CRL 9.29.2012 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 29, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                                    TO                                   
Commission File No. 001-15943
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
06-1397316
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
251 Ballardvale Street
Wilmington, Massachusetts
(Address of Principal Executive Offices)
 
01887
(Zip Code)
____________________________________________________________________________
(Registrant's telephone number, including area code): (781) 222-6000
_________________________________________________________
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 19, 2012, there were 48,553,049 shares of the Registrant's common stock outstanding.



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended September 29, 2012
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 29, 2012 and September 24, 2011
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 29, 2012 and September 24, 2011
 
 
Condensed Consolidated Balance Sheets (Unaudited) as of September 29, 2012 and December 31, 2011
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 29, 2012 and September 24, 2011
 
 
Condensed Consolidated Statement of Changes in Equity (Unaudited) for the nine months ended September 29, 2012
 
 
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 current expectations, estimates, forecasts, and projections about the industries in which Charles River 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 customers; our expectations regarding stock repurchases; present spending trends and other cost reduction activities by our customers; future actions by our management; the outcome of contingencies; changes in our business strategy; changes in our business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; our expectations with respect to sales growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure); changes in our expectations regarding future stock option, restricted stock, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our cash flow and liquidity. In addition, these statements include the impact of economic and market conditions on our customers; 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 31, 2011 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 29,
2012
 
September 24,
2011
 
September 29,
2012
 
September 24,
2011
Net sales related to products
$
111,196

 
$
116,932

 
$
356,535

 
$
361,069

Net sales related to services
167,490

 
160,647

 
492,855

 
490,616

Net sales
278,686

 
277,579

 
849,390

 
851,685

Costs and expenses
 
 
 
 
 
 
 
Cost of products sold
63,649

 
66,368

 
190,629

 
197,405

Cost of services provided
121,778

 
118,495

 
357,705

 
352,606

Selling, general and administrative
51,047

 
50,345

 
156,924

 
152,561

Amortization of other intangibles
4,530

 
5,277

 
13,436

 
16,454

Operating income
37,682

 
37,094

 
130,696

 
132,659

Other income (expense)
 
 
 
 
 
 
 
Interest income
124

 
138

 
460

 
1,060

Interest expense
(8,519
)
 
(11,944
)
 
(25,033
)
 
(32,619
)
Other, net
(892
)
 
(747
)
 
(2,582
)
 
(1,092
)
Income from continuing operations, before income taxes
28,395

 
24,541

 
103,541

 
100,008

Provision for income taxes
6,011

 
5,630

 
24,140

 
11,564

Income from continuing operations, net of income taxes
22,384

 
18,911

 
79,401

 
88,444

Loss from discontinued operations, net of taxes
(182
)
 
(18
)
 
(63
)
 
(5,695
)
Net income
22,202

 
18,893

 
79,338

 
82,749

Less: Net income attributable to noncontrolling interests
(230
)
 
(95
)
 
(459
)
 
(298
)
Net income attributable to common shareowners
$
21,972

 
$
18,798

 
$
78,879

 
$
82,451

Earnings (loss) per common share
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations attributable to common shareowners
$
0.47

 
$
0.38

 
$
1.64

 
$
1.71

Discontinued operations
$
—

 
$
—

 
$
—

 
$
(0.11
)
Net income attributable to common shareowners
$
0.46

 
$
0.38

 
$
1.64

 
$
1.60

Diluted:
 
 
 
 
 
 
 
Continuing operations attributable to common shareowners
$
0.46

 
$
0.37

 
$
1.63

 
$
1.69

Discontinued operations
$
—

 
$
—

 
$
—

 
$
(0.11
)
Net income attributable to common shareowners
$
0.46

 
$
0.37

 
$
1.63

 
$
1.58




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 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Net income
$
22,202

 
$
18,893

 
$
79,338

 
$
82,749

Foreign currency translation adjustment
12,962

 
(12,643
)
 
8,871

 
(6,943
)
Unrealized gains (losses) on marketable securities:
 
 
 
 
 
 
 
Unrealized gains (losses) for the period
—

 
(168
)
 
209

 
(305
)
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
560

 
260

 
1,880

 
759

Comprehensive income, before tax
35,724

 
6,342

 
91,010

 
76,260

Income tax expense related to items of other comprehensive income
156

 
572

 
701

 
1,111

Comprehensive income, net of tax
35,568

 
5,770

 
90,309

 
75,149

Less: comprehensive income related to noncontrolling interests
(225
)
 
(121
)
 
(459
)
 
(354
)
Comprehensive income attributable to common shareholders
$
35,343

 
$
5,649

 
$
89,850

 
$
74,795




















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 29,
2012
 
December 31,
2011
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
83,224

 
$
68,905

Trade receivables, net
215,621

 
184,810

Inventories
93,718

 
92,969

Other current assets
65,243

 
79,052

Current assets of discontinued businesses
109

 
107

Total current assets
457,915

 
425,843

Property, plant and equipment, net
724,699

 
738,030

Goodwill, net
207,420

 
197,561

Other intangibles, net
89,777

 
93,437

Deferred tax asset
45,917

 
44,804

Other assets
40,987

 
57,659

Long-term assets of discontinued businesses
903

 
986

Total assets
$
1,567,618

 
$
1,558,320

Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt and capital leases
$
125,603

