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CHARLES RIVER LABORATORIES INTERNATIONAL, INC. FORM 10-Q For the Quarterly Period Ended March 26, 2005 Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 333-92383

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        As of April 29, 2005, there were 66,663,106 shares of the registrant's common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended March 26, 2005
Table of Contents

Special Note on Factors Affecting Future Results

        This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and the future results of Charles River Laboratories International, Inc. (Charles River) that are based on current expectations, estimates, forecasts and projections about the industries in which Charles River operates and the beliefs and assumptions of the management of Charles River. Words such as "expect," "anticipate," "target," "goal," "project," "intend," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Charles River's Annual Report on Form 10-K for the year ended December 25, 2004 under the section entitled "Risks Related to Our Business and Industry." Charles River undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

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Part I. Financial Information

Item 1. Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per share amounts)

See Notes to Condensed Consolidated Interim Financial Statements

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

See Notes to Condensed Consolidated Interim Financial Statements

4

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

See Notes to Condensed Consolidated Interim Financial Statements

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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

1. Basis of Presentation

        The condensed consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the financial position and results of operations of Charles River Laboratories International, Inc. (the "Company"). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 25, 2004.

        Certain amounts in prior-year financial statements and related notes have been reclassified to conform with the current year presentation.

2. Business Acquisitions

        On October 20, 2004, the Company's shareholders approved the merger agreement with Inveresk Research Group (Inveresk). The acquisition strengthened the Company's position as a leading global company providing essential preclinical and clinical drug development services and products. The strategic combination significantly expanded the Company's service portfolio and strengthens the Company's global footprint in the growing market for pharmaceutical research and development products and services. Under the terms of the merger agreement, Inveresk shareholders received 0.48 shares of the Company's common stock and $15.15 in cash for each share of Inveresk common stock they owned. The purchase price of $1,458,057 consisted of $841,042 representing the fair value of the Company's common stock of 18,451,996 shares issued, $582,391 of cash consideration, the fair value of the Company's stock options exchanged for Inveresk stock options and transaction costs incurred by the Company. The Company utilized approximately $161,229 of available cash and $500,000 of borrowings under the credit facility for the cash consideration paid to Inveresk shareholders and to pay off Inveresk's existing credit facility of $78,838.

        The purchase price associated with the Inveresk acquisition is as follows:

        The Company's purchase price has not been finalized as the Company is awaiting the completion by an outside appraiser of the valuations of the equipment. The outside appraisal of the intangible

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assets acquired has been finalized. The Company does not anticipate any significant differences between current book values and the fair values upon the completion of the asset valuation.

        The preliminary purchase price allocation associated with the Inveresk acquisition is as follows:

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

        Refer to Note 7 for further discussion of the method of computation of earnings per share.

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3. Impairment and Other Charges

        During the fourth quarter of 2004, the Company recorded a charge of $2,956 associated with the closure of the Charles River Proteomic Services business, which was included in the Preclinical Services segment. The charge includes an asset impairment charge of $1,539, a lease impairment charge of $989, severance of $41 and other related expenses of $387.

4. Supplemental Balance Sheet Information

        The composition of trade receivables is as follows:

        The composition of inventories is as follows:

        The composition of other current assets is as follows:

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

        Depreciation expense for the three months ended March 26, 2005 and March 27, 2004 was $11,063 and $6,646, respectively.

        The composition of other assets is as follows:

        The composition of other current liabilities is as follows:

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

5. Goodwill and Other Intangible Assets

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

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

6. Long-Term Debt

        On October 15, 2004, the Company entered into a credit agreement which provides for a $400,000 term loan facility and a $150,000 revolving facility. The term loan facility matures in 20 equal, quarterly installments with the first installment payable December 31, 2004 and the last installment due September 30, 2009. The revolver facility matures on October 15, 2009 and requires no scheduled prepayment before that date. The interest rates applicable to term loans and revolving loans under the credit agreement are, at the Company's option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus ¹/2%) or the adjusted LIBOR rate, in each case plus an interest rate margin based upon the Company's leverage ratio which was 4.0625% as of March 26, 2005. Based on the leverage ratio of the Company, the margin range for LIBOR based loans is 1.25% to 1.75%. The credit agreement includes certain customary representations and warranties, negative and affirmative covenants and events of default. The Company was in compliance with its debt covenants as of March 26, 2005. The Company had $4,988 outstanding under letters of credit as of March 26, 2005 and December 25, 2004.

