are generally high and present a significant impediment for new market participants, particularly in those areas which require substantial capital expenditures, trained and specialized personnel, and mandate GLP compliant practices, are generally high and present a significant impediment for new market participants.

GLP-compliant practices.

Industry Support and Animal Welfare


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One of our core values is a concern for and commitment to animal welfare. We have been in the forefront of animal welfare improvements in our industry, and continue to show our commitment with special recognition programs for employees who demonstrate an extraordinary commitment in this critical areaaspect of our business. We created our own Humane Care Initiative, which is directed by our Animal Welfare and Training Group. The goal of the initiative is to assure that we continue as a worldwide leader in the humane care of laboratory animals. Laboratory animals are an important resource that further our knowledge of living systems and contribute to the discovery of life-saving drugs and procedures. We work hand-in-hand with the scientific community to understand how living conditions, handling procedures and stress play an important role in the quality and efficiency of research. As animal caregivers and researchers, we are responsible to our clients and the public for the health and well being of the animals in our care.

We support a wide variety of organizations and individuals working to further animal welfare as well as the interests of the biomedical research community. We fund scholarships to laboratory animal training programs, provide financial support to non-profit institutions that educate the public about the benefits of animal research and provide awards and prizes to outstanding leaders in the laboratory animal medicine field.

Employees
Employees

As of December 27, 2008,31, 2011, we had approximately 9,0007,100 employees including(including approximately 577 science400 professionals with advanced scientific degrees, including approximately 143Ph.D.s, D.V.M.s, 191 Ph.D.s and 13 M.D.s.M.D.s). Our employees are not unionized in the United States, although employees are unionized at some of our European facilities, consistent with local customs for our industry. Our annual satisfactionpast employee surveys indicatehave indicated that we have an excellent relationshiprelationships with our employees.

Backlog

Our backlog for our PCS business segment from continuing operations was approximately $310.7$202.5 million at December 27, 200831, 2011, as compared to $393$219.9 million at December 29, 2007.25, 2010. Our preclinical services are performed over varying durations, from short to extended periods of time, which may be as long as several years. We maintain an order backlog to track anticipated revenue from studies and projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We only recognize a study or project in backlog after we have received written evidence of a customer'sclient's intention to proceed. We do not recognize verbal orders.orders as backlog. Cancelled studies or projects are removed from backlog.

We do not report backlog for our RMS business segment because turnaround time from order placement to fulfillment, both for products and services, is rapid.

We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, studies vary in duration (i.e., some studies that are


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included in 20082011 backlog may be completed in 2009,2012, while others may be completed in later years). Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus or penalty payments. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities for a number of reasons, including the failure of a drug to satisfy safety and efficacy requirements or a sponsor making a strategic decision that a study or service is no longer necessary. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.

Regulatory Matters

As our business operates in a number of distinct operating environments and in a variety of locations worldwide, we are subject to numerous, and sometimes overlapping, regulatory environments, as described below.

environments.

The Animal Welfare Act (AWA) governs the care and use of certain species of animals used for research. The United States Congress has passed legislation which excludes laboratory rats, mice and chickens used for research from regulation under the AWA. As a result, most of our United StatesU.S. small animal research modelmodels activities and our avian vaccine support services operations are not subject to regulation under the AWA. For regulated species, the AWA and attendant Animal Care regulations require producers and users of regulated species to provide veterinary care and to utilize specific husbandry practices such as cage size, shipping conditions, sanitation and, for certain species, environmental enrichment to assure the welfare of these animals. We comply with licensing and registration requirement standards set by the United States Department of Agriculture (USDA) for the care and use of regulated species. Our animal production facilities and preclinical facilities in the U.S. are accredited by the Association for Assessment and Accreditation of Laboratory Animal Care International (AAALAC), a private, nonprofit, international organization that promotes the humane treatment of animals in science through voluntary accreditation and assessment programs. AAALAC covers all species of laboratory animals, including rats, mice and birds. Our preclinical

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business is also generally regulated by the USDA.

Our import and export of animals in support of several of our business units as well as our operations in foreign countries are subject to international agreements and conventions, as well as a variety of national, regional, and local laws and regulations, which establish the standards for the humane treatment, care and handling of animals by dealers and research facilities. We maintain the necessary certificates, licenses, detailed standard operating procedures and other documentation required to comply with applicable regulations for the humane treatment of the animals in our custody at our locations.

Our PCS business conducts nonclinical laboratory safety assessment studies intended to support the registration or licensing of our clients' products throughout the world. A minor part of our RMS business also conducts similar studies for our clients. The conduct of many of these studies must comply with national statutory or regulatory requirements for Good Laboratory Practice (GLP). GLP regulations describe a quality system concerned with the organizational process and the conditions under which nonclinical laboratory studies are planned, performed, monitored, recorded, archived and reported. GLP compliance is required by such regulatory agencies as the FDA, United States Environmental Protection Agency, European Medicines Agency for the Evaluation of Medicinal Products,(EMA), Medicines and Healthcare Products Regulatory Agency (MHRA) in the United Kingdom, Health Canada, State Food and Drug Administration of the Peoples' Republic of China, and the Japanese Ministry of Health and Welfare.Welfare, among others. GLP requirements are significantly harmonized throughout the world and our laboratories are capable of conducting studies in compliance with all appropriate requirements. To assure our compliance obligations, we have established quality assurance units (QAU) in each of our nonclinical laboratories. The QAUs operate independently from those individuals that direct and conduct studies, and monitor each study to assure management that the facilities, equipment, personnel, methods, practices, records, and controls are in compliance with GLP. Our laboratory managers use the results of


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QAU monitoring as part of a continuous process improvement program to assure our nonclinical studies meet client and regulatory expectations for quality and integrity.

        Our PCS business also conducts human Phase I clinical trials and provides services in support of our clients' registration or licensing applications. Human clinical trials are conducted in a progressive fashion beginning with Phase I, and in the case of approved drugs, continued through Phase IV trials. Phase I studies are the initial human clinical trials and are conducted with a small number of subjects under highly controlled conditions. These clinical trials and services are performed in accordance with the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use Good Clinical Practice Consolidated Guidance and in compliance with regulations governing the conduct of clinical investigations and the protection of human clinical trial subjects. In the United States, these trials and services must comply with FDA regulations and in Europe our clinical trials and services must comply with the clinical trials directive of the European Union. Neither FDA regulations nor the clinical trials directive requires a quality assurance program; however, our Phase I facilities have established quality assurance units that monitor the conduct and reporting of Phase I trials to assure that these trials are conducted in compliance with appropriate regulatory requirements.

Our manufacturing business producesbusinesses produce endotoxin test kits, reagents, cell banks used in research and biopharmaceutical production and vaccine support products. Additionally, several of our laboratories conduct identity, stability and potency testing in support of our clients' manufacturing programs. These activities are subject to regulation by the FDA and other national regulatory agencies under their respective current Good Manufacturing Practice (GMP)(cGMP) regulations. We are subject to inspection on a routine basis for compliance with these regulations. These regulations require that we manufacture our products or perform testing in a prescribed manner with respect to GMPcGMP compliance, and maintain records of our manufacturing, testing and control activities. We also maintain a Biological License Agreement (BLA) with the FDA's Center for Biologics Evaluation and Research (CBER) that covers the manufacture and distribution of in vitro diagnostic reagents in detecting endotoxins. We also maintain an Establishment License with USDA's Center for Veterinary Biologics (CVB) that covers certain of our sites which manufacture antigens used in a licensed diagnostic kit for rodents or—particular to our vaccine support business—which manufacturer USDA licensed antigens, antibodies, and viruses that are sold to clients for use in the manufacturing of their own USDA licensed products. Our vaccine support business also manufactures and markets twothree USDA licensed products that are considered final use products (Mycoplasma Gallisepticum Antigen, Mycoplasma Melegridis Antigen and Mycoplasma Synoviae Antigen), and sites involved in the manufacture of these articles are subject to regular inspection by USDA/CVB.

All of our sites are also subject to licensing and regulation under national, regional and local laws relating to the surface and air transportation of laboratory specimens, the handling, storage and disposal of laboratory specimens, hazardous waste and radioactive materials, and the safety and health of laboratory employees. Although we believe we are currently in compliance in all material respects with such national, regional and local laws (which include the USDA, the standards set by the International Air Transport Association, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), and European oversight agencies), failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

To ensure that all business sectors comply with applicable statutory and regulatory requirements and satisfy our client expectations for quality and regulatory compliance, we have established a corporate regulatory affairs and compliance organization that oversees our corporate quality system and all of our quality assurance functions within the Company, headed by our Corporate Vice President for Regulatory Affairsfunctions.
Intellectual Property
We develop and Compliance.

Intellectual Property

        We have developed and implementedimplement computer software and technically derived procedures and products intended to maximize the quality and effectiveness of our services. Although our intellectual property rights are valuable to our success, we believe that such factors as the technical expertise, proprietary know-how, ability and experience of our professionals are more important, and that, overall,


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these technological capabilities provide significant benefits to our clients. Where we consider it appropriate, steps are taken to protect our know-how through confidentiality agreements and protection through registration of title or use.registrations. In addition, we in-license technology and products from other companies wherewhen it enhances both our product and services business.businesses. In the future, in-licensing may become a larger initiative to enhancing our offerings, particularly as we focus on therapeutic area


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expertise. With the exception of technology related to ourin vitroIn Vitro testing business, including the Endosafe-PTS, we have no patents, trademarks, licenses, franchises or concessions which are material and upon which any of the products or services we offer are dependent.

Corporate Governance

We are committed to operating our business with integrity and accountability. We strive to meet or exceed all of the corporate governance standards established by the New York Stock Exchange, the Securities and Exchange Commission, and the Federal government as implemented by the Sarbanes-Oxley Act of 2002. Nine of the ten members of our Board of Directors are independent and have no significant financial, business or personal ties to the Company or management and all of our Board committees (with the exception of our Executive Committee and our Strategic Planning and Capital Allocation Committee) are composed entirely of independent directors. The Board adheres to Corporate Governance Guidelines and a Code of Business Conduct and Ethics which has been communicated to employees and posted on our website. We are diligent in complying with established accounting principles and are committed to providing financial information that is transparent, timely and accurate. We have a Related Person Transactions Policy designed to promote the timely identification of such transactions and to ensure we give appropriate consideration to any real or perceived conflicts in our commercial arrangements. We have a global process through which employees, either directly or anonymously, can notify management (and the Audit Committee of the Board of Directors) of alleged accounting and auditing concerns or violations including fraud. Our internal Disclosure Committee meets regularly and operates pursuant to formal disclosure procedures and guidelines which help to ensure that our public disclosures are accurate and timely. Copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Related Person Transactions Policy are available on our website at www.criver.com under the "Investor Relations—Corporate Governance"“Investor Relations-Corporate Governance” caption.


Item 1A.    Risk Factors

Risks Related to Our Business and Industry

Set forth below, and elsewhere in this Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-K. We note that factors set forth below, individually or in the aggregate, may cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.


The outsourcing trend in the preclinical and clinical stages of drug discovery and development may decrease, which could slow our growth.

Over the past several years, some areas ofdecade, our businesses have grown significantly as a result of the increase in pharmaceutical and biotechnology companies outsourcing their preclinical and clinical research support activities. While many industry analysts expect the outsourcing trend to continue to increase for the next several years a decrease(although with different growth rates for different phases of drug discovery and development) decreases in preclinical and/or clinical outsourcing activity couldmay result in a diminished growth rate in the sales of any one or more of our expected higher-growth areasservice lines and may adversely affect our financial condition and results of operations. In fact, in 2011 our revenues for our PCS segment declined 6.3% from 2010, our 2010 PCS revenues declined 8.8% from 2009, and 2009 revenues declined 19.5% from 2008. For additional discussion of the factors that we believe have recently been influencing outsourcing demand from our customers,clients, please see the section entitled "Our Strategy"“Our Strategy” included elsewhere in the Form 10-K. Furthermore, our customerclient contracts are generally terminable on little or no notice. Termination of a large contract or multiple contracts could adversely affect our sales and profitability. Our operations and financial results could be significantly affected by these risks.


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A reduction in research and development budgets at pharmaceutical and biotechnology companies may adversely affect our business.

Our customersclients include researchers at pharmaceutical and biotechnology companies. Our ability to continue to grow and win new business is dependent in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on compoundsmolecules in the preclinical phase of research and development and to outsource the products and

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services we provide. Fluctuations in the expenditure amounts in each phase of the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products and services. Research and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities (including available resources of our biotechnology clients, particularly those that are cash-negative, who may be highly focused on rationing their liquid assets in a challenging funding environment), general economic conditions and institutional budgetary policies. Our business could be adversely affected by any significant decrease in life sciencesdrug research and development expenditures by pharmaceutical and biotechnology companies, as well as by academic institutions, government laboratories or private foundations. In particular, studies in recent studiesyears have indicated that a majority of academic researchers are anticipating reductions in their budgets. Similarly, economic factors and industry trends that affect our clients in these industries, including funding for biotechnology companies, which have suffered during the recent economic downturn, in 2008/2009, also affect their research and development budgets and, consequentially, our business as well. The economic downturn has also negatively affected us to the extent that the research and development budgets atspending by our pharmaceutical customers have recently slowed down their preclinical and Phase I studies in favor ofclients has been directed towards their later-stage products rather than early-stage studies as they reprioritize compound pipelines (focusing on the back-end of their pipelines in the near-term) and moderate their spending per drug candidate. Furthermore, our clients (particularly larger biopharmaceutical companies) continue to search for ways to maximize the return on their investments with a focus on leaner research and development costs per drug candidate. For additional discussion of the factors that we believe have recently been influencing outsourcing demand fromresearch and development budgets at our customers,clients, please see the sectionsections entitled "Our Strategy"“Our Strategy” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in the Form 10-K.

A reduction or delay in government funding of research and development may adversely affect our business.

A portion of net sales in our RMS segment is derived from customersclients at academic institutions and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources, such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies.agencies, which can be difficult to forecast. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Our sales may be adversely affected if our customersclients delay purchases as a result of uncertainties surrounding the approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities. Other programs, such as homeland security or defense, or general efforts to reduce the federal budget deficit could be viewed by the U.S. government as a higher priority. These budgetary pressures may result in reduced allocations in the future to government agencies that fund research and development activities. Although recent reports indicate that the newObama administration's stimulus package includes a substantial increasepackages in 2009 and 2010 included increases in NIH funding, for 2009, NIH funding hashad otherwise remained fairly flat in recent years and a(including into 2012). A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results.

Also, there is no guarantee that NIH funding will be directed towards projects and studies that require use of our products and services.

Changes in government regulation or in practices relating to the pharmaceutical or biotechnologicalbiotechnology industries, including potential health care reform, could decrease the need for the services we provide.

Governmental agencies throughout the world, but particularly in the United States,U.S., strictly regulate the drug development process. Our business involves helping pharmaceutical and biotechnology companies, among others, navigate the regulatory drug approval process. Accordingly, many regulations, and often new regulations, are expected to result in higher regulatory standards and often additional revenues for companies that service these industries. However, some changes in regulations, such as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services. In addition, if regulatory authorities were to mandate a significant reduction in safety testingassessment procedures which utilize laboratory animals (as has been advocated by certain groups), certain segments of our business could be materially adversely affected.


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In recent yearsMarch 2010, the U.S. Congress enacted health care reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. In November 2011, the U.S. Supreme Court decided to review the constitutionality of this legislation and agreed to hear oral arguments in March 2012. If this legislation, or parts of it, is found to be constitutional, the legislation as enacted and implemented may significantly impact the pharmaceutical and biotechnology industries. In addition, the U.S. Congress, various state legislatures have consideredand European and Asian governments may consider various types of health care reform in order to control growing health care costs. We are presently uncertain as to the effects of the recently enacted legislation on our business and are unable to predict what legislative proposals will be adopted in the future, if any. Similar reform movements have occurred in Europe and Asia.

Implementation of health care reform legislation may have certain benefits but also may contain costs that contains costs could limit

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the profits that can be made from the development of new drugs. This could adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could in turn decrease the business opportunities available to us both in the United StatesU.S. and abroad. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings. Furthermore, if health insurers were to change their practices with respect to reimbursements for pharmaceutical products, our customersclients may spend less, or reduce their growth in spending on research and development.

Any failure by us to comply with applicable regulations and related guidance could harm our reputation and operating results, and compliance with new regulations and guidance may result in additional costs.
Any failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. This could harm our reputation, our prospects for future work and our operating results. For example, the issuance of a notice of observations or a warning from the FDA based on a finding of a material violation by us of good laboratory practice or current good manufacturing practice requirements could materially and adversely affect us. In recent years, the FDA has significantly increased the number of warning letters regarding drug products. Typically, such letters (and the underlying accountability) are directed to the drug sponsor, but in recent years the FDA has provided such letters to a small number of other contract research organizations (CRO). If our operations are found to violate any applicable law or other governmental regulations, we might be subject to civil and criminal penalties, damages and fines. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and damage our reputation.
In addition, regulations and guidance worldwide concerning the production and use of laboratory animals for research purposes continues to be updated. Notably, there has been a recent updating and adoption of new guidance in Europe that will be implemented over a period of several years on a country-by-country basis.Because of the complexities of the formal adoption process, the finalization and implementation of this guidance will likely take three or more years, but is likely to be fully implemented by 2016. Some of the new guidance will require additional operating and capital expenses that will impact not only us and our industry competitors but clients in the biomedical research community, who not only will bear the costs of these changes in the pricing of goods and services, but will also need to make similar changes in their own operations.
Similarly, guidance has been and continues to be developed for other areas that impact the biomedical research community on both a national and international basis, including transportation, euthanasia guidance, and import and export requirements of biological materials, health monitoring requirements and the use of disinfectants. In the U.S., guidance used by the NIH and by certain oversight agencies for the care and use of laboratory animals was revised in 2010 and will be implemented over a three year period which began in 2011. Furthermore, we have had to begin implementation of some components of this new guidance in 2011 in order to avoid additional costs in certain long-term contracts initiated or bid upon in 2011. Conforming to these new guidelines will likely cause us increased costs attributable to upgrading of existing or addition of new facilities, the need to add personnel to address new processes, as well as increased administrative burden.
Our standard customerclient agreements contain customer-determinedcustomer‑determined termination and service reduction provisions, which may result in less contract revenue than we anticipate.

Generally, our agreements with our customersclients provide that the customersclients can terminate the agreements or reduce the scope of services under the agreements with little or no notice. CustomersClients may elect to terminate their agreements with us for various reasons, including:
the products being tested fail to satisfy safety requirements;
unexpected or undesired study results;
production problems resulting in shortages of the drug being tested;
the customer'sclient's decision to forego or terminate a particular study; or
the loss of funding for the particular research study. study; or
general convenience/client preference.
If a customerclient terminates a contract with us, we are entitled under the terms of the contract to receive revenue earned to date as well as certain other costs and, in some cases, penalties. Cancellation of a large contract or proximate cancellation of multiple

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contracts could materially adversely affect our business (particularly our PCS segment) and, therefore, may adversely affect our operating results.

Many of our contracts are fixed price and may be delayed or terminated or reduced in scope for reasons beyond our control, or we may under-priceunder‑price or overrun cost estimates with these contracts, potentially resulting in financial losses.

Many of our contracts provide for services on a fixed price or fee-for-service with a cap basis and, accordingly, we bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates. In addition, these contracts may be terminated or reduced in scope either immediately or upon notice. Cancellations may occur for a variety of reasons, and often at the discretion of the customer.client. The loss, reduction in scope or delay of a large contract or the loss or delay of multiple contracts could materially adversely affect our business, although our contracts frequently entitle us to receive the costs of winding down the terminated projects, as well as all fees earned by us up to the time of termination. Some contracts also entitle us to a predetermined termination fee.

fee and irrevocably committed costs/expenses.

Contaminations in our animal populations can damage our inventory, harm our reputation for contaminant-free production, result in decreased sales and cause us to incur additional costs.

Our research models and fertile chicken eggs must be free of certain adventitious, infectious agents such as certain viruses and bacteria because the presence of these contaminants can distort or compromise the quality of research results and could adversely impact human or animal health. The presence of these infectious agents in our animal production facilities and certain service operations could disrupt our contaminant-free research model and fertile egg production as well as our animal services businesses including GEMS, harm our reputation for contaminant-free production and result in decreased sales.

Contaminations typically require cleaning up, renovating, disinfecting, retesting and restarting production or services. Such clean-ups result in inventory loss, clean-up and start-up costs, and reduced sales as a result of lost customerclient orders and credits for prior shipments. In addition to microbiological


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contaminations, the potential for genetic mix-ups or mismatings also exists and may require the restarting of the applicable colonies. While this does not require the complete clean-up, renovation and disinfection of the barrier room, it would likely result in inventory loss, additional start-up costs and possibly reduced sales. In addition, contaminationsContaminations also expose us to risks that customersclients will request compensation for damages in excess of our contractual indemnification requirements. There also exists a risk that contaminations from models that we produce may affect our customer'sclient's facilities, with similar impact to them. In some cases, we may produce or import animals carrying infectious agents capable of causing disease in man;humans; and in the case of such a contamination or undiagnosed infection, there could be a possible risk of human exposure and infection.

We are also subject to similar contamination risks with respect to our large research models. While often we own these models, they may be maintained on our behalf at a site operated by the original provider. Accordingly, risk of contamination may be outside of our control, and we depend on the practices and protocols of third parties to ensure a contamination-free environment. Furthermore, while we often negotiate for contractual risk indemnification, we may be exposed in the event of such contaminations if the third party does not fulfill its indemnification obligation or is unable to as a result of insolvency or other impediments.
All such contaminations described above are unanticipated and difficult to predict and could adversely impact our financial results. WeMany of our operations are comprised of complex mechanical systems which are subject to periodic failure, including aging fatigue. Such failures are unpredictable, and while we have made significant capital expenditures designed to strengthen our biosecurity, and have significantly improvedimprove our operating procedures to protect against such contaminations; however,contaminations, and replace impaired systems and equipment in advance of such events, failures and/or contaminations may still occur.

Our business is subject to risks relating to operating internationally.

        A significant part of our net sales is derived from operations outside the United States. Our international revenues, which include revenues from our non-U.S. subsidiaries, have represented approximately one-half our total net sales in recent years. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. There are a number of risks associated with our international business, including:

Upgrading and integrating our business systems could result in implementation issues and business disruptions.

        We currently are engaged in a project to replace many of our numerous legacy business systems at our different sites globally with an enterprise wide, integrated enterprise resource planning (ERP)


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system. The process of planning and preparing for such an integrated, wide-scale implementation is extremely complex and we are required to address a number of challenges including data conversion, system cutover and user training. Problems in any of these areas could cause operational problems during implementation including delayed shipments, missed sales, billing and accounting errors and other operational issues. There have been numerous, well-publicized instances of companies experiencing difficulties with the implementation of ERP systems which resulted in negative business consequences.

Negative attention from special interest groups may impair our business.

        The products and services which we provide our customers are essential to the drug discovery and development process, and are almost universally mandated by law. Notwithstanding, certain special interest groups categorically object to the use of animals for valid research purposes. Historically, our core research model activities with rats, mice and other rodents have not been the subject of significant animal rights media attention. However, research activities with animals have been the subject of adverse attention, impacting the industry. This has included on-site demonstrations near facilities operated by us. Any negative attention, threats or acts of vandalism directed against our animal research activities in the future could impair our ability to operate our business efficiently.

Several of our product and service offerings are dependent on a limited source of supply, which if interrupted could adversely affect our business.

        We depend on a limited international source of supply of large animal models required in our product and service offerings. Disruptions to their continued supply may arise from health problems, export or import restrictions or embargoes, foreign government or economic instability, severe weather conditions, increased competition amongst suppliers for models, disruptions to the air travel system or other normal-course or unanticipated events. Any disruption of supply could harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms.

Any failure by us to comply with applicable regulations and related guidance could harm our reputation and operating results.

        Any failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. This could harm our reputation, our prospects for future work and our operating results. For example, if we were to fail to verify that informed consent is obtained from participants in connection with a particular Phase I clinical trial, the data collected from that trial could be disqualified and we might be required to redo the trial at no further cost to our customer, but at substantial cost to us. Furthermore, the issuance of a notice of observations or a warning from the FDA based on a finding of a material violation by us of good clinical practice, good laboratory practice or current good manufacturing practice requirements could materially and adversely affect us.

        In addition, regulations and guidance worldwide concerning the production and use of laboratory animals for research purposes continues to be updated. Notably, there has been a recent updating of guidance in Europe that will be implemented over a period of several years on a country-by-country basis. Similarly, guidance has been and continues to be developed for other areas that impact the biomedical research community including transportation and the use of disinfectants. In the United States, an updating of guidance used by the National Institutes of Health and by certain oversight agencies has been recently funded, and it is expected that over the next 3 years, standards will be updated for the care and use of laboratory animals in all aspects of our US business units. These new guidelines could cause us increased costs attributable to additional facilities, the need to add personnel to address new processes, as well as increased administrative burden, and the upgrading of existing facilities.


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The drug discovery and development services industry is highly competitive.

        The drug discovery and development services industry is highly competitive. We often compete for business not only with other drug discovery and development companies, but also with internal discovery and development departments within our larger clients, who may have greater resources than ours. We also compete with universities and teaching hospitals. We compete on a variety of factors, including:

        If we do not compete successfully, our business will suffer. Increased competition might lead to price and other concessions that might adversely affect our operating results. The drug discovery and development services industry has continued to see a trend towards consolidation, particularly among the biotechnology companies, who are targets for each other and for larger pharmaceutical companies (although recent trends in late 2008 and early 2009 may signal increased merger activity between larger pharmaceutical companies themselves). If this trend continues, it is likely to produce more competition among the larger companies and contract research organizations generally, with respect to both clients and acquisition candidates. In addition, while there are substantial barriers to entry for large, global competitors with broad-based services, small, specialized entities considering entering the contract research organization industry will continue to find lower barriers to entry, and private equity firms may determine that there are opportunities in acquiring and rolling up these companies, thus further increasing possible competition. Furthermore, in recent years both Charles River and our competitors, particularly in the preclinical services area, have been investing in capital projects to increase capacity. An ongoing challenge for all participants is balancing capacity growth and market demand. If capacity has been increased too much, pressure to lower prices or to take on lower-margin studies and projects may occur. These competitive pressures may affect the attractiveness of our services and could adversely affect our financial results.

We could be adversely affected by tax law changes in Canada and the United Kingdom.

        We have substantial operations in Canada and the United Kingdom which currently benefit from favorable corporate tax arrangements. We receive substantial tax credits in Canada from both the Canadian federal and Quebec governments and benefits from tax credits and accelerated tax depreciation allowances in the United Kingdom. Any reduction in the availability or amount of these tax credits or allowances would be likely to have a material adverse effect on profits, cash flow and our effective tax rate.


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Impairment of goodwill may adversely impact future results of operations.

We have intangible assets, including goodwill and other identifiable and indefinite-lived acquired intangibles on our balance sheet due to our acquisitions of businesses. The initial identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition involve use of management judgments and estimates. These estimates are based on, among other factors, input from accredited valuation consultants, reviews of projected future income cash flows and statutory regulations. The use of alternative estimates and assumptions might have increased or decreased the estimated fair value of our goodwill and other intangible assets that could potentially result in a different impact to our results of operations.

We perform an annuala test for goodwill impairment analysisannually and whenever events or circumstances make it likely the fair value of goodwilla reporting unit has fallen below its carrying amount to determine if impairment exists. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting

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unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine 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. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets, we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including client relationships.
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment (step one) for 2011, the fair value of our business units exceed their carrying value and therefore our goodwill was not impaired.
Goodwill will not be amortized, but will be reviewed for impairment at least annually. The results of this year's impairment test are as of a point in time. If the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 31, 2011, we had recorded goodwill and other intangibles of $291.0 million in the consolidated balance sheet.
Our business is subject to risks relating to operating internationally.
A significant part of our net sales is derived from operations outside the U.S. Our international revenues, which include revenues from our non-U.S. subsidiaries, have represented approximately one-half of our total net sales in recent years. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. There are a number of risks associated with our international business, including:
foreign currencies we receive for sales and in which we record expenses outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar and reduce the amount of revenue and cash flow (and increase the amount of expenses) that we recognize and cause fluctuations in reported financial results;
certain contracts, particularly in Canada, are frequently denominated in currencies other than the currency in which we incur expenses related to those contracts and where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations;
general economic and political conditions in the markets in which we operate;
potential international conflicts, including terrorist acts;
potential trade restrictions, exchange controls and legal restrictions on the repatriation of funds into the U.S.;
difficulties and costs associated with staffing and managing foreign operations, including risks of violations of local laws or anti-bribery laws such as the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and the OECD

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Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
unexpected changes in regulatory requirements;
the difficulties of compliance with a wide variety of foreign laws and regulations;
unfavorable labor regulations in foreign jurisdictions;
potentially negative consequences from changes in or interpretations of US and foreign tax laws;
exposure to business disruption or property damage due to geographically unique natural disasters;
longer accounts receivable cycles in certain foreign countries; and
import and export licensing requirements.
Negative attention from special interest groups may impair our business.
The products and services which we provide our clients are essential to the drug discovery and development process, and are almost universally mandated by law. Notwithstanding, certain special interest groups categorically object to the use of animals for valid research purposes. Historically, our core research model activities with rats, mice and other rodents have not been the subject of significant animal rights media attention. However, research activities with animals have been the subject of adverse attention, including shareholder proposals, impacting the industry. This has included demonstrations near facilities operated by us, as well as a shareholder proposal we received for our 2012 Annual Meeting. Any negative attention, threats or acts of vandalism directed against our animal research activities in the future could impair our ability to operate our business efficiently.
Several of our product and service offerings are dependent on a limited source of supply, which if interrupted could adversely affect our business.
We depend on a limited international source of supply of large research models required in our product and service offerings. Disruptions to their continued supply may arise from health problems, export or import laws/restrictions or embargoes, international trade regulations, foreign government or economic instability, severe weather conditions, increased competition amongst suppliers for models, disruptions to the air travel system or other normal-course or unanticipated events. Any disruption of supply could harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms.
The drug discovery and development services industry is highly competitive.
The drug discovery and development services industry is highly competitive. We often compete for business not only with other contract research organizations (CRO), but also with internal discovery and development departments within our larger clients, who may have greater resources than ours. We also compete with universities and teaching hospitals for our services. We compete on a variety of factors, including:
reputation for on-time quality performance;
reputation for regulatory compliance;
expertise and experience in multiple specialized areas;
scope and breadth of service and product offerings across the drug discovery and development spectrum;
ability to provide flexible and customized solutions to support our clients' drug discovery and development needs;
broad geographic availability (with consistent quality);
price/value;
technological expertise and efficient drug development processes;

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quality of facilities;
financial stability;
size; and
ability to acquire, process, analyze and report data in an accurate manner.
If we do not compete successfully, our business will suffer. Increased competition might lead to price and other concessions that might adversely affect our operating results. The drug discovery and development services industry has continued to see a trend towards consolidation, particularly among the biotechnology companies, who are targets for each other and for larger pharmaceutical companies (although recent trends since 2008 also demonstrated increased merger activity between larger pharmaceutical companies themselves). If this trend continues, it is likely to produce more competition among the larger companies and CROs generally, with respect to both clients and acquisition candidates. In addition, while there are substantial barriers to entry for large, global competitors with broad-based services, small, specialized entities considering entering the CRO industry will continue to find lower barriers to entry, and private equity firms may determine that there are opportunities to acquire and consolidate these companies, thus further increasing possible competition. Furthermore, between 2006 and 2008, both Charles River and our competitors, particularly in the preclinical services area, invested significantly in capital projects to increase capacity. An ongoing challenge for all participants is balancing existing (and sometimes excess) capacity and market demand. Where capacity has been increased too much, pressure to lower prices or to take on lower-margin studies and projects can occur. More generally, our competitors or others might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain competitive, our competitive position, and in turn our business, revenue and financial condition, would be materially and adversely affected. In the aggregate, these competitive pressures may affect the attractiveness of our technologies, services or products and could adversely affect our financial results.
Potential Changes in U.S. Tax Law.
In its budget submission to Congress in February 2010, and reiterated in the administration's 2012 and 2013 budget proposals, the Obama administration proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies. The proposed changes include, among others, limiting the ability of U.S. corporations to deduct interest expense allocated and apportioned to offshore earnings and modifying the foreign tax credit rules. Additionally, on October 26, 2011, House Ways and Means committee Chairman Camp released a draft tax reform proposal that includes a reduction in the corporate statutory tax rate, a move to a territorial tax system which allows a partial exemption from taxation for dividends received from foreign corporations and gains recognized on the sale of shares in foreign corporations, as well as certain anti-base erosion and thin capitalization rules. While it is uncertain how the U.S. Congress may address the issue of tax reform, it continues to be a topic of discussion and debate. Although the scope of the proposed changes remains unclear and the likelihood of enactment is uncertain, it is possible that these or other changes in the U.S. tax laws could increase our effective tax rate which would affect our profitability.
We could be adversely affected by tax law changes in Canada and the United Kingdom.
We have substantial operations in Canada and the United Kingdom which currently benefit from favorable corporate tax arrangements. We receive substantial tax credits in Canada from both the Canadian federal and Quebec governments and benefits from enhanced deductions and accelerated tax depreciation allowances in the U.K. Any reduction in the availability or amount of these tax credits or deductions due to tax law changes or outcomes of tax controversies would likely have a material adverse effect on our profits, cash flow and our effective tax rate.
Contract research services create a risk of liability.
As a contract research organization, we face a range of potential liabilities which may include:
errors or omissions in reporting of study detail in preclinical studies that may lead to inaccurate reports, which may undermine the usefulness of a study or data from the study, or which may potentially advance studies absent the necessary support or inhibit studies from proceeding to the next level of testing;
risks associated with our possible failure to properly care for our clients' property, such as research models and samples, study compounds, records, work in progress, other archived materials, or goods and materials in transit,

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while in our possession;
risks that models in our breeding facilities or in facilities that we manage may be infected with diseases that may be harmful and even lethal to themselves or humans despite preventive measures contained in our policies for the quarantine and handling of imported animals; and
risks that we may have errors and omissions related to our products designed to conduct lot release testing of medical devices and injectable drugs (primarily through our In Vitro business) or in the testing of biologics and other services performed by our biopharmaceutical services business, which could result in us or our clients failing to identify unsafe or contaminated materials.
We attempt to mitigate these risks through a variety of methods. Nonetheless, it is impossible to completely eradicate such risks.
In our RMS business, we mitigate these risks to the best of our abilities through our regimen of animal testing, quarantine, and veterinary staff vigilance, through which we seek to control the exposure of animal related disease or infections.
In our PCS business, we attempt to reduce these risks by contract provisions entitling us to be indemnified or entitling us to a limitation of liability, insurance maintained by our clients and by us, and various regulatory requirements we must follow in connection with our business.
In both our RMS and PCS businesses, contractual risk transfer indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or in the event that a party who must indemnify us does not fulfill its indemnification obligations or which is beyond the level of insurance coverage. Furthermore, there can be no assurance that we or a party required to indemnify us will be able to maintain such insurance coverage on terms acceptable to us.
New technologies may be developed, validated and increasingly used in biomedical research that could reduce demand for some of our products and services.
For many years, groups within the scientific and research communities have attempted to develop models, methods and systems that would replace or supplement the use of living animals as test subjects in biomedical research. Some companies have developed techniques in these areas that may have scientific merit. In addition, technological improvements to existing or new processes, such as imaging technology, could result in a refinement in the number of animal research models necessary to conduct the required research. It is our strategy to participate in some fashion with any non-animal test method or other method that reduces the need for animal research models as it becomes validated as a research model alternative or adjunct in our markets. However, we generally may not be successful in commercializing these methods if developed, and sales or profits from these methods may not offset reduced sales or profits from research models. Alternative research methods could decrease the need for research models, and we may not be able to develop new products effectively or in a timely manner to replace any lost sales. In addition, other companies or entities may develop research models with characteristics different than the ones that we produce, and which may be viewed as more desirable by our clients.
Upgrading and integrating our business systems could result in implementation issues and business disruptions.
In 2010 we completed the initial implementation of a project to replace many of our numerous legacy business systems at our different sites globally with an enterprise wide, integrated enterprise resource planning (ERP) system. The first stages, which included all of our U.S. sites as well as our RMS site in Canada, and our PCS sites in Montreal and Edinburgh, went live in 2010. We are now enhancing the value of the system's reporting capabilities. The expansion of the system to other international locations may occur at a future date based on value to the business. In general, the process of planning and preparing for these types of integrated, wide-scale implementations is extremely complex and we are required to address a number of challenges including data conversion, system cutover and user training. Problems in any of these areas could cause operational problems during implementation including delayed shipments, missed sales, billing and accounting errors and other operational issues. There have been numerous, well-publicized instances of companies experiencing difficulties with the implementation of ERP systems which resulted in negative business consequences.
The drug discovery and development industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.

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The drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue. Accordingly, we face potential patent infringement suits by companies that have patents for similar products and methods used in business or other suits alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management's attention from other business concerns, whether we win or lose. If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, including treble damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.
We may not be able to successfully develop and market new services and products.
We may seek to develop and market new services and products that complement or expand our existing business or service offerings. If we are unable to develop new services and products and/or create demand for those newly developed services and products, our future business, results of operations, financial condition, and cash flows could be adversely affected.
Our debt level could adversely affect our business and growth prospects.
At December 31, 2011, we had approximately $739 million of debt. This debt could have significant adverse effects on our business, including making it more difficult for us to obtain additional financing on favorable terms; requiring us to dedicate a substantial portion of our cash flows from operations to the repayment of debt and the interest on this debt; limiting our ability to capitalize on significant business opportunities; and making us more vulnerable to rising interest rates. For additional information regarding our debt, please see Note 5 included in the Notes to Consolidated Financial Statements elsewhere in this Form 10-K.
If we are not successful in selecting and integrating the businesses and technologies we acquire, or in managing our current and future divestitures, our business may suffer.
During the past decade, we have expanded our business through numerous acquisitions. We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions.
Even if completed, acquisitions and alliances involve numerous risks which may include:
difficulties and expenses incurred in assimilating and integrating operations, services, products or technologies;
challenges with developing and operating new businesses, including those which are materially different from our existing businesses and which may require the development or acquisition of new internal capabilities and expertise;
diversion of management's attention from other business concerns;
potential losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain from the seller;
acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common stock to the shareholders of the acquired company, dilutive to the percentage of ownership of our existing stockholders;
loss of key employees;
risks of not being able to overcome differences in foreign business practices, customs and importation regulations, language and other cultural barriers in connection with the acquisition of foreign companies;
risks that disagreements or disputes with prior owners of an acquired business, technology, service or product may result in litigation expenses and distribution of our management's attention;
the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies; and

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difficulties in achieving business and financial success.
In the event that an acquired business or technology or an alliance does not meet our expectations, our results of operations may be adversely affected.
Some of the same risks exist when we decide to sell a business, site, or product line. In addition, divestitures could involve additional risks, including the following:
difficulties in the separation of operations, services, products and personnel; and
the need to agree to retain or assume certain current or future liabilities in order to complete the divestiture.
We continually evaluate the performance and strategic fit of our businesses. These and any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have an adverse effect on our results of operations and financial condition. In addition, we may encounter difficulty in finding buyers or alternative exit strategies at acceptable prices and terms and in a timely manner. We may not be successful in managing these or any other significant risks that we encounter in divesting a business, site or product line, and as a result, we may not achieve some or all of the expected benefits of the divestiture.
We could experience a breach of the confidentiality of the information we hold or of the security of our computer systems.
We operate large and complex computer systems that contain significant amounts of client data. As a routine element of our business, we collect, analyze and retain substantial amounts of data pertaining to the preclinical studies we conduct for our clients. Unauthorized third parties could attempt to gain entry to such computer systems for the purpose of stealing data or disrupting the systems. We believe that we have taken adequate measures to protect them from intrusion, and we continue to improve and enhance our systems in this regard, but in the event that our efforts are unsuccessful we could suffer significant harm. Our contracts with our clients typically contain provisions that require us to keep confidential the information generated from these studies. In the event the confidentiality of such information was compromised, we could suffer significant harm.
We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our business.
Our success depends to a significant extent on the continued services of our senior management and other members of management. James C. Foster, our Chief Executive Officer since 1992 and Chairman since 2000, has held various positions with us for 35 years. We have no employment agreement with Mr. Foster or other members of our non-European based senior management. If Mr. Foster or other members of senior management do not continue in their present positions, our business may suffer.
Because of the specialized scientific nature of our business, we are highly dependent upon attracting and retaining qualified scientific, technical and managerial personnel. While we have a strong record of employee retention, there is still significant competition for qualified personnel in the veterinary, pharmaceutical and biotechnology fields. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, could harm our business.
Our quarterly operating results may vary, which could negatively affect the market price of our common stock.
Our results of operations in any quarter may vary from quarter to quarter and are influenced by such factors as:
changes in the general global economy;
the number and scope of ongoing client engagements;
the commencement, postponement, delay, progress, completion or cancellation of client contracts in the quarter;
changes in the mix of our products and services;
the extent of cost overruns;

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holiday buying patterns of our clients;
budget cycles of our clients;
the timing and charges associated with completed acquisitions and other events;
the occasional extra “53rd week” that we recognize in a fiscal year (and 4th fiscal quarter thereof) due to our fiscal year ending on the last Saturday in December; and
exchange rate fluctuations.
We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results. Nonetheless, fluctuations in our quarterly operating results could negatively affect the market price of our common stock.

Item 1B.    Unresolved Staff Comments
There are no unresolved comments to be reported in response to Item 1B.

Item 2.    Properties

We own or lease the land and buildings where we have facilities. We own large facilities (facilities over 50,000 square feet) for our PCS businesses in the United States, Canada, Scotland and Ireland, and lease large facilities in the United States. We own large RMS facilities in the United Kingdom, France, Germany, Japan, Canada and the United States. None of our leases is individually material to our business operations. Many of our leases have an option to renew, and we believe that we will be able to successfully renew expiring leases on terms satisfactory to us. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed.For additional information see Note 10 to the Consolidated Financial Statements included elsewhere in this Form 10-K.
We continually evaluate capacity in light of our client needs and demands. Accordingly, in 2011 we disposed of our PCS operation in Shanghai, China and consolidated our Discovery Services site in Michigan with our operations in North Carolina. Currently, we do not anticipate significant expansion requirements in our PCS business for the next few years due to available capacity at existing and suspended sites. However, we may expand at specific sites should we determine that it is not feasible to utilize available capacity at existing or suspended sites. We have adequate capacity to meet the current needs of our RMS clients and do not currently envision the need for significant expansion of our RMS capacity.
We continue to employ a master site planning strategy to proactively evaluate our real estate needs. In certain circumstances, we dispose of or consolidate operations where the associated real estate is leased. Depending on the resolution of these situations, we may be encumbered with the remaining real estate lease obligations.

Item 3.    Legal Proceedings

We are not party to any material legal proceedings, other than ordinary routine litigation incidental to our business that is not material to our business or financial condition.  On January 31, 2012, a putative class action, entitled Irma Garcia v. Charles River Laboratories, Inc., was filed against us in the San Diego Superior Court, alleging various causes of action related to failure to make proper and timely payments to employees in California, failure to timely furnish accurate itemized wage statements, unfair business practices, associated penalties pursuant to California law, and declaratory relief. While no prediction may be made as to the outcome of litigation, we intend to defend against this proceeding vigorously. 