 
$
14,758

Accounts payable
27,744

 
34,332

Accrued compensation
48,771

 
41,602

Deferred revenue
57,833

 
56,530

Accrued liabilities
49,655

 
54,377

Other current liabilities
14,539

 
14,033

Current liabilities of discontinued businesses
1,092

 
1,165

Total current liabilities
325,237

 
216,797

Long-term debt and capital leases
543,143

 
703,187

Other long-term liabilities
96,975

 
108,451

Long-term liabilities of discontinued businesses
2,311

 
2,522

Total liabilities
967,666

 
1,030,957

Commitments and contingencies

 

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

 
—

Common stock, $0.01 par value; 120,000,000 shares authorized; 79,385,168 issued and 48,480,525 shares outstanding at September 29, 2012 and 78,473,888 issued and 48,875,715 shares outstanding at December 31, 2011
794

 
785

Capital in excess of par value
2,085,034

 
2,056,921

Accumulated deficit
(386,717
)
 
(465,596
)
Treasury stock, at cost, 30,904,643 shares and 29,598,173 shares at September 29, 2012 and December 31, 2011, respectively
(1,116,962
)
 
(1,071,120
)
Accumulated other comprehensive income
15,564

 
4,593

Total shareowners' equity
597,713

 
525,583

Noncontrolling interests
2,239

 
1,780

Total equity
599,952

 
527,363

Total liabilities and equity
$
1,567,618

 
$
1,558,320

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 29,
2012
 
September 24,
2011
Cash flows relating to operating activities
 
 
 
Net income
$
79,338

 
$
82,749

Less: Income (loss) from discontinued operations
(63
)
 
(5,695
)
Income from continuing operations
79,401

 
88,444

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60,617

 
64,249

Amortization of debt issuance costs and discounts
13,136

 
15,229

Non-cash compensation
15,828

 
16,919

Deferred income taxes
(1,338
)
 
(1,460
)
Other, net
7,493

 
110

Changes in assets and liabilities:
 
 
 
Trade receivables
(27,931
)
 
(8,467
)
Inventories
(2,183
)
 
7,090

Other assets
1,201

 
1,834

Accounts payable
(6,743
)
 
459

Accrued compensation
6,287

 
(5,143
)
Deferred revenue
283

 
(12,400
)
Accrued liabilities
(1,518
)
 
(3,730
)
Taxes payable and prepaid taxes
7,323

 
(21,196
)
Other liabilities
(8,177
)
 
(6,993
)
Net cash provided by operating activities
143,679

 
134,945

Cash flows relating to investing activities
 
 
 
Acquisition of business, less cash acquired
(16,902
)
 
—

Capital expenditures
(33,795
)
 
(21,672
)
Purchases of investments
(10,814
)
 
(19,837
)
Proceeds from sale of investments
23,549

 
27,840

Other, net
2,746

 
1,620

Net cash used in investing activities
(35,216
)
 
(12,049
)
Cash flows relating to financing activities
 
 
 
Proceeds from long-term debt and revolving credit agreement
53,115

 
235,806

Proceeds from exercises of stock options and warrants
11,916

 
20,574

Payments on long-term debt, capital lease obligation and revolving credit agreement
(112,731
)
 
(214,299
)
Purchase of treasury stock and Accelerated Stock Repurchase Program
(45,842
)
 
(255,610
)
Other, net
535

 
(2,248
)
Net cash used in financing activities
(93,007
)
 
(215,777
)
Discontinued operations
 
 
 
Net cash used in operating activities
(292
)
 
(1,703
)
Net cash used in discontinued operations
(292
)
 
(1,703
)
Effect of exchange rate changes on cash and cash equivalents
(845
)
 
(3,356
)
Net change in cash and cash equivalents
14,319

 
(97,940
)
Cash and cash equivalents, beginning of period
68,905

 
179,160

Cash and cash equivalents, end of period
$
83,224

 
$
81,220

Supplemental cash flow information
 
 
 
Capitalized interest
$
472

 
$
202




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
Interest
December 31, 2011
$
527,363

 
$
(465,596
)
 
$
4,593

 
$
785

 
$
2,056,921

 
$
(1,071,120
)
 
$
1,780

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
79,338

 
78,879

 
 
 
 
 
 
 
 
 
459

Other comprehensive income
10,971

 
 
 
10,971

 
 
 
 
 
 
 
—

Total comprehensive income
90,309

 
 
 
 
 
 
 
 
 
 
 
459

Tax detriment associated with stock issued under employee compensation plans
(10
)
 
 
 
 
 
 
 
(10
)
 
 
 
 
Issuance of stock under employee compensation plans
12,304

 
 
 
 
