Table of Contents


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 25, 201029, 2012

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. oý

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). Yes o    No ý

On June 26, 2010,30, 2012, the aggregate market value of the Registrant's voting common stock held by non-affiliates of the Registrant was approximately $2,317,534,618.

$1,558,792,774. As of February 10, 2011,15, 2013, there were outstanding 56,477,88948,182,352 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 20112013 Annual Meeting of StockholdersShareholders scheduled to be held on May 10, 2011,7, 2013, which will be filed with the Securities and Exchange Commission not later than 120 days after December 25, 2010,29, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the 20112013 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.


Table of Contents



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

TABLE OF CONTENTS

Item
  
 Page  Page

 

PART I

    PART I 

1

 

Business

  
1		 
Business
1

1A

 

Risk Factors

  18 
Risk Factors
13

1B

 

Unresolved Staff Comments

  29 
Unresolved Staff Comments
23

2

 

Properties

  29 
Properties
23

3

 

Legal Proceedings

  30 
Legal Proceedings
23

4

 

Removed and Reserved

  30 Mine Safety Disclosure
23

 

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

  30 
Supplementary Item. Executive Officers of the Registrant pursuant to Instruction 3 to Item 401 (b) of Regulation S-K
 

 

PART II

    PART II 

5

 

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

  
32		 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
24

6

 

Selected Consolidated Financial Data

  36 
Selected Consolidated Financial Data
27

7

 

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

  37 
Management's Discussion and Analysis of Financial Condition and Results of Operations
42

7A

 

Quantitative and Qualitative Disclosures About Market Risk

  54 
Quantitative and Qualitative Disclosures About Market Risk
43

8

 

Financial Statements and Supplementary Data

  55 
Financial Statements and Supplementary Data
43

9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  112 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
90

9A

 

Controls and Procedures

  112 
Controls and Procedures
90

9B

 

Other Information

  112 
Other Information
91

 

PART III

    PART III 

10

 

Directors and Executive Officers of the Registrant

  
113		 
Directors, Executive Officers and Corporate Governance
91

11

 

Executive Compensation

  113 
Executive Compensation
91

12

 

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

  113 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
92

13

 

Certain Relationships and Related Transactions

  114 
Certain Relationships and Related Transactions, and Director Independence
92

14

 

Principal Accountant Fees and Services

  114 
Principal Accountant Fees and Services
92

 

PART IV

    PART IV 

15

 

Exhibits

  114 
Exhibits and Financial Statement Schedules
92

Table of Contents



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 and spending trends by our customers;clients; our expectations regarding stock repurchases, including our accelerated stock repurchase program, 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;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; our strategic relationships with leading pharmaceutical companies and opportunities for future similar arrangements; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; our expectations with respect to sales growth 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, and other equity grants to employees and directors; 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 impact of economic and market conditions on our customers;clients; the effects of our 2010 cost-saving actions and the steps to optimize returns to shareholders on an effective and timely 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.


Table of Contents


offering. Our stock is traded on the New York Stock Exchange under the symbol "CRL"“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 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

1


Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, 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, a 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 support planned or on-going human trials.
The development of new drugs requires the steadily increasing investment of time and money—variousmoney. Various studies and reports estimate that it takes between 10-1610-15 years, up to $2.0 billion, and exploration of more than 10,000 drug compounds to produce a single FDA-approved drug. Charles River isWe are positioned to leverage our core competency inin vivo biology in an efficient and cost-effective way to aid our customersclients in bringing their drugs to market faster. Our clients reduce their costs, increase their speed and improve their productivity and effectiveness in early-stage discovery and development by using our broad portfolio of products and services.

        We

For over 65 years, we have two reporting segments: Research Models and Services (RMS) and Preclinical Services (PCS). We providebeen in the business of providing the research models required in research and development of new drugs, devices and therapies and have been intherapies. Over this business for over 60 years. Wetime, we have built upon our core competency of in vivo biology to develop a diverse and growingexpanding 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 6865 facilities in 1615 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 2010,2012, our net sales from continuing operations were $1.13$1.1 billion and our operating lossincome from continuing operations was $298.5$166.5 million.

        Since 2004, we

We have acquired companies that have broadened our portfolio of high-end services to include general toxicology, specialty toxicology, discovery and imaging services, and biopharmaceutical services. In addition, these acquisitions significantly expanded our overall corporate size and expanded and strengthened our global footprint in the growing market for pharmaceutical research and development services.

        These acquisitions, which include Piedmont Research Center LLC, Cerebricon Ltd., and Systems Pathology Company, LLC in 2009 and NewLab BioQuality AG 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 outsourcedin vivo discovery and drug development services markets in which we currently participate—ranging from research model production through discovery services through preclinical services—has a current size of approximately $5.0-6.0 billion and it is thought that this represents approximately 40% of all of the relatedin vivo


Table of Contents


discovery and non-clinical drug development work currently performed (with wide variances among the different services, ranging from 15% to 100% outsourced) and in the aggregate is expected to increase over time as outsourcing trends continue.

two reporting segments: Research Models and Services (RMS) and Preclinical Services (PCS).

Through Charles River hasour 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 model strains, principally genetically and microbiologically 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), we maintain production centers, including a total of approximately 185 barrier rooms and/or isolator facilities, strategically located near our customers.clients. In 2010,2012, RMS accounted for 58.8%61.5% of our total net sales from continuing operations and approximately 47.5%50% of our employees including approximately 11690 science professionals with advanced scientific degrees.

Our PCS business segment provides services that enable 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. Global pharmaceutical and biotechnology companies choose to outsource their development activities because a significant investment in personnel, facilities and other capital resources is required 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 38.5% of our total net sales from continuing operations in 2012 and employed 45% of our employees including approximately 430 science professionals with advanced scientific degrees.

2


We provide discovery services in both our RMS and PCS business segments. The biopharmaceutical industry continues to reduce infrastructure and search for more efficient and cost-effective models of drug discovery and development. In particular, large pharmaceutical and biotechnology companies are outsourcing biopharmaceutical discovery research, an area they historically considered a core competency. 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.
In recent years, we have focused our efforts on unifying our businesses and improving the efficiency of our global operations to enhance our ability to support our key clients. Our key pharmaceutical and biotechnology clients are increasingly seeking full service, “one-stop” global partners to whom they can outsource more of their drug discovery and development efforts. By some estimates, the outsourced early-stagedrug discovery and development services markets in which we currently participate, ranging from research model production to discovery services to regulated safety assessment, is approximately $7.5 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 currently believed to be less outsourced.
Research Models and Services (RMS). Our RMS segment is comprised of (1) Research Models, (2) Research Model Services and (3) other related productsEndotoxin and services.

Microbial Detection.

Research Models. Our Research Models business is comprisedof the production and sale of research models and avian vaccine services.
A significant portion of this business is comprised of the commercial production and sale of research models, principally purpose-bred rats and mice 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 20 production facilities located in 7 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 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 associated with the products.quality. Our research models are bred and maintained in controlled environments which are designed to ensure that the models 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, which are genetically heterogeneous;

•
purposefully bred for heterogeneity;
inbred, which are genetically identical;

•
hybrid, which are the offspring of two different inbred parents;

•
spontaneous mutant, which contain a naturally occurring genetic mutation (such as immune deficiency); and

•
other genetically modified research models, including knock-out models with one or more disabled genes and transgenic animals.

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 five areas of research: oncology, central nervous system, metabolic, cardiovascular and renal diseases.

        In addition to our small research models, we also

We are a premier provider of high-quality purpose-bred, specific pathogen-freehigh quality, purpose bred, specific-pathogen-free (SPF) large research models to the biomedical research community.

We are the global leaderfor the supply of SPF fertile chicken eggs and chickens. SPF chicken embryos are used by animal health companies as self-contained “bioreactors” for the manufacture of live viruses. These viruses are used as a raw material primarily in poultry as well as human and veterinary vaccine applications. The production of SPF eggs is performed under biosecure conditions, similar in many ways to our research model production. We have a worldwide presence, with several SPF egg production facilities in the United States, contracted production capabilities in Hungary, and franchise

3

Table


operations in India. We also operate a specialized avian laboratory in the United States, which provides in-house quality control testing of Contents

the SPF flocks, offers testing services to vaccine companies and commercial poultry operations, and manufactures poultry diagnostics and bulk antigens for poultry vaccines.

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. 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 the maintenance and monitoring of research models, as well as servicesand those which are 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—services-Genetically Engineered Models and Services, Consulting and Staffing Services,Insourcing Solutions, Discovery Research Services and Research Animal Diagnostic Services.

Genetically Engineered Models and Services (GEMS). In this area of our business, we assist our customers in breedingWe breed and maintenance ofmaintain research models purchased or purposefully created by our customersclients for biomedical research activities. While theThe creation of a genetically engineered model (GEM) can beis a critical scientific event, but 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. Our team of project managers is supported by a technologically advanced internet based colony management system that allows for real time data exchange. We also provide breeding expertise and colony development, quarantine, health and healthgenetic monitoring, germplasm cryopreservation, and rederivation including assisted reproduction and genetic monitoring.reproduction. We provide these services to over 500 laboratories and customersclients around the world from pharmaceutical and biotechnology companies to hospitals and universities.

        Consulting and Staffing Services.Insourcing Solutions (IS). Building upon our core capability as the leading provider of high-quality research models, weWe manage research model care operations (including recruitment, training, staffing and management services) on behalf offor government andentities, academic organizations as well asand commercial customers. Demandclients. Research institutions prefer to outsource staffing and management while retaining certain elements of their research in-house thus driving demand for our services has been driven by the trend for research institutions to outsource internal functions or activities that are not critical to their core scientific innovation process, or for which they do not maintain the necessary resources in-house. In addition, weservices. We believe that our expertise in in vivo biology, and in particular research model care, and facility operations, and discovery and development services, enhances the productivity and quality of our customers'clients' research model programs.

Discovery Services.Research Services (DRS).  DRS 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. DRS activities typically extend anywhere from 4-6 years in conventional pharmaceutical research and development timelines. We offer research and development expertise, capabilities, and services globally to accelerate our clients' drug discovery pipelines from lead generation to candidate selection.  We complement clients' capabilities and expertise to improve their decision-making, increase their flexibility, and reduce their internal costs and product development timelines. We support a variety of therapeutic areas including oncology, bone and muscoskeletal, inflammation, metabolic, cardiovascular ophthalmology and CNS diseases.  In addition, we provide non-therapeutic support in a non-regulated environment to support lead optimization to candidate selection activities.  Examples of this include, early pharmacokinetic and pharmocodynamic studies and in vitro Augmenting our traditional model production and GEMS described above,in vivo assays to assess mechanism, bioavailability, metabolism, and safety pharmacology.  As we look forward, we believe there are emerging opportunities to assist our customersclients in a variety of drug discovery research, developmentapplications and imaging areas. Expediting the development processplatforms from target validation to candidate selection. Services performed at sites dedicated to discovery services are considered part of investigational agents by providing products and services to customers extends their internal capabilities, complements their internal expertise and helps reduce product development timelines. In addition, ourin vivo biology expertise positions us to provide complementary disease research model services which include surgical procedures, pre-conditioning and aging. We augmented our discovery and research and development capabilities substantially in 2009 via the acquisitionspart of Piedmont Research Center (focusing on therapeutic efficacy studies in oncology and other therapeutic areas) and Cerebricon Ltd. (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. The Discovery Services that we offer through our RMS business are complementary to the Discovery Support services that we offer through our PCS business.segment. 

Research Animal Diagnostic Services.Services (RADS). We assist our customers in monitoringmonitor and analyzinganalyze the health profiles of the research models and cell lines used in their research protocols.of our clients. 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's needs, we mayWe are able to serve as itsour clients' sole-source testing laboratory, or as an alternative source supporting itsour clients internal laboratory capabilities.capabilities . We believe that the continued use, characterization and utilization of specific disease models and GEMs allows us to be well positioned to bewe are the reference laboratory of choice for health testing of laboratory research models and an industry leader in the field of animal diagnostics.

        Other Related Research Model Products and Services. We can also offer two other categories of productsnon-GXP biomarker assay platforms and services within RMS—to support early stage discovery studies. Across these platforms, we can provide both standard as well as customized biomarker testing, including serum and urine chemistries.

Endotoxin and Microbial Detection(EMD) in vitro(f/k/a products and avian vaccine services.


Table of Contents

        In Vitro.    OurIn Vitro). Our EMD business provides non-animal, orin vitro, methods for lot release testing of medical devices and injectable drugs for endotoxin contamination. We are committed to beingIn addition, with our acquisition of Accugenix, we provide our clients with state-of-the-art microbial identification services for manufacturing in the leader in providing our customers within vitro alternatives as these methods become scientifically validatedbiopharmaceutical, medical device, nutraceutical and commercially feasible, and toward that goal we work with and support the European Center for Validation of Alternative Methods in these efforts. consumer care industries.

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 most successful FDA-validatedin vitro alternative to an animal model test to date. The extraction of blood does not harm the crabs, which are subsequently returned to their natural ocean environment. Our EMDIn Vitrobusiness produces and distributes endotoxin testing kits, reagents, software, accessories, instruments and associated services to

4


pharmaceutical and biotechnology companies worldwide. We are a market leader in endotoxin testing products and services, which are used for FDA-required quality control testing of injectable drugs and medical devices, their components and the processes by which they are manufactured.

        OurThe growth in theour EMDIn Vitrobusiness is driven by our FDA approved line of next generationnext-generation endotoxin testing products, which are based on the Endosafe Portable Testing System (Endosafe®(Endosafe®-PTS™) technology that allows rapid endotoxin testing in the central laboratory or manufacturing environment. In recent years, we have expanded the PTS product portfolio to include a multiple sample testing system known as the Endosafe-MCSEndosafe®-MCS™ (multi cartridge system) in response to satisfy the demand of our clients who have higher testing volume customers.volumes of tests to perform. We anticipate continued adoption ofour clients' demand for rapid methods of testing will increase as our customersthey respond to the FDA's Process Analytical Technology (PAT) Initiative. In addition,November 2012, we are planning to introduce aintroduced the first fully automated MCSrobotic system developed specifically for high-volume endotoxin testing, Endosafe®-Nexus™. We expect to start shipping the Endosafe®-Nexus™ in late 2011, which will assist in penetrating our customer's high-volume central testing laboratories.2013. We also expect to see expanded use of this rapid endotoxin testing technology in non-traditional areas such as renal dialysis, nuclear and compounding pharmacies, and cellular therapy. In addition, weWe are currently exploring obtaining 510(K)510(k) medical device approval of this technology for clinical diagnostic applications.

        Avian Vaccine Services.In 2012, our EMD business acquired Accugenix, the premier global provider of cGMP- compliant contract microbial identification testing. Accugenix is an acknowledged industry leader in species-level identification and strain typing of bacteria and fungi that are recovered from manufacturing facilities. Utilizing state-of-the-art and proprietary in vitro We are the global leader for the supply of specific pathogen-free, or SPF, fertile chicken eggstechnologies, coupled with scientific expertise and chickens. SPF chicken embryos are used by animal health companies as self-contained "bioreactors" for the manufacture of live viruses. These viruses are used as a raw material primarilyanalysis, Accugenix excels in poultry, as well as human, vaccine applications. The production of SPF eggs is performed under biosecure conditions, similar in many waysproviding accurate, time-effective and cost-effective microbial identification services required to our research model production. We have a worldwide presence in North America with several SPF egg production facilities in the United States, contracted production capabilities in Hungary,meet internal quality standards and a franchise operation in India. We also operate a specialized avian laboratory in the United States, which provides in-house 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.government regulations.

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

    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 last 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 thesafety, tolerability andclinical efficacy of the selected drug candidates. During the preclinical stage of the development process, a drug candidate is testedin vitro (typically on a cellular or sub-cellular level in a test tube or multi-well petri plate) andin vivo (in research models) to support planned or on-going human trials.

        The development services portion of our PCS business enables our customers to outsource their critical, regulatory-required toxicology 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


Table of Contents

larger global pharmaceutical companies. The necessary significant investments in personnel, facilities and other capital resources required in order to efficiently conduct these activities means that global pharmaceutical and biotechnology companies have frequently chosen 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, and Europe. We also have a small facility in Shanghai, China as to which we announced in December 2010 we are pursuing strategic alternatives. Our PCS segment represented 41% of our total net sales from continuing operations in 2010 and employed 48.0% of our employees including approximately 330 science professionals with advanced scientific degrees (excluding employees at our sites included in discontinued operations).

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

        Toxicology.    Toxicology is onedevelopment. We also provide DRS activities at certain of our corePCS sites, including non-GLP pharmacokinetics, metabolism and pharmacology support to assist in the process of integrative drug candidate selection which we reported in our PCS segment.

Safety Assessment. We offer a full range of 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 health products and other materials;

    •
    market-leading expertise in the conduct and assessment of 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 clients basedsubmission on our wealth of experience and scientific expertise in support of drug development; and

    •
    a strong history of assisting our clients in achieving their regulatory or internal milestones for safety testing, including studies addressing stem cell therapies, DNA vaccines, protein biotherapeutics, small molecules and medical devices.

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 regulatory 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 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-driven


Table of Contents


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 bioanalytical techniques required to satisfy these requirements for a number of drug classes. After performing sample analysis for preclinical study support, we have the opportunity to capture the benefits of bridging the preclinical bioanalysis with subsequent clinical development. Once the analysis is complete, our scientists evaluate the data to provide information on the pharmacokinetics and/or toxicokinetics of the drug, as well asand complete an evaluation of the distribution of the drug or 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 toat higher doses that may result in adverse effects. Our clients require theseThese studies are required for the full preclinical assessment of the disposition of the drug and the results of which are used in the final preclinical safety evaluation of the compound.

        Discovery Support.Toxicology. AtToxicology is one of our core preclinical competencies and a competitive strength. Once a lead molecule is selected, toxicology studies are conducted in support of clinical trials in humans. These toxicology studies focus on safety and assess any harmful effects. They are typically performed in research models to elucidate any potential adverse effects that a compound has on an organism over a variety of doses and over various time periods. Our toxicology services feature:

all the earliest stagesstandard 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 lead compound identification,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 health products and other materials;
expertise in the conduct and assessment of reproductive and developmental toxicology studies (in support of larger scale and later-stage human clinical trials);

5


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:

We also offer lead optimization strategies including early pharmacokinetic, metabolism, and toxicology support to help in early integrative drug selection criteria. The Discovery Support services that we offer through our PCS business are complementarymedical devices.

Our preclinical facilities comply with Good Laboratory Practices (GLPs) to the Discovery Services thatextent 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. 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 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 offer throughperform for our RMS business.

clients.

Biopharmaceutical Services. We provideperform specialized testing of biologics and devices frequently outsourced by global pharmaceutical and biotechnology developers.companies. Our laboratories in the United States, Germany, Scotland and Ireland provide timely and compliant molecular biology, virology, bioanalytical, immunochemistry, microbiology and related services. We confirm that biological processes and the drug candidates produced are consistent, correctly defined, stable and essentially contaminant free. This 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,further design and manufacturing scale-up.

Discontinued Operations—provide viral clearance projects for Phase I, Clinical Trials

        We currently offer Phase I clinical research services through our clinic in Tacoma, Washington; however, we have announced that we are currently pursuing strategic alternatives for this businessII and are no longer including this business unitIII studies in our continuing operations. Phase I clinical trials are usually short duration studies conducted on a small number (20-100) of healthy human subjects (although

German and US facilities.

Table of Contents


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 located at our premier Phase I clinic in Tacoma, Washington, with a capacity of 250 beds.

        The Phase I clinical trials and other services we currently provide at our Tacoma site are subject to a specific regulatory environment. 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. FDA regulations do not require a quality assurance program; however, our Phase I facility has an established quality assurance unit that monitors the conduct and reporting of Phase I trials to assure 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. We drive our growth by providing our clients in acceleratingsuperior, flexible and tailored solutions to help them accelerate and enhance the search for drugsefficiency of their drug research and other therapies. From fundamental research toin vivo discovery through preclinical development our goalefforts. Our strategy is to deliver a comprehensive and integrated portfolio of early-stage products and services for academic research, early-stage/drug discovery and development products, services, and solutions to partner withsupport our clients by providingclients' goal to maintain the greatest valueflexible infrastructure that they require to bring new and strategic benefit. Asimproved therapies to market faster and more cost effectively. We believe we have certain competitive advantages in executing this strategy, as a premierresult 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, services, and solutions that focuses almost exclusively on early-stage drug discovery and preclinical development. We provide research models and associated services, discovery research studies and services, that spans the early-stage development platform (from research models through preclinical development),and comprehensive safety assessment and toxicology studies in both regulated and non-regulated environments. As such, we are able to collaborate with clients at the earliest stages, whenfrom early lead generation through candidate selection. When critical decisions are made regarding which therapeutic agentstherapies will progress or remain in development, andwe continue to work alongside them as the drug candidates move downstream through the preclinical development process. In particular, ourprocess and post-candidate selection. Our recognized expertise inin vivo biology throughout our RMS and PCS businessespharmacology provides us with a competitive advantage in understanding our customer's drug candidates,clients' therapies, and the challenges faced during the discovery and development process, including non-GLPmechanism of action, efficacy, drug metabolism and safety assessment and toxicological testing critical for "go/no-go" decision-making.making “go/no-go” decisions.

        Our business is primarily driven by the trend towards virtualization of, and increase in outsourced services by, our customers, along with research and development spending by pharmaceutical and biotechnology companies, the federal government and academic institutions. Outsourcing allows our customers to concentrate their internal expertise and resources on early drug discovery (and for more mature companies, 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 their drug discovery and development process. Our strategy is to capitalize on these opportunities by continuing to build our portfolio of premium, value-added products and services through internal development and investment, augmented by strategic targeted "bolt-on" transactions.

        Charles River is positioned to address our customers' future needs and improve the efficiency and speed of their drug development activities, as we

Deep Scientific Expertise. We provide a multi-faceted value proposition that enables us to:

    •
    provide externalbreadth and depth of scientific expertise which may be too costly for our customersclients to build and/or maintain in-house;in-house. We provide essential capabilities that our clients demand but are not perceived as strategic differentiators for their business. These include biomarkers, biology, pharmacology, immunology, pathology and other specialty areas that have high infrastructure costs or are cost-prohibitive for clients

6


to maintain in-house. We continue to increase our portfolio in key therapeutic and pharmacology areas to align with our clients' internal drug discovery and development areas of focus. These areas of focus and expertise include oncology, metabolism and obesity, immunology, bone and musculoskeletal, diabetes, cardiovascular, infectious disease and central nervous system.
Superior Quality and Client Support.

•
leverage integrated offerings fromWe maintain scientific rigor and high quality standards through management of key performance indicators and an intense focus on biosecurity. These standards allow clients to access our two business segments (RMSglobal portfolio of products and PCS);services with the confidence that they will obtain consistent results no matter where they choose to obtain their products or conduct research.
Flexible and Customized Environment to Provide the Right Solutions.

•
partner with customersAll of our clients are different. Each has individual needs and specific requirements. We understand the importance of flexibility and we can deliver customized work based upon the breadth and depth of our capabilities, expertise and services. We help clients improve their workload and staffing requirements by drawing upon the higher utilization and streamlined efficiencies of our facilities. This allows our clients to allow them to compensate for recentreduce internal capacity and/or staff reductions;

•
provide flexible arrangementsstaff. We leverage the expertise embedded in our integrated early-stage portfolio to better balance our clients' workload/staff requirements (often reducing their personnel and operating costs);

Table of Contents

    •
    provide customized solutions acrosstailored to fit the specific need or therapeutic area;

    •
    draw upon our higher utilization and efficiencies to our clients' advantage (including the use of purpose-built facilities designedarea for high throughput);

    •
    address our customers' demands for "non-core" but strategically importantin vivo biology activities and specialty services, such as general and specialty toxicology and program management, that are prohibitive for customers to maintain in-house; and

    •
    a particular client. We provide additionalenhanced value to our customers through broad-based partnerships across the breadth of the Charles River portfolio.

        In today's business environment, weclients who use us as a full service integrated partner over several years.

Large, Global Partner. We believe there is a particular advantage in being a global, full service, high-quality provider of non-clinical services throughout the drug discovery and development continuum.preclinical in vivo products and services on a global scale. Many of our customers,clients, especially large pharmaceuticalbiopharmaceutical companies, are attractedhave decided to limit the number of suppliers with which they work, preferring to partner with Tier 1 contract research organizationsCROs who offer and can bring experience in project management to a portfolio of capabilities. Large CROs like Charles River can present clients with a full breadth of capabilities, and chooseaccess 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 increased focus on key therapeutic areas, may favor larger contract research organizations who can present customers with the benefits ofthrough economies of scale and scope,scope. This includes extensive scientific, technical and therapeutic area expertise, real-time access to data through secure portals, a global footprint, and streamlined and simplified processes and communications including professional project 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 studies with providers they can rely upon.relationship management. We are focused on beingleveraging our competitive advantages to ensure we are recognized as athe premier preferred provider by building and buildingexpanding broader and deeper long-term strategic partnershipsrelationships with our customers. Accordingly,clients.
For example, in 2012 we entered into a strategic relationship with many ofa leading global pharmaceutical company for outsourced regulatory safety assessment and development DMPK (drug metabolism and pharmacokinetics). Utilizing our largest customers,capabilities will enable this client to create a flexible research platform to deliver innovative health solutions. And, in 2011, we enter into globalexpanded an existing preferred provider agreementsagreement with another leading global pharmaceutical company. We are now this client's primary in vivo biology partner, providing non-GLP pharmacology for multiple therapeutic areas, drug metabolism and DMPK, services, and GLP safety assessment.We believe we are at an inflection point when global biopharmaceutical companies are making the decision to outsource more significant tranches of their drug discovery and development processes.
We believe it is critical to participate in that spanprocess now, because the relationships that are formed now are likely to extend for lengthy periods of time, from three to five years. Furthermore, both segmentsthe client and the CRO invest heavily in the the initial phases of the relationship, to successfully transfer work streams and establish governance processes. Given this investment, clients are less likely to change CROs, which means that the opportunity to compete for the outsourced business may not be available again. Our goal is to prevail in the majority of these opportunities, so our business. In addition,strategy is focused on positioning Charles River as the preferred partner for outsourced early-stage drug discovery and development products and services. We differentiate ourselves by our broad, early-stage portfolio, which is unique in responsethe CRO universe; our extensive scientific expertise; our attention to individual customer needs, we remainclient service; our best-in-class data systems and portals; and our ability to structure creative, flexible and open to broad-based multi-year partnering arrangements which may take various and customized forms, and which tap into the broad array of physical and/or service resourcessolutions that we provide (e.g. reserving dedicated space within existing facilities; building out space to a particular specification; working withinsupport our clients' infrastructure;goals of reducing the cost and occasionally establishing a new facility).

        Thisimproving the productivity of drug development.

We developed this strategy and focus has been developed in recognition of the needs and desires of our customers who are increasingly facingclients' needs. Biopharmaceutical companies continue to face increasing pressure to innovate and to better manage their researchpipelines. Accordingly, our clients have reduced their infrastructure while simultaneously they have been searching for improved ways to identify and develop innovative new therapies. Clients are reducing historical fixed costs in favor of a more flexible business model, with an aim to accelerate their discovery and development costs while at the same time maintaining or developingactivities. As 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. It is both risky and expensive to bring a new prescription drug to market. It is estimated that only 4 in 5,000 - 10,000 investigational drugs that begin preclinical testing will progress to human testing, and only one of those will be approved for human use. According to various reports, it takes 10 to 16 years and costs in the range of $180 million to $2.0 billion, with an average cost of over $900 million, to bring a new drug to market ($1.2 billion for a biologic). Furthermore, costs associated with developing new drugs and biologics are increasing due to a variety of factors, including:


Table of Contents

        In order to convert largely fixed costs into variable expenses and to facilitate and speed their research,consequence, our pharmaceutical and biotechnology customers are making strategic decisionsclients have been looking to outsource a portfolio ofthese services to high-quality full servicehigh quality, full-service providers like us. DuringOur business prospects are driven primarily by this trend towards the past decade, we believe thatvirtualization and externalization of our clients through partnering and outsourcing. Client spending is not just influenced by the growthlevels of outsourcing by our customers has been driven by a unique confluence of events, including:


7


areas that provide true differentiation and advance their pipelines. This creates opportunities for us to help optimize our clients' pipelines and be a true partner in developing countries);

•
heightened regulatory authority scrutiny worldwide, particularly concerningaccelerating their drug safety;discovery and

•
scrutiny of development process.
In recent years, the medical value of new drugs being developed as compared to established therapies.

        Over the last 2-3 years, our customerspharmaceutical and biotechnology industries have faced a more challenging market environment. Among the factorscollection of challenges. This involves scientific, public-perception, economic and regulatory challenges that all have negatively affected them, we have seen the following have the most material impactdemand (and pricing) for outsourced discovery and negatively affect outsourcing trends:

patent expirations of “blockbuster” therapies
intensified their cost-savingsactions designed to reduce costs and efficiency actions, and have announced significant initiatives to improve their research and development innovation and productivity, including cost-cutting and rationalize theirother efficiency initiatives;
rationalization of drug pipelines. This focus has been manifested through consolidation and reductions in infrastructure, spending constraints, pricing pressures and project delays and cancellations, as well as for a stronger emphasis on later-stage products as they reprioritized compound pipelines (focusing on the back-end of their pipelines in the near-term) and moderated their spending per drug candidate;

•
biotechnology customers, particularly those that are cash-flow negative, have been highly focused on rationing their liquid assets in a challenging funding environment. Funding has been improving, as large pharmaceutical companies have partnered with or acquired smaller biotechnology companies, and has been supplemented to a lesser extent by the capital markets. However, the universe of biotechnology companies has declined throughout this period, which has resulted in less robust spending overall;

•
sponsor consolidation, particularly several large and mid-sized biopharmaceutical company mergers;

•
many customers have narrowed their pipelines to focus on a smaller number of similar,programs and high-potential therapeutic areas which may yieldareas;
changes to government healthcare policies and funding;
a stronger emphasis on delivering later-stage programs to accelerate drugs in clinical trials to market;
increased pharmaceutical merger activity and the greatest returns (with particular focusassociated integration issues;
fluctuations in the biotech funding environment; and competition in oncology, metabolism/obesity, autoimmune/inflammatory, central nervous system and infectious disease);
the uncertain global economy.

Table of Contents

        From a broad perspective, over the past 18-24 months,regard to the large pharmaceutical industryindustry. First, these clients are increasingly emphasizing studies that have greater translation to the clinic so that they can make appropriate decisions regarding the progression of potential therapeutic entities earlier in the development process. This has re-examined itsreduced the number of compounds moving into preclinical and clinical development and results in fewer molecules undergoing regulated safety assessment. The result is a greater focus on discovery research services, including in vivo pharmacology studies consisting of efficacy and development model, which has been strugglingnon-regulated DMPK (drug metabolism and pharmacokinetics) studies. Second, these clients are choosing to outsource additional discovery research services in recent years with few novel therapeutics developed, notwithstanding significantorder to increase the efficiency and effectiveness of their drug research and development spending. decision processes.

We believe three major conclusions have been reached by the industry participants:

        While the consequences of these factors and conclusions have mitigated the outsourcing growth rate trend in the short-term, we believe that these changesthis changing environment will provide enhanced outsourcing opportunities going forward. In fact, wefor us in the future. We remain optimistic that with the completionour clients are increasingly receptive to moving towards increased outsourcing of the major mergers anddiscovery services. With the stabilization of other of the factors addressed above, includingas well as the successful launch of new therapies currently in late-stage development,and the need to advance early-stage pipelines, we believe outsourcing by the pharmaceutical industry will returncontinue to focusing on driving drugs and therapies through preclinical development. Also, webe a positive driver.

We also believe that as larger pharmaceuticalbiopharmaceutical companies become leanerwill increasingly focus on efficiencies and more efficient, generally focusing on theirexecution. They will continue to reassess what are core competencies of fundamentaldifferentiators from research and development and commercialization,to commercialization. We expect they will also continue to be conservative in their staffingre-building infrastructure and further reduce their in-house expertise. This should lead to reinvigoration ofmore opportunities for strategic outsourcing as theyclients choose to utilize external resources rather than invest in internal infrastructure. In the aggregate, we believe that the evolving large pharmaceuticalbiopharmaceutical research and development business model will make our essential products and services even more relevant to our clients, and allowsallow them to leverage our integrated offerings and expertise to drive their R&Dresearch and development efficiency and cost effectiveness.

