CRL 6.29.2013 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 JUNE 29, 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 July 22, 2013, there were 49,060,865 shares of the Registrant's common stock outstanding.



CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-Q
For the Quarterly Period Ended June 29, 2013
TABLE OF CONTENTS

 
 
 
Page
Part I.
Financial Information
 
 
Item 1.
Financial Statements
 
 
 
Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended June 29, 2013 and June 30, 2012
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 29, 2013 and June 30, 2012
 
 
Condensed Consolidated Balance Sheets (Unaudited) as of June 29, 2013 and December 29, 2012
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 29, 2013 and June 30, 2012
 
 
Condensed Consolidated Statement of Changes in Equity (Unaudited) for the six months ended June 29, 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 1.
Legal Proceedings
 
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
 
Six Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Net sales related to products
$
121,858

 
$
119,125

 
$
248,145

 
$
245,339

Net sales related to services
171,075

 
165,598

 
336,026

 
325,365

Net sales
292,933

 
284,723

 
584,171

 
570,704

Costs and expenses
 
 
 
 
 
 
 
Cost of products sold
66,627

 
62,035

 
132,660

 
126,980

Cost of services provided
123,736

 
119,103

 
244,730

 
235,927

Selling, general and administrative
54,919

 
49,900

 
112,118

 
105,877

Amortization of other intangibles
4,463

 
4,411

 
8,712

 
8,906

Operating income
43,188

 
49,274

 
85,951

 
93,014

Other income (expense)
 
 
 
 
 
 
 
Interest income
236

 
151

 
333

 
336

Interest expense
(7,544
)
 
(8,079
)
 
(15,824
)
 
(16,514
)
Other, net
967

 
(1,346
)
 
2,035

 
(1,690
)
Income from continuing operations, before income taxes
36,847

 
40,000

 
72,495

 
75,146

Provision for income taxes
8,219

 
9,453

 
17,941

 
18,129

Income from continuing operations, net of income taxes
28,628

 
30,547

 
54,554

 
57,017

Income (loss) from discontinued operations, net of taxes
(915
)
 
42

 
(1,070
)
 
119

Net income
27,713

 
30,589

 
53,484

 
57,136

Less: Net income attributable to noncontrolling interests
(429
)
 
(121
)
 
(622
)
 
(229
)
Net income attributable to common shareholders
$
27,284

 
$
30,468

 
$
52,862

 
$
56,907

Earnings per common share
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.58

 
$
0.63

 
$
1.12

 
$
1.18

Discontinued operations
$
(0.02
)
 
$
—

 
$
(0.02
)
 
$
—

Net income attributable to common shareholders
$
0.57

 
$
0.63

 
$
1.10

 
$
1.18

Diluted:
 
 
 
 
 
 
 
Continuing operations attributable to common shareholders
$
0.58

 
$
0.63

 
$
1.11

 
$
1.17

Discontinued operations
$
(0.02
)
 
$
—

 
$
(0.02
)
 
$
—

Net income attributable to common shareholders
$
0.56

 
$
0.63

 
$
1.09

 
$
1.17





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
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Net income
$
27,713

 
$
30,589

 
$
53,484

 
$
57,136

Foreign currency translation adjustment
(6,091
)
 
(10,871
)
 
(26,024
)
 
(4,091
)
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)
760

 
659

 
1,497

 
1,320

Comprehensive income, before tax
22,382

 
20,377

 
28,957

 
55,286

Income tax expense related to items of other comprehensive income
296

 
284

 
1,200

 
545

Comprehensive income, net of tax
22,086

 
20,093

 
27,757

 
54,741

Less: comprehensive income related to noncontrolling interests
(577
)
 
(108
)
 
(806
)
 
(234
)
Comprehensive income attributable to common shareholders
$
21,509

 
$
19,985

 
$
26,951

 
$
54,507


























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)
 