 
9

 
12,295

 
 
 
 
Acquisition of treasury shares
(45,842
)
 
 
 
 
 
 
 
—

 
(45,842
)
 
 
Stock-based compensation
15,828

 
 
 
 
 
 
 
15,828

 
 
 
 
September 29, 2012
$
599,952

 
$
(386,717
)
 
$
15,564

 
$
794

 
$
2,085,034

 
$
(1,116,962
)
 
$
2,239




















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 31, 2011.
Certain amounts in prior-year financial statements and related notes have been reclassified to conform with the current year presentation. For a summary of recent accounting pronouncements, please see "Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations", page 33.
2. RESTRUCTURING AND CONTRACT TERMINATION COSTS
In September 2012, we commenced a consolidation of certain research model operations in Europe. As a result, we recorded an impairment charge of $3,548 for the disposition of facilities that we own. The assets will be classified as held-for-use as we unwind operations over the next several months. In addition, we implemented staffing reductions associated with the affected operations and, accordingly, we recorded severance and retention charges of $865 for the three months ended September 29, 2012. As a result of these actions and previously implemented staffing reductions, we recorded severance and retention charges as shown below. As of September 29, 2012, $1,946 was included in accrued compensation and $1,894 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 29, 2012
 
September 24, 2011
Balance, beginning of period
$
3,374

 
$
10,658

Expense
1,881

 
1,317

Payments/utilization
(1,415
)
 
(7,625
)
Balance, end of period
$
3,840

 
$
4,350


The following table presents severance and retention costs by classification on the income statement:
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
Severance charges included in cost of sales
$
936

 
$
437

Severance charges included in selling, general and administrative expense
945

 
880

Total expense
$
1,881

 
$
1,317





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 29, 2012
 
September 24, 2011
Research models and services
$
934

 
$
444

Preclinical services
947

 
979

Corporate
—

 
(106
)
Total expense
$
1,881

 
$
1,317

3. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of net trade receivables is as follows:
 
September 29, 2012
 
December 31, 2011
Client receivables
$
188,203

 
$
159,381

Unbilled revenue
31,301

 
29,446

Total
219,504

 
188,827

Less allowance for doubtful accounts
(3,883
)
 
(4,017
)
Net trade receivables
$
215,621

 
$
184,810


The composition of inventories is as follows:
 
September 29, 2012
 
December 31, 2011
Raw materials and supplies
$
13,352

 
$
13,987

Work in process
14,203

 
13,533

Finished products
66,163

 
65,449

Inventories
$
93,718

 
$
92,969

The composition of other current assets is as follows:
 
September 29, 2012
 
December 31, 2011
Prepaid assets
$
22,016

 
$
22,828

Deferred tax asset
25,220

 
30,894

Marketable securities
6,352

 
5,359

Prepaid income tax
11,426

 
19,742

Restricted cash
229

 
229

Other current assets
$
65,243

 
$
79,052







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 29, 2012
 
December 31, 2011
Land
$
41,240

 
$
40,517

Buildings
707,897

 
696,275

Machinery and equipment
351,125

 
332,683

Leasehold improvements
35,427

 
29,975

Furniture and fixtures
26,840

 
26,775

Vehicles
3,668

 
5,226

Computer hardware and software
107,025

 
105,563

Construction in progress
43,362

 
57,661

Total
1,316,584

 
1,294,675

Less accumulated depreciation
(591,885
)
 
(556,645
)
Net property, plant and equipment
$
724,699

 
$
738,030

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 29, 2012 and September 24, 2011 was $47,181 and $47,795, respectively.
The composition of other assets is as follows:
 
September 29, 2012
 
December 31, 2011
Deferred financing costs
$
7,080

 
$
9,239

Cash surrender value of life insurance policies
20,501

 
25,057

Long term marketable securities
—

 
11,051

Other assets
13,406

 
12,312

Other assets
$
40,987

 
$
57,659

The composition of other current liabilities is as follows:
 
September 29, 2012
 
December 31, 2011
Accrued income taxes
$
8,968

 
$
10,552

Current deferred tax liability
1,115

 
1,379

Accrued interest and other
4,456

 
2,102

Other current liabilities
$
14,539

 
$
14,033









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 29, 2012
 
December 31, 2011
Deferred tax liability
$
14,268

 
$
16,074

Long-term pension liability
39,383

 
49,223

Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan
26,309

 
25,739

Other long-term liabilities
17,015

 
17,415

Other long-term liabilities
$
96,975

 
$
108,451

4. MARKETABLE SECURITIES AND EQUITY METHOD AFFILIATES
Investments in marketable securities are reported at fair value and consist of time deposits and auction rate securities. During the nine months ended September 29, 2012, we sold our auction rate securities for $11,260 in cash and recorded a realized loss of $712 , which is included in other income (expense).
The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:
 
