0001445305-13-002575.txt : 20131030 0001445305-13-002575.hdr.sgml : 20131030 20131030150526 ACCESSION NUMBER: 0001445305-13-002575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20130928 FILED AS OF DATE: 20131030 DATE AS OF CHANGE: 20131030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARLES RIVER LABORATORIES INTERNATIONAL INC CENTRAL INDEX KEY: 0001100682 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 061397316 FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15943 FILM NUMBER: 131179016 BUSINESS ADDRESS: STREET 1: 261 BALLARDVALE STREET CITY: WILMINGTON STATE: MA ZIP: 01867 BUSINESS PHONE: 9786586000 MAIL ADDRESS: STREET 1: 251 BALLARDVALE ST CITY: WILMINGTON STATE: MA ZIP: 01887 FORMER COMPANY: FORMER CONFORMED NAME: CHARLES RIVER LABORATORIES HOLDINGS INC DATE OF NAME CHANGE: 19991208 10-Q 1 crl929201310q.htm 10-Q CRL 9.29.2013 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                                    TO                                   
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
06-1397316
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
251 Ballardvale Street
Wilmington, Massachusetts
(Address of Principal Executive Offices)
 
01887
(Zip Code)
____________________________________________________________________________
(Registrant's telephone number, including area code): (781) 222-6000
_________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ý No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if smaller
reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of October 21, 2013, there were 48,117,860 shares of the Registrant's common stock outstanding.




CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended September 28, 2013
TABLE OF CONTENTS

 
 
 
Page
Part I.
Financial Information
 
 
Item 1.
Financial Statements
 
 
 
Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 28, 2013 and September 29, 2012
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 28, 2013 and September 29, 2012
 
 
Condensed Consolidated Balance Sheets (Unaudited) as of September 28, 2013 and December 29, 2012
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 28, 2013 and September 29, 2012
 
 
Condensed Consolidated Statement of Changes in Equity (Unaudited) for the nine months ended September 28, 2013
 
 
Notes to Condensed Consolidated Interim Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
Item 4.
Controls and Procedures
Part II.
Other Information
 
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6.
Exhibits

1




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 or we) that are based on our current expectations, estimates, forecasts, and projections about the industries in which we operates and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could” and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward‑looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties, and assumptions that are difficult to predict. For example, we may use forward‑looking statements when addressing topics such as: the pursuit of our initiatives to optimize returns for stockholders, including efforts to improve our operating margins, improve free cash flow, invest in growth businesses and return value to shareholders; future demand for drug discovery and development products and services, including the outsourcing of these services and spending trends by our clients; our expectations regarding stock repurchases, including the number of shares to be repurchased, expected timing and duration, the amount of capital that may be expended and the treatment of repurchased shares; present spending trends and other cost reduction activities by our clients; future actions by our management; the outcome of contingencies; changes in our business strategy; changes in our business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; our strategic relationships with leading pharmaceutical companies and opportunities for future similar arrangements; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; our expectations with respect to sales growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure); the potential outcome of, and impact to our business and financial operations due to, litigation and legal proceedings, including with respect to our on-going investigation of inaccurate billing with respect to certain government contracts; changes in our expectations regarding future stock option, restricted stock, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our cash flow and liquidity. In addition, these statements include the impact of economic and market conditions on our clients; the effects of our cost-saving actions and the steps to optimize returns to shareholders on an effective and timely basis and the ability of Charles River to withstand the current market conditions. You should not rely on forward‑looking statements because they are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward‑looking statements. You are cautioned not to place undue reliance on these forward‑looking statements, which speak only as of the date of this document or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 29, 2012 under the section entitled “Our Strategy,” the section entitled “Risks Related to Our Business and Industry,” the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in our press releases and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward‑looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward‑looking events we discuss in this report not to occur.



2



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)
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net sales related to products
$
116,732

 
$
111,196

 
$
364,877

 
$
356,535

Net sales related to services
175,397

 
167,490

 
511,423

 
492,855

Net sales
292,129

 
278,686

 
876,300

 
849,390

Costs and expenses
 
 
 
 
 
 
 
Cost of products sold
70,294

 
63,649

 
202,954

 
190,629

Cost of services provided
121,909

 
121,778

 
366,639

 
357,705

Selling, general and administrative
54,903

 
51,047

 
167,021

 
156,924

Amortization of other intangibles
4,180

 
4,530

 
12,892

 
13,436

Operating income
40,843

 
37,682

 
126,794

 
130,696

Other income (expense)
 
 
 
 
 
 
 
Interest income
143

 
124

 
476

 
460

Interest expense
(2,319
)
 
(8,519
)
 
(18,143
)
 
(25,033
)
Other income (expense), net
4,059

 
(892
)
 
6,094

 
(2,582
)
Income from continuing operations, before income taxes
42,726

 
28,395

 
115,221

 
103,541

Provision for income taxes
11,390

 
6,011

 
29,331

 
24,140

Income from continuing operations, net of income taxes
31,336

 
22,384

 
85,890

 
79,401

Income (loss) from discontinued operations, net of taxes
(113
)
 
(182
)
 
(1,183
)
 
(63
)
Net income
31,223

 
22,202

 
84,707

 
79,338

Less: Net income attributable to noncontrolling interests
(356
)
 
(230
)
 
(978
)
 
(459
)
Net income attributable to common shareholders
$
30,867

 
$
21,972

 
$
83,729

 
$
78,879

Earnings (loss) per common share
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.65

 
$
0.47

 
$
1.77

 
$
1.64

Discontinued operations
$

 
$

 
$
(0.02
)
 
$

Net income attributable to common shareholders
$
0.64

 
$
0.46

 
$
1.75

 
$
1.64

Diluted:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.64

 
$
0.46

 
$
1.75

 
$
1.63

Discontinued operations
$

 
$

 
$
(0.02
)
 
$

Net income attributable to common shareholders
$
0.64

 
$
0.46

 
$
1.72

 
$
1.63





See Notes to Condensed Consolidated Interim Financial Statements.