June 29,
2013
 
December 29,
2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
113,521

 
$
109,685

Trade receivables, net
224,030

 
203,001

Inventories
88,405

 
88,470

Other current assets
92,915

 
83,601

Current assets of discontinued businesses
886

 
495

Total current assets
519,757

 
485,252

Property, plant and equipment, net
696,495

 
717,020

Goodwill, net
227,524

 
208,609

Other intangibles, net
90,210

 
84,922

Deferred tax asset
30,187

 
38,554

Other assets
53,915

 
48,659

Long-term assets of discontinued businesses
3,510

 
3,328

Total assets
$
1,621,598

 
$
1,586,344

Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt and capital leases
$
16,163

 
$
139,384

Accounts payable
37,295

 
31,218

Accrued compensation
45,006

 
46,951

Deferred revenue
53,695

 
56,422

Accrued liabilities
48,858

 
45,208

Other current liabilities
22,557

 
21,262

Current liabilities of discontinued businesses
2,280

 
1,802

Total current liabilities
225,854

 
342,247

Long-term debt and capital leases
619,771

 
527,136

Other long-term liabilities
104,604

 
104,966

Long-term liabilities of discontinued businesses
8,979

 
8,795

Total liabilities
959,208

 
983,144

Commitments and contingencies

 

Redeemable noncontrolling interest
11,676

 
—

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; 81,088,294 issued and 49,040,927 shares outstanding at June 29, 2013 and 79,607,981 issued and 48,220,037 shares outstanding at December 29, 2012
810

 
796

Capital in excess of par value
2,145,054

 
2,097,316

Accumulated deficit
(315,439
)
 
(368,301
)
Treasury stock, at cost, 32,047,367 shares and 31,387,944 shares at June 29, 2013 and December 29, 2012, respectively
(1,163,166
)
 
(1,135,609
)
Accumulated other comprehensive income
(19,308
)
 
6,603

Total shareholders' equity
647,951

 
600,805

Noncontrolling interests
2,763

 
2,395

Total equity
662,390

 
603,200

Total liabilities and equity
$
1,621,598

 
$
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)
 
Six Months Ended
 
June 29,
2013
 
June 30,
2012
Cash flows relating to operating activities
 
 
 
Net income
$
53,484

 
$
57,136

Less: Income (loss) from discontinued operations
(1,070
)
 
119

Income from continuing operations
54,554

 
57,017

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
40,420

 
40,067

Amortization of debt issuance costs and discounts
8,695

 
8,662

Non-cash compensation
12,184

 
10,586

Deferred income taxes
6,236

 
4,590

Other, net
156

 
3,315

Changes in assets and liabilities:
 
 
 
Trade receivables
(26,450
)
 
(25,390
)
Inventories
(882
)
 
(1,206
)
Other assets
(5,618
)
 
(2,665
)
Accounts payable
1,143

 
617

Accrued compensation
(1,136
)
 
(3,890
)
Deferred revenue
(2,864
)
 
4,349

Accrued liabilities
(820
)
 
(9,080
)
Taxes payable and prepaid taxes
(4,292
)
 
2,737

Other liabilities
(2,383
)
 
(7,065
)
Net cash provided by operating activities
78,943

 
82,644

Cash flows relating to investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(24,218
)
 
—

Capital expenditures
(16,223
)
 
(23,553
)
Purchases of investments
(6,413
)
 
(8,178
)
Proceeds from sale of investments
6,808

 
21,424

Other, net
59

 
1,729

Net cash used in investing activities
(39,987
)
 
(8,578
)
Cash flows relating to financing activities
 
 
 
Proceeds from long-term debt and revolving credit agreement
423,309

 
38,117

Proceeds from exercises of stock options and warrants
36,351

 
3,107

Payments on long-term debt, capital lease obligation and revolving credit agreement
(461,184
)
 
(76,355
)
Purchase of treasury stock
(26,899
)
 
(30,813
)
Other, net
(994
)
 
474

Net cash used in financing activities
(29,417
)
 
(65,470
)
Discontinued operations
 
 
 
Net cash used in operating activities
(946
)
 
(88
)
Net cash provided by discontinued operations
(946
)
 
(88
)
Effect of exchange rate changes on cash and cash equivalents
(4,757
)
 
