Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	52
Consolidated Statements of Income for fiscal years 2019, 2018 and 2017	55
Consolidated Statements of Comprehensive Income for fiscal years 2019, 2018 and 2017	56
Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018	57
Consolidated Statements of Cash Flows for fiscal years 2019, 2018 and 2017	58
Consolidated Statements of Changes in Equity for fiscal years 2019, 2018 and 2017	60
Notes to Consolidated Financial Statements	61

Report of Independent Registered Public Accounting Firm

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Charles River Laboratories International, Inc. and its subsidiaries (the “Company”) as of December 28, 2019 and December 29, 2018, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three fiscal years in the period ended December 28, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated 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 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Citoxlab and the acquisition of a DSA supplier from its assessment of internal control over financial reporting as of December 28, 2019 because they were acquired by the Company in purchase business combinations during 2019. We have also excluded Citoxlab and the acquisition of the DSA supplier from our audit of internal control over financial reporting. Citoxlab and the DSA supplier whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 5.0% and 4.7%, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended December 28, 2019.

Definition and Limitations of Internal Control over Financial Reporting

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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Acquisition of Citoxlab - Valuation of Acquired Customer Relationship Intangible Assets

As described in Notes 1 and 2 to the consolidated financial statements, the Company completed the acquisition of Citoxlab on April 29, 2019. The preliminary purchase price allocation included customer relationship intangible assets (also referred to as client relationships) of $134.6 million. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price, requires the use of significant judgment with regard to (i) the fair value; and (ii) the period and the method by which the intangible assets will be amortized. To determine the fair value of the acquired client relationships, management utilized the multiple period excess earnings model (a commonly accepted valuation technique), which includes the following key assumptions: projections of cash flows from the acquired entities, which include future revenue growth rates, operating income margins, and customer attrition rates, as well as discount rates based on an analysis of the weighted average cost of capital.

The principal considerations for our determination that performing procedures relating to the acquisition of Citoxlab - valuation of acquired customer relationship intangible assets is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of customer relationship intangible assets acquired due to the significant amount of judgment and estimation by management when developing the estimate, (ii) significant audit effort was required in evaluating the key assumptions relating to the estimate, including future revenue growth rates, operating income margins, customer attrition rates, and discount rates, and in evaluating audit evidence relating to the economic useful life over which cash flow projections were estimated in the valuation of the customer relationship intangible assets, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of acquired customer relationship intangible assets, including controls over the review of the valuation methodology, the key assumptions underlying the valuation, and the useful lives of the acquired customer relationship intangible assets. These procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of customer relationship intangible assets and evaluating the reasonableness of the estimated future revenue growth rates, operating margins and customer attrition rate assumptions by evaluating their consistency with data from external sources, past performance of the acquired business, and evidence obtained in other areas of the audit, and (iii) evaluating the reasonableness of the economic useful life over which cash flow projections are estimated. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s valuation model and certain significant assumptions, including customer attrition and the discount rates.

Discovery and Safety Assessment Revenue Recognized Over Time

As described in Notes 1 and 3 to the consolidated financial statements, the Company recognized revenue of $1,619.0 million in its Discovery and Safety Assessment (DSA) segment in 2019, of which $1,618.3 million was recognized over time as services are delivered to the customer based on the extent of progress towards completion of the performance obligation using either the cost-to-cost (input method) or right to invoice measures of progress (output method). The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Management uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer, which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.

The principal considerations for our determination that performing procedures relating to DSA revenue recognized over time is a critical audit matter are there was a high degree of auditor subjectivity and effort in performing procedures to evaluate the calculation of DSA revenue recognized over time, including the estimates of the variables within the calculation of the forecasted cost of service contracts, such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to DSA revenue recognized over time, including controls over the review of agreements, development of the forecasted costs, the review of budget versus actual costs incurred and the review of revenue recognition. These procedures also included, among others, (i) reading agreements and reports describing the results of services provided for a sample of service contracts selected for testing, (ii) evaluating and testing management’s process for determining the amount of revenue recognized for a sample of service contracts, which included evaluating the reasonableness of forecasted costs through a comparison of actual current year project costs to historical management cost estimates for completed service contracts, and (iii) testing actual costs incurred for a sample of in-process service contracts by examining evidence of costs incurred, including invoices, time cards, human resources documents, and the completeness and accuracy of overhead allocations.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 11, 2020

We have served as the Company’s auditor since 1999.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	Fiscal Year
	2019				2018				2017
Service revenue	$	2,029,371			$	1,687,941			$	1,298,298
Product revenue	591,855				578,155				559,303
Total revenue	2,621,226				2,266,096				1,857,601
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)	1,371,699				1,150,371				867,014
Cost of products sold (excluding amortization of intangible assets)	291,216				275,658				289,669
Selling, general and administrative	517,622				443,854				371,266
Amortization of intangible assets	89,538				64,830				41,370
Operating income	351,151				331,383				288,282
Other income (expense):
Interest income	1,522				812				690
Interest expense	(60,882		)		(63,772		)		(29,777		)
Other income, net	12,293				13,258				37,760
Income from continuing operations, before income taxes	304,084				281,681				296,955
Provision for income taxes	50,023				54,463				171,369
Income from continuing operations, net of income taxes	254,061				227,218				125,586
Income (loss) from discontinued operations, net of income taxes	—				1,506				(137		)
Net income	254,061				228,724				125,449
Less: Net income attributable to noncontrolling interests	2,042				2,351				2,094
Net income attributable to common shareholders	$	252,019			$	226,373			$	123,355
Earnings per common share
Basic:
Continuing operations attributable to common shareholders	$	5.17			$	4.69			$	2.60
Discontinued operations	$	—			$	0.03			$	—
Net income attributable to common shareholders	$	5.17			$	4.72			$	2.60
Diluted:
Continuing operations attributable to common shareholders	$	5.07			$	4.59			$	2.54
Discontinued operations	$	—			$	0.03			$	—
Net income attributable to common shareholders	$	5.07			$	4.62			$	2.54
Weighted-average number of common shares outstanding:
Basic	48,730				47,947				47,481
Diluted	49,693				49,018				48,564
See Notes to Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Fiscal Year
	2019				2018				2017
Net income	$	254,061			$	228,724			$	125,449
Other comprehensive income (loss):
Foreign currency translation adjustment and other	14,224				(28,305		)		78,084
Pension and other post-retirement benefit plans (Note 12):
Prior service cost and (losses) gains arising during the period	(25,165		)		(1,659		)		36,593
Amortization of net loss and prior service benefit included in net periodic cost for pension and other post-retirement benefit plans	1,772				2,477				3,344
Comprehensive income, before income taxes	244,892				201,237				243,470
Less: Income tax (benefit) expense related to items of other comprehensive income (Note 10)	(3,633		)		(1,892		)		7,954
Comprehensive income, net of income taxes	248,525				203,129				235,516
Less: Comprehensive income related to noncontrolling interests, net of income taxes	1,822				1,398				3,128
Comprehensive income attributable to common shareholders, net of income taxes	$	246,703			$	201,731			$	232,388
See Notes to Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	December 28, 2019				December 29, 2018
Assets
Current assets:
Cash and cash equivalents	$	238,014			$	195,442
Trade receivables, net	514,033				472,248
Inventories	160,660				127,892
Prepaid assets	52,588				53,447
Other current assets	56,030				48,807
Total current assets	1,021,325				897,836
Property, plant and equipment, net	1,044,128				932,877
Operating lease right-of-use assets, net	140,085				—
Goodwill	1,540,565				1,247,133
Client relationships, net	613,573				537,945
Other intangible assets, net	75,840				72,943
Deferred tax assets	44,659				23,386
Other assets	212,615				143,759
Total assets	$	4,692,790			$	3,855,879
Liabilities, Redeemable Noncontrolling Interests and Equity
Current liabilities:
Current portion of long-term debt and finance leases	$	38,545			$	31,416
Accounts payable	111,498				66,250
Accrued compensation	158,617				137,212
Deferred revenue	171,805				145,139
Accrued liabilities	139,118				106,925
Other current liabilities	90,598				71,280
Total current liabilities	710,181				558,222
Long-term debt, net and finance leases	1,849,666				1,636,598
Operating lease right-of-use liabilities	116,252				—
Deferred tax liabilities	167,283				143,635
Other long-term liabilities	182,933				179,121
Total liabilities	3,026,315				2,517,576
Commitments and contingencies (Notes 2, 9, 11, 12, 16 and 17)
Redeemable noncontrolling interests	28,647				18,525
Equity:
Preferred stock, $0.01 par value; 20,000 shares authorized; no shares issued and outstanding	—				—
Common stock, $0.01 par value; 120,000 shares authorized; 48,936 shares issued and 48,936 shares outstanding as of December 28, 2019 and 48,210 shares issued and 48,209 shares outstanding as of December 29, 2018	489				482
Additional paid-in capital	1,531,785				1,447,512
Retained earnings	280,329				42,096
Treasury stock, at cost, 0 and 1 share as of December 28, 2019 and December 29, 2018, respectively	—				(55		)
Accumulated other comprehensive loss	(178,019		)		(172,703		)
Total equity attributable to common shareholders	1,634,584				1,317,332
Noncontrolling interest	3,244				2,446
Total equity	1,637,828				1,319,778
Total liabilities, redeemable noncontrolling interests and equity	$	4,692,790			$	3,855,879
See Notes to Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Fiscal Year
	2019				2018				2017
Cash flows relating to operating activities
Net income	$	254,061			$	228,724			$	125,449
Less: Income (loss) from discontinued operations, net of income taxes	—				1,506				(137		)
Income from continuing operations, net of income taxes	254,061				227,218				125,586
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	198,095				161,779				131,159
Stock-based compensation	57,271				47,346				44,003
Deferred income taxes	(21,895		)		(9,702		)		28,254
Gain on venture capital investments	(20,706		)		(15,928		)		(22,867		)
Gain on divestiture	—				—				(10,577		)
Impairment charges	—				—				17,239
Other, net	7,931				15,613				(666		)
Changes in assets and liabilities:
Trade receivables, net	(8,323		)		(21,196		)		(48,279		)
Inventories	(21,399		)		(13,338		)		(17,838		)
Accounts payable	29,775				(12,732		)		34
Accrued compensation	3,394				31,616				3,666
Long-term payable on Transition Tax (Notes 5 and 11)	—				(8,974		)		61,038
Deferred revenue	(3,620		)		36,072				(8,466		)
Customer contract deposits	(10,898		)		28,115				—
Other assets and liabilities, net	17,250				(24,749		)		15,788
Net cash provided by operating activities	480,936				441,140				318,074
Cash flows relating to investing activities
Acquisition of businesses and assets, net of cash acquired	(515,701		)		(824,868		)		(25,012		)
Capital expenditures	(140,514		)		(140,054		)		(82,431		)
Purchases of investments and contributions to venture capital investments	(22,341		)		(25,125		)		(46,217		)
Proceeds from sale of investments	942				35,849				9,128
Proceeds from divestiture	—				—				72,462
Other, net	(3,888		)		(805		)		(516		)
Net cash used in investing activities	(681,502		)		(955,003		)		(72,586		)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit facility	3,358,461				2,755,028				236,856
Proceeds from exercises of stock options	34,546				37,657				38,870
Payments on long-term debt, revolving credit facility, and finance lease obligations	(3,124,588		)		(2,201,003		)		(372,435		)
Payments on debt financing costs	(6,593		)		(18,337		)		—
Purchase of treasury stock	(18,087		)		(13,846		)		(106,909		)
Other, net	(11,802		)		(1,440		)		(4,858		)
Net cash provided by (used in) financing activities	231,937				558,059				(208,476		)
Discontinued operations
Net cash used in operating activities from discontinued operations	—				(3,735		)		(1,809		)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	11,357				(9,474		)		11,234
Net change in cash, cash equivalents, and restricted cash	42,728				30,987				46,437
Cash, cash equivalents, and restricted cash, beginning of period	197,318				166,331				119,894
Cash, cash equivalents, and restricted cash, end of period	$	240,046			$	197,318			$	166,331
See Notes to Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

	Fiscal Year
	2019				2018				2017
Supplemental cash flow information:
Cash and cash equivalents	$	238,014			$	195,442			$	163,794
Restricted cash included in Other current assets	431				465				592
Restricted cash included in Other assets	1,601				1,411				1,945
Cash, cash equivalents, and restricted cash, end of period	$	240,046			$	197,318			$	166,331
Cash paid for income taxes	$	54,060			$	67,600			$	60,377
Cash paid for interest	$	67,813			$	47,540			$	27,417
Non-cash investing and financing activities:
Additions to property, plant and equipment, net	$	21,447			$	18,212			$	38,199
Assets acquired under finance leases	$	4,819			$	1,473			$	722
See Notes to Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

	Common stock							Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock							Total Equity Attributable to Common Shareholders				Noncontrolling Interest				Total Equity
Shares			Amount							Shares			Amount
December 31, 2016	86,301			$	863			$	2,477,371			$	165,303			$	(253,764	)		38,938			$	(1,553,005	)		$	836,768			$	2,357			$	839,125
Net income	—			—				—				123,355				—				—			—				123,355				1,179				124,534
Other comprehensive income	—			—				—				—				109,033				—			—				109,033				—				109,033
Dividends declared to noncontrolling interest	—			—				—				—				—				—			—				—				(1,209		)		(1,209		)
Issuance of stock under employee compensation plans	1,194			12				38,818				—				—				—			—				38,830				—				38,830
Acquisition of treasury shares	—			—				—				—				—				1,155			(106,909		)		(106,909		)		—				(106,909		)
Stock-based compensation	—			—				44,003				—				—				—			—				44,003				—				44,003
December 30, 2017	87,495			875				2,560,192				288,658				(144,731		)		40,093			(1,659,914		)		1,045,080				2,327				1,047,407
Net income	—			—				—				226,373				—				—			—				226,373				1,550				227,923
Other comprehensive loss	—			—				—				—				(24,642		)		—			—				(24,642		)		—				(24,642		)
Reclassification due to adoption of ASU 2018-02	—			—				—				3,330				(3,330		)		—			—				—				—				—
Adjustment due to adoption of ASU 2016-01	—			—				—				1,424				—				—			—				1,424				—				1,424
Dividends declared to noncontrolling interest	—			—				—				—				—				—			—				—				(1,431		)		(1,431		)
Adjustment of redeemable noncontrolling interest to redemption value	—			—				(2,069		)		—				—				—			—				(2,069		)		—				(2,069		)
Issuance of stock under employee compensation plans	936			9				37,657				—				—				—			—				37,666				—				37,666
Acquisition of treasury shares	—			—				—				—				—				129			(13,846		)		(13,846		)		—				(13,846		)
Retirement of treasury shares	(40,221	)		(402		)		(1,195,614		)		(477,689		)		—				(40,221	)		1,673,705				—				—				—
Stock-based compensation	—			—				47,346				—				—				—			—				47,346				—				47,346
December 29, 2018	48,210			482				1,447,512				42,096				(172,703		)		1			(55		)		1,317,332				2,446				1,319,778
Net income	—			—				—				252,019				—				—			—				252,019				2,084				254,103
Other comprehensive loss	—			—				—				—				(5,316		)		—			—				(5,316		)		—				(5,316		)
Dividends declared to noncontrolling interest	—			—				—				—				—				—			—				—				(1,286		)		(1,286		)
Adjustment of redeemable noncontrolling interest to redemption value	—			—				(1,451		)		—				—				—			—				(1,451		)		—				(1,451		)
Purchase of additional equity interest in and modification of Vital River redeemable noncontrolling interest	—			—				(1,870		)		—				—				—			—				(1,870		)		—				(1,870		)
Issuance of stock under employee compensation plans	866			8				34,678				—				—				—			—				34,686				—				34,686
Acquisition of treasury shares	—			—				—				—				—				139			(18,087		)		(18,087		)		—				(18,087		)
Retirement of treasury shares	(140	)		(1		)		(4,355		)		(13,786		)		—				(140	)		18,142				—				—				—
Stock-based compensation	—			—				57,271				—				—				—			—				57,271				—				57,271
December 28, 2019	48,936			$	489			$	1,531,785			$	280,329			$	(178,019	)		—			$	—			$	1,634,584			$	3,244			$	1,637,828
See Notes to Consolidated Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Charles River Laboratories International, Inc. (the Company), together with its subsidiaries, is a full service, early-stage contract research organization (CRO). The Company has built upon its core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that enable the Company to support its clients from target identification through non-clinical development. The Company also provides a suite of products and services to support its clients’ manufacturing activities.