3



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)



 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Net income
$
31,223

 
$
22,202

 
$
84,707

 
$
79,338

Foreign currency translation adjustment
16,371

 
12,962

 
(9,653
)
 
8,871

Unrealized gains (losses) on marketable securities:
 
 
 
 
 
 
 
Unrealized gains (losses) for the period

 

 

 
209

Add: reclassification adjustment for losses included in net income

 

 

 
712

Defined benefit plan gains (losses) and prior service costs not yet recognized as components of net periodic pension cost:
 
 
 
 
 
 
 
Amortization of prior service costs and net gains and losses (Note 10)
752

 
560

 
2,249

 
1,880

Comprehensive income, before tax
48,346

 
35,724

 
77,303

 
91,010

Income tax expense (benefit) related to items of other comprehensive income (Note 9)
(326
)
 
156

 
874

 
701

Comprehensive income, net of tax
48,672

 
35,568

 
76,429

 
90,309

Less: comprehensive income related to noncontrolling interests
(454
)
 
(225
)
 
(1,260
)
 
(459
)
Comprehensive income attributable to common shareholders
$
48,218

 
$
35,343

 
$
75,169

 
$
89,850


























See Notes to Condensed Consolidated Interim Financial Statements.

4



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except per share amounts)
 
September 28,
2013
 
December 29,
2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
130,454

 
$
109,685

Trade receivables, net
224,270

 
203,001

Inventories
87,146

 
88,470

Other current assets
105,153

 
83,601

Current assets of discontinued businesses
758

 
495

Total current assets
547,781

 
485,252

Property, plant and equipment, net
690,725

 
717,020

Goodwill, net
229,271

 
208,609

Other intangibles, net
87,245

 
84,922

Deferred tax asset
28,249

 
38,554

Other assets
57,170

 
48,659

Long-term assets of discontinued businesses
3,326

 
3,328

Total assets
$
1,643,767

 
$
1,586,344

Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt and capital leases
$
16,170

 
$
139,384

Accounts payable
29,675

 
31,218

Accrued compensation
57,414

 
46,951

Deferred revenue
55,357

 
56,422

Accrued liabilities
53,998

 
45,208

Other current liabilities
20,613

 
21,262

Current liabilities of discontinued businesses
1,944

 
1,802

Total current liabilities
235,171

 
342,247

Long-term debt and capital leases
624,310

 
527,136

Other long-term liabilities
101,724

 
104,966

Long-term liabilities of discontinued businesses
8,531

 
8,795

Total liabilities
969,736

 
983,144

Commitments and contingencies

 

Redeemable noncontrolling interest
14,577

 

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

 

Common stock, $0.01 par value; 120,000,000 shares authorized; 81,700,104 issued and 48,254,391 shares outstanding at September 28, 2013 and 79,607,981 issued and 48,220,037 shares outstanding at December 29, 2012
817

 
796

Capital in excess of par value
2,170,901

 
2,097,316

Accumulated deficit
(284,572
)
 
(368,301
)
Treasury stock, at cost, 33,445,713 shares and 31,387,944 shares at September 28, 2013 and December 29, 2012, respectively
(1,228,681
)
 
(1,135,609
)
Accumulated other comprehensive income (loss)
(1,957
)
 
6,603

Total shareholders' equity
656,508

 
600,805

Noncontrolling interests
2,946

 
2,395

Total shareholder's equity, including redeemable noncontrolling interests
674,031

 
603,200

Total liabilities and equity
$
1,643,767

 
$
1,586,344

See Notes to Condensed Consolidated Interim Financial Statements.

5



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
Cash flows relating to operating activities
 
 
 
Net income
$
84,707

 
$
79,338

Less: Income (loss) from discontinued operations
(1,183
)
 
(63
)
Income from continuing operations
85,890

 
79,401

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
67,336

 
60,617

Amortization of debt issuance costs and discounts
9,124

 
13,136

Non-cash compensation
18,231

 
15,828

Deferred income taxes
8,675

 
(1,338
)
Other, net
(2,496
)
 
7,493

Changes in assets and liabilities:
 
 
 
Trade receivables
(22,663
)
 
(27,931
)
Inventories
1,445

 
(2,183
)
Other assets
(7,917
)
 
1,201

Accounts payable
(7,688
)
 
(6,743
)
Accrued compensation
10,500

 
6,287

Deferred revenue
(2,289
)
 
283

Accrued liabilities
3,285

 
(1,518
)
Taxes payable and prepaid taxes
(9,557
)
 
7,323

Other liabilities
(5,326
)
 
(8,177
)
Net cash provided by operating activities
146,550

 
143,679

Cash flows relating to investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(24,218
)
 
(16,902
)
Capital expenditures
(25,319
)
 
(33,795
)
Purchases of investments
(15,341
)
 
(10,814
)
Proceeds from sale of investments
10,437

 
23,549

Other, net
108

 
2,746

Net cash used in investing activities
(54,333
)
 
(35,216
)
Cash flows relating to financing activities
 
 
 
Proceeds from long-term debt and revolving credit agreement
467,804

 
53,115

Proceeds from exercises of stock options and warrants
58,986

 
11,916

Payments on long-term debt, capital lease obligation and revolving credit agreement
(502,241
)
 
(112,731
)
Purchase of treasury stock
(91,703
)
 
(45,842
)
Other, net
(1,176
)
 
535

Net cash used in financing activities
(68,330
)
 
(93,007
)
Discontinued operations
 
 
 
Net cash used in operating activities
(1,533
)
 
(292
)
Net cash used in discontinued operations
(1,533
)
 
(292
)
Effect of exchange rate changes on cash and cash equivalents
(1,585
)
 
(845
)
Net change in cash and cash equivalents
20,769

 
14,319

Cash and cash equivalents, beginning of period
109,685

 
68,905

Cash and cash equivalents, end of period
$
130,454

 
$
83,224

Supplemental cash flow information
 
 
 
Capitalized interest
$
79

 
$
472




See Notes to Condensed Consolidated Interim Financial Statements.