7. Shareholders' Equity

Earnings per Share

        Basic earnings per share for the three months ended March 26, 2005 and March 27, 2004 were computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods. The weighted average number of common shares outstanding in the three months ended March 26, 2005 and March 27, 2004 have

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been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for this period.

        Options to purchase 1,096,840 and 1,316,900 shares were outstanding at March 26, 2005 and March 27, 2004, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.

        Basic weighted average shares outstanding for the three months ended March 26, 2005 and March 27, 2004 excluded the weighted average impact of 519,191 and 90,839 shares, respectively, of non-vested fixed restricted stock awards.

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

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Comprehensive Income

        The components of comprehensive income are set forth below:

8. Income Taxes

        The following table provides a reconciliation of the provision for income taxes on the condensed consolidated statement of income:

        On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. The Act creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned outside the U.S. at an effective tax rate of 5.25%. This provision is applicable to our fiscal year 2005. We are currently in the process of evaluating whether or not, and to what extent, if any, this provision may benefit the Company. If the Company decides to repatriate all of the pre-acquisition earnings of Inveresk in a distribution that qualifies for the reduced tax rate under the Act, the Company estimates it will recognize a one-time tax benefit of $21,533 in the quarter in which the decision is made.

        In the first quarter of 2004, the Company reorganized its European operations. The purpose of the reorganization was to streamline the legal entity structure in order to improve operating efficiency and cash management, facilitate acquisitions and provide tax benefits. The reorganization, which did not involve reductions of personnel or facility closures, resulted in a one-time, non-cash charge to earnings in the first quarter of 2004 of $7,900 due primarily to the write-off of a deferred tax asset.

        In light of this reorganization, the Company reassessed the valuation allowance associated with its foreign tax credit carryforwards. As a result of this reassessment, $2,111 of the valuation allowance was released and recorded as a tax benefit.

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9. Employee Benefits

        The following table provides the components of net periodic benefit cost for the Company's defined benefit plans:

        The Company contributed $1,276 and $190 to its pension plans during the three months ended March 26, 2005 and March 27, 2004, respectively.

10. Stock-Based Compensation Plans

        SFAS No. 123, "Accounting for Stock-Based Compensation," requires the presentation of certain pro forma information as if the Company had accounted for its employee stock options under the fair value method. For purposes of this disclosure, the fair value of the fixed option grants was estimated using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected life of the options. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. However, for each period presented, management believes the Black-Scholes model is the most appropriate option valuation model for the Company's options.

        Had compensation expense for the Company's option grants been determined consistent with the provision of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-

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Transition and Disclosure, an Amendment of FASB Statement No. 123," the Company's net income would have been reduced to the pro forma amounts indicated below:

Restricted Common Stock and Performance Based Plans

        Under the Company's 2000 Incentive Plan, restricted common stock of the Company may be granted at no cost to officers and key employees. Plan participants are entitled to cash dividends, if declared, and to vote their respective shares. Restrictions limit the sale or transfer of these shares until they vest, which is typically over a three-year period. Upon issuance of restricted stock awards under the plan, unearned compensation equivalent to the market value at the date of grant is charged to shareholders' equity and subsequently amortized to expense over the vesting period. During the three months ended March 26, 2005, the Company granted 466,880 restricted stock awards and recorded $22,282 as unearned compensation in shareholders' equity. During the three months ended March 26, 2005 and March 27, 2004, the Company recorded $1,011 and $422, respectively, in compensation expense for restricted stock awards.