Principles of Consolidation

The Company’s consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest. For consolidated entities in which the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.

The Company’s fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31.

Segment Reporting

The Company reports its results in three reportable segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). The Company’s RMS reportable segment includes the Research Models and Research Model Services businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of its clients’ research operations (including recruitment, training, staffing, and management services). The Company’s DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. The Company’s Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens; and contract development and manufacturing (CDMO) services, which, until the Company divested this business on February 10, 2017, allowed it to provide formulation design and development, manufacturing, and analytical and stability testing for small molecules.

Use of Estimates

The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP) requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Cash, Cash Equivalents, and Investments

Cash equivalents include money market funds, time deposits and other investments with remaining maturities at the purchase date of three months or less. Time deposits with original maturities of greater than three months are reported as short term investments.

Trade Receivables, Net

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company records trade receivables net of an allowance for doubtful accounts. An allowance for doubtful accounts is established based on historical collection information, a review of major client accounts receivable balances and current economic conditions in the geographies in which it operates. Amounts determined to be uncollectible are charged or written off against the allowance.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade receivables. The Company places cash and cash equivalents and investments in various financial institutions with high credit rating and limits the amount of credit exposure to any one financial institution. Trade receivables are primarily from clients in the pharmaceutical and biotechnology industries, as well as academic and government institutions. Concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the wide variety of customers using the Company’s products and services as well as their dispersion across many geographic areas. No single client accounted for more than 5% of revenue in fiscal years 2019, 2018, or 2017 or trade receivables as of December 28, 2019 or December 29, 2018.

Fair Value Measurements

The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and requires certain disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has certain financial assets and liabilities recorded at fair value, which have been classified as Level 1, 2 or 3 within the fair value hierarchy:

•	Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access,

•	Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, and foreign currency spot rates,

•	Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The fair value hierarchy level is determined by asset and class based on the lowest level of significant input. The observability of inputs may change for certain assets or liabilities. This condition could cause an asset or liability to be reclassified between levels. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter.

Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:

•	Cash equivalents - Valued at market prices determined through third-party pricing services;

•	Foreign currency forward contracts - Valued using market observable inputs, such as forward foreign exchange points and foreign exchanges rates;

•	Life insurance policies - Valued at cash surrender value based on the fair value of underlying investments;

•

Debt instruments - The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. The book value of the Company’s 5.5% Senior Notes due in 2026 and the 4.25% Senior Notes due in 2028 (Senior Notes), which are fixed rate debt, are carried at amortized cost. Fair value of the Senior Notes is based on quoted market prices and on borrowing rates available to the Company; and

•	Contingent consideration - Valued based on a probability weighting of the future cash flows associated with the potential outcomes.

Inventories

The Company’s inventories consist of raw materials, work in process and finished product related primarily to small models, large models, microbial solutions products, and avian related eggs and flocks. Inventories are stated at the lower of cost or net realizable value. Inventory value is generally based on the standard cost method for all businesses except for the Avian business, which is based on an average cost. Standard costs are trued-up to reflect actual cost. For small models inventory, costs include direct materials such as feed and bedding, costs of personnel directly involved in the care of the models, and an allocation of facility overhead. For the large models inventory, costs are primarily the external cost paid to acquire the model.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the microbial solutions inventory, costs include direct materials, cost of personnel directly involved in the manufacturing and assembly of products sold, and an allocation of facility overhead. For the avian related inventory, costs include direct materials, such as animal feed, cost of personnel directly involved with the care of the eggs and flocks, and an allocation of facility overhead. Inventory costs are charged to cost of revenue in the period the products are sold to an external party. The Company analyzes its inventory levels on a quarterly basis and writes down inventory that is determined to be damaged, obsolete or otherwise unmarketable, with a corresponding charge to cost of products sold.

Property, Plant and Equipment, Net

Property, plant and equipment, net, including improvements that significantly add to productive capacity or extend useful life, are carried at cost and are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The cost of normal, recurring, or periodic repairs and maintenance activities related to property, plant and equipment is expensed as incurred. In addition, the Company capitalizes certain internal use computer software development costs. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.

Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset.

The Company generally depreciates the cost of its property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets as follow:

	Estimated Useful Lives
	(in years)
Land	Indefinite
Buildings	20 - 40
Machinery and equipment	3 - 20
Furniture and fixtures	5 - 10
Computer hardware and software	3 - 8
Vehicles	3 - 5

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Finance lease assets are amortized over the lease term, however, if ownership is transferred by the end of the finance lease, or there is a bargain purchase option, such finance lease assets are amortized over the useful life that would be assigned if such assets were owned.

When the Company disposes of property, plant and equipment, it removes the associated cost and accumulated depreciation from the related accounts on its consolidated balance sheet and includes any resulting gain or loss in its consolidated statement of income.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting. The Company allocates the amounts that it pays for each acquisition to the assets it acquires and liabilities it assumes based on their fair values at the dates of acquisition, including identifiable intangible assets, which typically represents a significant portion of the purchase price. The determination of the fair value of intangible assets requires the use of significant judgment using management’s best estimates of inputs and assumptions that a market participant would use. Significant judgments include (i) the fair value; and (ii) whether such intangible assets are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. The Company utilizes commonly accepted valuation techniques, such as the income approach and the cost approach, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In recent acquisitions, customer relationship intangible assets (also referred to as client relationships) are the most significant identifiable asset acquired. To determine the fair value of the acquired client relationships, the Company typically utilizes the multiple period excess earnings model (a commonly accepted valuation technique), which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital.

Contingent Consideration

The consideration for the Company’s acquisitions often includes future payments that are contingent upon the occurrence of a particular event. The Company records an obligation for such contingent payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. The Company revalues these contingent consideration obligations each reporting period. Changes in the fair value of the contingent consideration obligations are recognized in the Company’s consolidated statements of income as a component of selling, general and administrative expenses. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates and changes in the assumed probabilities of successful achievement of certain financial targets.

Discount rates in the Company’s valuation models represent a measure of the credit risk associated with settling the liability. The period over which the Company discounts its contingent obligations is typically based on when the contingent payments would be triggered. These fair value measurements are based on significant inputs not observable in the market. See Note 7, “Fair Value.”

Goodwill and Intangible Assets

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the acquisition method of accounting. Goodwill is not amortized, but reviewed for impairment on an annual basis, during the fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting units below their carrying amounts.

The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, the Company compares the fair value of its reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, then the second step of the impairment test is performed in order to determine the implied fair value of the Company’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.

Definite-lived intangible assets, including client relationships, are amortized over the pattern in which the economic benefits of the intangible assets are utilized and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, which requires the use of customer attribution rates and other assumptions. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the definite-lived intangible assets, the definite-lived intangible assets are written-down to their fair values.

Valuation and Impairment of Long-Lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable.

Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values.

Long-lived assets to be disposed of are carried at fair value less costs to sell.

Venture Capital Investments

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company invests in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. The Company’s ownership interest in these funds ranges from less than 1% to approximately 12%. The Company accounts for the investments in limited partnerships (LPs), which are variable interest entities, under the equity method of accounting. For publicly-held investments in the LPs, the Company adjusts for changes in fair market value based on reported share holdings at the end of each fiscal quarter. The Company is not the primary beneficiary because it has no power to direct the activities that most significantly affect the LPs’ economic performance. The Company accounts for the investments in limited liability companies, which are not variable interest entities, under the equity method of accounting.

Under the equity method of accounting, the Company’s portion of the investment gains and losses, as reported in the fund’s financial statements on a quarterly lag each reporting period, is recorded in other income, net in the accompanying consolidated statements of income. In addition, the Company adjusts the carrying value of these investments to reflect its estimate of changes to fair value since the fund’s financial statements are based on information from the fund’s management team, market prices of known public holdings of the fund and other information.

Other Investments

The Company invests in equity of certain privately-held companies, primarily with minority positions. These investments are reported at fair value or under the equity method of accounting, as appropriate. Equity investments that do not have readily determinable fair values are generally recorded at cost, plus or minus certain adjustments.

Life Insurance Contracts

Investments in life insurance contracts are recorded at cash surrender value. The initial investment at the transaction price is recognized and remeasured based on fair value of underlying investments or contractual value each reporting period. Investments in and redemptions of these life insurance contracts are reported as cash flows from investing activities in the consolidated statement of cash flows. The Company held 44 and 45 contracts at December 28, 2019 and December 29, 2018, with a face value of $72.7 million and $65.2 million, respectively.

Leases

At inception of a contract, the Company determines if a contract meets the definition of a lease. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if the contract conveys the right to control the use of an identified asset for a period of time. The Company assesses throughout the period of use whether the Company has both of the following: (1) the right to obtain substantially all of the economic benefits from use of the identified asset, and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments.

The Company leases laboratory, production, and office space (real estate), as well as land, vehicles and certain equipment under non-cancellable operating and finance leases. The carrying value of the Company’s right-of-use lease assets is substantially concentrated in its real estate leases, while the volume of lease agreements is primarily concentrated in vehicles and equipment leases. The Company’s policy is to not record leases with an original term of twelve months or less on the consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term.

Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period in which the obligation for these payments was incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use asset and liability. Only when lease components and their associated non-lease components are fixed are they accounted for as a single lease component and are recognized as part of a right-of-use asset and liability. Total contract consideration is allocated to the combined fixed lease and non-lease component. This policy election applies consistently to all asset classes under lease agreements.

Most leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 5 years. Certain lease agreements contain options to purchase the leased property and options to terminate the lease. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when it is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised,

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

or is not at the Company’s option. The Company determines whether the reasonably certain threshold is met by considering contract-, asset-, market-, and entity-based factors.

A portfolio approach is applied to certain lease contracts with similar characteristics. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases.

The Company subleases a limited number of lease arrangements. Sublease activity is not material to the consolidated financial statements.

Stock-Based Compensation

The Company may grant stock options, restricted stock, restricted stock units (RSUs), and performance share units (PSUs) to employees and stock options, restricted stock, and RSUs to non-employee directors under stock-based compensation plans. Stock-based compensation is recognized as an expense in the consolidated statements of income based on the grant date fair value, adjusted for forfeitures when they occur, over the requisite service period.

For stock options, restricted stock and RSUs that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. Where awards are made with non-substantive vesting periods and a portion of the award continues to vest after the employee’s eligible retirement, the Company recognizes expense based on the period from the grant date to the date on which the employee is retirement eligible. The Company records the expense for PSU grants subject to performance and/or market conditions using the accelerated attribution method over the remaining service period when management determines that achievement of the performance-based milestone is probable.

The fair value of stock options granted is calculated using the Black-Scholes option-pricing model and the fair value of PSUs is estimated using a lattice model with a Monte Carlo simulation, both of which require the use of subjective assumptions including volatility and expected term, among others. The expected volatility assumption is typically determined using the historical volatility of the Company’s common stock over the expected life of the stock-based award. The expected term is determined using historical option exercise activity. The fair value of restricted stock and RSUs is based on the market value of the Company’s common stock on the date of grant.

Revenue Recognition

Accounting Standard Codification Topic 606, “Revenue from Contracts with Customers” (ASC 606) became effective for the Company on December 31, 2017 and was adopted using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the practical expedient, which did not have a material effect on the cumulative impact of adopting ASC 606. The reported results for fiscal years 2019 and 2018 reflect the application of ASC 606 guidance while the historical results for fiscal year 2017 was prepared under the guidance of ASC 605, “Revenue Recognition” (ASC 605). There is no material difference in the reporting of revenue during fiscal years 2019 and 2018 in accordance with ASC 606 when compared to fiscal year 2017 in accordance with ASC 605.

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”).

To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, the Company does not extend payment terms beyond one year. Applying the practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. The Company’s contracts do not generally contain significant financing components.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, the Company generally measures its progress using either cost-to-cost (input method) or right-to-invoice (output method). The Company uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as the Company incurs costs on its contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the Company’s performance to date.

Income Taxes

The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements carrying amounts and their respective tax basis. The Company measures deferred tax assets and liabilities using the enacted tax rates in effect when the temporary differences are expected to be settled. The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.

The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in-process audit activities and changes in facts or circumstances related to a tax position. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.

Foreign Currency Contracts

Foreign currency contracts are recorded at fair value in the Company’s consolidated balance sheets and are not designated as hedging instruments. Any gains or losses on forward contracts associated with intercompany loans are recognized immediately in Other income, net and are largely offset by the remeasurement of the underlying intercompany loan. Any gains or losses on forward contracts associated with the Company’s U.S. dollar denominated loan borrowed by a non-U.S. entity under the Company’s Credit Facility are recognized immediately in Interest expense. Gains or losses incurred on the remeasurement of the Company’s U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency is recorded in Other income, net.

Translation of Foreign Currencies

For the Company’s subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

foreign exchange rates for the period. Adjustments resulting from the translation of the financial statements of the Company’s foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive loss, a separate component of equity.

Pension and Other Post-Retirement Benefit Plans

The Company recognizes the funded status of its defined benefit pension and other post-retirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. The Company measures plan assets and benefit obligations as of its fiscal year end.

The key assumptions used to calculate benefit obligations and related pension costs include expected long-term rate of return on plan assets, withdrawal and mortality rates, expected rate of increase in employee compensation levels and a discount rate. Assumptions are determined based on the Company’s data and appropriate market indicators, and evaluated each year as of the plan’s measurement date.

The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.

The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.

The Company is required to recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and prior service costs or credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive income is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.

The Company records the service cost component of the net periodic benefit cost within Cost of services provided and Selling, general, and administrative expenses (within Operating income) and all other components of net periodic benefit cost within Other income, net in the consolidated statements of income.

The Company recognizes pension settlement gains or losses in the period when all of the following settlement criteria are met: there is an irrevocable action, the Company is relieved of primary responsibility for a benefit obligation, and significant risks related to the obligation and the assets used to effect the settlement are eliminated. Refer to Note 12. “Employee Benefit Plans” for further discussion of the U.S. Pension Plan termination and expected settlement in fiscal 2020.