6



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(dollars in thousands)


 
Total
 
Accumulated
(Deficit)
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Common
Stock
 
Capital in
Excess
of Par
 
Treasury
Stock
 
Non-controlling
Interests
December 29, 2012
$
603,200

 
$
(368,301
)
 
$
6,603

 
$
796

 
$
2,097,316

 
$
(1,135,609
)
 
$
2,395

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
84,707

 
83,729

 
 
 
 
 
 
 
 
 
978

Other comprehensive loss
(8,278
)
 
 
 
(8,560
)
 
 
 
 
 
 
 
282

Total comprehensive income
76,429

 
 
 
 
 
 
 
 
 
 
 
1,260

Redeemable noncontrolling interest acquired in business combination
8,963

 
 
 
 
 
 
 
 
 
 
 
8,963

Adjustment of redeemable noncontrolling interest to fair value

 
 
 
 
 
 
 
(4,905
)
 
 
 
4,905

Tax benefit associated with stock issued under employee compensation plans
1,362

 
 
 
 
 
 
 
1,362

 
 
 
 
Issuance of stock under employee compensation plans
58,918

 
 
 
 
 
21

 
58,897

 
 
 
 
Acquisition of treasury shares
(93,072
)
 
 
 
 
 
 
 

 
(93,072
)
 
 
Stock-based compensation
18,231

 
 
 
 
 
 
 
18,231

 
 
 
 
September 28, 2013
$
674,031

 
$
(284,572
)
 
$
(1,957
)
 
$
817

 
$
2,170,901

 
$
(1,228,681
)
 
$
17,523




















See Notes to Condensed Consolidated Interim Financial Statements.

7



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 state fairly the financial position and results of operations of Charles River Laboratories International, Inc. 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 our Annual Report on Form 10-K for the year ended December 29, 2012. Certain amounts in prior-year financial statements and related notes have been reclassified to conform with current period presentation.

2. RESTRUCTURING COSTS
Facilities
In July 2013, management committed to a plan to consolidate production in its U.S. research model facilities and anticipates that these actions will result in the abandonment of certain long-lived assets, including a building at one of our facilities in California. During the quarter, the Company recorded to cost of sales accelerated depreciation of $6,766 related to the building based on its revised useful life. The Company anticipates that additional accelerated depreciation for the fourth quarter of 2013 will be up to approximately $7,000.
Staffing Reductions
We have implemented staffing reductions over the past few years to improve operating efficiency and profitability at various sites. As a result of these actions, for the nine months ended September 28, 2013 and September 29, 2012, we recorded severance and retention charges as shown below. As of September 28, 2013, $1,197 was included in accrued compensation and $1,413 in other long-term liabilities on our consolidated balance sheet.
The following table rolls forward our severance and retention cost liability:
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
Balance, beginning of period
$
3,636

 
$
3,374

Expense
1,058

 
1,881

Payments/utilization
(2,084
)
 
(1,415
)
Balance, end of period
$
2,610

 
$
3,840


The following table presents severance and retention costs by classification on the income statement:
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
Severance charges included in cost of sales
$
989

 
$
936

Severance charges included in selling, general and administrative expense
69

 
945

Total expense
$
1,058

 
$
1,881


8


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


The following table presents severance and retention cost by segment:
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
Research models and services
$
811

 
$
934

Preclinical services
247

 
947

Total expense
$
1,058

 
$
1,881




3. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of net trade receivables is as follows:
 
September 28, 2013
 
December 29, 2012
Client receivables
$
191,183

 
$
174,774

Unbilled revenue
38,398

 
32,494

Total
229,581

 
207,268

Less allowance for doubtful accounts
(5,311
)
 
(4,267
)
Net trade receivables
$
224,270

 
$
203,001


The composition of inventories is as follows:
 
September 28, 2013
 
December 29, 2012
Raw materials and supplies
$
14,662

 
$
14,525

Work in process
10,894

 
11,082

Finished products
61,590

 
62,863

Inventories
$
87,146

 
$
88,470

The composition of other current assets is as follows:
 
September 28, 2013
 
December 29, 2012
Prepaid assets
$
28,860

 
$
20,404

Deferred tax asset
29,832

 
30,018

Marketable securities
11,084

 
6,781

Prepaid income tax
35,148

 
26,169

Restricted cash
229

 
229

Other current assets
$
105,153

 
$
83,601




9


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



The composition of net property, plant and equipment is as follows:
 
September 28, 2013
 
December 29, 2012
Land
$
40,638

 
$
40,812

Buildings
704,262

 
697,547

Machinery and equipment
373,431

 
356,960

Leasehold improvements
36,907

 
34,916

Furniture and fixtures
24,867

 
25,681

Vehicles
4,028

 
3,736

Computer hardware and software
111,025

 
107,171

Construction in progress
33,396

 
46,186

Total
1,328,554

 
1,313,009

Less accumulated depreciation
(637,829
)
 
(595,989
)
Net property, plant and equipment
$
690,725

 
$
717,020

Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets. Depreciation expense for the nine months ended September 28, 2013 and September 29, 2012 was $54,444 and $47,181, respectively.
The composition of other assets is as follows:
 
September 28, 2013
 
December 29, 2012
Deferred financing costs
$
7,563

 
$
6,424

Cash surrender value of life insurance policies
25,625

 
26,071

Equity-method affiliates
15,999

 
8,492

Other assets
7,983

 
7,672

Other assets
$
57,170

 
$
48,659

The composition of other current liabilities is as follows:
 
September 28, 2013
 
December 29, 2012
Accrued income taxes
$
18,260

 
$
18,216

Current deferred tax liability
469

 
410

Accrued interest and other
1,884

 
2,636

Other current liabilities
$
20,613

 
$
21,262







10


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



The composition of other long-term liabilities is as follows:
 
September 28, 2013
 
December 29, 2012
Deferred tax liability
$
16,530

 
$
13,147

Long-term pension liability
35,333

 
44,316

Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan
28,518

 
26,663

Other long-term liabilities
21,343

 
20,840

Other long-term liabilities
$
101,724

 
$
104,966



4. MARKETABLE SECURITIES AND EQUITY-METHOD AFFILIATES
Marketable Securities
Investments in marketable securities are reported at fair value and consist of time deposits. The carrying value for these time deposits approximates fair value. The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:
 
September 28, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits
$
11,084

 
$

 
$

 
$
11,084

 
$
11,084

 
$

 
$

 
$
11,084

 
December 29, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits
$
6,781

 
$

 
$

 
$
6,781

 
$
6,781

 
$

 
$

 
$
6,781

Maturities of debt securities were as follows:
 
September 28, 2013
 
December 29, 2012
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due less than one year
$
11,084

 
$
11,084

 
$
6,781

 
$
6,781

Due after one year through five years

 

 

 