        In recognition of the changes in demand for our products and services, starting in 2009, we began to take decisive actions to

To address the accelerating changes taking place inchallenging market conditions that have persisted over the biopharmaceutical industry. These actions have been designed to drive shareholder value by aligning our infrastructure to current demand, rigorously managing our operating costs, and increasing our stock repurchases. Nonetheless, the combination of reduced customer demand, cost containment initiatives pursued by our customers and excess capacity within our industry generally has resulted in significant pricing pressure beginning in late 2008 and continuing through 2010. In response,last few years, we have taken significant steps during the past two years to better support our customers in today's challenging environment,clients, identify new strategies to enhance client satisfaction, improve operating efficienciesefficiency, and generally strengthen our business model, and provide valuemodel. Our sales force is aligned to shareholders:


Table of Contents


We also began to take decisive actions in 2009 to reduce costs and improve operating efficiency through a combination of our integrated enterprise resource planning (ERP) system. The first stage, which included all of our United States sites as well as our RMS site in Canada, went live at the beginning of fiscal 2010 and in the beginning of our fiscal third quarter 2010 we added our remaining PCS sites in Montreal and Edinburgh. Other locations are expected to be added in later stages. In addition, we have continued to expand our Lean Six Sigma process improvement initiatives and cost-savings actions. The cost savings actions were intended to right-size our infrastructure and identify opportunities to operate more efficiently. In 2011, we initiated a program to reduce process cycle times, eliminate non-value added stepsidentify and implement additional operating efficiencies. These actions were designed to streamline and optimize our operating efficiencies. Based onprocesses and infrastructure to allow us to support our clients more efficiently and at a lower cost. In 2012, we continued these efforts

8


through the initial success of the program in our PCS business segment, we have recently expanded it to RMS to attain similar operational benefits.

•
In July 2010, our Board of Directors authorized a $500.0 million stock repurchase program, which was increased by $250.0 million to $750.0 million on October 20, 2010. Subsequent to the initial authorization, in August 2010, we entered into an agreement to implement an accelerated stock repurchase (ASR) program with a third party investment banker to repurchase $300.0 million of common stock. In total, we received 8,871,829 shares under the ASR through its completion in February 2011. Following the completion of the ASR program, we have $397.1 million remaining on our $750.0 million stock repurchase authorization. Our present intention is to complete the initial $500.0 million of the stock repurchase authorization in 2011.

•
In November 2010, we announced a number of additional cost-savings actions, including a reduction of headcount by approximately 4% across our PCS, RMS and Corporate functions, the closure of a small leased PCS satellite facility in Quebec, Canada, consolidationintroduction of our Michigan Discovery Services operations withProfit Improvement Program to further optimize our larger facility in North Carolina;global footprint by identifying top and further reductions in discretionary spending levels.

•
bottom-line drivers to improve efficiency and profitability.
In December 2010, we announced an intensified focus on four key initiatives designed to allow Charles Riverus to drive profitable growth and maximizingmaximize value for shareholders, and thus better

Table of Contents


Initiative2012 Progress
Improve our consolidated operating marginStable consolidated operating margin from continuing operations achieved due to:
Ÿ    Stable Corporate costs, and
Ÿ Six-sigma and other process improvement initiatives
Improve our free cash flow generation
Ÿ Free cash flow was stable and our per-share yield we believe was still the highest among public CROs.
Disciplined investment in growth businessesCapital and MD&A projects invested in growth business:
Ÿ    Diagnostic laboratories opened in 2012,
Ÿ EMD production facility in China and acquisition of Accugenix,
Ÿ Committed to acquire Vital River, which establishes research model presence in China, and
Ÿ Capacity expansion in Finland DRS business.
Return value to shareholders
Ÿ Repurchased 1.7 million shares of common stock for $61.4 million.

•
improving free cash flow generation;

•
disciplined investment in growth business, such as GEMS, Discovery Services, In Vitro and Biopharmaceutical Services; and

•
returning value to shareholders, such as through stock repurchase programs.

        In light of our actions and intensified focus, we

We believe that we are well positioned to exploit both existing and new outsourcing opportunities.opportunities in light of our actions and intensified focus. As strategicclients, particularly larger pharmaceutical companies, increase their outsourcing, by our customers increases, we believe that our expertise in areas previously addressed by our customers' in-house capabilities allows us to provide a more flexible, efficient and cost-effective alternative for them. In short,We are able to build and maintain expertise and achieve economies of scale that are difficult for our clients to match within their internal infrastructures because these products and services are the core of our business, we are able to build and maintain expertise and tap into economies of scale that are difficult for our customers to match within their internal infrastructure.

business.

We intend to continue to broaden the scope of the products and services we provide across the early-stage drug discovery and development continuum primarily through internal development, which will be augmented,and, as needed, through focused "bolt-on" acquisitions and alliances. Our approachAcquisitions are an integral part of our growth strategy, but we are committed to acquisitions is a disciplined oneapproach that seeks to target businesses that are a sound strategic fit and that offer the prospect of enhancing shareholder value. value, typically including the achievement of a hurdle rate on return on invested capital above our weighted cost of capital.
This strategy may include geographic as well as strategic expansion of existing core services. For example, in October 2012, we entered into an agreement to acquire 75% ownership of Vital River, the premier commercial provider of research models and related services in China. For the last ten years, Vital River has been a licensee for production and distribution of our research models in China, with sites which reflect our facility design. The acquisition closed in the first quarter of 2013. As a result of this acquisition, we now provide high-quality research models and associated services to the emerging China market for drug discovery and development. This strategy may also include strengthening the depth and expanding the breadth of our core capabilities and services or the addition of a new product or service in a related or adjacent business.

        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 funding or focus,business such as oncology, metabolism and obesity, autoimmune/inflammation, cardiovascular, infectious disease and central nervous system. 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 the early-stage drug development continuum.

Accugenix acquisition.


Customers


We maintain a three-pronged sales organization with a focus on:


global biopharmaceutical companies;

•
small and mid-sized pharmaceutical companies and biotechnology companies; and

•
academic and government customers.

institutions.

Our customersclients continue to consist primarily of all of the major pharmaceutical companies, many biotechnology companies, animal health,contract research organizations, agricultural and chemical companies, life science companies, veterinary medicine companies, contract manufacturing organizations, medical device companies, diagnostic and other life sciences companies, andcommercial entities, as well as leading

9


hospitals, academic institutions, and government agencies. We have stable, long-term relationships with many of our customers.clients. During 2010,2012, no single commercial customerclient accounted for more than 5% of our total net sales.


We continue to pursue a goal of expanding our relationships with our large biopharmaceutical clients, and with many of our larger mid-tier clients. These relationships take different forms, from preferred provider arrangements to strategic partnerships. These structured relationships incentivize clients to purchase more products and services across our early-stage portfolio, and in total, the strategic relationships in which we are now engaged represent approximately 25% of total company revenues. This provides us better visibility than we have had in the past, and because of the strength of these relationships, better insight into our clients' planning processes. 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 12 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 12 included in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.


Table of Contents

Sales, Marketing and Customer Support

We have designated dedicated sales people for each of our three customer segments, enhancingclient segments. This enhances our ability to meet customerclient needs by offering customized, tailored solutions across our entire portfolio. In addition, our mid-market pharmaceutical and biotechnology customers willclients 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. In addition to interactions with our direct salesales force, our primary promotional activities include organizing scientific symposia, publishing scientific papers and newsletters, webinars, and making presentations at, and participating atin, scientific conferences and trade shows in North America, Europe and Asia. We supplement these scientifically based marketing activities with internet-based marketing, advertising and direct mail. In certain locales,areas, our direct sales force is supplemented by international distributors and agents, for our products and services, particularly with respect to our EMDIn Vitroand Biopharmaceutical Services 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 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 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.

Our marketing efforts are focused to stimulateon 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,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
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 timeliness and availability, supported by our professional bench strength inin vivo biology, quality, reputation, flexibility, responsiveness, pricing, innovation and toxicology, global capabilities and strategically located facilities worldwide.capabilities. We are able to offer a unique portfolio of early-stage products and services to support early-stage drug development through our wide range of research models and research model services, discovery and imaging services and our broad array of preclinical services, including both general and specialty toxicology.development.


The competitive landscape for our two business segments varies.


For RMS, our main competitors include three smaller companies in North America (each of whom has 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 mainthese competitors compares to us in RMS has our comparable global reach, financial strength, breadth of product and services offerings, technical expertise or pharmaceutical and biotechnology industry relationships.

10




•
As forFor PCS, we believe we are one of the two largest providers of preclinical services in the world, based on net service revenue. Our commercial competitors for preclinical services consist of both publicly held and privately owned companies, and it is estimated that the top eight

Table of Contents

      ten participants (including Charles River)us) account for a significant portion of the global outsourced preclinical market, with the rest of the market remaining highly fragmented. Our PCS segment also competes with in-house departments of pharmaceutical and biotechnology companies, universities and teaching hospitals.

We believe that the barriers to entry in a 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.

Industry Support and Animal Welfare

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 aspect 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 importanta 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

As of December 25, 2010,29, 2012, we had approximately 7,5007,200 employees (including approximately 450540 professionals with advanced scientific degrees, including Ph.D.s, D.V.M.s, and M.D.s (excluding those in businesses designated as discontinued operations)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 satisfaction surveys indicate thatWe believe we have an excellent relationshiprelationships with our employees.

employees, based on a number of factors including employee retention and employee surveys.

Backlog

Our backlog for our PCS business segment from continuing operations was $219.9$213.9 million at December 25, 201029, 2012, as compared to $268.8$202.5 million at December 26, 2009.31, 2011. 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 included in 20102012 backlog may be completed in 2010,2013, 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


Table of Contents


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.



11


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 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 business is also generally regulated by the USDA.

Our import and export of animals in support of several of our business units as well asand 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.

facilities.

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 conductMany of these studies must comply with national statutory or regulatory requirements for Good Laboratory Practice (GLP). GLP regulations describe a quality system concerned withfor the organizational process and the conditions under which nonclinical laboratory studies are planned, performed, monitored, recorded, archivedreported and reported.archived. GLP compliance is required by such regulatory agencies as the FDA, United States Environmental Protection Agency, European Medicines Agency (EMA), Medicines and Healthcare Products Regulatory Agency (MHRA) in the United Kingdom, Health Canada State Food and Drug Administration ofother similar agencies in the Peoples' Republic of China, and the Japanese Ministry of Health and Welfare.countries we operate GLP requirements are significantly harmonized throughout the world and our laboratories are capable of conducting studies in compliance with all appropriatenecessary 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 managementensure that the facilities, equipment, personnel, methods, practices, records, and controls are in compliancecomply with GLP. At each of our PCS sites, QAU provides testing facility management with reports that provide a written status on each study, noting any problems and the corrective actions taken. Our laboratory managers use the results of QAU monitoring as part of a continuous process improvement program to assure our nonclinical studies meet clientregulatory and regulatoryclient expectations for quality and data integrity.


Table of Contents

Our manufacturing businesses produce endotoxin test kits, reagents, cell banks used in research and biopharmaceutical production, clinical trial vaccines 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 (cGMP) regulations. We are subject to inspection on a routine basis forby national (FDA) and international monitoring authorities compliance with these regulations. These regulations require that we manufacture our products or perform testing in a prescribed manner with respect to cGMP compliance, and maintain records of our manufacturing, testing and control activities. We maintain a biological license with the FDA's Center for Biologics Evaluation and Research that covers the manufacture and distribution of diagnostic reagents.  We also maintain an Establishment Licenseestablishment license with the USDA's Center for Veterinary Biologics (CVB) that covers certainfor the manufacture of our sites which manufacture antigens used in a licensed diagnostic kit for rodents or—particular to our avian vaccine services—which manufacture USDA licensed antigens, antibodies and viruses that are sold to clients for use in the manufacturing of their own USDA licensed products.viruses. Our vaccine supportAvian business also manufactures and markets three 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/the USDA and 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.

functions.


12


Intellectual Property

We develop and implement 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, 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 through registration of title or use.registrations. In addition, we in-license technology and products from other companies when it enhances both our product and services business.businesses. In the future, in-licensing may become a larger initiative to enhancingenhance our offerings, particularly as we focus on therapeutic area expertise. With the exception of technology related to our EMDIn Vitrotesting business, including Accugenix and the Endosafe-PTS, and our pathology based software development activities through our Systems Pathology Company subsidiary, we have no patents, trademarks, licenses, franchises or concessions which are material and upon which any of theour products or services we offer are dependent.


Table of Contents

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. Ten2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Nine of the eleventen members of our Board of Directors are independent and have no significant financial, business or personal ties to the Companyus or management and all of our Boardboard 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 our Corporate Governance Guidelines and a Code of Business Conduct and Ethics (fully revised in 2012) 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 slowimpair our growth.

Over the past decade, our businesses have grown as a result of the increase in pharmaceutical and biotechnology companies have generally increased their outsourcing theirof preclinical and clinical research support activities. While many industry analysts expect the outsourcing trend to continue to increase for the next several years (although with different growth rates for different phases of drug discovery and development), a decreasedecreases in preclinical 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 2010 our revenues for our PCS segment declined 8.8% from 2009, and 2009 revenues were down 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.


Table of Contents


13


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 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 customers,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 years have indicated that a majority of academic researchers are anticipating reductions in their budgets, although funds disbursed through the American Recovery and Reinvestment Act may have provided some offset. 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, 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 down their preclinical 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 customersclients (particularly larger bio/pharmaceuticalbiopharmaceutical 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 research 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, thatwhich 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 United StatesU.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 the Obama administration's stimulus packages in 2009 and 2010 included increases in NIH funding, NIH funding had otherwise remained fairly flat in recent years (including into 2012 and a2013). 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.


Table The significance and timing of Contentsany reductions to the NIH's budget from March 2013 may be significantly impacted by the sequestration provisions of the Budget Control Act of 2011 and by whether these provisions remain in effect.


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

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 simplifiedstreamlined or expedited 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. Although we believe we are currently in compliance in all material respects with 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 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. In addition, if regulatory authorities were to mandate a significant reduction in safety testing assessment

14


procedures which utilize laboratory animals (as has been advocated by certain groups), certain segments of our business could be materially adversely affected.

In March 2010, the United StatesU.S. Congress enacted health care reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. In June 2012, the U.S. Supreme Court upheld the constitutionality of this legislation. This legislation may significantly impact the pharmaceutical and biotechnology industries. In addition, the U.S. Congress, various state legislatures and 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 enactedthis legislation on our business and are unable to predict what legislative proposals will be adopted in the future, if any.

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

The FDA is in the terminationprocess of ongoing research orreviewing and updating the disqualification of data for submissionGLP regulations 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 clinical practice, good laboratory practice orreflect current good manufacturing practice requirements could materially and adversely affect us. 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 of guidance in Europe that will be implemented over a period of several years on a country-by-country basis. Becauseindustry standards. As this may change some of the complexities ofGLP requirements, the formal adoption process,regulatory impact will not be known until the finalization and implementation of this guidance will likely take three or more years. 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, import and export requirements of biological materials, health monitoring requirements and the use of disinfectants. In the United States, in 2010 guidance used by the National Institutes of Health and by certain oversight agencies for the care and use of laboratory animals has been completed, and it is expected to be implemented in 2011.


Table of Contents


Furthermore, certain of our customers may require us to comply with this new guidance in advance of its implementation as a condition to being awarded contracts. Conforming to these new guidelines will likely 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.

         Our standard customer agreements contain customer-determined termination and service reduction provisions, which may result in less contract revenue than we anticipate.

        Generally, our agreements with our customers provide that the customers can terminate the agreements or reduce the scope of services under the agreements with little or no notice. Customers may elect to terminate their agreements with us for various reasons, including:

If a customer terminates a contract with us, wefinal regulations 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 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-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. 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 and irrevocably committed costs/expenses.

issued.

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 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


Table of Contents


possibly reduced sales. Contaminations 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.

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 objectionable observations or a warning from the FDA based

15


on a finding of a material violation by us for 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. 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 (European Directive 2010/63/EU) that is being implemented over a period of several years on a country-by-country basis.Because of the complexities of the directive implementation process, the transposition, adoption and final enactment of the new regulations in each European Union country will take three more years, but they will 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 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, mandated contingency planning, 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 is currently being implemented. Furthermore, we have begun implementation of some components of this new guidance in order to avoid additional costs in certain long-term contracts initiated or bid upon currently. Conforming to these new guidelines may 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 revenue generating agreements contain termination and service reduction provisions or may otherwise terminate according to their term, which may result in less contract revenue than we anticipate.
Many of our agreements with both large and small clients, including those which underlie our strategic relationships with some of our more significant customers provide for termination or reduction in scope with little or no notice. In addition, we sell our products and services to our competitors, and similarly they sell products and services to us. For instance, we have historically entered into, and currently are party to, contracts with certain of our competitors to distribute specialty research models in locations where our competitors may not have distribution capabilities.
Clients and/or competitors 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;
a client's decision to forego or terminate a particular study;
establishment of alternative distribution channels by our competitors;
the loss of funding for the particular research study; or
general convenience/counterparty preference.

If a client or competitor 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, termination fees. Cancellation of a large contract or proximate cancellation of multiple contracts could materially adversely affect our business 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‑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 client. The loss, reduction in scope or delay of a large contract or the loss or delay of multiple

16


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 and irrevocably committed costs/expenses.
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.
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 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 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 customer relationships.

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment (step one) for 2010, the fair value of our PCS business


Table of Contents


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.

        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.of goodwill. 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.income from continuing operations. Such an impairment charge could materially and adversely affect our operating results and financial condition.results. As of December 25, 2010, we had recorded29, 2012, the carrying amount of goodwill and other intangibles of $319.7was $293.5 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 United States.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 as expenses outside the United StatesU.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 United States;

•
U.S.;
difficulties and costs associated with staffing and managing foreign operations, including risks of work stoppages and/or strikes, as well as violations of local laws or anti-bribery laws such as the U.S. Foreign Corrupt Practices Act, by employees overseas orthe UK Bribery Act, and the OECD 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;

17

•

potentially negative consequences from changes in or interpretations of US and foreign tax laws:

•
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 customersclients 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


Table of Contents


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.us and at our annual meetings, as well as shareholder proposals we received for our 2012 and 2013 Annual Meetings. In some instances, demonstrations at our operating sites occur at regular intervals. 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, commercial disputes, supplier insolvency, 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 drug discovery and development companies,CROs, 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 ouroutsourced 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;

•
quality of facilities;

•
financial stability;

•
size; and

•
ability to acquire, process, analyze and report data in an accurate manner.

manner; and

accessibility of client data through secure portals
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

18


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 contract research organizationsCROs 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 organizationCRO industry will continue to find lower barriers to entry, and private equity firms may determine that there are opportunities to acquire and roll upconsolidate these companies, thus further increasing possible competition. Furthermore, in recent yearsbetween 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


Table of Contents

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 budget proposal released on February 14, 2011, the Obama administration proposed changes to the manner in which the U.S. would, there are several proposals to reform corporate tax law that are currently under consideration. These proposals include reducing the international incomecorporate statutory tax rate, broadening the corporate tax base through the elimination or reduction of U.S.-based companies. The proposed changes include, among others,deductions, exclusions and credits, implementing a territorial regime of taxation, limiting the ability of U.S. corporations to deduct interest expense allocated and apportioned toassociated with offshore earnings, and modifying the foreign tax credit rules. While it is uncertain howrules, and reducing the ability to defer U.S. Congress may address this issue, reform of U.S. taxation, including taxation of international income, continues to be a topic of discussion for the U.S. Congress. Although the scope of the proposed changes remains unclear and the likelihood of enactment is uncertain, it is possible that thesetax on offshore earnings. These or other changes in the U.S. tax laws could increase the Company'sour 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 United Kingdom.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 be likely to 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 organizationCRO, we face a range of potential liabilities which may include:

errors or omissions in reporting of study detail in preclinical or Phase I clinical 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;

•
litigation risk, including resulting from our errors or omissions, associated with the possibility that the drugs/compounds of our clients that were included in drug development trials we participated in may cause illness, personal injury or have other negative side effects to clinical study participants or other persons (including death);

•
general risks associated with operating a Phase I clinical business, including negative consequences from the administration of drugs to clinical trial participants or the professional malpractice of Phase I medical care providers;

•
risks associated with our possible failure to properly care for our customers'clients' property, such as research models and samples, study compounds, records, work in progress, other archived materials, or goods and materials in transit, 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 company policies for the quarantine and handling of imported animals; and

Table of Contents

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;liability, insurance maintained by our clients investigators, and by us;us, and various regulatory requirements we must follow in connection with our business.


19



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 our insurance coverage. We also often contractually indemnify our clients, similar to the way they indemnify us, and we may be materially adversely affected if we have to fulfill our indemnity obligations. 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

The scientific and research communities have attemptedcontinue to explore methods to develop improved models methods and systems that would replace or supplement the use of living animals as test subjectsplatforms in biomedical research.research as well as improve the translation of cellular and animal models to human studies and vice-versa. 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,and other translational biomarker technologies, could result in athe refinement inand utility for the number of animal research models necessary to conductimprove the required research.translation from preclinical to human studies. It is our strategy to participate in some fashion with anyexplore non-animal test method or other method that reducesapproaches to reduce the need for animal research models as it becomes validated as a research model alternative or adjunct in our markets. For instance, in recent years we acquired imaging capabilities through our acquisitions of MIR and Cerebricon. However, we generallythese new methods become validated. We may not be successful in commercializing these methods, if developed, and, sales or profitsfurthermore, revenues from these methodsnew models and approaches if successfully developed, may not offset reduced sales or profits from research models. AlternativeIn addition, alternative research methods could decrease the need for future 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,Lastly, 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 some of our customers.

clients.

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

In 2010recent years we completed the initial implementation ofimplemented 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 stage, which included all of our United States sites as well as our RMS site in Canada, went live at the beginning of fiscal 2010 and in the beginning of our fiscal third quarter 2010, we added our remaining PCS sites in Montreal and Edinburgh. We are now enhancing the value of the system's reporting capabilities. The expansion of the system to other


Table of Contents


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.

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 have identified a material weakness in our internal controls that, if not properly corrected, could result in material misstatements in our financial statements, which could adversely affect our operating results, and investor, supplier and client confidence in our reported financial information.

As described in “Item 9A. Controls and Procedures”, we have identified a material weakness in our system of internal control over financial reporting as of December 29, 2012. A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness was related to the design and operation of certain controls over information technology, business processes and financial reporting. Specifically, we identified deficiencies with respect to controls over segregation of duties,

20


restricted access, changes to vendor and customer master data, transaction level and financial close controls which aggregated to a material weakness in internal control over financial reporting.
In response to the identification of the material weakness, management (1) has established a cross functional team to review and address segregation of duties conflicts and restricted access within the information technology used in our core business and (2) will design new controls or improve existing controls related to vendor and customer master data changes, transaction level controls as well as financial close controls. In addition, we will evaluate staffing levels and responsibilities, and increase training to reinforce pre-established and new controls to improve our ability to detect potential misstatements in our internally prepared reports, analyses and financial records.
Although there can be no assurances, we believe these enhancements and improvements, when repeated in future periods, will remediate the control deficiencies described above. If we are not able to remedy the control deficiencies in a timely manner, we may be unable to provide holders of our securities with the required financial information in a timely and reliable manner and we may incorrectly report financial information, either of which could subject us to regulatory enforcement and other actions, and could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information and the trading price of our common stock.
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. For instance, in 2009 we acquired System Pathology Company, LLC, a pathology based software development company focused on developing state-of-the-art analytical imaging technologies to automate the labor intensive tissue evaluations process which is a significant component of standard preclinical studies, and in 2010 we announced we entered into an exclusive, long-term marketing and distribution agreement with Transposagen Biopharmaceuticals, Inc., a Lexington, Kentucky-based provider of unique genetically modified rat models. 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 25, 2010,29, 2012, we had approximately $700.9$667 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.


Table of Contents

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

success; and

new technologies and products may be developed which cause businesses or assets we acquire to become less valuable
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. For example, on December 14, 2010, we announced that we intended to explore strategic alternatives for certain non-strategic or under-performing PCS assets including our U.S. Phase I clinic and the China preclinical facility. 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 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, and we continue to improve and enhance our systems in this regard, but in the event that our


Table of Contents


efforts are unsuccessful we could suffer significant harm. Our contracts with our customers 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 almost 3536 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 an excellenta strong record of employee retention, there is still strongsignificant 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 customerclient engagements;

•
the commencement, postponement, delay, progress, completion or cancellation of customerclient contracts in the quarter;

•
changes in the mix of our products and services;

•
the extent of cost overruns;

•
holiday buying patterns of our customers;

•
clients;
budget cycles of our customers;

•
clients;
the timing and charges associated with completed acquisitions and other events;

22


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, Canada and China.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


Table of Contents


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 customer needs and demands. Accordingly, in January 2010 we announced that we had decided to suspend operations at our Shrewsbury, Massachusetts facility by the middle of 2010, with the intention to resume operations when global preclinical market conditions improve and we require additional capacity. Currently, we do not anticipate further significant expansion requirements in either our RMS or PCS businessesbusiness 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 are pursuing strategic alternatives for our U.S Phase I clinical site in Tacoma, Washington and for our PCS operation in Shanghai, China. Similarly, we have announcedadequate capacity to meet the consolidationcurrent needs of our Discovery ServicesRMS clients and do not currently envision the need for significant expansion of our RMS capacity.

We continue to employ a master site in Ann Arbor, Michigan withplanning strategy to proactivly evaluate our operations in North Carolina. The real estate needs. In certain circumstances, we dispose of or consolidate operations where the associated with these operationsreal estate is leased and dependingleased. 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 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.    Removed and ReservedMine Safety Disclosures
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 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 56,58, 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 60,62, joined us in 1976 as General Counsel. Over the past 3436 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 58, 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

23


President, European & Asian Operations. Prior to joining the Company, Dr. Geller was employed in private practice as a veterinarian.
Nancy A. Gillett, age 55,57, joined us in 1999 with the acquisition of Sierra Biomedical. Dr. Gillett has 2627 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 ServicesPCS 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 49,51, 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


Table of Contents


as the Company'sour 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 41,43, 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.


Table of Contents


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.

2011
 High Low 

First quarter (through February 10, 2011)

 $39.18 $35.25 

2010

 
High
 
Low
 
2013High Low
First quarter (through February 15, 2013)$43.15
 $38.04
2012High Low

First quarter

 $39.75 $32.74 $37.02
 $27.39

Second quarter

 41.65 28.00 36.75
 31.82

Third quarter

 35.87 28.20 39.60
 32.27

Fourth quarter

 36.10 30.70 41.24
 35.65

2009

 
High
 
Low
 
2011High Low

First quarter

 $29.87 $23.03 $39.39
 $35.54

Second quarter

 33.28 23.29 42.47
 37.38

Third quarter

 37.47 29.82 42.05
 28.54

Fourth quarter

 40.14 30.95 33.57
 25.95

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 25, 2010.

29, 2012.



Shareholders


24


As of February 10, 2011January 31, 2013, there were approximately 471452 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 Company'sour purchases of shares of itsour common stock during the quarter ended December 25, 2010.

29, 2012.

 
 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 26, 2010 to October 23, 2010

  3,109 $33.15  — $498,535 

October 24, 2010 to November 20, 2010

  80 $32.77  — $498,535 

November 21, 2010 to December 25, 2010

  1,250,000 $34.45  1,250,000 $455,466 
            

Total:

  1,253,189     1,250,000    
 
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 30, 2012 to October 27, 2012124,326
 $39.37
 124,326
 $68,563
October 28, 2012 to November 23, 2012194,933
 $39.01
 194,933
 $60,958
November 24, 2012 to December 29, 2012163,994
 $37.49
 163,830
 $54,816
Total:483,253
  
 483,089
  

Table of Contents

On July 29, 2010, our Board of Directors authorized a $500.0$500.0 million stock repurchase program. Our Board of Directors increased the stock repurchase programauthorization by $250.0$250.0 million to $750.0$750.0 million on October 20, 2010. On August 27, 2010.

During the fourth quarter of 2012, we entered into an agreement to implement an accelerated stock repurchase (ASR) program with a third party investment banker to repurchase $300.0 millionrepurchased 483,089 shares of common stock. We paid the $300.0stock for $18.6 million under our Rule 10b5-1 Purchase Plan and received an initial delivery of 6,000,000 shares which represented approximately 60% of the total number of shares that we would receive under the ASR if the price per share of our common stock remained at the closing price per share of our common stock on August 27, 2010 throughout the calculation period. We received an additional 750,000 shares under the ASR on September 23, 2010, and an additional 1,250,000 shares on December 21, 2010. 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.

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, duringDuring the quarter ended December 25, 2010,29, 2012, the Company acquired 3,189164 shares for $0.11 milliona nominal amount as a result of such withholdings.













Securities Authorized for Issuance Under Equity Compensation Plans


25


The following table summarizes, as of December 25, 2010,29, 2012, 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
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))		 
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)
 (a) (b) (c) 

Equity compensation plan approved by security holders:

Equity compensation plan approved by security holders:

       

Charles River 2000 Incentive Plan

 2,910,771 $41.22 700,592 

Charles River 1999 Management Incentive Plan

 1,000 $31.12 6,000 

Inveresk 2002 Stock Option Plan

 89,041 $25.22 — 

2007 Incentive Plan

 3,593,501 $35.46 2,518,303 
Charles River 2000 Incentive Plan2,001,758
 $42.29
 1,151,987
 
Charles River 1999 Management Incentive Plan1,000
 $31.12
 6,000
 
Inveresk 2002 Stock Option Plan37,624
 $35.92
 —
 
2007 Incentive Plan3,820,021
 $37.48
 3,014,945
 

Equity compensation plans not approved by security holders

Equity compensation plans not approved by security holders

 — — — —
 —
 —
 
       

Total

Total

 6,594,313(1)   3,224,895(2)5,860,403
(1) 
 4,172,932
(2)
       
(1)
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).

(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.
____________________________
(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.

Table of Contents

The following table provides additional information regarding the aggregate issuances under the Company'sour existing equity compensation plans as of December 25, 2010:

29, 2012:
Category
 Number of securities
outstanding		 Weighted average
exercise price		 Weighted
average term		 
Number of securities
outstanding
 
Weighted average
exercise price
 
Weighted
average term

 (a)
 (b)
 (c)
 (a) (b) (c)

Total number of restricted shares outstanding(1)

 777,740 $— — 934,505
 $—
 —

Total number of options outstanding

 6,594,313 $37.87 4.10 5,860,403
 $39.11
 3.14
____________________________
(1)
For purposes of this table, only unvested restricted stock as of December 29, 2012 is included. Also for purposes of this table only, the total includes 112,503 restricted stock units granted to certain of our employees outside of the United States.

26
(1)
For purposes of this table, only unvested restricted stock as of December 25, 2010 is included. Also for purposes of this table only, the total includes 71,197 restricted stock units granted to certain employees of the Company 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 the Company's cumulative total shareholder return on its Common Stock during a period commencing on December 31, 200529, 2007 and ending on December 25, 201029, 2012 (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“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


Table of Contents


Market Services, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

information

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


 
 Dec. 31,
2005		 Dec. 30,
2006		 Dec. 29,
2009		 Dec. 27,
2008		 Dec. 26,
2009		 Dec. 25,
2010		 

Charles River Laboratories International, Inc.