        The Company will accrue compensation expense for the performance-based management incentive program (Mid-Term Incentive (MTI) Program) obligations over the period the participating employees are required to be employed by the Company. During the three months ended March 26, 2005 and March 27, 2004, the Company recorded $354 and $294, respectively, as compensation expense of which $178 and $176, respectively, was recorded as capital in excess of par value and $176 and $118, respectively, was recorded as accrued compensation. The accrual for the MTI Program is marked to market on a quarterly basis. Accordingly, changes in the market value of Company stock could materially affect this compensation expense. In February 2005, the Compensation Committee of the Board of Directors determined that it would not make any future awards under the MTI Program.

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11. Commitments and Contingencies

        Various lawsuits, claims and proceedings of a nature considered normal to its business are pending against the Company. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company's consolidated financial statements.

12. Business Segment Information

        The following table presents sales to unaffiliated customers and other financial information by product line segment.

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

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        A summary of unallocated corporate overhead consists of the following:

        Other general unallocated corporate expenses consist of various departmental costs including corporate accounting, legal and investor relations.

13. Recently Issued Accounting Standards

        On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), "Shared-Based Payment," which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. This revised standard will be effective for the Company at the first quarter of 2006.

        As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on the Company's result of operations, although it will have no impact on the Company's overall financial position. The impact of the modified prospective adoption of SFAS No. 123(R) cannot be estimated at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share.

14. Subsequent Events

        On March 28, 2005 the Company announced that on April 19, 2005 it would redeem all of the Company's $185 million, 3.5% Senior Convertible Debentures due February 1, 2022. During the second quarter, debentures amounting to $185 million were converted into 4.8 million shares of common stock.

        On May 4, 2005, the Company received consent from our lenders to amend the credit agreement which will reduce the interest rate by 0.5% and modify certain restrictive covenants. The amendment to the credit agreement is expected to be effective on May 6, 2005.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes.

Overview

        We are a leading provider of critical research tools and integrated support services that enable innovative and efficient drug discovery and development. We are the global leader in providing the animal research models required in research and development for new drugs, devices and therapies and have been in business for more than 55 years. The first quarter of 2005 financial results reflect a full quarter impact of the Inveresk acquisition. Our integration of Inveresk, which we acquired in the fourth quarter of 2004, is on target to achieve our cost savings goal of $10 million in 2005. We continue to make progress in presenting our unified strong brand name to our customers, identifying our best practices and optimizing the combined management talent.

        Our first quarter sales growth was driven by strong spending by major pharmaceuticals, biotechnology companies and academic institutions on our global products and services, which aid in their development of new drugs and products. Customers continued to outsource services to aid them in their efforts to bring new drugs, devices and therapies to market. We continue to see strong customer demand for toxicology services and specialty research models in our markets, partially offset by reduced market demand for our interventional and surgical services. Finally, our growth strategy has long included the acquisition of companies to serve as growth platforms. We continue to see near and long-term opportunities to add new platforms through acquisitions that complement our business and increase the rate of our growth.

        Total net sales in the first quarter of 2005 were $273.7 million, an increase of 58.6% over the same period last year. The sales increase was due primarily to the Inveresk acquisition and strong customer demand. Our gross margin decreased to 38.2% of net sales, compared to 39.9% of net sales for the same period last year primarily due to a higher proportion of service sales in the sales mix. Operating income was $45.4 million, an increase of $5.9 million, or 14.9%, compared to $39.5 million for the same period last year. The operating margin was 16.6%, compared to 22.9% for the same period last year. Operating income was unfavorably impacted by charges related to the acquisition of Inveresk, including amortization of intangibles, of $13.3 million and stock based compensation related to the acquisition of Inveresk of $3.0 million.

        Net income in the first quarter of 2005 was $27.6 million compared to $17.6 million in the same period last year. Diluted earnings per share for the first quarter of 2005 were $0.40, compared to $0.36 in the same period last year. The unfavorable impact of the Inveresk amortization ($0.12) and Inveresk related stock based compensation ($0.03) reduced diluted earnings per share by $0.15 in the first quarter of 2005. An unfavorable deferred tax adjustment related to the European reorganization ($0.15) partially offset by a favorable reversal of the tax valuation allowance ($0.04) decreased diluted earnings per share by $0.11 in the first quarter of 2004.