Due after ten years

 

 

 

 
$
11,084

 
$
11,084

 
$
6,781

 
$
6,781




11


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

Equity-Method Affiliates
We have invested in two limited partnerships that are accounted for under the equity-method. In 2009, we entered into a limited partnership that invests in biotechnology and medical device companies. We committed $20,000, or approximately 12%, of the limited partnership's total committed capital. As of September 28, 2013, we have contributed $9,420 of our total committed capital of $20,000. During the first quarter of 2013, we entered into a second limited partnership that invests in technology and life sciences companies with an emphasis on early stage investments. We committed $10,000, or approximately 4% of the limited partnership's total committed capital. As of September 28, 2013, we have contributed $2,075 to the limited partnership.
We recognized equity-method gains of $4,832 for the nine months ended September 28, 2013 related to these limited partnerships. These gains are reported within other income (expense). As of September 28, 2013, Equity Method Affiliates had a carrying value of $15,999, which is reported in Other Assets, Non-current, on the consolidated balance sheets.

5. FAIR VALUE
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are as follows:
Time deposits—Valued at their ending balances as reported by the financial institutions that hold our securities, which approximates fair value.
Life policies—Valued at cash surrender value based on fair value of underlying investments.
Hedge contract—Valued at fair value by management based on our foreign exchange rates and forward points provided by banks.
Redeemable noncontrolling interest—Valued using a weighted combination of a market-based approach, utilizing information about our company as well as publicly available industry information to determine revenue and earnings multiples, and an income approach based on estimated future cash flows based on projected financial data discounted by a weighted average cost of capital. Significant assumptions include a discount rate of 18% and a long-term pretax operating margin of 28% .
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurements at September 28, 2013
 
Quoted Prices in Active Markets for Identical Assets Level 1
 
Significant Other Observable Inputs Level 2
 
Significant Unobservable Inputs Level 3
 
Assets and Liabilities at Fair Value
Time deposits
$

 
$
11,084

 
$

 
$
11,084

Life policies

 
18,893

 

 
18,893

Total assets measured at fair value
$

 
$
29,977

 
$

 
$
29,977

Redeemable noncontrolling interest

 

 
14,577

 
14,577

Total liabilities measured at fair value
$

 
$

 
$
14,577

 
$
14,577


12


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

 
Fair Value Measurements at December 29, 2012
 
Quoted Prices in Active Markets for Identical Assets Level 1
 
Significant Other Observable Inputs Level 2
 
Significant Unobservable Inputs Level 3
 
Assets and Liabilities at Fair Value
Time deposits
$

 
$
6,781

 
$

 
$
6,781

Life policies

 
19,555

 

 
19,555

Hedge contract

 
16

 

 
16

Total assets measured at fair value
$

 
$
26,352

 
$

 
$
26,352

Redeemable noncontrolling interest

 

 

 

Total liabilities measured at fair value
$

 
$

 
$

 
$

    
The book value of our term and revolving loans, which are variable rate loans carried at amortized cost, approximates fair value based current market pricing of similar debt.
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Nine Months Ended
Redeemable Noncontrolling Interest (Liability)
September 28, 2013
 
September 29, 2012
Beginning balance
$

 
$

Transfers in and/or out of Level 3

 

Total gains or losses (realized/unrealized):
 
 
 
Included in other income (expense)
476

 

Included in other comprehensive income (CTA)
233

 

Included in additional paid-in capital
4,905

 
 
Purchases, issuances and settlements
8,963

 

Ending balance
$
14,577

 
$


 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Nine Months Ended
Auction rate securities (Asset)
September 28, 2013

 
September 29, 2012

Beginning balance
$

 
$
11,051

Transfers in and/or out of Level 3

 

Total gains or losses (realized/unrealized):
 
 
 
Included in other income (expense)

 
(712
)
Included in other comprehensive income

 
921

Purchases, issuances and settlements

 
(11,260
)
Ending balance
$

 
$


We enter into derivative instruments to hedge foreign currency exchange risk to reduce the impact of changes to foreign currency rates on our financial statements. During the nine months ended September 28, 2013, we recognized $289 of net

13


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

hedge losses associated with forward currency contracts open during the period. As of September 28, 2013, there were no open forward currency contracts.


6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table displays the gross carrying amount and accumulated amortization of definite-lived intangible assets by major class:
 
September 28, 2013
 
December 29, 2012
 
Gross Carrying Amount
 
Accumulated Amortization & Impairment Loss
 
Gross Carrying Amount
 
Accumulated Amortization & Impairment Loss
Backlog
$
2,899

 
$
(2,469
)
 
$
2,875

 
$
(2,375
)
Client relationships
313,595

 
(238,245
)
 
305,178

 
(231,902
)
Client contracts
15,339

 
(15,339
)
 
15,366

 
(15,366
)
Trademarks and trade names
5,380

 
(4,949
)
 
5,326

 
(4,821
)
Standard operating procedures
2,753

 
(1,339
)
 
2,751

 
(863
)
Other identifiable intangible assets
10,384

 
(4,202
)
 
10,033

 
(4,718
)
Total other intangible assets
$
350,350

 
$
(266,543
)
 
$
341,529

 
$
(260,045
)
Additionally, as of both September 28, 2013 and December 29, 2012 , other intangible assets, net, included $3,438 of indefinite-lived intangible assets.
The changes in the gross carrying amount and accumulated impairment loss of goodwill are as follows:
 
 
 
 
Adjustments to Goodwill
 
 
 
 
December 29, 2012
 
Acquisitions
 
Foreign Exchange
 
September 28, 2013
Research Models and Services
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
63,139

 
$
19,273

 
$
361

 
$
82,773

Preclinical Services
 
 
 
 
 
 
 
 
Gross carrying amount
 
1,150,470

 

 
1,028

 
1,151,498

Accumulated impairment loss
 
(1,005,000
)
 
 
 
 
 
(1,005,000
)
Total
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
1,213,609

 
$
19,273

 
$
1,389

 
$
1,234,271

Accumulated impairment loss
 
(1,005,000
)
 
 
 
 
 
(1,005,000
)
Goodwill, net
 
$
208,609

 
 
 
 
 
$
229,271











14


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


7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt consists of the following:
 
September 28, 2013
 
December 29, 2012
2.25% Senior convertible debentures:
 