Item 4.    Not Applicable

Supplementary Item. Executive Officers of the Registrant (pursuant to Instruction 3 to Item 401(b) of Regulation S-K).

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Below are the names, ages and principal occupations of each of our current executive officers. All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal.
Thomas F. Ackerman, age 57, joined us in 1988 with over eleven years of combined public accounting and international finance experience. He was named Controller, North America in 1992 and became our Vice President and Chief Financial Officer in 1996. In 1999, he was named a Senior Vice President and in 2005 he was named a Corporate Executive Vice President. He is currently responsible for overseeing our Accounting and Finance Department and several other corporate staff departments. Prior to joining us, Mr. Ackerman was an accountant at Arthur Andersen & Co.
James C. Foster, age 61, joined us in 1976 as General Counsel. Over the past 35 years, Mr. Foster has held various staff and managerial positions, and was named our President in 1991, Chief Executive Officer in 1992 and our Chairman in 2000.
Jörg M. Geller, age 57, joined our German operation in 1986 as production manager. In 1994 he was promoted to Vice President and in 2007 he was named a Senior Vice President. In 2011, Dr. Geller was promoted to Corporate Executive Vice President, European & Asian Operations. Prior to joining the Company, Dr. Geller was employed in private practice as a veterinarian.

Nancy A. Gillett, age 56, joined us in 1999 with the acquisition of Sierra Biomedical. Dr. Gillett has 27 years of experience as an ACVP board certified pathologist and scientific manager. In 1999, she became Senior Vice President and General Manager of our Sierra Biomedical division, and subsequently held a variety of managerial positions, including President and General Manager of Sierra Biomedical and Corporate Vice President and General Manager of Drug Discovery and Development (the predecessor to our PCS business segment). In 2004, Dr. Gillett was named Corporate Senior Vice President and President, Global Preclinical Services, and in 2006 she became a Corporate Executive Vice President. Currently, Dr. Gillett serves as our Corporate Executive Vice President, Chief Scientific Officer.
David P. Johst, age 50, joined us in 1991 as Corporate Counsel and was named Vice President, Human Resources in 1995. He became Vice President, Human Resources and Administration in 1996, a Senior Vice President in 1999, and a Corporate Executive Vice President in 2005. He currently serves as the Company's General Counsel and Chief Administrative Officer and is responsible for overseeing our Corporate legal function, Human Resources department and several other corporate staff departments. Prior to joining the Company, Mr. Johst was in private practice at the law firm of Hale and Dorr (now WilmerHale).
Davide Molho, age 42, joined our Italian operations in 1999 and was promoted to Director of Operations for Research Models and Services (RMS) Italy in 2002. In 2005, his role was expanded to include French RMS operations and in 2007, he became Corporate Vice President, European Research Models and Services, with responsibility for all European RMS operations. In July 2009, Dr. Molho was promoted to Corporate Senior Vice President, North American & European Research Models and Services. He was subsequently promoted to Corporate Executive Vice President and President, Global Research Models and Services in December 2010. Since 2011, Dr. Molho has served as our Corporate Executive Vice President, North America Operations.
PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock began trading on the New York Stock Exchange on June 23, 2000 under the symbol "CRL." The following table sets forth for the periods indicated below the high and low sales prices for our common stock.

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2012High Low
First quarter (through February 17, 2012)$36.25
 $27.39
2011High Low
First quarter$39.39
 $35.54
Second quarter42.47
 37.38
Third quarter42.05
 28.54
Fourth quarter33.57
 25.95
2010High Low
First quarter$39.75
 $32.74
Second quarter41.65
 28.00
Third quarter35.87
 28.20
Fourth quarter36.10
 30.70
There were no equity securities that were not registered under the Securities Act of 1933, as amended, sold by the Company during the fiscal year ended December 31, 2011.
Shareholders
As of January 31, 2012, there were approximately 448 registered shareholders of the outstanding shares of common stock.
Dividends
We have not declared or paid any cash dividends on shares of our common stock in the past two years and we do not intend to pay cash dividends in the foreseeable future. We currently intend to retain any earnings to finance future operations and expansion. Some of the restrictive covenants contained in our revolving credit agreement and term loan agreements limit our ability to pay dividends.
Issuer Purchases of Equity Securities
The following table provides information relating to the our purchases of shares of our common stock during the quarter ended December 31, 2011.

 
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under
the Plans or
Programs
September 25, 2011 to October 22, 2011450,240
 $28.95
 450,199
 $128,224
October 23, 2011 to November 19, 2011394,095
 $30.36
 394,095
 $116,258
November 20, 2011 to December 31, 2011
 $
 
 $116,258
Total:844,335
  
 844,294
  
On July 29, 2010, our Board of Directors authorized a $500.0 million stock repurchase program. Our Board of Directors increased the stock repurchase authorization by $250.0 million to $750.0 million on October 20, 2010.
During the fourth quarter of 2011, we repurchased 844,294 shares of common stock for $25.0 million under our Rule 10b5-1 Purchase Plan and in open market trading.
Additionally, the Company's Incentive Plans permit the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. Accordingly, during the quarter ended December 25, 2010, the Company acquired 41 shares for a nominal amount as a result of such withholdings.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, as of December 31, 2011, the number of options issued under the Company's stock option plans and the number of options available for future issuance under these plans.

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Plan Category
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
 
Weighted-average
exercise price of
outstanding
options, warrants
and rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
 (a) (b) (c) 
Equity compensation plan approved by security holders:      
Charles River 2000 Incentive Plan2,322,927
 $41.20
 1,083,653
 
Charles River 1999 Management Incentive Plan1,000
 $31.12
 6,000
 
Inveresk 2002 Stock Option Plan72,041
 $26.20
 
 
2007 Incentive Plan3,685,295
 $36.63
 4,709,080
 
Equity compensation plans not approved by security holders
 
 
 
Total6,081,263
(1) 
 5,798,733
(2)
____________________________
(1)None of the options outstanding under any of our equity compensation plans include rights to any dividend equivalents (i.e., a right to receive from us a payment commensurate to dividend payments received by holders of our common stock or our other equity instruments).
(2)On March 22, 2007, the Board of Directors determined that, upon approval of the 2007 Incentive Plan, no future awards would be granted under the preexisting equity compensation plans, including the Charles River 1999 Management Incentive Plan and the Charles River 2000 Incentive Plan. Shareholder approval was obtained on May 8, 2007. Previously, on February 28, 2005, the Board of Directors terminated the Inveresk 2002 Stock Option Plan to the extent that no further awards would be granted thereunder.
The following table provides additional information regarding the aggregate issuances under our existing equity compensation plans as of December 31, 2011:
Category
Number of securities
outstanding
 
Weighted average
exercise price
 
Weighted
average term
 (a) (b) (c)
Total number of restricted shares outstanding(1)703,011
 $
 
Total number of options outstanding6,081.263
 $38.25
 3.67
____________________________
(1)
For purposes of this table, only unvested restricted stock as of December 31, 2011 is included. Also for purposes of this table only, the total includes 72,668 restricted stock units granted to certain of our employees outside of the United States.
Comparison of 5-Year Cumulative Total Return
Among Charles River Laboratories International, Inc., the S&P 500 Index and the NASDAQ Pharmaceutical Index.
The following stock performance graph compares the annual percentage change in our cumulative total shareholder return on our Common Stock during a period commencing on December 30, 2006 and ending on December 31, 2011 (as measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between our share price at the end and the beginning of the measurement period; by (2) the share price at the beginning of the measurement period) with the cumulative total return of the S&P 500 Index and the NASDAQ Pharmaceutical Index during such period. We have not paid any dividends on the Common Stock, and no dividends are included in the representation of the Company's performance. The stock price performance on the graph below is not necessarily indicative of future price performance. The graph is not “soliciting material,” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. Information used in the graph was obtained from Standards & Poor's Institutional Market Services, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Charles River Laboratories International, Inc., The S&P 500 Index
And The NASDAQ Pharmaceutical Index


 
Dec. 30,
2006
 
Dec. 29,
2007
 
Dec. 27,
2008
 
Dec. 26,
2009
 
Dec. 25,
2010
 
Dec. 31,
2011
Charles River Laboratories International, Inc.100
 152.88
 57.85
 76.21
 82.54
 63.19
S&P 500 Index100
 105.49
 66.46
 84.05
 96.71
 98.75
NASDAQ Pharmaceutical Index100
 90.99
 84.71
 95.64
 100.1
 110.44

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Item 6.    Selected Consolidated Financial Data
The following selected financial data are derived from our Consolidated Financial Statements and notes thereto and should be read in conjunction with Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and notes thereto contained in Item 8., "Financial Statements and Supplementary Data" of this report.
 Fiscal Year(1)
 2011 2010 2009 2008 2007
 (dollars in thousands)
Statement of Income Data:         
Net sales$1,142,647
 $1,133,416
 $1,171,642
 $1,295,299
 $1,185,139
Cost of products sold and services provided740,405
 748,656
 748,650
 796,478
 720,254
Selling, general and administrative expenses198,648
 232,489
 227,663
 223,935
 212,471
Goodwill impairment
 305,000
 
 700,000
 
Asset impairment7,492
 91,378
 
 
 
Termination fee
 30,000
 
 
 
Amortization of intangibles21,796
 24,405
 25,716
 26,725
 30,020
Operating income (loss)174,306
 (298,512) 169,613
 (451,839) 222,394
Interest income1,353
 1,186
 1,712
 7,882
 9,120
Interest expense(42,586) (35,279) (21,682) (22,335) (24,453)
Other, net(411) (1,477) 1,914
 (5,154) (1,392)
Income (loss) from continuing operations before income taxes132,662
 (334,082) 151,557
 (471,446) 205,669
Provision for income taxes17,140
 23
 40,354
 57,029
 56,023
Income (loss) from continuing operations net of income taxes115,522
 (334,105) 111,203
 (528,475) 149,646
Income (loss) from discontinued businesses, net of tax(5,545) (8,012) 1,399
 3,283
 1,472
Net income (loss)109,977
 (342,117) 112,602
 (525,192) 151,118
Net income (loss) attributable to noncontrolling interests(411) 5,448
 1,839
 687
 (470)
Net income (loss) attributable to common shareowners$109,566
 $(336,669) $114,441
 $(524,505) $150,648
Common Share Data:         
Earnings (loss) per common share         
Basic         
Continuing operations attributable to common shareowners$2.26
 $(5.25) $1.73
 $(7.85) $2.23
Discontinued operations$(0.11) $(0.13) $0.02
 $0.05
 $(0.02)
Net income (loss) attributable to common shareowners$2.16
 $(5.38) $1.75
 $(7.8) $2.25
Diluted         
Continuing operations attributable to common shareowners$2.24
 $(5.25) $1.72
 $(7.85) $2.17
Discontinued operations$(0.11) $(0.13) $0.02
 $0.05
 $(0.02)
Net income (loss) attributable to common shareowners$2.14
 $(5.38) $1.74
 $(7.8) $2.19
Other Data:         
Depreciation and amortization$85,230
 $93,649
 $89,962
 $86,851
 $81,965
Capital expenditures49,143
 42,860
 79,853
 198,642
 230,754
Balance Sheet Data (at end of period):         
Cash and cash equivalents$68,905
 $179,160
 $182,574
 $243,592
 $225,449
Working capital209,046
 293,114
 345,828
 317,141
 299,587
Goodwill, net197,561
 198,438
 508,235
 457,578
 1,120,540
Total assets1,558,320
 1,733,373
 2,204,093
 2,141,413
 2,778,313
Total debt and capital lease obligations717,945
 700,852
 492,832
 515,332
 437,902
Total shareowners' equity525,583
 687,423
 1,375,243
 1,241,286
 1,905,390


(1)Our fiscal year consists of 12 months ending on the last Saturday on, or prior to, December 31.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis will help you understand the financial condition and results of operations. The Management's Discussion and Analysis is a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.
Overview
We are a leading global provider of solutions that advance the drug discovery and development process, including research models and associated services and outsourced preclinical services. We provide our products and services to global pharmaceutical companies and biotechnology companies, as well as government agencies, leading hospitals and academic institutions throughout the world in order to bring drugs to market faster and more efficiently. We have built upon our core competency of in vivo biology, including laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of preclinical services - both GLP (Good Laboratory Practice) and non-GLP - which address drug discovery and development. 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. We have been in business for 65 years and currently operate approximately 64 facilities in 15 countries worldwide.
Large pharmaceutical and biotechnology companies have been undergoing significant changes over the last few years as they endeavor to improve the productivity of their drug development pipelines, and at the same time, streamline their infrastructures in order to improve efficiency and reduce operating costs. Our clients' efforts have had an unfavorable impact on our operations as a result of: measured research and development spending by major pharmaceutical and biotechnology companies; delays in client decisions and commitments; tight cost constraints and the resultant pricing pressure, particularly in view of excess capacity in the contract research industry; a focus on late-stage clinical testing as clients accelerate their efforts to bring drugs to market in the face of expiration of patents on branded drugs; decreased funding for biopharmaceutical companies and the impact of healthcare reform initiatives. In addition, consolidation in the pharmaceutical and biotechnology industry has also affected demand for our products and services. All of these ongoing factors continue to contribute to demand uncertainty.
The market for our goods and services appears to be stabilizing but we remain uncertain as to when the unfavorable market factors will abate. As part of clients efforts to improve pipeline productivity, pharmaceutical and biotechnology companies are emphasizing efficacy testing in order to eliminate therapies from the pipeline earlier in the drug development process. This trend is visible in increasing demand for our non-GLP in vivo pharmacology and drug metabolism and pharmacokinetics (DMPK) services. We continue to anticipate that our clients will reduce their internal capacity through closure of underutilized facilities and increase their use of these outsourced services in the future, because utilizing outsourced services enables them to create a flexible drug development model which improves operating efficiency and reduces costs. We believe that increased focus on strategic outsourcing by our clients should result in the expansion of strategic relationships with a reduced and limited number of partners, which will drive demand for our services. We believe that the long-term drivers for our business as a whole will primarily emerge from our clients' continued demand for research models and services and both GLP and non-GLP in vivo biology services, which are essential to the drug development process. However, presently it is challenging to predict the timing associated with these drivers.
We continue to focus on our four key initiatives designed to allow us to drive profitable growth and to maximize value for shareholders, and thus better position ourselves to operate successfully in the current and future business environment. These four initiatives are:
Improving the consolidated operating margin. We continue to aggressively manage our cost structure and drive operating efficiencies which are expected to generate improving operating margins. We have already implemented significant actions to reduce costs during the last two years to manage challenging industry-wide preclinical market conditions. These actions have favorably impacted our margins in 2011. In the fourth quarter of 2011, we implemented a headcount reduction of approximately 2%, primarily in the Preclinical Services (PCS) business. This action is expected to generate annual savings of approximately $7.5 million beginning in 2012.
Improving free cash flow generation. We believe we have adequate capacity to support revenue growth in both business segments without significant additional investment for expansion. Improved operating margins, elimination of operating losses with the sale of our Phase I clinical business in 2011 and the closure of our PCS China facility in 2011, and minimal requirements for capital expansion, should contribute to strong cash flow generation. We expect capital expenditures to be approximately $50 million in 2012.

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Disciplined investment in growth businesses. We continue to maintain a disciplined focus on deployment of capital, investing in those areas of our existing business which will generate the greatest sales growth and profitability, such as Genetically Engineered Models and Services (GEMS), Discovery Services (DS), In Vitro products and Biopharmaceutical Services.
Returning value to shareholders. We are repurchasing our stock with the intent to drive immediate shareholder value and earnings per share accretion. During 2011, we repurchased 8.4 million shares. Our weighted average shares outstanding for 2011 has decreased to 51.3 million shares from 62.6 million shares for 2010. As of December 31, 2011, we had $116.3 million remaining on our $750.0 million stock repurchase authorization.
Total net sales in 2011 were $1,142.6 million, an increase of 0.8% from $1,133.4 million in 2010. The sales increase was due primarily to increased sales for RMS partially offset by lower PCS sales. The effect of foreign currency translation had a positive impact on sales of 2.2%. Due to the timing of our fiscal year end, we periodically recognize a "53rd week" in a fiscal year. The 53rd week in 2011 contributed approximately 1.0% to reported 2011 sales.
Our gross margin increased to 35.2% of net sales in 2011 compared to 33.9% of net sales in 2010, due primarily to cost savings actions and the impact of increased RMS sales.
Our operating income was $174.3 million for 2011 compared to an operating loss of $298.5 million for 2010. Income from continuing operations, net of tax, was $115.5 million for 2011 compared to an operating loss of $334.1 million for 2010. The increase in operating income was primarily due to prior year items which include a goodwill impairment, asset impairments and the $30.0 million acquisition termination fee. For 2011, diluted earnings per share attributable to common shareowners was $2.14 compared to a diluted loss per share of $5.38 in 2010. Our capital expenditures totaled $49.1 million for 2011, compared to $42.9 million for 2010. Our planned capital expenditures in 2012 are approximately $50.0 million. Net income attributable to common shareowners was $109.6 million in 2011, compared to a net loss of $336.7 million in 2010.
We report two segments: Research Models and Services (RMS) and Preclinical Services (PCS), which reflects the manner in which our operating units are managed.
Our RMS segment, which represented 61.7% of net sales in 2011, includes three categories: production of research models, Research Model Services, and Other Products. Research Model Services include four business units: Genetically Engineered Models and Services (GEMS), Research Animal Diagnostics (RADS), Discovery Services (DS), and Insourcing Solutions (IS). Other Products includes our In Vitro business and avian vaccine services. Net sales for the RMS segment increased 5.8% compared to 2010, primarily driven by higher sales of Other Products and Research Model Services. The effect of foreign currency translation has a positive impact on sales of 2.7%. We experienced increases in both the RMS gross margin, to 42.1% from 41.7%, and operating margin to 29.2% from 27.7% last year, due mainly to the impact of cost savings and our fixed cost leverage with increased sales.
Our PCS segment, which represented 38.3% of net sales in 2011, includes services required to take a drug through the development process including discovery support, safety assessment and biopharmaceutical services. Sales for this segment decreased 6.3% from 2010, driven by slower demand for preclinical services partially offset by favorable foreign currency, which increased sales growth by 1.5%. We experienced an increase in the PCS gross margin to 24.0% from 22.8% in 2010, due mainly to impairments in 2010 and cost savings in 2011 partially offset by the impact of sales mix and continued pricing pressure. The 2011 operating margin was 5.7% compared to (81.4%) in 2010, mainly due to the goodwill impairment and asset impairments in 2010.
Critical Accounting Policies and Estimates
Preparation of these financial statements requires management to use judgment when making assumptions that are involved in preparing estimates that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Some of those estimates can be complex and require management to make estimates about the future and actual results could differ from those estimates. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For any given estimate or assumption made by management, there may also be other estimates or assumptions that are reasonable.
We consider the following accounting estimates important in understanding our operating results and financial condition. For additional accounting policies see Notes to Consolidated Financial Statements-Note 1. Significant Accounting

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Policies.
Valuation and Impairment of Goodwill, Other Intangible Assets, and Other Long-Lived Assets
Valuation of certain long-lived assets including property, plant and equipment, intangible assets, and goodwill requires significant judgment. Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed in a business acquisition. A significant portion of the purchase price in our acquisitions is assigned to intangible assets and goodwill. Assigning value to intangible assets requires that we use significant judgment in determining (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 assets will be amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of long-lived assets. Typically, key assumptions include projected revenue and expense levels used in establishing the fair value of business acquisitions as well as discount rates based on an analysis of our weighted average cost of capital, adjusted for specific risks associated with the assets. Changes in the initial assumptions could lead to changes in amortization expense recorded in our future financial statements.
We perform a test for goodwill impairment annually and whenever events or circumstances make it likely the fair value of a reporting unit has fallen below its carrying amount to determine if impairment exists. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine 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. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on our internal plans. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
The second step of the goodwill impairment process is to determine the impairment which involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to the manner in which goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets, we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including client relationships.
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment (step one) for 2011, the fair value of our businesses units exceeded their carrying value therefore our goodwill was not impaired.
Additionally, we performed an annual assessment of the fair value of our in-process research and development acquired in the acquisition of SPC. The fair value of the in-process research and development was less than the carrying value recorded as the time of the acquisition. Based on the evaluation, we recorded an impairment in 2011 of $6.8 million.
Goodwill and other indefinite-lived assets will not be amortized, but will be reviewed for impairment at least annually. The results of this year's impairment test are as of a point in time. If the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 31, 2011, we had recorded goodwill and other intangibles of $291.0 million in the consolidated balance sheet.
For intangible assets, goodwill and property, plant and equipment, we assess the carrying value of these assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider

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important which 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.
Should we determine that the carrying value of long-lived tangible assets may not be recoverable, we will 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. We may also estimate fair value based on market prices for similar assets, as appropriate. Significant judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets.
Revenue Recognition
We recognize revenue related to our products, which include research models, in vitro technology and vaccine support products, when persuasive evidence of an arrangement exists, generally in the form of client purchase orders, title and risk of loss have transferred, which occurs upon delivery of the products, the sales price is fixed and determinable and collectability is reasonably assured. These recognition criteria are met at the time the product is delivered to the client's site. Product sales are recorded net of returns upon delivery. For large models in some cases clients pay in advance of delivery of the product. These advances are deferred and recognized as revenue upon delivery of the product.
Our service revenue is comprised of discovery support, safety assessment , RADS, GEMS, DS and IS and is generally evidenced by client contracts. Safety assessment services provide highly specialized toxicology studies to evaluate the safety and toxicity of new pharmaceutical molecules and materials used in medical devices. It also includes pathology services, which provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. RADS services monitor and analyze the health and genetics of research models used in research protocols. GEMS services include validating, maintaining, breeding and testing research models for biomedical research activities. DS augments our GEMS services by providing efficacy studies and other services required as drugs progress through the development pipeline. IS provides management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations.
The safety assessment services arrangements typically range from one to six months but can range up to approximately 24 months in length. These agreements are negotiated for a fixed fee. Laboratory service arrangements are generally completed within a one-month period and are also of a fixed fee nature. DS services are also short-term in nature, while GEMS and IS are longer-term from six months to five years, and are billed at agreed upon rates as specified in the contract.
Our service revenue is recognized upon the completion of the agreed upon performance criteria. These performance criteria are generally in the form of either study protocols or specified activities or procedures which we are engaged to perform. These performance criteria are established by our clients and do not contain acceptance provisions which are based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate contracts is recognized as services are performed, based upon rates specified in the contract. Revenue of fixed fee contracts is recognized as services are performed in relation to estimated costs to complete procedures specified by clients in the form of study protocols. In general, such amounts become billable in accordance with predetermined payment schedules, but are recognized as revenue as services are performed. As a result of the reviews, revisions in estimated effort to complete the contract are reflected in the period in which the change became known.
Deferred and unbilled revenue are recognized in our consolidated balance sheets. In some cases, a portion of the contract fee is paid at the time the study is initiated. These advances are recorded as deferred revenue and recognized as revenue as services are performed. Conversely, in some cases, revenue is recorded based on the level of service performed in advance of billing the client and recognized as unbilled receivable. As of December 31, 2011, based on the difference between the estimated level of services performed and the billing arrangements defined by our service contracts, we recorded unbilled revenue of $29.4 million and deferred revenue of $56.5 million in our consolidated balance sheet.



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Pension Plan Accounting
Our defined benefit pension plans' assets, liabilities and expenses are calculated by accredited independent actuaries using certain assumptions which are approved by management. The actuarial computations require the use of assumptions to estimate the total benefits ultimately payable to employees and allocate this cost to the service periods. The key assumptions used to calculate pension costs are determined and reviewed annually by management after consulting with outside investment advisers and actuaries. The key assumptions include the discount rate, the expected return on plan assets and expected future rate of salary increases. In addition, our actuaries determine the expense or liability of the plan using other assumptions for future experiences such as withdrawal and mortality rate. The assumed discount rate, which is intended to be the actual rate at which benefits could effectively be settled, is adjusted based on the change in the long-term bond yield as of the measurement date. As of December 31, 2011, the weighted‑average discount rate for our pension plans was 4.47%. As of December 31, 2011, we had a pension liability of $49.2 million.
The assumed expected return on plan assets is the average return expected on the funds invested or to be invested to provide future benefits to pension plan participants. This includes considering the asset allocation and expected returns likely to be earned over the life of the plan. If the actual return is different from the assumed expected return in plan assets, the difference would be amortized over a period of approximately 15 to 20 years. The estimated effect of a 1.0% change in the expected rate of return would increase or decrease pension expense by $2.0 million.
Stock-based Compensation
We recognize compensation expense for all stock-based payment awards made to employees and directors including employee stock options and restricted stock awards based on estimated fair values. Accordingly, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award and is recognized as expense on a straight-line basis over the requisite service period which is generally the vesting period. During the year ended December 31, 2011, we recognized $21.7 million of stock compensation expense associated with stock options, restricted stock and performance based stock awards. We estimate the fair value of stock options using the Black-Scholes option‑pricing model and the fair value of our restricted stock awards and restricted stock units based on the quoted market price of our common stock. We recognize the associated compensation expense on a straight-line basis over the vesting periods of the awards, net of estimated forfeitures. Forfeiture rates are estimated based on historical pre-vesting forfeitures and are updated on a quarterly basis to reflect actual forfeitures of unvested awards.
Estimating the fair value for stock options requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free interest rates. The expected volatility rates are estimated based on historical volatilities of our common stock over a period of time that approximates the expected term of the options. The expected term represents the average time that options are expected to be outstanding and is estimated based on the historical exercise and post-vesting cancellation patterns of our stock options. Expected dividends are estimated based on our dividend history as well as our current projections. The risk-free interest rate is based on the market yield of U.S. Treasury securities for periods approximating the expected terms of the options in effect at the time of grant. These assumptions are updated on at least an annual basis or when there is a significant change in circumstances that could affect these assumptions.
We record deferred tax assets for stock-based awards based on the amount of stock-based compensation recognized in our Consolidated Statements of Income at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assets and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits in computed in accordance with the long form method.
Income Taxes
As part of the process of preparing our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax expense and assessing temporary and permanent differences resulting from differing treatment of items for tax and financial reporting purposes. We recognize deferred tax assets and liabilities for the temporary differences using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We assess the realizability of our deferred tax assets based upon the weight of available evidence both positive and negative. To the extent we believe that recovery is not likely, we establish a valuation allowance. In the event that actual results differ from our estimates or we adjust our estimates in the future, we may need to increase or decrease income tax expense which could impact our financial position and results of operations.

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As of December 31, 2011, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $106.5 million. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. Federal and state taxes and withholding taxes payable to the various foreign countries. It is our policy to indefinitely reinvest the earnings of our non-U.S. subsidiaries unless they can be repatriated in a manner that generates a tax benefit or an unforeseen cash need arises in the United States and the earnings can be repatriated in a manner that is substantially free of income taxes. It is not practicable to estimate the amount of additional income taxes payable on the earnings that are indefinitely reinvested in foreign operations.
We are a worldwide business and operate in various tax jurisdictions where tax laws and tax rates are subject to change given the political and economic climate in these countries. We report and pay income taxes based upon operational results and applicable law. Our current and deferred tax provision is based upon enacted tax rates in effect for the current and future periods. Any significant fluctuation in tax rates or changes in tax laws and regulations or changes to interpretation of existing tax laws and regulations could cause our estimate of taxes to change resulting in either increases or decreases in our effective tax rate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. The tax benefits recognized in our financial statements from such positions are measured based upon the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Due to our size and the number of tax jurisdictions within which we conduct our global business operations, we are subject to income tax audits on a regular basis. As a result, we have tax reserves which are attributable to potential tax obligations around the world. We believe we have sufficiently provided for all audit exposures and assessments. Resolutions of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in an increase or decrease to our effective tax rate.
Results of Operations
The following table summarizes historical results of operations as a percentage of net sales for the periods shown:
 Fiscal Year Ended
 December 31, 2011 December 25, 2010 December 26, 2009
Net sales100.0 % 100.0 % 100.0%
Cost of products sold and services provided64.8 % 66.1 % 63.9%
Selling, general and administrative expenses17.4 % 20.5 % 19.4%
Goodwill impairment % 26.9 % %
Asset impairments0.7 % 8.1 % %
Termination fee % 2.6 % %
Amortization of other intangibles1.9 % 2.2 % 2.2%
Operating income (loss)15.3 % (26.3)% 14.5%
Interest income0.1 % 0.1 % 0.1%
Interest expense3.7 % 3.1 % 1.9%
Provision for income taxes1.5 %  % 3.4%
Discontinued operations(0.5)% (0.7)% 0.1%
Noncontrolling interests % 0.5 % 0.2%
Net income (loss) attributable to common shareowners9.6 % (29.7)% 9.8%






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Segment Operations
The following tables show the net sales and the percentage contribution of each of our reportable segments for the past three years. They also show cost of products sold and services provided, selling, general and administrative expenses, amortization of goodwill and intangibles and operating income by segment and as percentages of their respective segment net sales.

 Fiscal Year Ended
 December 31, 2011 
December 25,
2010
 
December 26,
2009
 (dollars in millions)
Net sales:     
Research models and services$705.4
 $667.0
 $659.9
Preclinical services437.2
 466.4
 511.7
Cost of products sold and services provided:     
Research models and services408.1
 388.6
 381.2
Preclinical services332.3
 360.0
 367.4
Goodwill impairment:     
Preclinical services
 305.0
 
Termination fee
 30.0
 
Asset impairment     
Research models and services0.7
 0.8
 
Preclinical services6.8
 90.6
 
Selling, general and administrative expenses:     
Research models and services83.6
 85.8
 79.1
Preclinical services58.1
 73.4
 85.1
Unallocated corporate overhead56.9
 73.3
 63.5
Amortization of other intangibles:     
Research models and services6.7
 7.3
 6.3
Preclinical services15.0
 17.1
 19.4
Operating income (loss):     
Research models and services206.3
 184.5
 $193.3
Preclinical services24.9
 (379.7) 39.8
Unallocated corporate overhead(56.9) (103.3) (63.5)

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 Fiscal Year Ended
 December 31, 2011 
December 25,
2010
 
December 26,
2009
Net sales:     
Research models and services61.7 % 58.8 % 56.3 %
Preclinical services38.3 % 41.2 % 43.7 %
Cost of products sold and services provided:     
Research models and services57.9 % 58.3 % 57.8 %
Preclinical services76.0 % 77.2 % 71.8 %
Goodwill impairment:     
Preclinical services % 65.4 %  %
Asset impairment:     
Research models and services0.1 % 0.1 %  %
Preclinical services1.6 % 19.4 %  %
Termination fee %  %  %
Selling, general and administrative expenses:     
Research models and services11.8 % 12.9 % 12.0 %
Preclinical services13.3 % 15.8 % 16.6 %
Unallocated corporate overhead %  %  %
Amortization of other intangibles:     
Research models and services1.0 % 1.1 % 1.0 %
Preclinical services3.4 % 3.7 % 3.8 %
Operating income:     
Research models and services29.2 % 27.7 % 29.3 %
Preclinical services5.7 % (81.4)% 7.8 %
Unallocated corporate overhead(5.0)% (9.1)% (5.4)%
In our consolidated statements of income, we provide a breakdown of net sales and cost of sales between net products and services. Such information is reported irrespective of the business segment from which the sales were generated.
Fiscal 2011 Compared to Fiscal 2010
Net Sales. Net sales for the year ending December 31, 2011 were $1,142.6 million, an increase of $9.2 million, or 0.8%, from $1,133 million for the year ending December 25, 2010, due primarily to increased sales for RMS and favorable foreign currency translation of 2.2% partially offset by lower PCS sales.
Research Models and Services. For the year ending December 31, 2011, net sales for our RMS segment were $705.4 million, an increase of $38.4 million, or 5.8%, from $667.0 million for the year ending December 25, 2010, due primarily to higher Other Product sales, which include our Avian and In Vitro businesses, as well as Research Model Services. The effect of favorable foreign currency translation increased sales by 2.7%.
Preclinical Services. For the year ending December 31, 2011, net sales for our PCS segment were $437.2 million, a decrease of $29.2 million, or 6.3%, from $466.4 million for the year ending December 25, 2010. The sales decrease was driven by reduced biopharmaceutical spending, which resulted in lower demand for our services and a shift in study mix, offset by favorable foreign currency translation of 1.5%.
Cost of Products Sold and Services Provided. Cost of products sold and services provided during 2011 was $740.4  million, a decrease of $8.3 million, or 1.1%, from $748.7 million during 2010. Cost of products sold and services provided during the year ending December 31, 2011 was 64.8% of net sales, compared to 66.1% during the year ending December 25, 2010.
Research Models and Services. Cost of products sold and services provided for RMS during 2011 was $408.1 million, an increase of $19.5 million, or 5.0%, compared to $388.6 million in 2010. Cost of products sold and services provided for the year ending December 31, 2011 decreased to 57.9% of net sales compared to 58.3% of net sales for the year ending December 25, 2010. The decrease in cost as a percentage of sales was due primarily to the impact of our cost-savings actions partially

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offset by the large model inventory write-off.
Preclinical Services. Cost of services provided for the PCS segment during 2011 was $332.3 million, a decrease of $27.7 million, compared to $360.1 million in 2010. Cost of services provided as a percentage of net sales was 76.0% during the year ending December 31, 2011, compared to 77.2% for the year ending December 25, 2010. The decrease in cost of services provided as a percentage of net sales was primarily due to the impact of our cost-savings actions.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ending December 31, 2011 were $198.7 million, a decrease of $33.8 million, or 14.6%, from $232.5 million for the year ending December 25, 2010. Selling, general and administrative expenses during 2011 were 17.4% of net sales compared to 20.5% for the year ending December 25, 2010. The decrease in selling, general and administrative expenses as a percent of sales was primarily due to the cost saving-actions.
Research Models and Services. Selling, general and administrative expenses for RMS for 2011 were $83.6 million, a decrease of $2.1 million, or 2.5%, compared to $85.7 million in 2010. Selling, general and administrative expenses decreased as a percentage of sales to 11.8% for the year ending December 31, 2011 from 12.9% for the year ending December 25, 2010. The decrease in selling, general and administrative expenses as a percent of sales was primarily due to cost-savings actions.
Preclinical Services. Selling, general and administrative expenses for the PCS segment during 2011 were $58.1 million, a decrease of $15.4 million, or 20.9%, compared to $73.5 million during 2010. Selling, general and administrative expenses for the year ending December 31, 2011 decreased to 13.3% of net sales, compared to 15.8% of net sales for the year ending December 25, 2010, due mainly to the benefit of cost-savings actions.
Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various costs primarily associated with activities centered at our corporate headquarters, such as compensation (including stock-based compensation), information systems, compliance and facilities expenses associated with our corporate, administration and professional services functions, was $56.9 million during the year ending December 31, 2011, compared to $73.3 million during the year ending December 25, 2010. The decrease was primarily due to cost-savings actions and tight expense control, a life insurance gain of $7.7 million in 2011 and prior year costs related to the evaluation of a proposed acquisition of $6.6 million.
Goodwill Impairment. Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment for 2011, the fair value of our business units exceeded their carrying value: therefore, our goodwill was not impaired.
During the fourth quarter of 2010, based on our annual goodwill assessment, the fair value of our PCS business was less than its carrying value. The second step of the goodwill impairment test involved calculation of the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill, resulting in a goodwill impairment of $305.0 million.
Asset Impairment. We recorded an asset impairment of $7.5 million composed of a $6.8 million impairment of our PCS in-process research and development cost and an $0.7 impairment of an RMS facility no longer in use.
During the fourth quarter of 2010, based on our then most recent market outlook, we assessed our long-lived assets for impairment. The assessment included an evaluation of the ongoing cash flows of the long-lived assets. We determined, based upon our evaluation, that the long-lived assets associated with PCS-Massachusetts and PCS-China were no longer fully recoverable from the future cash flows. Based upon the assets no longer being fully recoverable, we determined the fair value of the long-lived assets based upon a valuation completed by an independent third party valuation firm. The valuation was based upon the estimated market value of the long-lived assets and the future cash flow expected to be generated from the long-lived assets. Accordingly, we recorded impairment charges of $64.6 million for PCS-Massachusetts, $17.2 million for PCS-China and $7.2 million for in-process research and development costs representing the excess of the carrying value of the SPC assets over their respective fair market values.
Termination fee. On July 29, 2010, in connection with a proposed acquisition, we signed a termination agreement and subsequently paid a $30.0 million termination fee for full satisfaction of the parties' obligations under the acquisition agreement.
Amortization of Other Intangibles. Amortization of other intangibles for the year ending December 31, 2011 was $21.8 million, a decrease of $2.6 million, from $24.4 million for the year ending December 25, 2010. Amortization expense decreased as a percentage of sales to 1.9% for the year ending December 31, 2011, from 2.2% for the year ending December

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25, 2010.
Research Models and Services. In 2011, amortization of other intangibles for our RMS segment was $6.7 million, a decrease of $0.6 million from $7.3 million in 2010.
Preclinical Services. For the year ending December 31, 2011, amortization of other intangibles for our PCS segment was $15.0 million, a decrease of $2.1 million from $17.1 million for the year ending December 25, 2010.
Operating Income. Operating income for the year ending December 31, 2011was $174.3 million, an increase from a loss of $298.5  million for the year ending December 25, 2010. Operating income as a percentage of net sales for the year ending December 31, 2011 was 15.3% compared to (26.3)% for the year ending December 25, 2010, due primarily to the impact of the asset impairment, goodwill impairment and termination fee in 2010.
Research Models and Services. For 2011, operating income for our RMS segment was $206.3 million, an increase of $21.9 million, or 11.8%, from $184.5 million in 2010. Operating income as a percentage of net sales for the year ending December 31, 2011 was 29.2%, compared to 27.7% for the year ending December 25, 2010. The increase in operating income as a percentage of net sales was primarily due to cost-savings actions.
Preclinical Services. For the year ending December 31, 2011, operating income for our PCS segment was $24.9 million, an increase from a loss of $379.7 million for the year ending December 25, 2010. Operating income as a percentage of net sales increased to 5.7% in 2011 compared to (81.4)% of net sales in 2010. The increase in operating income as a percentage of net sales was primarily due to the asset impairment, goodwill impairment and termination fee in 2010.
Unallocated Corporate Overhead. Unallocated corporate overhead was $56.9 million during the year ending December 31, 2011, compared to $103.3 million during the year ending December 25, 2010. The decrease was primarily due to the termination fee and costs related to the evaluation of a proposed acquisition of $6.6 million in 2010 as well as cost-savings actions and tight expense control and a life insurance gain of $7.7 million in 2011.
Interest Expense. Interest expense for 2011 was $42.6 million, compared to $35.3 million in 2010. The increase was due to increased debt balances.
Interest Income. Interest income for 2011 was $1.4 million, compared to $1.2 million for 2010.
Income Taxes. Income tax expense in 2011 was $17.1 million, compared to $23 thousand in 2010. Our effective tax rate was 12.9 % in 2011, compared to 0% in 2010. Changes in the effective tax rate result from benefits recognized in 2011 due to releasing a valuation allowance on a tax loss incurred with the disposition of the our Phase I clinical business in the first quarter of 2011, a non-taxable gain on a settlement of a life insurance policy, a settlement of a German tax audit, and the impact of declines in statutory tax rates in the United Kingdom and Japan. Additionally, in 2010, the effective tax rate reflected goodwill and fixed asset impairments and the termination fee for a proposed acquisition, which were unbenefitted for tax purposes and the cost of repatriating foreign earnings that were previously indefinitely reinvested.
Net Income Attributable to Common Shareowners. Net income attributable to common shareowners for the year ending December 31, 2011 was $109.6 million compared to a loss of $336.7 million for the year ending December 25, 2010.

Fiscal 2010 Compared to Fiscal 2009
Net Sales.    Net sales in 2010 were $1,133.4 million, a decrease of $38.2 million, or 3.3%, from $1,171.6 million in 2009.
Research Models and Services.    In 2010, net sales for our RMS segment were $667.0 million, an increase of $7.1 million, or 1.1%, from $659.9 million in 2009. Sales growth was driven by the additions of Piedmont Research Center and Cerebricon, both of which were acquired in 2009, partially offset by lower sales of research models.
Preclinical Services.    In 2010, net sales for our PCS segment were $466.4 million, a decrease of $45.3 million, or 8.8%, compared to $511.7 million in 2009. The decrease in PCS sales was primarily due to reduced biopharmaceutical spending which resulted in lower sales volume and pricing pressure. Favorable foreign currency translation increased sales growth by 0.9%.