(1,337
)
Net change in cash and cash equivalents
3,836

 
7,171

Cash and cash equivalents, beginning of period
109,685

 
68,905

Cash and cash equivalents, end of period
$
113,521

 
$
76,076

Supplemental cash flow information
 
 
 
Capitalized interest
$
62

 
$
373




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
53,484

 
52,862

 
 
 
 
 
 
 
 
 
622

Other comprehensive loss
(25,727
)
 
 
 
(25,911
)
 
 
 
 
 
 
 
184

Total comprehensive income
27,757

 
 
 
 
 
 
 
 
 
 
 
806

Redeemable noncontrolling interest acquired in business combination
8,963

 
 
 
 
 
 
 
 
 
 
 
8,963

Adjustment of redeemable noncontrolling interest to fair value

 
 
 
 
 
 
 
(2,275
)
 
 
 
2,275

Tax benefit associated with stock issued under employee compensation plans
1,527

 
 
 
 
 
 
 
1,527

 
 
 
 
Issuance of stock under employee compensation plans
36,316

 
 
 
 
 
14

 
36,302

 
 
 
 
Acquisition of treasury shares
(27,557
)
 
 
 
 
 
 
 
—

 
(27,557
)
 
 
Stock-based compensation
12,184

 
 
 
 
 
 
 
12,184

 
 
 
 
June 29, 2013
$
662,390

 
$
(315,439
)
 
$
(19,308
)
 
$
810

 
$
2,145,054

 
$
(1,163,166
)
 
$
14,439




















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.
2. RESTRUCTURING COSTS
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 six months ended June 29, 2013 and June 30, 2012, we recorded severance and retention charges as shown below. As of June 29, 2013, $1,403 was included in accrued compensation and $1,514 in other long-term liabilities on our consolidated balance sheet.
The following table rolls forward our severance and retention cost liability:
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
Balance, beginning of period
$
3,636

 
$
3,374

Expense
582

 
911

Payments/utilization
(1,301
)
 
(1,233
)
Balance, end of period
$
2,917

 
$
3,052


The following table presents severance and retention costs by classification on the income statement:
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
Severance charges included in cost of sales
$
513

 
$
—

Severance charges included in selling, general and administrative expense
69

 
911

Total expense
$
582

 
$
911


The following table presents severance and retention cost by segment:
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
Research models and services
$
381

 
$
—

Preclinical services
201

 
911

Corporate
—

 
—

Total expense
$
582

 
$
911


8

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

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 the facilities. Management's analysis of financial impact of these actions is still in progress. Management anticipates that accelerated depreciation related to the abandoned building will be up to approximately $15,000 over approximately the next several quarters.
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of net trade receivables is as follows:
 
June 29, 2013
 
December 29, 2012
Client receivables
$
191,745

 
$
174,774

Unbilled revenue
37,110

 
32,494

Total
228,855

 
207,268

Less allowance for doubtful accounts
(4,825
)
 
(4,267
)
Net trade receivables
$
224,030

 
$
203,001


The composition of inventories is as follows:
 
June 29, 2013
 
December 29, 2012
Raw materials and supplies
$
14,427

 
$
14,525

Work in process
12,696

 
11,082

Finished products
61,282

 
62,863

Inventories
$
88,405

 
$
88,470

The composition of other current assets is as follows:
 
June 29, 2013
 
December 29, 2012
Prepaid assets
$
24,703

 
$
20,404

Deferred tax asset
29,531

 
30,018

Marketable securities
6,929

 
6,781

Prepaid income tax
31,523

 
26,169

Restricted cash
229

 
229

Other current assets
$
92,915

 
$
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:
 
June 29, 2013
 
December 29, 2012
Land
$
40,340

 
$
40,812

Buildings
682,832

 
697,547

Machinery and equipment
361,903

 
356,960

Leasehold improvements
36,583

 
34,916

Furniture and fixtures
24,420

 
25,681

Vehicles
3,862

 
3,736

Computer hardware and software
109,503

 
107,171

Construction in progress
43,793

 
46,186

Total
1,303,236

 
1,313,009

Less accumulated depreciation
(606,741
)
 