Earnings Per Share

Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share is computed using the treasury stock method, assuming the exercise of stock options and the vesting of restricted stock awards, RSUs, or PSUs, as well as their related income tax effects.

Treasury Shares

The Company periodically retires treasury shares acquired through share repurchases and returns those shares to the status of authorized but unissued. The Company accounts for treasury stock transactions under the cost method. For each reacquisition of common stock, the number of shares and the acquisition price for those shares is added to the existing treasury stock count and total value. Thus, the average cost per share is re-averaged each time shares are acquired. When treasury shares are retired, the Company allocates the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in-capital. The portion allocated to additional paid-in-capital is determined by applying a percentage, determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in-capital as of the retirement date.

Newly Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and nonemployees as well as improves financial reporting for share-based payments to nonemployees. The Company’s adoption of this standard in fiscal year 2019 did not have a significant impact on the consolidated financial statements and related disclosures.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. It also creates more transparency around how economic results are presented, both on the face of the financial statements and in the disclosures. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. The Company’s adoption of this standard in fiscal year 2019 did not have a significant impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard, including subsequently issued amendments, collectively referred to as Accounting Standards Codification (ASC) 842, “Leases”, established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The Company adopted this standard using the modified retrospective transition approach as applied to leases existing as of or entered into after the adoption date (December 30, 2018) in fiscal year 2019. See Note 16, “Leases” for a discussion of the Company’s adoption of this standard and its impact on the consolidated financial statements and related disclosures.

Newly Issued Accounting Pronouncements

In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 states any equity security transitioning from the alternative method of accounting under Topic 321 to the equity method, or vice versa, due to an observable transaction will be remeasured immediately before the transition. In addition, the ASU clarifies the accounting for certain non-derivative forward contracts or purchased call options to acquire equity securities stating such instruments will be measured using the fair value principles of Topic 321 before settlement or exercise. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied on a prospective basis. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures, but does not believe there will be a material impact upon adoption.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intraperiod tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax). which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of any enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement that is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and will be applied either retrospectively or prospectively. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-14, “Compensation Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20).” ASU 2018-14 removes the requirements to disclose the amounts in Accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year and the related party disclosures about the amount of future annual benefits covered by insurance contracts. In addition, the ASU adds the requirement to disclose an explanation for any significant gains and losses related to changes in the benefit obligation for the period. The ASU is effective for fiscal years ending after December 15, 2020 and will be applied on a retrospective basis to all periods presented. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 removes the disclosure requirement for the amount and reasons for transfers between Level 1 and Level 2 fair value measurements as well as the process for Level 3 fair value measurements. In addition, the ASU adds the disclosure requirements for changes in unrealized gains and losses included in

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and will be applied on a retrospective basis to all periods presented. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.” The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and requires the modified retrospective approach. Early adoption is permitted. Based on the composition of the Company’s trade receivables and other financial assets, current market conditions, and historical credit loss activity, the adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

2. BUSINESS COMBINATIONS AND DIVESTITURE

HemaCare Corporation

On January 3, 2020, the Company acquired HemaCare Corporation (HemaCare), a business specializing in the production of human-derived cellular products for the cell therapy market. The acquisition of HemaCare will expand the Company’s comprehensive portfolio of early-stage research and manufacturing support solutions to encompass the production and customization of high-quality, human derived cellular products to better support clients’ cell therapy programs. The preliminary purchase price of HemaCare was approximately $380 million in cash. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. See Note 9, “Long-Term Debt and Finance Leases.” This business will be reported as part of the Company’s RMS reportable segment. Due to the limited time between the acquisition date and the filing of this Annual Report on Form 10-K, it is not practicable for the Company to disclose the preliminary allocation of the purchase price to assets acquired and liabilities assumed. The Company incurred transaction and integration costs in connection with the acquisition of $3.3 million during fiscal year 2019, which were included in Selling, general and administrative expenses within the consolidated statements of income.

Citoxlab

On April 29, 2019, the Company acquired Citoxlab, a non-clinical CRO, specializing in regulated safety assessment services, non-regulated discovery services, and medical device testing. With operations in Europe and North America, the acquisition of Citoxlab further strengthens the Company’s position as a leading, global, early-stage CRO by expanding its scientific portfolio and geographic footprint, which enhances the Company’s ability to partner with clients across the drug discovery and development continuum. The preliminary purchase price for Citoxlab was $527.7 million in cash, subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. This business is reported as part of the Company’s DSA reportable segment.

The preliminary purchase allocation of $491.0 million, net of $36.7 million of cash acquired was as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	April 29, 2019
	(in thousands)
Trade receivables (contractual amount of $35,405)	$	35,405
Inventories	5,282
Other current assets (excluding cash)	13,917
Property, plant and equipment	88,605
Goodwill	280,711
Definite-lived intangible assets	162,400
Other long-term assets	20,163
Deferred revenue	(15,278		)
Current liabilities	(46,081		)
Deferred tax liabilities	(27,458		)
Other long-term liabilities	(22,624		)
Redeemable noncontrolling interest	(4,035		)
Total purchase price allocation	$	491,007

The preliminary purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts and obligations. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition. From the date of the acquisition through December 28, 2019, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis.

The breakout of definite-lived intangible assets acquired was as follows:

	Definite-Lived Intangible Assets				Weighted Average Amortization Life
	(in thousands)				(in years)
Client relationships	$	134,600			13
Developed technology	19,900				3
Backlog	7,900				1
Total definite-lived intangible assets	$	162,400			12

The goodwill resulting from the transaction, $7.2 million of which is deductible for tax purposes due to a prior asset acquisition, is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through Citoxlab and the assembled workforce of the acquired business.

The Company incurred transaction and integration costs in connection with the acquisition of $20.7 million during fiscal year 2019, which were primarily included in Selling, general and administrative expenses within the consolidated statements of income.

Beginning on April 29, 2019, Citoxlab has been included in the operating results of the Company. Citoxlab revenue and operating income from April 29, 2019 through December 28, 2019 was $123.7 million and $6.2 million, respectively.

The following selected unaudited pro forma consolidated results of operations are presented as if the Citoxlab acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is December 31, 2017, after giving effect to certain adjustments. For fiscal year 2019, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $5.7 million, additional interest expense on borrowings of $1.2 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For fiscal year 2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $9.4 million, additional interest expense on borrowings of $4.1 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fiscal Year
	2019				2018
	(in thousands)
	(unaudited)
Revenue	$	2,683,610			$	2,442,283
Net income attributable to common shareholders	268,995				233,288

These unaudited pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the dates indicated or that may result in the future. No effect has been given for synergies, if any, that may be realized through the acquisition.

MPI Research

On April 3, 2018, the Company acquired MPI Research, a non-clinical CRO providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. The acquisition enhances the Company’s position as a leading global early-stage CRO by strengthening its ability to partner with clients across the drug discovery and development continuum. The purchase price for MPI Research was $829.7 million in cash. The acquisition was funded by borrowings on the Credit Facility as well as the issuance of the Company’s 2026 Senior Notes. See Note 9, “Long-Term Debt and Finance Lease Obligations.” This business is reported as part of the Company’s DSA reportable segment.

The purchase allocation of $800.8 million, net of $27.7 million of cash acquired and a final net working capital adjustment of $1.2 million, was as follows:

	April 3, 2018
	(in thousands)
Trade receivables (contractual amount of $35,073)	$	35,073
Inventories	4,463
Other current assets (excluding cash)	5,893
Property, plant and equipment	128,403
Goodwill	441,656
Definite-lived intangible assets	309,200
Other long-term assets	1,081
Deferred revenue	(23,926		)
Current liabilities	(32,885		)
Deferred tax liabilities	(65,945		)
Other long-term liabilities	(2,213		)
Total purchase price allocation	$	800,800

From the date of the acquisition through March 30, 2019, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.

The breakout of definite-lived intangible assets acquired was as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Definite-Lived Intangible Assets				Weighted Average Amortization Life
	(in thousands)				(in years)
Client relationships	$	264,900			13
Developed technology	23,400				3
Backlog	20,900				1
Total definite-lived intangible assets	$	309,200			12

The goodwill resulting from the transaction, $4.1 million of which is deductible for tax purposes due to a prior asset acquisition, is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through MPI Research and the assembled workforce of the acquired business.

No significant integration costs were incurred in connection with the acquisition for fiscal year 2019. The Company incurred transaction and integration costs in connection with the acquisition of $16.5 million during fiscal year 2018, which were primarily included in Selling, general and administrative expenses within the consolidated statements of income.

MPI Research revenue and operating income from April 3, 2018 through December 29, 2018 was $209.5 million and $33.4 million, respectively. Beginning on April 3, 2018, MPI Research has been included in the operating results of the Company.

The following selected unaudited pro forma consolidated results of operations are presented as if the MPI Research acquisition had occurred as of the beginning of the period immediately preceding the period of acquisition, which is January 1, 2017, after giving effect to certain adjustments. For fiscal year 2018, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $14.1 million, additional interest expense on borrowings of $2.8 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments. For fiscal year 2017, these adjustments included additional amortization of intangible assets and depreciation of fixed assets of $22.4 million, additional interest expense on borrowings of $27.1 million, elimination of intercompany activity and other one-time costs, and the tax impacts of these adjustments.

	Fiscal Year
	2018				2017
	(in thousands)
	(unaudited)
Revenue	$	2,328,213			$	2,095,385
Net income attributable to common shareholders	225,550				126,641

These unaudited pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the dates indicated or that may result in the future. No effect has been given for synergies, if any, that may be realized through the acquisition.

KWS BioTest Limited

On January 11, 2018, the Company acquired KWS BioTest Limited (KWS BioTest), a CRO specializing in in vitro and in vivo discovery testing services for immuno-oncology, inflammatory and infectious diseases. The acquisition enhances the Company’s discovery expertise, with complementary offerings that provide the Company’s customers with additional tools in the active therapeutic research areas of oncology and immunology. The purchase price for KWS BioTest was $20.3 million in cash, and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction included aggregate, undiscounted contingent payments of up to £3.0 million based on future performance. The terms of these contingent payments were amended during fiscal year 2018, resulting in a fixed payment of £2.0 million or $2.6 million, which was paid during the first quarter of fiscal year 2019. The KWS BioTest business is reported as part of the Company’s DSA reportable segment.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The purchase price allocation of $21.5 million, net of $1.0 million of cash acquired and a final net working capital adjustment of $0.4 million, was as follows:

	January 11, 2018
	(in thousands)
Trade receivables (contractual amount of $1,309)	$	1,309
Other current assets (excluding cash)	99
Property, plant and equipment	1,136
Definite-lived intangible assets - client relationships	3,647
Goodwill	17,660
Current liabilities	(1,575		)
Deferred revenue	(151		)
Long-term liabilities	(596		)
Total purchase price allocation	$	21,529

From the date of the acquisition through December 29, 2018, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.

The only definite-lived intangible asset relates to client relationships, which will be amortized over a weighted average life of 12 years.

The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA business from customers introduced through KWS BioTest and the assembled workforce of the acquired business. The goodwill attributable to KWS BioTest is not deductible for tax purposes.

No significant integration costs were incurred in connection with the acquisition during fiscal year 2019. The Company incurred transaction and integration costs in connection with the acquisition of $0.7 million during fiscal year 2018, which were included in Selling, general and administrative expenses within the consolidated statements of income.

Pro forma financial information as well as actual revenue and operating income (loss) have not been included because KWS BioTest’s financial results are not significant when compared to the Company’s consolidated financial results.

Brains On-Line

On August 4, 2017, the Company acquired Brains On-Line, a CRO providing critical data that advances novel therapeutics for the treatment of central nervous system (CNS) diseases. Brains On-Line strategically expands the Company’s existing CNS capabilities and establishes the Company as a single-source provider for a broad portfolio of discovery CNS services. The purchase price for Brains On-Line was $21.3 million in cash and was funded by the Company’s various borrowings. In addition to the initial purchase price, the transaction included aggregate, undiscounted contingent payments of up to €6.7 million based on future performance. During the first quarter of fiscal year 2019, the terms of these contingent payments were amended, resulting in a fixed payment of $2.6 million, which was paid during the three months ended June 29, 2019. The Brains On-Line business is reported as part of the Company’s DSA reportable segment.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The purchase price allocation of $20.1 million, net of $0.6 million of cash acquired, was as follows:

	August 4, 2017
	(in thousands)
Trade receivables (contractual amount of $1,146)	$	1,146
Other current assets (excluding cash)	640
Property, plant and equipment	664
Other long-term assets	29
Definite-lived intangible assets	9,300
Goodwill	12,582
Current liabilities	(1,683		)
Deferred revenue	(405		)
Long-term liabilities	(2,151		)
Total purchase price allocation	$	20,122

From the date of the acquisition through June 30, 2018, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis. No further adjustments will be made to the purchase price allocation.

The breakout of definite-lived intangible assets acquired was as follows:

	Definite-Lived Intangible Assets				Weighted Average Amortization Life
	(in thousands)				(in years)
Client relationships	$	7,000			13
Other intangible assets	2,300				10
Total definite-lived intangible assets	$	9,300			12

The goodwill resulting from the transaction is primarily attributable to the potential growth of the Company’s DSA businesses from customers and technology introduced through Brains On-Line and the assembled workforce of the acquired business. The goodwill attributable to Brains On-Line is not deductible for tax purposes.

No significant integration costs were incurred in connection with the acquisition during fiscal years 2019 or 2018. The Company incurred transaction and integration costs in connection with the acquisition of $2.6 million during fiscal year 2017, which were included in selling, general and administrative expenses within the consolidated statements of income.

Pro forma financial information as well as actual revenue and operating income (loss) have not been included because Brains On-Line’s financial results are not significant when compared to the Company’s consolidated financial results.

Other Acquisition

On August 28, 2019, the Company acquired an 80% ownership interest in a supplier that supports the Company’s DSA reportable segment. The remaining 20% interest is a redeemable non-controlling interest. See Note 10, “Equity and Noncontrolling Interests.” The preliminary purchase price was $23.4 million, net of a $4.0 million pre-existing relationship for a supply agreement settled upon acquisition, and subject to certain post-closing adjustments that may change the purchase price. The acquisition was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. The business is reported as part of the Company’s DSA reportable segment.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The preliminary purchase allocation of $23.1 million, net of $0.3 million of cash acquired was as follows:

	August 28, 2019
	(in thousands)
Trade receivables (contractual amount of $189)	$	189
Inventories	7,644
Property, plant and equipment	1,462
Goodwill	12,669
Other long-term assets	11,849
Current liabilities	(441		)
Deferred tax liabilities	(1,331		)
Other long-term liabilities	(238		)
Redeemable noncontrolling interest	(8,740		)
Total purchase price allocation	$	23,063

The purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including certain contracts and obligations. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition. From the date of the acquisition through December 28, 2019, the Company recorded measurement-period adjustments related to the acquisition that resulted in an immaterial change to the purchase price allocation on a consolidated basis.

The Company incurred transaction and integration costs in connection with the acquisition of $3.6 million for fiscal year 2019 which are primarily included in Selling, general and administrative expenses within the consolidated statements of income.

Pro forma financial information as well as the disclosure of actual results have not been included because these financial results are not significant when compared to the Company’s consolidated financial results.