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Cost of Products Sold and Services Provided.    Cost of products sold and services provided in 2010 was $748.6 million, essentially flat with 2009. Cost of products sold and services provided in 2010 was 66.1% of net sales, compared to 63.9% in 2009 due mainly to lower sales.
Research Models and Services.    Cost of products sold and services provided for RMS in 2010 was $388.6 million, an increase of $7.4 million, or 1.9%, compared to $381.2 million in 2009. Cost of products sold and services provided as a percentage of net sales in 2010 was 58.3%, compared to 57.8% in 2009. The increase in cost as a percentage of sales was due mainly to the impact of increased fixed costs with a small sales increase partially offset by cost savings.
Preclinical Services.    Cost of services provided for the PCS segment in 2010 was $360.0 million, a decrease of $7.4 million, or 2.0%, compared to $367.4 million in 2009. Cost of services provided as a percentage of net sales was 77.2% in 2010, compared to 71.8% in 2009. The increase in cost of services provided as a percentage of net sales was primarily due to lower capacity utilization due to the lower sales volume and increased pricing pressure.
Selling, General and Administrative Expenses.    Selling, general and administrative expenses in 2010 were $232.5 million, an increase of $4.8 million, or 2.1%, from $227.7 million in 2009. Selling, general and administrative expenses in 2010 were 20.5% of net sales, compared to 19.4% of net sales in 2009. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to lower sales.
Research Models and Services.    Selling, general and administrative expenses for RMS in 2010 were $85.8 million, an increase of $6.7 million, or 8.5%, compared to $79.1 in 2009. Selling, general and administrative expenses increased as a percentage of sales to 12.9% in 2010 from 12.0% in 2009, due mainly to the reinstatement of limited merit-based wage increases coupled with increased allocations of Corporate Marketing and IT costs.
Preclinical Services.    Selling, general and administrative expenses for the PCS segment in 2010 were $73.4 million, a decrease of $11.7 million, or 13.6%, compared to $85.1 million in 2009 due mainly to reduced allocations of Corporate Marketing and IT costs and tight expense control over discretionary costs. Selling, general and administrative expenses in 2010 decreased to 15.8% of net sales, compared to 16.6% in 2009.
Unallocated Corporate Overhead.    Unallocated corporate overhead, which consists of various costs primarily related to activities centered at our corporate headquarters, such as compensation (including stock-based compensation), information systems, compliance and facilities expenses associated with our corporate, administration and professional services functions was $73.3 million in 2010, compared to $63.5 million in 2009. The increase in unallocated corporate overhead during 2010 was due primarily to increased global IT costs and costs related to the implementation of our ERP system in 2010 and increased costs associated with the evaluation of acquisition candidates.
Goodwill Impairment.    Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment for 2010, the fair value of our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $305.0 million.
Asset Impairment.    During the fourth quarter of 2010, based on our most recent market outlook, we assessed our long-lived assets for impairment. The assessment included an evaluation of the ongoing cash flows of the long-lived assets. We determined, based upon our evaluation, that the long-lived assets associated with PCS-Massachusetts and PCS-China were no longer fully recoverable from the future cash flows. Based upon the assets no longer being fully recoverable, we determined the fair value of the long-lived assets based upon a valuation completed by an independent third party valuation firm. The valuation was based upon the estimated market value of the long-lived assets and the future cash flow expected to be generated from the long-lived assets. Accordingly, we recorded impairment charges of $64.6 million for PCS-Massachusetts, $17.2 million for PCS-China and $7.2 million for in-process research and development costs representing the excess of the carrying value of the SPC assets over their respective fair market values.
Termination Fee.    On July 29, 2010, in connection with a proposed acquisition, we signed a termination agreement and subsequently paid a $30.0 million termination fee for full satisfaction of the parties' obligations under the acquisition agreement.
Amortization of Other Intangibles.    Amortization of other intangibles in 2010 was $24.4 million, a decrease of $1.3 million, from $25.7 million in 2009.
Research Models and Services.    In 2010, amortization of other intangibles for our RMS segment was $7.3 million, an increase of $1.0 million from $6.3 million in 2009 due to acquisitions.
Preclinical Services.    In 2010, amortization of other intangibles for our PCS segment was $17.1 million, a decrease of

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$2.3 million from $19.4 million in 2009.
Operating Loss.    The operating loss in 2010 was $298.5 million, compared to operating income of $169.6 million in 2009.
Research Models and Services.    In 2010, operating income for our RMS segment was $184.5 million, a decrease of $8.8 million, or 4.6%, from $193.3 million in 2009. Operating income as a percentage of net sales in 2010 was 27.7%, compared to 29.3% in 2009. The decrease in operating income as a percentage of net sales was primarily due to the impact of our fixed costs with flat sales and higher selling, general and administrative expenses.
Preclinical Services.    In 2010, operating loss for our PCS segment was $379.7 million compared to operating income of $39.8 million in 2009. The decrease in operating income was primarily due to our $305.0 million goodwill impairment, our $64.6 million PCS-Massachusetts impairment and $17.2 million PCS-China impairment.
Interest Expense.    Interest expense in 2010 was $35.3 million, compared to $21.7 million in 2009. The increase was due to increased debt balances.
Interest Income.    Interest income in 2010 was $1.2 million, compared to $1.7 million in 2009 primarily due to lower cash balances and lower interest rates on invested funds.
Income Taxes.    Income tax expense in 2010 was $23 thousand, compared to $40.4 million in 2009. Our effective tax rate was 0.0 % in 2010, compared to 26.6% in 2009. Changes in the effective tax rate resulted primarily from goodwill and fixed asset impairments and the termination fee for a proposed acquisition that were unbenefitted for tax purposes, amount and mix of earnings, increased tax benefits related to our research and development activities in Canada and the UK and the cost of repatriating foreign earnings that were previously indefinitely reinvested.
Income from discontinued operations.    During the fourth quarter of 2010, we initiated actions to divest our Phase I clinical services business. We engaged an investment banker and were actively trying to sell the Phase I clinical services business at year end. On December 25, 2010, taking into account the planned divestiture of the Phase I clinical services business, we performed an impairment test on the long-lived assets of the Phase I clinical services business. Based on this analysis, we determined that the book value of assets assigned to the Phase I clinical services business exceeded its future cash flows, which included the proceeds from the sale of the business, and therefore recorded an impairment of the assets of $6.4 million.
Net Loss Income attributable to common shareowners.    The net loss attributable to common shareowners in 2010 was $336.7 million, compared to net income of $114.4 million in 2009.
Liquidity and Capital Resources

The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in our consolidated statements of cash flows.
Our principal sources of liquidity have been our cash flow from operations, our marketable securities and our revolving line of credit arrangements.
On December 25, 2010, we had a $750 million credit agreement, which had a maturity date of August 26, 2015 and provided for a $230 million term loan, a €133.8 million Euro term loan and a $350 million revolving credit facility. On February 24, 2011, we amended the credit agreement, primarily to provide for an incremental $150 million term loan and to modify the leverage ratio used in calculating the interest rate applicable to amounts outstanding. On September 23, 2011, we amended and restated the credit agreement primarily to reduce the interest rate margin applicable to the term loans and the revolving loans based on our leverage ratio and extend the maturity date by approximately one year to September 2016. The current credit agreement provides for a $ 299.8 million term loan, a €69.4 million Euro term loan and a $350 million revolving credit facility. Under specified circumstances, we have the ability to increase the term loans and/or revolving line of credit by up to $250 million in the aggregate. The term loans mature in 20 quarterly installments with the last installment due September 23, 2016. The $350 million revolving facility also matures on September 23, 2016 and requires no scheduled payment before that date. The book value of our term and revolving loans approximates fair value. We had $4.5 million outstanding under letters of credit as of December 31, 2011.
The interest rates applicable to term loans and revolving loans under the credit agreement are, at our option, equal to either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50% or (3) the one-month adjusted LIBOR rate plus 1%) plus an applicable interest rate margin based upon the leverage ratio. Based on our leverage ratio, the margin range for base rate loans is 0.0% to 0.75% and the margin range for LIBOR based loans is 1.00% to 1.75%. As

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of December 31, 2011, the interest rate margin for base rate loans was 0.75% and for adjusted LIBOR loans was 1.75%.
Our obligations under the credit agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of our assets, including a pledge of 100% of the capital stock of our domestic subsidiaries (other than the capital stock of any domestic subsidiary that is treated as a disregarded entity for U.S. federal income tax purposes) and 65% of the capital stock of certain first-tier foreign subsidiaries and domestic disregarded entities, and mortgages on owned real property in the U.S. having a book value in excess of $10 million. In addition, the credit agreement includes certain customary representations and warranties, events of default, notices of material adverse changes to our business and negative and affirmative covenants. These covenants include (1) the ratio of consolidated earnings before interest, taxes, depreciation and amortization less capital expenditures to consolidated cash interest expense, which for any period of four consecutive fiscal quarters, of no less than 3.5 to 1.0 as well as (2) the ratio of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization for any period of four of the previous consecutive fiscal quarters, of no more than 4 to 1. In the second and third quarters of 2012, this ratio will step down to 3.5 to 1, and thereafter will step down to 3.25 to 1. As of December 31, 2011, we were compliant with all financial covenants specified in the credit agreement.
In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested as of the end of 2011, as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax-free. During the third quarter of 2011, we restructured our international operations in a tax-free manner to allow us more flexibility in accessing our offshore cash to fund needs outside the U.S.
In order to enable us to facilitate, on a more timely and cost efficient basis, the repurchase of a substantial number of our shares pursuant to our $750.0 million stock repurchase authorization approved by our Board of Directors in 2010, we entered into agreements with a third party investment bank to implement an accelerated stock repurchase (ASR) program. The ASR programs are recorded as two transactions allocated between the initial purchase of treasury stock and a forward contract indexed to our common stock. The treasury shares result in an immediate reduction of shares on our statement of financial position and in our EPS calculation.
On August 26, 2010, we entered into an agreement with a third party investment bank to implement an ASR program to repurchase $300 million of common stock. Under this ASR, we paid $300 million on August 27, 2010 from cash on hand and available liquidity, including funds borrowed by us under our new amended and restated $750 million credit facility. The initial delivery of 6,000,000 treasury shares was recorded at $175.1 million, the market value at the date of the transaction. We received an additional 750,000 shares under the ASR on September 23, 2010, which were recorded at $23.5 million, which represented the market value on that date, and we received an additional 1,250,000 shares on December 21, 2010, which were recorded at $43.1,million which also represented the market value on that date. During 2010, in total, we repurchased 8,000,000 shares under the ASR program. The ASR was settled on February 11, 2011 based on a discount to the daily volume weighted average price (VWAP) of our common stock over the course of a calculation period. We received the final 871,829 shares based on the settlement of the ASR, which were recorded at $32.5 million.
On February 24, 2011, we entered into an ASR to repurchase $150 million of common stock. Under the ASR, we paid $150 million from cash on hand, including funds borrowed under our credit facility. Upon signing the ASR on February 24, 2011, we received the initial delivery of 3,759,398 shares, which was recorded at $135.9 million based on the market value at the date of the transaction, and recorded $14.1 million as a forward contract indexed to our common stock. The ASR was settled on May 16, 2011 based on a discount to the daily VWAP of our common stock over the course of a calculation period. We received the final 6,505 shares based on the settlement of the ASR, which were recorded at $0.3 million.
During 2011, 2010 and 2009, we repurchased 3,790,762 shares of common stock for $130.9, million, 9,759,857 shares of common stock for $294.5 million and 1,592,500 shares of common stock for $42.4 million, respectively, under our Rule 10b5-1 purchase plan and in open market trading. The timing and amount of any future repurchases will depend on market conditions and corporate considerations.
As of December 31, 2011, we had $16.4 million in marketable securities with $5.3 million in time deposits and $11.1 million in auction rate securities rated AAA by a major credit rating agency. The year-end balance was comprised of $11.1 million held in the United States and $5.3 million held by non-U.S. subsidiaries. Our auction rate securities are guaranteed by U.S. federal agencies. The current overall credit concerns in the capital markets as well as the failed auction status of these securities have impacted our ability to liquidate our auction rate securities. If the auctions for the securities we own continue to fail, the investment may not be readily convertible to cash until a future auction of these investments is successful. Based on our ability to access our cash and other short-term investments, our expected operating cash flows and other sources of cash, we do not anticipate the current lack of liquidity on these investments will affect our ability to operate our business as usual.

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In 2006, we issued $350.0 million of 2.25% Convertible Senior Notes (the 2013 Notes) due in 2013. At December 31, 2011, the fair value of our outstanding 2013 Notes was approximately $339.5 million based on their quoted market value. During the fourth quarter of 2011, no conversion triggers were met. Upon maturity, we will settle the principal balance of the 2013 Notes in cash and any additional amount due to the conversion feature in cash or shares. We intend to utilize our existing cash and marketable securities, future cash flow from operations, existing capacity of our credit agreement, which includes possible increases to term and/or revolving line of credit, and evaluate other financing alternatives, to meet the cash requirement at maturity in June 2013.
We have various life insurance policies which have cash surrender value. The policies provide funding for our deferred compensation plan and in certain cases, funding for life insurance benefits. During the second quarter of 2011, we received life insurance proceeds of $9.5 million related to a former officer. We recognized a tax exempt gain of $7.7 million representing the difference between the life insurance proceeds and the cash surrender value.
Cash and cash equivalents totaled $68.9 million at December 31, 2011, compared to $179.2 million at December 25, 2010. The decline in cash and cash equivalents was primarily due to the repurchase of shares, capital expenditures and prepayment of debt. At December 31, 2011, the $68.9 million was comprised of $0.4 million held in the United States and $68.5 million held by non-U.S. subsidiaries. At December 25, 2010, the $179.2 million was comprised of $72.3 million held in the United States and $106.9 million held by non-U.S. subsidiaries. The decline in cash in the U.S. was primarily due to share repurchases and capital expenditures while the decline in cash outside the U.S. was primarily due to capital expenditures and prepayments on the Euro term loan. We are a net borrower and closely managed the cash at year-end to keep balances low. We were able to maintain liquidity by having the ability to borrow on our revolving line of credit.
Net cash provided by operating activities for the years ending December 31, 2011 and December 25, 2010 was $206.8 million and $168.2 million, respectively. The increase in cash provided by operations was primarily due to net income and trade receivables, partially offset by a decrease in taxes payable. The tax benefit related to the disposition of the Phase I clinical business, which increased net income in 2011, will be realized in cash in the future. Our days sales outstanding (DSO) increased to 48 days as of December 31, 2011 compared to 45 days as of December 25, 2010. Our DSO includes deferred revenue as an offset to accounts receivable in the calculation. The increase in our DSO was primarily driven by slower collections and decreased deferred revenue. Our net cash provided by operating activities will be impacted by future timing of client payments for products and services as evidenced in our DSO. A one-day increase or decrease in our DSO represents a change of approximately $3.1 million of cash provided by operating activities. Our allowance for doubtful accounts was $4.0 million as of December 31, 2011 compared to $4.8 million as of December 25, 2010.
Net cash provided by (used in) investing activities for the years ending December 31, 2011 and December 25, 2010 was $(36.6) million and $3.0 million, respectively. Our capital expenditures during 2011 were $49.1 million, of which $34.3 million was related to RMS and $14.9 million to PCS. For 2012, we project capital expenditures to be approximately $50.0 million. We anticipate that future capital expenditures will be funded by operating activities, marketable securities and existing credit facilities. During 2011 and 2010, we sold $31.6 million and $72.5 million of marketable securities, respectively.
Net cash used in financing activities for the years ending December 31, 2011 and December 25, 2010 was $271.8 million and $168.0 million, respectively. Proceeds from long-term debt were $250.7 million and $579.4 million for the years ending December 31, 2011 and December 25, 2010, respectively. Payments on long-term debt and revolving credit agreements were $253.0 million and $381.5 million for the years ending December 31, 2011 and December 25, 2010, respectively. During 2011, we paid $283.8 million for treasury stock and shares of common stock acquired through our ASR program and open market purchases, compared to $356.5 million during 2010.
Minimum future payments of our contractual obligations at December 31, 2011 are as follows (in millions)
Contractual Obligations (in millions)Total 
Less than
1 Year
 1 - 3 Years 3 - 5 Years 
After
5 Years
Debt$739.4
 $14.7
 $447.4
 $277.3
 $
Interest payments82.0
 31.5
 36.0
 14.5
 
Operating leases60.2
 14.7
 20.4
 10.9
 14.1
Pension and supplemental retirement benefits107.0
 6.7
 25.1
 21.9
 53.3
Total contractual cash obligations$988.6
 $67.6
 $528.9
 $324.6
 $67.4
The above table does not reflect unrecognized tax benefits. Refer to Note 7 to the Consolidated Financial Statements for

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additional discussion on unrecognized tax benefits.

Off-Balance Sheet Arrangements
The conversion features of our 2013 Notes are equity-linked derivatives. As such, we recognize these instruments as off-balance sheet arrangements. Because the conversion features associated with these notes are indexed to our common stock and classified in stockholders' equity, these instruments are not accounted for as derivatives.
Recent Accounting Pronouncements
In May 2011, the FASB issued an accounting standard update to provide guidance on wording changes used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the update provides clarification about the FASB's intent regarding the application of existing fair value measurement requirements. This amendment will become effective for us on January 1, 2012 and will be applied prospectively.
In June 2011, the FASB issued an accounting standard update to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The update also requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. This amendment will become effective for us on January 1, 2012 and will be applied retrospectively.
In September 2011, the FASB issued an accounting standard update related to the goodwill impairment test. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing companies with the option of performing a qualitative assessment to determine whether future impairment testing is necessary. The revised standard is effective for us on January 1, 2012 and will be applied prospectively.
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk
Certain of our financial instruments are subject to market risks, including interest rate risk and foreign currency exchange rates. We generally do not use financial instruments for trading or other speculative purposes.
Interest Rate Risk
We entered into our amended credit agreement on September 23, 2011. Our primary interest rate exposure results from changes in LIBOR or the base rates which are used to determine the applicable interest rates under our term loans and revolving credit facility in the credit agreement.
        Our potential additional interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate would be approximately $7.1 million on a pre-tax basis. The book value of our debt approximates fair value.
        We issued $350.0 million of the 2013 Notes in a private placement in the second quarter of 2006. The 2013 Notes bear an interest rate of 2.25%. The fair market value of the outstanding notes was approximately $339.5 million on December 31, 2011 based on their quoted market value.
Foreign Currency Exchange Rate Risk
        We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our earnings and cash flows. This risk is mitigated by the fact that various foreign operations are principally conducted in their respective local currencies. A portion of the revenue from our foreign operations is denominated in U.S. dollars, with the costs accounted for in their local currencies. Additionally, we have exposure on certain intercompany loans. We attempt to minimize this exposure by using certain financial instruments, for purposes other than trading, in accordance with our overall risk management and our hedge policy. In accordance with our hedge policy, we designate such transactions as hedges.
        During 2011, we utilized foreign exchange contracts, principally to hedge the impact of currency fluctuations on client

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transactions and certain balance sheet items, including intercompany loans. The foreign currency contract outstanding as of December 31, 2011 is a non-designated hedge, and is marked to market with changes in fair value recorded to earnings.

Item 8.    Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Supplementary Data:

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Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report which is included herein.


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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareowners of Charles River Laboratories International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, equity and cash flows present fairly, in all material respects, the financial position of Charles River Laboratories International, Inc. and its subsidiaries at December 31, 2011 and December 25, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts

February 27, 2012

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
 Fiscal Year Ended
 December 31,
2011
 December 25,
2010
 December 26,
2009
Net sales related to products$483,309
 $458,623
 $465,268
Net sales related to services659,338
 674,793
 706,374
Net sales1,142,647
 1,133,416
 1,171,642
Costs and expenses     
Cost of products sold267,966
 252,962
 255,682
Cost of services provided472,439
 495,694
 492,968
Selling, general and administrative198,648
 232,489
 227,663
Goodwill impairment
 305,000
 
Asset impairments7,492
 91,378
 
Termination fee
 30,000
 
Amortization of other intangibles21,796
 24,405
 25,716
Operating income (loss)174,306
 (298,512) 169,613
Other income (expense)     
Interest income1,353
 1,186
 1,712
Interest expense(42,586) (35,279) (21,682)
Other, net(411) (1,477) 1,914
Income (loss) from continuing operations, before income taxes132,662
 (334,082) 151,557
Provision for income taxes17,140
 23
 40,354
Income (loss) from continuing operations, net of income taxes115,522
 (334,105) 111,203
Income (loss) from discontinued operations, net of taxes(5,545) (8,012) 1,399
Net income (loss)109,977
 (342,117) 112,602
Less: Net loss (income) attributable to noncontrolling interests(411) 5,448
 1,839
Net income (loss) attributable to common shareowners$109,566
 $(336,669) $114,441
Earnings (loss) per common share     
Basic:     
Continuing operations attributable to common shareowners$2.26
 $(5.25) $1.73
Discontinued operations$(0.11) $(0.13) $0.02
Net income (loss) attributable to common shareowners$2.16
 $(5.38) $1.75
Diluted:     
Continuing operations attributable to common shareowners$2.24
 $(5.25) $1.72
Discontinued operations$(0.11) $(0.13) $0.02
Net income (loss) attributable to common shareowners$2.14
 $(5.38) $1.74






See Notes to Consolidated Financial Statements.

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
 December 31,
2011
 December 25,
2010
Assets   
Current assets   
Cash and cash equivalents$68,905
 $179,160
Trade receivables, net184,810
 192,972
Inventories92,969
 100,297
Other current assets79,052
 76,603
Current assets of discontinued businesses107
 3,862
Total current assets425,843
 552,894
Property, plant and equipment, net738,030
 752,657
Goodwill, net197,561
 198,438
Other intangibles, net93,437
 121,236
Deferred tax asset44,804
 45,003
Other assets57,659
 62,323
Long-term assets of discontinued businesses986
 822
Total assets$1,558,320
 $1,733,373
Liabilities and Equity   
Current liabilities   
Current portion of long-term debt and capital leases$14,758
 $30,582
Accounts payable34,332
 30,627
Accrued compensation41,602
 48,918
Deferred revenue56,530
 66,905
Accrued liabilities54,377
 59,369
Other current liabilities14,033
 20,095
Current liabilities of discontinued businesses1,165
 3,284
Total current liabilities216,797
 259,780
Long-term debt and capital leases703,187
 670,270
Other long-term liabilities108,451
 114,596
Long-term liabilities of discontinued businesses2,522
 
Total liabilities1,030,957
 1,044,646
Commitments and contingencies
 
Shareowners' equity   
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding
 
Common stock, $0.01 par value; 120,000,000 shares authorized; 78,473,888 issued and 48,875,715 shares outstanding at December 31, 2011 and 77,531,056 issued and 56,441,081 shares outstanding at December 25, 2010785
 775
Capital in excess of par value2,056,921
 1,996,874
Accumulated deficit(465,596) (575,162)
Treasury stock, at cost, 29,598,173 shares and 21,089,975 shares at December 31, 2011 and December 25, 2010, respectively(1,071,120) (768,699)
Accumulated other comprehensive income4,593
 33,635
Total shareowners' equity525,583
 687,423
Noncontrolling interests1,780
 1,304
Total equity527,363
 688,727
Total liabilities and equity$1,558,320
 $1,733,373

See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 Fiscal Year Ended
 December 31,
2011
 December 25,
2010
 December 26,
2009
Cash flows relating to operating activities     
Net income (loss)$109,977
 $(342,117) $112,602
Less: Income (loss) from discontinued operations(5,545) (8,012) 1,399
Income (loss) from continuing operations115,522
 (334,105) 111,203
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:     
Depreciation and amortization85,230
 93,649
 89,962
Amortization of debt issuance costs and discounts20,010
 19,777
 13,798
Goodwill impairment
 305,000
 
Impairment charges7,492
 91,378
 3,460
Pension curtailment
 
 (674)
Non-cash compensation21,706
 25,526
 23,652
Deferred income taxes(8,668) (42,342) 16,845
Other, net(7,436) 1,797
 906
Changes in assets and liabilities:     
Trade receivables7,669
 (5,640) 21,082
Inventories3,766
 1,989
 (4,376)
Other assets505
 (2,131) 1,461
Accounts payable2,208
 71
 (11,349)
Accrued compensation(7,412) 4,482
 (9,545)
Deferred revenue(9,515) (4,209) (14,468)
Accrued liabilities(1,355) 5,501
 (6,671)
Taxes payable and prepaid taxes(13,782) 13,087
 (15,095)
Other liabilities(9,098) (5,594) (4,614)
Net cash provided by operating activities206,842
 168,236
 215,577
Cash flows relating to investing activities     
Acquisition of businesses and assets, net of cash acquired
 
 (83,347)
Capital expenditures(49,143) (42,860) (79,853)
Purchases of investments(24,556) (27,600) (98,991)
Proceeds from sale of investments31,607
 72,464
 50,484
Other, net5,447
 950
 2,623
Net cash provided by (used in) investing activities(36,645) 2,954
 (209,084)
Cash flows relating to financing activities     
Proceeds from long-term debt and revolving credit agreement250,708
 579,372
 18,000
Proceeds from exercises of stock options and warrants20,625
 4,492
 819
Payments on long-term debt, capital lease obligation and revolving credit agreement(252,965) (381,535) (54,130)
Purchase of treasury stock and Accelerated Stock Repurchase Program(283,795) (356,527) (45,897)
Other, net(6,359) (13,697) 231
Net cash used in financing activities(271,786) (167,895) (80,977)
Discontinued operations     
Net cash provided by (used in) operating activities(1,559) 777
 9,467
Net cash provided by investing activities
 2,807
 263
Net cash provided by financing activities
 
 
Net cash provided by (used in) discontinued operations(1,559) 3,584
 9,730
Effect of exchange rate changes on cash and cash equivalents(7,107) (10,293) 3,736
Net change in cash and cash equivalents(110,255) (3,414) (61,018)
Cash and cash equivalents, beginning of period179,160
 182,574
 243,592
Cash and cash equivalents, end of period$68,905
 $179,160
 $182,574
Supplemental cash flow information     
Cash paid for interest$22,231
 $16,140
 $8,104
Cash paid for taxes$29,124
 $22,068
 $27,180
Capitalized interest$298
 $56
 $2,496
See Notes to Consolidated Financial Statements.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
 Total 
Accumulated
(Deficit)
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Common
Stock
 
Capital in
Excess
of Par
 
Treasury
Stock
 
Non-controlling
Interest
Balance at December 27, 2008$1,241,708
 $(352,934) $3,347
 $766
 $2,016,031
 $(425,924) $422
Components of comprehensive income, net of tax:             
Net income112,602
 114,441
         (1,839)
Foreign currency translation adjustment47,248
   47,250
       (2)
Net decrease in unrecognized pension net gain/loss and prior service costs(6,328)   (6,328)       
Unrealized gain on marketable securities768
   768
       
Total comprehensive income154,290
           (1,841)
Tax detriment associated with stock issued under employee compensation plans(2,203)       (2,203)    
Exercise of warrants22
       22
    
Issuance of stock under employee compensation plans797
     5
 792
    
Acquisition of treasury shares(44,603)     
 
 (44,603)  
Stock-based compensation23,813
       23,813
    
Balance at December 26, 2009$1,373,824
 $(238,493) $45,037
 $771
 $2,038,455
 $(470,527) $(1,419)
Components of comprehensive income, net of tax:             
Net loss(342,117) (336,669)         (5,448)
Foreign currency translation adjustment(4,985)   (4,803)       (182)
Net decrease in unrecognized pension net gain/loss and prior service costs(7,452)   (7,452)       
Unrealized gain on marketable securities853
   853
       
Total comprehensive income(353,701)           (5,630)
Dividends paid noncontrolling interest(270)           (270)
Purchase of noncontrolling interest in PCS-China(4,000)       (12,623)   8,623
Tax detriment associated with stock issued under employee compensation plans(926)       (926)    
Issuance of stock under employee compensation plans4,590
     4
 4,586
    
Acquisition of treasury shares(298,172)       
 (298,172)  
Accelerated Stock Repurchase equity instrument(58,355)       (58,355)    
Stock-based compensation25,737
       25,737
    
Balance at December 25, 2010$688,727
 $(575,162) $33,635
 $775
 $1,996,874
 $(768,699) $1,304
Components of comprehensive income, net of tax:             
Net income109,977
 109,566
         411
Foreign currency translation adjustment(13,084)   (13,149)       65
Net decrease in unrecognized pension net gain/loss and prior service costs(15,568)   (15,568)       
Unrealized gain on marketable securities(325)   (325)       
Total comprehensive income81,000
           476
Tax detriment associated with stock issued under employee compensation plans(802)       (802)    
Issuance of stock under employee compensation plans20,527
     10
 20,517
    
Acquisition of treasury shares(269,655)       32,766
 (302,421)  
Accelerated Stock Repurchase equity instrument(14,140)       (14,140)    
Stock-based compensation21,706
       21,706
    
Balance at December 31, 2011$527,363
 $(465,596) $4,593
 $785
 $2,056,921
 $(1,071,120) $1,780
See Notes to Consolidated Financial Statements.

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Charles River Laboratories International, Inc. together with its subsidiaries is a leading global provider of solutions that accelerate the drug discovery and development process including research models and associated services, and outsourced preclinical services. Our fiscal year is the twelve-month period ending the last Saturday in December.
Principles of Consolidation
The consolidated financial statements include all majority-owned subsidiaries. Intercompany accounts, transactions and profits are eliminated.
Reclassifications
Certain reclassifications have been made to prior year statements to conform to the current year presentation. These reclassifications have no impact on period reported net income or cash flow.
Use of Estimates
The financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. Estimates and assumptions are reviewed in an ongoing basis and the effect of revisions is reflected in the consolidated statements in the period in which they are determined to be necessary. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include time deposits and highly liquid investments with original maturities at the purchase date of three months or less.
Trade Receivables
We record trade receivables net of an allowance for doubtful accounts. We establish an allowance for doubtful accounts which we believe is adequate to cover anticipated losses on the collection of all outstanding trade receivable balances. The adequacy of the doubtful account allowance is based on historical information, a review of major client accounts receivable balances and management's assessment of current economic conditions. We reassess the allowance for doubtful accounts each quarter. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Provisions to the allowance for doubtful accounts amount to $426 in 2011, $1,536 in 2010 and $405 in 2009. Write offs to the allowance for doubtful accounts amounted to $1,228 in 2011, $1,541 in 2010 and $243 in 2009.
The composition of net trade receivables is as follows:
 December 31, 2011 December 25, 2010
Client receivables$159,381
 $170,696
Unbilled revenue29,446
 27,095
Total188,827
 197,791
Less allowance for doubtful accounts(4,017) (4,819)
Net trade receivables$184,810
 $192,972
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. We place our cash and cash equivalents in various financial institutions with high credit rating and limit the amount of credit exposure to any one financial institution. Our trade receivables are from clients in the

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

pharmaceutical and biotechnology industries. No single client accounted for more than 5% of our net sales or trade receivables for any period presented.
Marketable Securities
Investments in marketable securities are reported at fair value and consist of time deposits and auction rate securities.
Realized gains and losses on securities are included in earnings and are determined using the specific identification method. Unrealized holding gains and losses on securities classified as available for sale, are excluded from earnings and are reported in accumulated other comprehensive income, net of related tax effects. Unrealized gains and losses on actively traded securities are included in earnings. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income.
As of December 31, 2011, we held $11,051 in auction rate securities which are variable rate debt instruments, which bear interest rates that reset approximately every 35 days. The auction rate securities owned were rated AAA by a major credit rating agency and are either commercially insured or guaranteed by the Federal Family Education Loan Program (FFELP). The underlying securities have contractual maturities which are generally greater than 10 years. The auction rate securities are classified as available for sale and are recorded at fair value. We have classified these investments as long-term consistent with the term of the underlying security which are structured with short term interest rate reset dates of generally 35 days but with contractual maturities that are long term.
The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:
 December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits$5,359
 $
 $
 $5,359
Auction rate securities11,972
 
 (921) 11,051
 $17,331
 $
 $(921) $16,410
 December 25, 2010
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits$9,834
 $
 $
 $9,834
Auction rate securities11,974
 
 (597) 11,377
 $21,808
 $
 $(597) $21,211
Maturities of debt securities were as follows:
 December 31, 2011 December 25, 2010
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due less than one year$5,359
 $5,359
 $9,834
 $9,834
Due after one year through five years
 
 
 
Due after ten years11,972
 11,051
 11,974
 11,377
 $17,331
 $16,410
 $21,808
 $21,211
Inventories
Inventories are stated at the lower of cost, determined principally on the average cost method, or market. The determination of market value involves assessment of numerous factors, including costs to dispose of inventory and estimated selling price. Inventory costs for small models are based upon the average cost to produce specific models and strains. Costs for large models are accumulated in inventory by specific model. Inventory costs for both small and large models are charged to

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

cost of sales in the period the models are sold. Reserves are recorded to reduce the carrying value for inventory determined damaged, obsolete or otherwise unable to be sold.
The composition of inventories is as follows:
 December 31, 2011 December 25, 2010
Raw materials and supplies$13,987
 $13,153
Work in process13,533
 13,869
Finished products65,449
 73,275
Inventories$92,969
 $100,297
Other Current Assets
Other current assets consist of assets we intend to settle within the next twelve months.
 December 31, 2011 December 25, 2010
Prepaid assets$22,828
 $21,434
Deferred tax asset30,894
 31,251
Marketable securities5,359
 9,834
Prepaid income tax19,742
 13,856
Restricted cash229
 228
Other current assets$79,052
 $76,603
Property, Plant and Equipment
Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful life, are recorded at cost, while maintenance and repairs are expensed as incurred. We capitalize interest and period costs on certain capital projects which amounted to $298 and $555 in 2011, $56 and $394 in 2010 and $2,496 and $5,023 in 2009, respectively. We also capitalize internal and external costs incurred during the application development stage of internal use software. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 20 to 40 years; machinery and equipment, 3 to 20 years; furniture and fixtures, 5 to 10 years; vehicles, 3 to 5 years; and leasehold improvements, the shorter of estimated useful life or the lease periods. We begin to depreciate capital projects in the first full month the asset is placed in service.













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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The composition of net property, plant and equipment is as follows:
 December 31, 2011 December 25, 2010
Land$40,517
 $40,409
Buildings696,275
 694,342
Machinery and equipment348,795
 327,353
Leasehold improvements29,975
 26,772
Furniture and fixtures10,663
 10,473
Vehicles5,226
 5,456
Computer hardware and software105,563
 106,073
Construction in progress57,661
 45,465
Total1,294,675
 1,256,343
Less accumulated depreciation(556,645) (503,686)
Net property, plant and equipment$738,030
 $752,657
Depreciation expense for 2011, 2010 and 2009 was $63,435, $69,244 and $64,246, respectively.
Valuation and Impairment of Goodwill and Other Intangible Assets
Valuation of certain long-lived assets including intangible assets and goodwill requires significant judgment. Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed in a business acquisition. A significant portion of the purchase price in our acquisitions is assigned to intangible assets and goodwill. Assigning value to intangible assets requires that we use significant judgment in determining (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 assets will be amortized. We utilize commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of long-lived assets. Typically, key assumptions include projected revenue and expense levels used in establishing the fair value of business acquisitions as well as discount rates based on an analysis of our weighted average cost of capital, adjusted for specific risks associated with the assets. Changes in the initial assumptions could lead to changes in amortization expense recorded in our future financial statements.
As of December 31, 2011, we had recorded goodwill and other intangibles of $290,998 in the consolidated balance sheet. Goodwill and other indefinite-lived intangibles will not be amortized, but will be reviewed for impairment at least annually. Other intangibles with definite lives are amortized over their estimated lives.
We perform a test for goodwill impairment annually and whenever events or circumstances make it likely the fair value of a reporting unit has fallen below its carrying amount to determine if impairment exists. Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine 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. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

The second step of the goodwill impairment process, if required, involves the calculation of an implied fair value of

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customerclient relationships.

        Our annual goodwill impairment assessment has historically been completed at

Valuation and Impairment of Long-Lived Assets
We assess the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resultingproperty, plant and equipment whenever events or changes in a goodwill impairment of $700 million.

        Goodwill will not be amortized, but will be reviewed for impairment at least annually. The results of this year's impairment test are as of a point in time. Ifcircumstances indicate that the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could


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impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 27, 2008, we had recorded goodwill and other intangibles of $593.7 million in the consolidated balance sheet.

Contract research services create a risk of liability.

        As a contract research organization we face a range of potential liabilities which may include:

        We attempt to mitigate these risks through a variety of methods. Nonetheless, it is impossible to completely eradicate such risks.

        In our RMS business, we mitigate these risks to the best of our abilities through our regimen of animal testing, quarantine, and veterinary staff vigilance, through which we seek to control the exposure of animal related disease or infections.

        In our PCS business, we attempt to reduce these risks by contract provisions entitling us to be indemnified or entitling us to a limitation of liability; insurance maintained by our clients, investigators, and by us; and various regulatory requirements we must follow in connection with our business.

        In both our RMS and PCS businesses, contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or in the event that a party who must indemnify us does not fulfill its indemnification obligations or which is beyond the level of our insurance coverage. Furthermore, there can be no assurance that we will be able to maintain such insurance coverage on terms acceptable to us.

We may be unable to build out our facilities as anticipated.

        To support our customers' demand for drug discovery and development services, including increased strategic focus on outsourcing services and programs, we had engaged in a substantial capacity expansion program over the past two years with $227 million spent on capital expenditures in


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2007 and $197 million in 2008. We estimated $100-$120 million allocated for capital expenditures in 2009, as major expansions complete and capacity comes on-line. Included in our 2009 capital plan are the following: continuing fit-out work at our new PCS facility in Nevada, dedicated space initiatives at our new PCS facility in Massachusetts, expansions at our Canada and Scotland PCS facilities, and the remaining work for completing the construction of our new PCS facility in China. We cannot assure you that any or all of these facilities, or any particular phase of such facilities, will be constructed on the anticipated timetable or on budget. Any material delay in bringing these facilities on-line, or substantial increase in costs to complete these facilities, could materially and adversely affect us. In addition, the costs of these capacity expansion programs may have an adverse impact on our operating margins, particularly within our PCS business.

If we are unable to attract suitable participants for our Phase I clinical trials, our business might suffer.

        The Phase I clinical research studies we run rely upon the ready accessibility and willing participation of subjects. Participants generally include people from the communities in which the studies are conducted, which such communities to date have provided a substantial pool of potential subjects for research studies. Our Phase I clinical research activities could be adversely affected if we were unable to attract suitable and willing participants on a consistent basis.

New technologies may be developed, validated and increasingly used in biomedical research that could reduce demand for some of our products and services.

        For many years, groups within the scientific and research communities have attempted to develop models, methods and systems that would replace or supplement the use of living animals as test subjects in biomedical research. Some companies have developed techniques in these areas, including vaccine development, that may have scientific merit. In addition, technological improvements to existing or new processes, such as imaging technology, could result in a refinement in the number of animal research models necessary to conduct the required research. It is our strategy to participate in some fashion with any non-animal test method or other method that reduces the need for animal research models as it becomes validated as a research model alternative or adjunct in our markets. For instance, we acquired imaging capabilities in 2008 through our acquisition of MIR Preclinical. However, we generally may not be successfulrecoverable. Factors we consider important which 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 commercializing these methods if developed, and salesstrategy or profits from these methods may not offset reduced sales or profits from research models. Alternative research methods could decreaseoperations that negatively affect the need for research models, andutilization of our long-lived assets.
Should we determine that the carrying value of long-lived tangible assets may not be ablerecoverable, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to develop new products effectively orbe commensurate with the risk inherent in a timely manner to replace any lost sales.

The drug discovery and development industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.

        The drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue. Accordingly, we face potential patent infringement suits by companies that have patents for similar products and methods used inour current business or other suits alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management's attention from other business concerns, whether we win or lose. If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, including treble damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.

model. We may not be able to successfully develop and market new services.

        We may seek to develop and market new services that complement or expand our existing business or service offerings. If we are unable to develop new services and/or create demand for those newly developed services, our future business, results of operations, financial condition, and cash flows could be adversely affected.


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Our debt level could adversely affect our business and growth prospects.

        At December 27, 2008, we had approximately $575.8 million of debt. This debt could have significant adverse effects on our business, including making it more difficult for us to obtain additional financing on favorable terms; requiring us to dedicate a substantial portion of our cash flows from operations to the repayment of debt and the interest on this debt; limiting our ability to capitalize on significant business opportunities; and making us more vulnerable to rising interest rates. For additional information regarding our debt, please see Note 4 included in the Notes to Consolidated Financial Statements elsewhere in this Form 10-K.

If we are not successful in selecting and integrating the businesses and technologies we acquire, our business may suffer.

        During the past seven years, we have expanded our business through several acquisitions. We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions. For instance, in 2008, we expensed over $1.3 million for costs incurred for potential deals that we decided to abandon prior to signing definitive agreements.

        Even if completed, acquisitions and alliances involve numerous risks which may include:

        In the event that an acquired business or technology or an alliance does not meet our expectations, our results of operations may be adversely affected.

We could experience a breach of the confidentiality of the information we hold or of the security of our computer systems.

        We operate large and complex computer systems that contain significant amounts of customer data. As a routine element of our business, we collect, analyze and retain substantial amounts of data pertaining to the preclinical and the clinical studies we conduct for our customers. Unauthorized third parties could attempt to gain entry to such computer systems for the purpose of stealing data or disrupting the systems. We believe that we have taken adequate measures to protect them from intrusion, but in the event that our efforts are unsuccessful we could suffer significant harm. Our contracts with our customers typically contain provisions that require us to keep confidential the


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information generated from these studies. In the event the confidentiality of such information was compromised, we could suffer significant harm.

We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our business.

        Our success depends to a significant extent on the continued services of our senior management and other members of management. James C. Foster, our Chief Executive Officer since 1992 and Chairman since 2000, has held various positions with us for over 30 years. We have no employment agreement with Mr. Foster or other members of our management. If Mr. Foster or other members of management do not continue in their present positions, our business may suffer.

        Because of the specialized scientific nature of our business, we are highly dependent upon attracting and retaining qualified scientific, technical and managerial personnel. While we have an excellent record of employee retention, there is still strong competition for qualified personnel in the veterinary, pharmaceutical and biotechnology fields. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, could harm our business.

Our quarterly operating results may vary, which could negatively affect the market price of our common stock.

        Our results of operations in any quarter may vary from quarter to quarter and are influenced by such factors as:

        We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results. Nonetheless, fluctuations in our quarterly operating results could negatively affect the market price of our common stock

Item 1B.    Unresolved Staff Comments

        There are no unresolved comments to be reported in response to Item 1B.

Item 2.    Properties

        We own or lease the land and buildings where we have facilities. We own large facilities (facilities over 50,000 square feet) for our PCS businesses in the United States, Canada, Scotland and Ireland, and lease large facilities in the United States, Canada and China. We own large RMS facilities in the United Kingdom, France, Germany, Japan, Canada and the United States. None of our leases are individually material to our business operations and many have an option to renew. We believe that we will be able to successfully renew expiring leases on terms satisfactory to us. We believe that our facilities are adequate for our operations and that suitable additional space will be available when


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needed. For additional information see Note 9 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

Item 3.    Legal Proceedings

        We are not a party to any material legal proceedings, other than ordinary routine litigation incidental to our business that is not material to our business or financial condition.

Item 4.    Submission of Matters to a Vote of Security Holders

        Not applicable.


Supplementary Item. Executive Officers of the Registrant(pursuant to Instruction 3 to Item 401(b) of Regulation S-K).

        Below are the names, ages and principal occupations of each our current executive officers. All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal.

        Thomas F. Ackerman, age 54, joined us in 1988 with over eleven years of combined public accounting and international finance experience. He was named Controller, North America in 1992 and became our Vice President and Chief Financial Officer in 1996. In 1999, he was named a Senior Vice President and in 2005 he was named a Corporate Executive Vice President. He is currently responsible for overseeing our Accounting and Finance Department and several other corporate staff departments. Prior to joining us, Mr. Ackerman was an accountant at Arthur Andersen & Co.

        Christophe Berthoux, age 46, rejoined us in February 2005 as General Manager of our clinical services business. Following the sale of our Phase II-IV clinical services business in August 2006, Dr. Berthoux was named Corporate Senior Vice President, U.S. Research Models and Services and In Vitro Products and Services, and in 2008 he was named our Corporate Executive Vice President, Global Sales and Marketing and Chief Commercial Officer. Previously, from 1990 to early 2004, Dr. Berthoux held a variety of managerial positions with the Company, including Corporate Vice President and head of European Research Models and Services.

        James C. Foster, age 58, joined us in 1976 as General Counsel. Over the past 30 years, Mr. Foster has held various staff and managerial positions, and was named our President in 1991, Chief Executive Officer in 1992 and our Chairman in 2000.

        Nancy A. Gillett, age 53, joined us in 1999 with the acquisition of Sierra Biomedical. Dr. Gillett has 22 years of experience as an ACVP board certified pathologist and scientific manager. In 1999, she became Senior Vice President and General Manager of our Sierra Biomedical division, and subsequently held a variety of managerial positions, including President and General Manager of Sierra Biomedical and Corporate Vice President and General Manager of Drug Discovery and Development (the predecessor to our Preclinical Services business segment). In 2004, Dr. Gillett was named Corporate Senior Vice President and President, Global Preclinical Services, and in 2006 she became a Corporate Executive Vice President.

        David P. Johst, age 47, joined us in 1991 as Corporate Counsel and was named Vice President, Human Resources in 1995. He became Vice President, Human Resources and Administration in 1996, a Senior Vice President in 1999, and a Corporate Executive Vice President in 2005. He currently serves as the Company's Chief Administrative Officer and is responsible for overseeing our Human Resources department, our Consulting and Staffing Services business unit and several other corporate staff departments. Prior to joining the Company, Mr. Johst was an attorney in the Corporate Department at Hale and Dorr.