        We report three segments, Research Models and Services (RMS), Preclinical Services and Clinical Services. The RMS segment aligns all the businesses that are based upon research models including sales of research models, transgenic services, laboratory services, in vitro technology and contract staffing. Our Preclinical Services segment includes all of our products and services necessary to take a drug or medical device through the development process, including sales of general and specialty toxicology services, pathology services, interventional and surgical services, biopharmaceutical services, pharmacokinetic and metabolic analysis and bioanalytical chemistry. Our Clinical Services segment conducts Phase I clinical trials and provides Phase II-IV clinical trials management services which includes testing, medical data sciences services and regulatory support.

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        Our RMS segment represented 46.7% of net sales in the first quarter of 2005. Net sales for this segment increased 7.1% over the same period last year. Favorable foreign currency translation contributed approximately 2% of the net sales gain. Operating income increased to 33.1% of net sales, compared to 32.4% of net sales for the same period last year, resulting from greater economies of scale.

        Our Preclinical Services segment represented 41.7% of net sales in the first quarter of 2005. Sales for this segment increased 114.6% over the same period last year. Our sales results were favorably impacted by the acquisition of Inveresk. Favorable foreign currency translation contributing less than 1% of the net sales gain. We experienced favorable market conditions as demand for toxicology services remained strong. We see improving levels of customer demand in certain of our development services businesses, particularly large animal, reproductive and inhalation toxicology.

        Our Clinical Services segment represented 11.6% of net sales in the first quarter of 2005. We acquired the clinical service business with the acquisition of Inveresk during the fourth quarter of 2004.

Three Months Ended March 26, 2005 Compared to Three Months Ended March 27, 2004

        Net Sales.    Net sales for the three months ended March 26, 2005 were $273.7 million, an increase of $101.1 million, or 58.6%, from $172.6 million for the three months ended March 27, 2004.

        Research Models and Services.    For the three months ended March 26, 2005, net sales for our RMS segment were $127.9 million, an increase of $8.4 million, or 7.1%, from $119.5 million for the three months ended March 27, 2004. RMS global prices increased in a range up to 5% with the weighted average increase approximately 3%. Increased unit volume of both models and services added approximately 2% to the net sales increase. Favorable foreign currency translation contributed approximately 2% to our net sales gain. Sales of our research models and services increased due to general price increases, and greater market demand for our higher priced specialty units and for services in our foreign locations. The RMS sales increase was driven by higher basic research and biotechnology spending, which drove greater demand for our products and services.

        Preclinical Services.    For the three months ended March 26, 2005, net sales for our Preclinical Services segment were $114.1 million, an increase of $60.9 million, or 114.6%, compared to $53.2 million for the three months ended March 27, 2004. The increase was primarily due to the acquisition of Inveresk in October 2004 and to increased customer demand for toxicology and other preclinical services, partially offset by reduced demand for our interventional and surgical services. Our preclinical services business benefited from increased customer demand, reflecting increased drug development efforts and customers outsourcing. Foreign currency contributed less than 1% to the sales growth.

        Clinical Services.    In the fourth quarter of 2004, we entered the clinical services business with the acquisition of Inveresk. For the three months ended March 26, 2005, net sales for our Clinical Services segment were $31.7 million.

        Cost of Products Sold and Services Provided.    Cost of products sold and services provided for the three months ended March 26, 2005 was $169.1 million, an increase of $65.3 million, or 62.9%, from $103.8 million for the three months ended March 27, 2004. Cost of products sold and services provided for the three months ended March 26, 2005 was 61.8% of net sales, compared to 60.1% for the three months ended March 27, 2004 due primarily to a higher proportion of service sales in the sales mix, to the mix of more service sales. Cost of goods sold and services provided include the appropriate depreciation, facilities cost and other costs, which is a refinement of Inveresk's pre-acquisition reporting where such costs were reported in selling, general and administrative expenses.