 
 
Principal
$

 
$
349,995

Unamortized debt discount

 
(6,726
)
Net carrying amount of senior convertible debentures

 
343,269

Term loan facilities
414,750

 
290,947

Revolving credit facility
224,752

 
32,000

Other long-term debt
237

 
232

Total debt
639,739

 
666,448

Less: current portion of long-term debt
(15,987
)
 
(139,373
)
Long-term debt
$
623,752

 
$
527,075

On May 29, 2013, we amended and restated our credit agreement dated September 23, 2011 to repay loans outstanding under the previous agreement, to retire our 2.25% Senior Convertible Debentures (2013 Notes), and to extend the maturity date of our credit agreement under a new $970,000 agreement (the $970M Credit Facility). The $970M Credit Facility provides for a $420,000 U.S. term loan facility and a $550,000 multi-currency revolving credit facility. The revolving credit facility may be drawn in U.S. Dollars, Euros, Pound Sterling, or Japanese Yen, subject to sub-limits by currency. Under specified circumstances, we have the ability to expand the term loan and/or revolving credit facility by up to $350,000 in the aggregate. Certain financing costs associated with the $970M Credit Facility were capitalized as deferred financing costs and will be amortized over the life of the agreement using the effective interest method. As a result of the refinancing and the associated modification and extinguishment of the previous debt agreement, we recognized an extinguishment loss of $389 of deferred financing costs associated with the previous credit agreement.
The $420,000 U.S. term loan matures in quarterly installments through maturity on May 29, 2018. The revolving credit facility also matures on May 29, 2018 and requires no scheduled payment before this date. The interest rates applicable to the $970M Credit Facility are variable and are based on an applicable rate plus a spread determined by our leverage ratio. As of September 28, 2013, the interest rate spread for the adjusted LIBOR was 1.25%.
The $970M Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to our business and negative and affirmative covenants. As of September 28, 2013, we were compliant with all financial covenants specified in the credit agreement.
We had $4,855 outstanding under letters of credit as of September 28, 2013.
Our $350,000 2013 Notes issued in June 2006 became due in June 2013 and were retired with funds provided by the $970M Credit Facility and available cash.
Principal maturities of existing debt for the periods set forth in the table below, are as follows:

15


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

Twelve Months Ending
 
September 2014
$
15,987

September 2015
42,000

September 2016
42,000

September 2017
63,000

September 2018
476,752

Total
$
639,739

We have capital leases for equipment. These leases are capitalized using interest rates considered appropriate at the inception of the lease. Capital lease obligations amounted to $741 and $72 at September 28, 2013 and December 29, 2012, respectively.


8. EQUITY
Earnings Per Share
Basic earnings per share for the three and nine months ended September 28, 2013 and September 29, 2012 was computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for the three and nine months ended September 28, 2013 and September 29, 2012 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.
Options to purchase 2,652,660 shares and 4,667,739 shares were outstanding in each of the three months ended September 28, 2013 and September 29, 2012, 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 and nine months ended September 28, 2013 and September 29, 2012 excluded the weighted average impact of 1,107,313 and 941,873 shares, respectively, of non-vested restricted stock awards. Options to purchase 2,363,878 shares and 4,590,418 shares were outstanding in each of the nine months ended September 28, 2013 and September 29, 2012, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.

16


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

The following table illustrates the reconciliation of the numerator and denominator in the computations of the basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Numerator:
 
 
 
 
 
 
 
Income from continuing operations for purposes of calculating earnings per share
$
30,980

 
$
22,154

 
$
84,912

 
$
78,942

Income (loss) from discontinued businesses
(113
)
 
$
(182
)
 
$
(1,183
)
 
$
(63
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding—Basic
47,910,649

 
47,625,806

 
47,950,018

 
48,028,602

Effect of dilutive securities:
 
 
 
 
 
 
 
2.25% senior convertible debentures

 

 

 

Stock options and contingently issued restricted stock
530,516

 
482,808

 
704,118

 
447,544

Weighted-average shares outstanding—Diluted
48,441,165

 
48,108,614

 
48,654,136

 
48,476,146

Basic earnings per share from continuing operations attributable to common shareholders
$
0.65

 
$
0.47

 
$
1.77

 
$
1.64

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

 
$

 
$
(0.02
)
 
$

Diluted earnings per share from continuing operations attributable to common shareholders
$
0.64

 
$
0.46

 
$
1.75

 
$
1.63

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

 
$

 
$
(0.02
)
 
$

Treasury Shares
For the nine months ended September 28, 2013 and September 29, 2012, we repurchased 1,945,021 shares of common stock for $88,553 and 1,222,432 shares of common stock for $42,800, respectively, through open market purchases made in reliance on Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. Additionally, our 2007 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the nine months ended September 28, 2013 and September 29, 2012, we acquired 112,748 shares for $4,519 and 84,086 shares for $3,042, respectively, as a result of such withholdings.
Share repurchases for the nine months ended September 28, 2013 and September 29, 2012 were as follows:
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
Number of shares of common stock repurchased
2,057,769

 
1,306,518

Total cost of repurchase
$
93,072

 
$
45,842


On July 30, 2013, our Board of Directors increased the stock repurchase authorization to $850,000 from $750,000.
Warrants
Separately and concurrently with the pricing of our 2013 Notes in 2006, we issued warrants for approximately 7.2 million shares of common stock. The warrants give the holders the right to receive, for no additional consideration, cash or shares (at the Company's option) with a value equal to the appreciation in the price of the Company's shares above $59.93. The warrants expire over 90 equal installments between September 13, 2013 and January 22, 2014. As of September 28, 2013, approximately 6.3 million are outstanding.