September 29, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits
$
6,352

 
$
—

 
$
—

 
$
6,352

Auction rate securities
—

 
—

 
—

 
—

 
$
6,352

 
$
—

 
$
—

 
$
6,352

 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits
$
5,359

 
$
—

 
$
—

 
$
5,359

Auction rate securities
11,972

 
—

 
(921
)
 
11,051

 
$
17,331

 
$
—

 
$
(921
)
 
$
16,410

Maturities of debt securities were as follows:
 
September 29, 2012
 
December 31, 2011
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due less than one year
$
6,352

 
$
6,352

 
$
5,359

 
$
5,359

Due after one year through five years
—

 
—

 
—

 
—

Due after ten years
—

 
—

 
11,972

 
11,051

 
$
6,352

 
$
6,352

 
$
17,331

 
$
16,410


Equity-Method Affiliates
In 2009, we entered into a limited partnership, which invests in biotechnology and medical device companies. We committed $20,000, or approximately 12%, of the limited partnership's total committed capital. As of September 29, 2012, we have contributed $7,920 of our total committed capital of $20,000. We recognized equity losses of $380 and $245 for the three and nine months ended September 29, 2012, respectively. These losses are reported as other income (expense). As of

11

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

September 29, 2012, equity method affiliates had a carrying value of $7,965, which is reported in other assets 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.
•
Auction rate securities—Valued at fair value by management in part utilizing an independent valuation using pricing models and discounted cash flow methodologies incorporating assumptions that reflect the assumptions a marketplace participant would use.
•
Life policies—Valued at cash surrender value.
•
Hedge contract—Valued at fair value by management based on our foreign exchange rates and forward points provided by banks.
•
Long-lived assets impaired during the period—Valued at fair value by management based the income approach
•
Long-term debt—Disclosed fair value based on current market pricing for similar debt.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurements at September 29, 2012 using
 
Quoted Prices in Active Markets for Identical Assets Level 1
 
Significant Other Observable Inputs Level 2
 
Significant Unobservable Inputs Level 3
 
Assets and Liabilities at Fair Value
Time deposits
$
—

 
$
6,352

 
$
—

 
$
6,352

Auction rate securities
—

 
—

 
—

 
—

Life policies
—

 
14,865

 
—

 
14,865

Hedge contract
—

 
(4
)
 
—

 
(4
)
Total assets measured at fair value
$
—

 
$
21,213

 
$
—

 
$
21,213

Total liabilities measured at fair value
$
—

 
$
—

 
$
—

 
$
—

 
Fair Value Measurements at December 31, 2011 using
 
Quoted Prices in Active Markets for Identical Assets Level 1
 
Significant Other Observable Inputs Level 2
 
Significant Unobservable Inputs Level 3
 
Assets and Liabilities at Fair Value
Time deposits
$
—

 
$
5,359

 
$
—

 
$
5,359

Auction rate securities
—

 
—

 
11,051

 
11,051

Life policies
—

 
19,520

 
—

 
19,520

Hedge contract
—

 
5

 
—

 
5

Total assets measured at fair value
$
—

 
$
24,884

 
$
11,051

 
$
35,935

Total liabilities measured at fair value
$
—

 
$
—

 
$
—

 
$
—

    
During the quarter ended September 29, 2012, we recorded an impairment charge for long-lived assets held and used (see Note 2). As a result, we adjusted the carrying amount of this asset group, consisting of land, buildings, and equipment, to fair value, which was based on the income approach. In applying the income approach, we estimated the future net cash flows associated with operating the asset group and the asset group's salvage value. The fair value of the asset group was adjusted to $1,611. We classified the fair value of this asset group as Level 3, whereby the inputs are based on management's internal estimates and not corroborated with observable market data.

12

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


The book value of our term and revolving loans, which are variable rate loans carried at amortized cost, approximates fair value based current market pricing of similar debt. The fair value of our 2.25% Senior Convertible Debentures (2013 Notes), which are carried at cost less unamortized discount on our consolidated balance sheets, was $353,915 as of September 29, 2012. We determine the fair value of these 2013 Notes based on their most recent quoted market price and by reference to the market value of similar debt instruments. We classify the fair value of our debt as Level 2 (significant other observable inputs) on the valuation hierarchy, where Level 2 inputs include quoted prices for similar assets and liabilities in active markets and/or quoted prices for identical or similar assets and liabilities in markets that are not active.
The following table presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 29, 2012 and September 24, 2011.
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Nine Months Ended
Auction rate securities
September 29, 2012

 
September 24, 2011

Beginning balance
$
11,051

 
$
11,377

Transfers in and/or out of Level 3
—

 
—

Total gains or losses (realized/unrealized):
 
 
 
Included in other income (expense)
(712
)
 
(1
)
Included in other comprehensive income
921

 
(306
)
Purchases, issuances and settlements
(11,260
)
 
—

Ending balance
$
—

 
$
11,070


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 29, 2012, we recognized $1,449 of hedge losses associated with forward currency contracts. As of September 29, 2012, outstanding forward currency contracts had a fair value of $(4).





