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        Research Models and Services.    Cost of products sold and services provided for RMS for the three months ended March 26, 2005 was $71.3 million, an increase of $4.6 million, or 6.9%, compared to $66.7 million for the three months ended March 27, 2004. Cost of products sold and services provided as a percentage of net sales for the three months ended March 26, 2005 remained flat compared to the three months ended March 27, 2004 at 44.2% of net sales.

        Preclinical Services.    Cost of products sold and services provided for the Preclinical Services segment for the three months ended March 26, 2005 was $75.9 million, an increase of $38.8 million, or 104.5%, compared to $37.1 million for the three months ended March 27, 2004. Cost of products sold and services provided as a percentage of net sales was 66.5% for the three months ended March 26, 2005, compared to 69.8% for the three months ended March 27, 2004. The decrease in cost of products sold and services provided as a percentage of net sales was primarily due to improved capacity utilization from the increased sales of services.

        Clinical Services.    Cost of products sold and services provided for the Clinical Services segment for the three months ended March 26, 2005 was $21.9 million. Cost of products sold and services provided as a percentage of net sales was 69.0%.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the three months ended March 26, 2005 were $44.9 million, an increase of $16.8 million, or 59.5%, from $28.1 million for the three months ended March 27, 2004. Selling, general and administrative expenses for the three months ended March 26, 2005 were 16.4% of net sales compared to 16.3% of net sales for the three months ended March 27, 2004. The increase was due primarily to the compensation charge for Inveresk's stock options, increased compensation expense for stock awards and increased professional fees related to compliance with the internal control certification requirements of Sarbanes-Oxley. During the three months ended March 26, 2005, the Company granted 466,880 restricted stock awards and recorded $22,282 as unearned compensation in shareholders' equity which will be amortized over three years.

        Research Models and Services.    Selling, general and administrative expenses for RMS for the three months ended March 26, 2005 were $14.3 million, an increase of $0.3 million, or 2.1%, compared to $14.0 million for the three months ended March 27, 2004. Selling, general and administrative expenses decreased as a percentage of sales to 11.2% for the three months ended March 26, 2005 from 11.7% for the three months ended March 27, 2004 due to our continued ability to manage costs in line with our sales increase.

        Preclinical Services.    Selling, general and administrative expenses for the Preclinical Services segment for the three months ended March 26, 2005 were $14.3 million, an increase of $7.0 million, or 95.3%, compared to $7.3 million for the three months ended March 27, 2004. Selling, general and administrative expenses for the three months ended March 26, 2005 decreased to 12.6% of net sales, compared to 13.8% of net sales for the three months ended March 27, 2004 due to greater economies of scale.

        Clinical Services.    Selling, general and administrative expenses for the Clinical Services segment for the three months ended March 26, 2005 were $6.0 million. Selling, general and administrative expenses for the Clinical Services segment were 18.9% of net sales.

        Unallocated Corporate Overhead.    Unallocated corporate overhead, which consists of various corporate expenses including those associated with pension, executive salaries and departments such as corporate accounting, legal and investor relations, was $10.3 million for the three months ended March 26, 2005, compared to $6.8 million for the three months ended March 27, 2004. The increase in unallocated corporate overhead for the three months ended March 26, 2005 was due primarily to stock-based compensation relating to the acquisition of Inveresk and increased restricted stock expense.

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        Amortization of Other Intangibles.    Amortization of other intangibles for the three months ended March 26, 2005 was $14.4 million, an increase of $13.2 million, from $1.2 million for the three months ended March 27, 2004. The increased amortization was due to the acquisition of Inveresk.

        Preclinical Services.    For the three months ended March 26, 2005, amortization of other intangibles for our Preclinical Services segment was $11.4 million, an increase of $10.3 million from $1.1 million for the three months ended March 27, 2004. The increase in amortization of other intangibles was due to the acquisition of Inveresk.

        Clinical Services.    For the three months ended March 26, 2005, amortization of other intangibles for our Clinical Services segment was $3.0 million, due to the acquisition of Inveresk.