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        Real H. Renaud, age 62, joined us in 1964 and has over 40 years of research models production and related management experience. In 1986, Mr. Renaud became Vice President of Production, with responsibility for overseeing the Company's North American small animal operations, and was named Vice President, Worldwide Production in 1990. Mr. Renaud became Vice President and General Manager, European and North American Animal Operations in 1996, following a two-year European assignment during which he provided direct oversight to our European operations. In 1999, he became a Senior Vice President and in 2003, Mr. Renaud became Corporate Executive Vice President and President Global Research Models and Services.


PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock began trading on the New York Stock Exchange on June 23, 2000 under the symbol "CRL." The following table sets forth for the periods indicated below the high and low sales prices for our common stock.

2009
 High Low 

First quarter (through February 13, 2009)

 $29.87 $23.14 


2008
 High Low 

First quarter

 $69.04 $53.73 

Second quarter

  65.95  55.14 

Third quarter

  69.19  57.84 

Fourth quarter

  58.00  19.92 


2007
 High Low 

First quarter

 $47.64 $42.71 

Second quarter

  54.04  45.30 

Third quarter

  56.64  50.15 

Fourth quarter

  68.00  55.11 

        There were no equity securities that were not registered under the Securities Act of 1933, as amended, sold by the Company during the fiscal year ended December 27, 2008.

Shareholders

        As of February 13, 2009 there were approximately 572 registered shareholders of the outstanding shares of common stock.

Dividends

        We have not declared or paid any cash dividends on shares of our common stock in the past two years and we do not intend to pay cash dividends in the foreseeable future. We currently intend to retain any earnings to finance future operations and expansion. Some of the restrictive covenants contained in our revolving credit agreement and term loan agreements limit our ability to pay dividends.


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Issuer Purchases of Equity Securities

        The following table provides information relating to the Company's purchases of shares of its common stock during the quarter ended December 27, 2008.

 
 Total Number
of Shares
Purchased
 Average Price
Paid per Share
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
 

Sep. 28, 2008—Oct. 25, 2008

  209,825 $46.91  209,308 $202,065,830 

Oct. 26, 2008—Nov. 22, 2008

  220,671 $28.49  220,000 $195,803,701 

Nov. 23, 2008—Dec. 27, 2008

  370,000 $23.42  370,000 $187,139,993 
            

Total

  800,496     799,308    
            

        The Board of Directors of the Company has authorized a share repurchase program, originally authorized on July 27, 2005 and subsequently amended on October 26, 2005, May 9, 2006, August 1, 2007 and July 24, 2008 to acquire up to a total of $600.0 million of common stock. The program does not have a fixed expiration date.

        During the quarter ended December 27, 2008, the Company repurchased 799,308 shares of common stock for approximately $24.7 million. The timing and amount of any future repurchases will depend on market conditions and corporate considerations. Additionally, the Company's Incentive Plans permit the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. Accordingly, during the quarter ended December 27, 2008, the Company acquired 1,188 shares as a result of such withholdings.

Securities Authorized for Issuance Under Equity Compensation Plans

        The following table summarizes, as of December 27, 2008, the number of options issued under the Company's stock option plans and the number of options available for future issuance under these plans.

Plan Category
 Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
 Weighted-average
exercise price of
outstanding
options, warrants
and rights
 Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
 
 (a)
 (b)
 (c)
 

Equity compensation plan approved by security holders:

          
 

Charles River 2000 Incentive Plan

  3,459,396 $41.28  174,618 
 

Charles River 1999 Management Incentive Plan

  30,754 $14.52  15,617 
 

Inveresk 2002 Stock Option Plan

  136,305 $28.00   
 

2007 Incentive Plan

  915,765(1)$58.25  4,399,402 

Equity compensation plans not approved by security holders

       
         

Total

  4,542,220(2)$43.93  4,589,637(3)
         

(1)
Includes shares payable under our performance awards granted in fiscal year 2008 under our 2007 Incentive Plan, utilizing 100% target award level of 61,100 shares; actual awards to be determined in February 2009 may differ from this number. The weighted-average exercise prices in column (b) do not take these performance awards into account.

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(2)
None of the options outstanding under any equity compensation plan of the Company include rights to any dividend equivalents (i.e., a right to receive from the Company a payment commensurate to dividend payments received by holders of common stock or other equity instruments of the Company).

(3)
On March 22, 2007, the Board of Directors determined that, upon approval of the 2007 Incentive Plan, no future awards would be granted under the preexisting equity compensation plans, including the Charles River 1999 Management Incentive Plan and the Charles River 2000 Incentive Plan. Shareholder approval was obtained on May 8, 2007. Previously, on February 28, 2005, the Board of Directors terminated the Inveresk 2002 Stock Option Plan to the extent that no further awards would be granted thereunder.

        The following table provides additional information regarding the aggregate issuances under the Company's existing equity compensation plans as of December 27, 2008:

Category
 Number of securities
outstanding
 Weighted average
exercise price
 Weighted
average term
 
 
 (a)
 (b)
 (c)
 

Total number of restricted shares outstanding(1)

  716,394 $   

Total number of options outstanding(2)

  4,542,220 $43.93  5.02 

(1)
For purposes of this table, only unvested restricted stock as of December 27, 2008 is included. Also for purposes of this table only, the total includes 46,465 restricted stock units granted to certain employees of the Company outside of the United States.

(2)
Includes shares payable under our performance awards granted in fiscal year 2008 under our 2007 Incentive Plan, utilizing target award level of 61,100 shares; actual awards determined in February 2009 differ from this number. The weighted-average exercise prices in column (b) do not take these performance awards into account.

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Comparision of 5-Year Cumulative Total Return

Among Charles River Laboratories International, Inc., The S&P 500 Index and The NASDAQ Pharmaceutical Index.

        The following stock performance graph compares the annual percentage change in the Company's cumulative total shareholder return on its Common Stock during a period commencing on December 27, 2003 and ending on December 27, 2008 (as measured by dividing (1) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the Company's share price at the end and the beginning of the measurement period; by (2) the share price at the beginning of the measurement period) with the cumulative total return of the S&P 500 Index and the NASDAQ Pharmaceutical Index during such period. The Company has not paid any dividends on the Common Stock, and no dividends are included in the representation of the Company's performance. The stock price performance on the graph below is not necessarily indicative of future price performance. The graph is not "soliciting material," is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. Information used in the graph was obtained from Standards & Poor's Institutional Market Services, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

 
 Dec. 27,
2003
 Dec. 25,
2004
 Dec. 31,
2005
 Dec. 30,
2006
 Dec. 29,
2007
 Dec. 27,
2008
 

Charles River Laboratories International, Inc.

  100.00  138.50  126.06  128.68  196.73  74.44 

S&P 500

  100.00  110.88  116.33  134.70  142.10  89.53 

NASDAQ Pharmaceutical

  100.00  110.22  111.87  114.89  106.37  97.32 

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Item 6.    Selected Consolidated Financial Data

        The following selected financial data should be read in conjunction with Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and consolidated financial statements and notes thereto contained in Item 8., "Financial Statements and Supplementary Data" of this report.

 
 Fiscal Year(1) 
 
 2008 2007 2006 2005 2004 
 
 (dollars in thousands)
 

Statement of Income Data:

                

Net sales

 $1,343,493 $1,230,626 $1,058,385 $993,328 $724,221 

Cost of products sold and services provided

  832,784  752,435  651,778  603,624  435,499 

Selling, general and administrative expenses

  230,159  217,491  180,795  157,999  116,879 

Goodwill impairment

  700,000         

Amortization of goodwill and intangibles

  30,312  33,509  37,639  47,011  13,857 
            

Operating income (loss)

  (449,762) 227,191  188,173  184,694  157,986 

Interest income

  8,691  9,683  6,836  3,695  3,262 

Interest expense

  (14,009) (18,004) (19,426) (24,324) (11,718)

Other, net

  (5,930) (1,448) 981  (177) 937 
            

Income (loss) before income taxes, minority interests and earnings from equity investments

  (461,010) 217,422  176,564  163,888  150,467 

Provision for income taxes

  61,944  59,400  49,738  16,261  60,159 
            

Income (loss) before minority interests and earnings from equity investments

  (522,954) 158,022  126,826  147,627  90,308 

Minority interests

  687  (470) (1,605) (1,838) (1,577)
            

Income (loss) from continuing operations

  (522,267) 157,552  125,221  145,789  88,731 

Income (loss) from discontinued businesses, net of tax

  424  (3,146) (181,004) (3,790) 1,061 
            

Net income (loss)

 $(521,843)$154,406 $(55,783)$141,999 $89,792 
            

Common Share Data:

                

Earnings (loss) per common share

                

Basic

                
 

Continuing operations

 $(7.76)$2.35 $1.82 $2.09 $1.79 
 

Discontinued operations

 $0.01 $(0.05)$(2.63)$(0.05)$0.02 
 

Net income (loss)

 $(7.76)$2.31 $(0.81)$2.04 $1.81 

Diluted

                
 

Continuing operations

 $(7.76)$2.29 $1.79 $2.02 $1.65 
 

Discontinued operations

 $0.01 $(0.05)$(2.59)$(0.05)$0.02 
 

Net income (loss)

 $(7.76)$2.25 $(0.80)$1.96 $1.68 

Other Data:

                

Depreciation and amortization

 $91,183 $86,379 $82,586 $87,935 $42,063 

Capital expenditures

  197,081  227,036  181,747  94,520  44,735 

Balance Sheet Data (at end of period):

                

Cash and cash equivalents

 $243,592 $225,449 $175,380 $114,821 $207,566 

Working capital

  317,141  305,336  241,762  107,910  161,191 

Goodwill, net

  457,578  1,120,540  1,119,309  1,097,590  1,102,511 

Total assets

  2,159,918  2,805,537  2,557,544  2,538,209  2,626,835 

Total debt

  576,098  510,049  572,054  296,090  686,844 

Total shareholders' equity

  1,199,025  1,860,467  1,595,211  1,827,013  1,472,505 

(1)
Our fiscal year consists of 12 months ending on the last Saturday on, or prior to, December 31.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        We are a leading global provider of solutions that advance the drug discovery and development process, including research models and associated services and outsourced preclinical services. We provide our products and services to global pharmaceutical companies, biotechnology companies, as well as government agencies, and leading hospitals and academic institutions throughout the world in order to bring drugs to market faster and more efficiently. Our broad portfolio of products and services enables our customers to reduce costs, increase speed to market and enhance their productivity and effectiveness in drug discovery and development. We have built upon our core competency of laboratory animal medicine and science (research model technologies) to develop a diverse and growing portfolio of regulatory compliant preclinical services which address drug discovery and development in the preclinical arena. We have been in business for over 60 years and currently operate approximately 70 facilities in 17 countries worldwide.

        Our sales growth in 2008 was driven by continued spending by major pharmaceuticals, biotechnology companies and academic institutions on our global products and services, which aid in their development of new drugs and products, partially offset by the impact of the slower economy and world wide credit crisis. We expect the long-term drivers for our business as a whole primarily to emerge from our customers' continued demand for research models and services and regulatory compliant preclinical services, as well as increased strategic focus on outsourcing. During the second half of 2008, demand for our services decelerated at a greater rate than products impacting our growth rate. We believe this was primarily due to emerging factors which include: business restructuring and reprioritization of pipelines by pharmaceutical and biotechnology clients, which led to significant and accelerating study slippage and delays; lack of funding for biotechnology companies; and tight cost controls which resulted in more measured spending and some pricing pressure.

        Our 2009 expectations reflect softer market demand, particularly for preclinical services which will continue at least until mid-year. We believe that our clients will continue to outsource drug development services as they strive to improve the efficiency of their drug pipelines. For additional discussion of the factors that we believe are influencing outsourcing demand from our customers, please see the section entitled "Our Strategy" included elsewhere in this Form 10-K.

        We are using this period of market uncertainty to streamline our operations, and have implemented additional actions to improve our operating efficiency. These actions include initiating a hiring freeze, a salary freeze for a substantial percentage of our workforce, including all incentive-eligible employees, continued tight control of discretionary spending and implementing a headcount reduction affecting 3% of our total workforce (predominately in our PCS business segment) and the closure of our Arkansas facility. As a result of these cost-saving actions, the Company will take a one-time charge in 2009 of approximately $9.0 million. The Company expects that these actions will reduce costs by approximately $20.0 million in 2009, with an annual run-rate of approximately $25.0 million. We also are pursuing strategic alternatives for our clinical Phase I operation in Scotland, with an intention to divest these operations.

        Our capital expenditures totaled $197.1 million in 2008 and our planned capital expenditures in 2009 are in the range of $100 million to $120 million. As a result of the factors which are affecting our sales growth, we evaluated our expansion plans and determined that we have sufficient capacity to accommodate our clients' current demand. We expect to open the Sherbrooke (Canada) facility in the first half of 2009, in order to relieve capacity constraints at our Montreal facility. We have delayed the expansion of our Ohio facility until 2010, when we believe the industry will be better positioned to absorb additional capacity.

        In addition to internally generated organic growth, our business strategy includes strategic "bolt-on" acquisitions that complement our business, increase the rate of our growth or geographically


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expand our existing services, as evidenced by our acquisitions of NewLab BioQuality AG and MIR Preclinical Services in 2008.

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook were not as strong as anticipated, coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill, resulting in a goodwill impairment of $700 million.

        Total net sales in 2008 were $1.3 billion, an increase of 9.2% over 2007 with demand decelerating during the second half of the year. The sales increase was due primarily to increased customer demand and higher pricing in Research Models and Services (RMS), strong large model safety testing and certain specialty toxicology sales partially offset by slower demand for PCS due to our clients' restructuring and reprioritization efforts, particularly in Europe. The effect of foreign currency translation added 1.3% to sales growth. Our gross margin decreased to 38.0% of net sales compared to 38.9% of net sales in 2007, due primarily to lower sales growth.

        Our operating loss for 2008 was $449.8 million compared to income of $227.2 million for 2007 primarily due to the goodwill impairment of $700 million in 2008.

        Net loss from continuing operations was $522.3 million in 2008 compared to income of $157.6 million in 2007. Diluted loss per share from continuing operations for 2008 was $7.76 compared to earnings per share of $2.29 in 2007.

        We report two segments: RMS and PCS, which reflect the manner in which our operating units are managed.

        Our RMS segment, which represented 49.1% of net sales in 2008, includes sales of research models, genetically engineered models and services (GEMS), research animal diagnostics, discovery and imaging services, consulting and staffing services, vaccine support and in vitro technology (primarily endotoxin testing). Although demand decelerated during the second half of the year, net sales for this segment increased 14.3% compared to 2007 due to increased small model sales in the United States and Europe, increased consulting and staffing services and strong in vitro sales. Favorable foreign currency translation increased the net sales gain by 3.7%. We experienced decreases in both the RMS gross margin and operating margin compared to last year (to 43.1% from 43.2% and to 30.1% from 30.7%, respectively) due mainly to the impact of the greater proportion of services in the sales mix and the second-quarter increase in operating expenses in Japan.

        Our PCS segment, which represented 50.9% of net sales in 2008, includes services required to take a drug through the development process including discovery support, toxicology, pathology, biopharmaceutical, bioanalysis, pharmacokinetics and drug metabolism services, as well as Phase I clinical trials. Sales for this segment increased 4.6% over 2007, however, demand decelerated during the second half of the year. Sales were driven by continuing demand for large model safety testing and certain specialty toxicology studies as well as the acquisition of NewLab BioQuality AG, partially offset by more measured pharmaceutical spending due to our clients' restructuring and reprioritization efforts, particularly in Europe. Unfavorable foreign currency decreased sales growth by 0.9%. We experienced a decrease in the PCS gross margin during 2008 to 33.1% from 35.0% in 2007, due mainly to the lower sales growth and additional costs associated with the transition to the new preclinical facility in Nevada and start-up costs in China. As a result of the goodwill impairment, the 2008 operating margin was a negative 87.3% compared to 15.8% in 2007.


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Net Income

        Net loss for 2008 was $521.8 million compared to income of $154.4 million in 2007.

Critical Accounting Policies and Estimates

        The preparation of these financial statements requires management to use judgment when making assumptions that are involved in preparing estimates that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Some of those estimates can be complex and require management to make estimates about the future and actual results could differ from those estimates. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For any given estimate or assumption made by management, there may also be other estimates or assumptions that are reasonable.

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the consolidated financial statements of Charles River Laboratories International, Inc. which have been prepared in accordance with accounting principles generally accepted in the United States. Management believes the following critical accounting policies are most affected by significant judgments and estimates used in the preparation of our consolidated financial statements. The following summary should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-K. We believe the following critical accounting policies and estimates reflect our more significant judgments and estimates than usual in the preparation of our consolidated financial statement:

        Goodwill, Other Intangible Assets    We have intangible assets, including goodwill and other identifiable and indefinite-lived acquired intangibles on our balance sheet due to our acquisitions of businesses. The initial identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition involve use of management judgments and estimates. These estimates are based on, among other factors, input from accredited valuation consultants, reviews of projected future income cash flows and statutory regulations. The use of alternative estimates and assumptions might have increased or decreased the estimated fair value of our goodwill and other intangible assets that could potentially result in a different impact to our results of operations.

        We perform an annual impairment analysis of goodwill to determine if impairment exists. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine 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. Determining


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the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basisprices for our assessment. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

        The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unitassets, as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships.

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted in the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700 million.

        Goodwill will not be amortized, but will be reviewed for impairment at least annually. The results of this year's impairment test are as of a point in time. If the future growth and operating results of our business are not as strong as anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value in subsequent years. To the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to our earnings. Such an impairment charge could materially and adversely affect our operating results and financial condition. As of December 27, 2008, we had recorded goodwill and other intangibles of $593.7 million in the consolidated balance sheet.

        Revenue Recognition    We recognize revenue on product and services sales. We record product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectability is reasonably assured. Recognition of service revenue is primarily based on the completion of agreed-upon service procedures including rate specified contracts and fixed fee contracts. Revenue of agreed-upon rate contracts is recognized as services are performed, based on rates specified in the contract. Revenue of fixed fee contracts is recognized as services are performed in relation to estimated costs to complete procedures specified by the customers in the form of study protocols. Our fixed fee service contracts, which are utilized mainly in our Preclinical segment, vary in term from a few days to greater than a year, with the majority of such contracts having a term of less than six months. Management reviews the costs incurred and services provided to date on these contracts in relation to the total estimated effort to complete the contract. As a result of the reviews, revisions in estimated effort to complete the contract are reflected in the period in which the change became known. Theseappropriate. Significant judgments and estimates are not expected to result in a change that would materially affect our reported results. In some cases, a portion of the contract fee is paid at the time the study is initiated. These advances are recorded as deferred revenue and recognized as revenue as services are performed. Conversely, in some cases, revenue is recorded based on the level of service


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performed in advance of billing the customer with the offset to unbilled receivable. As of December 27, 2008, we had recorded unbilled revenue of $51.8 million and deferred revenue of $86.7 million in our consolidated balance sheet based on the difference between the estimated level of services performed and the billing arrangements defined by our service contracts.

        Pension Plan Accounting    As of December 27, 2008, we had a pension liability of $32.2 million. The actuarial computations require the use of assumptions to estimate the total benefits ultimately payable to employees and allocate this cost to the service periods. The key assumptions include the discount rate, the expected return on plan assets and expected future rate of salary increases. In addition, our actuaries determine the expense or liability of the plan using other assumptions for future experiences such as withdrawal and mortality rate. The key assumptions used to calculate pension costs are determined and reviewed annually by management after consulting with outside investment advisors and actuaries. The assumed discount rate, which is intended to be the actual rate at which benefits could effectively be settled, is adjusted based on the change in the long-term bond yield as of the measurement date. As of December 27, 2008, the weighted-average discount rate for our pension plans was 5.74%.

        The assumed expected return on plan assets is the average return expected on the funds invested or to be invested to provide future benefits to pension plan participants. This includes considering the assets allocation and expected returns likely to be earned over the life of the plan. If the actual return is different from the assumed expected return in plan assets, the difference would be amortized over a period of approximately 15 to 20 years. The estimated effect of a 1.0% change in the expected rate of return would increase or decrease pension expense by $1.3 million.

        During 2008, our Board of Directors voted to freeze the accrual of benefits under our U.S. pension plan effective April 30, 2008. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," we recorded a curtailment gain of $3.3 million in 2008.

        Stock-based Compensation    We recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options and restricted stock awards based on estimated fair values. Accordingly, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award and is recognized as expense on a straight-line basis over the requisite service period which is generally the vesting period. During the year ended December 27, 2008, we recognized $24.3 million of stock compensation expense associated with stock options, restricted stock and performance based stock awards.

        We estimate the fair value of stock options using the Black-Scholes option-pricing model and the fair value of our restricted stock awards and restricted stock units based on the quoted market price of our common stock. We recognize the associated compensation expense on a straight-line basis over the vesting periods of the awards, net of estimated forfeitures. Forfeiture rates are estimated based on historical pre-vesting forfeitures and are updated on vesting date to reflect actual forfeitures.

        Estimating the fair value for stock options requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free interest rates. The expected volatility rates are estimated based on historical volatilities of our common stock over a period of time that approximates the expected term of the options. The expected term represents the average time that options are expected to be outstanding and is estimated based on the historical exercise and post-vesting cancellation patterns of our stock options. Expected dividends are estimated based on our dividend history as well as our current projections. The risk-free interest rate is based on the market yield of U.S. Treasury securities for periods approximating the expected terms of the options in effect at the time of grant. These assumptions are updated on at least an annual basis or when there is a significant change in circumstances that could affect these assumptions.


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        The fair value of option based stock awards granted during 2008 was estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:

 
 December 27, 2008 

Expected life (in years)

  4.5 

Expected volatility

  24.0%

Risk-free interest rate

  2.76%

Expected dividend yield

  0.0%

Weighted-average option grant date fair value

 $14.85 

        Income Taxes    As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxesfuture cash flows, including the selection of appropriate discount rates and other assumptions. Changes in each of the jurisdictions in which we operate. This process involves estimating our current tax expense and assessing temporary and permanent differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance whichand assumptions could impact our financial position or results of operations.

        As of December 27, 2008, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $192.9 million. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. Federal and state taxes and withholding taxes payable to the various foreign countries. It is not practicable to estimate the amount of additional tax that might be payable on this undistributed foreign income.

        We are a worldwide business and operate in various tax jurisdictions where tax laws and tax rates are subject to change given the political and economic climate in these countries. We report and pay income taxes based upon operational results and applicable law. Our tax provision is based upon enacted tax rates in effect to determine both the current and deferred tax position. Any significant fluctuation in tax rates or changes in tax laws could cause our estimate of taxes to change resulting in either increases or decreases in our effective tax rate.

        Effective December 31, 2006, we adopted the provisions of FIN 48 "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109," which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on the derecognition of previously recognized income tax items, measurement, classification, interest and penalties, accounting in interim periods and financial statement disclosure. Under FIN 48, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in our financial statements from such positions are measured on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

        Due to our size and the number of tax jurisdictions within which we conduct our global business operations, we are subject to income tax audits on a regular basis. As a result, we have tax reserves which are attributable to potential tax obligations around the world. We believe we have sufficiently provided for all audit exposures and assessments. Settlements of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in an increase or decrease to our effective tax rate.


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Segment Operations

        The following tables show the net sales and the percentage contribution of each of our reportable segments for the past three years. They also show cost of products sold and services provided, selling, general and administrative expenses, amortization of goodwill and intangibles and operating income by segment and as percentages of their respective segment net sales.

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 
 
 (dollars in millions)
 

Net sales:

          
 

Research models and services

 $659.9 $577.2 $515.0 
 

Preclinical services

  683.6  653.4  543.4 

Cost of products sold and services provided:

          
 

Research models and services

 $375.3 $327.9 $300.9 
 

Preclinical services

  457.5  424.5  350.9 

Goodwill impairment

          
 

Research models and services

 $ $ $ 
 

Preclinical services

  700.0     

Selling, general and administrative expenses:

          
 

Research models and services

 $83.3 $70.3 $65.9 
 

Preclinical services

  94.8  93.7  73.0 
 

Unallocated corporate overhead

  52.1  53.5  41.9 

Amortization of other intangibles:

          
 

Research models and services

 $2.6 $1.9 $0.4 
 

Preclinical services

  27.7  31.6  37.2 

Operating income (loss):

          
 

Research models and services

 $198.7 $177.1 $147.8 
 

Preclinical services

  (596.4) 103.6  82.3 
 

Unallocated corporate overhead

  (52.1) (53.5) (41.9)


 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Net sales:

          
 

Research models and services

  49.1% 46.9% 48.7%
 

Preclinical services

  50.9% 53.1% 51.3%

Cost of products sold and services provided:

          
 

Research models and services

  56.9% 56.8% 58.4%
 

Preclinical services

  66.9% 65.0% 64.6%

Goodwill impairment

          
 

Research models and services

       
 

Preclinical services

  102.4%    

Selling, general and administrative expenses:

          
 

Research models and services

  12.6% 12.2% 12.8%
 

Preclinical services

  13.9% 14.3% 13.4%
 

Unallocated corporate overhead

       

Amortization of other intangibles:

          
 

Research models and services

  0.4% 0.3% 0.1%
 

Preclinical services

  4.1% 4.8% 6.8%

Operating income:

          
 

Research models and services

  30.1% 30.7% 28.7%
 

Preclinical services

  (87.3)% 15.9% 15.2%
 

Unallocated corporate overhead

  (3.9)% (4.3)% (4.0)%

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        In our consolidated statements of income, we provide a breakdown of net sales and cost of sales between net products and services. Such information is reported irrespective of the business segment from which the sales were generated.

Results of Operations

        The following table summarizes historical results of operations as a percentage of net sales for the periods shown:

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Net sales

  100.0% 100.0% 100.0%

Cost of products sold and services provided

  62.0% 61.1% 61.6%

Selling, general and administrative expenses

  17.1% 17.7% 17.0%

Goodwill impairment

  52.1%    

Amortization of other intangibles

  2.3% 2.7% 3.6%

Operating income (loss)

  (33.5)% 18.5% 17.8%

Interest income

  0.6% 0.8% 0.6%

Interest expense

  1.0% 1.5% 1.8%

Provision for income taxes

  4.6% 4.8% 4.7%

Minority interests

  0.1% % 0.2%

Income (loss) from continuing operations

  (38.9)% 12.8% 11.8%

Fiscal 2008 Compared to Fiscal 2007

        Net Sales.    Net sales in 2008 were $1,343.5 million, an increase of $112.9 million, or 9.2%, from $1,230.6 million in 2007.

        Research Models and Services.    In 2008, net sales for our RMS segment were $659.9 million, an increase of $82.7 million, or 14.3%, from $577.2 million in 2007, due to increased small model sales in the United States and Europe, increased consulting and staffing services and strong in vitro sales. Favorable foreign currency translation increased sales growth by approximately 3.7%. RMS sales increased due to pricing and unit volume increases in both models, including large models, and services. The RMS sales growth was driven by increases in basic research and biotechnology spending, which drove greater demand for our products and services.

        Preclinical Services.    In 2008, net sales for our PCS segment were $683.6 million, an increase of $30.2 million, or 4.6%, compared to $653.4 million in 2007. Sales were driven by continuing demand for large model safety testing and certain specialty toxicology studies as well as the acquisition of NewLab BioQuality AG, partially offset by more measured pharmaceutical spending due to our clients' restructuring and reprioritization efforts, particularly in Europe. Unfavorable foreign currency had a negative impact on sales growth by 0.9%.

        Cost of Products Sold and Services Provided.    Cost of products sold and services provided in 2008 was $832.8 million, an increase of $80.4 million, or 10.7%, from $752.4 million in 2007. Cost of products sold and services provided in 2008 was 62.0% of net sales, compared to 61.1% in 2007.

        Research Models and Services.    Cost of products sold and services provided for RMS in 2008 was $375.3 million, an increase of $47.5 million, or 14.5%, compared to $327.8 million in 2007. Cost of products sold and services provided as a percentage of net sales in 2008 was 56.9% compared to 56.8% in 2007. The greater facility utilization was the result of the increased sales during the quarter, partially offset by an unfavorable product mix due to greater growth in the lower margin service area.

        Preclinical Services.    Cost of services provided for the PCS segment in 2008 was $457.5 million, an increase of $32.9 million, or 7.8%, compared to $424.6 million in 2007. Cost of services provided as a


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percentage of net sales was 66.9% in 2008, compared to 65.0% in 2007. The increase in cost of services provided as a percentage of net sales was primarily due to the impact of lower sales growth and the start-up and transition costs of PCS Nevada facilities.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses in 2008 were $230.2 million, an increase of $12.7 million, or 5.8%, from $217.5 million in 2007. Selling, general and administrative expenses in 2008 were 17.1% of net sales compared to 17.7% of net sales in 2007.

        Research Models and Services.    Selling, general and administrative expenses for RMS in 2008 were $83.3 million, an increase of $13.0 million, or 18.5%, compared to $70.3 million in 2007. Selling, general and administrative expenses increased as a percentage of sales to 12.6% in 2008 from 12.2% in 2007 due mainly to higher operating costs.

        Preclinical Services.    Selling, general and administrative expenses for the PCS segment in 2008 were $94.8 million, an increase of $1.1 million, or 1.2%, compared to $93.7 million in 2007. Selling, general and administrative expenses in 2008 decreased to 13.9% of net sales compared to 14.3% in 2007.

        Unallocated Corporate Overhead.    Unallocated corporate overhead, which consists of various costs primarily related to activities centered at our corporate headquarters, such as compensation (including stock-based compensation), information systems, compliance and facilities expenses associated with our corporate, administration and professional services functions was $52.1 million in 2008, compared to $53.5 million in 2007. The decrease in unallocated corporate overhead in 2008 was primarily due to the gain associated with the curtailment of the U.S. pension plan and slower growth in health care costs.

        Amortization of Other Intangibles.    Amortization of other intangibles in 2008 was $30.3 million, a decrease of $3.2 million, from $33.5 million in 2007.

        Research Models and Services.    In 2008, amortization of other intangibles for our RMS segment was $2.6 million, an increase of $0.7 million from $1.9 million in 2007.

        Preclinical Services.    In 2008, amortization of other intangibles for our PCS segment was $27.7 million, a decrease of $3.9 million from $31.6 million in 2007.

        Goodwill Impairment.    Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance and outlook was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008. Our analysis resulted inmaterially affect the determination that the fair value our PCS business was less than its carrying value. The second step of the goodwill impairment test involved us calculating the implied goodwill for the PCS business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700 million.

        Operating Income.    Operating loss in 2008 was $449.8 million, compared to operating income of $227.2 million in 2007.

        Research Models and Services.    In 2008, operating income for our RMS segment was $198.7 million, an increase of $21.5 million, or 12.2%, from $177.2 million in 2007. Operating income as a percentage of net sales in 2008 was 30.1%, compared to 30.7% in 2007. The decrease in operating income as a percentage of sales was primarily due to increased operating expenses offset by improved utilization due to the higher sales volume.

        Preclinical Services.    In 2008, operating loss for our PCS segment was $596.4 million, compared to operating income of $103.5 million in 2007. The decrease in operating income as a percentage of net sales was primarily due to goodwill impairment as well as to the start-up and transition costs for our


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PCS Nevada facilities partially offset by improved operating efficiency as a result of higher sales and lower amortization costs.

        Interest Expense.    Interest expense in 2008 was $14.0 million, compared to $18.0 million in 2007, due primarily to lower outstanding debt and lower interest rates.

        Interest Income.    Interest income in 2008 was $8.7 million compared to $9.7 million in 2007.

        Income Taxes.    Income tax expense in 2008 was $61.9 million, an increase of $2.5 million compared to $59.4 million in 2007. Our effective tax rate in 2008 was (13.4)% which was adversely impacted by the goodwill impairment by (40.5)%. Our 2007 effective tax rate was 27.3%. The change from 2007 to 2008 effective tax rate was primarily due to the goodwill impairment.

        Net Income(Loss).    Net loss in 2008 was $521.8 million compared to net income of $154.4 million in 2007.

Fiscal 2007 Compared to Fiscal 2006

        Net Sales.    Net sales in 2007 were $1,230.6 million, an increase of $172.2 million, or 16.3%, from $1,058.4 million in 2006.

        Research Models and Services.    In 2007, net sales from our RMS segment were $577.2 million, an increase of $62.2 million, or 12.1%, from $515.0 million in 2006. Favorable foreign currency translation increased our net sales gain by 2.9%. RMS sales increased due to pricing and unit volume increases in both models and services. The RMS sales growth was driven by increases in basic research and biotechnology spending, which drove greater demand for our products and services, partially offset by lower sales growth in research models in Japan.

        Preclinical Services.    In 2007, net sales from our Preclinical Services segment were $653.4 million, an increase of $110.0 million, or 20.2%, compared to $543.4 million in 2006. The increase was primarily due to the increased customer demand for toxicology and other specialty preclinical services, reflecting increased customer outsourcing along with the full year impact of the acquisition of Northwest Kinetics. Favorable foreign currency increased sales growth by 2.9%.

        Cost of Products Sold and Services Provided.    Cost of products sold and services provided in 2007 was $752.4 million, an increase of $100.6 million, or 15.4%, from $651.8 million in 2006. Cost of products sold and services provided in 2007 was 61.1% of net sales, compared to 61.6% in 2006.

        Research Models and Services.    Cost of products sold and services provided for RMS in 2007 was $327.9 million, an increase of $27.0 million, or 9.0%, compared to $300.9 million in 2006. Cost of products sold and services provided in 2007 decreased to 56.8% of net sales compared to 58.4% of net sales in 2006. The favorable cost of products sold and services provided as a percentage of sales was due to greater facility utilization as a result of increased sales.

        Preclinical Services.    Cost of services provided for the Preclinical Services segment in 2007 was $424.5 million, an increase of $73.6 million, or 21.0%, compared to $350.9 million in 2006. Cost of services provided as a percentage of net sales was 65.0% in 2007, compared to 64.6% in 2006. The increase in cost of services provided as a percentage of net sales was primarily due to the impact of increased costs related to the transition to our new Massachusetts facility and the foreign exchange impact of the strengthening Canadian dollar, partially offset by improved performance at certain PCS locations.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses in 2007 were $217.5 million, an increase of $36.7 million, or 20.3%, from $180.8 million in 2006. Selling, general and administrative expenses in 2007 were 17.7% of net sales compared to 17.1% of net sales in 2006. The increase as a percentage of sales was due primarily to increases in unallocated corporate overhead and charges related to the accelerated exit of our Worcester facility.


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        Research Models and Services.    Selling, general and administrative expenses for RMS in 2007 were $70.3 million, an increase of $4.4 million, or 6.8%, compared to $65.9 million in 2006. Selling, general and administrative expenses decreased as a percentage of sales to 12.2% in 2007 from 12.8% in 2006 due mainly to greater economies of scale.

        Preclinical Services.    Selling, general and administrative expenses for the Preclinical Services segment in 2007 were $93.7 million, an increase of $20.7 million, or 28.3%, compared to $73.0 million in 2006. Selling, general and administrative expenses in 2007 increased to 14.3% of net sales, compared to 13.4% of net sales in 2006 due to charges related to the accelerated exit of our Worcester facility.

        Unallocated Corporate Overhead.    Unallocated corporate overhead, which consists of various corporate expenses including those associated with stock based compensation, pension and departments such as senior executives, corporate accounting, legal, tax, treasury, global informational technology, human resources and investor relations, was $53.5 million in 2007, compared to $41.9 million in 2006. The increase in unallocated corporate overhead in 2007 was due to increased equity based compensation, higher information technology costs and higher bonus accruals.

        Amortization of Other Intangibles.    Amortization of other intangibles in 2007 was $33.5 million, a decrease of $4.1 million, from $37.6 million in 2006. The decreased amortization was primarily due to reduced amortization related to the acquisition of Inveresk.

        Research Models and Services.    In 2007, amortization of other intangibles for our RMS segment was $1.9 million, an increase of $1.5 million from $0.4 million in 2006. The increased amortization was primarily due to the acquisition of the remaining 15% of the equity of Charles River Laboratories Japan, Inc., from the minority interest partner in the first quarter of 2007.

        Preclinical Services.    In 2007, amortization of other intangibles for our Preclinical Services segment was $31.6 million, a decrease of $5.6 million from $37.2 million in 2006. The decrease in amortization of other intangibles was primarily due to reduced amortization related to the Inveresk acquisition.

        Operating Income.    Operating income in 2007 was $227.2 million, an increase of $39.0 million, or 20.7%, from $188.2 million in 2006. Operating income in 2007 was 18.5% of net sales, compared to 17.8% of net sales in 2006. The increase as a percentage of sales was due primarily to increased operating income margins in RMS along with lower amortization costs.

        Research Models and Services.    In 2007, operating income for our RMS segment was $177.2 million, an increase of $29.4 million, or 19.9%, from $147.8 million in 2006. Operating income as a percentage of net sales in 2007 was 30.7%, compared to 28.7% in 2006. The increase in operating income as a percentage of sales was primarily due to improved capacity utilization resulting from the higher sales volume.

        Preclinical Services.    In 2007, operating income for our Preclinical Services segment was $103.5 million, an increase of $21.2 million, or 25.8%, from $82.3 million in 2006. Operating income as a percentage of net sales increased to 15.8%, compared to 15.2% of net sales in 2006. The increase in operating income as a percentage of net sales was primarily due to higher sales which resulted in improved operating efficiency and lower amortization costs, partially offset by the start-up and transition costs for our PCS Massachusetts facilities and the foreign exchange impact of the strengthening Canadian dollar.

        Interest Income.    Interest income in 2007 was $9.7 million, compared to $6.8 million in 2006. The $2.9 million increase was primarily due to increased funds invested.


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        Interest Expense.    Interest expense in 2007 was $18.0 million, compared to $19.4 million in 2006. The $1.4 million decrease was primarily due to debt repayment.

        Income Taxes.    Income tax expense for 2007 was $59.4 million, an increase of $9.7 million compared to $49.7 million in 2006. Our effective tax rate for 2007 was 27.3% compared to 28.2% for 2006. The decline in effective tax rate in 2007 was primarily due to benefits recorded in 2007 related to tax law changes in the United Kingdom and Germany and benefits generated due to mix of earnings.

        Income from Continuing Operations.    Income from continuing operations in 2007 was $157.6 million, an increase of $32.4 million from $125.2 million in 2006.

        Loss from Discontinued Operations.    The loss from discontinued operations in 2007 was $3.1 million. The loss from discontinued operations for 2006 was $181.0 million which included a goodwill impairment of $129.2 million, the tax expense of $37.8 million related to the sale of the Phase II-IV Clinical business, as well as results from our ISS business.

        Net Income (Loss).    Net income in 2007 was $154.4 million compared to a net loss of $55.8 million in 2006.

Liquidity and Capital Resources

        The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in our condensed consolidated statements of cash flows.

        Our principal sources of liquidity have been our cash flow from operations, the convertible debt offering, our marketable securities and our revolving line of credit arrangements.

        We had marketable securities of $19.0 million and $63.4 million as of December 27, 2008 and December 29, 2007, respectively. The decline was primarily due to management's decision to move funds into cash equivalent type investments. As of December 27, 2008 and December 29, 2007, we had $19.0 million and $38.2 million invested in auction rate securities rated AAA by a major credit rating agency. Our auction rate securities are guaranteed by U.S. federal agencies. These auction rate securities provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, usually every 7 or 35 days. The overall credit concerns in the capital markets as well as the failed auctions of these securities have impacted our ability to liquidate these investments. The auctions for the securities we own continue to fail, the investment may not be readily convertible to cash until a future auction of these investments is successful. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and other sources of cash, we do not anticipate the current lack of liquidity on these investments will affect our ability to operate our business as usual.

        In 2006, we issued $350.0 million of 2.25% Convertible Senior Notes (the 2013 notes) due in 2013. At December 27, 2008, the fair value of our outstanding 2013 Notes was approximately $311.1 based on their quoted market value. During the fourth quarter of 2008 no conversion triggers were met.

        Concurrently with the sale of the 2013 Notes, we entered into convertible note hedge transactions with respect to our obligation to deliver common stock under the 2013 Notes. The convertible note hedges give us the right to receive, for no additional consideration, the numbers of shares of common stock that we are obligated to deliver upon conversion of the 2013 Notes (subject to antidilution adjustments substantially identical to those in the 2013 Notes), and expire on June 15, 2013. The aggregate cost of these convertible note hedges was $98.3 million.

        Separately and concurrently with the pricing of the 2013 Notes, we issued warrants for approximately 7.2 million shares of our common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at our option) with a value equal to the appreciation in the price of our shares above $59.925, and expire between September 13, 2013 and


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January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants were $65.4 million.

        From our economic perspective, the cumulative impact of the purchase of the convertible note hedges and the sale of the warrants increases the effective conversion price of the 2013 Notes from $48.94 to $59.925 per share.

        We currently have a $428 million credit agreement and a $50 million credit agreement. At December 27, 2008, we had term loans of $134.9 million and $90.0 million under our revolving credit facility outstanding. As of December 27, 2008, we had $104.4 million available to borrow under our revolving credit agreements. As of December 27, 2008, we were compliant with all financial covenants specified in the credit agreements. For additional information regarding the 2013 Notes, the $428 million credit agreement and the $50 million credit agreement, please see Note 4 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

        During the first quarter of 2009, the Company plans to repatriate approximately $90.0 million of the earnings of its non-U.S. subsidiaries. As such, the Company has changed its permanent reinvestment assertion with regards to these unremitted earnings. As a result of the change in assertion, the Company recorded a tax benefit primarily due to foreign tax credits in the fourth quarter of 2008 of $7.2 million, of which $4.0 million was reflected in the effective tax rate and $3.2 million was reflected in the Cumulative Translation Account. The proceeds from the repatriation will be used for general corporate purposes. The Company continues to maintain its permanent reinvestment assertion with regards to the remaining unremitted earnings of its non-U.S. subsidiaries.

        Our Board of Directors has authorized a share repurchase program, originally authorized on July 27, 2005 and subsequently amended on October 26, 2005, May 9, 2006, August 1, 2007 and July 24, 2008 to acquire up to a total of $600.0 million of common stock. The program does not have a fixed expiration date. In order to facilitate these share repurchases, the Company has entered into Rule 10b5-1 Purchase Plans. As of December 27, 2008, approximately $187.1 million remained authorized for share repurchases.

        Cash and cash equivalents totaled $243.6 million at December 27, 2008 compared to $225.4 million at December 29, 2007.

        Net cash provided by operating activities in 2008 and 2007 was $279.5 million and $288.4 million, respectively. The decrease in cash provided by operations was primarily due to a decrease in deferred revenue. Our days sales outstanding (DSO) of 40 days as of December 27, 2008 increased from 35 days at December 29, 2007. Our DSO includes deferred revenue as an offset to accounts receivable in the calculation.

        Net cash used in investing activities in 2008 and 2007 was $227.2 million and $200.8 million, respectively. Our capital expenditures in 2008 were $197.1 million of which $60.5 million was related to RMS and $136.6 million to PCS. For 2009 we project capital expenditures to be in the range of $100 to $120 million. We anticipate that future capital expenditures will be funded by operating activities and existing credit facilities.