Contract Manufacturing

On February 10, 2017, the Company sold its CDMO business to Quotient Clinical Ltd., based in London, England, for $75 million in proceeds, net of $0.6 million in cash and cash equivalents transferred in conjunction with the sale and $0.3 million of working capital adjustments.

The CDMO business was acquired in April 2016 as part of the acquisition of WIL Research and was reported in the Company’s Manufacturing reportable segment. The Company determined that the CDMO business was not optimized within the Company’s portfolio at its current scale, and that the capital could be better deployed in other long-term growth opportunities.

During the three months ended April 1, 2017, the Company recorded a gain on the divestiture of the CDMO business of $10.6 million, which was included in other income, net within the Company’s consolidated statements of income. The carrying amounts of the major classes of assets and liabilities associated with the divestiture of the CDMO business were as follows:

	February 10, 2017
	(in thousands)
Assets
Current assets	$	5,505
Property, plant and equipment, net	11,174
Goodwill	35,857
Long-term assets	17,154
Total assets	$	69,690
Liabilities
Deferred revenue	$	4,878
Other current liabilities	1,158
Total liabilities	$	6,036

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Disaggregation of Revenue

The following tables disaggregate the Company’s revenue by major business line and timing of transfer of products or services:

Major Products/Service Lines:	2019				2018
	(in thousands)
RMS	$	537,089			$	519,682
DSA	1,618,995				1,316,854
Manufacturing	465,142				429,560
Total revenue	$	2,621,226			$	2,266,096

Timing of Revenue Recognition:	2019				2018
	(in thousands)
RMS
Services and products transferred over time	$	227,872			$	202,872
Services and products transferred at a point in time	309,217				316,810
DSA
Services and products transferred over time	1,618,281				1,316,005
Services and products transferred at a point in time	714				849
Manufacturing
Services and products transferred over time	142,896				128,287
Services and products transferred at a point in time	322,246				301,273
Total revenue	$	2,621,226			$	2,266,096

RMS

The RMS business generates revenue through the commercial production and sale of research models and the provision of services related to the maintenance and monitoring of research models and management of clients’ research operations. Revenue from the sale of research models is recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the shipping terms of a contract. Revenue generated from research models services is recognized over time and is typically based on a right-to-invoice measure of progress (output method) as invoiced amounts correspond directly to the value of the Company’s performance to date.

DSA

The Discovery and Safety Assessment business provides a full suite of integrated drug discovery services directed at the identification, screening and selection of a lead compound for drug development and offers a full range of safety assessment services including bioanalysis, drug metabolism, pharmacokinetics, toxicology and pathology. Discovery and Safety Assessment services revenue is generally recognized over time using the cost-to-cost or right to invoice measures of progress, primarily representing fixed fee service contracts and per unit service contracts, respectively.

Manufacturing

The Manufacturing business includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services; Biologics Testing Services (Biologics), which performs specialized testing of biologics; and Avian Vaccine Services (Avian), which supplies specific-pathogen-free chicken eggs and chickens. Species identification service revenue is generally recognized at a point in time as identifications are completed by the Company. Biologics service revenue is generally recognized over time using the cost-to-cost measure of progress. Microbial Solutions and Avian product sales are generally recognized at a point in time when the customer obtains control of the product, which may be upon shipment or upon delivery based on the contractual shipping terms of a contract.

Transaction Price Allocated to Future Performance Obligations

The Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of December 28, 2019. Excluded from the disclosure is the value of unsatisfied performance obligations for (i)

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of December 28, 2019:

	Revenue Expected to be Recognized in Future Periods
	Less than 1 Year				1 to 3 Years				4 to 5 Years				Beyond 5 Years				Total
	(in thousands)
DSA	$	156,125			$	89,458			$	5,965			$	527			$	252,075
Manufacturing	11,604				11,816				19				13				23,452
Total	$	167,729			$	101,274			$	5,984			$	540			$	275,527

Contract Balances from Contracts with Customers

The timing of revenue recognition, billings and cash collections results in billed receivables (client receivables), contract assets (unbilled revenue), and contract liabilities (current and long-term deferred revenue and customer contract deposits) on the consolidated balance sheets. The Company’s payment terms are generally 30 days in the United States and consistent with prevailing practice in international markets. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a customer is conditioned other than the passage of time. Client receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. The following table provides information about client receivables, contract assets, and contract liabilities from contracts with customers:

	December 28, 2019				December 29, 2018
	(in thousands)
Balances from contracts with customers:
Client receivables	$	395,740			$	370,131
Contract assets (unbilled revenue)	121,957				105,216
Contract liabilities (current and long-term deferred revenue)	192,788				179,559
Contract liabilities (customer contract deposits)	33,080				38,245

When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $27 million and $22 million of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying consolidated balance sheets as of December 28, 2019 and December 29, 2018, respectively. Advanced client payments of approximately $33 million and $38 million have been presented as customer contract deposits within other current liabilities in the accompanying consolidated balance sheets as of December 28, 2019 and December 29, 2018.

Other changes in the contract asset and the contract liability balances during fiscal year 2019 were as follows:

(i) Changes due to business combinations:

See Note 2. “Business Combinations and Divestiture” for client receivables, contract assets, and contract liabilities that were acquired as part of the Citoxlab acquisition on April 29, 2019.

(ii) Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification:

During fiscal year 2019, an immaterial cumulative catch-up adjustment to revenue was recorded.

(iii) A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

recorded as a client receivable):

Approximately 95% of unbilled revenue as of December 29, 2018 was billed during fiscal year 2019.

(iv) A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability):

Approximately 85% of contract liabilities as of December 29, 2018 were recognized as revenue during fiscal year 2019.

4. SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). Asset information on a reportable segment basis is not disclosed as this information is not separately identified and internally reported to the Company’s Chief Operating Decision Maker.

The following table presents revenue and other financial information by reportable segment:

	2019				2018				2017
	(in thousands)
RMS
Revenue	$	537,089			$	519,682			$	493,615
Operating income	133,912				136,468				114,588
Depreciation and amortization	19,197				19,469				19,627
Capital expenditures	26,989				35,172				20,879
DSA
Revenue	$	1,618,995			$	1,316,854			$	980,022
Operating income	258,903				227,577				182,796
Depreciation and amortization	151,139				112,976				79,355
Capital expenditures	86,843				73,425				36,616
Manufacturing
Revenue	$	465,142			$	429,560			$	383,964
Operating income	145,420				136,212				123,898
Depreciation and amortization	23,584				22,529				22,893
Capital expenditures	23,617				23,323				15,188

The following tables present reconciliations of segment operating income, depreciation and amortization, and capital expenditures to the respective consolidated amounts:

	Operating Income												Depreciation and Amortization
	2019				2018				2017				2019				2018				2017
	(in thousands)
Total reportable segments	$	538,235			$	500,257			$	421,282			$	193,920			$	154,974			$	121,875
Unallocated corporate	(187,084		)		(168,874		)		(133,000		)		4,175				6,805				9,284
Total consolidated	$	351,151			$	331,383			$	288,282			$	198,095			$	161,779			$	131,159

	Capital Expenditures
	2019				2018				2017
	(in thousands)
Total reportable segments	$	137,449			$	131,920			$	72,683
Unallocated corporate	3,065				8,134				9,748
Total consolidated	$	140,514			$	140,054			$	82,431

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue for each significant product or service offering is as follows:

	2019				2018				2017
	(in thousands)
RMS	$	537,089			$	519,682			$	493,615
DSA	1,618,995				1,316,854				980,022
Manufacturing	465,142				429,560				383,964
Total revenue	$	2,621,226			$	2,266,096			$	1,857,601

A summary of unallocated corporate expense consists of the following:

	2019				2018				2017
	(in thousands)
Stock-based compensation	$	37,855			$	32,068			$	27,114
Compensation, benefits, and other employee-related expenses	73,893				69,191				46,920
External consulting and other service expenses	16,639				18,652				22,224
Information technology	16,080				12,463				11,997
Depreciation	4,175				6,805				9,284
Acquisition and integration	26,877				16,295				3,728
Other general unallocated corporate	11,565				13,400				11,733
Total unallocated corporate expense	$	187,084			$	168,874			$	133,000

Other general unallocated corporate expense consists of costs associated with departments such as senior executives, corporate accounting, legal, tax, human resources, treasury, and investor relations.

Revenue and long-lived assets by geographic area are as follows:

	U.S.				Europe				Canada				Asia Pacific				Other				Consolidated
	(in thousands)
2019
Revenue	$	1,471,097			$	726,421			$	271,987			$	146,218			$	5,503			$	2,621,226
Long-lived assets	602,654				253,665				127,495				60,213				101				1,044,128
2018
Revenue	$	1,267,620			$	643,957			$	206,382			$	142,495			$	5,642			$	2,266,096
Long-lived assets	597,223				205,185				74,051				56,262				156				932,877
2017
Revenue	$	959,263			$	569,812			$	200,343			$	126,462			$	1,721			$	1,857,601
Long-lived assets	446,574				203,911				82,228				49,020				240				781,973

Included in the Asia Pacific category above are operations located in China, Japan, South Korea, Australia, Singapore, and India. Included in the Other category above are operations located in Brazil and Israel. Revenue represents sales originating in entities physically located in the identified geographic area. Long-lived assets consist of property, plant, and equipment, net.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. SUPPLEMENTAL BALANCE SHEET INFORMATION

The composition of trade receivables, net is as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Client receivables	$	395,740			$	370,131
Unbilled revenue	121,957				105,216
Total	517,697				475,347
Less: Allowance for doubtful accounts	(3,664		)		(3,099		)
Trade receivables, net	$	514,033			$	472,248

Net provisions of $3.0 million, $2.1 million, and $0.9 million were recorded to the allowance for doubtful accounts in fiscal years 2019, 2018, and 2017, respectively.

The composition of inventories is as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Raw materials and supplies	$	24,613			$	22,378
Work in process	35,852				21,732
Finished products	100,195				83,782
Inventories	$	160,660			$	127,892

The composition of other current assets is as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Prepaid income tax	$	54,358			$	47,157
Short-term investments	941				885
Restricted cash	431				465
Other	300				300
Other current assets	$	56,030			$	48,807

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	December 28, 2019				December 29, 2018
	(in thousands)
Land	$	63,077			$	52,266
Buildings (1)	1,006,357				938,184
Machinery and equipment (1)	585,965				501,894
Leasehold improvements	84,630				59,854
Furniture and fixtures	28,304				26,700
Computer hardware and software (1)	179,865				166,398
Vehicles (1)	5,561				5,167
Construction in progress	67,939				56,549
Total	2,021,698				1,807,012
Less: Accumulated depreciation	(977,570		)		(874,135		)
Property, plant and equipment, net	$	1,044,128			$	932,877

(1) These balances include assets under finance leases. See Note 16, “Leases.”

Depreciation expense in fiscal years 2019, 2018 and 2017 was $108.6 million, $96.9 million and $89.8 million, respectively.

The composition of other assets is as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Venture capital investments	$	108,983			$	87,545
Other investments	13,996				1,046
Life insurance policies	38,207				32,340
Restricted cash	1,601				1,411
Other	49,828				21,417
Other assets	$	212,615			$	143,759

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of other current liabilities is as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Current portion of operating lease right-of-use liabilities	$	20,357			$	—
Accrued income taxes	26,066				24,120
Customer contract deposits	33,080				38,245
Other	11,095				8,915
Other current liabilities	$	90,598			$	71,280

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

	December 28, 2019				December 29, 2018
	(in thousands)
U.S. Transition Tax	$	52,066			$	52,064
Long-term pension liability	43,054				24,671
Accrued executive supplemental life insurance retirement plan and deferred compensation plan	37,779				36,086
Long-term deferred revenue	20,983				34,420
Other	29,051				31,880
Other long-term liabilities	$	182,933			$	179,121

6. VENTURE CAPITAL AND OTHER INVESTMENTS

Venture capital investments were $109.0 million and $87.5 million as of December 28, 2019 and December 29, 2018, respectively. The Company’s total commitment to the venture capital funds as of December 28, 2019 was $128.4 million, of which the Company funded $80.3 million through that date. During fiscal years 2019, 2018, and 2017, the Company received dividends totaling $11.4 million, $18.2 million, and $10.1 million, respectively. During fiscal years 2019, 2018, and 2017, the Company recognized gains related to the venture capital investments of $20.7 million, $15.9 million and $22.9 million, respectively. As of December 28, 2019 and December 29, 2018, the Company’s consolidated retained earnings included $20.6 million and $14.1 million, respectively, of the undistributed earnings related to these investments.

Other investments were $14.0 million and $1.0 million as of December 28, 2019 and December 29, 2018, respectively. The Company recognized an insignificant amount of gains and losses related to these investments for fiscal years 2019 and 2018.

Gains and losses from venture capital and other investments are recorded in Other income, net in the accompanying consolidated statements of income.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE

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

	December 28, 2019
	Level 1				Level 2				Level 3				Total
	(in thousands)
Cash equivalents	$	—			$	55,278			$	—			$	55,278
Other assets:
Life insurance policies	—				30,454				—				30,454
Total assets measured at fair value	$	—			$	85,732			$	—			$	85,732
Other current liabilities measured at fair value:
Contingent consideration	$	—			$	—			$	712			$	712
Foreign currency forward contract	—				876				—				876
Total liabilities measured at fair value	$	—			$	876			$	712			$	1,588

	December 29, 2018
	Level 1				Level 2				Level 3				Total
	(in thousands)
Cash equivalents	$	—			$	45,982			$	—			$	45,982
Other assets:
Life insurance policies	—				24,541				—				24,541
Total assets measured at fair value	$	—			$	70,523			$	—			$	70,523
Other current liabilities:
Contingent consideration	$	—			$	—			$	3,033			$	3,033
Foreign currency forward contract	—				1,319				—				1,319
Total liabilities measured at fair value	$	—			$	1,319			$	3,033			$	4,352

During fiscal years 2019 and 2018, there were no transfers between fair value levels.

Contingent Consideration

The following table provides a rollforward of the contingent consideration related to previous business acquisitions. See Note 2, “Business Combinations and Divestiture”.

	Fiscal Year
	2019				2018
	(in thousands)
Beginning balance	$	3,033			$	298
Additions	2,869				3,315
Payments	(5,252		)		—
Total gains or losses (realized/unrealized):
Foreign currency translation	62				(298		)
Reversal of previously recorded contingent liability and change in fair value	—				(282		)
Ending balance	$	712			$	3,033

The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement of certain financial targets and a discount rate. Increases or decreases in any of the probabilities of

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

success would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.

Debt Instruments

The book value of the Company’s term and revolving loans, which are variable rate loans carried at amortized cost, approximates the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable inputs, including current interest and foreign currency exchange rates, it is deemed to be Level 2 within the fair value hierarchy.