        Operating Income.    Operating income for the three months ended March 26, 2005 was $45.4 million, an increase of $5.9 million, or 14.9%, from $39.5 million for the three months ended March 27, 2004. Operating income for the three months ended March 26, 2005 was 16.6% of net sales, compared to 22.9% of net sales for the three months ended March 27, 2004. The decrease as a percentage of sales was due primarily to the Inveresk related amortization of $13.3 million and the Inveresk stock based compensation charge of $3.0 million.

        Research Models and Services.    For the three months ended March 26, 2005, operating income for our RMS segment was $42.6 million, an increase of $3.5 million, or 9.2%, from $38.8 million for the three months ended March 27, 2004. Operating income as a percentage of net sales for the three months ended March 26, 2005 was 33.1%, compared to 32.4% for the three months ended March 27, 2004. The increase was primarily due to increased sales during the first quarter of 2005 and our continued ability to manage costs.

        Preclinical Services.    For the three months ended March 26, 2005, operating income for our Preclinical Services segment was $12.5 million, an increase of $4.9 million, or 65.2%, from $7.6 million for the three months ended March 27, 2004. Operating income as a percentage of net sales decreased to 11.0%, compared to 14.2% of net sales for the three months ended March 27, 2004. The decrease in operating income for the three months ended March 26, 2005 was primarily due to Inveresk related amortization expense, partially offset by improved capacity utilization.

        Clinical Services.    For the three months ended March 26, 2005, operating income for our Clinical Services segment was $0.8 million. Operating income as a percentage of net sales was 2.6% for the three months ended March 26, 2005.

        Interest Expense.    Interest expense for the three months ended March 26, 2005 was $7.2 million, compared to $2.1 million for the three months ended March 27, 2004. The $5.1 million increase was primarily due to the increased borrowing as a result of the Inveresk acquisition.

        Income Taxes.    Income tax expense for the three months ended March 26, 2005 was $10.9 million, a decrease of $9.3 million compared to $20.2 million for the three months ended March 27, 2004. Our effective tax rate for the three months ended March 26, 2005 was 27.85%. Excluding charges associated with the deferred tax write-off and the benefit from the reversal of the valuation allowance, the effective tax rate for the three months ended March 27, 2004 was 37.50%. The decrease in the effective tax rate was due primarily to the lower effective tax rates for foreign operations.

        Net Income.    Net income for the three months ended March 26, 2005 was $27.6 million, an increase of $10.0 million from $17.6 million for the three months ended March 27, 2004.

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Backlog

        Our backlog for Preclinical Services and Clinical Services was $427.3 million at March 26, 2005. We do not report backlog for the RMS segment because turnaround time from order placement to fulfillment, both for products and services, is rapid. Our preclinical and clinical services are performed over varying times, from a short period of time to extended periods of time, which may be as long as several years. We maintain an order backlog for these segments to track anticipated revenue from studies and projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We only recognize a study or project in backlog after we have received written evidence of a customer's intention to proceed with a study or project. Cancelled studies or projects are removed from backlog.

        We believe our aggregate backlog as of any date is not necessarily an indicator of our future results for a variety of reasons. First, studies vary in duration. For instance, some studies that are included in 2005 backlog may be completed in 2006, while others may be completed in later years. Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus or penalty payments. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities. Terminations or delays can result from a number of reasons. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made.

Liquidity and Capital Resources

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

        Our principal sources of liquidity have been our cash flow from operations, our revolving line of credit arrangements and proceeds from our debt and equity offerings.

        On March 28, 2005 we announced that on April 19, 2005 we would redeem all of our $185 million, 3.5% Senior Convertible Debentures due February 1, 2022. Prior to the redemption date of April 19, 2005, debentures amounting to $185 million were converted into 4.8 million shares of common stock.

        Cash and cash equivalents totaled $213.1 million at March 26, 2005, compared to $207.6 million at December 25, 2004.