        Net cash used in financing activities in 2008 was $17.3 million and $46.4 million in 2007. During 2008, we purchased $115.1 million of treasury stock and repaid debt of $36.5 million partially offset by proceeds from exercises of employee stock options and warrants of $28.5 million and proceeds from debt of $102.0 million. During 2007, we purchased $41.6 million of treasury stock and repaid $64.5 million of debt, partially offset by proceeds from exercises of employee stock options of $54.0 million.


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        Minimum future payments of our contractual obligations at December 27, 2008 are as follows:

Contractual Obligations
 Total Less than
1 Year
 1—3 Years 3—5 Years After
5 Years
 

Debt

 $575.8 $35.4 $190.4 $350.0 $ 

Interest payments

  45.6  12.8  28.8  4.0   

Operating leases

  98.3  21.4  24.8  17.4  34.7 

Pension

  94.5  9.4  9.7  28.7  46.7 

Construction commitments

  27.4  27.4       
            
 

Total contractual cash obligations

 $841.6 $106.4 $253.7 $400.1 $81.4 
            

        The above table does not reflect unrecognized tax benefits of $28.7 million. Refer to Note 6 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.

Off-Balance Sheet Arrangements

        The conversion features of our 2013 Notes are equity-linked derivatives. As such, we recognize these instruments as off-balance sheet arrangements. The conversion features associated with these notes would be accounted for as derivative instruments, except that they are indexed to our common stock and classified in stockholders' equity. Therefore, these instruments meet the scope of exception of paragraph 11(a) of SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities," and are accordingly not accounted for as derivatives for purposes of SFAS No. 133.

Recent Accounting Pronouncements

        In June, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (FSP EITF 03-6-1) which clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the calculation of basic earnings per share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those years. Once effective, all prior-period earnings per share data presented must be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of the FSP. Early application is not permitted. Upon adoption of FSP EITF 03-6-1, we expect to revise prior period earning per share from continuing operations as follows: decrease 2008 basic and diluted loss per share by $0.08; reduce 2007 basic and diluted earning per share by $0.02 and reduce 2006 basic earning per share by $0.02 and diluted earning per share from continuing operations by $0.01.

        In May 2008, the FASB issued FSP No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP 14-1). This FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectively to all periods presented. We estimate that upon adoption of the provisions of FSP 14-1, $261,508 of the total proceeds from our debt will be allocated to the liability component, which represents the estimated fair value of similar debt instruments without the conversion option as of the date of issuance. The remaining $88,492 will be allocated to the equity component. The debt discount of $88,492 will be amortized to interest expense over the seven year period from June 2006 to June 2013, the expected life of the instrument. Additionally, upon adoption, approximately $1,903 of deferred financing costs capitalized at the time of issuance will be reclassified to equity as equity issuance costs and will not be amortized to interest expense.


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        In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities" (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement is not expected to have an impact on our consolidated financial statements.

        In February 2008, the FASB issued FSP 157-1 and 157-2 that (1) partially deferred the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain leasing transactions from the scope of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008 and will be applied prospectively. The provisions of SFAS 157 will not have a material impact on our consolidated financial statements.

        In February 2008, the FASB issued FSP FAS 140-3: "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" (FSP 140-3). FSP 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing. This FSP presumes that an initial transfer for a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under Statement 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140. This FSP is not expected to have an impact on our consolidated financial statements.

        In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS 141(R)) and No. 160, "Noncontrolling Interests in Consolidated Financial Statements" (SFAS 160). SFAS 141(R) and SFAS 160 introduce significant changes in the accounting for and reporting of business acquisitions and noncontrolling interests in a subsidiary. SFAS 141(R) continues the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. SFAS 141(R) changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. In addition, SFAS 141(R) will impact the annual goodwill impairment test associated with acquisitions that close both before and after its effective date. SFAS 141(R) amends SFAS 109 changing the accounting for adjustments to deferred tax asset valuation allowances and income tax uncertainties related to acquisitions that close both before and after its effective date, generally requiring adjustments to be reflected in income tax expense. SFAS 141(R) applies prospectively to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. An entity may not apply SFAS 141(R) before that date. The adoption of SFAS 141(R) and SFAS 160 will impact our consolidated financial statements.

Item 7A.    Quantitative and Qualitative Disclosure about Market Risk

        Certain of our financial instruments are subject to market risks, including interest rate risk and foreign currency exchange rates. We generally do not use financial instruments for trading or other speculative purposes.

Interest Rate Risk

        The fair value of our marketable securities is subject to interest rate risk and will fall in value if market interest rates increase. If market rates were to increase immediately and uniformly by 100 basis points from levels at December 27, 2008, then the fair value of the portfolio would decline by approximately $0.2 million.

        We have entered into two credit agreements, the $428 million credit agreement and the $50 million credit agreement. Our primary interest rate exposure results from changes in LIBOR or the


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base rates which are used to determine the applicable interest rates under our term loans in the $428 million credit agreement and in the $50 million agreement and our revolving credit facilities. Our potential additional interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate would be approximately $3.3 million on a pre-tax basis.

        We issued $350 million of the 2013 Notes in a private placement in the second quarter of 2006. The convertible senior debenture notes bear an interest rate of 2.25%. The fair market value of the outstanding notes was $311.1 million on December 27, 2008.

Foreign Currency Exchange Rate Risk

        We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our earnings and cash flows. This risk is mitigated by the fact that various foreign operations are principally conducted in their respective local currencies. However, a portion of our foreign operations' revenue is denominated in U.S. dollars, with the costs accounted for in their local currencies. We attempt to minimize this exposure by using certain financial instruments, for purposes other than trading, in accordance with our overall risk management and our hedge policy. In accordance with our hedge policy, we designate certain transactions as hedges as set forth in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

        During 2008, we utilized foreign exchange contracts, principally to hedge the impact of currency fluctuations on customer transactions and certain balance sheet items. No foreign exchange contracts were outstanding on December 27, 2008.


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Item 8.    Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Consolidated Financial Statements:

Report of Management

50

Report of Independent Registered Public Accounting Firm

51

Consolidated Statements of Income for the years ended December 27, 2008, December 29, 2007 and December 30, 2006

52

Consolidated Balance Sheets as of December 27, 2008 and December 29, 2007

53

Consolidated Statements of Cash Flows for the years ended December 27, 2008, December 29, 2007 and December 30, 2006

54

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 27, 2008, December 29, 2007 and December 30, 2006

55

Notes to Consolidated Financial Statements

56

Supplementary Data:

Quarterly Information (Unaudited)

100

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Management's Annual Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment our management concluded that, as of December 27, 2008, our internal control over financial reporting was effective based on those criteria.

        The effectiveness of our internal control over financial reporting as of December 27, 2008 has been audited by PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report which is included herein.


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Charles River Laboratories International, Inc:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Charles River Laboratories International, Inc and its subsidiaries at December 27, 2008 and December 29, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2008, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for uncertain tax positions as of December 31, 2006.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 23, 2009


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Net sales related to products

 $471,741 $415,247 $374,832 

Net sales related to services

  871,752  815,379  683,553 
        

Net sales

  1,343,493  1,230,626  1,058,385 

Costs and expenses

          
 

Cost of products sold

  252,938  225,088  211,008 
 

Cost of services provided

  579,846  527,347  440,770 
 

Selling, general and administrative

  230,159  217,491  180,795 
 

Goodwill impairment

  700,000     
 

Amortization of other intangibles

  30,312  33,509  37,639 
        

Operating income (loss)

  (449,762) 227,191  188,173 

Other income (expense)

          
 

Interest income

  8,691  9,683  6,836 
 

Interest expense

  (14,009) (18,004) (19,426)
 

Other, net

  (5,930) (1,448) 981 
        

Income (loss) before income taxes and minority interests

  (461,010) 217,422  176,564 

Provision for income taxes

  61,944  59,400  49,738 
        

Income (loss) before minority interests

  (522,954) 158,022  126,826 

Minority interests

  687  (470) (1,605)
        

Income (loss) from continuing operations

  (522,267) 157,552  125,221 

Loss from discontinued operations, net of tax

  424  (3,146) (181,004)
        

Net income (loss)

 $(521,843)$154,406 $(55,783)
        

Earnings (loss) per common share

          
 

Basic:

          
  

Continuing operations

 $(7.76)$2.35 $1.82 
  

Discontinued operations

 $0.01 $(0.05)$(2.63)
  

Net income (loss)

 $(7.76)$2.31 $(0.81)
 

Diluted:

          
  

Continuing operations

 $(7.76)$2.29 $1.79 
  

Discontinued operations

 $0.01 $(0.05)$(2.59)
  

Net income (loss)

 $(7.76)$2.25 $(0.80)

See Notes to Consolidated Financial Statements.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 
 December 27,
2008
 December 29,
2007
 

Assets

       
 

Current assets

       
  

Cash and cash equivalents

 $243,592 $225,449 
  

Trade receivables, net

  210,214  213,908 
  

Inventories

  96,882  88,023 
  

Other current assets

  67,218  79,477 
  

Current assets of discontinued operations

  233  1,007 
      
   

Total current assets

  618,139  607,864 
 

Property, plant and equipment, net

  828,921  748,793 
 

Goodwill, net

  457,578  1,120,540 
 

Other intangibles, net

  136,100  148,905 
 

Deferred tax asset

  62,935  89,255 
 

Other assets

  52,058  85,993 
 

Long term assets of discontinued operations

  4,187  4,187 
      
   

Total assets

 $2,159,918 $2,805,537 
      

Liabilities and Shareholders' Equity

       
 

Current liabilities

       
  

Current portion of long-term debt and capital leases

 $35,452 $25,051 
  

Accounts payable

  40,517  36,715 
  

Accrued compensation

  54,870  53,359 
  

Deferred revenue

  86,707  102,021 
  

Accrued liabilities

  60,741  61,366 
  

Other current liabilities

  22,676  23,268 
  

Current liabilities of discontinued operations

  35  748 
      
   

Total current liabilities

  300,998  302,528 
 

Long-term debt and capital leases

  540,646  484,998 
 

Other long-term liabilities

  118,827  154,044 
      
   

Total liabilities

  960,471  941,570 
 

Commitments and contingencies

       
 

Minority interests

  422  3,500 
 

Shareholders' equity

       
  

Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding

     
  

Common stock, $0.01 par value; 120,000,000 shares authorized; 76,609,779 issued and 67,052,884 shares outstanding at December 27, 2008 and 75,427,649 issued and 68,135,324 shares outstanding at December 29, 2007

  766  754 
  

Capital in excess of par value

  1,965,150  1,906,997 
  

Retained (deficit) earnings

  (344,314) 177,529 
  

Treasury stock, at cost, 9,556,895 shares and 7,292,325 shares at December 27, 2008 and December 29, 2007, respectively

  (425,924) (310,372)
  

Accumulated other comprehensive income

  3,347  85,559 
      
   

Total shareholders' equity

  1,199,025  1,860,467 
      
   

Total liabilities and shareholders' equity

 $2,159,918 $2,805,537 
      

See Notes to Consolidated Financial Statements.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Cash flows relating to operating activities

          
 

Net income (loss)

 $(521,843)$154,406 $(55,783)
 

Less: Income (loss) from discontinued operations

  424  (3,146) (181,004)
        
  

Income (loss) from continuing operations

  (522,267) 157,552  125,221 

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:

          
 

Depreciation and amortization

  91,183  86,379  82,586 
 

Goodwill impairment

  700,000     
 

Gain on pension curtailment

  (3,276)    
 

Non-cash compensation

  24,333  26,017  21,090 
 

Deferred income taxes

  12,671  (9,786) 4,035 
 

Other, net

  9,019  9,056  1,659 

Changes in assets and liabilities:

          
 

Trade receivables

  (8,532) (492) (18,961)
 

Inventories

  (9,670) (12,988) (6,475)
 

Other assets

  6,421  (9,057) (19,139)
 

Accounts payable

  8,177  2,076  (2,586)
 

Accrued compensation

  1,248  9,445  (414)
 

Deferred revenue

  (15,314) 8,736  (2,967)
 

Accrued liabilities

  6,717  3,442  (8,493)
 

Other liabilities

  (21,245) 18,045  417 
        
  

Net cash provided by operating activities

  279,465  288,425  175,973 
        

Cash flows relating to investing activities

          
 

Acquisition of businesses, net of cash acquired

  (69,151) (11,584) (30,862)
 

Capital expenditures

  (197,081) (227,036) (181,747)
 

Purchases of marketable securities

  (6,439) (299,408) (207,900)
 

Proceeds from sale of marketable securities

  45,444  334,546  122,981 
 

Other, net

  51  2,668  130 
        
  

Net cash used in investing activities

  (227,176) (200,814) (297,398)
        

Cash flows relating to financing activities

          
 

Proceeds from long-term debt and revolving credit agreement

  102,000    440,300 
 

Payments on long-term debt, capital lease obligation and revolving credit agreement

  (36,540) (64,545) (170,842)
 

Purchase of call options

      (98,110)
 

Proceeds from exercises of stock options and warrants

  28,490  53,977  22,900 
 

Proceeds from issuance of warrants

      65,423 
 

Excess tax benefit from exercises of employee stock options

  3,788  7,150  6,540 
 

Purchase of treasury stock

  (115,058) (41,617) (249,958)
 

Other, net

    (1,392) (10,685)
        
  

Net cash provided by (used in) financing activities

  (17,320) (46,427) 5,568 
        

Discontinued operations

          
  

Net cash provided by (used in) operating activities

  484  (4,177) (11,603)
  

Net cash provided by investing activities

    30  189,406 
  

Net cash used in financing activities

      (182)
        
  

Net cash provided by (used in) discontinued operations

  484  (4,147) 177,621 
        

Effect of exchange rate changes on cash and cash equivalents

  (17,310) 13,032  (1,205)
        

Net change in cash and cash equivalents

  18,143  50,069  60,559 

Cash and cash equivalents, beginning of period

  225,449  175,380  114,821 
        

Cash and cash equivalents, end of period

 $243,592 $225,449 $175,380 
        

Supplemental cash flow information

          
 

Cash paid for interest

 $14,186 $20,110 $22,992 
 

Cash paid for taxes

 $43,157 $38,448 $93,109 

Supplemental non-cash investing activities information

          
 

Capitalized interest

 $2,486 $4,716 $4,107 

See Notes to Consolidated Financial Statements.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(dollars in thousands)

 
 Total Accumulated
(Deficit)
Earnings
 Accumulated
Other
Comprehensive
Income
 Common
Stock
 Capital in
Excess
of Par
 Treasury
Stock
 Unearned
Compensation
 

Balance at December 31, 2005

 $1,827,013 $78,906 $8,540 $724 $1,777,625 $(17,997)$(20,785)
 

Components of comprehensive income, net of tax:

                      
  

Net (loss)

  (55,783) (55,783)          
  

Foreign currency translation adjustment

  12,335    12,335         
  

Minimum pension liability adjustment

  (195)   (195)        
  

Unrealized gain on marketable securities

  11    11         
                      
   

Total comprehensive income

  (43,632)            
                      
  

Adjustment to initially apply SFAS No. 158, net of tax

  480    480         
 

Tax benefit associated with stock issued under employee compensation plans

  5,714        5,714     
 

Exercise of warrants

  79        79     
 

Issuance of stock under employee compensation plans

  22,821      10  22,811     
 

Acquisition of treasury shares

  (249,958)          (249,958)  
 

Stock-based compensation

  21,866        21,866     
 

Purchase of hedge on convertible debt

  (98,110)       (98,110)    
 

Issuance of warrants

  65,423        65,423     
 

Deferred tax assets

  43,515        43,515     
 

Reversal of unearned compensation upon adoption of SFAS No. 123(R)

           (20,785)   20,785 
                

Balance at December 30, 2006

 $1,595,211 $23,123 $21,171 $734 $1,818,138 $(267,955)$ 
 

Components of comprehensive income, net of tax:

                      
  

Net income

  154,406  154,406           
  

Foreign currency translation adjustment

  57,872    57,872         
  

Net increase in unrecognized pension net gain/loss and prior service costs

  6,564    6,564         
  

Unrealized loss on marketable securities

  (48)   (48)        
                      
   

Total comprehensive income

  218,794             
                      
 

Tax benefit associated with stock issued under employee compensation plans

  8,727        8,727     
 

Exercise of warrants

  14        14     
 

Issuance of stock under employee compensation plans

  54,121      20  54,101     
 

Acquisition of treasury shares

  (42,417)         (42,417)  
 

Stock-based compensation

  26,017        26,017     
                

Balance at December 29, 2007

 $1,860,467 $177,529 $85,559 $754 $1,906,997 $(310,372)$ 
 

Components of comprehensive income, net of tax:

                      
  

Net (loss)

  (521,843) (521,843)          
  

Foreign currency translation adjustment

  (72,588)   (72,588)        
  

Net decrease in unrecognized pension net gain/loss and prior service costs

  (7,457)   (7,457)        
  

Unrealized loss on marketable securities

  (2,167)   (2,167)        
                      
   

Total comprehensive income

  (604,055)            
                      
 

Tax benefit associated with stock issued under employee compensation plans

  4,769        4,769     
 

Exercise of warrants

  741        741      
 

Deferred taxes

  731        731     
 

Issuance of stock under employee compensation plans

  27,591      12  27,579     
 

Acquisition of treasury shares

  (115,552)         (115,552)  
 

Stock-based compensation

  24,333        24,333     
                

Balance at December 27, 2008

 $1,199,025 $(344,314)$3,347 $766 $1,965,150 $(425,924)$ 
                

See Notes to Consolidated Financial Statements.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies

        Charles River Laboratories International, Inc. together with its subsidiaries is a leading global provider of solutions that accelerate the drug discovery and development process including research models and associated services, and outsourced preclinical services. Our fiscal year is the twelve-month period ending the last Saturday in December.

        The consolidated financial statements include all majority-owned subsidiaries. Intercompany accounts, transactions and profits are eliminated. Results for majority-owned subsidiaries are recorded on a one-month lag basis. There were no material transactions or events for these subsidiaries between the reporting date and our fiscal year-end date.

        Certain reclassifications have been made to prior year statements to conform to the current year presentation. These reclassifications have no impact on period reported net income or cash flow.

        The financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. Actual results could differ from those estimates.

        Cash equivalents include time deposits and highly liquid investments with remaining maturities at the purchase date of three months or less.

        We record trade receivables net of an allowance for doubtful accounts. We establish an allowance for doubtful accounts which we believe is adequate to cover anticipated losses on the collection of all outstanding trade receivable balances. The adequacy of the doubtful account allowance is based on historical information, a review of major customer accounts receivable balances and management's assessment of current economic conditions. We reassess the allowance for doubtful accounts each quarter. Provisions to the allowance for doubtful accounts amount to $1,179 in 2008 and $494 in 2007. Write offs to the allowance for doubtful accounts amounted to $288 in 2008 and $421 in 2007.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

        The composition of net trade receivables is as follows:

 
 December 27,
2008
 December 29,
2007
 

Customer receivables

 $162,518 $165,057 

Unbilled revenue

  51,798  52,033 
      

Total

  214,316  217,090 

Less allowance for doubtful accounts

  (4,102) (3,182)
      
 

Net trade receivables

 $210,214 $213,908 
      

        Financial instruments that potentially subject us to concentrations of credit risk consist primarily of trade receivables from customers in the pharmaceutical and biotechnology industries. No single customer accounted for more than 5% of our net sales.

        We account for our investment in marketable securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investments in marketable securities are reported at fair value and consist of corporate debt securities and government securities and obligations which are classified as securities available for sale and mutual funds which are classified as actively traded.

        Realized gains and losses on securities are included in earnings and are determined using the specific identification method. Unrealized holding gains and losses on securities classified as available for sale, are excluded from earnings and are reported in accumulated other comprehensive income, net of related tax effects. Unrealized gains and losses on actively traded securities are included in earnings. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income.

        As of December 27, 2008, we held $18,958 in auction rate securities which are variable rate debt instruments, which bear interest rates that reset approximately every 7 or 35 days. The auction rate securities owned were rated AAA by a major credit rating agency and are either commercially insured or guaranteed by the Federal Family Education Loan Program (FFELP). The underlying securities have contractual maturities which are generally greater than ten years. The auction rate securities are classified as available for sale and are recorded at fair value. Typically, the carrying value of auction rate securities approximates fair value due to the frequent resetting of the interest rates. We have classified these investments as long-term consistent with the term of the underlying security which are structured with short term interest rate reset dates of generally 7 or 35 days but with contractual maturities that are long term.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

        The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:

these assets.
 
 December 27, 2008 
 
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 

Auction rate securities

 $21,175 $ $(2,217)$18,958 
          

 $21,175 $ $(2,217)$18,958 
          


 
 December 29, 2007 
 
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 

Auction rate securities

 $38,175 $ $ $38,175 

Corporate debt securities

  13,620  21  (91) 13,550 

Bank time deposits

  4,983      4,983 

Government securities and obligations

  4,339    (4) 4,335 

Mutual funds

  2,372      2,372 
          

 $63,489 $21 $(95)$63,415 
          

        Maturities of corporate debt securities and government securities and obligations classified as available for sale were as follows:

 
 December 27, 2008 December 29, 2007 
 
 Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
 

Due less than one year

 $  $  $14,963 $14,958 

Due after one year through five years

      48,526  48,457 

Due after ten years

  21,175  18,958     
          

 $21,175 $18,958 $63,489 $63,415 
          

        Inventories are stated at the lower of cost, determined principally on the average cost method, or market. The determination of market value involves assessment of numerous factors, including costs to dispose of inventory and estimated selling price. Inventory costs for small models are based upon the average cost to produce specific models and strains. Costs for large models are accumulated in inventory by specific model. Inventory costs for both small and large models are charged to cost of sales in the period the models are sold. Reserves are recorded to reduce the carrying value for inventory determined damaged, obsolete or otherwise unsellable.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

        The composition of inventories is as follows:

 
 December 27,
2008
 December 29,
2007
 

Raw materials and supplies

 $14,202 $13,139 

Work in process

  12,091  9,794 

Finished products

  70,589  65,090 
      
 

Inventories

 $96,882 $88,023 
      

        Other current assets consist of assets we intend to settle within the next twelve months.

 
 December 27,
2008
 December 29,
2007
 

Prepaid assets

 $25,354 $26,087 

Deferred tax asset

  31,748  25,506 

Marketable securities

    14,958 

Prepaid income tax

  7,391  7,214 

Restricted cash

  2,725  3,493 

Other

    2,219 
      
 

Other current assets

 $67,218 $79,477 
      

        Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful life, are recorded at cost, while maintenance and repairs are expensed as incurred. We capitalize interest and period costs on certain capital projects which amounted to $2,486 and $6,363 in 2008, $4,716 and $5,484 in 2007 and $4,107 and $2,904 in 2006, respectively. We also capitalize internal and external costs incurred during the application development stage of internal use software. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 20 to 40 years; machinery and equipment, 3 to 20 years; furniture and fixtures, 5 to 10 years; vehicles, 3 to 5 years; and leasehold improvements, the shorter of estimated useful life or the lease periods. We begin to depreciate capital projects in the first full month the asset is placed in service.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

        The composition of net property, plant and equipment is as follows:

 
 December 27,
2008
 December 29,
2007
 

Land

 $38,696 $35,934 

Buildings

  680,405  518,090 

Machinery and equipment

  337,687  337,215 

Leasehold improvements

  16,850  17,139 

Furniture and fixtures

  10,935  7,734 

Vehicles

  5,514  5,042 

Construction in progress

  112,326  199,399 
      
 

Total

  1,202,413  1,120,553 

Less accumulated depreciation

  (373,492) (371,760)
      

Net property, plant and equipment

 $828,921 $748,793 
      

        Depreciation expense for 2008, 2007 and 2006 was $60,871, $52,870 and $44,947, respectively.

        We account for goodwill and other intangible assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting standards for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separate intangible assets that have finite useful lives continue to be amortized over their estimated useful lives.

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment for 2008, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired. As economic conditions worsened late in the fourth quarter and our business performance was not as strong as anticipated coupled with a decrease in our market capitalization, management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008.

        The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine 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. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)


value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired. However, if the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. Our analysis resulted in the determination that the fair value of our PCS business was less than its carrying value.

        The second step of the goodwill impairment process involves the calculation of an implied fair value of goodwill for the PCS business which step one indicated an impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $700,000.

        Intangible assets deemed to have an indefinite life are tested for impairment using a one-step process which compares the fair value to the carrying amount of the asset. We completed the annual impairment tests in 2008 and 2007 and concluded there was no impairment of identifiable intangible assets with indefinite useful lives.

Other assets consist of assets that we do not intend to settle within the next twelve months.

The composition of other assets is as follows:

 
 December 27,
2008
 December 29,
2007
 

Deferred financing costs

 $6,550 $8,632 

Cash surrender value of life insurance policies

  19,652  22,027 

Long term marketable securities

  18,958  48,457 

Other assets

  6,898  6,877 
      
 

Other assets

 $52,058 $85,993 
      
 December 31, 2011 December 25, 2010
Deferred financing costs$9,239
 $11,167
Cash surrender value of life insurance policies25,057
 31,054
Long term marketable securities11,051
 11,377
Other assets12,312
 8,725
Other assets$57,659
 $62,323

Equity Method Affiliates
In 2009, we entered into a limited partnership which invests in biotechnology and medical device companies. We committed $20,000, or approximately 12%, of the limited partnership's total committed capital. As of December 31, 2011, we have contributed $5,447 of our total committed capital of $20,000. We recognized equity income/(loss) of $869 and $(579)for the years ended December 31, 2011 and December 25, 2010, respectively. This income/(loss) is reported as Other Income (Expense), Net. As of December 31, 2011, Equity Method Affiliates had a carrying value of $5,737, which is reported in Other Assets on the consolidated balance sheets. Subsequent to year end 2011, an investment held by the limited partnership completed its initial public offering, which will result in income in 2012.
Accounting for Investment in Life Insurance Contracts

        We account for ourOur investment in life insurance contracts in accordance with FASB Staff Position No. FTB 85-4,Accounting for Life Settlement Contracts by Third-Party Investors using theare recorded at fair value method. Under the fair value method,value. Accordingly, we recognize the initial investment at the transaction price and remeasure the investment at fair value each reporting period. Investments in life insurance contracts are reported as part of purchases of marketable securitiesinvestments in the statement of cash flows. At December 27, 2008,31, 2011, we held 8469 contracts with a carrying value of $19,652 and a face value of $134,782.



53


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)


1. Description of Business and Summary of Significant Accounting Policies (Continued)

        In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposal are less than its carrying amount. In such instances, additional analysis is performed and thea carrying value of long-lived assets is reduced to the estimated fair$25,057 and a face value if this is lower, as determined using an appraisal or discounted cash flows, as appropriate.

Restructuring and Contract Termination Costs

We recognize obligations associated with restructuring activities and contract termination costs in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requiresby recording a liability at fair value for the costs associated with an exit or disposal activity as well as costs to terminate a contract or an operating lease. The overall purpose of our restructuring actions is to lower overall operating costs and improve profitability by reducing excess capacities. Restructuring charges are typically recorded in selling, general and administrative expenses in the period in which the plan is approved by our senior management and, where material, our Board of Directors, and when the liability is incurred. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity is recognized and measured at its fair value when the entity ceases using the right conveyed by the contract. During 2007, the Company ceased using2011, 2010 and 2009 we implemented staffing reductions to improve operating efficiency and profitability at various sites. As a leased facility in Worcester, MA and recorded a chargeresult of $2,793these actions, for the years ended December 31, 2011, December 25, 2010 and December 26, 2009, we recorded severance and retention charges as shown below. As of December 31, 2011, $1,432 was included in accrued compensation and $1,942 in other long-term liabilities on our consolidated balance sheet. As of December 25, 2010, $5,000 was included in accrued compensation and $5,658 in other long-term liabilities on our consolidated balance sheet.
The following table rolls forward our severance and retention cost to terminate this operating lease.

 Severance and Retention Costs
 2011 2010 2009
Balance, beginning of period$10,658
 $4,332
 $639
Expense5,462
 16,504
 16,334
Payments/utilization(12,746) (10,178) (12,641)
Balance, end of period$3,374
 $10,658
 $4,332

The following table presents severance and retention costs by classification on the income statement:
 Fiscal Year Ended
 2011 2010 2009
Severance charges included in cost of sales$1,012
 $10,860
 $5,005
Severance charges included in selling, general and administrative expense4,450
 5,644
 11,339
Total expense$5,462
 $16,504
 $16,344
The following table presents severance and retention cost by segment:
 Fiscal Year Ended
 2011 2010 2009
Research models and services$1,196
 $4,429
 $3,997
Preclinical services4,372
 9,145
 9,722
Corporate(106) 2,930
 2,625
Total expense$5,462
 $16,504
 $16,344

Other Current Liabilities

Other current liabilities consist of liabilities we intend to settle within the next twelve months.

The composition of other current liabilities is as follows:


 
 December 27,
2008
 December 29,
2007
 

Accrued income taxes

 $20,763 $21,438 

Current deferred tax liability

  1,269  1,347 

Accrued interest and other

  644  483 
      
 

Other current liabilities

 $22,676 $23,268 
      
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

 December 31, 2011 December 25, 2010
Accrued income taxes$10,552
 $18,372
Current deferred tax liability1,379
 963
Accrued interest and other2,102
 760
Other current liabilities$14,033
 $20,095
Other Long-Term Liabilities

Other long-term liabilities consist of liabilities we do not intend to settle within the next twelve months.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

The composition of other long-term liabilities is as follows:

 
 December 27,
2008
 December 29,
2007
 

Deferred tax liability

 $47,538 $70,914 

Long-term pension liability

  32,175  35,729 

Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan

  25,954  29,293 

Other long-term liabilities

  13,160  18,108 
      
 

Other long-term liabilities

 $118,827 $154,044 
      

        We hold investments in joint ventures that are separate legal entities whose purpose is consistent with our overall operations and represent geographic and business segment expansions of our existing markets. The financial results of all joint ventures were consolidated in our results as we have the ability to exercise control over these entities. The interests of the outside joint venture partners have been recorded as minority interests totaling $422 and $3,500 at December 27, 2008 and December 29, 2007, respectively.

 December 31, 2011 December 25, 2010
Deferred tax liability$16,074
 $30,050
Long-term pension liability49,223
 36,335
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan25,739
 24,659
Other long-term liabilities17,415
 23,552
Other long-term liabilities$108,451
 $114,596

Stock-Based Compensation Plans

We adopted on a modified prospective basis, the provisions of SFAS No. 123(R), "Share-Based Payment (Revised 2004)," (SFAS No. 123(R)) and related guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employeegrant stock options and restricted stock awards based on estimated fair values. Accordingly,to employees and non-employee directors under our stock-based compensation plans. Stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period.

We recognize revenue relatedestimate the fair value of stock options using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the option's expected term, the expected annual dividend yield and the expected stock price volatility. The expected stock price volatility assumption was determined using the historical volatility of our productscommon stock over the expected life of the option. The risk-free interest rate was based on the market yield for the five year U.S. Treasury security. The expected life of options was determined using historical option exercise activity. Management believes that the valuation technique and servicesthe approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

We record deferred tax assets for stock-based awards based on the amount of stock-based compensation recognized in our Consolidated Statements of Income at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assets and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits in computed in accordance with the SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition."

long form method.

Revenue Recognition
We recognize revenue related to our products, which include research models, invitro technology and avian vaccine support products, when persuasive evidence of an arrangement exists, generally in the form of customerclient purchase orders, title and risk of loss have transferred, which occurs upon delivery of the products, the sales price is fixed and determinable and collectability is reasonably assured. These recognition criteria are met at the time the product is delivered to the customer'sclient's site. Product sales are recorded net of returns upon delivery. For large models, in some cases customersclients pay in advance of delivery of the product. These advances are deferred and recognized as revenue upon delivery of the product.

Our service revenue is comprised of discovery support, safety assessment, research animal diagnostic services (RADS),

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business


genetically engineered models and Summary of Significant Accounting Policies (Continued)

        Our service revenue is comprised of toxicology, pathology, laboratory, clinical Phase I trials, transgenicservices (GEMS), discovery services (DS) and contract staffing servicesinsourcing solutions (IS) and is generally evidenced by customerclient contracts. ToxicologySafety assessment services provide highly specialized toxicology studies to evaluate the safety and toxicity of new pharmaceutical compoundsmolecules and materials used in medical devices. PathologyIt also includes pathology services, which provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. LaboratoryRADS services monitor and analyze the health and genetics of research models used in research protocols. Clinical Phase I conducts tolerability assessments to explore human pharmacology. TransgenicGEMS services include validating, maintaining, breeding and testing research models for biomedical research activities. Contract staffing servicesIS provide management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations.

The toxicology, pathology and clinical Phase I trialssafety assessment services arrangements typically range from one to six months but can range up to approximately 24 months in length. These agreements are negotiated for a fixed fee. LaboratoryRADS service arrangements are generally completed within a one-monthone -month period and are also of a fixed fee nature. TransgenicDS services are also short term in nature, while GEMS and contract staffing servicesIS are of a longer-term nature, from six6 months to five5 years, and are billed at agreed upon rates as specified in the contract.

Our service revenue is recognized upon the completion of the agreed upon performance criteria. These performance criteria are generally in the form of either study protocols or specified activities or procedures which we are engaged to perform. These performance criteria are established by our customersclients and do not contain acceptance provisions which are based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate contracts is recognized as services are performed, based upon rates specified in the contract. Revenue of fixed fee contracts is recognized as services are performed in relation to estimated costs to complete procedures specified by customersclients in the form of study protocols.

Deferred and unbilled revenue isare recognized in our consolidated balance sheets. In some cases, a portion of the contract fee is paid at the time the study is initiated. These advances are recorded as deferred revenue and recognized as revenue as services are performed. Revenue is recognized on unbilled services and relate to amounts that are currently unbillablenot billable to the customerclient pursuant to contractual terms. In general, such amounts become billable in accordance with predetermined payment schedules, but are recognized as revenue as services are performed.

Guarantees

We include standard indemnification provisions in customerclient contracts, which include standard provisions limiting our liability under such contracts, including our indemnification obligations, with certain exceptions.

Derivatives and Hedging Activities

We followenter into derivatives to hedge the requirementsforeign currency exchange risk in order to minimize the impact of SFAS No. 133, "Accounting for Derivative Instrumentsmarket fluctuations of foreign currency rates on our financials. Throughout the year we entered into various contracts to manage this risk. During 2011 and Hedging Activities," which establishes accounting2010 , the Company entered into a forward foreign currency contract in order to hedge the foreign exchange impact of an intercompany loan between our entities with different functional currencies. As of December 31, 2011, the outstanding forward contract had a fair value of $5. We recorded a hedge gain (loss) of $(6,287) in 2011, $713 in 2010 and reporting standards for derivative instruments, including$1,785 in 2009.
Fair Value
We hold cash equivalents, investments and certain derivative instruments embedded in other contracts and used for hedging activities. All derivatives, whether designed for hedging relationships or not,assets that are required to be recorded on the balance sheetcarried at fair value. If the derivative is designated as aWe generally determine fair value hedge, all changesusing a market approach based on quoted prices of identical instruments when available. When market quotes of identical instruments are not readily accessible or available, we determine fair value based on quoted market prices of similar instruments. As of December 31, 2011, we do not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities.
The valuation hierarchy for disclosure of the inputs used to measure fair value prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Descriptions of the derivativevaluation methodologies used for assets and changes in theliabilities measured at fair value of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of

follows:


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)


Time deposits—Valued at their ending balances as reported by the changes in thefinancial institutions that hold our securities, which approximates fair value.
Auction rate securities—Valued at fair value by management in part utilizing an independent valuation reviewed by management which used pricing models and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use at December 31, 2011.
Life policies—Valued at cash surrender value.
Contingent consideration—Consists of future acquisition-related payments based on certain agreed upon revenue and technical milestones valued using the derivative are recorded in other comprehensive income and are recognized in the statement of operations when the hedged item affects earnings. The ineffective portions of bothapproach.
Hedge contract—Valued at fair value by management based on our foreign exchange rates and cash flow hedges are immediately recognized as earnings. We recorded a hedge gain (loss) of $(3,977) in 2008, $1,603 in 2007 and $(66) in 2006.

        Effective December 30, 2007, we adopted SFAS No. 157, "Fair Value Measurements" (SFAS 157) and SFAS No. 159 "The Fair Value Option for Financial forward points provided by banks.

Assets and Financial Liabilities" (SFAS 159). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value which are provided in the table below. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The adoption of both SFAS 157 and SFAS 159 had no impact on our financial statements other than the disclosures presented herein.

Level 1Quoted prices in active markets for identical assets or liabilities.

Level 2


Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include corporate-owned key person life insurance policies.

Level 3


Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes auction rate securities where independent pricing information was not able to be obtained.

        Assets measured at fair value on a recurring basis are summarized below:

 
 Fair Value Measurements at December 27, 2008 using 
Assets
 Quoted Prices in
Active Markets
for Identical
Assets
Level 1
 Significant Other
Observable
Inputs
Level 2
 Significant
Unobservable
Inputs
Level 3
 Assets at
Fair Value
 

Auction rate securities

 $ $ $18,958 $18,958 

Fair value of life policies

    14,062    14,062 
          

Total assets

 $ $14,062 $18,958 $33,020 
          
 Fair Value Measurements at December 31, 2011 using
 Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Assets and Liabilities at Fair Value
Time deposits$
 $5,359
 $
 $5,359
Auction rate securities
 
 11,051
 11,051
Fair value of life policies
 19,520
 
 19,520
Hedge contract
 5
 
 5
Total assets measured at fair value$
 $24,884
 $11,051
 $35,935
Contingent consideration
 
 
 
Total liabilities measured at fair value$
 $
 $
 $
 Fair Value Measurements at December 25, 2010 using
 Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Assets and Liabilities at Fair Value
Time deposits$
 $9,834
 $
 $9,834
Auction rate securities
 
 11,377
 11,377
Fair value of life policies
 25,609
 
 25,609
Hedge contract
 419
 
 419
Total assets measured at fair value$
 $35,862
 $11,377
 $47,239
Contingent consideration
 
 5,365
 5,365
Total liabilities measured at fair value$
 $
 $5,365
 $5,365

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

The following table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the quarteryears ended December 27, 2008.31, 2011 and December 25, 2010. Our auction rate securities were valued at fair value by management in part utilizing an independent valuation reviewed by management which used pricing models and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use at December 27, 2008.

31, 2011.
 
 Fair Value Measurements
Using Significant
Unobservable
Inputs
(Level 3)
 
 
 Auction rate securities 

Balance, December 30, 2007

 $ 

Transfers in and/or (out) of Level 3 upon adoption of SFAS 157

  21,175 

Total gains or losses (realized/unrealized):

    
 

Included in earnings

   
 

Included in other comprehensive income

  (2,217)

Purchases, issuances and settlements

   
    

Balance, December 27, 2008

 $18,958 
    

        Certain

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 Year ended
Auction rate securitiesDecember 31, 2011
 December 25, 2010
Beginning balance$11,377
 $16,212
Transfers in and/or out of Level 3
 
Total gains or losses (realized/unrealized):   
Included in earnings (other expenses)(1) 14
Included in other comprehensive income(325) 651
Purchases, issuances and settlements
 (5,500)
Ending balance$11,051
 $11,377
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 Year ended
Contingent ConsiderationDecember 31, 2011
 December 25, 2010
Beginning balance$5,365
 $9,300
Transfers in and/or out of Level 3
 
Total gains or losses (realized/unrealized):   
Included in selling, general and administrative expense(5,365) (3,935)
Included in other comprehensive income
 
Purchases, issuances and settlements
 
Ending balance$
 $5,365
Income Taxes
We recognize deferred tax assets and liabilities are measured at fair value on a non-recurring basis. As of December 27, 2008, we have not applied the provisions of SFAS 157 to these assets and liabilities in accordance with FASB "Staff Position FAS 157-2: Effective Date of SFAS 157" (FSP 157-2). FSP 157-2 partially defers the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities and removes certain leasing transactions from the scope of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in the first quarter of 2009 and will be applied prospectively.

        We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. A valuation allowance is provided forWe measure deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence both positive and negative, it is more likely than not that these itemswe will expire before we are able tonot realize their benefitssome or that their future deductibility is uncertain.

        Effective all of the deferred tax assets.

As of December 31, 2006,2011, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $106,504. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we adoptedwould be subject to both U.S. Federal and state taxes and withholding taxes payable to the provisionsvarious foreign countries. It is our policy to indefinitely reinvest the earnings of FIN 48 "Accountingour non-U.S. subsidiaries unless they can be repatriated in a manner that generates a tax benefit or an unforeseen cash need arises in the United States and the earnings can be repatriated in a manner that is substantially free of income taxes. It is not practicable to estimate the amount of additional income taxes payable on the earnings that are indefinitely reinvested in foreign operations.
We are a worldwide business and operate in various tax jurisdictions where tax laws and tax rates are subject to change given the political and economic climate in these countries. We report and pay income taxes based upon operational results and applicable law. Our current and deferred tax provision is based upon enacted tax rates in effect for Uncertaintythe current and future periods. Any significant fluctuation in Income Taxes-antax rates or changes in tax laws and regulations or changes to interpretation of FASB Statement No. 109," which clarifies the accounting for incomeexisting tax positions by prescribing a minimum recognition threshold that alaws and regulations could cause our estimate of taxes to change resulting in either increases or decreases in our effective tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on the derecognition of previously recognized income tax items, measurement, classification, interest and penalties, accounting in interim periods and financial statement disclosure. Under FIN 48, werate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

sustained upon examination by the taxing authorities, based on the technical merits of the tax


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)


position. The tax benefits recognized in our financial statements from such positions are measured onbased upon the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

Foreign Currency Translation

The functional currency of each of our operating foreign subsidiaries is local currency. In accordance with SFAS No. 52, "Foreign Currency Translation," theThe financial statements of these subsidiaries are translated into U.S. dollars as follows: assets and liabilities at year-end exchange rates; income, expenses and cash flows at average exchange rates; and shareholders' equity at historical exchange rates. The resulting translation adjustment is recorded as a component of accumulated other comprehensive income in the accompanying balance sheet. Exchange gains and losses on foreign currency transactions are recorded as other income or expense. We recorded an exchange gain (loss) of $3,653$6,237 in 2008, $(3,959)2011, $(1,299) in 20072010 and $170$(861) in 2006.

Comprehensive Income

        We account for

Our comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." As it relates to us, comprehensive income is defined asconsists of net income plus the sum of the changes in unrealized gains (losses) on available-for-sale marketable securities, unrealized gains (losses) on hedging activities, foreign currency translation adjustments and change in unrecognized pension gains and losses and prior service costs and credits (collectively, other comprehensive income) and is presented in the Consolidated Statements of Changes in Shareholders' Equity, net of tax.

Pension Obligations

        We recognize obligations associated with ourPlans

Our defined benefit pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions." Assets,plans' assets, liabilities and expenses are calculated by accredited independent actuaries. As required by SFAS No. 87, we are required to makeusing certain assumptions to value the plan assets and liabilities.assumptions. These assumptions are reviewed annually, or whenever otherwise required, by SFAS No. 87, based on reviews of current plan information and consultations with independent investment advisors and actuaries. The selection of assumptions requires a high degree of judgment and may materially change from period to period. We do not offer other defined benefits associated with post-retirement benefit plans other than pensions.