13

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

6. 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:
 
September 29, 2012
 
December 31, 2011
 
Gross Carrying Amount
 
Accumulated Amortization & Impairment Loss
 
Gross Carrying Amount
 
Accumulated Amortization & Impairment Loss
Goodwill
$
1,224,136

 
$
(1,016,716
)
 
$
1,214,285

 
$
(1,016,724
)
Other intangible assets not subject to amortization:
 
 
 
 
 
 
 
Research models
$
3,438

 
$
—

 
$
3,438

 
$
—

Other intangible assets subject to amortization:
 
 
 
 
 
 
 
Backlog
2,848

 
(2,334
)
 
2,856

 
(2,253
)
Client relationships
307,671

 
(229,660
)
 
298,813

 
(210,816
)
Trademarks and trade names
5,320

 
(4,782
)
 
5,022

 
(4,706
)
Other identifiable intangible assets
11,809

 
(4,533
)
 
5,415

 
(4,332
)
Total other intangible assets
$
331,086

 
$
(241,309
)
 
$
315,544

 
$
(222,107
)
The changes in the gross carrying amount and accumulated amortization of goodwill are as follows:
 
 
 
 
Adjustments to Goodwill
 
 
 
 
December 31, 2011
 
Acquisitions
 
Foreign Exchange/ Impairment
 
September 29, 2012
Research Models and Services
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
56,402

 
$
10,520

 
$
(73
)
 
$
66,849

Accumulated amortization
 
(3,721
)
 
—

 
8

 
(3,713
)
Preclinical Services
 
 
 
 
 
 
 
 
Gross carrying amount
 
1,157,883

 
—

 
(596
)
 
1,157,287

Accumulated impairment loss
 
(1,005,000
)
 
—

 
—

 
(1,005,000
)
Accumulated amortization
 
(8,003
)
 
—

 
—

 
(8,003
)
Total
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
1,214,285

 
$
10,520

 
$
(669
)
 
$
1,224,136

Accumulated impairment loss
 
(1,005,000
)
 
—

 
—

 
(1,005,000
)
Accumulated amortization
 
(11,724
)
 
—

 
8

 
(11,716
)












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 29, 2012
 
December 31, 2011
2.25% Senior convertible debentures:
 
 
 
Principal
$
349,995

 
$
349,995

Unamortized debt discount
(10,556
)
 
(21,533
)
Net carrying amount of senior convertible debentures
339,439

 
328,462

Term loan facilities
298,069

 
356,322

Revolving credit facility
31,000

 
33,000

Other long-term debt represents secured and unsecured promissory notes, interest rates ranging from 0% to 0.5% at both September 29, 2012 and December 31, 2011, maturing between 2012 and 2013
226

 
118

Total debt
668,734

 
717,902

Less: current portion of long-term debt
(125,590
)
 
(14,732
)
Long-term debt
$
543,144

 
$
703,170

Our credit agreement dated September 23, 2011 provides for a $299,750 term loan, a €69,414 Euro term loan and a $350,000 revolving credit facility. Under specified circumstances, we have the ability to increase the term loan and/or revolving line of credit by up to $250,000 in the aggregate. The term loan facility matures in 20 quarterly installments with the last installment due September 23, 2016. The $350,000 revolving facility also matures on September 23, 2016 and requires no scheduled payment before that date. The book value of our term and revolving loans approximates fair value.
The credit agreement includes certain customary representations and warranties, events of default, notices of material adverse changes to our business and negative and affirmative covenants. As of September 29, 2012, we were compliant with all financial covenants specified in the credit agreement. We had $4,325 outstanding under letters of credit as of September 29, 2012.
As of September 29, 2012, our debt included $349,995 of 2.25% Senior Convertible Debentures (2013 Notes) due June 2013. At September 29, 2012, the fair value of these outstanding 2013 Notes was approximately $353,915 based on their quoted market value and no conversion triggers were met. The current portion of the 2013 Notes is $101,833, which represents the amount we expect to settle upon maturity through available cash and future borrowings. We expect to settle the remaining balance on the 2013 Notes utilizing the capacity on our current revolving credit facility when the 2013 Notes mature.
As of September 29, 2012, $10,556 of debt discount related to the 2013 Notes remained and will be amortized over 3 quarters. Interest expense related to our convertible debt of $3,877 and $3,514 for quarters ended September 29, 2012 and September 24, 2011, respectively, yielded an effective interest rate of 6.93% on the liability component. In addition, $1,969 and $1,969 of contractual interest expense was recognized on our convertible debt during the quarters ended September 29, 2012 and September 24, 2011, respectively.
    






15

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

Principal maturities of existing debt, which excludes unamortized discount, for the periods set forth in the table below are as follows:
Twelve Months Ending
 
September 2013
$
128,757

September 2014
43,142

September 2015
58,830

September 2016
448,561

September 2017
—

Total
$
679,290

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 $12 and $43 at September 29, 2012 and December 31, 2011, respectively.