The book value of the Company’s 2026 and 2028 Senior Notes is a fixed rate obligation carried at amortized cost. Fair value is based on quoted market prices as well as borrowing rates available to the Company. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy. The book value and fair value of the Company’s 2026 and 2028 Senior Notes is summarized below:

	December 28, 2019								December 29, 2018
	Book Value				Fair Value				Book Value				Fair Value
2026 Senior Notes	$	500,000			$	537,500			$	500,000			$	495,000
2028 Senior Notes	500,000				510,000				—				—

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table provides a rollforward of the Company’s goodwill:

					Adjustments to Goodwill												Adjustments to Goodwill
	December 30, 2017				Acquisitions				Foreign Exchange				December 29, 2018				Acquisitions				Foreign Exchange				December 28, 2019
	(in thousands)
RMS	$	58,122			$	—			$	(1,154	)		$	56,968			$	—			$	(382	)		$	56,586
DSA	1,610,176				460,223				(13,929		)		2,056,470				293,380				373				2,350,223
Manufacturing	141,608				2,551				(5,464		)		138,695				—				61				138,756
Gross carrying amount	1,809,906				462,774				(20,547		)		2,252,133				293,380				52				2,545,565
Accumulated impairment loss - DSA	(1,005,000		)		—				—				(1,005,000		)		—				—				(1,005,000		)
Goodwill	$	804,906											$	1,247,133											$	1,540,565

Based on the Company’s step one goodwill impairment test, which was performed in the fourth quarter for each of the fiscal years 2019, 2018 and 2017, the fair value of each reporting unit exceeded the reporting unit’s book value and, therefore, goodwill was not impaired.

The increase in goodwill during fiscal year 2019 related primarily to the acquisition of Citoxlab in the DSA reportable segment. The increase in goodwill during fiscal year 2018 related primarily to the acquisitions of MPI Research and KWS BioTest in the DSA reportable segment, an immaterial acquisition of an Australian business in the Manufacturing reportable segment, and the impact of foreign exchange.

Intangible Assets, Net

The following table displays intangible assets, net by major class:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	December 28, 2019												December 29, 2018
	Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
	(in thousands)
Backlog	$	28,865			$	(26,895	)		$	1,970			$	20,900			$	(18,691	)		$	2,209
Technology	122,106				(57,737		)		64,369				101,506				(41,870		)		59,636
Trademarks and trade names	8,430				(4,901		)		3,529				8,331				(4,640		)		3,691
Other	18,279				(12,307		)		5,972				17,448				(10,041		)		7,407
Other intangible assets	177,680				(101,840		)		75,840				148,185				(75,242		)		72,943
Client relationships	934,668				(321,095		)		613,573				791,725				(253,780		)		537,945
Intangible assets	$	1,112,348			$	(422,935	)		$	689,413			$	939,910			$	(329,022	)		$	610,888

The increase in intangible assets, net during the fiscal year 2019 related primarily to the acquisition of Citoxlab. The increase in intangible assets, net during the fiscal year 2018 related primarily to the acquisitions of MPI Research and KWS BioTest.

Amortization expense of definite-lived intangible assets, including client relationships, for fiscal years 2019, 2018 and 2017 was $89.5 million, $64.8 million and $41.4 million, respectively. As of December 28, 2019, estimated amortization expense for intangible assets for each of the next five fiscal years is expected to be as follows:

Fiscal Year		Amortization Expense
		(in thousands)
2020		$	97,024
2021		87,540
2022		76,204
2023		67,807
2024		60,918

9. LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS

Long-term debt, net and finance leases consists of the following:

	December 28, 2019				December 29, 2018
	(in thousands)
Term loans	$	193,750			$	731,250
Revolving facility	676,134				397,452
2026 Senior Notes	500,000				500,000
2028 Senior Notes	500,000				—
Other debt	5,781				26,286
Finance leases (Note 16)	30,527				29,240
Total debt and finance leases	1,906,192				1,684,228
Less:
Current portion of long-term debt	35,548				28,228
Current portion of finance leases (Note 16)	2,997				3,188
Current portion of long-term debt and finance leases	38,545				31,416
Long-term debt and finance leases	1,867,647				1,652,812
Debt discount and debt issuance costs	(17,981		)		(16,214		)
Long-term debt, net and finance leases	$	1,849,666			$	1,636,598

The acquisition of HemaCare on January 3, 2020 for approximately $380 million was funded through a combination of cash on hand and proceeds from the Company’s Credit Facility under the multi-currency revolving facility. The increased borrowings occurred subsequent to December 28, 2019 and are not reflected in the table above.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 28, 2019 and December 29, 2018, the weighted average interest rate on the Company’s debt was 3.46% and 4.24%, respectively.

Term Loans and Revolving Facility

On March 26, 2018, the Company amended and restated its $1.65 billion credit facility creating a $2.3 billion credit facility (Credit Facility). The amendment extended the maturity date and provided for a $750 million term loan and a $1.55 billion multi-currency revolving facility. The amendment was accounted for as a debt modification. In connection with the transaction, the Company capitalized $6.2 million within Long-term debt, net and finance leases in the accompanying consolidated balance sheets and expensed $1.0 million of debt issuance costs recorded within Interest expense in the accompanying consolidated statements of income for the year ended 2018. The term loan facility matures in 19 quarterly installments with the last installment due March 26, 2023. The revolving facility matures on March 26, 2023, and requires no scheduled payment before that date. On September 25, 2019, the Company amended and restated the Credit Facility for certain administrative matters.

On October 23, 2019, the Company prepaid $500.0 million of the term loan with proceeds from a $500.0 million unregistered private offering (see 2028 Senior Notes Offering below) which was treated as a debt modification. Additionally, on November 4, 2019, the Company amended and restated the Credit Facility to increase the multi-currency revolving facility by $500.0 million, from $1.55 billion to $2.05 billion. In connection with these transactions, the Company capitalized $0.5 million within Long-term debt, net and finance leases in the accompanying consolidated balance sheets and expensed $1.6 million of debt issuance costs recorded within Interest expense in the accompanying consolidated statements of income for the year ended 2019. Under specified circumstances, the Company has the ability to increase the term loan and/or revolving facility by up to $1.0 billion in the aggregate.

The interest rates applicable to the term loan and revolving facility under the Credit Facility are, at the Company’s 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 1.0%) or the adjusted LIBOR rate, plus an interest rate margin based upon the Company’s leverage ratio.

The Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to the Company’s business and negative and affirmative covenants. These covenants include (1) maintenance of a ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures to consolidated cash interest expense, for any period of four consecutive fiscal quarters, of no less than 3.50 to 1.0 as well as (2) maintenance of a ratio of consolidated indebtedness to consolidated EBITDA for any period of four consecutive fiscal quarters, of no more than 4.00 to 1.0. As of December 28, 2019, the Company was compliant with all covenants.

The obligations of the Company under the Credit Facility are collateralized by substantially all of the assets of the Company.

During fiscal years 2019 and 2018, the Company had multiple U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Company’s Credit Facility, which ranged from $300 million to $400 million each. This resulted in foreign currency losses recognized in Other income, net of $9.6 million and less than $0.1 million during fiscal years 2019 and 2018, respectively, related to the remeasurement of the underlying debt. The Company entered into foreign exchange forward contracts to limit its foreign currency exposures related to these borrowings and recognized gains of $18.7 million and $1.5 million during fiscal years 2019 and 2018, respectively, within Interest expense. As of December 28, 2019, the Company did not have any outstanding borrowings in a currency different than its respective functional currency. See Note 14, “Foreign Currency Contracts”, for further discussion.

Base Indenture for Senior Notes Offerings

On April 3, 2018, the Company entered into an indenture (Base Indenture) with MUFG Union Bank, N.A., (Trustee). The purpose of the Indenture was to allow the Company the ability to issue senior notes. The Company has entered into two supplemental indentures in connection with two unregistered offerings, which are described below.

The Indenture contains certain covenants including, but not limited to, limitations and restrictions on the ability of the Company and its U.S. subsidiaries to (i) create certain liens, (ii) enter into any Sale and Leaseback Transaction (as defined in the Indenture) with respect to any property, and (iii) merge, consolidate, sell or otherwise dispose of all or substantially all of their assets. These covenants are subject to a number of conditions, qualifications, exceptions and limitations. Any event of default, as defined, could result in the acceleration of the repayment of the obligations.

2026 Senior Notes Offering

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On April 3, 2018, the Company entered into the first supplemental indenture (First Supplemental Indenture) with the Trustee in connection with an offering of $500 million in aggregate principal amount of the Company’s 5.5% Senior Notes (2026 Senior Notes), due in 2026, in an unregistered offering. Under the terms of the First Supplemental Indenture, interest on the Senior Notes is payable semi-annually on April 1 and October 1, beginning on October 1, 2018. The 2026 Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred $7.4 million of debt issuance costs, which the Company capitalized upon issuance on April 3, 2018 and recorded within Long-term debt, net and finance leases in the accompanying consolidated balance sheets.

The Company may redeem all or part of the 2026 Senior Notes at any time prior to April 1, 2021, at its option, at a redemption price equal to 100.0% of the principal amount of such Senior Notes plus the Applicable Premium (as defined in the First Supplemental Indenture). The Company may also redeem up to 40.0% of the Senior Notes with the proceeds of certain equity offerings completed before April 1, 2021, at a redemption price equal to 105.5% of the principal amount of such 2026 Senior Notes. On or after April 1, 2021, the Company may on any one or more occasions redeem all or a part of the 2026 Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the 2026 Senior Notes at a purchase price equal to 101.0% of the aggregate principal amount of such 2026 Senior Notes. Any redemption of the 2026 Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.

Net proceeds from the 2026 Senior Notes of $493.8 million were used to partially repay the outstanding revolving credit facility on April 3, 2018 as well as fund the acquisition of MPI Research.

2028 Senior Notes Offering

On October 23, 2019, the Company entered into a second supplemental indenture (Second Supplemental Indenture) with the Trustee in connection with the offering of $500 million in aggregate principal amount of the Company’s 4.25% Senior Notes (2028 Senior Notes), due in 2028, in an unregistered offering. Under the terms of the Second Supplemental Indenture, interest on the 2028 Senior Notes is payable semi-annually on May 1 and November 1, beginning on May 1, 2020. The 2028 Senior Notes are guaranteed fully and unconditionally, jointly and severally on a senior unsecured basis by the Company and certain of its U.S. subsidiaries. In connection with the transaction, the Company incurred approximately $6 million of debt issuance costs, which were capitalized upon the 2028 Senior Notes issuance on October 23, 2019, and was recorded within Long-term debt, net and finance leases in the accompanying consolidated balance sheets.

The Company may redeem all or part of the 2028 Senior Notes at any time prior to May 1, 2023, at its option, at a redemption price equal to 100% of the principal amount of such 2028 Senior Notes plus the Applicable Premium (as defined in the Indenture). The Company may also redeem up to 40% of the 2028 Senior Notes with the proceeds of certain equity offerings completed before May 1, 2023, at a redemption price equal to 104.25% of the principal amount of such 2028 Senior Notes. On or after May 1, 2023, the Company may on any one or more occasions redeem all or a part of the 2028 Senior Notes, at the redemption prices specified in the Indenture based on the applicable date of redemption. Upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the Senior Notes at a purchase price equal to 101% of the aggregate principal amount of such Senior Notes. Any redemption of the Senior Notes would also require settlement of accrued and unpaid interest, if any, up to but excluding the redemption date.

Net proceeds from the 2028 Senior Notes of approximately $494 million and available cash were used to prepay a portion of the term loan on October 23, 2019.

Commitment Letter

On February 12, 2018, the Company secured an $830 million commitment under a 364-day senior unsecured bridge loan facility (Bridge Facility) for the purpose of financing the acquisition of MPI Research. The Bridge Facility was terminated as of April 3, 2018 upon the successful acquisition of MPI Research. Debt issuance costs of $1.8 million, which were capitalized upon the execution of the Bridge Facility, were expensed upon termination of the agreement on April 3, 2018. In addition, the Company incurred and expensed $2.0 million of fees pertaining to a temporary backstop facility related to the negotiation of the Credit Facility during the three months ended March 31, 2018. These costs were included within Interest expense in the accompanying consolidated statements of income.

Principal Maturities

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Principal maturities of existing debt for the periods set forth in the table below, are as follows:

	Principal
	(in thousands)
2020	$	35,536
2021	61,151
2022	93,966
2023	682,602
2024	468
Thereafter	1,001,942
Total	$	1,875,665

Letters of Credit

As of December 28, 2019 and December 29, 2018, the Company had $7.5 million and $6.5 million, respectively, in outstanding letters of credit.

10. EQUITY AND NONCONTROLLING INTERESTS

Earnings Per Share

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

	Fiscal Year
	2019				2018				2017
	(in thousands)
Numerator:
Income from continuing operations, net of income taxes	$	254,061			$	227,218			$	125,586
Income (loss) from discontinued operations, net of income taxes	—				1,506				(137		)
Less: Net income attributable to noncontrolling interests	2,042				2,351				2,094
Net income attributable to common shareholders	$	252,019			$	226,373			$	123,355
Denominator:
Weighted-average shares outstanding—Basic	48,730				47,947				47,481
Effect of dilutive securities:
Stock options, restricted stock, restricted stock units and performance share units	963				1,071				1,083
Weighted-average shares outstanding—Diluted	49,693				49,018				48,564

Options to purchase 0.4 million shares, 0.5 million shares, and 0.6 million shares for fiscal years 2019, 2018 and 2017, respectively, as well as a non-significant number of restricted shares, RSUs, and performance share units (PSUs), were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted-average shares outstanding for fiscal years 2019, 2018 and 2017 excluded the impact of 1.0 million shares, 1.0 million shares and 1.1 million shares, respectively, of non-vested restricted stock, RSUs and PSUs.

Treasury Shares

In July 2010, the Company’s Board of Directors authorized a $500.0 million stock repurchase program, and subsequently approved increases to the stock repurchase program of $250.0 million in 2010, $250.0 million in 2013, $150.0 million in 2014, and $150.0 million in 2017, for an aggregate authorization of $1.3 billion. Under its authorized stock repurchase program, the Company did not repurchase any shares in fiscal years 2019 and 2018. The Company repurchased 1.0 million shares totaling $90.6 million in fiscal year 2017. As of December 28, 2019, the Company had $129.1 million remaining on the authorized stock repurchase program.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, RSUs, and PSUs in order to satisfy individual statutory tax withholding requirements. The Company acquired 0.1 million shares for $18.1 million, 0.1 million shares for $13.8 million, and 0.2 million shares for $16.3 million in fiscal years 2019, 2018 and 2017, respectively, from such netting.

In fiscal years 2019 and 2018, the Company’s Board of Directors approved the cancellation and return to the Company’s authorized and unissued capital stock of 0.1 million treasury shares totaling $18.1 million and 40.2 million treasury shares totaling $1.7 billion, respectively, reducing treasury stock on the Company’s consolidated balance sheet. The Company allocated the excess of the repurchase price over the par value of shares acquired to reduce both retained earnings and additional paid-in capital for $13.8 million and $4.3 million, respectively, in fiscal 2019 and $0.5 billion and $1.2 billion, respectively, in fiscal year 2018.