  100.00  102.08  156.05  59.05  77.79  84.26 

S&P 500

  100.00  115.80  122.16  76.96  97.33  111.99 

NASDAQ Pharmaceutical

  100.00  101.61  94.58  87.40  95.29  101.44 
 
Dec. 29,
2007
 
Dec. 27,
2008
 
Dec. 26,
2009
 
Dec. 25,
2010
 
Dec. 31,
2011
 
Dec. 29,
2012
Charles River Laboratories International, Inc.100
 37.84
 49.85
 53.99
 41.33
 55.78
S&P 500 Index100
 63.00
 79.67
 91.67
 93.61
 108.59
NASDAQ Pharmaceutical Index100
 97.45
 104.75
 111.47
 123.06
 164.89

Table of Contents














27



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) 
 
 2010 2009 2008 2007 2006 
 
 (dollars in thousands)
 

Statement of Income Data:

                

Net sales

 $1,133,416 $1,171,642 $1,295,299 $1,185,139 $1,034,742 

Cost of products sold and services provided

  748,656  748,650  796,478  720,254  636,488 

Selling, general and administrative expenses

  232,489  227,663  223,935  212,471  178,453 

Goodwill impairment

  305,000  —  700,000  —  — 

Asset impairment

  91,378  —  —  —  — 

Termination fee

  30,000  —  —  —  — 

Amortization of intangibles

  24,405  25,716  26,725  30,020  35,757 
            

Operating income (loss)

  (298,512) 169,613  (451,839) 222,394  184,044 

Interest income

  1,186  1,712  7,882  9,120  6,550 

Interest expense

  (35,279) (21,682) (22,335) (24,453) (23,099)

Other, net

  (1,477) 1,914  (5,154) (1,392) 838 
            

Income (loss) from continuing operations before income taxes

  (334,082) 151,557  (471,446) 205,669  168,333 

Provision for income taxes

  23  40,354  57,029  56,023  47,920 
            

Income (loss) from continuing operations net of income taxes

  (334,105) 111,203  (528,475) 149,646  120,413 

Income (loss) from discontinued businesses, net of tax

  (8,012) 1,399  3,283  1,472  (176,791)
            

Net income (loss)

  (342,117) 112,602  (525,192) 151,118  (56,378)

Net income (loss) attributable to noncontrolling interests

  5,448  1,839  687  (470) (1,605)
            

Net income (loss) attributable to common shareowners

 $(336,669)$114,441 $(524,505)$150,648 $(57,983)
            

Common Share Data:

                

Earnings (loss) per common share

                

Basic

                
 

Continuing operations attributable to common shareowners

 $(5.25)$1.73 $(7.85)$2.23 $1.72 
 

Discontinued operations

 $(0.13)$0.02 $0.05 $(0.02)$(2.56)
 

Net income (loss) attributable to common shareowners

 $(5.38)$1.75 $(7.80)$2.25 $(0.84)

Diluted

                
 

Continuing operations attributable to common shareowners

 $(5.25)$1.72 $(7.85)$2.17 $1.70 
 

Discontinued operations

 $(0.13)$0.02 $0.05 $(0.02)$(2.53)
 

Net income (loss) attributable to common shareowners

 $(5.38)$1.74 $(7.80)$2.19 $(0.83)

Other Data:

                

Depreciation and amortization

 $93,649 $89,962 $86,851 $81,965 $80,408 

Capital expenditures

  42,860  79,853  198,642  230,754  183,314 

Balance Sheet Data (at end of period):

                

Cash and cash equivalents

 $179,160 $182,574 $243,592 $225,449 $175,380 

Working capital

  293,114  345,828  317,141  299,587  241,762 

Goodwill, net

  198,438  508,235  457,578  1,120,540  1,119,309 

Total assets

  1,733,373  2,204,093  2,141,413  2,778,313  2,523,449 

Total debt and capital lease obligations

  700,852  492,832  515,332  437,902  489,277 

Total shareowners' equity

  687,423  1,375,243  1,241,286  1,905,390  1,643,892 
(1)
Our fiscal year consists of 12 months ending on the last Saturday on, or prior to, December 31.
 Fiscal Year
 2012 2011 2010 2009 2008
 (dollars in thousands)
Statement of Income Data:         
Net sales$1,129,530
 $1,142,647
 $1,133,416
 $1,171,642
 $1,295,299
Cost of products sold and services provided733,901
 740,405
 748,656
 748,650
 796,478
Selling, general and administrative expenses208,248
 198,648
 232,489
 227,663
 223,935
Goodwill impairment—
 —
 305,000
 —
 700,000
Asset impairment3,548
 7,492
 91,378
 —
 —
Termination fee—
 —
 30,000
 —
 —
Amortization of intangibles18,068
 21,796
 24,405
 25,716
 26,725
Operating income (loss)165,765
 174,306
 (298,512) 169,613
 (451,839)
Interest income589
 1,353
 1,186
 1,712
 7,882
Interest expense(33,342) (42,586) (35,279) (21,682) (22,335)
Other, net(3,266) (411) (1,477) 1,914
 (5,154)
Income (loss) from continuing operations before income taxes129,746
 132,662
 (334,082) 151,557
 (471,446)
Provision for income taxes27,628
 17,140
 23
 40,354
 57,029
Income (loss) from continuing operations net of income taxes102,118
 115,522
 (334,105) 111,203
 (528,475)
Income (loss) from discontinued businesses, net of tax(4,252) (5,545) (8,012) 1,399
 3,283
Net income (loss)97,866
 109,977
 (342,117) 112,602
 (525,192)
Net income (loss) attributable to noncontrolling interests(571) (411) 5,448
 1,839
 687
Net income (loss) attributable to common shareowners$97,295
 $109,566
 $(336,669) $114,441
 $(524,505)
Common Share Data:         
Earnings (loss) per common share         
Basic         
Continuing operations attributable to common shareowners$2.12
 $2.26
 $(5.25) $1.73
 $(7.85)
Discontinued operations$(0.09) $(0.11) $(0.13) $0.02
 $0.05
Net income (loss) attributable to common shareowners$2.03
 $2.16
 $(5.38) $1.75
 $(7.80)
Diluted         
Continuing operations attributable to common shareowners$2.10
 $2.24
 $(5.25) $1.72
 $(7.85)
Discontinued operations$(0.09) $(0.11) $(0.13) $0.02
 $0.05
Net income (loss) attributable to common shareowners$2.01
 $2.14
 $(5.38) $1.74
 $(7.80)
Other Data:         
Depreciation and amortization$81,275
 $85,230
 $93,649
 $89,962
 $86,851
Capital expenditures47,534
 49,143
 42,860
 79,853
 198,642
Balance Sheet Data (at end of period):         
Cash and cash equivalents$109,685
 $68,905
 $179,160
 $182,574
 $243,592
Working capital143,005
 209,046
 293,114
 345,828
 317,141
Goodwill, net208,609
 197,561
 198,438
 508,235
 457,578
Total assets1,586,344
 1,558,320
 1,733,373
 2,204,093
 2,141,413
Total debt and capital lease obligations666,520
 717,945
 700,852
 492,832
 515,332
Total shareowners' equity600,805
 525,583
 687,423
 1,375,243
 1,241,286

Table of Contents







28


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 theour 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
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, 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 in vivo biology, including laboratory animal medicine and science (research model technologies) to develop a diverse and growing 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 in the preclinical arena.model which reduces their costs, enhances their productivity and effectiveness, and increase speed to market. We have been in business for over 6065 years and currently operate approximately 6865 facilities in 1615 countries worldwide.

Large pharmaceutical and biotechnology companies have been undergoing significant change for 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 market forclients' efforts have had an unfavorable impact on our goods and services continues to be in transition, and we are uncertainoperations as to when the unfavorable market demand factors, which continue to negatively impact our results of operations, will abate. These market factors, which have existed since 2008, include:a result of: measured research and development spending by major pharmaceutical and biotechnology companies due to the impact of the slower economy; significant impact from consolidations in the pharmaceutical and biotechnology industry; significant patent expirations;companies; delays in customer decisions and commitments; tight cost constraints by our customers and recognitionthe resultant pricing pressure, particularly in view of excess preclinical capacity within our industry which has resulted in pricing pressure;the contract research industry; a focus on late-stage (human)clinical testing as customers endeavoraccelerate their efforts to bring drugs further downto market in the development pipeline to market;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 affected demand for our products and services. All of these ongoing factors continue to contribute to demand uncertainty and impacted salesare expected to impact future sales.
Over the last two years, our market for goods and services appears to have continued to stabilize. As part of our clients' efforts to improve pipeline productivity, pharmaceutical and biotechnology companies are emphasizing efficacy testing in 2010.

        As we look forward, weorder to eliminate molecules 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 services. We continue to anticipate that demand, particularly for Preclinical Services,our clients will begin to ramp up as our customers reinvigorate their early-stage drug development pipelines, continue to choose outsourcing of services to improve the effectiveness and cost efficiency of their drug development efforts, and reduce their internal capacity through closure of underutilized facilities. We believe that increasedfacilities 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.

As our clients increase focus on strategic outsourcing, our scientific expertise, operating efficiency, informational technology platforms and ability to meet each client's individual needs strongly positions us to compete for business. We continue to build momentum by our customers should result informalizing the expansion of our strategic relationships with our clients. Last year, we signed a reducedlarge, five-year agreement with a leading global pharmaceutical company to become the client's primary in vivo biology partner. During 2012, a large pharmaceutical company selected us as its preferred strategic partner for outsourced regulated safety assessment and limited numberdevelopment DMPK (drug metabolism and pharmacokinetics) for a three-year period. We won these strategic relationships in a highly competitive marketplace because of partners, which will drive demand for our services. broad portfolio of products and services, scientific expertise and ability to develop a customized in vivo biology program to support our client's drug development efforts. Price was a factor in the bid but we believe our scientific expertise was a key criterion.  Our ongoing discussions concerning additional strategic relationships continue as our clients focus on the logistics of outsourcing. Additionally, we continue to expand our relationships with our mid-tier and academic clients by focusing our sales and marketing efforts in order to achieve market share gains.
We believe that the long-term drivers for our business as a whole will primarily emerge from our customers'clients' continued demand for research models and services and regulatory compliant preclinicalboth 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.

        In response

We continue to the challenging market environment during the past few years, which has continued through 2010, we have taken significant steps to better support our customers, identify new strategies to enhance client satisfaction, improve operating efficiencies and generally strengthen our business model. For additional discussion of these steps, please see the section entitled "Our Strategy" included in Item 1 in this Form 10-K.

        Additionally, in December 2010, we announced an intensified 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 detailed:


29


Improving the consolidated operating margin.  By continuingWe continue to aggressively manage our cost structure and drive operating efficiencies, we expectwhich are expected to generate improvingimprovement in our operating margins,

Table of Contents

Improving free cash flow generation.We currently believe we have adequate capacity to support revenue growth in both business segments without significant additional investment for expansion. Improved operating margins, elimination ofCapital expenditures were $47.5 million in the specified operating losses2012 and minimal requirementswe expect capital expenditures to be approximately $50.0 million for capital expansion should contribute to generate strong cash flow.2013.


•
Disciplined investment in growth businesses.We expectcontinue to maintain a disciplined focus on deployment of capital, investing in those areas of our existing business which will generate the greatest sales growth potential and profitability, such as GEMS,Genetically Engineered Models and Services (GEMS), Research Animal Diagnostic Services (RADS), Discovery Research Services (DRS) and Endotoxin and Microbial Detection (EMD, formerly In VitroVitro) products and Biopharmaceutical Services.services. During the third quarter of 2012 we acquired Accugenix, Inc., a global provider of cGMP-compliant contract microbial identification testing, which strengthens our EMD portfolio of products and services by providing clients with state-of-the-art microbial detection services for manufacturing in the biopharmaceutical, medical device, nutraceutical and consumer care industries. In January 2013, we completed our acquisition of 75% of Vital River, the premier commercial provider of research models and related services in China. Through this acquisition, we now provides high-quality research models and associated services to the emerging China market for drug discovery and development.
Also in 2012 we opened our new biomedical diagnostic testing facility in Wilmington, Massachusetts. The state-of-the-art, 60,000-square-foot R&D services facility expands our diagnostic capabilities for research model health monitoring, clinical chemistry, hematology, biomarker assay development and immunoassay services. In addition, in 2012 we moved to a larger DRS facility in Finland to support our growth.


•
Returning value to shareholders.  On July 29, 2010,We are repurchasing our stock with the Board of Directors authorized a $500.0 million stock repurchase program and increased the authorization to $750.0 million on October 20, 2010. Under the authorization, in 2010 we initiated a substantial stock repurchase program which is intendedintent to drive immediate shareholder value and earnings per share accretion. We intendDuring 2012 and 2011, we repurchased 1.7 million and 8.4 million shares, respectively. Our weighted average shares outstanding for year ending December 29, 2012 have decreased to complete the initial $500.048.4 million shares compared to 51.3 million shares for year ending December 31, 2011. As of the Board'sDecember 29, 2012, we had $54.8 million remaining on our $750 million stock repurchase authorization in 2011.program.

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. 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 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.

        As a result of our decision to pursue strategic alternatives for our preclinical facility in China, in the fourth quarter we recognized an impairment of $17.2 million. Additionally, we determined the fair value of our in process research and development acquired in the acquisition of System Pathology Company, LLC (SPC). The fair value of the in process research and development was less than the carrying value recorded at the time of the acquisition. Based on the evaluation we recorded an impairment of $7.2 million. Also in the fourth quarter of 2010, we determined we would not be utilizing our PCS-Massachusetts facility in the foreseeable future. We performed a fair value assessment of that site which resulted in our recording an impairment of $64.6 million.

Total net sales in 20102012 were $1.1 billion,$1,129.5 million, a decrease of 3.3%1.1% from 2009.$1,142.6 million in 2011. The sales decrease was due primarily to lower demand and pricing pressure for PCS and moderately slower demand for RMS. Thethe effect of foreign currency translation which had a positivenegative impact on sales of 0.1%2.0%. Due to the timing of our fiscal year end, we periodically recognize a "53rd week" in a fiscal year. The 53rd week in 2011 negatively impacted our 2012 sales growth by 1.1%. Our gross margin decreased to 33.9% of net sales compared to 36.1%35.0% of net sales in 2009,2012 compared to 35.2% of net sales in 2011, due primarily to the impact of lower sales.

sales and costs associated with the consolidation of certain RMS Europe operations.

Our operating (loss)/income was $165.8 million for 2010 was $(298.5) million2012 compared to $169.6operating income of $174.3 million for 2009. (Loss)/2011. Income from continuing operations, net of tax, was $(334.1)$102.1 million in 2010 for 2012 compared to $111.2$115.5 million for 2011. The decrease in 2009. The operating loss isincome from continuing operations was primarily due to the goodwill impairment, asset impairmentsa prior year life insurance gain and the $30.0 million WuXi termination fee. Theprior year release of a valuation allowance on a tax loss related to the disposition of our Phase I clinical business. For 2012, diluted earnings per share attributable to common shareowners was $2.01 compared to a diluted loss per share from continuing operations attributable to common shareowners for 2010 was $5.25 compared to diluted earnings per share of $1.72$2.14 in 2009. Our capital expenditures totaled $42.9 million for 2010, compared to $79.9 million for 2009. Our planned capital expenditures in 2011 are approximately $50.0 million.. Net (loss)/income attributable to common shareowners for 2010 was $(336.7)$97.3 million in 20102012, compared to $114.4$109.6 million in 2009.

2011.

Table of Contents

We report two segments: RMSResearch Models and PCS,Services (RMS) and Preclinical Services (PCS), which reflectreflects the manner in which our operating units are managed.

Our RMS segment, which represented 58.8%61.5% of net sales in 2010,2012, includes salesthree categories: Research Models, Research Model Services, and EMD. Research Models includes production of small and large research models genetically engineered modelsas well as avian products. Research Model Services include four business units: GEMS, RADS, DRS, and services (GEMS), research animal diagnostics (RADS), discovery services (DS), consulting and staffing services (CSS), vaccine support, and ourin vitro business.Insourcing Solutions (IS). Net sales for thisthe RMS segment increased 1.1%decreased 1.5% compared to 2009, with2011, primarily driven by the additioneffect of Piedmont Research Center and Cerebricon, Ltd., partially offset by unfavorable foreign currency translation which had a negative impact on sales of 0.5%2.5%. We experienced decreases in both theThe RMS gross margin from 42.2% to 41.7%, and operating margin from 29.3% to 27.7% compared to last yearwere essentially flat at 42.2% and 29.1%, due mainly to the impact of our fixed costs with flat sales partiallycost savings offset by cost savings.costs associated with the consolidation of certain RMS Europe operations.

Our PCS segment, which represented 41.2%38.5% of net sales in 2010,2012, includes services required to take a drug through the development process including discovery support, toxicology, pathology,DRS, safety assessment and biopharmaceutical bioanalysis, pharmacokinetics and drug metabolism services. Sales for this segment decreased 8.8% over 20090.6% from 2011, driven by slowerunfavorable foreign currency, which decreased sales growth by 1.1%. partially offset by increased demand for preclinical services partially offset by favorable foreign currency, which increased sales growth by 0.9%.services. We experienced a decrease in the PCS gross margin to 23.6%from 28.2%24.0% in 2009 to 22.8% in 2010,2011, due mainly

30


to lower capacity utilization due toimpairments in 2011 and cost savings in 2012 partially offset by the lowerimpact of sales volumemix and increasedcontinued pricing pressure. The 20102012 operating margin was a negative 84.1%8.0% compared to a positive 7.8%5.7% in 20092011, mainly due to the goodwill impairment and asset impairments.

impairments in 2011.

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—NoteStatements-Note 1. Description of Business and Summary of Significant Accounting Policies.

Valuation and Impairment of Goodwill Otherand Indefinite-Lived Intangible Assets
Goodwill and Other Long-Lived Assets

other indefinite-lived intangibles are not amortized and are reviewed for impairment at least annually. 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. Our annual goodwill impairment assessment has historically been completed in the fourth quarter.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, otherwise known as “Step 0”. Step 0 provides entities with the option to perform a qualitative assessment to determine whether it is “more likely than not” that the reporting unit's fair value is less than its goodwill. The qualitative factors may include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the reporting units, events affecting the reporting units, share price, etc.

Table

As management considered whether applying purely qualitative assessment of Contents

goodwill would be sufficient (i.e. applying Step 0 without quantitative support and bypassing Step 1), management reviewed the implied “cushion” for each reporting unit as of the prior year's goodwill assessment. For the PCS reporting unit, given the relatively low cushion of approximately 15% and the preliminary 5-year strategic plan, management concluded that a quantitative analysis would be required. Therefore, management decided to proceed to Step 1 for all reporting units.

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 Companycompany 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 projections.plans. Key assumptions, strategies, opportunities and risks from this strategic review along with a market evaluation are the basis for our assessment. If

31


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, involvesif required, measures the calculation ofgoodwill impairment by calculating 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 howthe manner in which goodwill is calculated in a business combination,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 the beginning

Valuation and Impairment of the fourth quarter. 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 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.

        Additionally, we performed an 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 of $7.2 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 25, 2010, we had recorded goodwill and other intangibles of $319.7 million in the consolidated balance sheet.

        For intangible assets, goodwill and property, plant and equipment, weLong-Lived Assets

We assess the carrying value of theseproperty, plant and equipment and definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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;

Table of Contents

Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Should we determine that the carrying value of held-for-use 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.

        The fourth quarter of 2010 was impacted by continuing market factors which include: measured spending by major pharmaceutical

Long-lived asset groups may be classified as held-for-sale when the following conditions are met: we have committed to a plan to sell the asset group and biotechnology companies dueit is unlikely that significant changes will be made to the impact ofplan; the slower economy; significant impact from consolidationsasset group is available for immediate sale in its present condition and it is probable that the pharmaceuticalsale will be completed within one year; and biotechnology industry; delays in customer decisions and commitments; tight cost constraints by our customers and recognition of excess preclinical capacity within our industry whichan active program to locate a buyer has resulted in pricing pressure; a focus on late-stage (human) testing as customers endeavor to bring drugs further down the development pipeline to market;been initiated and the impact of healthcare reform initiatives. All of these ongoing factors contributeasset group is being marketed at a sale price that is reasonable in relation to demand uncertainty and have impacted sales in 2010.

        During the fourth quarter of 2010, based on our most recent market outlookits current fair value. Should 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,determine 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 an impairment charge of $64.6 million for PCS-Massachusetts and $17.2 million for PCS-China representing the excess of the carrying value of thoseheld-for-sale long-lived assets over their respectiveexceeds its fair market values.

Revenue Recognition

We recognize revenue related to our products, which include research models, in vitroEMD technology and 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 andor 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 toxicology, pathology, laboratory, GEMS, DS and CSS and is generally evidenced by customerclient contracts. Toxicology services provide highly specialized studies to evaluate the safety and toxicity of new pharmaceutical compounds and materials used in medical devices. Pathology services provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. Laboratory 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 popeline. CSS provides management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations.


Table of Contents

        The toxicology and pathology 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 CSS 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 whichthat 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 per unit 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 the total estimated costs to complete procedures specified by customersclients 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, revisionsRevisions in estimated effort to complete the contract are reflected in the period in which the change became known.


32


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 customerclient and recognized as unbilled receivable. As of December 25, 2010, we had recorded unbilled revenue of $27.1 million and deferred revenue of $66.9 million in our consolidated balance sheet29, 2012, based on the difference between the estimated level of services performed and the billing arrangements defined by our service contracts.

Service revenue from our businesses can be categorized as follows:
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. 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 primarily negotiated for a fixed fee and also include unit-based pricing.
RADS services monitor and analyze the health and genetics of research models used in research protocols. These laboratory service arrangements are generally completed within a one-month period and are also of a fixed fee nature.
GEMS services include validating, maintaining, breeding and testing research models for biomedical research activities. These services are long-term and are recognized as revenue monthly based on agree-upon fixed price per unit.
Discovery Research Services (DRS), which provides non-GLP efficacy studies and other services required as drugs progress through the development pipeline, range between one month and five years. Revenue for these services is recognized as the services are performed.
Insourcing Solutions (IS) services provides management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations. These services are billed and recognized as revenue at a fixed rate per hour.
EMD services provide contract microbial identification testing. These services are generally completed in less than 30 days and are billed, and recognized as revenue, upon completion and billing.
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 advisorsadvisers 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 25, 2010,29, 2012, the weighted-averageweighted‑average discount rate for our pension plans was 5.10%4.13%. As of December 25, 2010,29, 2012, we had a pension liability of $36.4 million.

$44.4 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 $1.9$2.4 million.

Stock-based Compensation

We recognize compensation expense for all share-basedstock-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


Table of Contents

period which is generally the vesting period. During the year ended December 25, 2010,29, 2012, we recognized $25.5$21.9 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-pricingoption‑pricing model and the fair value of


33


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 inis 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.

As of December 25, 2010,29, 2012, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $31.8 million.$155.1 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 bothadditional U.S. Federal and state income taxes and foreign income and withholding taxes, payable to the various foreign countries.which could be material. 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 freetax free. Determination of the amount of unrecognized deferred income taxes. Ittax liabilities on these earnings is not practicable due to estimatethe complexities with the hypothetical calculation. Additionally, the amount of additional income taxes payable on the earnings that are indefinitely reinvested in foreign operations.

liability is dependent upon the circumstances existing if and when the remittance occurs.

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


Table of Contents


enacted tax rates in effect to determine bothfor the current and deferred tax position.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 onbased 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.


34


Results of Operations

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


 Fiscal Year Ended Fiscal Year Ended

 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Net sales

 100% 100% 100.0%100.0 % 100.0 % 100.0 %

Cost of products sold and services provided

 66.1% 63.9% 61.5%65.0 % 64.8 % 66.1 %

Selling, general and administrative expenses

 20.5% 19.4% 17.3%18.4 % 17.4 % 20.5 %

Goodwill impairment

 26.9% — 54.0%— % — % 26.9 %

Asset impairment

 8.1% — — 
Asset impairments0.3 % 0.7 % 8.1 %

Termination fee

 2.6% — — — % — % 2.6 %

Amortization of other intangibles

 2.2% 2.2% 2.1%1.6 % 1.9 % 2.2 %

Operating income (loss)

 (26.3)% 14.5% (34.9)%14.7 % 15.3 % (26.3)%

Interest income

 0.1% 0.1% 0.6%0.1 % 0.1 % 0.1 %

Interest expense

 3.1% 1.9% 1.7%3.0 % 3.7 % 3.1 %

Provision for income taxes

 0.0% 3.4% 4.4%2.4 % 1.5 % — %

Discontinued operations

 (0.7)% 0.1% 0.3%(0.4)% (0.5)% (0.7)%

Noncontrolling interests

 0.5% 0.2% 0.1%(0.1)% — % 0.5 %

Net income (loss) attributable to common shareowners

 (29.7)% 9.8% (40.5)%8.6 % 9.6 % (29.7)%

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,


Table of Contents


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 25,
2010		 December 26,
2009		 December 27,
2008		 
 
 (dollars in millions)
 

Net sales:

          
 

Research models and services

 $667.0 $659.9 $659.9 
 

Preclinical services

  466.4  511.7  635.4 

Cost of products sold and services provided:

          
 

Research models and services

  388.6  381.2  375.3 
 

Preclinical services

  360.0  367.4  421.2 

Goodwill impairment:

          
 

Preclinical services

  305.0  —  700.0 

Termination fee

  30.0  —  — 

Asset impairment

          
 

Research models and services

  0.8  —  — 
 

Preclinical services

  90.6  —  — 

Selling, general and administrative expenses:

          
 

Research models and services

  85.8  79.1  83.3 
 

Preclinical services

  73.4  85.1  88.5 
 

Unallocated corporate overhead

  73.3  63.5  52.1 

Amortization of other intangibles:

          
 

Research models and services

  7.3  6.3  2.6 
 

Preclinical services

  17.1  19.4  24.1 

Operating income (loss):

          
 

Research models and services

 $184.5 $193.3 $198.7 
 

Preclinical services

  (379.7) 39.8  (598.4)
 

Unallocated corporate overhead

  (103.3) (63.5) (52.1)

Table of Contents


 
 Fiscal Year Ended 
 
 December 25,
2010		 December 26,
2009		 December 27,
2008		 

Net sales:

          
 

Research models and services

  58.8% 56.3% 50.9%
 

Preclinical services

  41.2% 43.7% 49.1%

Cost of products sold and services provided:

          
 

Research models and services

  58.3% 57.8% 56.9%
 

Preclinical services

  77.2% 71.8% 66.3%

Goodwill impairment:

          
 

Preclinical services

  65.4% —  110.2%

Asset impairment:

          
 

Research models and services

  0.1% —  — 
 

Preclinical services

  19.4% —  — 

Termination fee

          

Selling, general and administrative expenses:

          
 

Research models and services

  12.9% 12.0% 12.6%
 

Preclinical services

  15.8% 16.6% 13.9%
 

Unallocated corporate overhead

  —  —  — 

Amortization of other intangibles:

          
 

Research models and services

  1.1% 1.0% 0.4%
 

Preclinical services

  3.7% 3.8% 3.8%

Operating income:

          
 

Research models and services

  27.7% 29.3% 30.1%
 

Preclinical services

  (81.4)% 7.8% (94.2)%
 

Unallocated corporate overhead

  (9.1)% (5.4)% (4.0)%

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.


35


 Fiscal Year Ended
 December 29, 2012 December 31, 2011 December 25, 2010
 (dollars in millions)
Net sales:     
Research models and services$695.1
 $705.4
 $667.0
Preclinical services434.4
 437.2
 466.4
Cost of products sold and services provided:     
Research models and services401.8
 408.1
 388.6
Preclinical services332.1
 332.3
 360.0
Goodwill impairment:     
Preclinical services—
 —
 305.0
Termination fee—
 —
 30.0
Asset impairment     
Research models and services3.5
 0.7
 0.8
Preclinical services—
 6.8
 90.6
Selling, general and administrative expenses:     
Research models and services81.0
 83.6
 85.8
Preclinical services56.0
 58.1
 73.4
Unallocated corporate overhead71.2
 56.9
 73.3
Amortization of other intangibles:     
Research models and services6.4
 6.7
 7.3
Preclinical services11.7
 15.0
 17.1
Operating income (loss):     
Research models and services$202.4
 $206.3
 $184.5
Preclinical services$34.6
 $24.9
 (379.7)
Unallocated corporate overhead$(71.2) $(56.9) (103.3)
 Fiscal Year Ended
 December 29, 2012 December 31, 2011 December 25, 2010
Net sales:     
Research models and services61.5 % 61.7 % 58.8 %
Preclinical services38.5 % 38.3 % 41.2 %
Cost of products sold and services provided:     
Research models and services57.8 % 57.9 % 58.3 %
Preclinical services76.4 % 76.0 % 77.2 %
Goodwill impairment:     
Preclinical services— % — % 65.4 %
Asset impairment:     
Research models and services0.5 % 0.1 % 0.1 %
Preclinical services— % 1.6 % 19.4 %
Termination fee— % — % — %
Selling, general and administrative expenses:     
Research models and services11.6 % 11.8 % 12.9 %
Preclinical services12.9 % 13.3 % 15.8 %
Unallocated corporate overhead— % — % — %
Amortization of other intangibles:     
Research models and services0.9 % 1.0 % 1.1 %
Preclinical services2.7 % 3.4 % 3.7 %
Operating income:     
Research models and services29.1 % 29.2 % 27.7 %
Preclinical services8.0 % 5.7 % (81.4)%
Unallocated corporate overhead(6.3)% (5.0)% (9.1)%




36


Fiscal 20102012 Compared to Fiscal 2009

2011

Net Sales. Net sales in 2010for the year ending December 29, 2012 were $1,133.4$1,129.5 million, a decrease of $38.2$13.1 million, or 3.3%1.1%, from $1,171.6$1,142.6 million in 2009.for the year ending

December 31, 2011, due primarily to unfavorable foreign currency translation of 2.0%.

Research Models and Services. In 2010,For the year ending December 29, 2012, net sales for our RMS segment were $667.0$695.1 million, an increasea decrease of $7.1$10.3 million, or 1.1%1.5%, from $659.9$705.4 million in 2009. Sales growthfor the year ending December 31, 2011. The decrease was drivendue primarily to unfavorable foreign currency translation which decreased sales by the additions of Piedmont Research Center2.5% and Cerebricon both of which were acquired in 2009, partially offset by lower sales of research models.models partially offset by increased sales for EMD and research model services.

Preclinical Services. In 2010,For the year ending December 29, 2012, net sales for our PCS segment were $466.4$434.4 million, a decrease of $45.3$2.8 million, or 8.8%0.6%, compared to $511.7from $437.2 million in 2009.for the year ending December 31, 2011. The sales decrease in PCS sales was primarily due to reduced biopharmaceutical spending which resulted in lower sales volume and pricing pressure. Favorabledriven by unfavorable foreign currency translation of 1.1% and reduced biopharmaceutial spending partially offset by increased sales growth by 0.9%.demand for preclinical services.

Cost of Products Sold and Services Provided. Cost of products sold and services provided in 2010during 2012 was $748.6$733.9 million, essentially flat with 2009.a decrease of $6.5 million, or 0.9%, from $740.4 million during 2011. Cost of products sold and services provided in 2010during the year ending December 29, 2012 was 66.1%65.0% of net sales, compared to 63.9% in 2009 due mainly to lower sales.

64.8% during the year ending December 31, 2011.

Research Models and Services. Cost of products sold and services provided for RMS in 2010during 2012 was $388.6$401.8 million, an increasea decrease of $7.4$6.3 million, or 1.9%1.5%, compared to $381.2$408.1 million in 2009.2011. Cost of products sold and services provided as a percentagefor the year ending December 29, 2012 decreased to 57.8% of net sales in 2010 was 58.3% compared to 57.8% in 2009.57.9% of net sales for the year ending December 31, 2011. The increasedecrease in cost as a percentage of sales was due mainlyprimarily to the impacteffect of increased fixed costs with a small sales increaseour cost-savings actions partially offset by the effect of lower sales on our fixed cost savings.base.


Table of Contents

Preclinical Services. Cost of services provided for the PCS segment in 2010during 2012 was $360.0$332.1 million, a decrease of $7.4$0.2 million, or 2.0%, compared to $367.4$332.3 million in 2009.2011. Cost of services provided as a percentage of net sales was 77.2% in 2010,76.4% during the year ending December 29, 2012, compared to 71.8% in 2009.76.0% for the year ending December 31, 2011. The increase in cost of services provided as a percentage of net sales was primarily due to lower capacity utilization due to the impact of lower sales volumeon our fixed cost base and increased pricing pressure.the performance of client protocols under an expanded preferred provider agreement with a global pharmaceutical client partially offset by our cost-savings actions.

Selling, General and Administrative Expenses. Selling, general and administrative expenses in 2010for the year ending December 29, 2012 were $232.5$208.2 million, an increase of $4.8$9.6 million, or 2.1%4.8%, from $227.7$198.6 million in 2009.for the year ending December 31, 2011. Selling, general and administrative expenses in 2010during 2012 were 20.5%18.4% of net sales compared to 19.4% of net sales in 2009.17.4% for the year ending December 31, 2011. The increase in selling, general and administrative expenses as a percentagepercent of sales was primarily due to lower sales.a prior year insurance gain of $7.7 million partially offset by the impact of our cost saving-actions.

Research Models and Services. Selling, general and administrative expenses for RMS in 2010for 2012 were $85.8$81.0 million, an increasea decrease of $6.7$2.6 million, or 8.5%3.1%, compared to $79.1$83.6 million in 2009.2011. Selling, general and administrative expenses increaseddecreased as a percentage of sales to 12.9%11.6% for the year ending December 29, 2012 from 11.8% for the year ending December 31, 2011. The decrease in 2010 from 12.0% in 2009,selling, general and administrative expenses as a percent of sales was primarily due mainly to cost-savings actions and the reinstatement of limited merit-based wage increases coupled with increased allocations of Corporate Marketing and IT costs.insurance settlement related related to our Japan operations.

Preclinical Services. Selling, general and administrative expenses for the PCS segment in 2010during 2012 were $73.4$56.0 million, a decrease of $11.7$2.1 million, or 13.6%3.6%, compared to $85.1$58.1 million in 2009 due mainly to reduced allocations of Corporate Marketing and IT costs and tight expense control over discretionary costs.during 2011. Selling, general and administrative expenses in 2010for the year ending December 29, 2012 decreased to 15.8%12.9% of net sales, compared to 16.6% in 2009.

13.3% of net sales for the year ending December 31, 2011, due mainly to the benefit of cost-savings actions.

Unallocated Corporate Overhead. Unallocated corporate overhead, which consists of various costs primarily related toassociated 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 $73.3$71.2 million during the year ending December 29, 2012, compared to $56.9 million during the year ending December 31, 2011. The increase was primarily due to a prior year life insurance gain of $7.7 million in 2010,2011 and higher 2012 costs related to the evaluation of acquisitions partially offset by cost-savings actions and tight expense control.