8. EQUITY
Earnings Per Share
Basic earnings per share for the three and nine months ended September 29, 2012 and September 24, 2011 was computed by dividing earnings available to common shareowners for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for the three and nine months ended September 29, 2012 and September 24, 2011 has been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.
Options to purchase 4,667,739 shares and 4,253,703 shares were outstanding in each of the three months ended September 29, 2012 and September 24, 2011, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase 4,590,418 shares and 4,245,953 shares were outstanding in each of the nine months ended September 29, 2012 and September 24, 2011, 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 September 29, 2012 and September 24, 2011 excluded the weighted average impact of 1,232 and 705,662 shares, respectively, of non-vested fixed restricted stock awards. Basic weighted average shares outstanding for the nine months ended September 29, 2012 and September 24, 2011 excluded the weighted average impact of 6,719 and 705,662 shares, respectively, of non-vested fixed restricted stock awards.













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 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Numerator:
 
 
 
 
 
 
 
Income from continuing operations for purposes of calculating earnings per share
$
22,154

 
$
18,816

 
$
78,942

 
$
88,146

Income (loss) from discontinued businesses
(182
)
 
$
(18
)
 
$
(63
)
 
$
(5,695
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding—Basic
47,625,806

 
50,084,850

 
48,028,602

 
51,671,559

Effect of dilutive securities:
 
 
 
 
 
 
 
2.25% senior convertible debentures
—

 
—

 
—

 
—

Stock options and contingently issued restricted stock
482,808

 
448,897

 
447,544

 
566,868

Weighted-average shares outstanding—Diluted
48,108,614

 
50,533,747

 
48,476,146

 
52,238,427

Basic earnings per share from continuing operations attributable to common shareowners
$
0.47

 
$
0.38

 
$
1.64

 
$
1.71

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

 
$
—

 
$
—

 
$
(0.11
)
Diluted earnings per share from continuing operations attributable to common shareowners
$
0.46

 
$
0.37

 
$
1.63

 
$
1.69

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

 
$
—

 
$
—

 
$
(0.11
)
Treasury Shares
For the nine months ended September 29, 2012 and September 24, 2011, we repurchased 1,222,432 shares of common stock for $42,800 and 2,946,468 shares of common stock for $105,852, 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 2000 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the nine months ended September 29, 2012 and September 24, 2011, we acquired 84,086 shares for $3,042 and 79,663 shares for $2,942, respectively, as a result of such withholdings. The nine months ended September 24, 2011 also includes the acquisition of 4,637,732 shares under accelerated stock repurchase programs (ASR).
Share repurchases for the nine months ended September 29, 2012 and September 24, 2011 were as follows:
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
Number of shares of common stock repurchased
1,306,518

 
7,663,863

Total cost of repurchase
$
45,842

 
$
277,420










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 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Income from continuing operations before income taxes
28,395

 
24,541

 
103,541

 
100,008

Effective tax rate
21.2
%
 
22.9
%
 
23.3
%
 
11.6
%
Provision (benefit) for income taxes
6,011

 
5,630

 
24,140

 
11,564

Our overall effective tax rate was 21.2% in the third quarter of 2012 and 22.9% in the third quarter of 2011. The change was primarily attributable to a tax benefit recorded in the third quarter of 2012 of $1,226 from the settlement of a Canadian tax controversy related to Scientific Research and Experimental Development (SR&ED) credits claimed in 2003 and 2004 and adjustments to the uncertain tax position related to the Canadian SR&ED credits claimed during open years. We also recognized a benefit of $256 during the third quarter of 2012 due to remeasurement of our deferred taxes for the decline in statutory tax rate in the United Kingdom. The effective tax rate for the third quarter of 2011 reflects benefits of $1,366 due to the settlement of a German tax audit and $486 due to remeasurement of our deferred taxes for the decline in the statutory tax rate in the United Kingdom. These benefits are partially offset by a detriment reflected in the third quarter of 2011 of $747 for a provision to return adjustment in the United States primarily related to the cost of 2010 repatriation.
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. Additionally, the effective tax rate for the nine months ended September 24, 2011 reflects an $11,111 tax benefit recorded in the first quarter of 2011 associated with a tax loss incurred with the disposition of the Company's Phase I clinical business and the receipt of a $7,710 tax exempt gain on the settlement of a life insurance policy received in the second quarter of 2011.

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.
During the fourth quarter of 2010, we took actions to divest our Phase 1 clinical business. We recorded in discontinued operations a deferred tax asset associated with the excess of the tax outside basis over the basis for financial reporting purposes of the Phase I clinical business. As of the fourth quarter of 2010, we determined that we did not meet the more-likely-than-not realization threshold for this deferred tax asset and we recorded a valuation allowance against it as part of discontinued operations. During the first quarter of 2011, we determined that the tax loss would more-likely-than-not be benefitted as a worthless stock deduction. As such, we released the valuation allowance recorded against the tax loss on the Phase I clinical business and recognized the benefit in continuing operations.
During the third quarter of 2012, our unrecognized tax benefits recorded decreased by $811 to $28,069 primarily due to the settlement of Canadian SR&ED controversies for years 2003 and 2004 partially offset by increases due to 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 $1,260 to $21,776, primarily due to the Canadian SR&ED controversy settlement. The amount of accrued interest on unrecognized tax benefits increased by $194 to $1,739 in the third quarter of 2012 primarily due to the revaluation of current and prior period exposures.