Accumulated Other Comprehensive Income (Loss)

Changes to each component of accumulated other comprehensive income (loss), net of income taxes, are as follows:

	Foreign Currency Translation Adjustment and Other				Pension and Other Post-Retirement Benefit Plans				Total
	(in thousands)
December 30, 2017	$	(77,545	)		$	(67,186	)		$	(144,731	)
Other comprehensive loss before reclassifications (1)	(27,352		)		(1,659		)		(29,011		)
Amounts reclassified from accumulated other comprehensive income (loss)	—				2,477				2,477
Net current period other comprehensive (loss) income	(27,352		)		818				(26,534		)
Amount reclassified from accumulated other comprehensive loss due to the adoption of ASU 2018-02	—				3,330				3,330
Income tax (benefit) expense	(2,698		)		806				(1,892		)
December 29, 2018	(102,199		)		(70,504		)		(172,703		)
Other comprehensive income (loss) before reclassifications (1)	14,444				(25,165		)		(10,721		)
Amounts reclassified from accumulated other comprehensive income (loss)	—				1,772				1,772
Net current period other comprehensive income (loss)	14,444				(23,393		)		(8,949		)
Income tax (benefit)	(177		)		(3,456		)		(3,633		)
December 28, 2019	$	(87,578	)		$	(90,441	)		$	(178,019	)
(1) The impact of the foreign currency translation adjustment to other comprehensive income (loss) before reclassifications was primarily due to the effect of changes in foreign currency exchange rates of the Euro, British Pound, and Canadian Dollar and to a lesser extent due to the impact of changes in the Chinese Yuan Renminbi and Japanese Yen.

Nonredeemable Noncontrolling Interest

The Company has an investment in an entity whose financial results are consolidated in the Company’s financial statements, as it has the ability to exercise control over this entity. The interest of the noncontrolling party in this entity has been recorded as noncontrolling interest within Equity in the accompanying consolidated balance sheets. The activity within the nonredeemable noncontrolling interest during fiscal years 2019, 2018, and 2017 was not significant.

Redeemable Noncontrolling Interests

In January 2013, the Company acquired a 75% ownership interest in Vital River, a commercial provider of research models and related services in China, for $24.2 million, net of $2.7 million of cash acquired. Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling interest holders that provided the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 25% of the entity for cash at its fair value beginning in January 2016. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets, which is presented above

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining equity interest.

During fiscal years 2016 through the 2019, the following transactions and amendments impacted the Vital River redeemable noncontrolling interest as follows:

•

On July 7, 2016, the Company purchased an additional 12% equity interest in Vital River for $10.8 million, resulting in total ownership of 87%. Concurrent with the transaction, the original agreement was amended providing the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 13% equity interest at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. These rights are exercisable beginning in 2019 and are accelerated in certain events. Subsequent to the amendment during fiscal years 2016 through 2019, the redeemable noncontrolling interest was measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($18.5 million as of December 29, 2018) and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest.

•

On June 13, 2019, the Company purchased an additional 5% equity interest in Vital River for $7.9 million, resulting in total ownership of 92%. The Company recorded a $0.8 million gain in equity equal to the excess fair value of the 5% equity interest over the purchase price. Concurrent with the transaction, the pre-existing agreement was further amended to provide the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 8% equity interest (redeemable noncontrolling interest) at a contractually defined redemption value, subject to a redemption floor, which represents a derivative embedded within the equity instrument. These rights are exercisable beginning in 2022 and are accelerated in certain events. The Company recorded a charge of $2.2 million in Selling, general and administrative expenses within the consolidated statements of income, equal to the excess fair value of the hybrid instrument (equity interest with embedded derivative) over the fair value of the 8% equity interest. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value ($15.5 million as of December 28, 2019) and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 8% interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets, which is presented above the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining 8% equity interest.

As part of the Citoxlab acquisition on April 29, 2019, the Company acquired a less than wholly owned subsidiary that is fully consolidated under the voting interest model. The Company acquired an approximate 90% equity interest, which includes an approximate 10% redeemable noncontrolling interest. The noncontrolling interest holders have the ability to require the Company to purchase the remaining approximate 10% interest at certain dates in the future between 2021 through 2023. The noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets and is approximately $4 million as of December 28, 2019.

On August 28, 2019, the Company acquired an 80% equity interest in a supplier, which included a 20% redeemable noncontrolling interest. The contract provides the Company the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 20% equity interest at its appraised value. These rights are exercisable beginning in 2022. The redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the appraised value and the carrying amount adjusted for net income (loss) attributable to the noncontrolling interest or a pre-determined floor value. As the noncontrolling interest holders have the ability to require the Company to purchase the remaining 20% interest, the noncontrolling interest is classified in the mezzanine section of the consolidated balance sheets, which is presented above the equity section and below liabilities. The agreement does not limit the amount that the Company could be required to pay to purchase the remaining 20% equity interest.

The following table provides a rollforward of the activity related to the Company’s redeemable noncontrolling interests:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fiscal Year
	2019				2018
	(in thousands)
Beginning balance	$	18,525			$	16,609
Adjustment to Vital River redemption value	1,451				2,069
Purchase of Vital River 5% equity interest	(8,745		)		—
Change in fair value of Vital River 8% equity interest, included in additional paid-in capital	2,708				—
Modification of Vital River 8% purchase option	2,196				—
Acquisition of an approximate 10% non-controlling interest through acquiring Citoxlab	4,035				—
Acquisition of a 20% non-controlling interest through acquiring a supplier	8,740				—
Net (loss) income attributable to noncontrolling interests	(42		)		800
Foreign currency translation	(221		)		(953		)
Ending balance	$	28,647			$	18,525

11. INCOME TAXES

The components of income from continuing operations before income taxes and the related provision for income taxes are presented below:

	Fiscal Year
	2019				2018				2017
	(in thousands)
Income from continuing operations before income taxes:
U.S.	$	108,326			$	95,062			$	123,896
Non-U.S.	195,758				186,619				173,059
	$	304,084			$	281,681			$	296,955
Income tax provision (benefit):
Current:
Federal	$	18,101			$	17,390			$	93,871
Foreign	43,489				38,557				37,150
State	9,915				8,837				12,361
Total current	71,505				64,784				143,382
Deferred:
Federal	(3,226		)		(7,145		)		9,416
Foreign	(17,111		)		(4,104		)		14,953
State	(1,145		)		928				3,618
Total deferred	(21,482		)		(10,321		)		27,987
	$	50,023			$	54,463			$	171,369

Included in the fiscal year 2019 tax expense of $50.0 million is a $20.6 million tax benefit for the recognition of $315.5 million of historical foreign net operating loss deferred tax assets, partially offset by a $294.9 million valuation allowance. Prior to 2019, these deferred tax assets were not recognized as the Company believed the ability to utilize the net operating losses was remote. As a result of both U.S. Tax Reform and European tax legislation, the Company made changes in 2019 to its financing structure, resulting in the ability to utilize a portion of the net operating losses previously considered remote in nature.

The Company’s accounting for the elements of U.S. Tax Reform is complete based on all published tax law and corresponding guidance. However, proposed and final clarifying guidance is anticipated for various aspects of U.S. Tax Reform which are relevant to the Company. The effects of any additional guidance will be recorded in the period such guidance is issued.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	Fiscal Year
	2019			2018			2017
U.S. statutory income tax rate	21.0	%		21.0	%		35.0	%
Foreign tax rate differences	2.7			0.5			(6.8	)
State income taxes, net of federal tax benefit	2.6			2.4			2.0
Non-deductible compensation	1.7			1.0			1.3
Research tax credits and enhanced deductions	(4.4	)		(2.9	)		(2.4	)
Stock-based compensation	(2.2	)		(2.1	)		(3.2	)
Enacted tax rate changes	(0.7	)		(0.1	)		(4.2	)
Transition Tax	—			(0.3	)		24.8
Impact of tax uncertainties	(2.6	)		(1.1	)		(0.4	)
Tax on unremitted earnings	1.7			1.2			7.3
Impact of acquisitions and restructuring	2.7			0.3			3.8
Net operating loss deferred tax asset recognition, net of valuation allowance (NOL DTA)	(6.8	)		—			—
Other	0.8			(0.6	)		0.5
Effective income tax rate	16.5	%		19.3	%		57.7	%

The components of deferred tax assets and liabilities are as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Deferred tax assets:
Compensation	$	40,582			$	36,724
Accruals and reserves	13,687				13,183
Net operating loss and credit carryforwards	367,269				35,679
Operating lease liability	33,785				—
Other	7,181				5,060
Valuation allowance	(309,962		)		(9,788		)
Total deferred tax assets	152,542				80,858
Deferred tax liabilities:
Goodwill and other intangibles	(174,847		)		(154,743		)
Depreciation related	(29,317		)		(19,373		)
Venture capital investments	(12,806		)		(10,557		)
Tax on unremitted earnings	(17,282		)		(14,140		)
Right-of-use assets	(34,953		)		—
Other	(5,961		)		(2,296		)
Total deferred tax liabilities	(275,166		)		(201,109		)
Net deferred taxes	$	(122,624	)		$	(120,251	)

The valuation allowance increased by $300.2 million from $9.8 million as of December 29, 2018 to $310.0 million as of December 28, 2019. The increase is primarily related to the recognition of $315.5 million of net operating loss deferred tax assets due to changes in the Company’s financing structure, $294.9 million of which the Company does not believe is more likely than not to be utilized.

As of December 28, 2019, the Company had foreign net operating loss carryforwards of $337.3 million, as compared to $35.7 million as of December 29, 2018. Of this amount, $23.3 million are definite-lived and begin to expire in 2020, and the remainder of $314.0 million can be carried forward indefinitely. The Company has tax credit carryforwards of $30.1 million,

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

which will begin to expire after 2035 and beyond. Additionally, the Company records a benefit to operating income for research and development and other credits in Quebec, France, the Netherlands, and the U.K. related to its DSA facilities.

The Company has recognized its deferred tax assets on the belief that it is more likely than not that they will be realized. The only exceptions relate to deferred tax assets primarily for net operating losses in Hong Kong, Luxembourg, certain capital losses, and fixed assets in the U.K.

A reconciliation of the Company’s beginning and ending unrecognized income tax benefits is as follows:

	Fiscal Year
	2019				2018				2017
	(in thousands)
Beginning balance	$	18,827			$	24,710			$	24,186
Additions to tax positions for current year	3,691				2,477				1,791
Additions to tax positions for prior years	5,234				—				1,428
Reductions to tax positions for prior years	(1,033		)		(4,543		)		—
Settlements	(274		)		(3,380		)		(1,754		)
Expiration of statute of limitations	(6,780		)		(437		)		(941		)
Ending balance	$	19,665			$	18,827			$	24,710

The $0.8 million increase in unrecognized income tax benefits during fiscal year 2019 as compared to the corresponding period in 2018 is primarily attributable to increases due to business combinations and an additional year of Canadian SR&ED credit, partially offset by expiration of statutes of limitations.

The amount of unrecognized income tax benefits that, if recognized, would favorably impact the effective tax rate was $17.0 million as of December 28, 2019 and $17.6 million as of December 29, 2018. The $0.6 million decrease is primarily attributable to expiration of statutes of limitations, partially offset by increases due to business combinations and an additional year of Federal Canadian SR&ED credit. It is reasonably possible as of December 28, 2019 that the liability for unrecognized tax benefits for the uncertain tax position will decrease by $4.0 million over the next twelve month period, primarily as a result of lapsing statutes of limitations. The Company continues 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 28, 2019 and December 29, 2018 was $2.3 million and $2.7 million, respectively. There were no accrued penalties related to unrecognized income tax benefits as of December 28, 2019 or as of December 29, 2018.

The Company conducts business in a number of tax jurisdictions. As a result, it is subject to tax audits on a regular basis including, but not limited to, such major jurisdictions as the U.S., the U.K., China, France, Germany, and Canada. With few exceptions, the Company is no longer subject to U.S. and international income tax examinations for years before 2016.

The Company and certain of its subsidiaries have ongoing tax controversies in the U.S., France and Canada. The Company does not anticipate resolution of these audits will have a material impact on its financial statements.

12. EMPLOYEE BENEFIT PLANS

Pension Plans

The Charles River Laboratories, Inc. Pension Plan (U.S. Pension Plan) is a qualified, non-contributory defined benefit plan covering certain U.S. employees. Effective 2002, the U.S. Pension Plan was amended to exclude new participants from joining and in 2008 the accrual of benefits was frozen. On January 31, 2019, the Company commenced the process to terminate the U.S. Pension Plan and expects to complete the termination process during fiscal year 2020. As part of the planned termination, the Company re-balanced assets to a target asset allocation (primarily fixed income investments) to better match our assets to the characteristics of the liabilities. At December 28, 2019, the U.S Pension Plan has a benefit obligation of $94.4 million and plan assets of $91.2 million. The benefit obligation has been valued at the amount expected to be required to settle the obligations. Assumptions utilized considered the portion of obligations expected to be settled through participant acceptance of lump sum payments or annuities and the cost to purchase annuities, which are subject to change upon actual plan settlement. Increasing the U.S Pension Plan’s obligations to reflect the expected settlement value resulted in an actuarial loss of approximately $6 million, which was recorded to Other comprehensive income as part of the annual revaluation for fiscal year 2019. In the event that approvals are received and we proceed with effecting termination of this plan, settlement of the obligation is expected to occur in the second half of 2020. Upon settlement of the benefit obligation, the Company will

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

reclassify the related pension losses, currently recorded within Accumulated other comprehensive loss on the consolidated balance sheet, to Other expense, net in the consolidated statements of income. As of December 28, 2019, the Company had unrecognized losses related to the U.S. Pension Plan of approximately $14 million.

The Charles River Pension Plan (U.K. Pension Plan) is a defined contribution and defined benefit pension plan covering certain U.K. 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. In the fourth quarter of 2015, the U.K. Pension Plan was amended such that the members of the defined benefit section of the plan ceased to accrue additional benefits; however, their benefits continue to be adjusted for changes in their final pensionable salary or a specified inflation index, as applicable.

In addition, the Company has several defined benefit plans in certain other countries in which it maintains an operating presence, including Canada, France, Germany, Japan, Italy, and the Netherlands.

The net periodic benefit cost (income) associated with these plans for fiscal years 2019, 2018 and 2017 totaled $1.5 million, $(1.5) million and $1.6 million, respectively.

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

The Company maintains a non-qualified deferred compensation plan, known as the Charles River Laboratories Deferred Compensation Plan (DCP), which allows a select group of eligible employees to defer a portion of their compensation. At the present time, no contributions are credited to the DCP, 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. Amounts may also be distributed during employment, subject to a minimum deferral requirement of three years.

The Company provides certain active employees an annual contribution into their DCP account of 10% of the employee’s base salary plus the lesser of their target annual bonus or actual annual bonus.

In addition to the DCP, certain officers and key employees also participate, or in the past participated, in the Company’s 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 U.S. Pension Plan and Social Security. In connection with the establishment of the DCP, certain active ESLIRP participants, who agreed to convert their accrued ESLIRP benefit to a comparable deferred compensation benefit, discontinued their direct participation in the ESLIRP. Instead, the present values of the accrued benefits of ESLIRP participants were credited to their DCP accounts, and future accruals are converted to present values and credited to their DCP accounts annually. In fiscal year 2019, one executive officer, who converted their ESLIRP benefit into the DCP, announced their intention to retire in May 2020 and therefore the DCP liability reflects the expected departure.

The net periodic benefit cost associated with these plans for fiscal years 2019, 2018 and 2017 totaled $2.5 million, $2.9 million and $2.3 million, respectively.