17


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


9. INCOME TAXES
The following table provides a reconciliation of the provision for income taxes on the condensed consolidated statements of income:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Income from continuing operations before income taxes
$
42,726

 
$
28,395

 
$
115,221

 
$
103,541

Effective tax rate
26.7
%
 
21.2
%
 
25.5
%
 
23.3
%
Provision for income taxes
$
11,390

 
$
6,011

 
$
29,331

 
$
24,140

Our overall effective tax rate was 26.7% in the third quarter of 2013 and 21.2% in the third quarter of 2012. The increase was primarily attributable to a $2,006 reduction of a tax asset related to the ongoing transfer pricing controversy with the Canadian Revenue Authority (CRA), a reduction in benefits from the U.K. research and development enhanced deduction regime due to the early adoption of the new refundable research and development credit that was enacted in the third quarter of 2013, and a French tax law change enacted in the first quarter of 2013 that limits the deductibility of interest by our French affiliates. These tax costs were partially offset in the third quarter of 2013 by a favorable mix of earnings, increased benefits from Canadian Scientific Research and Experimental Development credits (SR&ED), and an increased tax benefit from the U.S. domestic production deduction. The effective tax rate for the third quarter of 2012 reflects a tax benefit of $1,226 related to the settlement of a Canadian tax controversy for the SR&ED credits claimed in 2003 and 2004.
The effective tax rate for the nine months ended September 28, 2013 reflects the items noted above as well as a discrete tax cost of $703 due to the retroactive impact of the French tax law change to 2012, a $525 discrete tax cost related to nondeductible transaction costs incurred in 2012 for the acquisition of Vital River, which closed in the first quarter of 2013, and a discrete tax benefit of $330 for the retroactive impact to 2012 of a change in U.S. Federal tax law enacted during the first quarter of 2013 related to the U.S. anti deferral regime. Additionally the effective tax rate for the nine months ended September 29, 2012 reflects an unbenefitted capital loss of $712 on the sale of auction rate securities recorded in the first quarter of 2012.
In accordance with Canadian Federal tax law, we claim SR&ED credits on qualified research and development costs incurred by our preclinical services facility in Canada in the performance of projects for non-Canadian clients. Additionally, in accordance with the tax law of the United Kingdom, we claim enhanced deductions related to qualified research and development costs incurred by our preclinical services facility in Scotland, in the performance of certain client contracts. On July 17, 2013, the U.K. government enacted a tax law change that replaces the existing research and development enhanced deduction with a research and development credit. In the third quarter of 2013 we elected to adopt the tax law change with retroactive application to April 1, 2013. The benefit of the new refundable credit for the period April 1, 2013 through September 28, 2013 of $1,714 is reported in Cost of Services Provided in our Condensed Consolidated Statements of Income.
During the third quarter of 2013, our unrecognized tax benefits recorded decreased by $13,325 to $18,782 due primarily to a settlement reached during the quarter with the CRA related to SR&ED credits claimed in 2005 through 2011. This reduction was partially offset with an increase from ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate favorably decreased by $8,628 to $17,268. The decrease was due primarily to the Canadian SR&ED settlement. The amount of accrued interest on unrecognized tax benefits decreased by $1,788 to $637 in the third quarter of 2013 primarily due to the Canadian SR&ED settlement. It is reasonably possible as of September 28, 2013 that the liability for unrecognized tax benefits for the uncertain tax position associated with an acquisition agreement termination fee could decrease within the next twelve months by approximately $11,000 due to the potential expiration of a statute of limitations.

We conduct business in a number of tax jurisdictions. As a result, we are subject to tax audits in jurisdictions including, but not limited to, the United States, the United Kingdom, Japan, France, Germany and Canada. With few exceptions, we are no longer subject to U.S. and international income tax examinations for years before 2006.

18


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

We are currently under audit by the CRA for the years 2006 through 2009. In the fourth quarter of 2012, we received a draft reassessment from the CRA related to the transfer pricing in our preclinical services operations in Montreal. We received revised draft reassessments in the second quarter of 2013. The CRA proposes to disallow certain deductions related to headquarter service charges for the years 2006 through 2009. We intend to file an objection with the CRA upon receipt of the Notice of Reassessment and apply to the Internal Revenue Service (IRS) and the CRA for relief pursuant to the competent authority procedure provided in the tax treaty between the U.S. and Canada. We believe that the controversy will likely be settled via the competent authority process. In the fourth quarter of 2012, we established a reserve for this uncertain tax position of $2,408 related to years 2006 through 2012 to reduce the tax benefit recognized for these deductions in Canada to the level that we believe will likely be realized upon the ultimate resolution of this controversy. Additionally, in the fourth quarter of 2012, we recognized a tax asset of $2,981, which is included in Other Assets, that represents the correlative relief that we believe would more likely than not be received in the U.S. via the competent authority process. In the third quarter of 2013 there was a U.S. tax court opinion issued that could impact our ability to recognize the full benefit of the correlative relief recorded in 2012. As a result, in the third quarter of 2013, the U.S. tax asset recorded in the fourth quarter of 2012 was reduced by $2,006 to $975. The actual amounts of the liability for Canadian taxes and the asset for the correlative relief in the U.S. could be different based upon the agreement reached between the IRS and CRA.

On October 9, 2013 we were notified by the German Tax Office of an upcoming audit of our German operations for years 2008 through 2011. We do not believe that resolution of this audit will have a material impact on our financial position or results of operations.

We believe we have appropriately provided for all uncertain tax positions.
In the third quarter of 2013 the French government proposed a change to French tax law that, if enacted, could further reduce the deductibility of interest by our French affiliates in 2013 and beyond. We are currently analyzing the potential impact of the proposed law change.
In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested as of the end of the third quarter of 2013 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.
The income tax expense (benefit) related to items of other comprehensive income are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Income tax expense (benefit) related to foreign currency translation adjustment
$
(615
)
 
$
(60
)
 
$
42

 
$
(98
)
Income tax expense related to change in unrecognized pension gains, losses and prior service costs
289

 
216

 
832

 
799

Income tax expense (benefit) related to items of other comprehensive income
$
(326
)
 
$
156

 
$
874

 
$
701



10. EMPLOYEE BENEFITS
The following table provides the components of net periodic benefit cost for our defined benefit plans for the three month period ended:

19


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

 
Pension Benefits
 
Supplemental
Retirement Benefits
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Service cost
$
822

 
$
922

 
$
160

 
$
160

Interest cost
2,762

 
2,824

 
177

 
223

Expected return on plan assets
(3,593
)
 
(3,459
)
 

 

Amortization of prior service cost (credit)
(147
)
 
(256
)
 
165

 
165

Amortization of net loss (gain)
671

 
586

 
63

 
65

Net periodic benefit cost
$
515

 
$
617

 
$
565

 
$
613

The following table provides the components of net periodic benefit cost for our defined benefit plans for the nine month period ended:
 
Pension Benefits
 
Supplemental
Retirement Benefits
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Service cost
$
2,492

 
$
2,880

 
$
482

 
$
480

Interest cost
8,334

 
8,445

 
531

 
669

Expected return on plan assets
(10,842
)
 
(10,319
)
 

 

Amortization of prior service cost (credit)
(444
)
 
(566
)
 
495

 
495

Amortization of net loss (gain)
2,043

 
1,756

 
189

 
195

Net periodic benefit cost
$
1,583

 
$
2,196

 
$
1,697

 
$
1,839

During 2013, we expect to contribute $9,686 to our pension plans.