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. We and certain of our subsidiaries are currently under audit by the Canadian Revenue Authority (CRA) and various state tax authorities. With few

18

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

exceptions, we are no longer subject to U.S. and international income tax examinations for years before 2005.
During the third quarter of 2012, we reached a settlement with the Canadian Department of Justice with respect to our appeal of the CRA's reassessments of our 2003 and 2004 SR&ED claims to the Tax Court of Canada. As agreed to in the settlement, the CRA issued final reassessments in the third quarter of 2012 and we filed a Notice of Discontinuance with the Tax Court of Canada concluding the controversy. In the third quarter, we recorded a benefit due to the settlement of $586, of which $248 is recorded in pretax profit and $338 is recorded in tax expense. Our SR&ED claims in 2005 and forward remain open to audit. The settlement agreement for 2003 and 2004 does not apply to these open years.  We believe that we have appropriately provided for these claims as well as all uncertain tax positions.
    
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 2012 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.
The tax expense (benefit) related to items of other comprehensive income are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Tax expense (benefit) related to foreign currency translation adjustment
(60
)
 
456

 
(98
)
 
835

Tax expense related to change in unrecognized pension gains, losses and prior service costs
216

 
116

 
799

 
276

Income tax expense related to items of other comprehensive income
$
156

 
$
572

 
$
701

 
$
1,111



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:
 
Pension Benefits
 
Supplemental
Retirement Benefits
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Service cost
$
922

 
$
758

 
$
160

 
$
159

Interest cost
2,824

 
3,016

 
223

 
300

Expected return on plan assets
(3,459
)
 
(3,407
)
 
—

 
—

Amortization of prior service cost (credit)
(256
)
 
(155
)
 
165

 
125

Amortization of net loss (gain)
586

 
239

 
65

 
53

Net periodic benefit cost
617

 
451

 
613

 
637

Company contributions
$
2,096

 
$
1,100

 
$
—

 
$
—





19

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

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 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Service cost
2,880

 
2,279

 
480

 
477

Interest cost
8,445

 
9,056

 
669

 
901

Expected return on plan assets
(10,319
)
 
(10,213
)
 
—

 
—

Amortization of prior service cost (credit)
(566
)
 
(466
)
 
495

 
374

Amortization of net loss (gain)
1,756

 
693

 
195

 
158

Net periodic benefit cost
2,196

 
1,349

 
1,839

 
1,910

Company contributions
$
10,104

 
$
7,119

 
$
—

 
$
—


During 2012, we expect to contribute $13,868 to our defined benefit 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 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Stock-based compensation expense included in:
 
 
 
 
 
 
 
Cost of sales
$
1,271

 
$
1,626

 
$
3,995

 
$
5,003

Selling and administration
3,970

 
3,945

 
11,833

 
11,916

Stock-based compensation, before income taxes
5,241

 
5,571

 
15,828

 
16,919

Provision for income taxes
(1,847
)
 
(1,991
)
 
(5,615
)
 
(6,050
)
Stock-based compensation, net of tax
$
3,394

 
$
3,580

 
$
10,213

 
$
10,869

The fair value of stock-based awards granted during the first nine months of 2012 and 2011 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
September 29, 2012
 
September 24, 2011
Expected life (in years)
4.5

 
4.2

Expected volatility
34.9
%
 
33.4
%
Risk-free interest rate
0.84
%
 
2.22
%
Expected dividend yield
0
%
 
0
%
Weighted-average grant date fair value
$
10.94

 
$
11.35





20

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

Stock Options
The following table summarizes stock option activities under our plans:
 
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life
(in years)
 
Aggregate
Intrinsic
Value
Options outstanding as of December 31, 2011
6,081,263

 
$
38.25

 
 
 
 

Options granted
590,675

 
$
36.09

 
 
 
 

Options exercised
(436,611
)
 
$
28.18

 
 
 
 

Options canceled
(145,514
)
 
$
39.09

 
 
 
 

Options outstanding as of September 29, 2012
6,089,813

 
$
38.74

 
3.39 years
 
$
23,680

Options exercisable as of September 29, 2012
4,088,672

 
$
39.80

 
2.53 years
 
$
14,286

As of September 29, 2012, the unrecognized compensation cost related to 2,000,796 unvested stock options expected to vest was $14,723. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 28 months.
The total intrinsic value of options exercised during the three months ended September 29, 2012 and September 24, 2011 was $1,461 and $1,204, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total intrinsic value of options exercised during the nine months ended September 29, 2012 and September 24, 2011 was $2,769 and $7,914, respectively. The total amount of cash received from the exercise of options during the nine months ended September 29, 2012 and September 24, 2011 was $12,304 and $20,574, respectively. The actual tax benefit realized for the tax deductions from option exercises during the nine months ended September 29, 2012 was $821. A charge of $10 was recorded in capital in excess of par value in the first nine months of 2012 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.
The following table summarizes the restricted stock activity for the nine months ended September 29, 2012 :
 