        Net cash provided by operating activities for the three months ended March 26, 2005 and March 27, 2004 was $34.2 million and $25.9 million, respectively. The increase in cash provided by operations was primarily a result of improved days sales outstanding ("DSO") and a decrease in accrued compensation and deferred revenue. Our days sales outstanding decreased to 32 days as of March 26, 2005 from 45 days as of March 27, 2004, but remained constant with the DSO of 32 days as of December 25, 2004. The DSO decrease from last year is primarily due to the acquisition of Inveresk as well as improvements in other businesses.

        Net cash used in investing activities for the three months ended March 26, 2005 and March 27, 2004 was $13.9 million and $22.7 million, respectively. For the three months ended March 26, 2005, we used $12.4 million for capital expenditures. This compared to the first quarter of 2004 during which we paid $4.5 million for capital expenditures and $17.0 million for the acquisition of River Valley Farms. In the first quarter of 2005, we made capital expenditures in RMS of $5.3 million, Preclinical Services of $7.0 million and Clinical Services of $0.1 million. We anticipate that future capital expenditures will be funded by cash provided by operating activities. For fiscal 2005, we project capital expenditures to be approximately $100 million. We continue to evaluate acquisitions to serve as growth platforms.

        Net cash (used in) and provided by financing activities for the three months ended March 26, 2005 and March 27, 2004 was $(11.9) million and $4.4 million, respectively. Proceeds from exercises of

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employee stock options amounted to $9.7 million and $6.1 million for the three months ended March 26, 2005 and March 27, 2004, respectively. During the first quarter of 2005, we repaid $20.2 million in debt under our credit facility. During the first quarter of 2004, we borrowed and paid back $94.0 million as part of our European reorganization.

Off-Balance Sheet Arrangements

        We had no off-balance sheet arrangement during the three months ended March 26, 2005.

Recently Issued Accounting Pronouncements

        On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), "Shared-Based Payment," which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. This revised standard will be effective for us in the first quarter of fiscal year 2006.

        As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB 25 intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of the modified prospective adoption of SFAS No. 123(R) cannot be estimated at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

Interest Rate Risk

        The fair value of our marketable securities is subject to interest rate risk and will fall in value if market interest rates increase. If market rates were to increase immediately and uniformly by 100 basis points from levels at March 26, 2005, then the fair value of the portfolio would decline by approximately $0.1 million.

        On October 15, 2004, we entered into a credit agreement which provides for a $400 million term loan facility and a $150 million revolving facility. Our primary interest rate exposure results from changes in LIBOR or the base rates which are used to determine the applicable interest rates under our term loan and revolving credit facility. Our potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate would be approximately $5 million on a pre-tax basis.

        On May 4, 2005, we have received consent from our lenders to amend the credit agreement which will reduce our interest rate by 0.5% and modify certain restrictive covenants. The amendment to the credit agreement is expected to be effective on May 6, 2005.

        The fair value of our senior convertible debentures is subject to interest rate risk and is impacted by our stock price. The estimated fair value of our long-term debt at March 26, 2005 was

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$228.2 million. Fair values were determined from available market prices, using current interest rates and terms to maturity.

        On March 28, 2005 we announced that on April 19, 2005 we would redeem all of our $185 million, 3.5% Senior Convertible Debentures due February 1, 2022. Prior to the redemption date of April 19, 2005, debentures amounting to $185 million were converted into 4.8 million shares of common stock.

Foreign Currency Exchange Rate Risk

        We also have exposure to some foreign currency exchange rate fluctuations for the cash flows received from our foreign affiliates. This risk is mitigated by the fact that various operations are principally conducted in their respective local currencies. With the completion of the Inveresk acquisition, a portion of our revenue will be denominated in U.S. dollars, with the costs accounted for in their local currencies. We expect to hedge against certain foreign currency exchange rate risks beginning in the second quarter of 2005, and consistent with our hedge policy, will designate such transactions as hedges as set forth in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

Item 4. Controls and Procedures.

        Based on their evaluation, required by paragraph (b) of Rules 13a-15 or 15d-15, promulgated by the Securities Exchange Act of 1934 (the "Exchange Act"), the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective as of March 26, 2005 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

        There were no changes in the Company's internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended March 26, 2005 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II. Other Information

Item 6. Exhibits

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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