We adopted the recognition and disclosure requirements of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)" as of December 30, 2006. This statement requires employers that sponsor defined benefit plans to recognize the funded status of aour benefit planplans on itsour balance sheet; recognize gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of accumulated other comprehensive income, net of tax; and measure defined benefit plan assets and obligations as of the date of the employer'sour fiscal year-end balance sheet; and disclose in the notes to financial statements additionalsheet. Additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollarsobligation are disclosed in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

        During 2008,the notes to our Board of Directors voted to freeze the accrual of benefits under our U.S. pension plan effective April 30, 2008. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," we recorded a curtailment gain of $3,276 in 2008. Based on a remeasurement of the U.S. pension plan's assets and liabilities at April 30, 2008, the benefit accrual freeze reduced the projected benefit obligation by $8,298 and resulted in a corresponding adjustment, net of tax, to accumulated other comprehensive income.

Earnings (Loss) Per Share

Basic earnings per share are calculated by dividing net income attributable to common shareowners by the weighted average number of common shares outstanding. Diluted earnings per common share are calculated by adjusting the weighted average number of common shares outstanding to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued, to the extent these additional shares are not anti-dilutive.

Discontinued Operations

        In accordance with SFAS No. 144, the

The results of discontinued operations, less applicable income taxes (benefit) and assets and liabilities, are reported as a separate component in the accompanying statement of income and consolidated balance sheets for the current and prior periods. The statement of cash flows also reflects separate disclosure of cash flows pertaining to discontinued operations consistently for all periods presented.

2. Business Acquisitions
New Accounting Pronouncements

        In June 2008, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (FSP EITF 03-6-1) which clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be includedNo significant business acquisitions were made in the calculation of basic earnings per share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after ended December 15, 2008, as well as interim periods within those years. Once effective, all prior period earnings per share data presented must be adjusted retrospectively (including interim financial statements, summaries of earnings,31, 2011 and selected financial data) to conform with the provisions of the FSP. Early application is not permitted. Upon adoption of FSP EITF 03-6-1, we expect to revise prior period earning per share from continuing operations as follows: decrease 2008 basic and diluted loss per share by $0.08; reduce 2007 basic and diluted earning per share by $0.02 and reduce 2006 basic earning per share by $0.02 and diluted earning per share from continuing operations by $0.01.

        In May 2008, the FASB issued FSP No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP 14-1). This FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectively to all periods presented. We estimate that upon adoption of the provisions of FSP 14-1, $261,508 of the total proceeds from our debt will be allocated to the liability component,


25, 2010Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies (Continued)


which represents the estimated fair value of similar debt instruments without the conversion option as of the date of issuance. The remaining $88,492 will be allocated to the equity component. The debt discount of $88,492 will be amortized to interest expense over the seven year period from June 2006 to June 2013, the expected life of the instrument. Additionally, upon adoption, approximately $1,903 of deferred financing costs capitalized at the time of issuance will be reclassified to equity as equity issuance costs and will not be amortized to interest expense.

        In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities" (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement is not expected to have an impact on our consolidated financial statements.

        In February 2008, the FASB issued FSP 157-1 and 157-2 that (1) partially deferred the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain leasing transactions from the scope of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008 and will be applied prospectively. The provisions of SFAS 157 are not expected to have a material impact on our consolidated financial statements.

        In February 2008, the FASB issued FSP FAS 140-3: "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" (FSP 140-3). FSP 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing. This FSP presumes that an initial transfer for a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under Statement 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140. This FSP is not expected to have an impact on our consolidated financial statements.

        In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS 141(R)) and No. 160, "Noncontrolling Interests in Consolidated Financial Statements" (SFAS 160). SFAS 141(R) and SFAS 160 introduce significant changes in the accounting for and reporting of business acquisitions and noncontrolling interests, formerly "minority interest," in a subsidiary. SFAS 141(R) continues the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. SFAS 141(R) changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. In addition, SFAS 141(R) will impact the annual goodwill impairment test associated with acquisitions that close both before and after its effective date. SFAS 141(R) amends SFAS 109 changing the accounting for adjustments to deferred tax asset valuation allowances and income tax uncertainties related to acquisitions that close both before and after its effective date, generally requiring adjustments to be reflected in income tax expense. SFAS 141(R) applies prospectively to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. An entity may not apply SFAS 141(R) before that date. The adoption of SFAS 141(R) and SFAS 160 will impact our consolidated financial statements.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions

We acquired several businesses during the three-year periodyear ended December 27, 2008.26, 2009. The results of operations of the acquired businesses are included in the accompanying consolidated financial statements from the date of acquisition. Significant acquisitions include the following:

        On November 19, 2008

In August 2009, we acquired Systems Pathology Company, LLC (SPC), a pathology-based software development company, for $24,522 in cash and up to $14,000 (undiscounted) potential contingent consideration. SPC is a development stage company included in our PCS segment and its only activity consists of developing computer-assisted pathology system software. As of the acquisition date, SPC did not have developed technology given the current incomplete nature of the

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

software. Accordingly, the purchase price was allocated to the estimated fair value of In-process research and development. Annually, we perform an analysis of In-process research and development. As a result of our annual analysis, we recorded an impairments charges of $6,800 and $7,200 for the years ended December 31, 2011 and December 25, 2010, respectively, to adjust the In-process research and development to fair value.
The contingent consideration consists of payments based on certain assetsagreed upon revenue and technical milestones. The fair value of the contingent consideration at the date of acquisition was $9,100, which was estimated using the income approach based on significant inputs that are not observable in the market. Key assumptions included a discount rate of 18% and a probability adjustment as we estimated the probability of each milestone payment being made was from 60% to 85%. Due to the delay in the development of the product, we adjusted the contingent consideration to $5,365 during the year ending December 25, 2010 and reversed the remaining balance during the year ending December 31, 2011 with no payments of contingent consideration.
The purchase price allocation for SPC, net of $9 of cash acquired is as follows:
Current assets (excluding cash)$49
Property, plant and equipment338
Current liabilities(1,317)
Long term liabilities(1,040)
Goodwill and other intangible asset35,592
Total purchase price allocation$33,622
The breakout of goodwill and other intangibles acquired was as follows:
  
Weighted average
amortization
life (years)
In-process research and development (see Note 4)$14,000
5.1
Goodwill21,592

Total goodwill and other intangibles$35,592
 
In-process research and development is accounted for as an Indian distributorindefinite- lived intangible asset until its completion, after which it becomes an amortizable finite-lived asset (completion costs are expensed as incurred).
The goodwill recognized is largely attributable to anticipated revenue synergies expected to arise after the acquisition including new clients as well as the value of the assembled workforce. Goodwill is deductible for $5,469tax purposes.
On July 31, 2009, we acquired Cerebricon Ltd. which areis included in our RMS segment. segment for $8,180 in cash. Based in Finland, Cerebricon provides discovery services for therapeutic products for treatment of diseases of the central nervous system supported by in vivo imaging capabilities.
The preliminary purchase price allocation including deal costsfor Cerebricon, net of $273 incurred by us$1,200 of acquired cash is as follows:

Current assets (excluding cash)

$53

Property, plant and equipment

37

Deferred taxes

(80)

Goodwill and other intangible asset

5,459

Total purchase price allocation

$5,469

Current assets (excluding cash)$1,754
Property, plant and equipment816
Other long-term assets41
Current liabilities(1,485)
Long-term debt(1,178)
Long-term deferred tax(1,453)
Goodwill and other intangible asset9,685
Total purchase price allocation$8,180

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The breakout of goodwill and other intangibles acquired with the acquisition was as follows:

 
  
 Weighted average
amortization
life (years)
 

Customer relationships

 $3,770  5 

Non-compete

  236  2 

Goodwill

  1,453   
       

Total goodwill and other intangibles

 $5,459    
       

  
Weighted average
amortization
life (years)
client relationships$5,597
4.2
Goodwill4,088

Total goodwill and other intangibles$9,685
 
The goodwill recognized is largely attributable to anticipated revenue synergies expected to arise after the acquisition including new clients as well as the value of the assembled workforce. Goodwill is not deductible for tax purposes.


In Table of ContentsMay 2009


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        On September 15, 2008, we acquired privately-held Molecular Therapeutics, Inc., the parent entityassets of Molecular ImagingPiedmont Research Inc. (MIR)Center (PRC) for $12,041$45,558 in cash. Ann Arbor, Michigan-based MIRPRC, which is based in North Carolina, provides discovery services utilizing extensive in-vivo imaging capabilities tofocused on efficacy studies in oncology and other therapeutic areas for pharmaceutical and biotechnology clients and is included in our RMS segment.

The preliminary purchase price allocation including deal costs of $79 incurred by us and net of $368 of cash acquired,for PRC is as follows:

Current assets (excluding cash)

 $1,123 

Property, plant and equipment

  848 

Noncurrent assets

  223 

Current liabilities

  (1,271)

Noncurrent liabilities

  (564)

Deferred taxes

  (2,055)

Goodwill and other intangible asset

  13,448 
    

Total purchase price allocation

 $11,752 
    

        In conjunction with the purchase, we paid off $364 of acquired debt.

Current assets$1,414
Property, plant and equipment1,315
Current liabilities(1,204)
Goodwill and other intangible asset44,033
Total purchase price allocation$45,558
The breakout of goodwill and other intangibles acquired with the MIR acquisition was as follows:

 
  
 Weighted average
amortization
life (years)
 

Customer relationships

 $5,470  6.6 

Backlog

  200  0.4 

Non-compete

  10  2.1 

Goodwill

  7,768   
       

Total goodwill and other intangibles

 $13,448    
       

  Weighted average amortization life (years)
client relationships$18,400
6.3
Backlog900
0.7
Trademarks and trade names500
2.2
Developed technology300
1.5
Goodwill23,933

Total goodwill and other intangibles$44,033
 
The goodwill recognized is largely attributable to anticipated revenue synergies expected to arise after the acquisition including new clients as well as the value of the assembled workforce. Goodwill is not deductible for tax purposes.

        In addition, on September 9, 2008, we acquired all of the capital stock of privately held Dusseldorf, Germany-based NewLab BioQuality AG (NewLab) for $48,500 in cash. NewLab, a contract service organization, provides safety and quality control services to biopharmaceutical clients and enhances our existing capabilities in process validation services, in consulting services, and assisting in designing International Conference on Harmonisation (ICH)-compliant stability testing programs and is included in our PCS segment.

        The preliminary purchase price allocation associated with the NewLab acquisition, including transaction costs of $1,602 incurred by us and net of $3,363 of cash acquired, is as follows:

Current assets (excluding cash)

 $5,242 

Property, plant and equipment

  3,198 

Current liabilities

  (3,324)

Deferred taxes

  (6,012)

Goodwill and other intangibles acquired

  47,635 
    

Total purchase price allocation

 $46,739 
    

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        In conjunction with the purchase of NewLab, we utilized $87 of available cash to prepay NewLab's existing debt.

        The breakout of goodwill and other intangibles acquired with the NewLab acquisition was as follows:

 
  
 Weighted average
amortization
life (years)
 

Customer relationships

 $17,600  6.2 

Backlog

  800  0.7 

Non-compete covenants

  200  1.9 

Goodwill

  29,035   
       

Total goodwill and other intangibles

 $47,635    
       

        Goodwill is not deductible for tax purposes.

        On June 14, 2007, we entered into a joint venture with Shanghai BioExplorer Co., Ltd., a Shanghai, China-based provider of preclinical services, to form Charles River Laboratories Preclinical Services—China. We paid $2,400 in cash for a 75% ownership interest in the joint venture. Additionally, as part of the agreement, the joint venture purchased the net assets of Shanghai BioExplorer for a purchase price of $1,532 including transaction costs of $543. Intangible assets of $935 were recorded by the joint venture based on the preliminary purchase price allocation.

        On January 4, 2007, we acquired the remaining 15% of the equity (319,199 common shares) of Charles River Laboratories Japan, Inc., ("Charles River Japan") from Ajinomoto Company Inc., the minority interest partner. As of the effective date of this transaction, we own 100% of Charles River Japan. The purchase price for the equity was 1.3 billion Yen, or approximately $10,899, which was paid in cash. The purchase price allocation is as follows:

Minority interest acquired

 $5,624 

Property, plant and equipment

  2,224 

Deferred tax liability

  (4,187)

Intangible asset (customer relationships with 15 year estimated amortization life)

 $7,238 
    

 $10,899 
    

        On October 30, 2006, the Company acquired all of the capital stock of privately held Tacoma, Washington based Northwest Kinetics for $29,357 in cash. Northwest Kinetics runs clinical trials, primarily in Phase I facility, with a focus on high end clinical pharmacology studies.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        The final purchase price allocation associated with the Northwest Kinetics acquisition, including transaction costs of $265 incurred by the Company and net of $812 of cash acquired, is as follows:

Current assets (excluding cash)

 $6,741 

Property, plant and equipment

  2,983 

Non-current assets

  100 

Current liabilities

  (6,378)

Non-current liabilities

  (7,493)

Goodwill and other intangibles acquired

  32,857 
    

Total purchase price allocation

 $28,810 
    

        In conjunction with the purchase of Northwest Kinetics, the Company utilized $2,076 of available cash to pay off Northwest Kinetics' existing debt.

        The breakout of goodwill and other intangibles acquired with the Northwest Kinetics acquisition was as follows:

 
  
 Weighted average
amortization
life (years)
 

Customer relationships

 $13,700  12 

Participant list

  1,300  12 

Non-compete covenants

  200  5 

Trademarks and trade names

  40  1 

Goodwill

  17,617   
       

Total goodwill and other intangibles

 $32,857    
       

        The following selected unaudited pro forma consolidated results of operations are presented as if each of the acquisitions had occurred as of the beginning of the period immediately preceding the period of acquisition after giving effect to certain adjustments including the amortization of intangibles. The pro forma data is for informational purposes only and does not necessarily reflect the results of operations had the companies operated as one during the periods reported. No effect has been given for synergies, if any, that may have been realized through the acquisitions.

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Net sales

 $1,363,670 $1,253,372 $1,073,215 

Operating income

  (452,512) 226,386  186,918 

Income from continuing operations

  (522,931) 156,783  123,325 

Earnings per common share

          
 

Basic

 $(7.77)$2.34 $1.79 
 

Diluted

 $(7.77)$2.28 $1.76 

        Refer to Note 5 for further discussion of the method of computation of earnings per share.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

3. Goodwill and Other Intangible Assets

The following table displays goodwill and other intangible assets not subject to amortization and other intangible assets that continue to be subject to amortization:


 
 December 27, 2008 December 29, 2007 
 
 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization 

Goodwill

 $470,414 $(12,836)$1,133,432 $(12,892)
          

Other intangible assets not subject to amortization:

             
 

Research models

 $3,438 $ $3,438 $ 

Other intangible assets subject to amortization:

             
 

Backlog

  16,068  (15,259) 62,250  (62,250)
 

Customer relationships

  258,607  (131,410) 224,871  (85,000)
 

Customer contracts

  1,655  (1,655) 1,655  (1,655)
 

Trademarks and trade names

  4,581  (3,933) 3,274  (2,350)
 

Standard operating procedures

  657  (651) 1,356  (1,310)
 

Other identifiable intangible assets

  10,100  (6,098) 10,819  (6,193)
          

Total other intangible assets

 $295,106 $(159,006)$307,663 $(158,758)
          
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

 December 31, 2011 December 25, 2010
 Gross Carrying Amount Accumulated Amortization & Impairment Loss Gross Carrying Amount Accumulated Amortization & Impairment Loss
Goodwill$1,214,285
 $(1,016,724) $1,216,196
 $(1,017,758)
Other intangible assets not subject to amortization:       
Research models$3,438
 $
 $3,438
 $
PCS in process R&D
 
 6,800
 
Other intangible assets subject to amortization:       
Backlog2,856
 (2,253) 2,839
 (2,109)
Client relationships298,813
 (210,816) 301,175
 (192,345)
Client contracts14,818
 (14,818) 15,259
 (15,259)
Trademarks and trade names5,022
 (4,706) 5,041
 (4,614)
Standard operating procedures650
 (650) 657
 (657)
Other identifiable intangible assets5,415
 (4,332) 5,428
 (4,417)
Total other intangible assets$331,012
 $(237,575) $340,637
 $(219,401)
The changes in the gross carrying amount and accumulated amortization of goodwill are as follows:

 
  
 Adjustments to
Goodwill
  
 Adjustments to
Goodwill
  
 
 
 Balance at
December 30,
2006
 Balance at
December 29,
2007
 Balance at
December 27,
2008
 
 
 Acquisitions Other Acquisitions Other 

Research Models and Services

                      
 

Gross carrying amount

 $21,372 $ $634 $22,006 $9,221 $(280)$30,947 
 

Accumulated amortization

  (4,775)   (127) (4,902)   56  (4,846)

Preclinical Services

                      
 

Gross carrying amount

  1,110,702    724  1,111,426  29,035  (700,994) 439,467 
 

Accumulated amortization

  (7,990)     (7,990)     (7,990)

Total

                      
 

Gross carrying amount

 $1,132,074 $ $1,358 $1,133,432 $38,256 $(701,274)$470,414 
 

Accumulated amortization

  (12,765)   (127) (12,892)   56  (12,836)

   Adjustments to Goodwill   Adjustments to Goodwill  
 Balance at December 26, 2009 Acquisitions Foreign Exchange/ Impairment Balance at December 25, 2010 Acquisitions Foreign Exchange/ Impairment Balance at December 31, 2011
Research Models and Services             
Gross carrying amount$58,734
 $
 $(858) $57,876
 $
 $(1,474) $56,402
Accumulated amortization(4,875) 
 107
 (4,768) 
 1,047
 (3,721)
Preclinical Services             
Gross carrying amount1,162,366
 
 (4,046) 1,158,320
 
 (437) 1,157,883
Accumulated impairment loss(700,000) 
 (305,000) (1,005,000) 
 
 (1,005,000)
Accumulated amortization(7,990) 
 
 (7,990) 
 (13) (8,003)
Total             
Gross carrying amount$1,221,100
 $
 $(4,904) $1,216,196
 $
 $(1,911) $1,214,285
Accumulated impairment loss(700,000) 
 (305,000) (1,005,000) 
 
 (1,005,000)
Accumulated amortization(12,865) 
 107
 (12,758) 
 1,034
 (11,724)
Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our initial assessment (step one) for 2008,2011, the fair value of our business units exceeded their carrying value and, therefore, our goodwill was not impaired. As economic conditions worsened late inIf the fourth quarterfuture growth and operating results of our business performance wasbusinesses are not as strong as anticipated coupled with a decrease inand/or our market capitalization management determined that circumstances had changed enough to trigger another goodwill impairment test as of December 27, 2008.

        The goodwill impairment analysis is a two-step process. The first step isdeclines, this could impact the assumptions used to identify potential impairment and involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Fair value is determined by using a weighted combination of a market-based approach and an income approach, as this combination is deemed to be the most indicative of our fair


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

3. Goodwill and Other Intangible Assets (Continued)


value in an orderly transaction between market participants. Under the market-based approach, we utilize information about our Company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determine 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. Determiningcalculating the fair value of a reporting unitour goodwill in the future. To the extent goodwill is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, profit margin percentages, discount rates, perpetuity growth rates, future capital expenditures and future market conditions, among others. Our projections are based on an internal strategic review. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If the estimated fair value of a reporting unit exceedsimpaired, its carrying value goodwill is not consideredwill be written down to be impaired. However, if the carrying value exceeds estimatedits implied fair value there isand a charge will be made to our earnings. Such an indication of potential impairment charge could materially and the second step is performed to measure the amount of impairment. Our analysis resulted in the determination thatadversely affect our operating results and financial condition.

Based on our assessment (step one) for 2010, the fair value of our PCS business was less than its carrying value.

The second step of the goodwill impairment process involvestest involved us calculating the calculation of an implied fair value of goodwill for the PCS business which step one indicated an impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. In determining the fair value of assets we utilize appraisals for the fair value of property and equipment and valuations of certain intangible assets, including customer relationships.business. The carrying value of the goodwill assigned to the PCS business exceeded the implied fair value of goodwill resulting in a goodwill


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

impairment of $700,000.

$305,000.

Based on our assessment (step one) for 2009, the fair value of our business units exceeded their carrying value therefore our goodwill was not impaired.
Amortization expense of intangible assets for 2008, 20072011, 2010 and 20062009 was $30,312, $33,509$21,796, $24,405 and $37,639,$25,716, respectively.

Estimated amortization expense for each of the next five fiscal years is expected to be as follows:

2009

  25,801 

2010

  21,814 

2011

  18,105 

2012

  14,615 

2013

  11,331 
2012$17,670
201314,131
201411,738
20159,291
20167,693

4. Impairment of Long Lived Assets

For the years ended 2011, 2010 and 2009 based on our most recent market outlook, we assessed our long-lived assets for impairment. The assessment included an evaluation of the ongoing cash flows of the long lived assets. For the year ended 2011, we impaired $692 of long-lived assets in our RMS segment related to facilities no longer in use and not expected to be fully recoverable. For the year ended December 25, 2010, we determined that the long-lived assets associated with our PCS-Massachusetts and PCS-China locations were no longer fully recoverable. We calculated the fair value of the long-lived assets based upon a valuation completed by an independent third party valuation firm., which utilized our estimates of future cash flows discounted using a rate commensurate with the risks inherent in our current business model and the estimated market value of the long lived assets. Accordingly, for the year ended 2010, we recorded an impairment charge of $64,631 for PCS-Massachusetts and $17,186 for PCS-China representing the excess of the carry value of those assets over their respective fair market values. During the fourth quarter of 2011, we transferred our site and the sold the assets of our PCS-China facility for $4,593. We recognized a gain on the sale of $3,776.
Additionally, for the years ended December 31, 2011 and December 25, 2010, we determined that the fair value of our in process research and development acquired in the acquisition of SPC (see Note 2) exceeded its the carrying value. Based on our evaluation, we recorded an impairment charges of $6,800 and $7,200 for the period ended December 31, 2011 and December 25, 2010, respectively.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

4.


5. Long-Term Debt

Long-Term Debt

Long-term debt consists of the following:

 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Senior convertible debentures

 $350,000 $350,000 $350,000 

Term loan facilities

  134,967  159,200  221,274 

Revolving credit facility

  90,000     

Other long-term debt, represents secured and unsecured promissory notes, interest rates ranging from 0% to 3.7%, 0% to 11.6% and 0% to 11.6% at December 27, 2008, December 29, 2007 and December 30, 2006, respectively, maturing between 2008 and 2013

  806  849  780 
        

Total debt

  575,773  510,049  572,054 

Less: current portion of long-term debt

  (35,322) (25,051) (24,970)
        

Long-term debt

 $540,451 $484,998 $547,084 
        

 December 31, 2011 December 25, 2010
2.25% Senior convertible debentures:   
Principal$349,995
 $349,995
Unamortized debt discount(21,533) (35,583)
Net carrying amount of senior convertible debentures328,462
 314,412
Term loan facilities356,322
 386,213
Revolving credit facility33,000
 
Other long-term debt, represents secured and unsecured promissory notes, interest rates ranging from 0% to 0.5%, 0% to 0.5% and 0% to 0.5% at December 31, 2011, December 25, 2010 and December 26, 2009, respectively, maturing between 2012 and 2013118
 127
Total debt717,902
 700,752
Less: current portion of long-term debt(14,732) (30,535)
Long-term debt$703,170
 $670,217
Minimum future principal payments of long-term debt at December 27, 200831, 2011 are as follows:

Fiscal Year
  
 

2009

 $35,322 

2010

  77,040 

2011

  113,408 

2012

  8 

2013

  349,995 

Thereafter

   
    
 

Total

 $575,773 
    

Fiscal Year 
2012$14,732
2013388,965
201458,455
201577,941
2016199,342
Thereafter
Total$739,435
On July 31, 2006, the CompanyAugust 26, 2010, we amended and restated its $660,000our $428,000 credit agreement to (1) pay off loans outstanding under the credit agreement, (2) extend the maturity date under the new $750,000 credit facility to August 26, 2015 and (3) terminate and payoff the remaining term loan under our $50,000 credit agreement. The $750,000 credit agreement provided for a $230,000 U.S. term loan, a €133,763 Euro term loan and a $350,000 revolver. On February 24, 2011, we amended the credit agreement primarily to provide for an incremental $150,000 term loan and to modify the leverage ratio used in calculating the interest rate applicable to amounts outstanding. On September 23, 2011, we further amended the credit agreement to reduce the current interest rate modify certain restrictive covenantsmargin applicable to the term loans and the revolving loans based on our leverage ratio and extend the term.maturity date by approximately one year to September 2016. The amount of debt outstanding under the original $660,000current credit agreement remained the same at the time of amendment. The now $428,000 credit agreement providedprovides for a $156,000 U.S.$299,750 term loan, facility, a $200,000 U.S. revolving facility, a C$57,800€69,414 Euro term loan facility and a C$12,000$350,000 revolving facility for a Canadian subsidiary, and a GBP 6,000credit facility. Under specified circumstances, we have the ability to increase the term loans and/or revolving facility for a U.K. subsidiary.line of credit by up to $250,000 in the aggregate. The $156,000 term loan facility matures in 20 quarterly installments with the last installment due June 30, 2011. As of December 27, 2008, the Company had $85,800 outstanding on the U.S. term loan.September 23, 2016. The $200,000 U.S.$350,000 revolving facility also matures on July 31, 2011September 23, 2016 and requires no scheduled payment before that date. Under specified circumstances, the $200,000 U.S.The book value of our term and revolving facility may be increased by $100,000. The Canadian term loan was repaid during 2007. The Canadian and U.K. revolving facilities were both terminated in the first quarter of 2008. loans approximates fair value.
The interest raterates applicable to U.S.our term loanloans and revolving loanloans under the credit agreement are, at the Company'sour option, equal to either the base rate (which is the higher of (1) the prime rate, or(2) the federal funds rate plus 0.50%0.5% or (3) the one-month adjusted LIBOR rate plus 1%) plus an applicable interest rate margin based upon the leverage ratio or the adjusted LIBOR rate plus an

64

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

interest rate margin based upon the Company'sour leverage ratio. Based on the Company'sour leverage ratio, the margin range for base rate loans is 0% to 0.75% and the margin range for LIBOR based loans is 0.625%1% to 0.875%1.75%. TheAs of December 31, 2011, the interest rate margin for base rate loans was 0.625%0.75% and for adjusted LIBOR loans was 1.75%.
Our obligations under the credit agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of our assets, including a pledge of 100% of the capital stock of our domestic subsidiaries (other than the capital stock of any domestic subsidiary that is treated as


a disregarded entity for U.S. federal income tax purposes) and Table65% of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

4. Long-Term Debt (Continued)


of December 27, 2008. The Company has pledged the capital stock of certain first-tier foreign subsidiaries as well as certainand domestic disregarded entities, and mortgages on owned real property in the U.S. assets forhaving a book value in excess of $10,000. In addition, the $428,000 credit agreement. The $428,000 credit agreement includes certain customary representations and warranties, events of default, noticenotices of material adverse changechanges to our business and negative and affirmative covenants. These covenants includinginclude (1) the ratio of consolidated earnings before interest, taxes, depreciation and amortization less capital expenditures to consolidated cash interest expense, which for any period of four consecutive fiscal quarters, of no less than 3.5 to 1.0 as well as (2) the ratio of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization for any period of four consecutive fiscal quarters, of no more than 3.04.0 to 1.1.0 , which will step down to 3.5 to 1.0 effective in the second and third fiscal quarters in 2012, and thereafter will step down to 3.25 to 1.0 . As of December 27, 2008,31, 2011, we were compliant with all financial covenants specified in the credit agreement. The CompanyWe had $5,627 and $5,466$4,475 outstanding under letters of credit as of December 27, 2008 and December 29, 2007, respectively. As of December 27, 2008, $90,000 was outstanding on our U.S. revolving credit facility.

        On July 27, 2005 the Company entered into a $50,000 credit agreement ("$50,000 credit agreement"), which was subsequently amended on December 20, 2005 and again on July 31, 2006 to reflect substantially the same modifications made to the covenants in the $660,000 and $428,000 credit agreements, respectively. On June 15, 2007, the Company executed a third amendment to the $50,000 credit agreement to extend the maturity date and reduce the interest rate. The $50,000 credit agreement provides for a $50,000 term loan facility which matures on June 22, 2010. Prior to the amendment, the interest rate applicable to term loans under the credit agreement was, at the Company's option, equal to either the base rate (which was the higher of the prime rate or the federal funds rate plus 0.50%) or the LIBOR rate plus 0.75%2011. From June 15, 2007 through June 21, 2008, the interest rates applicable to term loans under the credit agreement are, at the Company's option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) minus 2.25% or the LIBOR rate plus 0.50%. Commencing June 22, 2008 through June 22, 2010, the applicable interest rates are equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 0.50%) or the adjusted LIBOR rate plus an interest rate margin based on the Company's leverage ratio. The Company has pledged certain U.S. assets for the $50,000 credit agreement. As of December 27, 2008, we were compliant with all financial covenants specified in the credit agreement. The $50,000 credit agreement includes certain customary representations and warranties, negative and affirmative covenants and events of default. As of December 27, 2008, $49,167 of the $50,000 credit agreement was outstanding.

        In 2006, we issued $350,000

Our $350,000 of 2.25% Convertible Senior Notes (the 2013 Notes) due in June 2013 with interest payable semi-annually. The 2013 Notessemi-annually are convertible into approximately 7.2 millioncash for the principal amount and shares of our common stock at an initialfor the conversion price of $48.94 per share of common stock. The 2013 Notes are convertible into cash and shares of our common stockpremium (or, at our election, cash in lieu of some or all of such common stock), if any, based on an initial conversion rate, subject to adjustment, of 20.4337 shares of our common stock per $1,000$1,000 principal amount of notes (which represents an initial conversion price of $48.94$48.94 per share), only in the following circumstances and to the following extent: (1) during any fiscal quarter beginning after July 1, 2006 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is more than 130% of the conversion price on the last day of such preceding fiscal quarter; (2) during the five business-day period after any five consecutive trading-day period, or the measurement period, in which the trading price per note for each day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (3) upon the occurrence of specified corporate transactions, as described in the indenture for the 2013


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

4. Long-Term Debt (Continued)


Notes; and (4) at the option of the holder at any time beginning on the date that is two months prior to the stated maturity date and ending on the close of business on the second trading-day immediately preceding the maturity date. Upon conversion, we will pay cash and shares of our common stock (or, at our election, cash in lieu of some or all of such common stock), if any. If we undergo a fundamental change as described in the indenture for the 2013 Notes, holders will have the option to require us to purchase all or any portion of their notes for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the purchase date.

        During the second and third quarters of 2008, our stock traded at or above 130% of the conversion price for 20 trading days during the last 30 consecutive trading days of the quarter. Since the conversion trigger was met, the 2013 Notes were convertible at the discretion of the bond holders during the third and fourth quarters of 2008. As of

At December 27, 2008, 5 bonds had been presented for conversion to occur in early February. The conversion trigger tests are repeated each fiscal quarter and no conversion triggers were met in the fourth quarter. At December 27, 2008,31, 2011, the fair value of our outstanding 2013 Notes was approximately $311.1$339,530 based on their quoted market value.

value and no conversion triggers were met.

5. Shareholders'As of December 31, 2011, $21,533 of debt discount remained and will be amortized over 6 quarters. As of December 31, 2011 and December 25, 2010, the equity component of our convertible debt was $88,492. Interest expense related to our convertible debt of $14,050 and $13,013 for years ending December 31, 2011 and December 25, 2010 respectively, yielded an effective interest rate of 6.93% on the liability component. In addition, $7,962 and $7,853 of contractual interest expense was recognized on our convertible debt during the years ended December 31, 2011 and December 25, 2010, respectively.
We have capital leases for equipment. These leases are capitalized using interest rates considered appropriate at the inception of each lease. Capital lease obligations amounted to $43 and $101 at December 31, 2011 and December 25, 2010, respectively.
6. Equity

Earnings Per Share

Basic earnings per share for 2008, 20072011, 2010 and 20062009 was computed by dividing earnings available to common shareholdersshareowners for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for 20072011 and 20062009 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

Options to purchase 4,481,1204,249,564 shares, 243,3576,594,313 shares and 2,972,4204,272,647 shares were outstanding at December 27, 2008, 31, 2011, December 29, 200725, 2010 and December 30, 2006,26, 2009, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.

In addition, weighted average shares outstanding for 2008, 20072011, 2010 and 20062009 excluded the weighted average impact of 777,494, 711,896703,011, 777,740 and 653,780896,393 shares, respectively, of non-vested fixed restricted stock awards.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

5. Shareholders' Equity (Continued)

The following table illustrates the reconciliation of the numerator and denominator in the computations of the basic and diluted earnings per share:

 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Numerator:

          

Income (loss) from continuing operations for purposes of calculating earnings per share

 $(522,267)$157,552 $125,221 

Income (loss) from discontinued businesses

 $424 $(3,146)$(181,004)
        

Denominator:

          

Weighted-average shares outstanding—Basic

  67,273,748  66,960,515  68,945,622 

Effect of dilutive securities:

          
 

2.25% senior convertible debentures

    481,136   
 

Stock options and contingently issued restricted stock

    1,160,369  867,204 
 

Warrants

    133,916  135,206 
        

Weighted-average shares outstanding—Diluted

  67,273,748  68,735,936  69,948,032 
        

Basic earnings (loss) per share from continuing operations

 $(7.76)$2.35 $1.82 

Basic earnings (loss) per share from discontinued operations

 $0.01 $(0.05)$(2.63)

Diluted earnings (loss) per share from continuing operations

 $(7.76)$2.29 $1.79 

Diluted earnings (loss) per share from discontinued operations

 $0.01 $(0.05)$(2.59)

 December 31, 2011 December 25, 2010 December 26, 2009
Numerator:     
Income (loss) from continuing operations for purposes of calculating earnings per share$115,111
 $(328,657) $113,042
Income (loss) from discontinued businesses(5,545) $(8,012) $1,399
Denominator:     
Weighted-average shares outstanding—Basic50,823,063
 62,561,294
 65,366,319
Effect of dilutive securities:     
2.25% senior convertible debentures
 
 
Stock options and contingently issued restricted stock495,179
 
 267,650
Warrants
 
 1,926
Weighted-average shares outstanding—Diluted51,318,242
 62,561,294
 65,635,895
Basic earnings (loss) per share from continuing operations attributable to common shareowners$2.26
 $(5.25) $1.73
Basic earnings (loss) per share from discontinued operations attributable to common shareowners$(0.11) $(0.13) $0.02
Diluted earnings (loss) per share from continuing operations attributable to common shareowners$2.24
 $(5.25) $1.72
Diluted earnings (loss) per share from discontinued operations attributable to common shareowners$(0.11) $(0.13) $0.02
The sum of the earnings (loss) per share from continuing operations attributable to common shareowners and the earnings (loss) per share from discontinued operations attributable to common shareowners does not necessarily equal the earnings (loss) per share from net income attributable to common shareowners in the consolidated statements of operations due to rounding.

Treasury Shares
On

        TheJuly 29, 2010, our Board of Directors has authorized a share$500,000 stock repurchase program. Our Board of Directors increased the stock repurchase authorization by $250,000 to $750,000 on October 20, 2010. In order to enable us to facilitate, on a more timely and cost efficient basis, the repurchase of a substantial number of our shares pursuant to that stock repurchase authorization, we entered into a series of accelerated stock repurchase (ASR) programs. The ASR programs are recorded as two transactions allocated between the initial purchase of treasury stock and a forward contract indexed to our common stock. The treasury shares result in an immediate reduction of shares on our statement of financial position and in our EPS calculation.

On August 26, 2010, we entered into an agreement with a third party investment bank to implement an ASR program originally authorized on July 27, 2005 and subsequently amended on October 26, 2005, May 9, 2006, August 1, 2007 and July 24, 2008 to acquire up to a total of $600,000repurchase $300,000 of common stock. Under this ASR, we paid $300,000 on August 27, 2010 from cash on hand and available liquidity, including funds borrowed by us under our $750,000 credit facility. The program does not have a fixed expiration date. In order to facilitate these share repurchases, we entered into Rule 10b5-1 Purchase Plans.

        During 2008, 2007 and 2006, we repurchased 2,159,908,initial delivery of 6,000,000 treasury shares of common stock for $109,260, 724,200 shares of common stock for $38,911, and 518,800 shares of common stock for $23,322, respectively, under these plans. In addition, concurrent withwas recorded at $175,066, the salemarket value at the date of the 2013 Notes, we used $148,866 of the net proceeds for the purchase of 3,726,300transaction. We received an additional 750,000 shares of its common stock.

        During 2006 we also entered into an Accelerated Stock Repurchase (ASR) program with a third-party investment bank. In connection with this ASR program, we purchased 1,787,706 shares of stock at a cost of $75,000. In conjunction with the ASR, we also entered into a cashless collar with a forward floor price of $37.9576 per share of our common stock (95% of the initial price of $39.9554, the market price of our common stock on August 23, 2006) and a forward cap price of $41.9532 per share of our common stock (105% of the initial price). The final number of shares repurchased under the ASR programon September 23, 2010, which were recorded at $23,511, which represented the market value on that date, and we received an additional 1,250,000 shares on December 21, 2010, which were recorded at $43,069, which also represented the market value on that date. During 2010, in total, we repurchased 8,000,000 shares under the ASR program. The ASR was determined by takingsettled on February 11, 2011 based on a discount to the averagedaily volume weighted average price (VWAP) of our common stock



66


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)


5. Shareholders' Equity (Continued)


for 65 trading days starting on August 23, 2006. Sincestock over the course of a calculation period. We received the final share price871,829 shares based on the settlement of $42.6503the ASR, which were recorded at $32,509.

On February 24, 2011, we entered into an ASR to repurchase $150,000 of common stock. Under the ASR, we paid $150,000 from cash on hand, including funds borrowed under our credit facility. Upon signing the ASR on February 24, 2011, we received the initial delivery of 3,759,398 shares, which was aboverecorded at $135,860 based on the cap pricemarket value at the date of $41.9532, therethe transaction, and recorded $14,140 as a forward contract indexed to our common stock. The ASR was no adjustmentsettled on May 16, 2011 based on a discount to the daily volume weighted average price (VWAP) of our common stock over the course of a calculation period. We received the final number6,505 shares based on the settlement of the ASR, which were recorded at $257.
During 2011, 2010 and 2009, we repurchased 3,790,762shares repurchased.

        As of December 27, 2008, approximately $187,140 remains authorizedcommon stock for share repurchases.

$130,853, 1,759,857 shares of common stock for $52,888 and 1,592,500 shares of common stock for $42,387, respectively, under our Rule 10b5-1 Purchase Plan and in open market trading. In May 2009, we terminated our Rule 10b5-1 Purchase Plan. The timing and amount of any future repurchases will depend on market conditions and corporate considerations.

Share repurchases during 2008, 20072011, 2010 and 20062009 were as follows:

 
 Fiscal Year Ended 
 
 December 27, 2008 December 29, 2007 December 30, 2006 

Number of shares of common stock repurchased

  2,159,908  724,200  6,032,806 

Total cost of repurchase

 $109,260 $38,911 $247,203 

 Fiscal Year Ended
 December 31, 2011 December 25, 2010 December 26, 2009
Number of shares of common stock repurchased8,428,494
 9,759,857
 1,592,500
Total cost of repurchase$299,479
 $294,534
 $42,387
Additionally, our 2000 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the fiscal year ended December 27, 2008, 31, 2011, December 29, 200725, 2010 and December 30, 2006,26, 2009, we acquired 104,66279,704 shares for $6,291, 71,456$2,942, 100,489 shares for $3,506$3,638 and 57,68880,234 shares for $2,755,$2,216, respectively, as a result of such withholdings.

        The timing and amount

Accumulated Deficit
None of any future repurchases will depend on market conditions and corporate considerations.

        Retained earnings includes approximately $2,000 whichour accumulated deficit is restricted due to statutory requirements in the local jurisdiction of a foreign subsidiary as of December 27, 200831, 2011 and December 29, 2007.

Accumulated Other Comprehensive Income

The composition of accumulated other comprehensive income is as follows:

 
 Foreign
Currency
Translation
Adjustment
 Pension Gains/(Losses)
and Prior Service
(Cost)/Credit Not Yet
Recognized as
Components of Net
Periodic Benefit Costs
 Net Unrealized
Gain on
Marketable
Securities
 Accumulated
Other
Comprehensive
Income
 

Balance at December 30, 2006

 $24,103 $(2,929)$(3)$21,171 
 

Period change

  58,045  10,201  (48) 68,198 
 

Tax

  (173) (3,637)    (3,810)
          

Balance at December 29, 2007

 $81,975 $3,635 $(51)$85,559 
          
 

Period change

  (79,278) (12,023) (2,167) (93,468)
 

Tax

  6,690  4,566    11,256 
          

Balance at December 27, 2008

 $9,387 $(3,822)$(2,218)$3,347 
          

 
Foreign
Currency
Translation
Adjustment
 
Pension Gains/(Losses)
and Prior Service
(Cost)/Credit Not Yet
Recognized as
Components of Net
Periodic Benefit Costs
 
Net Unrealized
Gain on
Marketable
Securities
 
Accumulated
Other
Comprehensive
Income
Balance at December 26, 2009$56,637
 $(10,150) $(1,450) $45,037
Period change(10,122) (10,776) 854
 (20,044)
Tax5,319
 3,323
 
 8,642
Balance at December 25, 2010$51,834
 $(17,603) $(596) $33,635
Period change(12,329) (22,660) (325) (35,314)
Tax(820) 7,092
 
 6,272
Balance at December 31, 2011$38,685
 $(33,171) $(921) $4,593
Warrants
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

5. Shareholders' Equity (Continued)

Separately and concurrently with the pricing of the 2013 Notes in June 2006, we issued warrants for approximately 7.2 million shares of our common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at our option) with a value equal to the appreciation in the price of our shares above $59.925,$59.925 and expire between September 13, 2013 and January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants was $65,423.

        As partwere


67

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

$65,423.

Noncontrolling Interests
We hold investments in several joint ventures. These joint ventures are separate legal entities whose purpose is consistent with our overall operations and represent geographic and business segment expansions of existing markets. The financial results of all joint ventures were consolidated in our results as we have the ability to exercise control over these entities. The interests of the recapitalizationoutside joint venture partners in 1999,these joint ventures have been recorded as noncontrolling interest totaling $1,780 and $1,304 at December 31, 2011 and December 25, 2010, respectively.
During the fourth quarter of 2010, we issued 150,000 units, each comprisedpurchased for $4,000 the remaining interest in our Charles River—PCS-China joint venture. The transaction closed on December 24, 2010 with the cash transferred on the following business day. On the date of a $1 senior subordinated note and a warrant tothe purchase, 7.6 shareswe recorded the purchase price of our common stock for total proceeds of $150,000. We allocated the $150,000 offering proceeds between the senior subordinated notes ($147,872)$4,000 and the warrants ($2,128), based upon the estimated fair value. The portionbalance of the proceeds allocatednoncontrolling interests of $8,623 to the warrants is reflected as capital in excess of par in the accompanying consolidated financial statements. Each warrant entitles the holder, subject to certain conditions, to purchase 7.6 shares of common stock at an exercise price of $5.19 per share of common stock, subject to adjustment under some circumstances. Upon exercise, the holders of warrants would be entitled to purchase 4,180 and 147,250 shares of our common stock as of December 27, 2008 and December 29, 2007, respectively. The warrants expire on October 1, 2009.