37


Asset Impairment. For the year ending December 29, 2012, we recorded asset impairments of $3.5 million for RMS primarily associated with the consolidation of certain RMS Europe operations. For the year ending December 31, 2011, 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.
Amortization of Other Intangibles. Amortization of other intangibles for the year ending December 29, 2012 was $18.1 million, a decrease of $3.7 million, from $21.8 million for the year ending December 31, 2011. Amortization expense decreased as a percentage of sales to 1.6% for the year ending December 29, 2012, from 1.9% for the year ending December 31, 2011.
Research Models and Services. In 2012, amortization of other intangibles for our RMS segment was $6.4 million, a decrease of $0.3 million from $6.7 million in December 31, 2011.
Preclinical Services. For the year ending December 29, 2012, amortization of other intangibles for our PCS segment was $11.7 million, a decrease of $3.3 million from $15.0 million for the year ending December 31, 2011.
Operating Income. Operating income for the year ending December 29, 2012 was $165.8 million, an decrease of $8.5 million compared to $63.5$174.3 million for the year ending December 31, 2011. Operating income as a percentage of net sales for the year ending December 29, 2012 was14.7% compared to 15.3% the year ending December 31, 2011, due primarily to the impact of lower sales on our fixed cost base offset by cost savings actions.
Research Models and Services. For 2012, operating income for our RMS segment was $202.4 million, a decrease of $3.9 million, or 1.9%, from $206.3 million in 2009.2011. Operating income as a percentage of net sales for the year ending December 29, 2012 remained essentially flat at 29.1%, compared to the year ending December 31, 2011, due primarily to the impact of lower sales on our fixed cost base offset by cost savings actions.
Preclinical Services. For the year ending December 29, 2012, operating income for our PCS segment was $34.6 million, an increase of $9.7 million compared to $24.9 million for the year ending December 31, 2011. Operating income as a percentage of net sales increased to 8.0% in 2012 compared to 5.7% of net sales in December 31, 2011. The increase in unallocatedoperating income as a percentage of net sales was primarily due to the cost savings actions and lower amortization.
Unallocated Corporate Overhead. Unallocated corporate overhead was $71.2 million during 2010the year ending December 29, 2012, compared to $56.9 million during the year ending December 31, 2011. The increase was primarily due primarily to increased global IT costsa prior year life insurance gain of $7.7 million and costs related to the implementationevaluation of acquisitions partially offset by cost-savings actions and tight expense control.
Interest Expense. Interest expense for 2012 was $33.3 million, compared to $42.6 million in 2011. The decrease was due to decreased debt balances and lower interest rates.
Interest Income. Interest income for 2012 was $0.6 million, compared to $1.4 million for 2011 due to lower cash balances and lower interest rates on invested funds.
Income Taxes. Income tax expense in 2012 was $27.6 million, compared to $17.1 million in December 31, 2011. Our effective tax rate was 21.3% in 2012, compared to 12.9% in 2011. The 2012 effective tax rate reflects a benefit from the settlement of the tax litigation related to the 2003 and 2004 Scientific Research and Experimental Development credits (SR&ED) claimed by our Preclinical services facility in Montreal. The 2012 effective tax rate also reflects increased benefits due to earnings mix and current year SR&ED claims. The effective tax rate for 2011 reflects benefits 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.
Net Income Attributable to Common Shareowners. Net income attributable to common shareowners for the year ending December 29, 2012 was $97.3 million compared to $109.6 million for the year ending December 31, 2011.




38


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 EMD sales and increased 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 ERP systemcost-savings actions partially 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, and increaseddue 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 candidates.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 (step one) for 2011, the fair value of our business units exceeded their carrying value: therefore, our goodwill was not impaired.

39


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 us calculatingcalculation 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.fee. On July 29, 2010, in connection with a proposed acquisition, we signed a termination agreement with WuXi PharmaTech (Cayman) Inc. (WuXi) to terminate the previously announced acquisition agreement. In accordance with the terms of the termination agreement, on July 29, 2010, weand subsequently paid WuXi a $30.0 million termination fee for full satisfaction of the parties' obligations under the acquisition agreement.


Table of Contents

Amortization of Other Intangibles. Amortization of other intangibles in 2010for the year ending December 31, 2011 was $24.4$21.8 million, a decrease of $1.3$2.6 million, from $25.7$24.4 million in 2009.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 25, 2010.

Research Models and Services. In 2010,2011, amortization of other intangibles for our RMS segment was $6.7 million, a decrease of $0.6 million from $7.3 million an increase of $1.0 million from $6.3 million in 2009 due to acquisitions.2010.

Preclinical Services. In 2010,For the year ending December 31, 2011, amortization of other intangibles for our PCS segment was $17.1$15.0 million, a decrease of $2.3$2.1 million from $19.4$17.1 million in 2009.for the year ending December 25, 2010.

Operating Loss.Income. Operating income for the year ending December 31, 2011was $174.3 million, an increase from a loss in 2010 wasof $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.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 20102010.

Research Models and Services. For 2011, operating income for our RMS segment was 27.7%$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 29.3%27.7% for the year ending December 25, 2010. The increase in 2009.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 decreaseincrease in operating income as a percentage of net sales was primarily due to the impact of our fixed costs with flat salesasset impairment and higher selling, general and administrative expenses.goodwill impairment in 2010.

        Preclinical Services.Unallocated Corporate Overhead. In 2010, operating loss for our PCS segmentUnallocated corporate overhead was $379.7$56.9 million during the year ending December 31, 2011, compared to operating income of $39.8$103.3 million in 2009.during the year ending December 25, 2010. The decrease in operating income was primarily due to our $305.0the termination fee and costs related to the evaluation of a proposed acquisition of $6.6 million goodwill impairment, our $64.6in 2010 as well as cost-savings actions and tight expense control and a life insurance gain of $7.7 million PCS-Massachusetts impairment and $17.2 million PCS-China impairment.in 2011.

Interest Expense. Interest expense in 2010for 2011 was $35.3$42.6 million, compared to $21.7$35.3 million in 2009.2010. The increase was due to increased debt balances.

Interest Income. Interest income in 2010for 2011 was $1.2$1.4 million, compared to $1.7$1.2 million in 2009 primarily due to lower cash balances and lower interest rates on invested funds.for 2010.


40


Income Taxes. Income tax expense in 20102011 was $17.1 million, compared to $23 thousand compared to $40.4 million in 2009.2010. Our effective tax rate was 0.0%12.9 % in 2010,2011, compared to 26.6%0% in 2009.2010. Changes in the effective tax rate resulted primarilyresult 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 thatand the termination fee for a proposed acquisition, which 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 formerly permanentlypreviously indefinitely reinvested.

Net Income from discontinued operations.    During the fourth quarter of 2010, we initiated actionsAttributable 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.    Net loss attributable to common shareowners in 2010 was $336.7 million, compared to net income of $114.4 million in 2009.

Fiscal 2009 Compared to Fiscal 2008

        Net Sales.    Net sales in 2009 were $1,171.6 million, a decrease of $123.7 million, or 9.5%, from $1,295.3 million in 2008.

        Research Models and Services.    In 2009, net sales for our RMS segment were $659.9 million, flat compared to 2008. Sales growth from the additions of Piedmont Research Center, MIR Preclinical Services and Cerebricon was offset by softer demand for research model products and services, a 1.3% negative impact from foreign currency translation and the divestiture of the vaccine business in Mexico.


Table of Contents

        Preclinical Services.    In 2009, net sales for our PCS segment were $511.7 million, a decrease of $123.7 million, or 19.5%, compared to $635.4 million in 2008. The decrease in PCS sales was primarily due to slower demand for preclinical services and unfavorable foreign currency which decreased sales growth by 3.4%, partially offset by full year impact of the NewLab acquisition.

        Cost of Products Sold and Services Provided.    Cost of products sold and services provided in 2009 was $748.6 million, a decrease of $47.9 million, or 6.0%, from $796.5 million in 2008. Cost of products sold and services provided in 2009 was 63.9% of net sales, compared to 61.5% in 2008.

        Research Models and Services.    Cost of products sold and services provided for RMS in 2009 was $381.2 million, an increase of $5.9 million, or 1.6%, compared to $375.3 million in 2008. Cost of products sold and services provided as a percentage of net sales in 2009 was 57.8% compared to 56.9% in 2008. The increase in cost as a percentage of sales was due to the impact of increased fixed costs with flat sales.

        Preclinical Services.    Cost of services provided for the PCS segment in 2009 was $367.4 million, a decrease of $53.8 million, or 12.8%, compared to $421.2 million in 2008. Cost of services provided as a percentage of net sales was 71.8% in 2009, compared to 66.3% in 2008. The increase in cost of products sold and services provided as a percentage of net sales was primarily due to lower capacity utilization, additional costs associated with the start up of the new preclinical facilities in Sherbrooke and China and severance costs partially offset by cost savings initiatives.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses in 2009 were $227.7 million, an increase of $3.8 million, or 1.7%, from $223.9 million in 2008. Selling, general and administrative expenses in 2009 were 19.4% of net sales compared to 17.3% of net sales in 2008. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to the lower sales.

        Research Models and Services.    Selling, general and administrative expenses for RMS in 2009 were $79.1 million, a decrease of $4.2 million, or 5.2%, compared to $83.3 in 2008. Selling, general and administrative expenses decreased as a percentage of sales to 12.0% in 2009 from 12.6% in 2008, due mainly to tight control of discretionary costs and lower operating expenses in Japan.

        Preclinical Services.    Selling, general and administrative expenses for the PCS segment in 2009 were $85.1 million, a decrease of $3.4 million, or 3.8%, compared to $88.5 million in 2008 due mainly to tight control of discretionary costs, lower incentive compensation expense and a gain on the sale of real estate. Selling, general and administrative expenses in 2009 increased to 16.6% of net sales compared 13.9% in 2008, due mainly to lower sales.

        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 $63.5 million in 2009, compared to $52.1 million in 2008. The increase in unallocated corporate overhead during 2009 was due primarily to severance charges related to our cost-saving actions, growth in health care costs, increased costs associated with the evaluation of acquisition candidates and the impact of the 2008 pension curtailment gain.

        Amortization of Other Intangibles.    Amortization of other intangibles in 2009 was $25.7 million, a decrease of $1.0 million, from $26.7 million in 2008.

        Research Models and Services.    In 2009, amortization of other intangibles for our RMS segment was $6.3 million, an increase of $3.7 million from $2.6 million in 2008 due to acquisitions.

        Preclinical Services.    In 2009, amortization of other intangibles for our PCS segment was $19.4 million, a decrease of $4.7 million from $24.1 million in 2008.


Table of Contents

        Operating Income.    Operating income in 2009 was $169.6 million, compared to a loss of $451.8 million in 2008 due primarily to the goodwill impairment of $700.0 million in 2008.

        Research Models and Services.    In 2009, operating income for our RMS segment was $193.3 million, a decrease of $5.4 million, or 2.7%, from $198.7 million in 2008. Operating income as a percentage of net sales in 2009 was 29.3%, compared to 30.1% in 2008. The decrease in operating income as a percentage of net sales was primarily due to the impact of our fixed costs with flat sales.

        Preclinical Services.    In 2009, operating income for our PCS segment was $39.8 million compared to a loss of $598.4 million in 2008. The increase in operating income was primarily due to our $700 million goodwill impairment recorded in 2008, partially offset by the impact of lower sales and increased severance costs.

        Interest Expense.    Interest expense in 2009 was $21.7 million, compared to $22.3 million in 2008. The decrease was due to lower debt balances and lower interest rates on outstanding debt partially offset by increased interest expense on the convertible debt and reduced capitalized interest.

        Interest Income.    Interest income in 2009 was $1.7 million compared to $7.9 million in 2008 primarily due to lower cash balances and lower interest rates on invested funds.

        Income Taxes.    Income tax expense in 2009 was $40.4 million, a decrease of $16.6 million compared to $57.0 million in 2008. Our effective tax rate was 26.6% in 2009, compared to (12.1)% in 2008. The goodwill impairment adversely impacted our 2008 effective tax rate by (51.4)%. Other changes in the effective tax rate resulted from earnings mix, increased unbenefitted losses in several jurisdictions and audit settlement benefits recorded in 2009. Additionally, the effective tax rate for 2008 included a one-time charge due to Massachusetts tax law change and one-time benefit due to repatriation of foreign earnings.

        Income from discontinued operations.    The net income from discontinued operations in 2009 of $1.4 million represented our Phase I business results and a decrease in the loss recognized from the sale of the Phase II—IV Clinical Services business of $5.6 million net of applicable income tax expense of $2.4 million. This adjustment resulted from a settlement with the IRS Appeals Division in the third quarter of 2009.

        Net Income/Loss attributable to common shareowners.Common Shareowners. Net income attributable to common shareowners in 2009for the year ending December 31, 2011 was $114.4$109.6 million compared to a loss of $524.5$336.7 million in 2008.for the year ending December 25, 2010.

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 and proceeds from our marketable securitieslong-term debt and our revolving line of credit arrangements.

        On August 26, 2010, we amended and restated our $428.0 million

Our credit agreement to (1) repay loans outstanding under the $428.0 million credit agreement, (2) extend the maturity date under this new $750.0 million credit facility to August 26, 2015 and (3) terminate and repay the remaining term loan under our $50.0 million credit agreement. The $750.0 million credit agreement, which has a maturity date of August 26, 2015,dated September 23, 2011 provides for a $230.0$299.8 million U.S. term loan, a 133.8€69.4 million Euro term loan and a $350.0$350 million revolver.revolving credit facility. Under specified circumstances, we have the ability to increase the term loans and/or revolving line of credit by up to $250.0$250 million in the aggregate. Deferred financing costs associated with the new $750.0 million credit agreement were $14.1 million, of which $9.6 million were capitalized and will amortize over 5 years, and $4.5 million which were expensed. Our obligations under the $750.0 million 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


Table of Contents


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 $10.0 million. The $400.0 million term loan facility matures in 20 quarterly installments with the last installment due June 30, 2015.September 23, 2016. The $350.0$350 million U.S. revolving facility also matures on August 26, 2015September 23, 2016 and requires no scheduled payment before that date. The interest rates applicablebook value of our term and revolving loans approximates fair value. We also had $5.0 million outstanding under letters of credit as of December 29, 2012.

In 2006, we issued $350.0 million of 2.25% Convertible Senior Notes (the 2013 Notes) due June 2013. At December 29, 2012, the fair value of the 2013 Notes was approximately $351.7 million based on their quoted market value. During the fourth quarter of 2012, no conversion triggers were met. Upon maturity in June 2013, we intend to settle the principal balance of the 2013 Notes in cash and any additional amount due to the conversion feature in cash or shares. To meet the cash requirements at maturity, we intend to use the existing capacity on our credit agreement, our existing cash and marketable securities or other financing alternatives, which could include increases to term loans and/or obtaining financing through other lenders.     
Cash and revolving loans under the new $750.0cash equivalents totaled $109.7 million credit agreement are higher than the interest rates under the prior facilities reflecting greater leverage at December 29, 2012, compared to $68.9 million at December 31, 2011. At December 29, 2012, cash and current market conditions. The new $750.0cash equivalents was comprised of $10.7 million credit agreement contains certain customary representations and warranties, affirmative covenants and events of default.

        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 or the adjusted LIBOR rate plus an interest rate margin based upon our leverage ratio.

        Our Board of Directors authorized a $500.0 million stock repurchase program on July 29, 2010 and increased the authorization by $250.0 million to $750.0 million 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, on August 26, 2010, we entered into an agreement with a third-party investment banker to implement an accelerated stock repurchase (ASR) program to repurchase $300.0 million of common stock. Under the ASR, we paid a purchase price of $300.0 million on August 27, 2010 from cash on hand and available liquidity, including funds borrowed by us under our new amended and restated $750.0 million credit facility. We received an initial delivery on August 27, 2010 of 6,000,000 shares of our common stock. The ASR program was recorded as two transactions allocated between the initial purchase of treasury shares and a forward contract indexed to our common stock. We received an additional 750,000 shares under the ASR on September 23, 2010 and 1,250,000 shares on December 21, 2010. Through the end of the fourth quarter, we received a total of 8,000,000 shares under the ASR. The ASR settled on February 11, 2011 and we received the final 871,829 shares based on a discount to the daily volume weighted average price (VWAP) of our common stock over the course of a calculation period. The treasury shares result in an immediate reduction of shares on our statement of financial position and in our EPS calculation. In addition to shares repurchased under the ASR, during 2010 we repurchased 1,759,857 shares on the open market at a total cost of $52.9 million.

        The ASR resulted in a cash need held in the United States thatand $99.0 million held by non-U.S. subsidiaries. At December 31, 2011, cash and cash equivalents was previously unforeseen. In accordance with our policy with respect to the unremitted earningscomprised of our 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 $229.8$0.4 million of earnings that were previously indefinitely reinvested and approximately $63.6 million in basis in our non-U.S. subsidiaries could be repatriated in a substantially tax-free manner. As such, we changed our indefinite reinvestment assertion with respect to these earnings and accrued the cost to repatriate of $10.3 million, of which $15.3 million is reflected as Income Tax Expense, with an offset of a benefit of $4.9 million recorded held in the Cumulative Translation Adjustment account. During 2010, we repatriated approximately $293.4United States and $68.5 million to held by non-U.S. subsidiaries. The decline in cash in the U.S. was primarily due to partially fundshare repurchases and capital expenditures while the ASRdecline in cash outside the U.S. was primarily due to capital expenditures and prepayments on the $30.0Euro term loan. We were able to maintain liquidity by having the ability to borrow on our revolving line of credit. In addition to our cash and cash equivalents, as of December 29, 2012, we had $6.8 million WuXi termination fee. in marketable securities, which was held by non-U.S. subsidiaries.

In accordance with our policy, the remaining undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested as of the end of 20102012, as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.

        As of December 25, 2010, we had $21.2 million in marketable securities with $9.8 million in time deposits and $11.4 million in auction rate securities rated AAA by a major credit rating agency. Our auction rate securities are guaranteed by U.S. federal agencies. In June 2010, we received notice of a full call on certain of our auction rate securities at par value of $5.5 million and received the proceeds in early July 2010. 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


Table of Contents


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 25, 2010, the fair value of our outstanding 2013 Notes was approximately $349.2 million based on their quoted market value.tax-free. During the fourththird quarter of 2010, no conversion triggers were met.

        On July 29, 2010,2011, we signedrestructured our international operations in a terminationtax-free manner to allow us more flexibility in accessing our offshore cash to fund needs outside the U.S.

In October 2012, we entered into an agreement with WuXi to terminate the previously announcedacquire a 75% majority ownership interest of Vital River, a commercial provider of research models and related services in China, for approximately $26.8 million in cash, subject to certain closing adjustments. The acquisition agreement. In accordance with the terms of the termination agreement, we paid WuXi on July 29, 2010, a $30.0 million termination 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.

        Cash and cash equivalents totaled $179.2 million at December 25, 2010 compared to $182.6 million at December 26, 2009.

closed in January 2013.

Net cash provided by operating activities in 2010for the years ending December 29, 2012 and 2009December 31, 2011 was $168.2$208.0 million and $215.6$206.8 million, respectively. The decreaseincrease in cash provided by operations was primarily due to lower earnings, which were impactedtaxes payable, deferred revenue and accrued compensation partially offset by the WuXi termination fee.net income and trade receivables. Our days sales outstanding (DSO) of 45increased to 51 days as of December 25, 2010 has increased from 4229, 2012 compared to 48 days at as of December 26, 2009. The increase in our DSO was primarily driven by decreased deferred revenue as a result of lower PCS sales volume.31, 2011. 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 future net cash provided by operating activities will be impacted by future timing of customerclient payments for products and services as evidenced in our DSO. A one dayone-day increase or decrease in our DSO represents a

41


change of approximately $3.1$3.1 million of cash provided by operating activities.

Our allowance for doubtful accounts was $4.3 million as of December 29, 2012 compared to $4.0 million as of December 31, 2011.

Net cash provided by (used in)used in investing activities for the years ending December 29, 2012 and December 31, 2011 was $55.0 million and $36.6 million, respectively. During 2012, we acquired Accugenix Inc. for $16.9 million, net of cash acquired. During the fourth quarter of 2012, we announced our intended acquisition of Vital River for $26.8 millionin 2010 and 2009 was $3.0 million and $(209.1) million, respectively.cash, which closed in the first quarter of 2013. As part of the acquisition agreement, we acquired the right, but not the obligation, to purchase the remaining 25% of Vital River at fair value for cash in January 2016. In addition, the non-controlling interest holders have the right, but not the obligation, to sell their 25% interest to us at fair value for cash beginning in January 2016. Our capital expenditures in 2010during 2012 were $42.9$47.5 million, of which $27.7$36.9 million was related to RMS and $15.2$10.7 million to PCS. For 2011,2012, we project capital expenditures to be in the range of $50.0 million.approximately $50.0 million. We anticipate that future capital expenditures will be funded by operating activities, marketable securities and existing credit facilities. Net proceedsDuring 2012 and 2011, we had net marketable security sales (purchases) of investments in 2010$6.6 million and 2009 were $44.9$7.1 million and $(48.5) million,, respectively. We paid $83.3 million for acquisitions during 2009, primarily related to our purchases of Piedmont Research Center, Systems Pathology Company, LLC (SPC) and Cerebricon.

Net cash used in financing activities in 2010for the years ending December 29, 2012 and December 31, 2011 was $168.0$111.1 million and $271.8 million, respectively. For the years ending December 29, 2012 and December 31, 2011, net payments from long-term borrowings were $66.2 million and $81.0$2.2 million in 2009. During 2010, we used $356.5 million for the purchase of treasury stock and the Accelerated Stock Repurchase Program as well as repaid debt of $381.5 million, partially offset by proceeds from debt of $579.4 million. During 2009, we purchased $45.9$64.2 million and $283.8 million of treasury stock, and repaid $54.1respectively. As of December 29, 2012, we had $54.8 million of debt, partially offset by proceeds from debt of $18.0 million.

remaining for approved open market treasury stock purchases.

Minimum future payments of our contractual obligations at December 25, 201029, 2012 are as follows:

follows (in millions)

Contractual Obligations
 Total Less than
1 Year		 1 - 3 Years 3 - 5 Years After
5 Years		 
Contractual Obligations (in millions)Total 
Less than
1 Year
 1 - 3 Years 3 - 5 Years 
After
5 Years

Debt

Debt

 $736.3 $30.5 $451.4 $254.4 $— $673.2
 $141.4
 $104.9
 $426.9
 $—

Interest payments

Interest payments

 101.3 34.1 54.4 12.8 — 78.1
 26.4
 42.3
 9.4
 —

Operating leases

Operating leases

 87.6 18.3 28.2 18.3 22.8 64.5
 15.4
 21.7
 13.1
 14.3

Pension and supplemental retirement benefits

Pension and supplemental retirement benefits

 114.6 11.5 24.3 15.8 63.0 117.1
 7.9
 15.9
 30.3
 63.0
           

Total contractual cash obligations

 $1,039.8 $94.4 $558.3 $301.3 $85.8 
           
Total contractual cash obligations$932.9
 $191.1
 $184.8
 $479.7
 $77.3

Table of Contents

The above table does not reflect unrecognized tax benefits. Refer to Note 7 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. Because the conversion features associated with these notes isare indexed to our common stock and classified in stockholders' equity, these instruments are not accounted for as derivatives.

Recent Accounting Pronouncements

        Effective December 27, 2009, we adopted an accounting standard update which addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this update addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The adoption of this update did not have an impact on our consolidated financial statements.

        Effective December 27, 2009, we adopted a new accounting standard to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This standard replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this standard also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. The adoption of this update did not have an impact on our consolidated financial statements.

In January 2010,June 2011, the FASB issued an accounting standard update to clarifyimprove 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 stock portiontwo-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 a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation onother comprehensive income and the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend.comprehensive income. This update wasamendment became effective for us on December 27, 2009January 1, 2012 and had no impact on our consolidated financial statements.

was applied retrospectively.

In January 2010,September 2011, the FASB issued an accounting standard update that requires new disclosures related to fair value measurements. A reporting entity should disclose separately the amountsgoodwill impairment test. The revised standard is intended to reduce the cost and complexity of significant transfers in and outthe annual goodwill impairment test by providing companies with the option of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), an entity should present separately information about purchases, sales, issuances and settlements onperforming a gross basis rather than as one net number. This update also clarifies existing disclosures by requiring fair value measurement disclosures for each class of assets and liabilities as well as disclosures about inputs and valuation techniques for fair value measurements that fall into Level 2 or Level 3. This update also includes conforming amendmentsqualitative assessment to the guidance on employers' disclosures about postretirement benefit plans that changes the terminology frommajor categories of assets toclasses of assets. This updatedetermine whether future impairment testing is necessary. The revised standard was effective for us on December 27, 2009January 1, 2012 and has increased the fair value disclosures made in our consolidated financial statements.

was applied prospectively.

In February 2010, the2013, The FASB issued an accounting standard update related to amend required subsequent events disclosure and eliminate potential conflict with SEC guidance. Specifically, an entity that is an SEC filer is no longer requiredComprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The revised standard requires companies to disclose the date through which subsequent events have been

present

42

Table


information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of Contents


evaluated.the financial statements. This update wasamendment will become effective for us on December 27, 2009January 1, 2013 and had no impact on our consolidated financial statements.

        In April 2010, the FASB issued an accounting standard update to provide guidance on defining a milestone in regards to revenue recognition, and for determining whether the milestone method of revenue recognition is appropriate. An entity can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all the criteria to be considered substantive. Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. The amendment will be effective for us beginning in fiscal 2011, and it will have no impact on our consolidated financial statements.

applied retrospectively.



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 a $750.0 millionour amended credit agreement dated August 26, 2010.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 $750.0 million 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 $7.4$6.4 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 Convertible 2013 Notes bear an interest rate of 2.25%. The fair market value of the outstanding notes was approximately $349.2$351.7 million on December 25, 201029, 2012 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 2010,2012, we utilized foreign exchange contracts, principally to hedge the impact of currency fluctuations on customerclient transactions and certain balance sheet items, including intercompany loans. The foreign currency contract outstanding as of December 25, 201029, 2012 is a non-designated hedge, and is marked to market with changes in fair value recorded to earnings.


Table of Contents






















43


Item 8.    Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Consolidated Financial Statements:

  
 
Consolidated Financial Statements:

Management's Annual Report on Internal Control Over Financial Reporting

5645
 

Report of Independent Registered Public Accounting Firm

5746
 

Consolidated Statements of Income for the years ended December 25, 2010,29, 2012, December 26, 200931, 2011, and December 27, 2008

25, 2010
5847
 
Consolidated Statements of Comprehensive Income for the years ended December 29, 2012, December 31, 2011, and December 25, 2010

48
Consolidated Balance Sheets as of December 25, 201029, 2012 and December 26, 2009

31, 2011
5949
 

Consolidated Statements of Cash Flows for the years ended December 25, 2010,29, 2012, December 26, 200931, 2011, and December 27, 2008

25, 2010
6050
 

Consolidated Statements of Changes in Equity for the years ended December 25, 2010,29, 2012, December 26, 200931, 2011, and December 27, 2008

25, 2010
6151
 

Notes to Consolidated Financial Statements

6252

Supplementary Data:

 
 

Quarterly Information (Unaudited)

11088

44

Table of Contents


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)1934, as amended). 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—IntegratedControl-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 maintaineddid not maintain effective internal control over financial reporting as of December 25, 2010.29, 2012

due to a material weakness related to the design and operation of certain controls over information technology, business processes and financial reporting. Specifically, the Company identified deficiencies with respect to the design and operation of controls over segregation of duties, restricted access, changes to vendor and customer master data, transaction level and financial close controls which aggregated to a material weakness in internal control over financial reporting as the deficiencies could result in a misstatement to the Company's annual or interim consolidated financial statements that would be material that would not be prevented or detected.

The effectiveness of our internal control over financial reporting as of December 25, 201029, 2012 has been audited by PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report which is included herein.



45

Table of Contents



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, comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of Charles River Laboratories International, Inc. and its subsidiariesat December 25, 201029, 2012 and December 26, 2009,31, 2011, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 25, 2010 29, 2012in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 25, 2010,29, 2012 based on criteria established inInternal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). because a material weakness in internal control over financial reporting related to the design and operation of certain controls over information technology,business processes and financial reporting existed at that date. Specifically, the company identified deficiencies with respect to controls over segregation of duties, restricted access, changes to vendor and customer master data, transaction level and financial close which aggregated to a material weakness in internal control over financial reporting.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 8.  We considered the material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the December 29, 2012 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. 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.management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integratedaudits. 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 23, 2011

27, 2013

46

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)
 Fiscal Year Ended Fiscal Year Ended
 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29,
2012		 December 31,
2011		 December 25,
2010

Net sales related to products

Net sales related to products

 $458,623 $465,268 $471,741 $467,944
 $483,309
 $458,623

Net sales related to services

Net sales related to services

 674,793 706,374 823,558 661,586
 659,338
 674,793
       

Net sales

Net sales

 1,133,416 1,171,642 1,295,299 1,129,530
 1,142,647
 1,133,416

Costs and expenses

Costs and expenses

      

Cost of products sold

 252,962 255,682 252,938 

Cost of services provided

 495,694 492,968 543,540 

Selling, general and administrative

 232,489 227,663 223,935 

Goodwill impairment

 305,000 — 700,000 

Asset impairments

 91,378 — — 

Termination fee

 30,000 — — 

Amortization of other intangibles

 24,405 25,716 26,725 
       
Cost of products sold255,409
 267,966
 252,962
Cost of services provided478,492
 472,439
 495,694
Selling, general and administrative208,248
 198,648
 232,489
Goodwill impairment—
 —
 305,000
Asset impairments3,548
 7,492
 91,378
Termination fee—
 —
 30,000
Amortization of other intangibles18,068
 21,796
 24,405

Operating income (loss)

Operating income (loss)

 (298,512) 169,613 (451,839)165,765
 174,306
 (298,512)

Other income (expense)

Other income (expense)

      

Interest income

 1,186 1,712 7,882 

Interest expense

 (35,279) (21,682) (22,335)

Other, net

 (1,477) 1,914 (5,154)
       
Interest income589
 1,353
 1,186
Interest expense(33,342) (42,586) (35,279)
Other, net(3,266) (411) (1,477)

Income (loss) from continuing operations, before income taxes

Income (loss) from continuing operations, before income taxes

 (334,082) 151,557 (471,446)129,746
 132,662
 (334,082)

Provision for income taxes

Provision for income taxes

 23 40,354 57,029 27,628
 17,140
 23
       

Income (loss) from continuing operations, net of income taxes

Income (loss) from continuing operations, net of income taxes

 (334,105) 111,203 (528,475)102,118
 115,522
 (334,105)

Income (loss) from discontinued operations, net of taxes

 (8,012) 1,399 3,283 
       
(Loss) from discontinued operations, net of taxes(4,252) (5,545) (8,012)

Net income (loss)

Net income (loss)

 (342,117) 112,602 (525,192)97,866
 109,977
 (342,117)

Less: Net loss attributable to noncontrolling interests

 5,448 1,839 687 
       
Less: Net loss (income) attributable to noncontrolling interests(571) (411) 5,448

Net income (loss) attributable to common shareowners

Net income (loss) attributable to common shareowners

 $(336,669)$114,441 $(524,505)$97,295
 $109,566
 $(336,669)
       

Earnings (loss) per common share

Earnings (loss) per common share

      

Basic:

 
 

Continuing operations attributable to common shareowners

 $(5.25)$1.73 $(7.85)
 

Discontinued operations

 $(0.13)$0.02 $0.05 
 

Net income (loss) attributable to common shareowners

 $(5.38)$1.75 $(7.80)

Diluted:

 
 

Continuing operations attributable to common shareowners

 $(5.25)$1.72 $(7.85)
 

Discontinued operations

 $(0.13)$0.02 $0.05 
 

Net income (loss) attributable to common shareowners

 $(5.38)$1.74 $(7.80)
Basic:     
Continuing operations attributable to common shareowners$2.12
 $2.26
 $(5.25)
Discontinued operations$(0.09) $(0.11) $(0.13)
Net income (loss) attributable to common shareowners$2.03
 $2.16
 $(5.38)
Diluted:     
Continuing operations attributable to common shareowners$2.10
 $2.24
 $(5.25)
Discontinued operations$(0.09) $(0.11) $(0.13)
Net income (loss) attributable to common shareowners$2.01
 $2.14
 $(5.38)







See Notes to Consolidated Financial Statements.