Restricted Stock
 
Weighted
Average
Grant Date
Fair Value
Outstanding as of December 31, 2011
703,011

 
$
35.70

Granted
541,820

 
36.10

Vested
(286,344
)
 
35.96

Canceled
(16,614
)
 
35.48

Outstanding as of September 29, 2012
941,873

 
$
35.85

As of September 29, 2012, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $24,221. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 33 months. The total fair value of restricted stock grants that vested during the three and nine months ended September 29, 2012 was $91 and $10,297, respectively. The total fair value of restricted stock grants that vested during the three and nine months ended September 24, 2011 was $122 and $10,985, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested during the nine months ended September 29, 2012 was $3,690.



21

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


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.

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 (formerly in vitro), and avian vaccine products and services. Our PCS segment includes services required to take a drug through the development process, which include discovery research services (DRS), safety assessment and biopharmaceutical services.
The following table presents sales and other financial information by business segment.
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Research Models and Services
 
 
 
 
 
 
 
Net sales
$
166,484

 
$
171,471

 
$
523,247

 
$
523,005

Gross margin
65,902

 
70,514

 
224,364

 
222,660

Operating income
43,389

 
48,534

 
158,398

 
155,967

Depreciation and amortization
9,670

 
9,327

 
27,697

 
27,914

Capital expenditures
7,423

 
5,789

 
27,892

 
14,202

Preclinical Services
 
 
 
 
 
 
 
Net sales
$
112,202

 
$
106,108

 
$
326,143

 
$
328,680

Gross margin
27,358

 
22,202

 
76,693

 
79,014

Operating income
10,975

 
3,663

 
25,958

 
20,844

Depreciation and amortization
10,880

 
11,840

 
32,920

 
36,334

Capital expenditures
2,819

 
2,433

 
5,903

 
7,470

A reconciliation of segment operating income to consolidated operating income is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Total segment operating income
$
54,364

 
$
52,197

 
$
184,356

 
$
176,811

Unallocated corporate overhead
(16,682
)
 
(15,103
)
 
(53,660
)
 
(44,152
)
Consolidated operating income
$
37,682

 
$
37,094

 
$
130,696

 
$
132,659







22

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

Net sales for each significant service area are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Research models
$
79,552

 
$
86,386

 
$
260,692

 
$
269,976

Research model services
53,586

 
54,539

 
163,892

 
161,936

Other products
33,346

 
30,546

 
98,663

 
91,093

Research Models and Services
166,484

 
171,471

 
523,247

 
523,005

Preclinical Services
112,202

 
106,108

 
326,143

 
328,680

Total sales
$
278,686

 
$
277,579

 
$
849,390

 
$
851,685

A summary of unallocated corporate overhead consists of the following:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Stock-based compensation expense
$
2,827

 
$
2,825

 
$
8,512

 
$
8,339

U.S. retirement plans
1,276

 
501

 
3,662

 
2,613

Audit, tax and related expense
842

 
855

 
2,133

 
2,115

Salary and bonus
4,813

 
3,187

 
14,602

 
12,522

Global IT
3,285

 
3,089

 
9,501

 
9,623

Employee health, long-term disability and fringe benefit expense
(2,248
)
 
(2,307
)
 
(1,395
)
 
7

Consulting and professional services
1,061

 
2,628

 
3,581

 
6,160

Depreciation expense
1,554

 
1,569

 
4,693

 
4,743

Life insurance death benefit gain
—

 
—

 
—

 
(7,710
)
Other general unallocated corporate expenses
3,272

 
2,756

 
8,371

 
5,740

Total unallocated corporate overhead costs
$
16,682

 
$
15,103

 
$
53,660

 
$
44,152

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

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 $13,632 as of September 29, 2012. The consolidated financial statements have been reclassified to segregate, as discontinued operations, the assets and liabilities, operating results and cash flows, of the businesses being discontinued for all periods presented.





23

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

Operating results from discontinued operations are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
Net sales
$
—

 
$
—

 
$
—

 
$
2,122

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

 
24

 
221

 
(8,129
)
Provision (benefit) for income taxes
231

 
42

 
284

 
(2,434
)
Income (loss) from operations of discontinued businesses, net of taxes
$
(182
)
 
$
(18
)
 
$
(63
)
 
$
(5,695
)
Assets and liabilities of discontinued operations at September 29, 2012 and December 31, 2011 consisted of the following:
 
September 29,
2012
 
December 31,
2011
Current assets
$
109

 
$
107

Long-term assets
903

 
986

Total assets
$
1,012

 
$
1,093

Current liabilities
$
1,092

 
$
1,165

Long-term liabilities
2,311

 
2,522

Total liabilities
$
3,403