6.equity.

7. Income Taxes

An analysis of the components of income (loss) from continuing operations before income taxes minority interests and earnings from equity investments and the related provision for income taxes is presented below:

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Income before income taxes, minority interests and earnings from equity investments

          
 

U.S. 

 $106,392 $94,286 $90,598 
 

Non-U.S. 

  (567,402) 123,136  85,966 
        

 $(461,010)$217,422 $176,564 
        

Income tax provision

          
 

Current:

          
  

Federal

 $21,922 $39,907 $22,626 
  

Foreign

  28,355  21,547  10,895 
  

State and local

  1,278  7,732  5,501 
        
   

Total current

 $51,555 $69,186 $39,022 
        

Deferred:

          
  

Federal

 $7,758 $(3,469)$10,595 
  

Foreign

  (5,136) (4,689) 121 
  

State and local

  7,767  (1,628) 0 
        
   

Total deferred

 $10,389 $(9,786)$10,716 
        

 $61,944 $59,400 $49,738 
        

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

6. Income Taxes (Continued)

 Fiscal Year Ended
 December 31, 2011 December 25, 2010 December 26, 2009
Income (loss) from continuing operations before income taxes     
U.S. $47,158
 $(149,275) $38,368
Non-U.S. 85,504
 (184,807) 113,189
 $132,662
 $(334,082) $151,557
Income tax provision     
Current:     
Federal$3,957
 $11,378
 $(4,607)
Foreign20,727
 23,782
 26,851
State and local1,124
 2,416
 1,086
Total current$25,808
 $37,576
 $23,330
Deferred:     
Federal$2,961
 $(24,604) $16,968
Foreign(11,649) (9,696) (1,487)
State and local20
 (3,253) 1,543
Total deferred$(8,668) $(37,553) $17,024
 $17,140
 $23
 $40,354
Net deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws.


 
 December 27,
2008
 December 29,
2007
 

Compensation

 $38,973 $31,314 

Accruals and reserves

  1,502  643 

Financing related

  25,129  31,301 

Goodwill and other intangibles

  (5,805) (7,851)

Net operating loss and credit carryforwards

  27,446  17,609 

Depreciation related

  (35,738) (28,948)

Non-indefinitely reinvested earnings

  (2,039) 0 

Other

  606  (1,007)
      

  50,074  43,061 

Valuation allowance

  (4,197) (561)
      

Total deferred taxes

 $45,877 $42,500 
      
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

 December 31, 2011 December 25, 2010
Compensation$49,178
 $47,695
Accruals and reserves3,712
 4,725
Financing related3,193
 3,576
Goodwill and other intangibles(6,523) (5,876)
Net operating loss and credit carryforwards57,193
 36,359
Depreciation related(34,389) (28,400)
Non-indefinitely reinvested earnings(146) (250)
Other(1,795) (547)
 70,423
 57,282
Valuation allowance(12,178) (12,041)
Total deferred taxes$58,245
 $45,241
Reconciliations of the statutory U.S. Federal income tax rate to effective tax rates are as follows:

 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

U.S. statutory income tax rate

  (35.0)% 35.0% 35.0%

Foreign tax rate differences

  (2.6)% (3.9)% (3.4)%

State income taxes, net of Federal tax benefit

  1.5% 1.7% 1.9%

Unbenefitted losses and valuation allowance

  0.9% 0.3% (0.2)%

Net impact of change in APB23 assertion

  (1.5)% 0.0% 0.0%

Research tax credits and enhanced deductions

  (3.2)% (6.0)% (6.4)%

Enacted tax rate changes

  0.7% (1.3)% (1.0)%

Impact of tax uncertainties

  0.5% 2.2% 1.1%

Impact of goodwill impairment

  52.5% 0.0% 0.0%

Other

  (0.4)% (0.7)% 1.2%
        

  13.4% 27.3% 28.2%
        

        In the third quarter of 2008, the Company revalued certain of its deferred tax assets and liabilities due to the enactment of a Massachusetts state tax law change resulting in tax expense of $3,396. Additionally, the Company recorded a deferred tax liability of $1,897 in the fourth quarter of 2008 resulting from a newly promulgated Massachusetts regulation.

        During 2008, the Company recorded a reduction to income taxes payable for $4,911 from the exercise of stock options and vesting of restricted shares. The benefit of this reduction has been recorded to additional paid in capital for $4,769 and goodwill for $142.

 December 31, 2011 December 25, 2010 December 26, 2009
U.S. statutory income tax rate35.0 % (35.0)% 35.0 %
Foreign tax rate differences(6.7)% (1.3)% (5.4)%
State income taxes, net of Federal tax benefit2.1 % (0.7)% 1.3 %
Unbenefitted losses and valuation allowance0.6 % 0.6 % 1.4 %
Impact of repatriation of non-U.S.earnings0.5 % 4.6 % (0.7)%
Research tax credits and enhanced deductions(7.6)% (3.6)% (6.7)%
Enacted tax rate changes(1.0)%  % (0.1)%
Impact of tax uncertainties(1.0)% 3.1 % 1.2 %
Impact of goodwill and other impairments % 31.3 %  %
Releasing valuation allowance on loss from disposition of the Phase 1 Clinical business(8.4)%  %  %
Non taxable gain from settlement of life insurance policy(2.2)%  %  %
Other1.6 % 1.0 % 0.6 %
 12.9 % 0.0 % 26.6 %

As of December 27, 2008, the Company has31, 2011, we have non-U.S. net operating loss carryforwards, the tax effect of which is $10,064.$18,372. Of this amount, $816$1,125 will begin to expire in 2013.2013, $1,856 will expire in 2014, $915 will expire in 2015, $2,533 will expire in 2016, $150 will expire in 2017 and $390 will expire in 2018. The remainder of $11,403 can be carried forward indefinitely. The Company hasWe have U.S. net operating loss carryforwards at the state level, the tax effect of which is $421, which will expire between 2015 and 2031. We have U.S. foreign tax credit carryforwards of $10,665 which$25,481. Of this amount, $16,428 will begin to expire in 2019. The Company has state tax credit2019, $6,285 will expire in 2020, $2,448 will expire in 2021, and the remaining $320 thereafter. We have Canadian Scientific Research and Experimental Development (SR&ED) Credit carryforwards of $1,843$18,402, which begin to expire in 2017. The Company has2029. In accordance with Canadian Investment Tax Credit carryforwards of $3,885 as a result


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

6. Income Taxes (Continued)


of itsFederal tax law, we claim SR&ED credits on qualified research and development activitycosts incurred by our Preclinical service facility in Montreal, which begin to expire in 2026. The Company has capital loss carryforwardsCanada, in the USperformance of projects for non-Canadian clients. Additionally, in accordance with the tax law of the United Kingdom, we claim enhanced deductions related to qualified research and development costs incurred by our Preclinical service facility in Scotland, in the performance of certain client contracts. We have unrealized capital losses in the U.S. and Canada, the tax effect of which is $825$341 and $164,$277, respectively.

        The Company has

We record deferred tax assets for stock-based awards based on the amount of stock-based compensation recognized in

69

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

our Consolidated Statements of Income at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assets and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less that the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, the subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits, which is computed in accordance with the long form method, was $10,580 as of December 31, 2011 and $12,614 as of December 25, 2010. During 2011, we recorded a tax detriment of $802 to additional paid-in-capital related to the exercise of stock options and vesting of restricted shares.

We have fully recognized itsour deferred tax assets on the belief that it is more likely than not that they will be realized. The only exceptions at December 27, 200831, 2011 relate to deferred tax assets primarily for net operating losses in China, Hong Kong, India, Luxembourg and China and athe Netherlands, capital losslosses in the U.S., and Canada, and fixed assets in the U.K. which have resulted in an increase of $137 in the valuation allowance increasing from $561$12,041 at December 29, 200725, 2010 to $4,197$12,178 at December 27, 2008. The Company established a31, 2011. We increased the valuation allowance against these tax attributes due to the determination, after consideration of all evidence, both positive and negative, that it is more likely than not that these carryforwardsdeferred tax assets will not be realized.

        In July 2006,

During the FASB issued FASB Interpretation No. 48, "Accountingfourth quarter of 2010, we took actions to divest of our Phase 1 clinical business. We recorded in discontinued operations a deferred tax asset associated with the excess of the tax outside basis over the basis for Uncertaintyfinancial reporting purposes of the Phase 1 clinical business. As of the fourth quarter of 2010, we determined that we did not meet the more-likely-than-not realization threshold for this deferred tax asset and we recorded a valuation allowance against it as part of discontinued operations. During the first quarter of 2011, we determined that the tax loss would more-likely-than-not be benefitted as a worthless stock deduction. As such, we released the valuation allowance recorded against the tax loss on the Phase 1 clinical business and recognized a $11,111 benefit in Income Taxes—an interpretationcontinuing operations during the first quarter of FASB Statement No. 109" (FIN 48), which became effective for the Company on2011.
At December 31, 2006. The cumulative effect of adopting FIN 48 did not result in a change to2011, the Company's opening retained earnings.amount recorded for unrecognized tax benefits was $27,976. At December 27, 200825, 2010 the amount recorded for unrecognized income tax benefits was $28,732. At December 29, 2007, the amount recorded for unrecognized tax benefits was $22,129.$33,427. The increase$5,451 decrease during 20082011 is primarily dueattributable to the continuingsettlement reached with the German Tax Office related to an uncertain tax position for the deductibility of interest. This decrease was offset by increases resulting from ongoing evaluation of uncertain tax positions conducted in the current and prior periods.periods and foreign exchange movement. The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $12,500$22,477 as of December 29, 200731, 2011 and increased to $21,441$28,456 as of December 27, 2008. This increase25, 2010. The $5,979 decrease is primarily attributable to the settlement of the German controversy which is partially offset by increases due to the amendment to SFAS 109 by SFAS 141(R) with regards to accounting for adjustments to incomeongoing evaluation of uncertain tax uncertainties related to acquisitions, generally requiring that, on a prospective basis, such adjustments be reflectedpositions in the effective tax rate versus impacting goodwill.

        The Company'scurrent and prior periods and foreign exchange movement.

A reconciliation of our beginning and ending unrecognized income tax benefits areis as follows:

 
 December 27,
2008
 December 29,
2007
 

Beginning balance

 $22,129 $16,896 

Additions:

       
 

Tax positions for current year

  2,071  3,612 
 

Tax positions for prior years

  8,041  2,413 

Reductions:

       
 

Tax positions for current year

  (252) (65)
 

Tax positions for prior years

  (3,011) (43)
 

Settlements

    (177)
 

Expiration of statute of limitations

  (246) (507)
      

Ending balance

 $28,732 $22,129 
      

        The Company continues

 December 31, 2011 December 25, 2010 December 26, 2009
Beginning balance$33,427
 $21,389
 $28,732
Additions:     
Tax positions for current year1,714
 13,142
 1,515
Tax positions for prior years
 693
 2,367
Reductions:     
Tax positions for current year
 
 
Tax positions for prior years(239) (1,797) (1,024)
Settlements(6,926) 
 (10,113)
Expiration of statute of limitations
 
 (88)
Ending balance$27,976
 $33,427
 $21,389


We continue to recognize interest and penalties related to unrecognized income tax benefits in income tax expense.

70

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The total amount of accrued interest related to unrecognized income tax benefits as of December 29, 200731, 2011 and December 27, 200825, 2010 was $1,753$1,515 and $2,729,$2,313, respectively. The Company has$798 decrease is primarily attributable to settlement of the German controversy, which is partially offset by increases due to ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement. We have not recorded a provision for penalties associated with uncertain tax positions.

        The Company conducts

We conduct business operations in a number of tax jurisdictions. As a result, the Company iswe are subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the United States, the United Kingdom, Germany and Canada. With few exceptions, we are no longer subject to U.S. and international income tax examinations for years before 2002.

2005.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

6. Income Taxes (Continued)

        The CompanyWe and certain of itsour subsidiaries are currently under audit by the CanadaCanadian Revenue Agency,Authority (CRA), the InternalMinister of Revenue Service in the United States,Quebec provincial tax authority (MRQ) and the Commonwealth of Massachusetts. It is reasonably possible that the Company will settle with the IRS Appeals division on proposed adjustments related to the 2004 and 2005various state tax filings for the Company and an acquired subsidiary and conclude an examination of the 2006 tax filings for the Company within the next twelve months.authorities. We do not anticipatebelieve that the settlementresolution of the proposed audit adjustments, which relate primarily to issues associated with an acquisition,these audits will have a material impact on our financial position or results of operations. During

Additionally, we are challenging the reassessments received by the CRA with respect to the SR&ED credits claimed in 2003 and 2004 by our Canadian Preclinical Services subsidiary in the Tax Court of Canada (TCC). In the fourth quarter of 2008, there has been no change2009 and the first quarter of 2010, we filed Notices of Appeal with the TCC and received the Crown's response in the statussecond quarter of 2010. In a related development, during the ongoing examinationsfirst quarter of 2010 we received Notices of Reassessment from the MRQ with respect to the Quebec Research and Development tax credit. We filed Notices of Objection with the MRQ in the second quarter of 2010. We disagree with the positions taken by the Canada Revenue AgencyCRA and Massachusetts DepartmentMRQ with regard to the credits claimed. We believe that it is reasonably possible that we will conclude the controversies with the TCC and MRQ within the next twelve months. We do not believe that resolution of Revenue. The Company believesthese controversies will have a material impact on our financial position or results of operations. However, it hasis possible that the CRA and MRQ will propose similar adjustments for later years.
We believe we have appropriately provided for all unrecognizeduncertain tax benefits.

positions.

During 2010, we executed an agreement to implement an accelerated share repurchase (ASR) program to repurchase $300,000 of common stock. The ASR resulted in a cash need in the first quarterUnited States that was previously unforeseen. In accordance with our policy with respect to the unremitted earnings of 2009, the Company plans to repatriate approximately $90,000our non-U.S. subsidiaries, we evaluated whether a portion of the foreign earnings could be repatriated in order to fund the ASR. We determined that approximately $229,792of itsearnings that were previously indefinitely reinvested and approximately $63,640 in basis in our non-U.S. subsidiaries.subsidiaries could be repatriated in a substantially tax-free manner. As such, the Company hasa result, in 2010, we changed its permanentour indefinite reinvestment assertion with regardsrespect to these unremitted earnings. As a result ofearnings and accrued the change in assertion, the Company recorded a tax benefit primarily duecost to foreign tax credits in the fourth quarter of 2008 of $7,227,repatriate $10,334, of which $4,045 was$15,264 is reflected in the effective tax rate and $3,182 was reflectedas Income Tax Expense, with an offsetting benefit of $4,930, which is recorded in the Cumulative Translation Account. The proceeds from the repatriation will be used for general corporate purposes. The Company continues to maintain its permanent reinvestment assertion with regardsAdjustment account. During 2010, we repatriated approximately $293,432 to the U.S. to partially fund the ASR and the $30,000 termination fee for a proposed acquisition.
In accordance with our policy, the remaining unremittedundistributed earnings of itsour non-U.S. subsidiaries.

subsidiaries remain indefinitely reinvested as of the end of 2011 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free. During the third quarter of 2011, we restructured our international operations in a tax-free manner to allow us more flexibility in accessing our offshore cash to fund needs outside the U.S. As of December 27, 2008,31, 2011, the earnings of the Company'sour non-U.S. subsidiaries considered to be indefinitely reinvested totaled $192,917. $106,504. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Companywe would be subject to both U.S. Federal and state income taxes and withholding taxes payable to the various foreign countries. It is not practicable to estimate the amount of additional tax that might be payable on this undistributed foreign income.

On June 12, 2006, the Companywe issued $300,000$300,000 aggregate principal amount of convertible senior notes ("the 2013 Notes")(2013 Notes) in a private placement with net proceeds to the Companyus of approximately $294,000.$294,000. On June 20, 2006, the initial purchasers associated with this convertible debt offering exercised an option to purchase an additional $50,000$50,000 of the 2013 Notes for additional net proceeds to the Company of approximately $49,000.$49,000. The 2013 Notes bear stated interest at 2.25% per annum, payable semi-annually, and mature on June 15, 2013. In accordance with the applicable accounting rules, a debt discount of $88,492 was recorded upon issuance of the 2013 Notes. Concurrently with the saleissuance of the 2013 Notes, the Companywe entered into convertible note hedge transactions with respect to its obligation to deliver common stock under the notes.2013 Notes. Separately and concurrently with the pricing of the 2013 Notes, the Companywe issued warrants for approximately 7.2 million shares of its common stock. The Company hasWe elected to apply the rules of the Integration Regulations under Treas. Reg. 1.1275-6 to treat the 2013 Notes and the associated hedge as synthetic debt instruments and accordingly is deductingwe deduct the option premium paid for the hedge as original issue discount (OID) over the 7 year term. The cash tax benefit of this deduction is recorded to additional paid in capital. A deferred tax asset has beenwas recorded at issuance with an offset to reflectAdditional Paid in Capital for tax savings

71

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

resulting from the future cash tax benefitexcess of the deductionsOID over the interest expense to be reported in our Statement of Income during the term of the 2013 Notes. Also, pursuant to Internal Revenue Code Section 1032, the Companywe will not recognize any gain or loss for tax purpose with respect to the exercise or lapse of the warrants.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7.

8. Employee Benefits

Charles River Laboratories Employee Savings Plan

Our defined contribution plan, the Charles River Laboratories Employee Savings Plan, qualifies under section 401(k) of the Internal Revenue Code. It covers substantially all U.S. employees and contains a provision whereby we match a percentage of employee contributions. The costs associated with this defined contribution plan totaled $6,377, $4,074$4,178, $4,694 and $3,439,$6,253, in 2008, 20072011, 2010 and 2006,2009, respectively.

Charles River Laboratories Deferred Compensation Plan and Executive Supplemental Life Insurance Retirement Plan

The Charles River Laboratories Deferred Compensation Plan (Deferred Compensation Plan) is designed for select eligible employees, including our Named Executive Officers. Under the Deferred Compensation Plan, participants may elect to defer bonus and salary amounts, and may select the investment returns to be applied to deferred amounts from among a number of reference mutual funds as well as an interest crediting rate. The plan is not qualified under Section 401(a) of the Internal Revenue Code and is not subject to the Employee Retirement Income Security Act of 1974. At the present time, no contributions will be credited to the plan, except as set forth below. Participants must specify the distribution date for deferred amounts at the time of deferral, in accordance with applicable IRS regulations. Generally, amounts may be paid in lump sum or installments upon retirement or termination of employment, or later if the employee terminates employment after age 55 and before age 65.65. Amounts may also be distributed during employment, subject to a minimum deferral requirement of three years.

In addition to the Deferred Compensation Plan, certain officers and key employees also participate, or in the past participated, in our amended and restated Executive Supplemental Life Insurance Retirement Plan (ESLIRP) which is a non-funded, non-qualified arrangement. Annual benefits under this plan will equal a percentage of the highest five consecutive years of compensation, offset by amounts payable under the Charles River Laboratories, Inc. Pension Plan and Social Security.

In connection with the establishment of the Deferred Compensation Plan, current active employees who agreed to convert their ESLIRP benefit to a comparable benefit in the deferred compensation plan discontinued their direct participation in the ESLIRP. Instead, the present value of the accrued benefits of ESLIRP participants was credited to their Deferred Compensation Plan accounts, and future ESLIRP accruals will now be converted to present values and credited to their Deferred Compensation Plan accounts annually. Upon the adoption of the Deferred Compensation Plan, the value of their accrued ESLIRP benefits, prior to adjustments for outstanding Medicare taxes, were credited to their Deferred Compensation Plan account. In addition, we provide certain active employees an annual contribution into their Deferred Compensation Plan account of 10% of the employee's base salary plus the lesser of their target annual bonus or actual annual bonus. The costs associated with these defined contribution plans totaled $2,819, $3,462$2,048, $3,082 and $4,029$3,562 in 2008, 20072011, 2010 and 2006,2009, respectively.

        The Company has

We have invested in several corporate-owned key-person life insurance policies as well as mutual funds and U.S. Treasury Securities with the intention of using these investments to fund the ESLIRP and the Deferred Compensation Plan. Participants have no interest in any such investments. At December 27, 200831, 2011 and December 29, 200725, 2010 the cash surrender value of these life insurance policies were $19,652$25,057 and $22,027,$31,054, respectively.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Employee Benefits (Continued)

The Charles River Pension Plan is a defined contribution plan and a defined benefit pension plan covering certain UK employees. Benefits are based on participants' final pensionable salary and years of service. Participants' rights vest immediately. Effective December 31, 2002, the plan was amended to exclude new participants from joining the defined benefit section of the plan and a defined contribution section was established for new entrants. Contributions under the defined contribution plan are determined as a percentage of gross salary.

        The Charles River Laboratories, Inc. Pension Plan is a qualified, non-contributory defined benefit During 2009, the UK plan that covers certain U.S. employees. Benefits are based on participants' final average monthly compensation and years of service. Participants' rights vest upon completion of five years of service. Effective January 1, 2002, this plan was amended to exclude new participants from joining. Benefit criteria offered to existing participants as of the amendment date did not change. During 2008, our Board of Directors voted to freeze the accrual of benefits under the Pension Plan effective April 30, 2008. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," we recorded a curtailment gain of $3,276$674 associated with the sale of our Phase I PCS business in 2008. Based on a remeasurement of the U.S. pension plan's assets and liabilities at April 30, 2008, the benefit accrual freeze reduced the projected benefit obligation by $8,298 and resulted in a corresponding adjustment, net of tax, to accumulated other comprehensive income.

UK.

The defined benefit pension plans for Japan and our Canadian RMS operation are non-contributory plans that cover substantially all employees of those respective companies. Benefits are based upon length of service and final salary. In addition, our French RMS operation has a defined benefit statutory indemnity plan covering most of its employees.


72

Table of Contents
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The following tables summarize the funded status of our defined benefit plans and amounts reflected in our consolidated balance sheets.

Obligations and Funded Status

��
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2008 2007 

Change in benefit obligations

             
 

Benefit obligation at beginning of year

 $232,852 $212,998 $29,925 $29,262 
 

Service cost

  4,037  6,204  908  882 
 

Interest cost

  12,014  11,663  1,718  1,580 
 

Plan participants' contributions

  789  919     
 

Curtailment

  (14,483)      
 

Settlement gain

  (3,454) (1,214)    
 

Benefit payments

  (5,404) (4,857) (704) (605)
 

Actuarial loss (gain)

  (24,564) (8,905) (734) (1,194)
 

Plan amendments

  137  24     
 

Other

    1,353     
 

Effect of foreign exchange

  (35,663) 14,667     
          
 

Benefit obligation at end of year

 $166,261 $232,852 $31,113 $29,925 
          

 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2011 2010
Change in benefit obligations       
Benefit obligation at beginning of year$228,810
 $205,913
 $30,572
 $28,297
Service cost3,056
 2,617
 636
 597
Interest cost12,107
 11,214
 1,201
 1,341
Plan participants' contributions574
 585
 
 
Curtailment
 
 
 
Settlements(158) (579) (5,113) 
Benefit payments(6,664) (5,849) (764) (764)
Actuarial loss (gain)13,319
 19,011
 (76) 1,101
Plan amendments53
 
 
 
Administrative expenses paid(272) (307) 
 
Effect of foreign exchange1,091
 (3,795) 
 
Benefit obligation at end of year$251,916
 $228,810
 $26,456
 $30,572
Change in plan assets       
Fair value of plan assets at beginning of year$192,429
 $174,022
 $
 $
Plan assets assumed
 
 
 
Actual return on plan assets3,661
 20,512
 
 
Settlements(158) (578) (5,113) 
Employer contributions12,170
 7,515
 5,877
 764
Plan participants' contributions574
 585
 
 
Benefit payments(6,664) (5,849) (764) (764)
Premiums paid(272) 
 
 
Other
 (307) 
 
Effect of foreign exchange912
 (3,471) 
 
Fair value of plan assets at end of year$202,652
 $192,429
 $
 $
Funded status       
Projected benefit obligation$251,916
 $228,810
 $26,456
 $30,572
Fair value of plan assets202,652
 192,429
 
 
Net balance sheet liability$49,264
 $36,381
 $26,456
 $30,572
Classification of net balance sheet liability       
Non-current assets$11
 $
 $
 $
Current liabilities52
 46
 717
 5,913
Non-current liabilities49,223
 36,335
 25,739
 24,659


73

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Employee Benefits (Continued)


 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2008 2007 

Change in plan assets

             
 

Fair value of plan assets at beginning of year

 $196,214 $163,446 $ $ 
 

Plan assets assumed

         
 

Actual return on plan assets

  (35,272) 11,598     
 

Settlement gain

  (3,454) (1,214)    
 

Employer contributions

  14,169  12,364  704  605 
 

Plan participants' contributions

  789  919     
 

Benefit payments

  (5,404) (4,857) (704) (605)
 

Premiums paid

         
 

Other

    383     
 

Effect of foreign exchange

  (33,008) 13,575     
          
 

Fair value of plan assets at end of year

 $134,034 $196,214 $ $ 
          

Funded status

             
 

Projected benefit obligation

 $166,261 $232,852 $31,113 $29,925 
 

Fair value of plan assets

  134,034  196,214     
          
 

Net balance sheet liability

 $32,227 $36,638 $31,113 $29,925 
          

Classification of net balance sheet liability

             
 

Current liabilities

 $52 $909 $5,159 $632 
 

Non-current liabilities

  32,175  35,729 $25,954 $29,293 

The accumulated benefit obligation for all defined benefit plans

 
$

162,843
 
$

214,564
 
$

20,614
 
$

23,308
 

Information for defined benefit plans with accumulated benefit obligation in excess of plan assets

 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2008 2007 

Projected benefit obligation

 $157,068 $165,080 $31,113 $29,925 

Accumulated benefit obligation

  156,017  163,741  20,614  23,308 

Fair value of plan assets

  125,143  142,131     

Information for defined benefit plans with projected benefit obligation in excess of plan assets

 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2008 2007 

Projected benefit obligation

 $166,261 $232,852 $31,112 $29,925 

Accumulated benefit obligation

  162,843  214,564  20,614  23,308 

Fair value of plan assets

  134,034  196,214     

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Employee Benefits (Continued)

Amounts recognized in statement of financial position as part of accumulated other comprehensive income ("AOCI")

 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2008 2007 

Net actuarial (gain)/loss

 $14,309 $(2,962)$6,365 $7,512 

Net prior service cost/(credit)

  (9,124) (11,023) 3,475  3,973 

Effect of foreign exchange

  (5,400) 103     
          

Total pre-tax

  (215) (13,882) 9,840  11,485 

Less: taxes

  1,908  (3,305) 3,895  4,541 
          

Total

 $(2,123)$(10,577)$5,945 $6,944 
          

 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2011 2010
Net actuarial (gain)/loss$52,384
 $30,045
 $3,190
 $2,988
Net prior service cost/(credit)(7,117) (7,734) 1,981
 2,479
Total$45,267
 $22,311
 $5,171
 $5,467
The accumulated benefit obligation for all defined benefit plans$245,705
 $224,127
 $24,663
 $29,073
Information for defined benefit plans with accumulated benefit obligation in excess of plan assets
 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2011 2010
Projected benefit obligation$247,232
 $216,088
 $26,457
 $30,572
Accumulated benefit obligation242,467
 214,802
 24,663
 29,073
Fair value of plan assets198,689
 180,587
 
 
Information for defined benefit plans with projected benefit obligation in excess of plan assets

 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2011 2010
Projected benefit obligation$251,723
 $228,810
 $26,457
 $30,572
Accumulated benefit obligation245,574
 224,127
 24,663
 29,073
Fair value of plan assets202,448
 192,429
 
 
Amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year

 
 Pension
Benefits
 Supplemental
Retirement
Benefits
 

Amortization of net actuarial (gain)/loss

 $1,250 $291 

Amortization of net prior service cost/(credit)

  (607) 498 

Components of net periodic benefit cost

 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2006 2008 2007 2006 

Service cost

 $4,037 $6,204 $6,426 $908 $882 $839 

Interest cost

  12,014  11,663  9,921  1,718  1,581  1,527 

Expected return on plan assets

  (13,499) (12,630) (10,013)      

Amortization of prior service cost (credit)

  (684) (526) (547) 498  498  498 

Amortization of net loss

  (31) 386  1,011  413  568  1,139 
              

Net periodic benefit cost

  1,837  5,097  6,798  3,537  3,529  4,003 

Curtailment gain

  (3,345) 326  (1,334)      
              

Net pension cost

 $(1,508)$5,423 $5,464 $3,537 $3,529 $4,003 
              

 
Pension
Benefits
 
Supplemental
Retirement
Benefits
Amortization of net actuarial (gain)/loss$2,338
 $261
Amortization of net prior service cost/(credit)(596) 660








74

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Employee Benefits (Continued)


Components of net periodic benefit cost

 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2009 2011 2010 2009
Service cost$3,056
 $2,617
 $2,283
 $636
 $597
 $623
Interest cost12,107
 11,214
 9,771
 1,201
 1,341
 1,485
Expected return on plan assets(13,677) (12,185) (9,783) 
 
 
Amortization of prior service cost (credit)(617) (598) (618) 498
 498
 498
Amortization of net loss (gain)978
 749
 1,271
 210
 155
 125
Net periodic benefit cost1,847
 1,797
 2,924
 2,545
 2,591
 2,731
Settlement23
 27
 43
 (487) 
 
Curtailment gain
 
 (674) 
 
 
Net pension cost$1,870
 $1,824
 $2,293
 $2,058
 $2,591
 $2,731
Rollforward of accumulated other comprehensive income
 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2011 2010
Beginning balance$22,311
 $12,012
 $5,467
 $5,020
Amortization of prior service cost617
 598
 (497) (498)
Amortization of net gain (loss)(978) (749) (210) (155)
Asset loss/(gain)10,016
 (8,327) 
 
Liability loss/(gain)13,319
 19,011
 (76) 1,100
Recognized prior service (cost) credit due to curtailment53
 
 
 
Recognized (loss)/gain due to settlement(23) (27) 487
 
Currency impact(48) (207) 
 
Ending balance$45,267
 $22,311
 $5,171
 $5,467
Assumptions

Weighted-average assumptions used to determine benefit obligations

 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2008 2007 

Discount rate

  5.74% 5.69% 6.15% 5.88%

Rate of compensation increase

  2.90% 4.07% 4.75% 4.75%

 
Pension
Benefits
 
Supplemental
Retirement Benefits
 2011 2010 2011 2010
Discount rate4.47% 5.20% 3.42% 4.34%
Rate of compensation increase3.12% 2.50% 2.50% 2.50%





75

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

Weighted-average assumptions used to determine net periodic benefit cost

 
 Pension Benefits Supplemental
Retirement Benefits
 
 
 2008 2007 2006 2008 2007 2006 

Discount rate

  5.69% 5.14% 4.95% 5.88% 5.56% 5.50%

Expected long-term return on plan assets

  7.10% 7.00% 6.58%      

Rate of compensation increase

  4.07% 3.94% 3.31% 4.75% 4.75% 4.75%

 Pension Benefits 
Supplemental
Retirement Benefits
 2011 2010 2009 2011 2010 2009
Discount rate5.20% 5.63% 5.74% 4.34% 5.22% 6.15%
Expected long-term return on plan assets6.79% 7.11% 6.84% 
 
 
Rate of compensation increase3.48% 2.50% 3.24% 2.50% 2.50% 4.75%
The expected long-term rate of return on plan assets was made considering the pension plan's asset mix, historical returns and the expected yields on plan assets.

The discount rates reflect the rates at which amounts that are invested in a portfolio of high-quality debt instruments would provide the future cash flows necessary to pay benefits when they become due. The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and our current employee compensation strategy.

Plan assets

        The Company's

Our pension planplans' weighted-average asset allocations are as follows:

 
 Target
Allocation
 Pension Benefits 
 
 2009 2008 2007 

Equity securities

  66% 56% 60%

Fixed income

  31% 36% 24%

Other

  3% 8% 16%
        

Total

  100% 100% 100%
        

 
Target
Allocation
 
Pension
Benefits
 2012 2011 2010
Equity securities67% 59% 65%
Fixed income31% 37% 31%
Other2% 4% 4%
Total100% 100% 100%
Our investment objective is to obtain the highest possible return commensurate with the level of assumed risk. Fund performances are compared to benchmarks including the S&P 500 Index, Russell 1000 Index, Russell 30002000, BC Aggregate Index and Lehman Brothers Aggregate BondMSCI EAFE Index. The Company'sOur Investment Committee meets on a quarterly basis to review plan assets.

Plan assets did not include any of our common stock at December 27, 200831, 2011 and December 29, 2007.25, 2010, respectively.
The fair value of our pension assets by asset category are as follows.
 Fair Value Measurements at December 31, 2011
Assets
Quoted Prices in
Active Markets
for Identical
Assets
Level 1
 
Significant Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Assets at
Fair Value
Cash$1,132
 $
 $
 $1,132
Common stock(a)85,288
 
 
 85,288
Debt securities(a)54,067
 
 
 54,067
Mutual funds(b)45,818
 14,559
 
 60,377
Life insurance policies(c)
 284
 1,419
 1,703
Other (d)85
 
 
 85
Total$186,390
 $14,843
 $1,419
 $202,652


(a)This category comprises investments valued at the closing price reported on the active market on which the individual securities are traded.
(b)This category comprises mutual funds valued at the net asset value of shares held at year end.

76

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

(c)This category comprises life insurance policies valued at cash surrender value at year end.
(d)This comprises annuity policies held with various insurance companies valued at face value.
 
Fair Value Measurements
Using Significant
Unobservable
Inputs
(Level 3)
Balance at December 25, 2010$1,203
Actual return on plan assets: 
Relating to assets still held at December 31, 2011334
Relating to assets sold during the period 
Purchases, sales and settlements(118)
Transfers in and/or out of Level 3
Balance at December 31, 2011$1,419
Contributions
Contributions

During 2008,2011, we contributed $13,597$18,047 to our pension plans. We expect to contribute $8,907$13,868 to our pension plan in 2009.


Table of Contents2012


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Employee Benefits (Continued)

Estimated future benefit payments

 
 Pension
Benefits
 Supplemental
Retirement
Benefits
 

2009

 $4,286 $5,159 

2010

  3,971  768 

2011

  4,187  758 

2012

  4,950  719 

2013

  5,306  17,726 

2014-2018

  35,931  10,783 

8.

 
Pension
Benefits
 
Supplemental
Retirement Benefits
2012$5,961
 $731
20136,869
 10,760
20146,679
 797
20157,379
 739
20168,357
 5,379
2017-2021$49,874
 $3,432

9. Stock Plans and Stock Based Compensation

We have share-based compensation plans under which employees and non-employee directors may be granted share based awards. During 2008, 20072011, 2010 and 2006,2009, the primary share-based awards and their general terms and conditions are as follows:

Stock options, which entitle the holder to purchase a specified number of shares of common stock at an exercise price equal to the closing market price of our common stock on the date of grant; vest incrementally, typically over three to four years; and generally expire seven to ten years from date of grant.

Restricted stock grants, which entitle the holder to receive at no cost, a specified number of shares of common stock that vests incrementally, typically over three to four years. Recipients are entitled to cash dividends and to vote their respective shares upon grant.

Performance based stock awards, which entitle the holder to receive at no cost, a specified number of shares of common stock within a range of shares from zero to a specified maximum. Payout of this award is contingent upon achievement of individualized stretch goals as determined by our Compensation Committee of the Board of Directors.

At the Annual Meeting of Shareholders held on May 8, 2007, our shareholders approved the 2007 Incentive Plan ("(2007 Plan). The 2007 Plan was subsequently amended in 2009 and 2011, and in each case the 2007 Plan").amendments were approved by our shareholders at the respective annual meeting of shareholders. The 2007 Plan provides that effective upon approval, no further awards will be granted under preexisting stock option and incentive plans; provided, however, that any shares that have been forfeited or canceled in accordance with the terms of the applicable award under a preexisting plan may be subsequently awarded in accordance with the terms of the preexisting plan. The 2007 Plan allows a maximum of 6.312.2 million shares to be awarded of which restricted stock grants and performance based stock awards count as 2.3 shares and stock options count as

77

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

one share. In the past, we had various employee stock and incentive plans under which stock options and other share-based awards were granted. Stock options and other share-based awards that were granted under prior plans and were outstanding on May 8, 2007, continue in accordance with the terms of the respective plans.

At December 27, 2008,31, 2011, approximately 4.55.8 million shares were authorized for future grants under our share-based compensation plans. We settle employee share-based compensation awards with newly issued shares.

The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards' vesting period on a straight-line basis in accordance with SFAS No. 123(R).basis. The effect of


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Stock Based Compensation (Continued)


recordingfollowing table presents stock-based compensation included in our consolidated statement of income:

 December 31, 2011 December 25, 2010 December 26, 2009
Stock-based compensation expense in:     
Cost of sales$5,983
 $7,186
 $7,006
Selling and administration15,723
 18,340
 16,646
Income from continuing operations, before income taxes21,706
 25,526
 23,652
Provision for income taxes(7,784) (9,179) (8,388)
Net income attributable to common shareowners$13,922
 $16,347
 $15,264
We capitalized no stock-based compensation related costs for the fiscal yearyears ended December 27, 2008, December 29, 20072011, 2010 and December 30, 2006 was as follows:

2009.
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Stock-based compensation expense by type of award:

          
 

Stock options

 $10,268 $11,042 $11,878 
 

Restricted stock

  14,065  14,976  9,271 
        
 

Share-based compensation expense before tax

  24,333  26,018  21,149 
 

Income tax benefit

  (8,612) (8,424) (7,746)
        
 

Reduction to income from continuing operations

  15,721  17,594  13,403 
 

Share-based compensation expense of discontinued businesses, net of tax

      980 
        

Reduction to net income

 $15,721 $17,594 $14,383 
        

Reduction to earnings per share:

          
 

Basic

 $0.23 $0.26 $0.21 
 

Diluted

 $0.23 $0.26 $0.21 

Effect on income by line item:

          
 

Cost of sales

 $6,406 $8,258 $7,033 
 

Selling and administration

  17,927  17,759  14,116 
        
 

Share based compensation expense before tax

  24,333  26,017  21,149 
 

Income tax benefit

  (8,612) (8,423) (7,746)
 

Operations of discontinued businesses, net of tax

      980 
        

Reduction to net income

 $15,721 $17,594 $14,383 
        

        We estimate the fair value of stock options using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the option's expected term, the expected annual dividend yield and the expected stock price volatility. The expected stock price volatility assumption was determined using the historical volatility of our common stock over the expected life of the option. The risk-free interest rate was based on the market yield for the five year U.S. Treasury security. The expected life of options was determined using historical option exercise activity. Management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted during fiscal years 2008, 2007 and 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Stock Based Compensation (Continued)

The fair value of stock-based awards granted during 2008, 20072011, 2010 and 20062009 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Expected life (in years)

  4.5  5.0  4.9 

Expected volatility

  24% 30% 30%

Risk-free interest rate

  2.8% 4.6% 4.8%

Expected dividend yield

  0.0% 0.0% 0.0%

Weighted—average grant date fair value

 $14.85 $16.49 $13.91 

 December 31, 2011 December 25, 2010 December 26, 2009
Expected life (in years)4.2
 4.5
 4.5
Expected volatility33% 34% 25%
Risk-free interest rate2.21% 2.35% 1.87%
Expected dividend yield0% 0% 0%
Weighted—average grant date fair value$11.32
 $11.96
 $6.15














78

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

Stock Options

The following table summarizes stock option activities under our plans:

 
 Shares Weighted Average
Exercise Price
 Weighted Average
Remaining
Contractual Life
(in years)
 Aggregate
Intrinsic
Value
 

Options outstanding as of December 31, 2005

  5,554,340 $35.39       

Options granted

  889,650 $39.62       

Options exercised

  (766,209)$29.97       

Options canceled

  (285,168)$41.85       
             

Options outstanding as of December 30, 2006

  5,392,613 $36.50       

Options granted

  934,690 $46.95       

Options exercised

  (1,737,413)$31.47       

Options canceled

  (122,087)$41.49       
             

Options outstanding as of December 29, 2007

  4,467,803 $40.50       

Options granted

  820,200 $58.59       

Options exercised

  (706,755)$38.98       

Options canceled

  (100,128)$46.14       
             

Options outstanding as of December 27, 2008

  4,481,120 $43.93  5.02 years $1,423 
             

Options exercisable as of December 30, 2006

  3,822,370 $34.04       

Options exercisable as of December 29, 2007

  2,708,268 $37.92       

Options exercisable as of December 27, 2008

  2,729,255 $39.65  4.67 years $1,423 

 Shares Weighted Average
Exercise Price
 Weighted Average
Remaining
Contractual Life
(in years)
 Aggregate
Intrinsic
Value
Options outstanding as of December 27, 20084,481,120
 $43.93
    
Options granted2,252,704
 $25.34
    
Options exercised(48,411) $16.46
    
Options canceled(468,470) $40.47
    
Options outstanding as of December 26, 20096,216,943
 $37.67
    
Options granted1,367,780
 $37.32
    
Options exercised(188,585) $24.34
    
Options canceled(801,825) $38.61
    
Options outstanding as of December 25, 20106,594,313
 $37.87
    
Options granted929,980
 $37.27
    
Options exercised(722,355) $28.41
    
Options canceled(720,675) $43.33
    
Options outstanding as of December 31, 20116,081,263
 $38.25
    
Options exercisable as of December 26, 20093,096,990
 $41.69
    
Options exercisable as of December 25, 20103,732,025
 $40.61
    
Options exercisable as of December 31, 20113,593,374
 $40.58
 2.65 years $1,319
As of December 27, 2008,31, 2011, the unrecognized compensation cost related to2,464,331 unvested stock options expected to vest was $19,352.$16,062. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 3028.13 months.

The total intrinsic value of options exercised during the fiscal years ending December 27, 2008, 31, 2011, December 29, 200725, 2010 and December 30, 200626, 2009 was $17,197, $37,342$7,950, $1,767 and $12,557,$909, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of these options during 2011was $27,589.$20,625. The actual tax benefit realized for the tax deductions from option exercises totaled $5,888$2,898 for the year ended December 27, 2008.