47

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts)

 
 December 25, 2010 December 26, 2009 

Assets

       
 

Current assets

       
  

Cash and cash equivalents

 $179,160 $182,574 
  

Trade receivables, net

  192,972  190,101 
  

Inventories

  100,297  102,723 
  

Other current assets

  76,603  111,884 
  

Current assets of discontinued businesses

  3,862  8,319 
      
   

Total current assets

  552,894  595,601 
 

Property, plant and equipment, net

  752,657  863,744 
 

Goodwill, net

  198,438  508,235 
 

Other intangibles, net

  121,236  153,580 
 

Deferred tax asset

  45,003  21,443 
 

Other assets

  62,323  53,180 
 

Long-term assets of discontinued businesses

  822  8,310 
      
   

Total assets

 $1,733,373 $2,204,093 
      

Liabilities and Equity

       
 

Current liabilities

       
  

Current portion of long-term debt and capital leases

 $30,582 $35,413 
  

Accounts payable

  30,627  31,218 
  

Accrued compensation

  48,918  45,250 
  

Deferred revenue

  66,905  71,114 
  

Accrued liabilities

  59,369  48,796 
  

Other current liabilities

  20,095  15,219 
  

Current liabilities of discontinued businesses

  3,284  2,763 
      
   

Total current liabilities

  259,780  249,773 
 

Long-term debt and capital leases

  670,270  457,419 
 

Other long-term liabilities

  114,596  122,066 
 

Long-term liabilities of discontinued businesses

  —  1,011 
      
   

Total liabilities

  1,044,646  830,269 
 

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; 77,531,056 issued and 56,441,081 shares outstanding at December 25, 2010 and 77,106,847 issued and 65,877,218 shares outstanding at December 26, 2009

  775  771 
  

Capital in excess of par value

  1,996,874  2,038,455 
  

Accumulated deficit

  (575,162) (238,493)
  

Treasury stock, at cost, 21,089,975 shares and 11,229,629 shares at December 25, 2010 and December 26, 2009, respectively

  (768,699) (470,527)
  

Accumulated other comprehensive income

  33,635  45,037 
      
   

Total shareowners' equity

  687,423  1,375,243 
      
 

Noncontrolling interests

  1,304  (1,419)
      
   

Total equity

  688,727  1,373,824 
      
   

Total liabilities and equity

 $1,733,373 $2,204,093 
      
 Fiscal Year Ended
 December 29, 2012 December 31, 2011 December 25, 2010
Net income (loss)$97,866
 $109,977
 $(342,117)
Foreign currency translation adjustment     
Write-off of currency translation adjustment for liquidated entities636
 —
 —
Foreign currency translation adjustment for the period4,682
 (12,264) (10,304)
Unrealized gains (losses) on marketable securities:     
Unrealized gains (losses) for the period209
 (325) 853
Add: reclassification adjustment for losses included in net income712
 —
 —
Defined benefit plan gains (losses) and prior service costs not yet recognized as components of net periodic pension cost:     
Prior service cost and losses for the period(8,634) (23,728) (11,579)
Amortization of prior service costs and net gains and losses2,772
 1,068
 804
Comprehensive income (loss), before tax98,243
 74,728
 (362,343)
Income tax (benefit) related to items of other comprehensive income(1,677) (6,272) (8,642)
Comprehensive income (loss), net of tax99,920
 81,000
 (353,701)
Less: comprehensive income (loss) related to noncontrolling interests615
 476
 (5,630)
Comprehensive income (loss) attributable to common shareholders$99,305
 $80,524
 $(348,071)















See Notes to Consolidated Financial Statements.



48

Table of Contents



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

BALANCE SHEETS
 
 Fiscal Year Ended 
 
 December 25,
2010		 December 26,
2009		 December 27,
2008		 

Cash flows relating to operating activities

          
 

Net income (loss)

 $(342,117)$112,602 $(525,192)
 

Less: Income (loss) from discontinued operations

  (8,012) 1,399  3,283 
        
  

Income (loss) from continuing operations

  (334,105) 111,203  (528,475)

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

          
 

Depreciation and amortization

  93,649  89,962  86,851 
 

Amortization of debt issuance costs and discounts

  19,777  13,798  13,464 
 

Goodwill impairment

  305,000  —  700,000 
 

Impairment charges

  91,378  3,460  2,267 
 

Pension curtailment

  —  (674) (3,276)
 

Non-cash compensation

  25,526  23,652  24,212 
 

Deferred income taxes

  (42,342) 16,845  7,872 
 

Other, net

  1,797  906  5,250 

Changes in assets and liabilities:

          
 

Trade receivables

  (5,640) 21,082  (11,171)
 

Inventories

  1,989  (4,376) (9,669)
 

Other assets

  (2,131) 1,461  6,206 
 

Accounts payable

  71  (11,349) 8,321 
 

Accrued compensation

  4,482  (9,545) 1,150 
 

Deferred revenue

  (4,209) (14,468) (15,127)
 

Accrued liabilities

  5,501  (6,671) 7,324 
 

Other liabilities

  7,493  (19,709) (19,633)
        
  

Net cash provided by operating activities

  168,236  215,577  275,566 
        

Cash flows relating to investing activities

          
 

Acquisition of businesses and assets, net of cash acquired

  —  (83,347) (69,151)
 

Capital expenditures

  (42,860) (79,853) (198,642)
 

Purchases of investments

  (27,600) (98,991) (6,439)
 

Proceeds from sale of investments

  72,464  50,484  45,444 
 

Other, net

  950  2,623  51 
        
  

Net cash provided by (used in) investing activities

  2,954  (209,084) (228,737)
        

Cash flows relating to financing activities

          
 

Proceeds from long-term debt and revolving credit agreement

  579,372  18,000  102,000 
 

Proceeds from exercises of stock options and warrants

  4,429  778  28,141 
 

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

  (381,535) (54,130) (36,540)
 

Purchase of treasury stock and Accelerated Stock Repurchase Program

  (356,527) (45,897) (115,058)
 

Payment of debt financing costs

  (14,168) —  — 
 

Other, net

  471  231  3,788 
        
  

Net cash used in financing activities

  (167,958) (81,018) (17,669)
        

Discontinued operations

          
  

Net cash provided by operating activities

  777  9,467  7,160 
  

Net cash provided by (used in) investing activities

  2,807  263  (1,216)
  

Net cash provided by financing activities

  63  41  349 
        
  

Net cash provided by discontinued operations

  3,647  9,771  6,293 
        

Effect of exchange rate changes on cash and cash equivalents

  (10,293) 3,736  (17,310)
        

Net change in cash and cash equivalents

  (3,414) (61,018) 18,143 

Cash and cash equivalents, beginning of period

  182,574  243,592  225,449 
        

Cash and cash equivalents, end of period

 $179,160 $182,574 $243,592 
        

Supplemental cash flow information

          
 

Cash paid for interest

 $16,140 $14,170 $14,186 
 

Cash paid for taxes

 $22,068 $27,180 $43,157 

Supplemental non-cash investing activities information

          
 

Capitalized interest

 $56 $2,496 $5,263 

See Notes to Consolidated Financial Statements.


Table of Contents


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		 Noncontrolling
Interest		 

Balance at December 29, 2007

 $1,908,890 $171,571 $85,559 $754 $1,957,878 $(310,372)$3,500 
 

Components of comprehensive income, net of tax:

                      
  

Net (loss)

  (525,192) (524,505) —  —  —  —  (687)
  

Foreign currency translation adjustment

  (72,538) —  (72,588) —  —  —  50 
  

Net increase 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

  (607,354) —  —  —  —  —  (637)
                     
 

Decrease in noncontrolling interest for sale of Mexico

  (2,441) —  —  —  —  —  (2,441)
 

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

 $1,241,708 $(352,934)$3,347 $766 $2,016,031 $(425,924)$422 
 

Components of comprehensive income, net of tax:

                      
  

Net income

  112,602  114,441  —  —  —  —  (1,839)
  

Foreign currency translation adjustment

  47,248  —  47,250  —  —  —  (2)
  

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

  (6,328) —  (6,328) —  —  —  — 
  

Unrealized gain on marketable securities

  768  —  768  —  —  —  — 
                     
   

Total comprehensive income

  154,290  —  —  —  —  —  (1,841)
                     
 

Tax detriment associated with stock issued under employee compensation plans

  (2,203) —  —  —  (2,203) —  — 
 

Exercise of warrants

  22  —  —  —  22     — 
 

Issuance of stock under employee compensation plans

  797  —  —  5  792  —  — 
 

Acquisition of treasury shares

  (44,603) —  —  —  —  (44,603) — 
 

Stock-based compensation

  23,813  —  —  —  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 income

  (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 securities

  853  —  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) —  — 
 

Exercise of warrants

  —  —  —  —  —  —  — 
 

Issuance of stock under employee compensation plans

  4,590  —  —  4  4,586  —  — 
 

Acquisition of treasury shares

  (298,172) —  —  —  —  (298,172) — 
 

Accelerated Stock Repurchase equity instrument

  (58,355) —  —  —  (58,355) —  — 
 

Stock-based compensation

  25,737  —  —  —  25,737  —  — 
                

Balance at December 25, 2010

 $688,727 $(575,162)$33,635 $775 $1,996,874 $(768,699)$1,304 
                

See Notes to Consolidated Financial Statements.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

 December 29,
2012		 December 31,
2011
Assets   
Current assets   
Cash and cash equivalents$109,685
 $68,905
Trade receivables, net203,001
 184,810
Inventories88,470
 92,969
Other current assets83,601
 79,052
Current assets of discontinued businesses495
 107
Total current assets485,252
 425,843
Property, plant and equipment, net717,020
 738,030
Goodwill, net208,609
 197,561
Other intangible assets, net84,922
 93,437
Deferred tax asset38,554
 44,804
Other assets48,659
 57,659
Long-term assets of discontinued businesses3,328
 986
Total assets$1,586,344
 $1,558,320
Liabilities and Equity   
Current liabilities   
Current portion of long-term debt and capital leases$139,384
 $14,758
Accounts payable31,218
 34,332
Accrued compensation46,951
 41,602
Deferred revenue56,422
 56,530
Accrued liabilities45,208
 54,377
Other current liabilities21,262
 14,033
Current liabilities of discontinued businesses1,802
 1,165
Total current liabilities342,247
 216,797
Long-term debt and capital leases527,136
 703,187
Other long-term liabilities104,966
 108,451
Long-term liabilities of discontinued businesses8,795
 2,522
Total liabilities983,144
 1,030,957
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; 79,607,981 issued and 48,220,037 shares outstanding at December 29, 2012 and 78,473,888 issued and 48,875,715 shares outstanding at December 31, 2011796
 785
Capital in excess of par value2,097,316
 2,056,921
Accumulated deficit(368,301) (465,596)
Treasury stock, at cost, 31,387,944 shares and 29,598,173 shares at December 29, 2012 and December 31, 2011, respectively(1,135,609) (1,071,120)
Accumulated other comprehensive income6,603
 4,593
Total shareowners' equity600,805
 525,583
Noncontrolling interests2,395
 1,780
Total equity603,200
 527,363
Total liabilities and equity$1,586,344
 $1,558,320

See Notes to Consolidated Financial Statements.

49


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 Fiscal Year Ended
 December 29,
2012		 December 31,
2011		 December 25,
2010
Cash flows relating to operating activities     
Net income (loss)$97,866
 $109,977
 $(342,117)
Less: Loss from discontinued operations(4,252) (5,545) (8,012)
Income (loss) from continuing operations102,118
 115,522
 (334,105)
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:     
Depreciation and amortization81,275
 85,230
 93,649
Amortization of debt issuance costs and discounts17,622
 20,010
 19,777
Goodwill impairment—
 —
 305,000
Impairment charges3,548
 7,492
 91,378
Non-cash compensation21,855
 21,706
 25,526
Deferred income taxes1,311
 (8,668) (42,342)
Other, net6,316
 (7,436) 1,797
Changes in assets and liabilities:     
Trade receivables(16,266) 7,669
 (5,640)
Inventories785
 3,766
 1,989
Other assets(296) 505
 (2,131)
Accounts payable(3,257) 2,208
 71
Accrued compensation4,612
 (7,412) 4,482
Deferred revenue(915) (9,515) (4,209)
Accrued liabilities(7,050) (1,355) 5,501
Taxes payable and prepaid taxes2,331
 (13,782) 13,087
Other liabilities(5,983) (9,098) (5,594)
Net cash provided by operating activities208,006
 206,842
 168,236
Cash flows relating to investing activities     
Acquisition of businesses and assets, net of cash acquired(16,861) —
 —
Capital expenditures(47,534) (49,143) (42,860)
Purchases of investments(18,537) (24,556) (27,600)
Proceeds from sale of investments25,156
 31,607
 72,464
Other, net2,786
 5,447
 950
Net cash provided by (used in) investing activities(54,990) (36,645) 2,954
Cash flows relating to financing activities     
Proceeds from long-term debt and revolving credit agreement74,116
 250,708
 579,372
Proceeds from exercises of stock options and warrants18,359
 20,625
 4,492
Payments on long-term debt, capital lease obligation and revolving credit agreement(140,347) (252,965) (381,535)
Purchase of treasury stock and Accelerated Stock Repurchase Program(64,189) (283,795) (356,527)
Other, net940
 (6,359) (13,697)
Net cash used in financing activities(111,121) (271,786) (167,895)
Discontinued operations     
Net cash provided by (used in) operating activities(106) (1,559) 777
Net cash provided by investing activities—
 —
 2,807
Net cash provided by (used in) discontinued operations(106) (1,559) 3,584
Effect of exchange rate changes on cash and cash equivalents(1,009) (7,107) (10,293)
Net change in cash and cash equivalents40,780
 (110,255) (3,414)
Cash and cash equivalents, beginning of period68,905
 179,160
 182,574
Cash and cash equivalents, end of period$109,685
 $68,905
 $179,160
Supplemental cash flow information     
Cash paid for interest$15,145
 $22,321
 $16,140
Cash paid for taxes$17,032
 $29,124
 $22,068
Capitalized interest$467
 $298
 $56
Assets acquired under capital lease$69
 $—
 $—
      
See Notes to Consolidated Financial Statements.

50


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 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 income (loss)(342,117)(336,669)    (5,448)
Other comprehensive income (loss)(11,584) (11,402)   (182)
Total comprehensive income (loss)(353,701)     (5,630)
Tax detriment associated with stock issued under employee compensation plans(926)   (926)  
Dividends paid noncontrolling interest(270)     (270)
Purchase of noncontrolling interest in PCS-China(4,000)   (12,623) 8,623
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
Other comprehensive income (loss)(28,977) (29,042)   65
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
Components of comprehensive income, net of tax:       
Net income97,866
97,295
    571
Other comprehensive income2,054
 2,010
   44
Total comprehensive income99,920
     615
Tax benefit associated with stock issued under employee compensation plans125
   125
  
Issuance of stock under employee compensation plans18,426
  11
18,415
  
Acquisition of treasury shares(64,489)   —
(64,489) 
Stock-based compensation21,855
   21,855
  
Balance at December 29, 2012$603,200
$(368,301)$6,603
$796
$2,097,316
$(1,135,609)$2,395





See Notes to Consolidated Financial Statements.

51


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 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.

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 customerclient 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 customersclients 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 $1,536$947 in 2010, $4052012, $426 in 20092011 and $1,179$1,536 in 2008.2010. Write offs to the allowance for doubtful accounts amounted to $1,541$697 in 2010, $2432012, $1,228 in 20092011 and $288$1,541 in 2008.

2010.

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 trade receivables is as follows:


 December 25,
2010		 December 26,
2009		 

Customer receivables

 $170,696 $163,332 

Unbilled revenue

 27,095 31,593 
     

Total

 197,791 194,925 

Less allowance for doubtful accounts

 (4,819) (4,824)
     

Net trade receivables

 $192,972 $190,101 
     December 29, 2012 December 31, 2011
Client receivables$174,774
 $159,381
Unbilled revenue32,494
 29,446
Total207,268
 188,827
Less allowance for doubtful accounts(4,267) (4,017)
Net trade receivables$203,001
 $184,810

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 customersclients in the pharmaceutical and biotechnology industries. No single customerclient accounted for more than 5% of our net sales or trade receivables for any period presented.


52

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

Marketable Securities

Investments in marketable securities are reported at fair value and consist of mutual funds, 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.

During the first quarter of 2012, we sold our auction rate securities for $11,260 in cash and recorded a realized loss of $712, which is included in other income (expense). We held no auction rate securities as of December 29, 2012. As of December 25, 2010, we held $11,377 in31, 2011, our marketable securities included auction rate securities, which are variable ratevariable-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 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. In June 2010, we received notice of a full call redemption on one of our auction rate securities at par value and received the amount of $5,500 in July 2010. 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.

instruments.

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


 December 25, 2010 December 29, 2012

 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value

Time deposits

 $9,834 $— $— $9,834 $6,781
 $—
 $—
 $6,781

Auction rate securities

 11,974 — (597) 11,377 —
 —
 —
 —
         $6,781
 $—
 $—
 $6,781

 $21,808 $— $(597)$21,211 
         



 December 26, 2009 December 31, 2011

 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value

Time deposits

 $8,016 $— $— $8,016 $5,359
 $—
 $—
 $5,359

Mutual fund

 47,615 — (201) 47,414 

Auction rate securities

 17,460 — (1,248) 16,212 11,972
 —
 (921) 11,051
         $17,331
 $—
 $(921) $16,410

 $73,091 $— $(1,449)$71,642 
         

Maturities of debt securities were as follows:


 December 25, 2010 December 26, 2009 December 29, 2012 December 31, 2011

 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value

Due less than one year

 $9,834 $9,834 $8,016 $8,016 $6,781
 $6,781
 $5,359
 $5,359

Due after one year through five years

 — — — — —
 —
 —
 —

Due after ten years

 11,974 11,377 17,460 16,212 —
 —
 11,972
 11,051
         $6,781
 $6,781
 $17,331
 $16,410

 $21,808 $21,211 $25,476 $24,228 
         

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.

unable to be sold. During 2012, we recorded an inventory write-off of $953 associated with a dispute concerning large model inventory held by a vendor which we believe to be non-recoverable.

Table of Contents



53

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 25,
2010		 December 26,
2009		 December 29, 2012 December 31, 2011

Raw materials and supplies

Raw materials and supplies

 $13,153 $15,262 $14,525
 $13,987

Work in process

Work in process

 13,869 17,178 11,082
 13,533

Finished products

Finished products

 73,275 70,283 62,863
 65,449
     

Inventories

 $100,297 $102,723 
     
Inventories$88,470
 $92,969

Other current assets consist of assets we intend to settle within the next twelve months.
 December 25,
2010		 December 26,
2009		 December 29, 2012 December 31, 2011

Prepaid assets

Prepaid assets

 $21,434 $21,072 $20,404
 $22,828

Deferred tax asset

Deferred tax asset

 31,251 21,671 30,018
 30,894

Marketable securities

Marketable securities

 9,834 55,430 6,781
 5,359

Prepaid income tax

Prepaid income tax

 13,856 13,711 26,169
 19,742

Restricted cash

Restricted cash

 228 — 229
 229
     

Other current assets

 $76,603 $111,884 
     
Other current assets$83,601
 $79,052

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 $56$467 in 2012, $298 in 2011 and $394$56 in 2010 $2,496 and $5,023 in 2009 and $5,263 and $6,363 in 2008,, respectively. We also capitalize internal and external costs incurred during the application development stage of internal use software. As of December 25, 2010, we have capitalized $45,251 related to our ERP software project. 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; computer hardware and software 3 to 8 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 25,
2010		 December 26,
2009		 December 29, 2012 December 31, 2011

Land

Land

 $40,409 $39,393 $40,812
 $40,517

Buildings

Buildings

 694,342 755,607 697,547
 696,275

Machinery and equipment

Machinery and equipment

 327,353 317,284 356,960
 332,683

Leasehold improvements

Leasehold improvements

 26,772 38,187 34,916
 29,975

Furniture and fixtures

Furniture and fixtures

 10,473 10,458 25,681
 26,775

Vehicles

Vehicles

 5,456 5,595 3,736
 5,226

Computer hardware and software

Computer hardware and software

 106,073 53,654 107,171
 105,563

Construction in progress

Construction in progress

 45,465 86,254 46,186
 57,661
     

Total

 1,256,343 1,306,432 
Total1,313,009
 1,294,675

Less accumulated depreciation

Less accumulated depreciation

 (503,686) (442,688)(595,989) (556,645)
     

Net property, plant and equipment

Net property, plant and equipment

 $752,657 $863,744 $717,020
 $738,030
     

Depreciation expense for 2010, 20092012, 2011 and 20082010 was $69,244, $64,246$63,207, $63,435 and $60,125,$69,244, respectively.



54

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


Valuation and Impairment of Goodwill Other Intangibles and Other Long-LivedIndefinite-Lived Intangible Assets

Goodwill and other indefinite-lived intangibles are not amortized and are reviewed for impairment at least annually. 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. Our annual goodwill impairment assessment has historically been completed in the fourth quarter.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, otherwise known as “Step 0”. Step 0 provides entities with the option to perform a qualitative assessment to determine whether it is “more likely than not” that the reporting unit's fair value is less than its goodwill. The qualitative factors may include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the reporting units, events affecting the reporting units, share price, etc.
As management considered whether applying a purely qualitative assessment of goodwill would be sufficient (i.e. applying Step 0 without quantitative support and bypassing Step 1), management reviewed the implied “cushion” for each reporting unit as of the prior year's goodwill assessment. For the PCS reporting unit, given the relatively low cushion of 15% and the preliminary 5 year strategic plan, management concluded that a quantitative analysis would be required. Therefore, management decided to proceed to Step 1 for all reporting units.
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


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 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 customer relationships.

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. 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 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 $305,000.

        Additionally, we determined 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 in excess to the carrying value recorded as the time of the acquisition. Based on the evaluation we recorded an impairment of $7,200.

        Goodwill and other indefinite-lived intangibles 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 25, 2010, we had recorded goodwill and other intangibles of $319,674 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 important which could trigger an impairment review include but are not limited to the following:


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)

        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.

        The fourth quarter of 2010 was impacted by continuing unfavorable market factors. The market factors include: measured spending by major pharmaceutical and biotechnology companies due to the impact of the slower economy; significant impact from consolidations in the pharmaceutical and biotechnology industry; delays in customer decisions and commitments; tight cost constraints by our customers and recognition of excess preclinical capacity within our industry which has resulted in pricing pressure; a focus on late-stage (human) testing as customers endeavor to bring drugs further down the development pipeline to market; and the impact of healthcare reform initiatives. All of these ongoing factors contribute to demand uncertainty and have impacted sales in 2010.

        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. Since the assets no longer fully recoverable, we determined the fair value of the long-lived assets based upon our valuation completed by an independent third party valuation firm revised by management. 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 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.

        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.

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


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 other assets is as follows:

 
 December 25,
2010		 December 26,
2009		 

Deferred financing costs

 $11,167 $3,679 

Cash surrender value of life insurance policies

  31,054  25,099 

Long term marketable securities

  11,377  16,212 

Other assets

  8,725  8,190 
      
 

Other assets

 $62,323 $53,180 
      

        Our investment in life insurance contracts are recorded at fair 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 investments in the statement of cash flows. At December 25, 2010, we held 79 contracts with a carrying value of $31,054 and a face value of $144,916.

        We recognize obligations associated with restructuring activities and contract termination costs by 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 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 2010 and 2009 we implemented staffing reductions to improve operating efficiency and profitability at various sites. As a result of these actions, for the years ended December 25, 2010 and December 26, 2009, we recorded severance charges of $16,504 and $16,344, including $10,860 and $5,005 in cost of sales and $5,644 and $11,339 in selling, general and administrative expense, respectively. For the years ended December 25, 2010 and December 26, 2009, $9,145 and $9,722 of these charges were related to our Preclinical Services segment, $4,429 and $3,997 to Research Models and Services and $2,930 and $2,625 to Corporate, respectively. As of December 26, 2009, $2,593 was included in accrued compensation and $1,739 in other long-term liabilities on our consolidated balance sheet

 
 Severance and Retention Costs 
 
 2010 2009 

Balance, beginning of period

 $4,332 $639 

Expense

  16,504  16,334 

Payments/utilization

  (10,178) (12,641)
      

Balance, end of period

 $10,658 $4,332 
      

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)

        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 25,
2010		 December 26,
2009		 

Accrued income taxes

 $18,372 $13,623 

Current deferred tax liability

  963  1,174 

Accrued interest and other

  760  422 
      
 

Other current liabilities

 $20,095 $15,219 
      

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

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

 
 December 25,
2010		 December 26,
2009		 

Deferred tax liability

 $30,050 $42,867 

Long-term pension liability

  36,335  32,516 

Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan

  24,659  22,889 

Other long-term liabilities

  23,552  23,794 
      
 

Other long-term liabilities

 $114,596 $122,066 
      

        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 noncontrolling interests totaling $1,304 and $(1,419) at December 25, 2010 and December 26, 2009, respectively.


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)

        We grant stock options and restricted stock to employees and non-employee directors under our share-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 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. 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 long form method.

        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 customer 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's site. Product sales are recorded net of returns upon delivery. For large models, in some cases customers 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 toxicology, pathology, laboratory, GEMS and consulting and staffing services and is generally evidenced by customer contracts. Toxicology services provide highly specialized studies to evaluate the safety and toxicity of new pharmaceutical compounds and materials used in medical devices. Pathology services provide the ability to identify and characterize pathologic changes within tissues and cells in determining the safety of a new compound. Laboratory 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. Consulting and staffing services provide management of animal care operations on behalf of government, academic, pharmaceutical and biotechnology organizations.

        The toxicology, pathology and clinical Phase I trials services arrangements typically range from one to six months but can range up to approximately 24 months in length. These agreements are negotiated


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)


for a fixed fee. Laboratory service arrangements are generally completed within a one-month period and are also of a fixed fee nature. GEMS and consulting and staffing services are of a longer-term nature, 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 customers 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 customers in the form of study protocols.

        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. Revenue is recognized on unbilled services and relate to amounts that are currently unbillable to the customer 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.

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

        We enter into derivatives to hedge the foreign currency exchange risk in order to minimize the impact of market fluctuations of foreign currency rates on our financials. Throughout the year we entered into various contracts to manage this risk. During 2010, 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 25, 2010, the outstanding forward contract had a fair value of $419. We recorded a hedge gain (loss) of $713 in 2010, $1,785 in 2009 and $(3,977) in 2008.

        We hold cash equivalents, investments and certain other assets that are carried at fair value. We generally determine fair value using 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. Disclosure for assets and liabilities that are measured at fair value but recognized and disclosed at fair value on a nonrecurring basis are required prospectively beginning January 1, 2009. As of December 25, 2010, 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,


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)


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.

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

 
 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 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

 $— $35,862 $11,377 $47,239 
          

Contingent consideration

  —  —  5,365  5,365 
          

Total liabilities

 $— $— $5,365 $5,365 
          


 
 Fair Value Measurements at December 26, 2009 using 
 
 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		 

Time deposits

 $— $8,016 $— $8,016 

Mutual funds

  47,414  —  —  47,414 

Auction rate securities

  —  —  16,212  16,212 

Fair value of life policies

  —  20,032  —  20,032 
          

Total assets

 $47,414 $28,048 $16,212 $91,674 
          

Contingent consideration

  —  —  9,300  9,300 
          

Total liabilities

 $— $— $9,300 $9,300 
          

        Descriptions of the valuation methodologies used for assets and liabilities measured at fair value are as follows:


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 table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 25, 2010 and December 26, 2009. 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 25, 2010.

 
 Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)		 
 
 Year ended 
Auction rate securities
 December 25,
2010		 December 26,
2009		 

Beginning balance

 $16,212 $18,958 

Transfers in and/or out of Level 3

  —  — 

Total gains or losses (realized/unrealized):

       
 

Included in earnings (other expenses)

  14  (40)
 

Included in other comprehensive income

  651  969 

Purchases, issuances and settlements

  (5,500) (3,675)
      

Ending balance

 $11,377 $16,212 
      


 
 Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)		 
 
 Year ended 
Contingent Consideration
 December 25,
2010		 December 26,
2009		 

Beginning balance

 $9,300 $— 

Transfers in and/or out of Level 3

  —  — 

Total gains or losses (realized/unrealized):

       
 

Included in (earnings) other expenses

  (3,935) 200 
 

Included in other comprehensive income

  —  — 

Purchases, issuances and settlements

  —  9,100 
      

Ending balance

 $5,365 $9,300 
      

        We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. We measure deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect


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)

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 we will not realize some or all of the deferred tax assets.

        As of December 25, 2010, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $31,774. 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 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 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.

        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.

        The functional currency of each of our operating foreign subsidiaries is local currency. The 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 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 $(1,299) in 2010, $(861) in 2009 and $3,570 in 2008.

        Our comprehensive income consists 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 Equity, net of tax.

        Our defined benefit pension plans' assets, liabilities and expenses are calculated using certain assumptions. These assumptions are reviewed annually, or whenever otherwise required, 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.


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)

        We recognize the funded status of our benefit plans on our 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 plan assets and obligations as of the date of our fiscal year-end balance sheet. 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 are disclosed in the notes to our financial statements.

        In December 2008, the FASB issued guidance on an employer's disclosures about plan assets of defined benefit pension or other postretirement plan. The new disclosures required shall be provided for fiscal years ending after December 15, 2009 and are not required for earlier periods that are presented for comparative purposes. This new accounting standard increases our pension footnote disclosure but does not have an impact on our consolidated financial statements.

        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.

        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

        We acquired several businesses during the three-year period ended December 25, 2010. 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:

        In August 2009, we acquired Systems Pathology Company, LLC (SPC) a pathology based software development company focused on developing state-of-the-art analytical imaging technologies to automate the labor intensive tissue evaluations process which is a significant component of standard preclinical studies for $24,522 in cash and up to $14,000 (undiscounted) potential contingent consideration. SPC is a development stage company. SPC's only activity consists of developing its computer assisted pathology system (CAPS™) software product and has no sales. The software is currently under development and will soon undergo beta testing. SPC did not have any developed technology at the time of the acquisition given the current incomplete nature of the product. SPC anticipates that certain important updates may be made to the product during the beta testing as the CAPS™ software will be tested by pathologists, who will provide additional input and insight regarding certain functionalities. Such as, the current version of the product (CAPS 1.0) as well as the incremental tissue and species details that will be included in version 2.0 will be considered as In-process research and development. The contingent consideration consists of payments based on certain agreed upon revenue and technical milestones. The fair value of the contingent consideration at


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)


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 believe the probability of each milestone payment being made ranges from 60% to 85%.

        During 2010, due mainly to the delay in the development of the current version of the product, we adjusted the contingent consideration to $5,365 at December 25, 2010. No payments of contingent consideration have been made as of December 25, 2010. We performed our annual analysis of In-process research and development. As a result of the analysis we recorded an impairment of $7,200 to adjust the in-process research and development to fair value. The in-process research and development on December 25, 2010 was $6,800. SPC is included in our PCS segment.

        The preliminary purchase price allocation net of $9 of cash acquired is as follows:

Current assets (excluding cash)

 $49 

Property, plant and equipment

  338 

Current liabilities

  (1,317)

Long term liabilities

  (1,040)

Goodwill and other intangible asset

  35,592 
    

Total purchase price allocation

 $33,622 
    

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

 
  
 Weighted average
amortization
life (years)		 

In-process research and development

 $14,000  5.1 

Goodwill

  21,592  — 
       

Total goodwill and other intangibles

 $35,592    
       

        In-process research and development is accounted for as an indefinite- 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 customers as well as the value of the assembled workforce. Goodwill is deductible for tax purposes.

        On July 31, 2009, we acquired Cerebricon Ltd. which is included in our RMS 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.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        The preliminary purchase price allocation net of $1,200 of acquired cash is as follows:

Current assets (excluding cash)

 $1,754 

Property, plant and equipment

  816 

Other long-term assets

  41 

Current liabilities

  (1,485)

Long-term debt

  (1,178)

Long-term deferred tax

  (1,453)

Goodwill and other intangible asset

  9,685 
    

Total purchase price allocation

 $8,180 
    

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

 
  
 Weighted average
amortization
life (years)		 

Customer relationships

 $5,597  4.2 

Goodwill

  4,088  — 
       

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 customers as well as the value of the assembled workforce. Goodwill is not deductible for tax purposes.

        In May 2009, we acquired the assets of Piedmont Research Center (PRC) for $45,558 in cash. PRC, which is based in North Carolina, provides discovery services focused 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 is as follows:

Current assets

 $1,414 

Property, plant and equipment

  1,315 

Current liabilities

  (1,204)

Goodwill and other intangible asset

  44,033 
    

Total purchase price allocation

 $45,558 
    

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

 
  
 Weighted average
amortization
life (years)		 

Customer relationships

 $18,400  6.3 

Backlog

  900  .7 

Trademarks and trade names

  500  2.2 

Developed technology

  300  1.5 

Goodwill

  23,933  — 
       

Total goodwill and other intangibles

 $44,033    
       

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        The goodwill recognized is largely attributable to anticipated revenue synergies expected to arise after the acquisition including new customers as well as the value of the assembled workforce. Goodwill is deductible for tax purposes.

        On September 15, 2008 we acquired privately-held Molecular Therapeutics, Inc., the parent entity of Molecular Imaging Research, Inc. (MIR) for $11,980 in cash. Ann Arbor, Michigan-based MIR provides discovery services utilizing extensive in-vivo imaging capabilities to pharmaceutical and biotechnology clients and is included in our RMS segment. The purchase price allocation, including deal costs of $79 incurred by us and net of $368 of cash acquired, 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

  (1,678)

Goodwill and other intangible asset

  13,010 
    

Total purchase price allocation

 $11,691 
    

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

        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

  7,330  — 
       

Total goodwill and other intangibles

 $13,010    
       

        The goodwill recognized is largely attributable to anticipated revenue synergies expected to arise after the acquisition including new customers as well as the value of the assembled workforce. Goodwill is not deductible for tax purposes.

        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 of 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.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        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

  (6,069)

Goodwill and other intangibles acquired

  47,692 
    

Total purchase price allocation

 $46,739 
    

        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    
       

        The goodwill recognized is largely attributable to anticipated revenue synergies expected to arise after the acquisition including new customers as well as the value of the assembled workforce. Goodwill is not deductible for tax purposes.

        Sales and operating income related to these acquisitions was for the years ended 2010, 2009 and 2008, $49,746, $38,414 and $7,995 and operating income (loss) of $(11,100), $137 and $787.