11. STOCK PLANS AND STOCK-BASED COMPENSATION
The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards' vesting period on a straight-line basis. The following table presents stock-based compensation included in our consolidated statement of income:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Stock-based compensation expense included in:
 
 
 
 
 
 
 
Cost of sales
$
1,332

 
$
1,271

 
$
4,051

 
$
3,995

Selling, general and administration
4,715

 
3,970

 
14,181

 
11,833

Stock-based compensation, before income taxes
6,047

 
5,241

 
18,232

 
15,828

Provision for income taxes
(2,103
)
 
(1,847
)
 
(6,422
)
 
(5,615
)
Stock-based compensation, net of tax
$
3,944

 
$
3,394

 
$
11,810

 
$
10,213




20


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

The fair value of stock-based awards granted during the first nine months of 2013 and 2012 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
September 28, 2013
 
September 29, 2012
Expected life (in years)
4.2 years

 
4.5 years

Expected volatility
32.7
%
 
34.9
%
Risk-free interest rate
0.80
%
 
0.84
%
Expected dividend yield
0
%
 
0
%
Weighted-average grant date fair value
$
11.17

 
$
10.94

Stock Options
The following table summarizes stock option activities under our plans:
 
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life
(in years)
 
Aggregate
Intrinsic
Value
Options outstanding as of December 29, 2012
5,860,403

 
$
39.11

 
 
 
 

Options granted
593,499

 
$
40.54

 
 
 
 

Options exercised
(1,729,768
)
 
$
34.06

 
 
 
 

Options canceled
(105,040
)
 
$
45.68

 
 
 
 

Options outstanding as of September 28, 2013
4,619,094

 
$
41.04

 
3.25 years
 
$
30,997

Options exercisable as of September 28, 2013
3,022,605

 
$
42.52

 
2.00 years
 
$
18,186

As of September 28, 2013, the unrecognized compensation cost related to 1,596,489 unvested stock options expected to vest was $12,634. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.5 years.
The total intrinsic value of options exercised during the nine months ended September 28, 2013 and September 29, 2012 was $17,629 and $2,769, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of options during the nine months ended September 28, 2013 and September 29, 2012 was $58,986 and $12,304, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $6,436 for the nine months ended September 28, 2013. A charge of $1,362 was recorded in capital in excess of par value in the first nine months of 2013 for the excess of deferred tax assets over the actual tax benefits at option exercise. We settle stock option exercises with newly issued common shares.
Restricted Stock
Stock compensation expense associated with restricted common stock is charged for the market value on the date of grant, less estimated forfeitures, and is amortized over the awards' vesting period on a straight-line basis.








21


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

The following table summarizes the restricted stock activity for the nine months ended September 28, 2013:
 
Restricted Stock
 
Weighted
Average
Grant Date
Fair Value
Outstanding as of December 29, 2012
934,505

 
$
35.83

Granted
565,699

 
40.52

Vested
(371,458
)
 
40.37

Canceled
(21,433
)
 
43.75

Outstanding as of September 28, 2013
1,107,313

 
$
36.55

As of September 28, 2013, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $32,752. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 31.5 months. The total fair value of restricted stock grants that vested during the nine months ended September 28, 2013 and September 29, 2012 was $14,996 and $10,297, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $5,375 for the nine months ended September 28, 2013.
Performance Based Stock Award Program
On February 22, 2013, we granted 163,847 Performance Share Units (PSUs) to certain executive officers. The PSUs will be paid out in our common stock based upon the results of two metrics: (1) performance based on our earnings per share with certain defined adjustments and (2) our relative stock price market performance based on a 3-year relative Total Shareholder Return calculation. Accordingly, the actual total number of our shares into which the granted PSUs will convert can range from no shares to 327,694 shares. The PSUs will be fully vested in December 2015 and will be paid out in the form of our common stock in the first quarter of 2016. Compensation expense associated with the PSUs of $1,455 was recorded during the nine months ended September 28, 2013.


12. COMMITMENTS AND CONTINGENCIES
Various lawsuits, claims and proceedings of a nature considered normal to our business are pending against us. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect our consolidated financial statements.
In early May 2013, the Company commenced an investigation into inaccurate billing with respect to certain government contracts.  The Company promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services' Office of the Inspector General, and the Department of Justice, and we are cooperating with these agencies to ensure the proper repayment and resolution of this matter. The Company identified approximately $1,500 in excess amounts billed on these contracts since January 1, 2007 and reserved such amount.  Because of the preliminary stage of discussions with the government and complex nature of this matter, the Company believes that it is reasonably possible that additional losses may be incurred. However, the Company cannot at this time estimate the potential range of loss beyond the current reserve of $1,500
On July 27, 2012, a Mauritius supplier of large animal models submitted an Application for Arbitration with The Permanent Secretariat, The Permanent Court of Arbitration, The Mauritius Chamber of Commerce and Industry in Port Louis, Mauritius.  The supplier asserted that the Company failed to pay certain invoices and the supplier was therefore permitted to terminate the supply agreement.  The Company filed a counterclaim asserting that the supplier had failed to meet its contractual obligations under the supply agreement.  The arbitration hearing relating to this contract dispute took place in Mauritius from August 13-15, 2013. While no prediction may be made as to the outcome of arbitration, the Company intends to defend against this proceeding vigorously and therefore an estimate of the possible loss or range of loss cannot be made.