The Company has invested in several corporate-owned key-person life insurance policies with the intention of using these investments to fund the ESLIRP and the DCP. Participants have no interest in any such investments. As of December 28, 2019 and December 29, 2018, the cash surrender value of these life insurance policies were $38.2 million and $32.3 million, respectively.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides a reconciliation of benefit obligations and plan assets of the Company’s pension, DCP and ESLIRP plans:

	December 28, 2019				December 29, 2018
	(in thousands)
Change in projected benefit obligations:
Benefit obligation at beginning of year	$	362,805			$	392,964
Service cost	2,833				2,612
Interest cost	11,583				10,850
Other	850				1,499
Benefit payments	(11,062		)		(8,886		)
Settlements	(74		)		—
Special/Contractual Termination Benefits	166				—
Plan amendments	—				104
Transfer in from acquisition	6,818				—
Actuarial loss (gain)	66,432				(21,168		)
Administrative expenses paid	(470		)		(195		)
Effect of foreign exchange	7,528				(14,975		)
Benefit obligation at end of year	$	447,409			$	362,805
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	305,709			$	304,325
Actual return on plan assets	53,741				(7,419		)
Employer contributions	2,105				31,174
Settlements	(74		)		—
Transfer in from acquisition	119				—
Benefit payments	(11,062		)		(8,886		)
Administrative expenses paid	(470		)		(195		)
Effect of foreign exchange	7,113				(13,290		)
Fair value of plan assets at end of year	$	357,181			$	305,709
Net balance sheet liability	$	90,228			$	57,096
Amounts recognized in balance sheet:
Noncurrent assets	$	1,742			$	3,280
Current liabilities	12,788				1,095
Noncurrent liabilities	79,182				59,281

Amounts recognized in accumulated other comprehensive loss related to the Company’s pension, DCP and ESLIRP plans are as follows:

	Fiscal Year
	2019				2018
	(in thousands)
Net actuarial loss	$	116,930			$	93,483
Net prior service cost (credit)	(2,096		)		(2,585		)
Net amount recognized	$	114,834			$	90,898

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The accumulated benefit obligation and fair value of plan assets for the Company’s pension, DCP and ESLIRP plans with accumulated benefit obligations in excess of plan assets are as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Accumulated benefit obligation	$	410,243			$	254,138
Fair value of plan assets	337,344				207,538

The projected benefit obligation and fair value of plan assets for the Company’s pension, DCP and ESLIRP plans with projected benefit obligations in excess of plan assets are as follows:

	December 28, 2019				December 29, 2018
	(in thousands)
Projected benefit obligation	$	435,638			$	273,625
Fair value of plan assets	343,688				213,249

The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year are as follows:

	December 28, 2019
	(in thousands)
Amortization of net actuarial loss	$	6,344
Amortization of net prior service credit	(501		)

Components of net periodic benefit cost for the Company’s pension, DCP and ESLIRP plans are as follows:

	Fiscal Year
	2019				2018				2017
	(in thousands)
Service cost	$	2,833			$	2,612			$	3,110
Interest cost	11,583				10,850				11,642
Expected return on plan assets	(13,005		)		(15,516		)		(14,249		)
Amortization of prior service credit	(489		)		(514		)		(496		)
Amortization of net loss	2,250				2,990				3,845
Other	850				910				—
Net periodic cost (benefit)	$	4,022			$	1,332			$	3,852

Assumptions

Weighted-average assumptions used to determine projected benefit obligations are as follows:

	December 28, 2019			December 29, 2018
Discount rate	2.14	%		3.21	%
Rate of compensation increase	2.99	%		3.23	%

The discount rate reflects the rate the Company would have to pay to purchase high-quality investments that would provide cash sufficient to settle its current pension obligations. Specifically for the expected termination of the U.S. Pension Plan, estimated costs of lump sum payments and annuity purchases are reflected in the discount rate. A 25 basis point change across all discount rates changes the projected benefit obligation by approximately $20 million for all Company plans.

Weighted-average assumptions used to determine net periodic benefit cost are as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	December 28, 2019			December 29, 2018			December 30, 2017
Discount rate	3.21	%		2.82	%		3.01	%
Expected long-term return on plan assets	4.28	%		5.18	%		5.41	%
Rate of compensation increase	3.23	%		3.16	%		3.25	%

A 0.5% decrease in the expected rate of return would increase annual pension expense by $1.8 million.

In fiscal years 2019 and 2018, new mortality improvement scales were issued in the U.S. and the United Kingdom (U.K.) reflecting a decline in longevity projection from previous releases the Company adopted, which decreased the Company’s benefit obligations by $2.8 million and $1.7 million as of December 28, 2019 and December 29, 2018, respectively.

Plan Assets

The Company invests its pension assets with the objective of achieving a total long-term rate of return sufficient to fund future pension obligations and to minimize future pension contributions. The Company is willing to tolerate a commensurate level of risk to achieve this objective. The Company controls its risk by maintaining a diversified portfolio of asset classes. Plan assets did not include any of the Company’s common stock as of December 28, 2019 or December 29, 2018. The weighted-average target asset allocations are 24.0% to equity securities, 24.6% to fixed income securities and 51.4% to other securities.

The fair value of the Company’s pension plan assets by asset category are as follows:

	December 28, 2019																December 29, 2018
	Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
	(in thousands)
Cash and cash equivalents	$	2,388			$	1,022			$	—			$	3,410			$	7,317			$	—			$	—			$	7,317
Equity securities (1)	7,621				84,377				—				91,998				72,237				—				—				72,237
Debt securities (2)	40,281				89,684				—				129,965				17,147				4,100				—				21,247
Mutual funds (3)	6,324				68,632				—				74,956				86,282				59,984				—				146,266
Other (4)	551				54,787				1,514				56,852				718				56,283				1,641				58,642
Total	$	57,165			$	298,502			$	1,514			$	357,181			$	183,701			$	120,367			$	1,641			$	305,709
(1) This category comprises equity investments and securities held by non-U.S. pension plans valued at the quoted closing price, and translated into U.S. dollars using a foreign currency exchange rate at year end.
(2) This category comprises debt investments and securities held by U.S. and non-U.S. pension plans valued at the quoted closing price. For non-U.S. pension plans, the quoted closing price is translated into U.S. dollars using a foreign currency exchange rate at year end. Holdings primarily include investment-grade corporate bonds and U.S. treasuries at various durations.
(3) This category comprises non-U.S. mutual funds valued at the net asset value of shares held at year end and translated into U.S. dollars using a foreign currency exchange rate at year end.
(4) This category mainly comprises fixed income securities tied to various U.K. government bond yields held by non-US pension plans valued at the net asset value of shares held at year-end, and translated into U.S. dollars using a foreign currency exchange rate at year end.

The activity within the Level 3 pension plan assets was non-significant during the periods presented.

During fiscal year 2019, the Company contributed $0.8 million to the pension plans and expects to contribute approximately $11.9 million in fiscal year 2020. During fiscal year 2019, the Company contributed $1.3 million directly to certain participants outside of plan assets.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Expected benefit payments are estimated using the same assumptions used in determining the Company’s benefit obligation as of December 28, 2019. Benefit payments will depend on future employment and compensation levels, among other factors, and changes in any of these factors could significantly affect these estimated future benefit payments. Estimated future benefit payments during the next five years and in the aggregate for fiscal years 2025 through 2029, are as follows. Payments in fiscal year 2020 reflect the estimated payments of approximately $94 million to participants in connection with the U.S. Pension Plan termination and $8 million to an executive officer expected to retire:

Fiscal Year		Pension Plans
		(in thousands)
2020		$	111,848
2021		9,420
2022		10,344
2023		40,911
2024		10,814
2025-2029		59,646

Post-Retirement Health and Life Insurance Plans

The Company’s Canadian location offers post-retirement life insurance benefits to its employees and post-retirement medical and dental insurance coverage to certain executives. The plan is non-contributory and unfunded. As of December 28, 2019 and December 29, 2018, the accumulated benefit obligation related to the plan was $1.1 million and $1.5 million, respectively. The amounts included in other accumulated comprehensive income as well as expenses related to the plan were non-significant for fiscal years 2019, 2018 and 2017.

Charles River Laboratories Employee Savings Plan

The Charles River Laboratories Employee Savings Plan is a defined contribution plan in the form of a qualified 401(k) plan in which substantially all U.S. employees are eligible to participate upon employment. The plan contains a provision whereby the Company matches a percentage of employee contributions. During fiscal years 2019, 2018 and 2017, the costs associated with this defined contribution plan totaled $19.1 million, $13.4 million and $11.6 million, respectively.

13. STOCK-BASED COMPENSATION

The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock, restricted stock units (RSUs), and performance share units (PSUs).

During fiscal years 2019, 2018 and 2017, 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 common stock on the date of grant; typically vest over 4 years; and typically expire 5 years from date of grant.

•	RSUs, which represent an unsecured promise to grant at no cost a set number of shares of common stock upon the completion of the vesting schedule, and typically vest over 2 to 4 years. With respect to RSUs, recipients are not entitled to cash dividends and have no voting rights on the stock during the vesting period.

•	PSUs, 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 and typically vest over 3 years. Payout of this award is contingent upon achievement of certain performance and market conditions.

In May 2007, the Company’s shareholders approved the 2007 Incentive Plan, which was amended in 2009, 2011, 2013 and 2015 (2007 Plan). The 2007 Plan provided no further awards to 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 18.7 million shares to be awarded, of which restricted stock grants, RSUs, and performance based stock awards count as 2.3 shares and stock options count as 1.0 share. Any stock options and other share-based awards that were granted under prior plans and were outstanding in May 2007 continue in accordance with the terms of the respective plans.

In May 2016, the Company’s shareholders approved the 2016 Incentive Plan (2016 Plan). The 2016 Plan provided no further awards to be granted under preexisting stock option and incentive plans; provided, however, that any shares that have been

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2016 Plan allows a maximum of 6.1 million shares to be awarded, of which restricted stock grants, RSUs, and performance based stock awards count as 2.3 shares and stock options count as 1.0 share. Any stock options and other share-based awards that were granted under prior plans and were outstanding in May 2016 continue in accordance with the terms of the respective plans.

In May 2018, the Company’s shareholders approved the 2018 Incentive Plan (2018 Plan). The 2018 Plan provided no further awards to 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 2018 Plan allows a maximum of 7.2 million shares to be awarded, of which restricted stock grants, RSUs, and performance based stock awards count as 2.3 shares and stock options count as 1.0 share. Any stock options and other share-based awards that were granted under prior plans and were outstanding in May 2018 continue in accordance with the terms of the respective plans.

As of December 28, 2019, approximately 5.8 million shares were authorized for future grants under the Company’s share-based compensation plans. The Company settles employee share-based compensation awards with newly issued shares. The following table provides stock-based compensation by the financial statement line item in which it is reflected:

	Fiscal Year
	2019				2018				2017
	(in thousands)
Cost of revenue	$	9,038			$	6,285			$	6,509
Selling, general and administrative	48,233				41,061				37,494
Stock-based compensation, before income taxes	57,271				47,346				44,003
Provision for income taxes	(9,465		)		(9,188		)		(13,428		)
Stock-based compensation, net of income taxes	$	47,806			$	38,158			$	30,575

No stock-based compensation related costs were capitalized in fiscal years 2019, 2018 and 2017.

Stock Options

The following table summarizes stock option activity under the Company’s stock-based compensation plans:

	Number of shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(in thousands)							(in years)		(in thousands)
Options outstanding as of December 29, 2018	1,556			$	86.44
Options granted	454			$	144.42
Options exercised	(442	)		$	78.49
Options canceled	(61	)		$	113.17
Options outstanding as of December 28, 2019	1,507			$	105.19			2.7		$	70,459
Options exercisable as of December 28, 2019	390			$	77.87			1.5		$	28,897
Options expected to vest as of December 28, 2019	1,117			$	114.73			3.1		$	41,562

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Fiscal Year
	2019			2018			2017
Expected life (in years)	3.6			3.7			3.6
Expected volatility	27	%		25	%		24	%
Risk-free interest rate	2.4	%		2.4	%		1.6	%
Expected dividend yield	0	%		0	%		0	%

The weighted-average grant date fair value of stock options granted was $33.97, $24.80 and $18.33 for fiscal years 2019, 2018 and 2017, respectively.

As of December 28, 2019, the unrecognized compensation cost related to unvested stock options expected to vest was $16.5 million. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.3 years.

The total intrinsic value of options exercised during fiscal years 2019, 2018 and 2017 was $27.0 million, $29.0 million and $30.0 million, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the exercise price.

Restricted Stock Units

The following table summarizes the restricted stock units activity for fiscal year 2019:

	Restricted Stock Units			Weighted Average Grant Date Fair Value
	(in thousands)
December 29, 2018	490			$	93.80
Granted	221			$	142.85
Vested	(185	)		$	89.34
Canceled	(30	)		$	115.10
December 28, 2019	496			$	116.07

As of December 28, 2019, the unrecognized compensation cost related to shares of unvested RSUs expected to vest was $32.6 million, which is expected to be recognized over an estimated weighted-average amortization period of 2.3 years. The total fair value of RSU grants that vested during fiscal years 2019, 2018 and 2017 was $16.5 million, $15.5 million and $13.6 million, respectively.

Performance Based Stock Award Program

The Company issues PSUs to certain corporate officers. The number of shares of common stock issued for each PSU is adjusted based on a performance condition linked to the Company’s financial performance. Certain awards are further adjusted based on a market condition, which is calculated based on the Company’s stock performance relative to a peer group over the three-year vesting period. The fair value of the market condition is reflected in the fair value of the award at grant date.

The Company utilizes a Monte Carlo simulation valuation model to value these awards. Information pertaining to the Company’s PSUs and the related estimated weighted-average assumptions used to calculate their fair value were as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fiscal Year
	2019				2018				2017
	(shares in thousands)
PSUs granted	160				200				198
Weighted average grant date fair value	$	164.47			$	117.89			$	99.96
Key Assumptions:
Expected volatility	25		%		26		%		26		%
Risk-free interest rate	2.4		%		2.4		%		1.3		%
Expected dividend yield	0		%		0		%		0		%
Total shareholder return of 20-trading day average stock price on grant date	17.7		%		2.9		%		17.7		%

The maximum number of common shares to be issued upon vesting of PSUs is 0.3 million. For fiscal years 2019, 2018 and 2017, the Company recognized stock-based compensation related to PSUs of $25.3 million, $20.4 million and $18.9 million, respectively. The total fair value of PSUs that vested during fiscal years 2019, 2018 and 2017 was $20.2 million, $18.3 million and $14.4 million, respectively.

In fiscal years 2019, 2018 and 2017, the Company also issued approximately 15,000, 17,000 and 15,000 PSUs using a weighted-average grant date fair value per share of $144.67, $109.34 and $88.05 respectively. These PSUs vest upon the achievement of financial targets and other performance measures.

14. FOREIGN CURRENCY CONTRACTS

Cross currency loans

The Company entered into foreign exchange forward contracts during fiscal 2019 and 2018 to limit its foreign currency exposure related U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Company’s Credit Facility. These contracts are not designated as hedging instruments. Any gains or losses on these forward contracts are recognized immediately within Interest expense in the consolidated statements of income.