        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 preceeding 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 26,
2009		 December 27,
2008		 

Net sales

 $1,179,921 $1,315,476 

Operating income

  165,886  (454,590)

Income from continuing operations

  111,049  (528,452)

Earnings per common share

       
 

Basic

 $1.70 $(7.86)
 

Diluted

 $1.69 $(7.86)

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

2. Business Acquisitions (Continued)

        Refer to Note 6 for further discussion of the method of computation of earnings per share.

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 25, 2010 December 26, 2009 
 
 Gross Carrying
Amount		 Accumulated
Amortization &
Impairment loss		 Gross Carrying
Amount		 Accumulated
Amortization &
Impairment loss		 

Goodwill

 $1,216,196 $(1,017,758)$1,221,100 $(712,865)
          

Other intangible assets not subject to amortization:

             
 

Research models

 $3,438 $— $3,438 $— 
 

PCS in process R&D

  6,800  —  14,000  — 

Other intangible assets subject to amortization:

             
 

Backlog

  2,839  (2,109) 16,575  (15,625)
 

Customer relationships

  301,175  (192,345) 299,321  (166,137)
 

Customer contracts

  15,259  (15,259) 1,645  (1,645)
 

Trademarks and trade names

  5,041  (4,614) 5,041  (4,298)
 

Standard operating procedures

  657  (657) 657  (643)
 

Other identifiable intangible assets

  5,428  (4,417) 5,435  (4,184)
          

Total other intangible assets

 $340,637 $(219,401)$346,112 $(192,532)
          

        The changes in the gross carrying amount and accumulated amortization of goodwill are as follows:

 
  
 Adjustments to Goodwill  
 Adjustments to Goodwill  
 
 
 Balance at
December 27,
2008		 Acquisitions Foreign
Exchange/
Impairment		 Balance at
December 26, 2009		 Acquisitions Foreign
Exchange/
Impairment		 Balance at
December 25,
2010		 

Research Models and Services

                      
 

Gross carrying amount

 $30,947 $27,478 $309 $58,734 $—  (858)$57,876 
 

Accumulated amortization

  (4,846) —  (29) (4,875) —  107  (4,768)

Preclinical Services

                      
 

Gross carrying amount

  1,139,467  22,226  673  1,162,366  —  (4,046) 1,158,320 
 

Accumulated impairment loss

  (700,000) —  —  (700,000) —  (305,000) (1,005,000)
 

Accumulated amortization

  (7,990) —  —  (7,990) —  —  (7,990)

Total

                      
 

Gross carrying amount

 $1,170,414 $49,704 $982 $1,221,100 $—  (4,904)$1,216,196 
 

Accumulated impairment loss

  (700,000) —  —  (700,000) —  (305,000) (1,005,000)
 

Accumulated amortization

  (12,836) —  (29) (12,865) —  107  (12,758)

        Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter.


Table of Contents


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)

        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 anour 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

If the first step of the impairment test indicates a potential impairment, we perform the second step of the goodwill impairment process. In the second step of the process, involves the calculation ofwe calculate an implied fair value of goodwill for eachthe applicable 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.

        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 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 $305,000.

        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.

        At the beginning of the fourth quarter of 2008, 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 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 $700,000.


Table of Contents


55

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

3. Goodwill



Valuation and Other Intangible Assets (Continued)

        Amortization expense of intangible assets for 2010, 2009 and 2008 was $24,405, $25,716 and $26,725, respectively.

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

2011

 $21,465 

2012

  17,670 

2013

  14,131 

2014

  11,738 

2015

  9,291 

4. Impairment of Long LivedLong-Lived Assets

        For intangible assets, goodwill and property, plant and equipment, we

We assess the carrying value of theseproperty, plant and equipment and definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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 strategy or operations that negatively affect the utilization of our long-lived assets.

        During the fourth quarter

Determination of 2010recoverability is based on our most recent market outlook we assessed our long-lived assets for impairment. The assessment included an evaluationestimate of undiscounted future cash flows resulting from the use of the ongoing cash flows of the long lived assets. We determined based upon our evaluation that the long-lived assets associated with PCS-Massachusettsasset and PCS-China were no longer fully recoverable from the future cash flows. Based upon the assets no longer fully recoverable, we determined the fair value of the long-lived assets based upon our 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 an impairment charge of $64,631 for PVS-Massachusetts and $17,186 for PCS-China representing the excess of the carry value of those assets over their respective fair market values.

its eventual disposition. Should we determine that the carrying value of held-for-use 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.

Long-lived asset groups may be classified as held-for-sale when the following conditions are met: we have committed to a plan to sell the asset group and it is unlikely that significant changes will be made to the plan; the asset group is available for immediate sale in its present condition and it is probable that the sale will be completed within one year; and an active program to locate a buyer has been initiated and the asset group is being marketed at a sale price that is reasonable in relation to its current fair value. Should we determine that the carrying value of held-for-sale long-lived assets exceeds its fair value, we will measure any impairment based on this difference. Subsequent adjustments to the carrying amount of held-for-sale assets based on changes in fair value are recorded but only to the extent of the carrying amount of the asset group when it entered the held-for-sale category.
Other Assets, Noncurrent
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 29, 2012 December 31, 2011
Deferred financing costs$6,424
 $9,239
Cash surrender value of life insurance policies25,240
 25,057
Long term marketable securities—
 11,051
Equity-method affiliates8,492
 5,737
Other assets8,503
 6,575
Other assets, noncurrent$48,659
 $57,659

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 29, 2012, we have contributed $8,820 of our total committed capital of $20,000. We recognized equity income/(loss) of $(618), $869 and $(579) for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 respectively. This income/(loss) is reported in Other income (expense), net on our consolidated statements of income. As of December 29, 2012, Equity Method Affiliates had a carrying value of $8,492, which is reported in Other Assets on the consolidated balance sheets.


56

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

Accounting for Investment in Life Insurance Contracts
Our investment in life insurance contracts are recorded at cash surrender value. Accordingly, we recognize the initial investment at the transaction price and remeasure the investment at cash surrender value based on fair value of underlying investments or contractual value each reporting period. Investments in life insurance contracts are reported as part of purchases of investments in the statement of cash flows. At December 29, 2012, we held 36 contracts with a carrying value of $25,240 and a face value of $85,138.
Restructuring and Contract Termination Costs
We recognize obligations associated with restructuring activities and contract termination costs by 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 operating costs and improve profitability by reducing excess capacities. Restructuring charges are typically recorded 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 us is recognized and measured at its fair value when we cease using the right conveyed by the contract. During 2012, 2011 and 2010, we implemented staffing reductions to improve operating efficiency and profitability at various sites. As a result of these actions, for the years ended December 29, 2012, December 31, 2011 and December 25, 2010, we recorded severance and retention charges as shown below. As of December 29, 2012, $1,885 was included in accrued compensation and $1,751 in other long-term liabilities on our consolidated balance sheet. 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.
The following table rolls forward our severance and retention cost liability:
 Severance and Retention Costs
 2012 2011 2010
Balance, beginning of period$3,374
 $10,658
 $4,332
Expense2,576
 5,462
 16,504
Payments/utilization(2,314) (12,746) (10,178)
Balance, end of period$3,636
 $3,374
 $10,658

The following table presents severance and retention costs by classification on the income statement:
 Fiscal Year Ended
 2012 2011 2010
Severance charges included in cost of sales$1,203
 $1,012
 $10,860
Severance charges included in selling, general and administrative expense1,373
 4,450
 5,644
Total expense$2,576
 $5,462
 $16,504
The following table presents severance and retention cost by segment:
 Fiscal Year Ended
 2012 2011 2010
Research models and services$1,068
 $1,196
 $4,429
Preclinical services1,508
 4,372
 9,145
Corporate—
 (106) 2,930
Total expense$2,576
 $5,462
 $16,504


57

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


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 29, 2012 December 31, 2011
Accrued income taxes$18,216
 $10,552
Current deferred tax liability410
 1,379
Accrued interest and other2,636
 2,102
Other current liabilities$21,262
 $14,033
Other Long-Term Liabilities
Other long-term liabilities consist of liabilities we do not intend to settle within the next twelve months.
The composition of other long-term liabilities is as follows:
 December 29, 2012 December 31, 2011
Deferred tax liability$13,147
 $16,074
Long-term pension liability44,316
 49,223
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan26,663
 25,739
Other long-term liabilities20,840
 17,415
Other long-term liabilities$104,966
 $108,451

Stock-Based Compensation Plans
We grant stock options and restricted stock 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 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 is determined using the historical volatility of our common stock over the expected life of the option. The risk-free interest rate is based on the market yield for the five year U.S. Treasury security. The expected life of options is determined using historical option exercise activity.
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 for 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 is computed in accordance with the long-form method.
Revenue Recognition
We recognize revenue related to our products, which include research models, endotoxin and microbial detection (EMD) technology and avian 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

58

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

is fixed or 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 generally evidenced by client contracts and 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 that we are engaged to perform. These performance criteria are established by our clients and do not contain acceptance provisions based upon the achievement of certain study or laboratory testing results. Revenue of agreed upon rate per unit 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 total 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. 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.
Guarantees
We include standard indemnification provisions in client contracts, which include standard provisions limiting our liability under such contracts, including our indemnification obligations, with certain exceptions. In addition, we are the guarantor of certain facility leases for businesses that have been sold to other parties. When we sell the business, we recognize the retained lease guarantee as a liability on our books at fair value and we amortize the liability ratably as our obligation decreases. In addition, we record contingent losses on the guarantee when it is probable that we will be required to make lease payments in excess of the remaining carrying amount of the guarantee liability and the additional payments are reasonably estimable. See Note 13 for discussion of guarantees related to our Phase I clinical business that we discontinued in 2011.
Derivatives and Hedging Activities
We enter into derivatives to hedge the foreign currency exchange risk in order to minimize the impact of market fluctuations of foreign currency rates on our financial statements. Throughout the year we entered into various contracts to manage this risk. During 2012 and 2011, we entered into forward foreign currency contracts in order to hedge the foreign exchange impact of an intercompany loan between our entities with different functional currencies. As of December 29, 2012, the outstanding forward contract had a fair value of $16. We recorded a hedge gain (loss) of $(1,260) in 2012, $(6,287) in 2011 and $713 in 2010.
Fair Value
We hold cash equivalents, investments and certain other assets that are carried at fair value. We generally determine fair value using 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 29, 2012, we do not have any significant non-recurring measurements of non-financial assets and non-financial 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.



59

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

Descriptions of the valuation methodologies used for assets and liabilities measured at fair value are as follows:
Time deposits—Valued at their ending balances as reported by the financial 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.
Life policies—Valued at cash surrender value based on fair value of underlying investments.
Long-lived assets impaired during the period - valued at fair value at the date of the impairment based upon the income approach.
Contingent consideration—Consists of future acquisition-related payments based on certain agreed upon revenue and technical milestones valued using the income approach.
Long-Term debt - disclosed fair value based on current market pricing for similar debt.
Hedge contract—Valued at fair value by management based on our foreign exchange rates and forward points provided by banks.
Assets measured at fair value on a recurring basis are summarized below:
 Fair Value Measurements at December 29, 2012 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$—
 $6,781
 $—
 $6,781
Life policies—
 19,555
 —
 19,555
Hedge contract—
 16
 —
 16
Total assets measured at fair value$—
 $26,352
 $—
 $26,352
 Fair Value Measurements at December 31, 2011 using
 Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Assets and Liabilities at Fair Value
Time deposits$—
 $5,359
 $—
 $5,359
Auction rate securities—
 —
 11,051
 11,051
Life policies—
 19,520
 —
 19,520
Hedge contract—
 5
 —
 5
Total assets measured at fair value$—
 $24,884
 $11,051
 $35,935


The book value of our term and revolving loans, which are variable rate loans carried at amortized cost, approximates fair value based current market pricing of similar debt. The fair value of our 2.25% Senior Convertible Debentures (2013 Notes), which are carried at cost less unamortized discount on our consolidated balance sheet, was $351,745 as of December 29, 2012. We determine the fair value of these 2013 Notes based on their most recent quoted market price and by reference to the market value of similar debt instruments. We classify the fair value of our debt as Level 2 on the valuation hierarchy.
The following table presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 29, 2012 and December 31, 2011. Our auction rate securities were valued at fair value by management in part utilizing an independent valuation reviewed by management which used

60

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

pricing models and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use at December 29, 2012.

 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 Year ended
Auction rate securitiesDecember 29, 2012
 December 31, 2011
Beginning balance$11,051
 $11,377
Transfers in and/or out of Level 3—
 —
Total gains or losses (realized/unrealized):   
Included in earnings (other expenses)(712) (1)
Included in other comprehensive income921
 (325)
Purchases, issuances and settlements(11,260) —
Ending balance$—
 $11,051
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 Year ended
Contingent ConsiderationDecember 29, 2012
 December 31, 2011
Beginning balance$—
 $5,365
Transfers in and/or out of Level 3—
 —
Total gains or losses (realized/unrealized):   
Included in selling, general and administrative expense—
 (5,365)
Included in other comprehensive income—
 —
Purchases, issuances and settlements—
 —
Ending balance$—
 $—

During the quarter ended September 29, 2012, we recorded an impairment charge for long-lived assets held and used (see Note 4). As a result, we adjusted the carrying amount of this asset group, consisting of land, buildings, and equipment, to fair value, which was based on the income approach. In applying the income approach, we estimated the future net cash flows associated with operating the asset group and the asset group's salvage value. During the third quarter, the fair value of the asset group was adjusted to $2,197 which we classified as Level 3, whereby the inputs are based on management's internal estimates and not corroborated with observable market data. Subsequent to the impairment, the assets were carried at adjusted cost and are thus not considered assets measured at fair value on a recurring basis.
Income Taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. We 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 we will not realize some or all of the deferred tax assets.
As of December 29, 2012, earnings of non-U.S. subsidiaries considered to be indefinitely reinvested totaled $155,087. No provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or

61

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

otherwise, we would be subject to additional U.S. Federal and state income taxes and foreign income and withholding taxes, which could be material. 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 tax free. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable due to the complexities with the hypothetical calculation. Additionally, the amount of the liability is dependent upon the circumstances existing if and when the remittance occurs.
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.
Foreign Currency Translation
The functional currency of each of our operating foreign subsidiaries is local currency. The 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 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 $(892) in 2012, $6,237 in 2011 and $(1,299) in 2010.
Other Comprehensive Income
Our other comprehensive income (OCI) consists of unrealized gains (losses) on available-for-sale marketable securities, foreign currency translation adjustments and unrecognized pension gains and losses and prior service costs and credits. These items are presented, before tax effects, in the Consolidated Statements of Other Comprehensive Income. We disclose the tax effects on each item included in Note 6 Equity.
Pension Plans
Our defined benefit pension plans' assets, liabilities and expenses are calculated using certain assumptions. These assumptions are reviewed annually, or whenever otherwise required, based on reviews of current plan information and consultations with independent investment advisers 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 recognize the funded status of our benefit plans on our 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 plan assets and obligations as of the date of our fiscal year-end balance sheet. 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 are disclosed in the notes to our financial statements.
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.


62

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

Discontinued Operations
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

We completed a business acquisition during the year end December 29, 2012. The results of operations of the acquired business are included in the accompanying consolidated financial statements from the date of acquisition. During the years ended December 31, 2011 and December 25, 2010 no significant business acquisitions were completed.

Accugenix
In August 2012, we acquired 100% of Accugenix Inc. (Accugenix), for $18,408 in cash, subject to adjustments. Accugenix is a global provider of cGMP-compliant contract microbial identification testing. The acquisition strengthens our EMD portfolio of products and services by providing state-of-the-art microbial detection services for the biotechnology, pharmaceutical, and medical device manufacturing industries. Accugenix is based in the U.S. and is included in our RMS reportable business segment.

The purchase price allocation, net of $1,547 of cash acquired is as follows:
Current assets (excluding cash)$2,162
Property, plant and equipment549
Current liabilities(911)
Long term liabilities(3,700)
Definite-lived intangible assets8,400
Goodwill10,361
Total purchase price allocation$16,861
The definite-lived intangible assets acquired are as follows:

  Weighted average amortization life (in years)
Client relationships$1,500
13
Proprietary database4,100
11
Standard operating procedures2,500
4
Trademarks300
12
 $8,400
 


The definite-lived intangibles are largely attributed to a proprietary database of thousands of species of organisms and the methods and technology to provide accurate, timely and cost-effective microbial identification services. The goodwill resulting from the transaction of $10,361 is primarily attributed to the potential for growth of the Company's global EMD products and services business through the increased competitive advantage and market penetration provided by the services offered by Accugenix. The goodwill is not deductible for tax purposes.




63

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

Vital River

In October 2012, we entered into an agreement to acquire a 75% ownership interest of Vital River, a commercial provider of research models and related services in China, for approximately $26,800 in cash, subject to certain closing adjustments. The acquisition closed in the first quarter of 2013.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

As of December 29, 2012 and December 31, 2011, other intangible assets, net, consisted of $3,438 and $3,438 of indefinite-lived intangible assets, respectively.

The following table displays the gross carrying amount and accumulated amortization of definite-lived intangible assets by major class:
 December 29, 2012 December 31, 2011
 Gross carrying amount Accumulated amortization Gross carrying amount Accumulated amortization
Backlog$2,875
 $(2,375) $2,856
 $(2,253)
Client relationships305,178
 (231,902) 298,813
 (210,816)
Client contracts15,366
 (15,366) 14,818
 (14,818)
Trademarks and trade names5,326
 (4,821) 5,022
 (4,706)
Standard operating procedures2,751
 (863) 650
 (650)
Other identifiable intangible assets10,033
 (4,718) 5,415
 (4,332)
Total finite-lived intangible assets$341,529
 $(260,045) $327,574
 $(237,575)

The following is a schedule of goodwill by reportable segment and changes in the gross carrying amount and accumulated amortization of goodwill:
   Adjustments to Goodwill   Adjustments to Goodwill  
 Balance at December 25, 2010 Acquisitions Foreign Exchange/ Impairment Balance at December 31, 2011 Acquisitions Foreign Exchange/ Impairment Balance at December 29, 2012
Research Models and Services             
Gross carrying amount$53,108
 $—
 $(427) $52,681
 $10,361
 $97
 $63,139
Preclinical Services             
Gross carrying amount1,150,330
 —
 (450) 1,149,880
 —
 590
 1,150,470
Accumulated impairment loss(1,005,000)   —
 (1,005,000)   —
 (1,005,000)
Total             
Gross carrying amount$1,203,438
 $—
 $(877) $1,202,561
 $10,361
 $687
 $1,213,609
Accumulated impairment loss(1,005,000)   —
 (1,005,000)   —
 (1,005,000)
Goodwill, net$198,438
     $197,561
     $208,609

Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. Based on our assessment (step one) for 2012 and 2011, the fair value of our business units exceeded their carrying value and, therefore, our goodwill was not impaired. If the future growth and operating results of our businesses are not as strong as

64

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

anticipated and/or our market capitalization declines, this could impact the assumptions used in calculating the fair value of our goodwill in the future. 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.
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 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 $305,000.
Amortization expense of intangible assets for 2012, 2011 and 2010 was $18,068, $21,796 and $24,405, respectively. Amortization of revenue-producing intangible assets is excluded from cost of services.
Estimated amortization expense for each of the next five fiscal years is expected to be as follows:
2013$14,369
201412,447
201511,095
20169,986
20178,987


4. IMPAIRMENT OF LONG-LIVED ASSETS
For the years ended 2012, 2011 and 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 associated with the use of the long lived assets.
In September 2012, we commenced a consolidation of certain research model operations in Europe. As a result, we recorded an impairment charge of $3,548 under the held-for-use model for the disposition of facilities that we own. Following the impairment, the long-lived asset group was classified as held-for-use as we unwind operations over the next several months and will be classified as held-for-sale when the following conditions are met: we have committed to a plan to sell the asset group and it is unlikely that significant changes will be made to the plan; the asset group is available for immediate sale in its present condition and it is probable that the sale will be completed within one year; and an active program to locate a buyer has been initiated and the asset group is being marketed at a sale price that is reasonable in relation to its current fair value.
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 sold the assets of our PCS-China facility for $4,593 and recognized a gain on the sale of $3,776. As of December 29, 2012, we continue to hold our PCS-Massachusetts site and are utilizing no production capacity at the site.
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 acquisitionsacquisition of SPC. The fairSPC 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. As of December 31, 2011 we had impaired the entire carrying value of theour in process research and development wasacquired in excess to the carrying value recorded as the timeacquisition of the acquisition. Based on the evaluation we recorded an impairment of $7,200.

SPC.

65

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)


5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt and Capital Lease Obligations

Long-term debt consists of the following:
 December 25,
2010		 December 26,
2009		 December 29, 2012 December 31, 2011

2.25% Senior convertible debentures:

2.25% Senior convertible debentures:

    

Principal

 $349,995 $349,995 

Unamortized debt discount

 (35,583) (48,597)
     
Principal$349,995
 $349,995
Unamortized debt discount(6,726) (21,533)

Net carrying amount of senior convertible debentures

Net carrying amount of senior convertible debentures

 314,412 301,398 343,269
 328,462

Term loan facilities

Term loan facilities

 386,213 100,433 290,947
 356,322

Revolving credit facility

Revolving credit facility

 — 90,000 32,000
 33,000

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 11.6% at December 25, 2010, December 26, 2009 and December 27, 2008, respectively, maturing between 2008 and 2013

 127 792 
     
Other long-term debt232
 118

Total debt

Total debt

 700,752 492,623 666,448
 717,902

Less: current portion of long-term debt

Less: current portion of long-term debt

 (30,535) (35,310)(139,373) (14,732)
     

Long-term debt

Long-term debt

 $670,217 $457,313 $527,075
 $703,170
     

Minimum future principal payments of long-term debt at December 25, 201029, 2012 are as follows:

Fiscal Year
Fiscal Year
  
  

2011

 $30,535 

2012

 35,492 

2013

2013

 415,895 $141,391

2014

2014

 111,523 44,963

2015

2015

 142,890 59,950
2016426,870

Thereafter

Thereafter

 — —
   

Total

 $736,335 
   
Total$673,174

On August 26, 2010,September 23, 2011, we amended and restated our $428,000 credit agreement to (1) pay offreduce the interest rate margin applicable to the term loans outstanding underand the $428,000 credit agreement, (2)revolving loans based on our leverage ratio and extend the maturity date under this new $750,000by approximately one year to September 2016. The current 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 which has a maturity date of August 26, 2015, provides for a $230,000 U.S.$299,750 term loan, a 133,763€69,414 Euro term loan and a $350,000 revolver.$350,000 revolving credit facility. Under specified circumstances, we have the ability to increase the term loans and/or revolving line of credit by up to $250,000$250,000 in the aggregate. The company wrote off $192 of deferred financing cost associated with the $428,000 and $50,000 credit agreements. Financing costs associated with the new $750,000 credit agreement were $14,150, of which $9,607 was capitalized as deferred financing costs and will amortize over 5 years, and $4,542 was expensed. Our obligations under the $750,000 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


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

5. Long-Term Debt and Capital Lease Obligations (Continued)


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 $10,000. The $400,000 term loan facility matures in 20 quarterly installments with the last installment due June 30, 2015.September 23, 2016. The $350,000 U.S.$350,000 revolving facility also matures on August 26, 2015September 23, 2016 and requires no scheduled payment before that date. The interest rates applicable tobook value of our term loans and revolving loans under the new $750,000 credit agreement are higher than the interest rates under the prior facilities reflecting current market conditions. The new $750,000 credit agreement contains certain customary representations and warranties, affirmative covenants and events of default.

approximates fair value.

The interest rates applicable to our 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%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 interest rate margin based upon our leverage ratio.

Based on our leverage ratio, the margin range for base rate loans is 0.75%0% to 1.5%0.75% and the margin range for LIBOR based loans is 1.75%1% to 2.5%1.75%. As of December 25, 2010,29, 2012, the interest rate margin for base rate loans was 1.5%0.5% and for adjusted LIBOR loans was 2.5%1.50%. The book value

Our obligations under the credit agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of our termassets, 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 revolving loans approximates fair value.

        We pledged65% of 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 for our credit agreement.having a book value in excess of $10,000. 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 includinginclude (1) the ratio of consolidated earnings before interest, taxes, depreciation and amortization less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters,


66

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

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 3.25 to 1.0 and will step down to 3.0 to 1.0 effective in the first fiscal quarter ending in 2012.. As of December 25, 2010,29, 2012, we were compliant with all financial covenants specified in the credit agreement. We had $5,125$5,030 outstanding under letters of credit as of December 25, 2010.

29, 2012.

Our $350,000$350,000 of 2.25% Senior Convertible Senior NotesDebentures (the 2013 Notes) are due in June 2013 with interest payable semi-annually and are convertible into cash for the principal amount and shares of our common stock for the conversion premium (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),. The 2013 Notes are convertible 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 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,


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

5. Long-Term Debt and Capital Lease Obligations (Continued)

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.

        At As of December 25, 2010, the29, 2012, no conversion triggers were met.

As of December 29, 2012, our debt included $349,995 of 2013 Notes due June 2013, which has a fair value of our outstanding 2013 Notes was approximately $349,190$351,745 based on their quoted market valuevalue. The long term portion of the 2013 Notes is $240,287, which is based upon our expected capacity on our existing credit facility. Upon maturity, we expect to settle the 2013 Notes utilizing the expected capacity on our existing credit facility, our existing cash and no conversion triggers were met.

marketable securities or other financing alternatives.

As of December 25, 2010, $35,58329, 2012, the carrying amount of the remaining debt discount remained andrelated to the 2013 Notes was $6,726, which will be amortized over 102 quarters. As of December 25, 2010 and December 26, 2009,29, 2012 the equity component of our convertible debtthe 2013 Notes was $88,492.$88,492. Interest expense related to our convertible debtthe 2013 Notes of $13,013$22,682 and $12,170 for years ending December 25, 2010$22,012, including $7,875 and December 26, 2009 respectively, yielded an effective interest rate of 6.93% on the liability component. In addition, $7,853$7,962 of contractual interest expense, was recognized on our convertible debt during the years ended December 25, 201029, 2012 and December 26, 2009.

31, 2011, respectively, yielding an effective interest rate of 6.93% on the liability component.

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 $101$72 and $210$43 at December 25, 201029, 2012 and December 26, 2009,31, 2011, respectively.


6. Equity

Earnings Per Share

Basic earnings per share for 2010, 20092012, 2011 and 20082010 was computed by dividing earnings available to common shareowners 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 20092012 and 2011 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.


67

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

Options to purchase 6,594,3134,590,925 shares, 4,272,6474,249,564 shares and 4,481,1206,594,313 shares were outstanding at December 29, 2012, December 31, 2011 and December 25, 2010 December 26, 2009 and December 27, 2008,, 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 2010, 20092012, 2011 and 20082010 excluded the weighted average impact of 777,740, 896,3935,255, 703,011 and 777,494777,740 shares, respectively, of non-vested fixed restricted stock awards.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

6. 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 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Numerator:

Numerator:

      

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

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

 $(328,657)$113,042 $(527,788)$101,547
 $115,111
 $(328,657)

Income (loss) from discontinued businesses

Income (loss) from discontinued businesses

 (8,012)$1,399 $3,283 $(4,252) $(5,545) $(8,012)

Denominator:

Denominator:

      

Weighted-average shares outstanding—Basic

Weighted-average shares outstanding—Basic

 62,561,294 65,366,319 67,273,748 47,912,135
 50,823,063
 62,561,294

Effect of dilutive securities:

Effect of dilutive securities:

      

2.25% senior convertible debentures

 — — — 

Stock options and contingently issued restricted stock

 — 267,650 — 

Warrants

 — 1,926 — 
       
2.25% senior convertible debentures—
 —
 —
Stock options and contingently issued restricted stock494,185
 495,179
 —
Warrants—
 —
 —

Weighted-average shares outstanding—Diluted

Weighted-average shares outstanding—Diluted

 62,561,294 65,635,895 67,273,748 48,406,320
 51,318,242
 62,561,294
       

Basic earnings (loss) per share from continuing operations attributable to common shareowners

Basic earnings (loss) per share from continuing operations attributable to common shareowners

 $(5.25)$1.73 $(7.85)$2.12
 $2.26
 $(5.25)

Basic earnings (loss) per share from discontinued operations attributable to common shareowners

Basic earnings (loss) per share from discontinued operations attributable to common shareowners

 $(0.13)$0.02 $0.05 $(0.09) $(0.11) $(0.13)

Diluted earnings (loss) per share from continuing operations attributable to common shareowners

Diluted earnings (loss) per share from continuing operations attributable to common shareowners

 $(5.25)$1.72 $(7.85)$2.10
 $2.24
 $(5.25)

Diluted earnings (loss) per share from discontinued operations attributable to common shareowners

Diluted earnings (loss) per share from discontinued operations attributable to common shareowners

 $(0.13)$0.02 $0.05 $(0.09) $(0.11) $(0.13)

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 July 29, 2010, our Board of Directors authorized a $500,000$500,000 stock repurchase program. Our Board of Directors increased the stock repurchase authorization by $250,000$250,000 to $750,000$750,000 on October 20, 2010.2010. 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, on August 26, 2010, we entered into an agreement with a third party investment bank to implement anseries of accelerated stock repurchase (ASR) program to repurchase $300,000 of common stock. Under the ASR, we paid $300,000 on August 27, 2010 from cash on hand and available liquidity, including funds borrowed by us under our new amended and restated $750,000 credit facility.programs. The ASR program wasprograms 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 $300,000 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 initial delivery of 6,000,000 treasury shares was recorded at $175,066,$175,066, 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 $23,511,$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,$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 settled on February 11, 2011 based on a discount to the daily volume weighted average price (VWAP) of our common

68

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

stock over the course of a calculation period. We received the final

6. Equity (Continued)871,829

repurchased 8,000,000 shares based on the settlement of the 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.ASR on February 24, 2011, we received the initial delivery of 3,759,398 shares, which was recorded at $135,860 based on the market value at the date of the transaction, and recorded $14,140 as a forward contract indexed to our common stock. The ASR was settled on February 11,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 871,8296,505 shares based ofon the settlement of the ASR. The treasury shares result in an immediate reduction of shares on our statement of financial positionASR, which were recorded at $257.
During 2012, 2011 and in our EPS calculation.

        During 2010 2009 and 2008,, we repurchased 1,759,8571,705,521 shares of common stock for $52,888, 1,592,500$61,442, 3,790,762 shares of common stock for $42,387$130,853 and 2,159,9081,759,857 shares of common stock for $109,260,$52,888, respectively, under our Rule 10b5-1 Purchase PlanPlans 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 through ASR programs and open market purchases during 2010, 20092012, 2011 and 20082010 were as follows:


 Fiscal Year Ended Fiscal Year Ended

 December 25, 2010 December 26, 2009 December 27, 2008 December 29, 2012 December 31, 2011 December 25, 2010

Number of shares of common stock repurchased

 9,759,857 1,592,500 2,159,908 1,705,521
 8,428,494
 9,759,857

Total cost of repurchase

 $294,534 $42,387 $109,260 $61,442
 $299,479
 $294,534

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 29, 2012, December 31, 2011 and December 25, 2010 December 26, 2009 and December 27, 2008,, we acquired 100,48984,250 shares for $3,638, 80,234$3,047, 79,704 shares for $2,216$2,942 and 104,662100,489 shares for $6,292,$3,638, respectively, as a result of such withholdings.

Accumulated Deficit
None

        Accumulated of our accumulated deficit includes approximately $2,000 which is restricted due to statutory requirements in the local jurisdiction of a foreign subsidiary as of December 26, 200929, 2012 and December 27, 2008.

    31, 2011.

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 27, 2008

 $9,387 $(3,822)$(2,218)$3,347 
 

Period change

  45,907  (7,102) 768  39,573 
 

Tax

  1,343  774  —  2,117 
          

Balance at December 26, 2009

 $56,637 $(10,150)$(1,450)$45,037 
          
 

Period change

  (10,122) (10,776) 854  (20,044)
 

Tax

  5,319  3,323  —  8,642 
          

Balance at December 25, 2010

 $51,834 $(17,603)$(596)$33,635 
          
 
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 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
Period change5,274
 (5,862) 921
 333
Tax98
 1,579
 —
 1,677
Balance at December 29, 2012$44,057
 $(37,454) $—
 $6,603

Warrants
Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

6. 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,$59.63 and expire between


69

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

September 13, 2013 and January 22, 2014 over 90 equal increments. The total proceeds from the issuance of the warrants were $65,423.

        As part of the recapitalization in 1999, we issued 150,000 units, each comprised of a $1 senior subordinated note and a warrant to purchase 7.6 shares of our common stock for total proceeds of $150,000. We allocated the $150,000 offering proceeds between the senior subordinated notes $(147,872) and the warrants $(2,128), based upon the estimated fair value. The portion of the proceeds allocated 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. All warrants were exercised before they expired on October 1, 2009.

$65,423.

Noncontrolling Interests

We hold investments in several joint ventures. These joint ventures are separate legal entities whose purpose is consistent with theour overall operations of the Company and represent geographic and business segment expansions of existing markets. The financial results of all joint ventures were consolidated in the Company'sour results as the Company haswe have the ability to exercise control over these entities. The interests of the outside joint venture partners in these joint ventures have been recorded as noncontrolling interest totaling $1,304$2,395 and $(1,419)$1,780 at December 25, 201029, 2012 and December 26, 2009,31, 2011, respectively.