31, 2011
.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Stock Based Compensation (Continued)

The following table summarizes significant ranges of outstanding and exercisable options as of December 27, 2008:

31, 2011:
 
 Options Outstanding Options Exercisable 
Range of Exercise Prices
 Number
Outstanding
 Weighted
Average
Remaining
Contractual
Life
(In years)
 Weighted
Average
Exercise
Price
 Aggregate
Intrinsic
Value
 Options
Exercisable
 Weighted
Average
Remaining
Contractual
Life
(In years)
 Weighted
Average
Exercise
Price
 Aggregate
Intrinsic
Value
 

$0.00–$10.00

  24,702  1.04 $4.74  501  24,702  1.04 $4.74  501 

$10.01–$20.00

  84,479  2.75  14.37  899  84,479  2.75  14.37  899 

$20.01–$30.00

  39,074  4.53  27.71  23  39,074  4.53  27.71  23 

$30.01–$40.00

  1,392,762  4.27  34.82    1,071,312  4.14  33.87   

$40.01–$50.00

  2,090,888  5.21  46.07    1,461,194  5.20  45.86   

$50.01–$60.00

  779,445  6.12  58.08    48,494  5.50  51.83   

$60.01–$70.00

  69,770  6.34  62.63           
                      

Totals

  4,481,120  5.02 years $43.93 $1,423  2,729,255  4.67 years $39.65 $1,423 
                      

 Options Outstanding Options Exercisable
Range of Exercise PricesNumber
Outstanding
 Weighted
Average
Remaining
Contractual
Life
(In years)
 Weighted
Average
Exercise
Price
 Aggregate
Intrinsic
Value
 Options
Exercisable
 Weighted
Average
Remaining
Contractual
Life
(In years)
 Weighted
Average
Exercise
Price
 Aggregate
Intrinsic
Value
$0.00–$10.00657
 0.16
 $0.24
 $18
 657
 0.16
 $0.24
 $18
$10.01–$20.0029,264
 0.55
 13.35
 409
 29,264
 0.55
 13.35
 409
$20.01–$30.001,167,411
 4.11
 25.20
 2,576
 468,256
 4.02
 25.61
 892
$30.01–$40.002,916,283
 4.11
 36.33
 
 1,318,068
 2.24
 35.19
 
$40.01–$50.001,415,972
 2.69
 45.65
 
 1,340,657
 2.49
 45.95
 
$50.01–$60.00503,356
 3.08
 57.96
 
 389,108
 3.05
 57.78
 
$60.01–$70.0048,320
 3.30
 62.56
 
 47,364
 3.29
 62.52
 
Totals6,081,263
 3.67
 $38.25
 $3,003
 3,593,374
 2.65
 $40.58
 $1,319

79

Table of Contents
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on a closing stock price of $25.02$27.33 as of December 27, 2008,31, 2011, that would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of December 27, 200831, 2011 was 118,948.

431,077.

The following table summarizes the non-vested stock option activity in the equity incentive plans for the fiscal year ending December 27, 2008:

31, 2011
:
 
 Stock Options Weighted Average
Exercise Price
 

Non-vested at December 29, 2007

  1,759,535 $44.47 

Granted

  820,200  58.59 

Forfeited

  (92,606) 46.93 

Vested

  (735,264) 45.43 
       

Non-vested at December 27, 2008

  1,751,865 $50.60 
       

 Non-vested Stock Options Weighted Average
Exercise Price
December 25, 20102,862,288
 $34.30
Granted929,980
 37.27
Forfeited(221,080) 33.52
Vested(1,083,299) 35.65
December 31, 20112,487,889
 $34.89
Restricted Stock

Stock compensation expense associated with restricted common stock is charged for the market value on the date of grant, less estimated forfeitures, and is amortized over the awards' vesting period on a straight-line basis.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Stock Based Compensation (Continued)

The following table summarizes the restricted stock activity for 2008:

2011:
 
 Restricted Stock Weighted
Average
Grant Date
Fair Value
 

Outstanding December 29, 2007

  711,896 $44.25 
 

Granted

  383,388  58.39 
 

Vested

  (344,272) 46.61 
 

Canceled

  (34,618) 46.33 
       

Outstanding December 27, 2008

  716,394 $50.58 
       

 Restricted Stock Weighted
Average
Grant Date
Fair Value
Outstanding as of December 25, 2010777,740
 $35.97
Granted292,840
 37.04
Vested(295,572) 37.18
Canceled(71,997) 37.88
Outstanding as of December 31, 2011703,011
 $35.70
As of December 27, 2008,31, 2011, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $24,895.$15,253. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 31 months.29 months. The total fair value of restricted stock grants that vested during the fiscal years ending December 27, 2008, 31, 2011, December 29, 200725, 2010 and December 30, 200626, 2009 was $16,049, $10,661$10,989, $13,072 and $9,231,$13,707, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $7,574$3,952 for the year ended December 27, 2008.

        During 2008 and 2007, we31, 2011.

Performance Based Stock Award Program
We made performance-based awards to our executives.executives during 2007, 2008 and 2009. Payout of these awards iswas contingent upon achievement of individualized stretch goals as determined by thegoals. Compensation Committee of the Board of Directors. These grants are accounted for in accordance with FAS 123(R), accordingly, compensation expense associated with these awards of $2,360$188, $496 and $1,883$412 has been recorded during 20082011, 2010 and 2007,2009, respectively.

9.

10. Commitments and Contingencies

Operating Leases

We have commitments for various operating leases for machinery and equipment, vehicles, office equipment, land and office space. As a matter of ordinary business course, we occasionally guarantee certain lease commitments to landlords. Rent expense for all operating leases was $23,781, $25,548$18,778, $22,635 and $18,134$19,952 in 2008, 20072011, 2010 and 2006,2009, respectively. Future minimum payments by year and in the aggregate, under noncancellable operating leases with initial or remaining terms of one year or more, consist of the following at December 27, 2008:

2009

  21,410 

2010

  13,790 

2011

  11,051 

2012

  8,937 

2013

  8,417 

Thereafter

  34,676 

31, 2011:


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)


2012$14,740
201311,483
20148,961
20155,980
20164,959
Thereafter$14,108
Insurance
9. Commitments and Contingencies (Continued)

We maintain various insurancesinsurance which maintain large deductibles up to $500,$750, some with or without stop-loss limits, depending on market availability. Aggregate loss limits for workers compensation and auto liability are projected at $5,200.

        We have certain purchase commitments related to the completion of our ongoing construction projects which amounted to approximately $27,406 as of December 27, 2008.

Litigation

Various lawsuits, claims and proceedings of a nature considered normal to itsour business are pending against us. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect our consolidated financial statements.

On January 31, 2012, a putative class action, entitled Irma Garcia v. Charles River Laboratories, Inc., was filed against us in the San Diego Superior Court, alleging various causes of action related to failure to make proper and timely payments to employees in California, failure to timely furnish accurate itemized wage statements, unfair business practices, associated penalties pursuant to California law, and declaratory relief. While no prediction may be made as to the outcome of litigation, we intend to defend against this proceeding vigorously and therefore an estimate of the possible loss or range of loss cannot be made.
11. Termination Fee—WuXi Pharma Tech
10.On July 29, 2010, we signed a termination agreement with WuXi to terminate the previously announced acquisition agreement. In accordance with the terms of the termination agreement, on July 29, 2010, we paid WuXi a $30,000termination fee for full satisfaction of the parties' obligations under the acquisition agreement. The termination agreement also included mutual releases of any claims and liabilities arising out of or relating to the acquisition agreement.
12. Business Segment and Geographic Information

        In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we disclose financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise for which separate financial information is available and is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

We report two business segments, called Research Models and Services (RMS) and Preclinical Services (PCS).

Our RMS segment includes sales of research models, genetically engineered modelsGEMS, IS, RADS, DS, in vitro products and services, (GEMS), research animal diagnostics, discovery and imaging services, consultingavian vaccine products and staffing services, vaccine support and in vitro technology (primarily endotoxin testing).services. Our PCS segment includes services required to take a drug through the development process, includingwhich include discovery support, toxicology, pathology,safety assessment and biopharmaceutical bioanalysis, pharmacokinetics and drug metabolism services as well as Phase I clinical trials.

services.

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

10. Business Segment and Geographic Information (Continued)

The following table presents sales and other financial information by business segment. Net sales represent sales originating in entities primarily engaged in either provision of RMS or PCS. Long-lived assets include property, plant and equipment goodwill, other intangibles and other long-lived assets.


 
 2008 2007 2006 

Research Models and Services

          
 

Net sales

 $659,941 $577,231 $514,999 
 

Gross margin

  284,639  249,348  214,125 
 

Operating income

  198,696  177,151  147,789 
 

Total assets

  684,824  630,029  674,963 
 

Long-lived assets

  327,568  287,058  306,267 
 

Depreciation and amortization

  28,186  23,378  20,804 
 

Capital expenditures

  60,490  51,086  27,018 

Preclinical Services

          
 

Net sales

 $683,552 $653,395 $543,386 
 

Gross margin

  226,070  228,843  192,482 
 

Operating income

  (596,437) 103,541  82,323 
 

Total assets

  1,470,674  2,170,313  1,875,487 
 

Long-lived assets

  1,147,089  1,817,173  1,641,935 
 

Depreciation and amortization

  62,997  63,001  61,779 
 

Capital expenditures

  136,591  175,950  154,728 
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share amounts)

 2011 2010 2009
Research Models and Services     
Net sales$705,419
 $666,986
 $659,929
Gross margin297,327
 278,391
 278,670
Operating income206,319
 184,464
 193,349
Total assets687,346
 711,824
 717,975
Long-lived assets282,388
 277,193
 284,809
Depreciation and amortization37,240
 37,657
 33,501
Capital expenditures34,257
 27,694
 31,859
Preclinical Services     
Net sales$437,228
 $466,430
 $511,713
Gross margin104,915
 106,369
 144,322
Operating income24,925
 (379,726) 39,814
Total assets869,881
 1,016,864
 1,469,488
Long-lived assets513,302
 537,786
 632,115
Depreciation and amortization47,990
 55,992
 56,461
Capital expenditures14,886
 15,166
 47,994
A reconciliation of segment operating income to consolidated operating income is as follows:

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Total segment operating income

 $(397,741)$280,692 $230,112 

Unallocated corporate overhead

  (52,021) (53,501) (41,939)
        

Consolidated operating income

 $(449,762)$227,191 $188,173 
        
 Fiscal Year Ended
 December 31, 2011 December 25, 2010 December 26, 2009
Total segment operating income$231,244
 $(195,262) $233,163
Unallocated corporate overhead(56,938) (73,250) (63,550)
Termination fee (Note 11)
 (30,000) 
Consolidated operating income$174,306
 $(298,512) $169,613
Net sales for each significant service area are as follows:

 Fiscal Year Ended
 December 31, 2011 December 25, 2010 December 26, 2009
Research models$358,027
 $355,218
 $362,669
Research model services222,110
 208,363
 194,663
Other products125,282
 103,405
 102,597
Total research models705,419
 666,986
 659,929
Total preclinical services437,228
 466,430
 511,713
Total sales$1,142,647
 $1,133,416
 $1,171,642





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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)


10. Business Segment and Geographic Information (Continued)

A summary of unallocated corporate overhead consists of the following:

following:
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Stock-based compensation expense

 $11,968 $11,902 $8,624 

U.S. retirement plans

  (161) 7,074  8,377 

Audit, tax and related expense

  2,727  3,455  3,924 

Salary and bonus

  18,943  15,652  11,271 

Global IT

  8,282  5,004   

Employee health LDP and fringe benefit expense

  (2,774) (908) 2,885 

Consulting and outside services

  1,822  1,675  1,477 

Other general unallocated corporate expenses

  11,214  9,647  5,381 
        

 $52,021 $53,501 $41,939 
        

 December 31, 2011 December 25, 2010 December 26, 2009
Stock-based compensation expense$11,159
 $11,893
 $10,757
U.S. retirement plans3,802
 3,921
 5,336
Audit, tax and related expense3,069
 2,805
 2,609
Salary and bonus18,486
 19,617
 17,239
Global IT13,253
 13,678
 9,309
Employee health, LDP and fringe benefit expense(2,952) (2,231) 1,622
Consulting and professional services8,432
 7,686
 3,329
Depreciation expense6,312
 5,796
 648
Severance expense(65) 4,153
 2,625
Transaction (acquisition/disposition) costs1,329
 6,669
 3,445
Contingent consideration write-down(5,598) (4,335) 
Other general unallocated corporate expenses(289) 3,598
 6,631
Total unallocated corporate overhead costs$56,938
 $73,250
 $63,550
Other general unallocated corporate expenses consist of various departmental costs including those associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury and investor relations.

The following table presents sales and other financial information by geographic regions. Included in the other non-U.S. category below are operations located in China, Korea, Australia, India and Mexico.India. Sales to unaffiliated customersclients represent net sales originating in entities physically located in the identified geographic area. Long-lived assets include property, plant and equipment goodwill, other intangibles, and other long-lived assets.

 
 U.S. Europe Canada Japan Other
Non-U.S.
 Consolidated 

2008

                   
 

Sales to unaffiliated customers

 $697,227 $362,751 $204,252 $66,749 $12,514 $1,343,493 
 

Long-lived assets

  11,582  608,839  768,882  58,081  27,273  1,474,657 

2007

                   
 

Sales to unaffiliated customers

 $620,915 $339,347 $201,936 $56,435 $11,993 $1,230,626 
 

Long-lived assets

  638,219  596,730  809,773  50,844  8,665  2,104,231 

2006

                   
 

Sales to unaffiliated customers

 $527,432 $289,072 $173,853 $56,387 $11,641 $1,058,385 
 

Long-lived assets

  537,534  580,143  785,420  41,385  3,721  1,948,203 

11.

 U.S Europe Canada Japan Other Non-U.S. Consolidated
2011           
Sales to unaffiliated clients$545,185
 $348,455
 $158,997
 $75,992
 $14,018
 $1,142,647
Long lived assets497,197
 123,634
 127,531
 45,857
 1,470
 795,689
2010           
Sales to unaffiliated clients$535,790
 $327,492
 $181,028
 $73,852
 $15,254
 $1,133,416
Long lived assets507,089
 124,428
 136,846
 44,818
 1,798
 814,979
2009           
Sales to unaffiliated clients$575,574
 $327,244
 $188,206
 $70,848
 $9,770
 $1,171,642
Long lived assets577,808
 135,316
 141,687
 42,084
 20,029
 916,924

13. Discontinued Operations

During the firstfourth quarter of fiscal 2006, the Company2010, we initiated actions to selldivest our Phase II-IV of the ClinicalI clinical services business. On May 9, 2006, the Company announced that it entered into a definitive agreement to sell Phase II-IV of the Clinical Services business for $215,000 in cash as part of a portfolio realignment which would allow the Company to capitalize on core competencies. Accordingly, management performed a goodwill impairment test for the Clinical business segment assuming sale of the Phase II-IV business. To determine the fair value of this segment, the Company used a combination of discounted cash flow methodology for the Phase I Clinical business and expected selling price for the


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

11. Discontinued Operations (Continued)


Phase II-IV Clinical business. Based on this analysis, it was determined that the book carrying value of goodwill assigned to the Clinical business reporting unit exceeded its implied fair value and therefore a $129,187 charge was recorded in 2006 to write-down the value of this goodwill. No additional goodwill impairment was recorded during 2006.

        In addition,December 25, 2010, taking into account the planned divestiture of the Phase II-IV ClinicalI clinical services business, the Companywe performed an impairment test on the long-lived assets of the Clinical Phase II-IVI clinical services business. Based on this analysis, the Companywe determined that the book value of assets assigned to the Clinical Phase II-IVI clinical services business exceeded its future cash flows, which included the proceeds from the sale of the business, and therefore recorded an impairment of the assets of $3,900$6,402 during 2006.

        During 2006, the Company also made2010.

On March 28, 2011, we disposed of our Phase I clinical business for a decision to close its Interventional and Surgical Services (ISS) business, which was formerly included in the Preclinical Services segment. The Company performed an impairment test on the long-lived assetsnominal amount. As part of the ISS business and based on that analysis, it was determined thatdisposition we remained the bookguarantor of the Phase I facility lease. During the second quarter of 2011, we recognized the value of the ISS assets exceeded the future cash flowsguarantee net of the business. Accordingly,buyer's related indemnity as a liability of $2,994, which we are amortizing ratably over the Company recorded an impairment charge of $1,070 during 2006.

        For the year end December 30, 2006, the discontinued businesses recorded a loss from operations of $181,004 which included a $546 loss from the saleremaining term of the Phase II-IV Clinical business. As a direct resultlease. The facility lease runs through January 2021 with remaining lease payments totaling $14,711 as of the sale, the Company realized a significant tax gain resultingDecember 31,


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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in additional tax expense of $37,835, all of which has been paid by the end of fiscal year 2006.

thousands, except per share amounts)


2011.
The consolidated financial statements have been reclassified to segregate, as discontinued operations, the assets and liabilities, operating results and cash flows, of the businesses being discontinued for all periods presented. Operating results from discontinued operations are as follows:

 
 Fiscal Year Ended 
 
 December 27,
2008
 December 29,
2007
 December 30,
2006
 

Net sales

 $ $599 $73,658 

Income (loss) from operations of discontinued businesses, before income taxes

  122  267  (145,613)

Provision for income taxes

  (302) 3,413  35,391 
        

Income (loss) from operations of discontinued businesses, net of taxes

 $424 $(3,146)$(181,004)
        

 Fiscal Year Ended
 December 31, 2011 December 25, 2010 December 26, 2009
Net sales$2,112
 $17,508
 $30,907
Asset impairment
 6,402
 
Income (loss) from operations of discontinued businesses, before income taxes(8,964) (13,465) 3,205
Provision (benefit) for income taxes(3,419) (5,453) 1,806
Income (loss) from operations of discontinued businesses, net of taxes$(5,545) $(8,012) $1,399
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

11. Discontinued Operations (Continued)

Assets and liabilities of discontinued operations at December 27, 20082011 and December 29, 20072010 consisted of the following:

 
 December 27, 2008 December 29, 2007 

Current assets

 $233 $1,007 

Long-term assets

  4,187  4,187 
      
 

Total assets

 $4,420 $5,194 
      

Current liabilities

 $35 $748 
      

Total liabilities

 $35 $748 
      

 December 31,
2011
 December 25,
2010
Current assets$107
 $3,862
Long-term assets986
 822
Total assets$1,093
 $4,684
Current liabilities$1,165
 $3,284
Long-term liabilities2,522
 
Total liabilities$3,687
 $3,284
Current assets included accounts receivable and prepaid income taxes. Non-current assets included a long-term deferred tax receivable.asset. Current and long-term liabilities consisted of accounts payable, deferred income and accrued expenses.

12. Subsequent Event

        During the first quarter of 2009, we implemented actions to improve our operating efficiency. As a result of these actions, we will record a one time charge, primarily in the first quarter of 2009 of approximately $9.0 million, mainly in the PCS segment, for the closure and severance of our Arkansas facility as well as other headcount reductions.


Quarterly Information (Unaudited)
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal Year Ended December 31, 2011       
Total net sales$285,843
 $288,263
 $277,579
 $290,962
Gross profit102,638
 106,320
 92,716
 100,568
Operating income42,251
 53,314
 37,094
 41,647
Income from continuing operations, net of tax35,377
 34,156
 18,911
 27,078
(Loss) income from discontinued businesses, net of tax(3,945) (1,732) (18) 150
Net income attributable to common shareowners31,335
 32,318
 18,798
 $27,115
Earnings (loss) per common share       
Basic       
Continuing operations attributable to common shareowners$0.65
 $0.67
 $0.38
 $0.55
Discontinued operations attributable to common shareowners(0.07) (0.03) 
 
Net income attributable to common shareowners$0.58
 $0.63
 $0.38
 $0.56
Diluted       
Continuing operations attributable to common shareowners$0.65
 $0.66
 $0.37
 $0.55
Discontinued operations attributable to common shareowners(0.07) (0.03) 
 
Net income attributable to common shareowners$0.57
 $0.63
 $0.37
 $0.55
Fiscal Year Ended December 25, 2010       
Total net sales$292,287
 $288,592
 $270,885
 $281,652
Gross profit100,191
 100,764
 90,500
 93,305
Operating income (loss)30,194
 29,985
 6,468
 (365,159)
Income from continuing operations, net of tax17,338
 15,234
 (24,248) (342,429)
Income (loss) from discontinued businesses, net of tax(338) (1,139) (986) (5,549)
Net income attributable to common shareowners$17,382
 $14,454
 $(24,941) $(343,564)
Earnings (loss) per common share       
Basic       
Continuing operations attributable to common shareowners$0.27
 $0.24
 $(0.38) $(5.94)
Discontinued operations attributable to common shareowners(0.01) (0.02) (0.02) (0.1)
Net income attributable to common shareowners$0.27
 $0.22
 $(0.4) $(6.04)
Diluted       
Continuing operations attributable to common shareowners$0.27
 $0.24
 $(0.38) $(5.94)
Discontinued operations attributable to common shareowners(0.01) (0.02) (0.02) (0.1)
Net income attributable to common shareowners$0.26
 $0.22
 $(0.4) $(6.04)




Quarterly Segment Information (Unaudited)
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal Year Ended December 31, 2011       
Research Models and Services       
Sales$173,371
 $178,163
 $171,471
 $182,414
Gross margin73,839
 78,307
 70,514
 74,667
Operating income51,742
 55,691
 48,534
 50,352
Depreciation and amortization9,269
 9,318
 9,327
 9,326
Capital expenditures4,403
 4,010
 5,789
 20,055
Preclinical Services       
Sales$112,472
 $110,100
 $106,108
 $108,548
Gross margin28,799
 28,013
 22,202
 25,902
Operating income9,306
 7,875
 3,663
 4,082
Depreciation and amortization11,996
 12,498
 11,840
 11,656
Capital expenditures2,387
 2,650
 2,433
 7,416
Unallocated corporate overhead$(18,797) $(10,252) $(15,103) $(12,786)
Total       
Sales$285,843
 $288,263
 $277,579
 $290,962
Gross margin102,638
 106,320
 92,716
 100,569
Operating income42,251
 53,314
 37,094
 41,648
Depreciation and amortization21,265
 21,816
 21,167
 20,982
Capital expenditures6,790
 6,660
 8,222
 27,471
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal Year Ended December 25, 2010       
Research Models and Services       
Sales$172,205
 $167,140
 $159,259
 $168,382
Gross margin74,279
 71,346
 64,383
 68,383
Operating income49,984
 47,258
 42,817
 44,405
Depreciation and amortization9,721
 8,811
 9,422
 9,703
Capital expenditures4,960
 6,245
 4,622
 11,867
Preclinical Services       
Sales$120,082
 $121,452
 $111,626
 $113,270
Gross margin25,912
 29,418
 26,117
 24,922
Operating income429
 6,509
 5,178
 (391,842)
Depreciation and amortization13,859
 14,114
 14,063
 13,956
Capital expenditures4,333
 2,187
 4,505
 4,141
Unallocated corporate overhead$(20,219) $(23,782) $(41,527) $(17,722)
Total       
Sales$292,287
 $288,592
 $270,885
 $281,652
Gross margin101,191
 100,764
 90,500
 93,305
Operating income30,194
 29,985
 6,468
 (365,159)
Depreciation and amortization23,580
 22,925
 23,485
 23,659
Capital expenditures9,293
 8,432
 9,127
 16,008

84


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

SUPPLEMENTARY DATA


Quarterly Information (Unaudited)

 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

Fiscal Year Ended December 27, 2008

             

Total net sales

 $337,685 $352,134 $342,227 $311,447 

Gross profit

  130,377  137,987  130,270  112,075 

Operating income (loss)

  63,500  69,323  68,211  (650,796)

Income from continuing operations

  45,154  50,187  44,700  (662,308)

Income (loss) from discontinued businesses, net of tax

        424 

Net income

 $45,154 $50,187 $44,700 $(661,884)

Earnings (loss) per common share

             
 

Basic

             
  

Continuing operations

 $0.67 $0.75 $0.67 $(9.91)
  

Discontinued operations

        0.01 
          
  

Net income

 $0.67 $0.75 $0.67 $(9.91)
 

Diluted

             
  

Continuing operations

 $0.64 $0.71 $0.63 $(9.91)
  

Discontinued operations

        0.01 
          
  

Net income

 $0.64 $0.71 $0.63 $(9.91)

Fiscal Year Ended December 29, 2007

             

Total net sales

 $291,199 $307,435 $313.964 $318,028 

Gross profit

  115,573  120,596  123,899  117,763 

Operating income (loss)

  54,701  56,725  63,631  52,134 

Income from continuing operations

  37,227  37,841  43,536  38,948 

Income (loss) from discontinued businesses, net of tax

  (464) 115  (759) (2,038)

Net income

 $36,763 $37,956 $42,777 $36,910 

Earnings (loss) per common share

             
 

Basic

             
  

Continuing operations

 $0.56 $0.57 $0.65 $0.58 
  

Discontinued operations

  (0.01)   (0.01) (0.03)
          
  

Net income

 $0.55 $0.57 $0.64 $0.55 
 

Diluted

             
  

Continuing operations

 $0.55 $0.55 $0.63 $0.55 
  

Discontinued operations

  (0.01)   (0.01) (0.03)
          
  

Net income

 $0.54 $0.55 $0.62 $0.52 

Fiscal Year Ended December 30, 2006

             

Total net sales

 $254,141 $267,859 $264,660 $271,725 

Gross profit

  95,505  107,110  102,262  101,730 

Operating income (loss)

  43,696  47,702  51,621  45,154 

Income from continuing operations

  28,515  32,781  32,133  31,792 

Income (loss) from discontinued businesses, net of tax

  (128,630) (7,032) (48,739) 3,397 

Net income

 $(100,115)$25,749 $(16,606)$35,189 

Earnings (loss) per common share

             
 

Basic

             
  

Continuing operations

 $0.40 $0.46 $0.48 $0.48 
  

Discontinued operations

  (1.80) (0.10) (0.73) 0.05 
          
  

Net income

 $(1.40)$0.36 $(0.25)$0.53 
 

Diluted

             
  

Continuing operations

 $0.39 $0.46 $0.47 $0.47 
  

Discontinued operations

  (1.76) (0.10) (0.72) 0.05 
          
  

Net income

 $(1.37)$0.36 $(0.24)$0.52 

Table of Contents

Quarterly Segment Information (Unaudited)

 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

Fiscal Year Ended December 27, 2008

             

Research Models and Services

             
 

Sales

 $168,596 $172,848 $165,656 $152,841 
 

Gross margin

  76,256  76,429  70,813  61,141 
 

Operating income

  55,813  52,199  50,673  40,011 
 

Depreciation and amortization

  6,659  7,016  7,043  7,468 
 

Capital expenditures

  10,146  23,510  12,572  14,262 

Preclinical Services

             
 

Sales

 $169,089 $179,286 $176,571 $158,606 
 

Gross margin

  54,121  61,558  59,457  50,934 
 

Operating income

  23,268  28,849  30,390  (678,944)
 

Depreciation and amortization

  15,674  16,004  15,894  15,425 
 

Capital expenditures

  29,558  40,667  33,577  32,789 

Unallocated corporate overhead

 
$

(15,581

)

$

(11,725

)

$

(12,852

)

$

(11,863

)

Total

             
 

Sales

 $337,685 $352,134 $342,227 $311,447 
 

Gross margin

  130,377  137,987  130,270  112,075 
 

Operating income

  63,500  69,323  68,211  (650,796)
 

Depreciation and amortization

  22,333  23,020  22,937  22,893 
 

Capital expenditures

  39,704  64,177  46,149  47,051 


 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

Fiscal Year Ended December 29, 2007

             

Research Models and Services

             
 

Sales

 $143,068 $143,803 $145,207 $145,153 
 

Gross margin

  63,654  63,109  63,408  59,177 
 

Operating income

  47,021  45,268  45,574  39,288 
 

Depreciation and amortization

  5,569  5,663  5,780  6,366 
 

Capital expenditures

  7,084  10,688  12,643  20,671 

Preclinical Services

             
 

Sales

 $148,131 $163,632 $168,757 $172,875 
 

Gross margin

  51,919  57,847  60,491  58,586 
 

Operating income

  23,444  27,426  29,993  22,678 
 

Depreciation and amortization

  14,344  15,569  16,180  16,908 
 

Capital expenditures

  30,840  38,724  37,692  68,694 

Unallocated corporate overhead

 
$

(15,764

)

$

(15,969

)

$

(11,936

)

$

(9,832

)

Total

             
 

Sales

 $291,199 $307,435 $313,964 $318,028 
 

Gross margin

  115,573  120,956  123,899  117,763 
 

Operating income

  54,701  56,725  63,631  52,134 
 

Depreciation and amortization

  19,913  21,232  21,960  23,274 
 

Capital expenditures

  37,924  49,412  50,335  89,365 

Table of Contents

 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

Fiscal Year Ended December 30, 2006

             

Research Models and Services

             
 

Sales

 $128,972 $130,816 $127,560 $127,651 
 

Gross margin

  55,866  55,478  52,423  50,358 
 

Operating income

  40,476  38,003  36,691  32,619 
 

Depreciation and amortization

  5,035  5,237  5,185  5,345 
 

Capital expenditures

  3,566  4,783  3,932  14,737 

Preclinical Services

             
 

Sales

 $125,169 $137,043 $137,100 $144,074 
 

Gross margin

  39,639  51,632  49,839  51,372 
 

Operating income

  13,788  22,530  22,971  23,034 
 

Depreciation and amortization

  14,625  15,288  15,389  16,482 
 

Capital expenditures

  35,821  12,620  39,038  67,249 

Unallocated corporate overhead

 
$

(10,568

)

$

(12,831

)

$

(8,041

)

$

(10,499

)

Total

             
 

Sales

 $254,141 $267,859 $264,660 $271,725 
 

Gross margin

  95,505  107,110  102,262  101,730 
 

Operating income

  43,696  47,702  51,621  45,154 
 

Depreciation and amortization

  19,660  20,525  20,574  21,827 
 

Capital expenditures

  39,387  17,403  42,970  81,986 

Table of Contents

Item 9.    Changes in and Disagreement with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures

Based on their evaluation, required by paragraph (b) of Rules 13a-15 or 15d-15, promulgated by the Securities Exchange Act of 1934 (Exchange Act), the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective, at a reasonable assurance level, as of December 27, 200831, 2011 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. We continually are in the process of further reviewing and documenting our disclosure controls and procedures, and our internal control over financial reporting, and accordingly may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b)   Changes in Internal Controls

(b)Changes in Internal Controls
There were no changes in the Company's internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 27, 200831, 2011 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's report on our internal controls over financial reporting can be found in Item 8 of this report. The Independent Registered Public Accounting Firm's attestation report on the effectiveness of our internal control over financial reporting can also be found in Item 8 of this report.


Item 9B.    Other Information

None.

PART III

Table of Contents


PART III

Item 10.    Directors, Executive Officers, and Corporate Governance

A.    Directors and Compliance with Section 16(a) of the Exchange Act

A.Directors and Compliance with Section 16(a) of the Exchange Act
The information required by this Item regarding theour directors of the Company and compliance with Section 16(a) of the Exchange Act by the Company'sour officers and directors will be included in the 20092012 Proxy Statement under the sectionsections captioned "Section“Nominees for Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance"Compliance” and is incorporated herein by reference thereto. The information required by this Item regarding the Company'sour corporate governance will be included in the 20092012 Proxy Statement under the section captioned "Corporate Governance"“Corporate Governance” and is incorporated herein by reference thereto.

B.    Executive Officers of the Company

B.Our Executive Officers
The information required by this Item regarding theour executive officers of the Company is reported in Part I of this Form 10-K under the heading "Supplementary“Supplementary Item. Executive Officers of the Registrant pursuant to Instruction 3 to Item 401(b) of Regulation S-K."

C.    Audit Committee Financial Expert


85

Table of Contents

C.Audit Committee Financial Expert
The information required by this Item regarding the audit committee of the Board of Directors and financial experts will be included in the 20092012 Proxy Statement under the section captioned "The“The Board of Directors and its Committees—AuditCommittees-Audit Committee and Financial Experts"Experts” and is incorporated herein by reference thereto.

D.Code of Ethics
D.    Code of Ethics

        The Company hasWe have adopted a Code of Business Conduct and Ethics that applies to all of itsour employees and directors, including theour principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. The Company'sOur Code of Business Conduct and Ethics is posted on our website by selecting the "Corporate Governance"“Corporate Governance” link athttp://ir.criver.com. The CompanyWe will provide to any person, without charge, a copy of itsour Code of Business Conduct and Ethics by requesting a copy from the Secretary, Charles River Laboratories, Inc., 251 Ballardvale Street, Wilmington, MA 01887. Information on our website is not incorporated by reference in this annual report.

E.    

E.Changes to Board Nomination Procedures
Since December 2008, there have been no material changes to Board Nomination Procedures

        Effective December 2, 2008, the Company'sprocedures by which security holders may recommend nominees to the our Board of Directors amended the Company's amended and restated bylaws. The amendments replaced sections 1.12 and 1.13 of the second amended and restated bylaws with entirely new sections 1.12 and 1.13, which relate primarily to the requirements for advance notice and additional information that a shareholder must provide when making a director nomination or proposal at the Company's annual meeting of shareholders. A copy of the amended bylaws is attached as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed on December 5, 2008.

Directors.

Item 11.    Executive Compensation

The information required by this Item will be included in the 20092012 Proxy Statement under the sections captioned "Compensation“2011 Director Compensation,” “Compensation Discussion and Analysis," "2008 Director” “Executive Compensation" "Compensation and Related Information,” “Compensation Committee Interlocks and Insider Participation," "Executive CompensationParticipation” and Related Information" and "Report“Report of Compensation Committee"Committee” and is incorporated herein by reference thereto.


Table of Contents


Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item will be included in the 20092012 Proxy Statement under the sections captioned "Beneficial“Beneficial Ownership of Securities" and "Equity Compensation Plan Information"Securities” and is incorporated herein by reference thereto. See also Item 5. "Market“Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—SecuritiesSecurities-Securities Authorized for Issuance Under Equity Compensation Plans"Plans” for the disclosure required by Item 201(d) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be included in the 20092012 Proxy Statement under the sections captioned "Related“Related Person Transaction Policy"Policy” and "Corporate Governance—Director“Corporate Governance-Director Qualification Standards; Director Independence"Independence” and is incorporated herein by reference thereto.

Item 14.    Principal Accountant Fees and Services

The information required by this Item will be included in the 20092012 Proxy Statement under the section captioned "Statement“Statement of Fees Paid to Independent Registered Public Accounting Firm"Firm” and is incorporated herein by reference thereto.


PART IV

Item 15.    Exhibits

and Financial Statement Schedules

Item 15(a)(1) and (2) and Item 15(d) Financial Statements and Schedules

See "Index to Consolidated Financial Statements and Financial Statements Schedules" at Item 8 to this Form 10-K. Other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto.


Item 15(a)(3) and Item 15(c) Exhibits

The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits. The Company hasWe have identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this

86


Annual Report on Form 10-K in response to Item 15(c) of Form 10-K.



87



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Date:
February 23, 200927, 2012
By:

By:


/s/ THOMAS F. ACKERMAN

Thomas F. Ackerman
Corporate Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated below and on the dates indicated.

Signatures
Title
Date


Title





Date
By:/s/ JAMES C. FOSTER

James C. Foster
President, Chief Executive Officer and ChairmanFebruary 23, 200927, 2012

By:

James C. Foster

By:/s/ THOMAS F. ACKERMAN

Thomas F. Ackerman


Corporate Executive Vice President and
February 27, 2012
Thomas F. AckermanChief Financial Officer and Principal Accounting Officer

February 23, 2009

By:

 

/s/ NANCY T. CHANG

Nancy T. Chang


Director


February 23, 2009

By:

/s/ ROBERT J. BERTOLINI

Director
February 27, 2012
Robert J. Bertolini
By:/s/ STEPHEN D. CHUBB

DirectorFebruary 27, 2012
Stephen D. Chubb
 

Director


February 23, 2009

By:

 

By:/s/ GEORGE E. MASSARO

DirectorFebruary 27, 2012
George E. Massaro
 

Director


February 23, 2009

By:

 

By:/s/ DEBORAH KOCHEVAR

Deborah Kochevar

Director

Director


February 23, 200927, 2012

By:

Deborah Kochevar

By:/s/ GEORGE M. MILNE, JR.

DirectorFebruary 27, 2012
George M. Milne, Jr.
 

Director

 

By:/s/ C. RICHARD REESEDirectorFebruary 23, 200927, 2012
C. Richard Reese
By:/s/ SAMUEL O. THIERDirectorFebruary 27, 2012
Samuel O. Thier
By:/s/ RICHARD F. WALLMANDirectorFebruary 27, 2012
Richard F. Wallman
By:/s/ WILLIAM H. WALTRIPDirectorFebruary 27, 2012
William H. Waltrip


88


EXHIBIT INDEX
Exhibit No.DescriptionFiled with this Form 10-KIncorporated by Reference
FormFiling DateExhibit No.
3.1Second Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. dated June 5, 2000 S-1/AJune 23, 20003.1
3.2Second Amended and Restated By-laws of Charles River Laboratories International, Inc. 8-KDecember 5, 20083.2
4.1Form of common stock certificate, $0.01 par value, of Charles River Laboratories International, Inc. S-1June 23, 20004.1
4.2Charles River Laboratories International, Inc. as Issuer and U.S. Bank National Association as Trustee Indenture dated June 12, 2006 8-KJune 12, 20064.1
4.3Charles River Laboratories International, Inc. Form of 2.25% Convertible Senior Note due 2013 8-KJune 12, 20064.1
10.1*Charles River Corporate Officer Separation Plan dated April 30, 2010 10-QAugust 3, 201010.1
10.2*Charles River Laboratories Holdings 1999 Management Incentive Plan 10-KMarch 14, 200610.6
10.3*Charles River Laboratories International, Inc. 2000 Incentive Plan amended May 9, 2005 10-KMarch 14, 200610.7
10.4*Charles River Laboratories International, Inc. 2000 Incentive Plan Inland Revenue Approved Rules for UK Employees 10-QNovember 5, 200199.1
10.5*Form of change in control agreement 10-KFebruary 23, 200910.7
10.6*Executive Incentive Compensation Plan dated January 1, 2009 10-KFebruary 23, 200910.8
10.7*Charles River Laboratories International, Inc. Form of Stock Option Award letter granted under 2000 Incentive Plan 10-QNovember 1, 200410.3
10.8*Charles River Laboratories International. Inc. Form of Restricted Stock Award granted under 2000 Incentive Plan 10-QNovember 1, 200410.4
10.9*Inveresk Research Group, Inc. 2002 Stock Option and Incentive Compensation Plan amended and restated as of May 4, 2004 S-8October 20, 200499.1
10.10*Charles River Laboratories, Inc. Executive Life Insurance/Supplemental Retirement Income Plan 10-KMarch 9, 200510.23
10.11*
Charles River Laboratories amended and restated Deferred Compensation Plan amended December 2, 2008, July 20, 2011 and October 27, 2011
X   
10.12Charles River Laboratories International, Inc. Fourth Amended and Restated Credit Agreement dated September 23, 2011 8-KSeptember 23, 201110.1
10.13*Charles River Laboratories International, Inc. 2007 Incentive Plan amended March 18, 2009 and March 22, 2011X   
10.14*Charles River Laboratories International, Inc. Form of Stock Option granted under 2007 Incentive Plan 10-KFebruary 20, 200810.17
10.15*Charles River Laboratories International, Inc. Form of Restricted Stock Award granted under 2007 Incentive Plan 10-KFebruary 20, 200810.18
10.16*Letter Agreements with Dr. Davide Molho dated May 22, 2009 10-KFebruary 23, 201110.17

89


Signatures
Title
Date

21.1






By:/s/ C. RICHARD REESE

C. Richard Reese
DirectorFebruary 23, 2009

By:


/s/ DOUGLAS E. ROGERS

Douglas E. Rogers


Director


February 23, 2009

By:


/s/ SAMUEL O. THIER

Samuel O. Thier


Director


February 23, 2009

By:


/s/ WILLIAM H. WALTRIP

William H. Waltrip


Director


February 23, 2009

Table of Contents


EXHIBIT INDEX

Exhibit No.Description
3.1Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. (filed as Exhibit 3.1).(1)


3.2


By-laws of Charles River Laboratories International, Inc. (Filed as Exhibit 3.2).(2)


4.1


Form of certificate representing shares of common stock, $0.01 per value per share (Filed as Exhibit 4.1).(1)


4.2


Indenture dated June 6, 2006, amount Charles River Laboratories International, Inc. and U.S. Bank National Association.(3)


4.3


Form of 2.25% Convertible Senior Note due 2013.(3)


10.1*


Severance Agreement between Charles River Laboratories, Inc. and Real H. Renaud, dated January 20, 1992, amended December 15, 2008. +


10.2*


1999 Charles River Laboratories Corporate Officer Separation Plan.+


10.3


Charles River Laboratories 1999 Management Stock Incentive Plan (Filed as Exhibit 10.6)+(4).


10.4


Charles River Laboratories 2000 Incentive Plan, as amended May 2003 and May 2005. (Filed as Exhibit 10.7).(4)+


10.5


Charles River Laboratories 2000 Incentive Plan Inland Revenue Approved Rules for UK Employees (Filed as Exhibit 99.1).(10)+


10.7*


Form of Change in Control Agreement.+


10.8*


Executive Incentive Compensation Plan, as amended.+


10.9


Form of Stock Option Award Agreement under 2000 Incentive Plan.+(6)


10.10


Form of Restricted Stock Award Agreement under 2000 Incentive Plan.+(6)


10.11


Inveresk Research Group, Inc. 2002 Stock Option and Incentive Compensation Plan, as amended and restated as of May 4, 2004.+(5)


10.12


Charles River Laboratories Executive Life Insurance/Supplemental Retirement Income Plan.(7)+


10.13*


Deferred Compensation Plan.+


10.14


Second Amended and Restated Credit Agreement, dated as of July 31, 2006, among Charles River Laboratories International, Inc., the Subsidiary Borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. as administrative agent, Credit Suisse Securities (USA) LLC, as syndication agent, and Bank of America, N.A., Citizens Bank of Massachusetts and Wachovia Bank, National Association, as co-documentation agents.(8)


10.15


Charles River Laboratories International, Inc. 2007 Incentive Plan(9)+


10.16


Form of Performance Award Agreement(9)+


10.17


Form of Stock Option Award Agreement Under 2007 Incentive Plan(11)+


10.18


Form of Restricted Stock Award Agreement Under 2007 Incentive Plan(11)+


21.1*


Subsidiaries of Charles River Laboratories International, Inc.
X

23.1

23.1*


Consent of PricewaterhouseCoopers LLP.

Table of Contents

LLPX
Exhibit No.Description
 31.1* 
31.1Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.OfficerX

31.2

31.2*


Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.Officer
X

32.1

32.1*


Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer.Officer
X
101.1The following materials from our Annual Report on Form 10-K for the year ended December 31, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Shareholders' Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text.X


*
Filed herewith.


+
Management contract or compensatory plan, contract or arrangement.


(1)
Previously filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 333-35524), as amended, filed June 23, 2000.

(2)
Previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on December 5, 2008.

(3)
Previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on June 12, 2006.

(4)
Previously filed as an exhibit to the Company's Annual Report on Form 10-K, filed on March 14, 2006.

(5)
Previously filed as an exhibit to the Company's Registration Statement on Form S-8, filed on October 20, 2004.

(6)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on November 1, 2004.

(7)
Previously filed as an exhibit to the Company's Annual Report on Form 10-K, filed March 9, 2005.

(8)
Previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on August 2, 2006.

(9)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on May 9, 2007.

(10)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on November 5, 2001.

(11)
Previously filed as exhibit to the Company's Annual Report on Form 10-K, filed February 20, 2008.


90