The Company had no open forward contracts related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency as of December 28, 2019. One contract remained open as of December 29, 2018, which has a duration of approximately 3 months, and is recorded at fair value in the Company’s accompanying consolidated balance sheets. The notional amount and fair value of the open contract is summarized as follows:

December 29, 2018
Notional Amount				Fair Value				Balance Sheet Location
(in thousands)
$	343,300			$	(1,319	)		Other current liabilities

The following table summarizes the effect of the foreign exchange forward contracts entered into to limit the Company’s foreign currency exposure related to U.S. dollar denominated loans borrowed by a non-U.S. Euro functional currency entity under the Credit Facility on the Company’s consolidated statements of income:

		Fiscal Year
		2019								2018
Location of gain (loss)		Financial statement caption amount				Amount of gain (loss)				Financial statement caption amount				Amount of gain (loss)
		(in thousands)
Interest expense		$	60,882			$	18,672			$	63,772			1,486

Intercompany loans

The Company periodically enters into foreign exchange forward contracts to limit its foreign currency exposure related to certain intercompany loans. These contracts are not designated as hedging instruments. Any gains or losses on forward

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

contracts associated with intercompany loans are recognized immediately in Other income, net and are largely offset by the remeasurement of the underlying intercompany loans.

The Company entered into foreign currency forward contracts during 2019. One contract remained open at December 28, 2019, which had a duration of less than one month and is recorded at fair value in the Company’s accompanying consolidated balance sheets. The Company did not have any significant foreign currency forward contracts related to certain intercompany loans during fiscal years 2018 and 2017. The notional amount and fair value of the open contract is summarized as follows:

December 28, 2019
Notional Amount				Fair Value				Balance Sheet Location
(in thousands)
$	115,038			$	(876	)		Other current liabilities

The following table summarizes the effect of the foreign exchange forward contracts in connection with certain intercompany loans on the Company’s consolidated statements of income:

		Fiscal Year
		2019
Location of gain (loss)		Financial statement caption amount				Amount of gain (loss)
		(in thousands)
Other income, net		$	12,293			$	(121	)

15. RESTRUCTURING AND ASSET IMPAIRMENTS

Global Restructuring Initiatives

In recent fiscal years, the Company has undertaken productivity improvement initiatives within all reportable segments at various locations across the U.S., Canada, Europe, China, and Japan. This includes workforce right-sizing and scalability initiatives, resulting in severance and transition costs; and cost related to the consolidation of facilities, resulting in asset impairment and accelerated depreciation charges. The Company does not have any significant remaining lease obligations for facilities associated with restructuring activities.

The following table presents a summary of restructuring costs related to these initiatives by classification within the consolidated statements of income:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Severance and Transition Costs				Asset Impairments and Other Costs				Total
	(in thousands)
December 28, 2019
Cost of services provided and products sold (excluding amortization of intangible assets)	$	4,348			$	2,367			$	6,715
Selling, general and administrative	7,106				18				7,124
Total	$	11,454			$	2,385			$	13,839
December 29, 2018
Cost of services provided and products sold (excluding amortization of intangible assets)	$	923			$	27			$	950
Selling, general and administrative	6,597				21				6,618
Total	$	7,520			$	48			$	7,568
December 30, 2017
Cost of services provided and products sold (excluding amortization of intangible assets)	$	1,944			$	929			$	2,873
Selling, general and administrative	1,905				—				1,905
Total	$	3,849			$	929			$	4,778

The following table presents restructuring costs by reportable segment for these productivity improvement initiatives:

	Fiscal Year
	2019				2018				2017
	(in thousands)
RMS	$	3,110			$	—			$	291
DSA	7,307				1,063				1,604
Manufacturing	3,032				1,227				2,883
Unallocated corporate	390				5,278				—
Total	$	13,839			$	7,568			$	4,778

2017 RMS Restructuring Initiative

In the fourth quarter of fiscal year 2017, the Company committed to a plan to further reduce costs and improve operating efficiencies in its RMS reportable segment. The plan included ceasing production within the Company’s facility in Maryland and reducing its workforce at various global RMS facilities during 2018. On August 1, 2018, the Company’s Board of Directors approved a modification to the plan which repurposed the facility in Maryland to be used for alternative initiatives. The Company’s existing lease obligation continues through 2028 and the Company expects to remain in the facility for the duration of the lease term.

The following table presents a summary of severance and transition costs, and asset impairments (referred to as restructuring costs) related to this initiative during fiscal years 2018 and 2017 by classification within the consolidated statements of income. The Company did not incur any restructuring costs during fiscal year December 28, 2019.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Severance and Transition Costs				Asset Impairments and Other Costs				Total
	(in thousands)
December 29, 2018
Cost of services provided and products sold (excluding amortization of intangible assets)	$	847			$	822			$	1,669
Selling, general and administrative	314				—				314
Total	$	1,161			$	822			$	1,983
December 30, 2017
Cost of services provided and products sold (excluding amortization of intangible assets)	$	362			$	17,716			$	18,078
Selling, general and administrative	67				—				67
Total	$	429			$	17,716			$	18,145

Restructuring costs incurred during 2017 were $18.1 million, which primarily related to non-cash asset impairments and accelerated depreciation charges of $17.7 million. The costs incurred during 2018 were $2.0 million, which primarily related to cash payments for severance and transition costs of $1.2 million. All of the costs are recorded in the RMS reportable segment. All severance and transition costs have been paid as of December 28, 2019 and no further restructuring costs related to the 2017 RMS Restructuring Initiative are expected to be incurred.

Rollforward of restructuring activities

The following table provides a rollforward for all of the Company’s severance and transition costs, and certain lease obligation liabilities related to restructuring activities:

	Fiscal Year
	2019				2018				2017
	(in thousands)
Beginning balance	$	2,921			$	6,856			$	8,102
Expense (excluding non-cash charges)	12,674				8,681				4,278
Payments / utilization	(9,206		)		(12,341		)		(6,103		)
Foreign currency adjustments	17				(275		)		579
Ending balance	$	6,406			$	2,921			$	6,856

As of December 28, 2019 and December 29, 2018, $6.3 million and $2.4 million of severance and other personnel related costs liabilities and lease obligation liabilities, respectively, were included in accrued compensation and accrued liabilities within the Company’s consolidated balance sheets and $0.1 million and $0.5 million, respectively, were included in other long-term liabilities within the Company's consolidated balance sheets.

16. LEASES

Adoption of ASC Topic 842, “Leases” (ASC 842)

ASC 842 became effective for the Company on December 30, 2018 and was adopted using the modified retrospective method for all leases that had commenced as of the effective date, along with certain available practical expedients. The Company elected to recognize any effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, which there were none. In addition, the Company elected to adopt the package of practical expedients permitted under the transition guidance within the new standard. The practical expedient package applied to leases that commenced prior to the effective date of the new standard and permits a reporting entity not to: i) reassess whether any expired or existing contracts are or contain leases, ii) reassess the historical lease classification for any expired or existing leases, and iii) reassess initial direct costs for any existing leases.

The reporting results for fiscal year 2019 reflect the application of ASC 842 guidance while the historical results for fiscal year 2018 were prepared under the guidance of ASC 840. The adoption of the new standard did not have a significant impact upon the Company’s consolidated statements of income and cash flows. The adoption of the new standard resulted in the following impact to the consolidated balance sheets: i) no significant change in the carrying values of assets and liabilities related to the Company’s finance leases, previously referred to as capital leases (See Note 9, “Long-Term Debt and Finance Lease Obligations”), ii) the derecognition of assets and related liabilities pertaining to certain build-to-suit arrangements previously accounted for under ASC 840 and recording them under the guidance of ASC 842, and iii) the recording of right-of-use assets and corresponding lease liabilities pertaining to the Company’s operating leases on the consolidated balance sheets, adjusted for

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

existing balances of prepaid rent and deferred rent liabilities as of the transition date. The cumulative effect of applying ASC 842 to all leases that had commenced as of December 29, 2018 was as follows:

Balance sheet captions impacted by ASC 842	December 30, 2018 (Prior to adoption of ASC 842)				Effect of the adoption of ASC 842					December 30, 2018 (As adjusted)
	(in thousands)
Prepaid assets	$	53,447			$	(4,413	)	(1)		$	49,034
Property, plant and equipment, net	932,877				(23,448		)	(2)		909,429
Operating lease right-of-use assets, net	—				134,172			(3)		134,172
Other assets	143,759				(4,989		)	(4)		138,770
Other current liabilities	71,280				15,935			(5)		87,215
Operating lease right-of-use liabilities	—				111,570			(6)		111,570
Long-term debt, net and finance leases	1,636,598				(26,183		)	(7)		1,610,415
ASC 842 adoption adjustments:
(1) Short term prepaid rent reclassified from Prepaid assets to the Operating lease right-of-use assets, net.
(2) Derecognition of approximately $26 million of leased properties, recorded in Property, plant and equipment, net, specifically Construction-in-process, that were recognized under the previously existing build-to-suit accounting rules; partially offset by Prepaid assets related to finance leases reclassified from Prepaid assets.
(3) Recognition of Operating lease right-of-use assets, net, and adjusted for prepaid rent and deferred rent liability reclassification adjustments identified in adjustments (1) (4) (5).
(4) Long-term prepaid rent reclassified from Other assets to Operating lease right-of-use assets, net.
(5) Recognition of short-term portion of the Operating lease right-of-use liabilities offset by reclassification of deferred rent liability to Operating lease right-of-use assets, net.
(6) Recognition of long-term portion of the Operating lease right-of-use liabilities.
(7) Derecognition of approximately $26 million of Other debt associated with leased properties that were recognized under the previously existing build-to-suit accounting rules.

Operating and Finance Leases

Right-of-use lease assets and lease liabilities are reported in the Company’s consolidated balance sheets as follows:

	December 28, 2019
	(in thousands)
Operating leases
Operating lease right-of-use assets, net	$	140,085
Other current liabilities	$	20,357
Operating lease right-of-use liabilities	116,252
Total operating lease liabilities	$	136,609
Finance leases
Property, plant and equipment, net	$	32,519
Current portion of long-term debt and finance leases	$	2,997
Long-term debt, net and finance leases	27,530
Total finance lease liabilities	$	30,527

The components of operating and finance lease costs for fiscal year 2019 were as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fiscal Year
	December 28, 2019
	(in thousands)
Operating lease costs	$	30,885
Finance lease costs:
Amortization of right-of-use assets	4,007
Interest on lease liabilities	1,349
Short-term lease costs	1,056
Variable lease costs	3,161
Sublease income	(994		)
Total lease costs	$	39,464

Other information related to leases was as follows:

Supplemental cash flow information

	Fiscal Year
	December 28, 2019
	(in thousands)
Cash flows included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,153
Operating cash flows from finance leases	1,406
Finance cash flows from finance leases	3,766
Non-cash leases activity:
Right-of-use lease assets obtained in exchange for new operating lease liabilities	$	24,382
Right-of-use lease assets obtained in exchange for new finance lease liabilities	4,819

Lease term and discount rate

	As of
	December 28, 2019
Weighted-average remaining lease term (in years)
Operating lease	8.23
Finance lease	12.97
Weighted-average discount rate
Operating lease	4.36
Finance lease	4.58

At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate.

As of December 28, 2019, maturities of operating and finance lease liabilities for each of the following five years and a total thereafter were as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Operating Leases				Finance Leases
	(in thousands)
2020	$	25,955			$	4,308
2021	25,028				3,832
2022	20,614				3,819
2023	16,853				2,929
2024	16,007				2,141
Thereafter	60,371				23,650
Total minimum future lease payments	164,828				40,679
Less: Imputed interest	28,219				10,152
Total lease liabilities	$	136,609			$	30,527

Total minimum future lease payments (predominantly operating leases) of approximately $57 million for leases that have not commenced as of December 28, 2019, as the Company does not yet control the underlying assets, are not included in the consolidated financial statements. These leases are expected to commence between fiscal years 2020 and 2024 with lease terms of approximately 4 to 15 years.

As of December 29, 2018, minimum future lease payments under non-cancellable leases for each of the following five years and a total thereafter were as follows:

	Operating Leases (1)				Finance Leases (1)
	(in thousands)
2019	$	25,411			$	3,972
2020	22,400				3,759
2021	21,544				2,869
2022	18,535				2,967
2023	15,398				2,209
Thereafter	66,870				24,304
Total minimum future lease payments	$	170,158			$	40,080
(1) Lease commitments are presented under the guidance of ASC 840 and includes approximately $14 million of minimum future lease payments for leases that had not commenced as of December 29, 2018. These commitments relate to existing leases for which the Company does not yet control certain expansion space.

17. COMMITMENTS AND CONTINGENCIES

Insurance

The Company maintains certain insurance policies that maintain large deductibles up to approximately $1.0 million, some with or without stop-loss limits, depending on market availability. Insurance policies at certain locations are based on a percentage of the insured assets, for which deductibles for certain property may exceed $5.0 million in the event of a catastrophic event.

Litigation

Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on the Company’s business or financial condition.

Guarantees

The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically include agreements with directors and officers, business partners, contractors, landlords, and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. However, to date the Company has not incurred

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these obligations is minimal.

Purchase Obligations

The Company enters into unconditional purchase obligations, in the ordinary course of business, that include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty. The aggregate amount of the Company’s unconditional purchase obligations totaled $154.0 million as of December 28, 2019 and is expected to be paid as follows:

	Payments Due by Period
	Less than 1 Year				1 - 3 Years				3 - 5 Years				Total
	(in millions)
Unconditional purchase obligations	$	106.1			$	45.0			$	2.9			$	154.0

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. SELECTED QUARTERLY FINANCIAL DATA (unaudited)

The following table contains quarterly financial information for fiscal years 2019 and 2018. The operating results for any quarter are not necessarily indicative of future period results.

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
	(in thousands, except per share amounts)
Fiscal Year 2019
Total revenue	$	604,569			$	657,568			$	667,951			$	691,138
Gross profit (1)	211,777				238,104				246,116				262,314
Operating income	69,792				79,768				92,802				108,789
Net income attributable to common shareholders	55,133				43,728				72,810				80,348
Earnings per common share
Basic:
Continuing operations attributable to common shareholders	$	1.14			$	0.90			$	1.49			$	1.64
Discontinued operations	$	—			$	—			$	—			$	—
Net income attributable to common shareholders	$	1.14			$	0.90			$	1.49			$	1.64
Diluted:
Continuing operations attributable to common shareholders	$	1.11			$	0.88			$	1.46			$	1.61
Discontinued operations	$	—			$	—			$	—			$	—
Net income attributable to common shareholders	$	1.11			$	0.88			$	1.46			$	1.61
Fiscal Year 2018
Total revenue	$	493,970			$	585,301			$	585,295			$	601,530
Gross profit (1)	181,469				215,981				216,200				226,417
Operating income	67,829				76,710				84,362				102,482
Net income attributable to common shareholders	52,631				53,709				60,368				59,665
Earnings per common share
Basic:
Continuing operations attributable to common shareholders	$	1.10			$	1.08			$	1.25			$	1.24
Discontinued operations	$	—			$	0.03			$	—			$	—
Net income attributable to common shareholders	$	1.10			$	1.11			$	1.25			$	1.24
Diluted:
Continuing operations attributable to common shareholders	$	1.08			$	1.06			$	1.22			$	1.21
Discontinued operations	$	—			$	0.03			$	—			$	—
Net income attributable to common shareholders	$	1.08			$	1.10			$	1.22			$	1.21
(1) Gross profit is calculated as total revenue minus cost of revenue (excluding amortization of intangible assets).

Full-year amounts may not sum due to rounding.