22


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

13. BUSINESS SEGMENT INFORMATION
We report two business segments, Research Models and Services (RMS) and Preclinical Services (PCS). Our RMS segment includes sales of Research Models, Genetically Engineered Models and Services (GEMS), Insourcing Solutions (IS), Research Animal Diagnostic Services (RADS), Discovery Research Services (DRS), Endotoxin and Microbial Detection (EMD) products and services, and Avian Vaccine products and services. Our PCS segment includes services required to take a drug through the development process, which includes discovery services, safety assessment and biopharmaceutical services.
The following table presents sales and other financial information by business segment.
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Research Models and Services
 
 
 
 
 
 
 
Net sales
$
173,405

 
$
166,484

 
$
534,867

 
$
523,247

Gross margin
65,710

 
65,902

 
221,916

 
224,364

Operating income
40,260

 
43,389

 
145,193

 
158,398

Depreciation and amortization
16,876

 
9,670

 
37,378

 
27,697

Capital expenditures
6,110

 
7,423

 
16,464

 
27,892

Preclinical Services
 
 
 
 
 
 
 
Net sales
$
118,724

 
$
112,202

 
$
341,433

 
$
326,143

Gross margin
34,216

 
27,358

 
84,791

 
76,693

Operating income
18,636

 
10,975

 
37,631

 
25,958

Depreciation and amortization
10,039

 
10,880

 
29,957

 
32,920

Capital expenditures
2,986

 
2,819

 
8,855

 
5,903

A reconciliation of segment operating income to consolidated operating income is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Total segment operating income
$
58,896

 
$
54,364

 
$
182,824

 
$
184,356

Unallocated corporate overhead
(18,053
)
 
(16,682
)
 
(56,030
)
 
(53,660
)
Consolidated operating income
$
40,843

 
$
37,682

 
$
126,794

 
$
130,696

Net sales for each significant service area are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Research models
$
92,969

 
$
90,877

 
$
294,993

 
$
293,575

Research model services
52,105

 
53,400

 
156,661

 
163,247

EMD
28,331

 
22,207

 
83,213

 
66,425

Total research models and services
173,405

 
166,484

 
534,867

 
523,247

Total preclinical services
118,724

 
112,202

 
341,433

 
326,143

Total sales
$
292,129

 
$
278,686

 
$
876,300

 
$
849,390




23


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

A summary of unallocated corporate overhead consists of the following:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Stock-based compensation expense
$
3,260

 
$
2,827

 
$
9,927

 
$
8,512

U.S. retirement plans
1,275

 
1,276

 
3,617

 
3,662

Audit, tax and related expense
811

 
842

 
3,135

 
2,133

Salary and bonus
5,831

 
4,813

 
16,057

 
14,602

Global IT
3,002

 
3,285

 
8,448

 
9,501

Employee health, long-term disability and fringe benefit expense
(1,470
)
 
(2,248
)
 
(898
)
 
(1,395
)
Consulting and professional services
1,439

 
1,061

 
3,443

 
3,581

Depreciation expense
1,570

 
1,554

 
4,712

 
4,693

Other general unallocated corporate expenses
2,335

 
3,272

 
7,589

 
8,371

Total unallocated corporate overhead costs
$
18,053

 
$
16,682

 
$
56,030

 
$
53,660

Other general unallocated corporate expenses consist of various departmental costs including those associated with senior executives, corporate accounting, legal, tax, human resources and treasury.


14. DISCONTINUED OPERATIONS
On March 28, 2011, we disposed of our Phase I clinical business for a nominal amount. As part of the disposition we remained the guarantor of the Phase I facility lease. During the second quarter of 2011, we recognized the value of the guarantee net of the buyer's related indemnity as a liability of $2,994, which we are accreting ratably over the remaining term of the lease. The facility lease runs through January 2021 with remaining lease payments totaling $11,677 as of September 28, 2013.
During the period ended December 29, 2012, we concluded that the decreasing financial viability of the lessee (the buyer of the Phase I clinical business) increased the probability that we will be required to make future lease payments as guarantor. As a result, we recorded an additional contingent loss for the guarantee, reflecting our estimate of the total future lease payments, which include real estate taxes passed on by the lessor, less estimated sublease income. Under the terms of the lease, if we were required to honor the guarantee due to default by the lessee, we had the right to obtain control of the leased property.
On April 4, 2013, the buyer of our Phase I clinical business filed for Chapter 11 bankruptcy. As a result, we revised our estimate of the total future lease payments, less estimated sublease income, resulting in an additional charge of $1,316. In July 2013, the bankruptcy court approved the rejection of the lease, and effective July 1, 2013, we assumed control of the leased property and assumed obligations under the lease consistent with the guarantee. The total carrying amount of the liability for our obligation under the lease as of September 28, 2013 is $10,375 and is reflected on the consolidated balance sheet as a liability of discontinued operations.
The consolidated financial statements classify, as discontinued operations, the assets and liabilities, operating results and cash flows, of businesses that are discontinued for all periods presented. Operating results from discontinued operations are as follows:

24


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

 
Three Months Ended
 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Net sales
$

 
$

 
$

 
$

Income (loss) from operations of discontinued businesses, before income taxes
(172
)
 
49

 
(1,894
)
 
221

Provision (benefit) for income taxes
(59
)
 
231

 
(711
)
 
284

Income (loss) from operations of discontinued businesses, net of taxes
$
(113
)
 
$
(182
)
 
$
(1,183
)
 
$
(63
)

Assets and liabilities of discontinued operations at September 28, 2013 and December 29, 2012 consisted of the following:
 
September 28,
2013
 
December 29,
2012
Current assets
$
758

 
$
495

Long-term assets
3,326

 
3,328

Total assets
$
4,084

 
$
3,823

Current liabilities
$
1,944

 
$
1,802

Long-term liabilities
8,531

 
8,795

Total liabilities
$
10,475

 
$
10,597

Current and long-term assets include deferred tax assets. Current and long-term liabilities consist primarily of estimated lease payments, less sublease income, for the Phase I facility.


15. BUSINESS ACQUISITIONS

Vital River
In October 2012, we entered into an agreement to acquire a 75%- ownership interest of Vital River, a commercial provider of research models and related services in China, for $26,890 in cash, subject to certain closing adjustments. The acquisition closed in January 2013. Vital River's financial results are included in our RMS reportable business segment.

The purchase price allocation, net of $2,671 of cash acquired, is as follows:
Current assets (excluding cash)
$
3,092

Property, plant and equipment
10,468

Other long-term assets
2,242

Definite-lived intangible assets