During the fourth quarter of 2010, we purchased for $4,000$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 the purchase, we recorded the purchase price of $4,000$4,000 and the balance of the noncontrolling interests of $8,623$8,623 to equity.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Income Taxes

INCOME TAXES

An analysis of the components of income (loss) from continuing operations before income taxes and the related provision for income taxes is presented below:
 Fiscal Year Ended Fiscal Year Ended
 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Income (loss) from continuing operations before income taxes

Income (loss) from continuing operations before income taxes

      

U.S. 

 $(149,275)$38,368 $96,634 

Non-U.S. 

 (184,807) 113,189 (568,080)
       

 $(334,082)$151,557 $(471,446)
U.S. $35,504
 $47,158
 $(149,275)
Non-U.S. 94,242
 85,504
 (184,807)
       $129,746
 $132,662
 $(334,082)

Income tax provision

Income tax provision

      
Current:     
Federal$(1,447) $3,957
 $11,378
Foreign26,411
 20,727
 23,782
State and local1,353
 1,124
 2,416
Total current$26,317
 $25,808
 $37,576
Deferred:     
Federal$13,132
 $2,961
 $(24,604)
Foreign(12,683) (11,649) (9,696)
State and local862
 20
 (3,253)
Total deferred$1,311
 $(8,668) $(37,553)

Current:

 $27,628
 $17,140
 $23
 

Federal

 11,378 $(4,607)$20,848 
 

Foreign

 23,782 26,851 28,545 
 

State and local

 2,416 1,086 1,265 
       
 

Total current

 37,576 $23,330 $50,658 
       

Deferred:

 
 

Federal

 (24,604)$16,968 $5,581 
 

Foreign

 (9,696) (1,487) (4,067)
 

State and local

 (3,253) 1,543 4,857 
       
 

Total deferred

 $(37,553)$17,024 $6,371 
       

 $23 $40,354 $57,029 
       








70

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

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 25,
2010		 December 26,
2009		 December 29, 2012 December 31, 2011

Compensation

 $47,695 $38,434 $52,664
 $49,178

Accruals and reserves

 4,725 1,725 5,827
 3,712

Financing related

 3,576 2,228 2,545
 3,193

Goodwill and other intangibles

 (5,876) (6,872)(14,982) (6,523)

Net operating loss and credit carryforwards

 36,359 26,064 55,480
 57,193

Depreciation related

 (28,400) (54,859)(37,624) (34,389)

Non-indefinitely reinvested earnings

 (250) (704)(146) (146)

Other

 (547) (817)(1,245) (1,795)
     62,519
 70,423

 57,282 5,199 

Valuation allowance

 (12,041) (6,126)(7,504) (12,178)
     

Total deferred taxes

 $45,241 $(927)$55,015
 $58,245
     

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Income Taxes (Continued)

Reconciliations of the statutory U.S. Federal income tax rate to effective tax rates are as follows:


 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

U.S. statutory income tax rate

 (35.0)% 35.0% (35.0)%35.0 % 35.0 % (35.0)%

Foreign tax rate differences

 (1.3)% (5.4)% (2.6)%(8.0)% (6.7)% (1.3)%

State income taxes, net of Federal tax benefit

 (0.7)% 1.3% 1.3%1.5 % 2.1 % (0.7)%

Unbenefitted losses and valuation allowance

 0.6% 1.4% 0.8%

Impact of repatriation of non-US earnings

 4.6% (0.7)% (1.5)%
Unbenefitted losses and changes in valuation allowance0.8 % 0.6 % 0.6 %
Impact of repatriation of non-U.S.earnings— % 0.5 % 4.6 %

Research tax credits and enhanced deductions

 (3.6)% (6.7)% (3.1)%(8.2)% (7.6)% (3.6)%

Enacted tax rate changes

 0.0% (0.1)% 0.2%(0.2)% (1.0)% — %

Impact of tax uncertainties

 3.1% 1.2% 0.5%(1.2)% (1.0)% 3.1 %

Impact of goodwill and other impairments

 31.3% 0.0% 51.4%— % — % 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)% — %

Other

 1.0% 0.6% 0.1%1.6 % 1.6 % 1.0 %
       21.3 % 12.9 % — %

 0.0% 26.6% 12.1%
       


As of December 25, 2010,29, 2012, we have non-U.S. net operating loss carryforwards, the tax effect of which is $13,740.$15,778. Of this amount, $1,063$564 will expire in 2013, $1,816$500 will expire in 2014, $803and $188 will expire in 2015, $222 will expire in 2017 and $496 will expire in 2018.thereafter. The remainder of $14,526 can be carried forward indefinitely. We have U.S. net operating loss carryforwards at the state level, the tax effect of which is $85, which will expire between 2022 and 2023. We have U.S. foreign tax credit carryforwards of $15,409.$20,251. Of this amount, $8,063$14,563 will expire in 2019, $7,045$5,368 will expire in 2020, and the remainderremaining $320 thereafter. We have Canadian Scientific Research and Experimental Development (SR&ED) Credit carryforwards of $12,830 as a result of our research and development activity in Montreal,$27,262, which begin to expire in 2029. In accordance with Canadian Federal tax law, we claim SR&ED credits on qualified research and development costs incurred by our Preclinical service facility in Canada, in the performance of projects for non-Canadian customers.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 Edinburgh, Scotland, in the performance of certain customerclient contracts. We have unrealizedrealized capital losses in the U.S., the tax effect of which is $219.

$267, which will expire in 2017. We have realized and unrealized capital losses in Canada, the tax effect of which is $63 and $696, respectively. These losses can be carried forward indefinitely.


71

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

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 deductionbenefit reported on our income tax returns are recorded in additional paid-in capital. If the tax deductionbenefit 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 $12,622$9,558 as of December 25, 201029, 2012 and $14,055$10,580 as of December 26, 2009.31, 2011. During 2010,2012, we recorded a tax detrimentbenefit of $926$125 to additional paid-in-capital related to the exercise of stock options and vesting of restricted shares.

We have fully recognized our deferred tax assets on the belief that it is more likely than not that they will be realized. The only exceptions at December 25, 201029, 2012 relate to deferred tax assets primarily for net operating losses in China, Hong Kong, India, Luxembourg and the Netherlands, a capital losslosses in the U.S., and Canada, and fixed assets in the U.K. and China which have resultedThe valuation allowance decreased by $4,674 from $12,178 at December 31, 2011 to $7,504 at December 29, 2012. The decrease in an increasevaluation allowance was primarily due to the liquidation of $5,915our former Chinese Preclinical services subsidiary resulting in the expiration of $5,380 of net operating losses and the reduction of the related valuation allowance from $6,126 at December 26, 2009 to $12,041 at December 25, 2010. Weallowance. Excluding this write off, we increased the valuation allowance against these tax attributesby $706 due to the determination, after consideration of all evidence, both positive and negative, that it is more likely than not that these deferred tax assets will not be realized.


During the fourth 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 financial 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 Table$11,111 benefit in continuing operations during the first quarter of Contents2011.


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. Income Taxes (Continued)

At December 25, 2010,29, 2012, the amount recorded for unrecognized tax benefits was $33,427.$30,996. At December 26, 200931, 2011 the amount recorded for unrecognized income tax benefits was $21,389.$27,976. The $12,038$3,020 increase during 20102012 is primarily attributable to the unrealized tax benefit associated with the $30,000 WuXi termination fee, ongoing evaluation of uncertain tax positions in the current and prior periods, settlement of tax controversies and foreign exchange movement. Significant increases during 2012 relate primarily to our Preclinical services subsidiary in Montreal and include an increase of $2,408 related to Canadian transfer pricing exposures for the years 2006 through 2012 resulting from headquarter service charges and $3,034 related to Canadian SR&ED and Quebec R&D benefits claimed in 2005 through 2012. Additionally, the unrecognized tax benefits were reduced by $2,954 related to the conclusion of the 2003 and 2004 SR&ED controversy that occurred in the third quarter of 2012.

The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $28,456$24,386 as of December 25, 201029, 2012 and $17,313$22,477 as of December 26, 2009.31, 2011. The $11,143$1,909 increase is primarily attributable to the unrealized tax benefit associated with the $30,000 WuXi termination fee, ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement.

movement partially offset by a decrease due to the conclusion of the Canadian controversy.











72

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

A reconciliation of our beginning and ending unrecognized income tax benefits is as follows:
 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Beginning balance

Beginning balance

 $21,389 $28,732 $22,129 $27,976
 $33,427
 $21,389

Additions:

Additions:

      

Tax positions for current year

 13,142 1,515 2,071 

Tax positions for prior years

 693 2,367 8,041 
Tax positions for current year1,907
 1,714
 13,142
Tax positions for prior years4,196
 —
 693

Reductions:

Reductions:

      

Tax positions for current year

 — — (252)

Tax positions for prior years

 (1,797) (1,024) (3,011)

Settlements

 — (10,113) — 

Expiration of statute of limitations

 — (88) (246)
       
Tax positions for current year—
 —
 —
Tax positions for prior years(28) (239) (1,797)
Settlements(3,055) (6,926) —
Expiration of statute of limitations—
 —
 —

Ending balance

Ending balance

 $33,427 $21,389 $28,732 $30,996
 $27,976
 $33,427
       


We continue to recognize interest and penalties related to unrecognized income tax benefits in income tax expense. The total amount of accrued interest related to unrecognized income tax benefits as of December 25, 201029, 2012 and December 26, 200931, 2011 was $2,313$1,964 and $1,689,$1,515, respectively. The $624$449 increase is primarily attributabledue to ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement.movement partially offset by a decrease due to the conclusion of the Canadian SR&ED controversy. We have not recorded a provision for penalties associated with uncertain tax positions.

We conduct business in a number of tax jurisdictions. As a result, we are subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the United States, the United Kingdom, France, Japan, Germany and Canada. With few exceptions, we are no longer subject to U.S. and international income tax examinations for years before 2003.

2005.

We and certain of our subsidiaries are currently under audit by the German Tax OfficeMinister of Revenue Quebec provincial tax authority (MRQ) and various state tax authorities. We believe that it is reasonably possible that the German audit will conclude within the next twelve months. We do not believe thatanticipate resolution of this audit willthese audits to have a material impact on our financial position or results of operations.

        Additionally, westatements.

We are challenging the reassessments receivedcurrently under audit by the Canadian Revenue Authority (CRA) for the years 2006 through 2009. In the fourth quarter of 2012, we received a draft reassessment from the CRA related to the transfer pricing in our Preclinical services operations in Montreal. The CRA proposes to disallow certain deductions related to headquarter service charges for the years 2006 through 2009. We intend to file an objection with the CRA upon receipt of the Notice of Reassessment and apply to the Internal Revenue Service (IRS) and the CRA for relief pursuant to the competent authority procedure provided in the tax treaty between the U.S. and Canada. We believe that the controversy will likely be ultimately settled via the competent authority process. In the fourth quarter of 2012, we established a reserve for this uncertain tax position of $2,408 related to years 2006 through 2012 to reduce the tax benefit recognized for these deductions in Canada Revenue Agency (CRA)to the level that we believe will likely be realized upon the ultimate resolution of this controversy. Additionally, in the fourth quarter of 2012, we recognized a tax asset of $2,981, which is included in Other Assets, that represents the correlative relief that we believe will more likely than not be received in the U.S. via the competent authority process. The actual amounts of the liability for Canadian taxes and the asset for the correlative relieve in the U.S. could be different based upon the agreement reached between the IRS and CRA.
During the third quarter of 2012, we reached a settlement with the Canadian Department of Justice with respect to our appeal of the SR&ED credits claimed inCRA's reassessments of our 2003 and 2004 bySR&ED claims to the Tax Court of Canada. As agreed to in the settlement which applies only to our Canadian Preclinical Services subsidiary2003 and 2004 claims, the CRA issued final reassessments in the third quarter of 2012 and we filed a Notice of Discontinuance with the Tax Court of Canada (TCC).concluding the controversy. In the fourththird quarter, we recorded a benefit due to the settlement of 2009$586, of which $248 is recorded in pretax profit and $338 is recorded in tax expense. Our SR&ED claims in 2005 and forward remain open to audit. We believe that we have appropriately provided for these claims as well as all uncertain tax positions.
During 2012, the first quarter of 2010, we filed Notices of Appeal with the TCC and received the Crown's responseCanadian government enacted a reduction in the second quarter of 2010. InSR&ED credit, which is applicable for years 2014 and beyond. This change in law will reduce our SR&ED credits by 25% starting in 2014. Subsequent to our December 29, 2012 year end, the French government enacted a related development, duringtax law change that applies retroactively to 2012. We will record the first quarter of 2010 we received Notices of Reassessment from the Minister of Revenue of Quebec (MRQ) provincial tax authorities with respect

2012 impact

73

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)


7. Income Taxes (Continued)


toof this law change, which limits the Quebec Researchdeductibility of interest by our French affiliates for 2012 and Developmentbeyond, as a discrete event in our financial statement for the first quarter ending March 30, 2013. The total 2012 impact from the tax credit. We filed Noticeslaw change is additional tax expense of Objection with$714. On February 25, 2013, the MRQGerman government enacted a law change that restricts the deductibility of losses in the second quarter of 2010. We disagree with the positions taken by the CRA and MRQ 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 resolutionGermany.  Application of these controversies will have a materialnew rules may increase our tax liability in Germany and our effective tax rate in 2013 and beyond. We are still assessing the impact of this new tax law on our financial position or results of operations. However, pending resolution of the reassessments with the TCC, it is possible that the CRAtax liability and MRQ will propose similar adjustments for later years.

        We believe we have appropriately provided for all uncertain2013 effective tax positions.

rate.

During 2010, we executed an agreement to implement an accelerated share repurchase (ASR) program to repurchase $300,000$300,000 of common stock. The ASR resulted in a cash need in the United States that was previously unforeseen. In accordance with our policy with respect to the unremitted earnings of our 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 $229,792$229,792 of earnings that were previously indefinitely reinvested and approximately $63,640$63,640 in basis in our non-U.S. subsidiaries could be repatriated in a substantially tax-free manner. As such,a result, in 2010, we changed our indefinite reinvestment assertion with respect to these earnings and accrued the cost to repatriate of $10,334,$10,334, of which $15,264$15,264 is reflected as Income Tax Expense, with an offset of aoffsetting benefit of $4,930$4,930, which is recorded in the Cumulative Translation Adjustment account. During 2010, we repatriated approximately $293,432$293,432 to the U.S. to partially fund the ASR and the $30,000 WuXi$30,000 termination fee.

fee for a proposed acquisition.

In accordance with our policy, the remaining undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested as of the end of 20102012 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 25, 2010,29, 2012, the earnings of our non-U.S. subsidiaries considered to be indefinitely reinvested totaled $31,774. $155,087. 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 bothadditional U.S. Federal and state income taxes and foreign income and withholding taxes, payable towhich could be material. Determination of the various foreign countries. Itamount of unrecognized deferred income tax liabilities on these earnings is not practicable to estimatebecause of the complexities with the hypothetical calculation. Additionally, the amount of additional tax that might be payableliability is dependent on this undistributed foreign income.

        On June 12, 2006, we issued $300,000 aggregate principal amount of convertible senior notes ("the 2013 Notes") in a private placement with net proceeds to us of approximately $294,000. On June 20, 2006, the initial purchasers associated with this convertible debt offering exercised an option to purchase an additional $50,000 of the 2013 Notes for additional net proceeds of approximately $49,000. The 2013 Notes bear stated interest at 2.25% per annum, payable semi-annually,circumstances existing if 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 issuance of the 2013 Notes, we entered into convertible note hedge transactions with respect to its obligation to deliver common stock under the notes. Separately and concurrently with the pricing of the 2013 Notes, we issued warrants for approximately 7.2 million shares of its common stock. We 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 we deduct the option premium paid for the hedge as original issue discount ("OID") over the 7 year term. A deferred tax asset was recorded at issuance with an offset to Additional Paid in Capital for tax savings resulting from the excess of the OID 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, we will not recognize any gain or loss for tax purpose with respect to the exercise or lapse of the warrants.

when remittance occurs.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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 $4,694, $6,253$4,364, $4,178 and $6,377,$4,694, in 2010, 20092012, 2011 and 2008,2010, 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

74

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

with these defined contribution plans, including the ESLIRP, totaled $2,220, $2,309$2,930, $2,048 and $2,819$3,082 in 2010, 20092012, 2011 and 2008,2010, respectively.

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 25, 201029, 2012 and December 26, 200931, 2011 the cash surrender value of these life insurance policies were $31,054$25,240 and $25,099,$25,057, respectively.


Post-Retirement Health and Life Insurance Plans

TableOur Montreal location offers post-retirement life insurance benefits to its employees and post-retirement medical & dental insurance coverage to certain executives. The plan is non-contributory and unfunded. As of ContentsDecember 29, 2012, the accumulated benefit obligation related to the plan was


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.$1,344

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued). In addition, accumulated other comprehensive income includes

(dollars in thousands, except per share amounts)$105

8. Employee Benefits (Continued) of deferred gains and losses, net of tax. Expenses related to the plan were

Pension Plans

The Charles River Laboratories, Inc. Pension Plan is a qualified, non-contributory defined benefit plan covering certain US employees. Effective 2002, the plan was amended to exclude new participants from joining and in 2008 the accrual of benefits was frozen.
The Charles River Pension Plan is a defined contribution plan and a defined benefitcontribution 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. During 2009, the UK plan recorded a curtailment gain of $674 associated with the sale of our Phase I PCS business in the UK.

        The Charles River Laboratories, Inc. Pension Plan is a qualified, non-contributory defined benefit 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. Accordingly, 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. In addition during 2009 as a result of realigning our work force, we terminated approximately 11% of the participants in our U.S. Pension Plan resulting in a curtailment. Because the accrual of benefits under this plan was frozen effective April 30, 2008, there is no curtailment gain or loss or change in the projected benefit obligation in 2009.

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.

















75

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
 2012 2011 2012 2011
Change in benefit obligations       
Benefit obligation at beginning of year$251,916
 $228,810
 $26,456
 $30,572
Service cost3,729
 3,056
 640
 636
Interest cost11,289
 12,107
 892
 1,201
Plan participants' contributions53
 574
 —
 —
Curtailment—
 —
 —
 —
Settlements—
 (158) —
 (5,113)
Benefit payments(6,186) (6,664) (743) (764)
Actuarial loss (gain)16,699
 13,319
 127
 (76)
Plan amendments—
 53
 —
 —
Administrative expenses paid(266) (272) —
 —
Effect of foreign exchange5,829
 1,091
 —
 —
Benefit obligation at end of year$283,063
 $251,916
 $27,372
 $26,456
Change in plan assets       
Fair value of plan assets at beginning of year$202,652
 $192,429
 $—
 $—
Plan assets assumed—
 —
 —
 —
Actual return on plan assets22,467
 3,661
 —
 —
Settlements—
 (158) —
 (5,113)
Employer contributions14,222
 12,170
 743
 5,877
Plan participants' contributions53
 574
 —
 —
Benefit payments(6,186) (6,664) (743) (764)
Premiums paid(266) (272) —
 —
Other—
 —
 —
 —
Effect of foreign exchange5,730
 912
 —
 —
Fair value of plan assets at end of year$238,672
 $202,652
 $—
 $—
Funded status       
Projected benefit obligation$283,063
 $251,916
 $27,372
 $26,456
Fair value of plan assets238,672
 202,652
 —
 —
Net balance sheet liability$44,391
 $49,264
 $27,372
 $26,456
Classification of net balance sheet liability       
Non-current assets$—
 $11
 $—
 $—
Current liabilities75
 52
 709
 717
Non-current liabilities44,316
 49,223
 26,663
 25,739

Table of Contents



76

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Employee Benefits (Continued)

Obligations and Funded Status


 
 Pension Benefits Supplemental
Retirement Benefits		 
 
 2010 2009 2010 2009 

Change in benefit obligations

             
 

Benefit obligation at beginning of year

 $205,913 $166,261 $28,297 $31,113 
 

Service cost

  2,617  2,283  597  623 
 

Interest cost

  11,214  9,771  1,341  1,485 
 

Plan participants' contributions

  585  654  —  — 
 

Curtailment

  —  —  —  — 
 

Settlement gain

  (579) (613) —  — 
 

Benefit payments

  (5,849) (5,799) (764) (726)
 

Actuarial loss (gain)

  19,011  23,425  1,101  (4,198)
 

Plan amendments

  —  —  —  — 
 

Administrative expenses paid

  (307) (158) —  — 
 

Effect of foreign exchange

  (3,795) 10,089  —  — 
          
 

Benefit obligation at end of year

 $228,810 $205,913 $30,572 $28,297 
          

Change in plan assets

             
 

Fair value of plan assets at beginning of year

 $174,022 $134,034 $— $— 
 

Plan assets assumed

  —  —  —  — 
 

Actual return on plan assets

  20,512  25,618  —  — 
 

Settlement gain

  (578) (613) —  — 
 

Employer contributions

  7,515  10,889  764  726 
 

Plan participants' contributions

  585  654  —  — 
 

Benefit payments

  (5,849) (5,799) (764) (726)
 

Premiums paid

  —  —  —  — 
 

Other

  (307) (158) —  — 
 

Effect of foreign exchange

  (3,471) 9,397  —  — 
          
 

Fair value of plan assets at end of year

 $192,429 $174,022 $— $— 
          

Funded status

             
 

Projected benefit obligation

 $228,810 $205,913 $30,572 $28,297 
 

Fair value of plan assets

  192,429  174,022  —  — 
          
 

Net balance sheet liability

 $36,381 $31,891 $30,572 $28,297 
          

Classification of net balance sheet liability

             
 

Non-current assets

 $— $688 $— $— 
 

Current liabilities

  46  63  5,913  5,408 
 

Non-current liabilities

  36,335  32,516  24,659  22,889 

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Employee Benefits (Continued)

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

:


 Pension Benefits Supplemental
Retirement Benefits		 

 2010 2009 2010 2009 Pension Benefits 
Supplemental
Retirement Benefits

Net actuarial (gain)/loss

 $30,045 $18,710 $2,988 $2,977 
2012 2011 2012 2011
Net actuarial loss$58,594
 $52,384
 $3,056
 $3,190

Net prior service cost/(credit)

 (7,734) (6,698) 2,479 2,043 (6,815) (7,117) 1,320
 1,981
         

Total

 $22,311 $12,012 $5,467 $5,020 $51,779
 $45,267
 $4,376
 $5,171
         

The accumulated benefit obligation for all defined benefit plans

 $224,127 $202,363 $29,073 $26,746 $275,162
 $245,705
 $26,495
 $24,663
         


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

assets:


 Pension Benefits Supplemental
Retirement Benefits		 Pension Benefits 
Supplemental
Retirement Benefits

 2010 2009 2010 2009 2012 2011 2012 2011

Projected benefit obligation

 $216,088 $195,239 $30,572 $28,297 $277,187
 $247,232
 $27,372
 $26,457

Accumulated benefit obligation

 214,802 194,167 29,073 26,746 271,204
 242,467
 26,495
 24,663

Fair value of plan assets

 180,587 162,862 — — 233,182
 198,689
 —
 —


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

assets:


 Pension Benefits Supplemental
Retirement Benefits		 Pension Benefits 
Supplemental
Retirement Benefits

 2010 2009 2010 2009 2012 2011 2012 2011

Projected benefit obligation

 $228,810 $200,056 $30,572 $28,297 $283,063
 $251,723
 $27,372
 $26,457

Accumulated benefit obligation

 224,127 197,827 29,073 26,746 275,162
 245,574
 26,495
 24,663

Fair value of plan assets

 192,429 167,476 — — 238,672
 202,448
 —
 —


Amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year

year:


 Pension
Benefits		 Supplemental
Retirement
Benefits		 
Pension
Benefits
 
Supplemental
Retirement
Benefits

Amortization of net actuarial (gain)/loss

  907 210 $2,764
 $249

Amortization of net prior service cost/(credit)

  (597) 498 (622) 660

Table of Contents








77

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Employee Benefits (Continued)


Components of net periodic benefit cost

cost:


 Pension Benefits Supplemental
Retirement Benefits		 Pension Benefits 
Supplemental
Retirement Benefits

 2010 2009 2008 2010 2009 2008 2012 2011 2010 2012 2011 2010

Service cost

 $2,617 $2,283 $4,037 $596 $623 $908 $3,729
 $3,056
 $2,617
 $640
 $636
 $597

Interest cost

 11,214 9,771 12,014 1,342 1,485 1,718 11,289
 12,107
 11,214
 892
 1,201
 1,341

Expected return on plan assets

 (12,185) (9,783) (13,499) — — — (13,799) (13,677) (12,185) —
 —
 —

Amortization of prior service cost (credit)

 (598) (618) (684) 498 498 498 2,461
 (617) (598) 260
 498
 498

Amortization of net loss (gain)

 749 1,271 (31) 155 125 413 (609) 978
 749
 660
 210
 155
             

Net periodic benefit cost

 1,797 2,924 1,837 2,591 2,731 3,537 3,071
 1,847
 1,797
 2,452
 2,545
 2,591

Settlement

 27 43 — — — — —
 23
 27
 —
 (487) —

Curtailment gain

 — (674) (3,345) — — — 
             

Net pension cost

 $1,824 $2,293 $(1,508)$2,591 $2,731 $3,537 $3,071
 $1,870
 $1,824
 $2,452
 $2,058
 $2,591
             


Rollforward of accumulated other comprehensive income

income:


 Pension Benefits Supplemental
Retirement Benefits		 Pension Benefits 
Supplemental
Retirement Benefits

 2010 2009 2010 2009 2012 2011 2012 2011

Beginning balance

 $12,012 $5,185 $5,020 $9,840 $45,267
 $22,311
 $5,171
 $5,467

Amortization of prior service cost

  598 618 (498) (498)(2,461) 617
 (660) (497)

Amortization of net gain (loss)

  (749) (1,271) (155) (125)609
 (978) (260) (210)

Asset loss/(gain)

  (8,327) (15,834) — — 8,030
 10,016
 125
 —

Liability loss/(gain)

  19,011 23,425 1,100 (4,197)—
 13,319
 —
 (76)

Recognized prior service (cost) credit due to curtailment

  — 674 — — —
 53
 —
 —

Recognized (loss)/gain due to settlement

  (27) (43) — — —
 (23) —
 487

Currency impact

  (207) (742) — — 334
 (48) —
 —
         

Ending balance

 $22,311 $12,012 $5,467 $5,020 $51,779
 $45,267
 $4,376
 $5,171
         


Assumptions

Weighted-average assumptions used to determine benefit obligations

obligations:


 Pension
Benefits		 Supplemental
Retirement Benefits		 
Pension
Benefits
 
Supplemental
Retirement Benefits

 2010 2009 2010 2009 2012 2011 2012 2011

Discount rate

 5.20% 5.41% 4.34% 5.22%4.13% 4.47% 2.63% 3.42%

Rate of compensation increase

 2.50% 3.19% 2.50% 2.50%3.04% 3.12% 2.50% 2.50%

Table of Contents





78

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Employee Benefits (Continued)


Weighted-average assumptions used to determine net periodic benefit cost

cost:


 Pension Benefits Supplemental
Retirement Benefits		 Pension Benefits 
Supplemental
Retirement Benefits

 2010 2009 2008 2010 2009 2008 2012 2011 2010 2012 2011 2010

Discount rate

 5.63% 5.74% 5.69% 5.22% 6.15% 5.88%4.47% 5.20% 5.63% 3.42% 4.34% 5.22%

Expected long-term return on plan assets

 7.11% 6.84% 7.10% — — — 6.55% 6.79% 7.11% —
 —
 —

Rate of compensation increase

 2.50% 3.24% 4.07% 2.50% 4.75% 4.75%3.12% 3.48% 2.50% 2.50% 2.50% 2.50%

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

assets:

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


 Target
Allocation		 Pension
Benefits		 
Target
Allocation
 
Pension
Benefits

 2011 2010 2009 2013 2012 2011

Equity securities

 67% 65% 64%67% 60% 59%

Fixed income

 31% 31% 32%31% 36% 37%

Other

 2% 4% 4%2% 4% 4%
       

Total

 100% 100% 100%100% 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 2000, BC Aggregate Index and MSCI EAFE Index. Our Investment Committee meets on a quarterly basis to review plan assets.

Plan assets did not include any of our common stock at December 25, 201029, 2012 and December 26, 2009.

31, 2011, respectively.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Employee Benefits (Continued)

The fair value of our pension assets by asset category are as follows.


 Fair Value Measurements at
December 25, 2010 using		 Fair Value Measurements at December 29, 2012
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		 
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

 $1,054 $— $— $1,054 $1,336
 $—
 $—
 $1,336

Common stock(a)

  4,334 — — 4,334 100,864
 4,261
 —
 105,125

Debt securities(a)

  42,352 — — 42,352 63,283
 3,169
 —
 66,452

Mutual funds(b)

  128,535 14,487 — 143,022 55,453
 8,551
 —
 64,004

Life insurance policies(c)

    270 — 270 —
 43
 —
 43

Other

  194(e)   1,203(d) 1,397 
         
Other (d)224
 —
 1,488
 1,712

Total

 $176,469 $14,757 $1,203 $192,429 $221,160
 $16,024
 $1,488
 $238,672
         

(a)This category comprises investments valued at the closing price reported on the active market on which the individual securities are traded.

79
(a)
This category comprises investments valued at the closing price reported on the active market on which the individual securities are traded.

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

(b)
This category comprises mutual funds valued at the net asset value of shares held at year end.

(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.
(b)This category comprises mutual funds valued at the net asset value of shares held at year end.
(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, December 26, 2009

 $1,166 

Actual return on plan assets:

    
 

Relating to assets still held at December 25, 2010

  170 
 

Relating to assets sold during the period

    
 

Purchases, sales and settlements

  (133)
 

Transfers in and/or out of Level 3

  — 
    

Balance, December 25, 2010

 $1,203 
    
 
Fair Value Measurements
Using Significant
Unobservable
Inputs
(Level 3)
Balance at December 31, 2011$1,419
Actual return on plan assets: 
Relating to assets still held at December 29, 201251
Relating to assets sold during the period 
Purchases, sales and settlements(78)
Transfers in and/or out of Level 396
Balance at December 29, 2012$1,488


Contributions:
Contributions

During 2010,2012, we contributed $7,297$13,966 to our pension plans. We expect to contribute $9,054$13,868 to our pension plan in 2011.

2013.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

8. Employee Benefits (Continued)

Estimated future benefit payments

payments:


 Pension
Benefits		 Supplemental
Retirement Benefits		 

2011

 $5,524 $6,036 

2012

  5,970 731 
Pension
Benefits
 
Supplemental
Retirement Benefits

2013

  6,446 11,109 $7,180
 $721

2014

  7,148 757 6,773
 800

2015

  7,167 745 7,559
 745

2016-2020

  53,890 9,156 
20168,591
 12,379
20178,657
 721
2018-2022$54,207
 $8,811



9. Stock Plans and Stock Based Compensation

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 2010, 20092012, 2011 and 2008,2010, 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 (the "2007 Plan")(2007 Plan). The 2007 Plan was subsequently amended in 2009 and 2011, and in each case the amendments were approved by our

80

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

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 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 25, 2010,29, 2012, approximately 3.23.0 million shares were authorized for future grants under our share-based compensation plans. We settle employee share-based compensation awards with newly issued shares.


Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

9. Stock Plans and Stock Based Compensation (Continued)

The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards' vesting period on a straight-line basis. The following table presents stock-based compensation included in our consolidated statement of income:
 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Stock-based compensation expense in:

Stock-based compensation expense in:

      

Cost of sales

 $7,186 $7,006 $6,394 

Selling and administration

 18,340 16,646 17,818 
       

Income from continuing operations, before income taxes

 25,526 23,652 24,212 

Provision for income taxes

 (9,179) (8,388) (8,569)
       
Cost of sales$5,470
 $5,983
 $7,186
Selling and administration16,385
 15,723
 18,340
Income from continuing operations, before income taxes21,855
 21,706
 25,526
Provision for income taxes(7,793) (7,784) (9,179)

Net income attributable to common shareowners

Net income attributable to common shareowners

 $16,347 $15,264 $15,643 $14,062
 $13,922
 $16,347
       

We did not capitalize anycapitalized no stock-based compensation related costs for the years ended 2010, 20092012, 2011 and 2008.

2010.

The fair value of stock-based awards granted during 2010, 20092012, 2011 and 20082010 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:


 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Expected life (in years)

 4.5 4.5 4.5 4.5
 4.2
 4.5

Expected volatility

 34% 25% 24%35% 33% 34%

Risk-free interest rate

 2.35% 1.87% 2.8%0.84% 2.21% 2.35%

Expected dividend yield

 0.0% 0.0% 0.0%0% 0% 0%

Weighted—average grant date fair value

 $11.96 $6.15 $14.85 $10.94
 $11.32
 $11.96

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

9. Stock Plans and Stock Based Compensation (Continued)

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 29, 2007

 4,467,803 $40.50     
Shares Weighted Average
Exercise Price		 Weighted Average
Remaining
Contractual Life
(in years)		 Aggregate
Intrinsic
Value
Options outstanding as of December 31, 20116,081,263
 $38.25
    

Options granted

 820,200 $58.59     590,675
 $36.09
    

Options exercised

 (706,755)$38.98     (650,255) $28.34
    

Options canceled

 (100,128)$46.14     (161,280) $39.00
    
     

Options outstanding as of December 27, 2008

 4,481,120 $43.93     

Options granted

 2,252,704 $25.34     

Options exercised

 (48,411)$16.46     

Options canceled

 (468,470)$40.47     
     

Options outstanding as of December 26, 2009

 6,216,943 $37.67     

Options granted

 1,367,780 $37.32     

Options exercised

 (188,585)$24.34     

Options canceled

 (801,825)$38.61     
     

Options outstanding as of December 25 2010

 6,594,313 $37.87     
     

Options exercisable as of December 27, 2008

 2,729,255 $39.65     

Options exercisable as of December 26, 2009

 3,096,990 $41.69     

Options exercisable as of December 25, 2010

 3,732,025 $40.61 3.10 years $7,966 
Options outstanding as of December 29, 20125,860,403
 $39.11
    
Options exercisable as of December 29, 20123,871,131
 $41.27
 2.25 years $7,600


81

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

As of December 25, 2010,29, 2012, the unrecognized compensation cost related to 2,661,9281,989,722 unvested stock options expected to vest was $18,331.$12,924. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 3026 months.

The total intrinsic value of options exercised during the fiscal years ending December 29, 2012, December 31, 2011 and December 25, 2010 December 26, 2009 was $5,135, $7,950 and December 27, 2008 was $1,767, $909 and $17,197,$1,767, 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 options during 20102012 was $4,492.$18,359. The actual tax benefit realized for the tax deductions from option exercises totaled $534$1,682 for the year ended December 25, 2010.

29, 2012.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

9. Stock Plans and Stock Based Compensation (Continued)

The following table summarizes significant ranges of outstanding and exercisable options as of December 25, 2010:

29, 2012:


 Options Outstanding Options Exercisable 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		 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

 1,657 1.13 $0.40 $58 1,657 1.13 $0.40 $58 

$10.01–$20.00

 35,704 1.52 13.36 798 35,704 1.52 13.36 798 

$20.01–$30.00

 1,695,420 5.09 25.18 17,835 464,963 4.88 25.70 4,650 844,220
 3.12
 25.30
 9,775,196
 519,445
 3.08
 25.59
 5,864,633

$30.01–$40.00

 2,495,311 4.16 35.80 3,261 1,274,081 2.24 34.70 2,460 3,097,578
 3.97
 36.62
 2,334,531
 1,436,354
 2.53
 36.35
 1,734,878

$40.01–$50.00

 1,692,024 3.14 46.00 — 1,547,116 3.12 45.96 — 1,383,030
 1.71
 45.64
 —
 1,379,757
 1.70
 45.66
 —

$50.01–$60.00

 610,607 3.89 57.97 — 348,209 3.68 57.56 — 487,255
 2.10
 57.99
 —
 487,255
 2.10
 57.99
 —

$60.01–$70.00

 63,590 4.29 62.48 — 60,295 4.29 62.38 — 48,320
 2.30
 62.56
 —
 48,320
 2.30
 62.56
 —
             

Totals

 6,594,313 4.10 $37.87 $21,952 3,732,025 3.10 $40.61 $7,966 5,860,403
 3.14
 $39.11
 $12,109,727
 3,871,131
 2.25
 $41.27
 $7,599,511
             

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on a closing stock price of $35.70$36.88 as of December 25, 2010,29, 2012, 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 25, 201029, 2012 was 1,272,486.

1,854,088.

The following table summarizes the non-vested stock option activity in the equity incentive plans for the fiscal year ending December 25, 2010:

29, 2012:


 Stock Options Weighted Average
Exercise Price		 

Non-vested at December 26, 2009

 3,119,953 $33.68 
Non-vested Stock Options Weighted Average
Exercise Price
December 31, 20112,487,889
 $34.89

Granted

 1,367,780 37.32 590,675
 36.09

Forfeited

 (568,725) 35.11 (47,846) 35.08

Vested

 (1,056,720) 35.97 (1,040,996) 35.53
     

Non-vested at December 25, 2010

 2,862,288 $34.30 
     
December 29, 20121,989,722
 $34.91

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







82

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)




9. Stock Plans and Stock Based Compensation (Continued)

The following table summarizes the restricted stock activity for 2010:

2012:

 
 Restricted Stock Weighted
Average
Grant Date
Fair Value		 

Outstanding December 26, 2009

  896,393 $36.45 
 

Granted

  382,800  37.25 
 

Vested

  (340,242) 38.42 
 

Canceled

  (161,211) 36.49 
       

Outstanding December 25, 2010

  777,740 $35.97 
       
 Restricted Stock Weighted
Average
Grant Date
Fair Value
Outstanding as of December 31, 2011703,011
 $35.70
Granted541,820
 36.10
Vested(288,549) 35.99
Canceled(21,777) 43.16
Outstanding as of December 29, 2012934,505
 $35.83

As of December 25, 2010,29, 2012, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $17,536.$21,970. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 28 months.31 months. The total fair value of restricted stock grants that vested during the fiscal years ending December 29, 2012, December 31, 2011 and December 25, 2010 December 26, 2009 was $10,385, $10,989 and December 27, 2008 was $13,072, $13,707 and $16,049,$13,072, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $4,538$3,720 for the year ended December 25, 2010.

29, 2012.

Performance Based Stock Award Program

We made performance-based awards to our executives during 2007, 2008 and 2009. Payout of these awards was contingent upon achievement of individualized goals. Compensation expense associated with these awards of $496, $412$(28), $188 and $2,360$496 has been recorded during 2010, 20092012, 2011 and 2008,2010, respectively.


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 $22,635, $19,952$18,246, $18,778 and $20,589$22,635 in 2010, 20092012, 2011 and 2008,2010, 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 25, 2010:

29, 2012:

2011

 $18,253 

2012

  15,404 

2013

  12,784 $15,440

2014

  9,624 12,749

2015

  8,660 8,953
20167,196
20175,889

Thereafter

  22,822 14,257

We maintain various insurances whichinsurance policies that maintain large deductibles up to $750,$750, some with or without stop-loss limits, depending on market availability.

Deductibles for certain property insurance policies in the event of a catastrophic event for certain locations based on a percentage of the insured assets, which may exceed $750.

Table of Contents


83

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

10. Commitments and Contingencies (Continued)


Litigation

Various lawsuits, claims and proceedings of a nature considered normal to our 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.

We expense as incurred legal costs expected to be incurred in connection with loss contingencies.


11. Termination Fee—TERMINATION FEE—WuXi Pharma Tech

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 $30,000 $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

BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

We report two business segments, called Research Models and Services (RMS) and Preclinical Services (PCS). 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.

Our RMS segment includes sales of research models, genetically engineered models and services (GEMS), consulting and staffing services,insourcing solutions (IS), research animal diagnostics,diagnostic services (RADS), discovery research services (DRS), Endotoxin and Microbial Detection (EMD) products and services ( formerly in vitrovitro), and avian vaccine products and services. Our PCS segment includes services required to take a drug through the development process, including toxicology, pathology services, bioanalysis, pharmacokinetics and drug metabolism, discovery supportwhich includes DRS, safety assessment and biopharmaceutical services.

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 and other long-lived assets.
 2010 2009 2008 2012 2011 2010

Research Models and Services

Research Models and Services

      

Net sales

 $666,986 $659,929 $659,941 

Gross margin

 278,391 278,670 284,639 

Operating income

 184,464 193,349 198,696 

Total assets

 711,824 717,975 675,571 

Long-lived assets

 277,193 284,809 276,370 

Depreciation and amortization

 37,657 33,501 28,239 

Capital expenditures

 27,694 31,859 61,878 
Net sales$695,083
 $705,419
 $666,986
Gross margin289,750
 297,327
 278,391
Operating income202,362
 206,319
 184,464
Total assets698,134
 687,346
 711,824
Long-lived assets272,559
 282,388
 277,193
Depreciation and amortization37,541
 37,240
 37,657
Capital expenditures36,856
 34,257
 27,694

Preclinical Services

Preclinical Services

      

Net sales

 $466,430 $511,713 $635,358 

Gross margin

 106,369 144,322 214,182 

Operating income

 (379,726) 39,814 (598,407)

Total assets

 1,016,864 1,469,488 1,439,720 

Long-lived assets

 537,786 632,115 607,103 

Depreciation and amortization

 55,992 56,461 58,612 

Capital expenditures

 15,166 47,994 136,764 
Net sales$434,447
 $437,228
 $466,430
Gross margin102,331
 104,915
 106,369
Operating income34,628
 24,925
 (379,726)
Total assets888,210
 869,881
 1,016,864
Long-lived assets493,120
 513,302
 537,786
Depreciation and amortization43,734
 47,990
 55,992
Capital expenditures10,678
 14,886
 15,166

Table of Contents




84

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

12. Business Segment and Geographic Information (Continued)




A reconciliation of segment operating income to consolidated operating income is as follows:


 Fiscal Year Ended Fiscal Year Ended

 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Total segment operating income

 $(195,262)$233,163 $(399,711)$236,990
 $231,244
 $(195,262)

Unallocated corporate overhead

  (103,250) (63,550) (52,128)(71,225) (56,938) (73,250)
       
Termination fee (Note 11)—
 —
 (30,000)

Consolidated operating income

 $(298,512)$169,613 $(451,839)$165,765
 $174,306
 $(298,512)
       

Net sales for each significant service area are as follows:
 Fiscal Year Ended Fiscal Year Ended
 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Research models

Research models

 $355,218 $362,669 $370,379 $381,790
 $401,660
 $386,872

Research model services

Research model services

  208,363 194,663 188,198 219,671
 220,698
 208,363

Other products

  103,405 102,597 101,364 
       

Total research models

  666,986 659,929 659,941 

Total preclinical services

  466,430 511,713 635,358 
       
EMD93,622
 83,061
 71,751
Total research models695,083
 705,419
 666,986
Total preclinical services434,447
 437,228
 466,430

Total sales

Total sales

 $1,133,416 $1,171,642 $1,295,299 $1,129,530
 $1,142,647
 $1,133,416
       

A summary of unallocated corporate overhead consists of the following:

following:


 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Stock-based compensation expense

 $11,893 $10,757 $11,968 $11,724
 $11,159
 $11,893

U.S. retirement plans

  3,921 5,336 (161)4,831
 3,802
 3,921

Audit, tax and related expense

  2,805 2,609 2,727 3,019
 3,069
 2,805

Salary and bonus

  19,617 17,239 18,943 19,997
 18,486
 19,617

Global IT

  13,678 9,309 8,282 12,622
 11,785
 12,793

Employee health LDP and fringe benefit expense

  (2,231) 1,622 (2,774)

Consulting and outside services

  7,686 3,329 1,822 
Employee health, LDP and fringe benefit expense(4,569) (2,952) (2,231)
Consulting and professional services4,434
 8,432
 7,686

Depreciation expense

  5,796 648 383 6,260
 6,312
 5,796

Severance expense

  4,153 2,625 — 53
 (65) 4,153

Costs associated with evaluation of acquisitions

  6,669 3,445 1,313 

Termination fee

  30,000 — — 
Transaction (acquisition/disposition) costs3,772
 1,329
 6,669

Contingent consideration write-down

  (4,335) — — —
 (5,598) (4,335)

Other general unallocated corporate expenses

  3,598 6,631 9,625 9,082
 1,179
 4,483
       

 $103,250 $63,550 $52,128 
       
Total unallocated corporate overhead costs$71,225
 $56,938
 $73,250

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

12. Business Segment and Geographic Information (Continued)

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.




85

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


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 and other long-lived assets.

 
 U.S. Europe Canada Japan Other
Non-U.S.		 Consolidated 

2010

                   
 

Sales to unaffiliated customers

 $535,790 $327,492 $181,028 $73,852 $15,254 $1,133,416 
 

Long-lived assets

  507,089  124,428  136,846  44,818  1,798  814,979 

2009

                   
 

Sales to unaffiliated customers

 $575,574 $327,244 $188,206 $70,848 $9,770 $1,171,642 
 

Long-lived assets

  577,808  135,316  141,687  42,084  20,029  916,924 

2008

                   
 

Sales to unaffiliated customers

 $658,847 $352,937 $204,252 $66,749 $12,514 $1,295,299 
 

Long-lived assets

  567,415  127,589  123,492  45,035  19,942  883,473 
 U.S Europe Canada Japan Other Non-U.S. Consolidated
2012           
Sales to unaffiliated clients$534,817
 $341,550
 $160,004
 $77,707
 $15,452
 $1,129,530
Long lived assets476,927
 122,351
 124,302
 39,642
 2,457
 765,679
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



13. Discontinued OperationsDISCONTINUED OPERATIONS
On

        During the fourth quarter of 2010,March 28, 2011, we initiated actions to divestdisposed of our Phase I clinical services business. We have engaged an investment banker and were actively trying to sellbusiness for a nominal amount. As part of the Phase I clinical services business at year end. On December 25, 2010, taking into accountdisposition we remained the planned divestitureguarantor of the Phase I clinical services business,facility lease. During the second quarter of 2011, we performedrecognized the value of the guarantee net of the buyer's related indemnity as a liability of $2,994, which we are amortizing ratably over the remaining term of the lease. The facility lease runs through January 2021 with remaining lease payments totaling $13,272 as of December 29, 2012.

During the period ended December 29, 2012, we concluded that the decreasing financial viability of the lessee increased the probability that we will be required to make future lease payments as guarantor. As a result, we recorded an impairment testadditional contingent loss of $7,158 for the guarantee, reflecting our estimate of the total future lease payments less sublease income. Under the terms of the lease, if we are required to honor the guarantee due to default by the lessee, we may obtain control of the leased property. The total carrying amount of the liability for our obligation under the guarantee is $9,679 as of December 29, 2012 and is reflected on the long-lived assetsconsolidated balance sheet a liability of the Phase I clinical services business. Based on this analysis, the Company 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 $6,402 during 2010.

        During 2006, we also made a decision to sell our Phase II-IV Clinical business and close our Interventional and Surgical Services (ISS) business, which was formerly included in the Preclinical Services segment.

        For the year end December 25, 2010, the discontinued businesses recorded a loss from operations of $13,465 which included a $6,402 impairment from the sale of the Phase I clinical services business.

operations.

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

13. Discontinued Operations (Continued)

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 Fiscal Year Ended

 December 25,
2010		 December 26,
2009		 December 27,
2008		 December 29, 2012 December 31, 2011 December 25, 2010

Net sales

 $17,508 $30,907 $48,199 $—
 $2,112
 $17,508

Asset impairment

  6,402 — — —
 —
 6,402

Income (loss) from operations of discontinued businesses, before income taxes

  (13,465) 3,205 2,125 (6,986) (8,964) (13,465)

Provision (benefit) for income taxes

  (5,453) 1,806 (1,158)(2,734) (3,419) (5,453)
       

Income (loss) from operations of discontinued businesses, net of taxes

 $(8,012)$1,399 $3,283 $(4,252) $(5,545) $(8,012)
       




86

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

Assets and liabilities of discontinued operations at December 25, 20102012 and December 26, 20092011 consisted of the following:
 December 25,
2010		 December 26,
2009		 December 29,
2012		 December 31,
2011

Current assets

Current assets

 $3,862 $8,319 $495
 $107

Long-term assets

Long-term assets

  822 8,310 3,328
 986
     

Total assets

 $4,684 $16,629 
     
Total assets$3,823
 $1,093

Current liabilities

Current liabilities

 $3,284 $2,763 $1,802
 $1,165

Long-term liabilities

Long-term liabilities

  — 1,011 8,795
 2,522
     

Total liabilities

 $3,284 $3,774 
     
Total liabilities$10,597
 $3,687

Current assets included accounts receivable and prepaid income taxes.include a current deferred tax asset. Non-current assets includedinclude a long-term deferred tax asset. Current and long-term liabilities consistedconsist of accounts payable, deferred income and accrued expenses.

a lease guarantee.


87

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

SUPPLEMENTARY DATA


Quarterly Information (Unaudited)
 First
Quarter		 Second
Quarter		 Third
Quarter		 Fourth
Quarter		 

Fiscal Year Ended December 25, 2010

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal Year Ended December 29, 2012       
Total net sales$285,981
 $284,723
 $278,686
 $280,140
Gross profit104,212
 103,585
 93,259
 94,573
Operating income43,740
 49,274
 37,682
 35,069
Income from continuing operations, net of tax26,470
 30,547
 22,384
 22,717
(Loss) income from discontinued businesses, net of tax77
 42
 (182) (4,189)
Net income attributable to common shareowners26,439
 30,468
 21,972
 $18,416
Earnings (loss) per common share       
Basic       
Continuing operations attributable to common shareowners$0.55
 $0.63
 $0.47
 $0.48
Discontinued operations attributable to common shareowners—
 —
 —
 (0.09)
Net income attributable to common shareowners$0.55
 $0.63
 $0.46
 $0.4
Diluted       
Continuing operations attributable to common shareowners$0.54
 $0.63
 $0.46
 $0.48
Discontinued operations attributable to common shareowners—
 —
 —
 (0.09)
Net income attributable to common shareowners$0.54
 $0.63
 $0.46
 $0.39
Fiscal Year Ended December 31, 2011       

Total net sales

Total net sales

 $292,287 $288,592 $270,885 $281,652 $285,843
 $288,263
 $277,579
 $290,962

Gross profit

Gross profit

 100,191 100,764 90,500 93,305 102,638
 106,320
 92,716
 100,568

Operating income (loss)

Operating income (loss)

 30,194 29,985 6,468 (365,159)42,251
 53,314
 37,094
 41,647

Income from continuing operations, net of tax

Income from continuing operations, net of tax

 17,338 15,234 (24,248)��(342,429)35,377
 34,156
 18,911
 27,078

Income (loss) from discontinued businesses, net of tax

Income (loss) from discontinued businesses, net of tax

 (338) (1,139) (986) (5,549)(3,945) (1,732) (18) 150

Net income attributable to common shareowners

Net income attributable to common shareowners

 17,382 14,454 (24,941)$(343,564)$31,335
 $32,318
 $18,798
 $27,115

Earnings (loss) per common share

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) (0.10)
         
 

Net income attributable to common shareowners

 $0.27 $0.22 $(0.40)$(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) (0.10)
         
 

Net income attributable to common shareowners

 $0.26 $0.22 $(0.40)$(6.04)

Fiscal Year Ended December 26, 2009

 

Total net sales

 $291,451 $298,892 $291,344 $289,955 

Gross profit

 105,154 112,353 105,659 99,826 

Operating income (loss)

 40,300 50,249 45,459 33,605 

Income from continuing operations, net of tax

 25,403 33,352 34,132 18,316 

Income (loss) from discontinued businesses, net of tax

 (534) 303 2,859 (1,229)
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

Net income attributable to common shareowners

 $25,405 $34,154 $37,313 $17,569 $0.58
 $0.63
 $0.38
 $0.56

Earnings (loss) per common share

 

Basic

 
 

Continuing operations attributable to common shareowners

 $0.39 $0.52 $0.53 $0.29 
 

Discontinued operations attributable to common shareowners

 (0.01) — 0.04 (0.02)
         
 

Net income attributable to common shareowners

 $0.39 $0.53 $0.57 $0.27 

Diluted

 
 

Continuing operations attributable to common shareowners

 $0.39 $0.52 $0.53 $0.29 
 

Discontinued operations attributable to common shareowners

 (0.01) — 0.04 (0.02)
         
 

Net income attributable to common shareowners

 $0.38 $0.52 $0.57 $0.27 
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





88

Table of Contents


CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

SUPPLEMENTARY DATA


Quarterly Segment Information (Unaudited)


 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 margin

 74,279 71,346 64,383 68,383 

Operating income

 49,984 47,258 42,817 44,405 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter

Depreciation and amortization

 9,721 8,811 9,422 9,703 

Capital expenditures

 4,960 6,245 4,622 11,867 
Fiscal Year Ended December 29, 2012       
Research Models and Services       
Sales$183,152
 $173,611
 $166,484
 $171,836
Gross margin82,196
 76,266
 65,902
 65,386
Operating income59,467
 55,542
 43,389
 43,964
Depreciation and amortization8,942
 9,085
 9,670
 9,844
Capital expenditures12,900
 7,569
 7,423
 8,964

Preclinical Services

Preclinical Services

        

Sales

 $120,082 $121,452 $111,626 $113,270 

Gross margin

 25,912 29,418 26,117 24,922 

Operating income

 429 6,509 5,178 (391,842)

Depreciation and amortization

 13,859 14,114 14,063 13,956 

Capital expenditures

 4,333 2,187 4,505 4,141 
Sales$102,829
 $111,112
 $112,202
 $108,304
Gross margin22,016
 27,319
 27,358
 25,638
Operating income4,174
 10,809
 10,975
 8,670
Depreciation and amortization11,060
 10,980
 10,880
 10,814
Capital expenditures1,211
 1,872
 2,819
 4,776

Unallocated corporate overhead

Unallocated corporate overhead

 $(20,219)$(23,782)$(41,527)$(17,722)$(19,901) $(17,077) $(16,682) $(17,565)

Total

Total

        
Sales$285,981
 $284,723
 $278,686
 $280,140
Gross margin104,212
 103,585
 93,260
 91,024
Operating income43,740
 49,274
 37,682
 35,069
Depreciation and amortization20,002
 20,065
 20,550
 20,658
Capital expenditures14,111
 9,441
 10,242
 13,740

Sales

 $292,287 $288,592 $270,885 $281,652 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter

Gross margin

 101,191 100,764 90,500 93,305 

Operating income

 30,194 29,985 6,468 (365,159)

Depreciation and amortization

 23,580 22,925 23,485 23,659 

Capital expenditures

 9,293 8,432 9,127 16,008 



 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 

Fiscal Year Ended December 26, 2009

 
Fiscal Year Ended December 31, 2011       

Research Models and Services

Research Models and Services

        

Sales

 $161,490 $165,682 $163,313 $169,444 

Gross margin

 68,313 71,206 68,623 70,528 

Operating income

 47,444 50,894 46,131 48,880 

Depreciation and amortization

 7,673 8,049 9,346 8,433 

Capital expenditures

 7,624 6,307 8,933 8,995 
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

Preclinical Services

        

Sales

 $129,961 $133,210 $128,031 $120,511 

Gross margin

 36,841 41,147 37,036 29,298 

Operating income

 10,953 15,923 11,056 1,882 

Depreciation and amortization

 13,271 13,917 14,643 14,630 

Capital expenditures

 16,877 14,112 9,545 7,460 
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

Unallocated corporate overhead

 $(18,097)$(16,568)$(11,728)$(17,157)$(18,797) $(10,252) $(15,103) $(12,786)

Total

Total

        

Sales

 $291,451 $298,892 $291,344 $289,955 

Gross margin

 105,154 112,353 105,659 99,826 

Operating income

 40,300 50,249 45,459 33,605 

Depreciation and amortization

 20,944 21,966 23,989 23,063 

Capital expenditures

 24,501 20,419 18,478 16,455 
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

89

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, as amended (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 not effective, at a reasonable assurance level, as of December 25, 201029, 2012 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 issuerthe Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer'sCompany'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. Based upon their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures were not effective because of the material weakness below relating to our internal control over financial reporting.
A material weakness in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.
As of December 29, 2012 management determined that the Company did not maintain effective controls over information technology business processes and financial reporting. Specifically, the Company identified deficiencies with respect to design and operation of controls over segregation of duties, restricted access, changes to vendor and customer master data, transaction level and financial close controls which aggregated to a material weakness in internal control over financial reporting.
We have determined that this deficiency constitutes a "material weakness" in our internal control over financial reporting.
Based on the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe the consolidated financial statement included in this report as of and for the periods ended December 29, 2012 are fairly stated in all material respects.
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 controlscontrol 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 25, 201029, 2012 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.

Subsequent Remediation Efforts
The following remediation efforts, as outlined below, are designed to address the aforementioned material weakness identified by management and to strengthen our internal control over financial reporting.
In response to the identification of the material weakness, in the first quarter of 2013 management performed additional procedures designed to ensure the reliability of our financial reporting and based upon such performance we believe the consolidated financial statement included in this report as of and for the periods ended December 29, 2012 are fairly stated

90


in all material respects. Furthermore, in the first quarter of 2013 management (1) has established a cross functional team to review and address segregation of duties conflicts and restricted access within the information technology used in our core business and (2) will design new controls or improve existing controls related to vendor and customer master data changes, transaction level controls as well as financial close controls. In addition, we will evaluate staffing levels and responsibilities, and increase training to reinforce pre-established and new controls to improve our ability to detect potential misstatements in our internally prepared reports, analyses and financial records.

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 20112013 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 20112013 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

”

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 20112013 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.    Changes to Board Nomination Procedures

E.Changes to Board Nomination Procedures
Since December 2008, there have been no material changes to the procedures by which security holders may recommend nominees to the Company'sour Board of Directors.


Item 11.    Executive Compensation

The information required by this Item will be included in the 20112013 Proxy Statement under the sections captioned "2010“2012 Director Compensation," "Compensation” “Compensation Discussion and Analysis," "Executive” “Executive Compensation and Related Information," "Compensation”

91


“Compensation Committee Interlocks and Insider Participation"Participation” and "Report“Report of Compensation Committee"Committee” and is incorporated herein by reference thereto.


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 20112013 Proxy Statement under the sections captioned "Beneficial“Beneficial Ownership of Securities"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


Table of Contents


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 20112013 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 20112013 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)15(b) 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 Annual Report on Form 10-K in response to Item 15(c) of Form 10-K.


92

Table of Contents


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, 201127, 2013
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.

SignaturesTitleDate
By:/s/ JAMES C. FOSTERPresident, Chief Executive Officer and ChairmanFebruary 27, 2013
James C. Foster
By:/s/ THOMAS F. ACKERMANCorporate Executive Vice President andFebruary 27, 2013
Thomas F. AckermanChief Financial Officer and Principal Accounting Officer
By:/s/ ROBERT J. BERTOLINIDirectorFebruary 27, 2013
Robert J. Bertolini
By:/s/ STEPHEN D. CHUBBDirectorFebruary 27, 2013
Stephen D. Chubb
By:/s/ GEORGE E. MASSARODirectorFebruary 27, 2013
George E. Massaro
By:/s/ DEBORAH KOCHEVARDirectorFebruary 27, 2013
Deborah Kochevar
By:/s/ GEORGE M. MILNE, JR.DirectorFebruary 27, 2013
George M. Milne, Jr.
By:/s/ C. RICHARD REESEDirectorFebruary 27, 2013
C. Richard Reese
By:/s/ SAMUEL O. THIERDirectorFebruary 27, 2013
Samuel O. Thier
By:/s/ RICHARD F. WALLMANDirectorFebruary 27, 2013
Richard F. Wallman
By:/s/ WILLIAM H. WALTRIPDirectorFebruary 27, 2013
William H. Waltrip


93


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
4.4*Charles River Laboratories International, Inc. Form of Performance Share Unit Granted Under 2007 Incentive PlanX   
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
 10-KFebruary 27, 201210.11
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, 2011 10-KFebruary 27, 201210.13
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

94


Signatures
Title
Date

10.16*





By:/s/ JAMES C. FOSTER
James C. Foster		President, Chief Executive Officer and ChairmanFebruary 23, 2011

By:

/s/ THOMAS F. ACKERMAN
Thomas F. Ackerman

Corporate Executive Vice President and
Chief Financial Officer

February 23, 2011

By:

/s/ ROBERT J. BERTOLINI
Robert J. Bertolini

Director

February 23, 2011

By:

/s/ STEPHEN D. CHUBB
Stephen D. Chubb

Director

February 23, 2011

By:

/s/ GEORGE E. MASSARO
George E. Massaro

Director

February 23, 2011

By:

/s/ DEBORAH KOCHEVAR
Deborah Kochevar

Director

February 23, 2011

By:

/s/ GEORGE M. MILNE, JR.
George M. Milne, Jr.

Director

February 23, 2011

Table of Contents

Signatures
Title
Date







By:/s/ C. RICHARD REESE
C. Richard Reese		DirectorFebruary 23, 2011

By:

/s/ DOUGLAS E. ROGERS
Douglas E. Rogers

Director

February 23, 2011

By:

/s/ SAMUEL O. THIER
Samuel O. Thier

Director

February 23, 2011

By:

/s/ RICHARD F. WALLMAN
Richard F. Wallman

Director

February 23, 2011

By:

/s/ WILLIAM H. WALTRIP
William H. Waltrip

Director

February 23, 2011

Table of Contents


EXHIBIT INDEX

Exhibit
No.		Description
3.1Second Amended and Restated Certificate of Incorporation of Charles River Laboratories International, Inc. (Filed as Exhibit 3.1)(1)


3.2

Second Amended and Restated 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 par value per share. (Filed as Exhibit 4.1)(1)


4.2

Indenture dated June 12, 2006, among Charles River Laboratories International, Inc. and U.S. Bank National Association. (Filed as Exhibit 4.1)(3)


4.3

Form of 2.25% Convertible Senior Note due 2013. (Filed as Exhibit 4.2)(3)


10.1

Charles River Laboratories Corporate Officer Separation Plan (revised April 2010) (filed as Exhibit 10.1)(14)+


10.2

Charles River Laboratories 1999 Management Incentive Plan. (Filed as Exhibit 10.6)(5)+


10.3

Charles River Laboratories 2000 Incentive Plan, as amended May 2005. (Filed as Exhibit 10.7)(5)+


10.4

Charles River Laboratories 2000 Incentive Plan Inland Revenue Approved Rules for UK Employees. (Filed as Exhibit 99.1)(6)+


10.5

Form of Change in Control Agreement. (Filed as Exhibit 10.7)(7)+


10.6

Executive Incentive Compensation Plan, as amended. (Filed as Exhibit 10.8)(7)+


10.7

Form of Stock Option Award Agreement under 2000 Incentive Plan. (Filed as Exhibit 10.3)(8)+


10.8

Form of Restricted Stock Award Agreement under 2000 Incentive Plan. (Filed as Exhibit 10.4)(8)+


10.9

Inveresk Research Group, Inc. 2002 Stock Option and Incentive Compensation Plan, as amended and restated as of May 4, 2004. (Filed as Exhibit 99.1)(9)+


10.10

Charles River Laboratories Executive Life Insurance/Supplemental Retirement Income Plan. (Filed as Exhibit 10.23)(10)+


10.11

Deferred Compensation Plan. (Filed as Exhibit 10.13)(7)+


10.12

Third Amended and Restated Credit Agreement, dated as of August 26, 2010, among Charles River Laboratories International, Inc., the Subsidiary Borrower party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. as administrative agent, Bank of America, N.A., as syndication agent, and RBS Citizens National Association, Societe Generale and Wells Fargo Bank, National Association, as co-documentation agents (filed as Exhibit 10.1) (11)


10.13

Charles River Laboratories International, Inc. 2007 Incentive Plan. (Filed as Exhibit 10.1)(4)+


10.14

Form of Performance Award Agreement. (Filed as Exhibit 10.2)(12)+


10.15

Form of Stock Option Award Agreement Under 2007 Incentive Plan. (Filed as Exhibit 10.17)(13)+


10.16

Form of Restricted Stock Award Agreement Under 2007 Incentive Plan. (Filed as Exhibit 10.18)(13)+


10.17
*
Letter Agreements with Dr. Davide Molho dated May 29, 2009.+22, 2009

Table of Contents

Exhibit
No.		Description
 21.110-K*February 23, 201110.17
10.17*Amended and Restated Deferred Compensation Plan Document dated July 17, 201210-QAugust 7, 201210.1
10.18*Employment agreement between Dr. Jorg Geller and Charles River Germany GmbH & Co.X
21.1Subsidiaries of Charles River Laboratories International, Inc.X

23.1
23.1
*
Consent of PricewaterhouseCoopers LLP.LLP		X

31.1
31.1
*
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.Officer		X

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.INS
101.1XBRL Instance Document
*X
The following materials from the Company's Annual Report on Form 10-K for the year ended December 25, 2010 formatted in
101.SCHXBRL (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.Taxonomy Extension SchemaX
101.CALXBRL Taxonomy Extension Calculation LinkbaseX
101.DEFXBRL Taxonomy Extension Definition LinkbaseX
101.LABXBRL Taxonomy Extension Labels LinkbaseX
101.PREXBRL Taxonomy Extension Presentation LinkbaseX

*
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 Quarterly Report on Form 10-Q, filed on May 6, 2009.

(5)
Previously filed as an exhibit to the Company's Annual Report on Form 10-K, filed on March 14, 2006.

(6)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on November 5, 2001.

(7)
Previously filed as an exhibit to the Company's Annual Report on Form 10-K, filed on February 23, 2009.

(8)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on November 1, 2004.

(9)
Previously filed as an exhibit to the Company's Registration Statement on Form S-8, filed on October 20, 2004.

(10)
Previously filed as an exhibit to the Company's Annual Report on Form 10-K, filed March 9, 2005.

(11)
Previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on August 31, 2010.

(12)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on May 9, 2007.

(13)
Previously filed as an exhibit to the Company's Annual Report on Form 10-K, filed February 20, 2008.

(14)
Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed on August 3, 2010.


95