(595,989
)
Net property, plant and equipment
$
696,495

 
$
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 six months ended June 29, 2013 and June 30, 2012 was $31,708 and $31,160, respectively.
The composition of other assets is as follows:
 
June 29, 2013
 
December 29, 2012
Deferred financing costs
$
8,026

 
$
6,424

Cash surrender value of life insurance policies
24,063

 
25,240

Equity-method affiliates
11,117

 
8,492

Other assets
10,709

 
8,503

Other assets
$
53,915

 
$
48,659

The composition of other current liabilities is as follows:
 
June 29, 2013
 
December 29, 2012
Accrued income taxes
$
19,440

 
$
18,216

Current deferred tax liability
426

 
410

Accrued interest and other
2,691

 
2,636

Other current liabilities
$
22,557

 
$
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:
 
June 29, 2013
 
December 29, 2012
Deferred tax liability
$
16,150

 
$
13,147

Long-term pension liability
38,796

 
44,316

Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan
28,337

 
26,663

Other long-term liabilities
21,321

 
20,840

Other long-term liabilities
$
104,604

 
$
104,966


4. MARKETABLE SECURITIES AND EQUITY-METHOD AFFILIATES
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:
 
June 29, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Time deposits
$
6,929

 
$
—

 
$
—

 
$
6,929

 
$
6,929

 
$
—

 
$
—

 
$
6,929

 
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:
 
June 29, 2013
 
December 29, 2012
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due less than one year
$
6,929

 
$
6,929

 
$
6,781

 
$
6,781

Due after one year through five years
—

 
—

 
—

 
—

Due after ten years
—

 
—

 
—

 
—

 
$
6,929

 
$
6,929

 
$
6,781

 
$
6,781


Equity-Method Affiliates
We have invested in 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 June 29, 2013, we have contributed $8,820 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 June 29, 2013, we have contributed $1,321 to the limited partnership.

11

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

We recognized equity-method gains of $1,305 for the six months ended June 29, 2013 related to these limited partnerships. These gains are reported within other income (expense). As of June 29, 2013, Equity Method Affiliates had a carrying value of $11,117, which is reported in Other Assets, Noncurrent 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 17.5% and a long-term pretax operating margin of 33.5% .
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurements at June 29, 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
$
—

 
$
6,929

 
$
—

 
$
6,929

Life policies
—

 
18,301

 
—

 
18,301

Total assets measured at fair value
$
—

 
$
25,230

 
$
—

 
$
25,230

Redeemable noncontrolling interest
—

 
—

 
11,676

 
11,676

Total liabilities measured at fair value
$
—

 
$
—

 
$
11,676

 
$
11,676

 
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.

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
Using Significant
Unobservable Inputs
(Level 3)
 
Six Months Ended
Redeemable Noncontrolling Interest (Liability)
June 29, 2013

 
June 30, 2012

Beginning balance
$
—

 
$
—

Transfers in and/or out of Level 3
—

 
—

Total gains or losses (realized/unrealized):
 
 
 
Included in other income (expense)
299

 
—

Included in other comprehensive income (CTA)
139

 
—

Included in additional paid-in capital
2,275

 
 
Purchases, issuances and settlements
8,963

 
—

Ending balance
$
11,676

 
$
—


 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Six Months Ended
Auction rate securities (Asset)
June 29, 2013

 
June 30, 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 six months ended June 29, 2013, we recognized $761 of net hedge losses associated with forward currency contracts open during the period. As of June 29, 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:

13

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

 
June 29, 2013
 
December 29, 2012
 
Gross Carrying Amount
 
Accumulated Amortization & Impairment Loss
 
Gross Carrying Amount
 
Accumulated Amortization & Impairment Loss
Backlog
$
2,848

 
$
(2,409
)
 
$
2,875

 
$
(2,375
)
Client relationships
306,450

 
(228,699
)
 
305,178

 
(231,902
)
Client contracts
14,554

 
(14,554
)
 
15,366

 
(15,366
)
Trademarks and trade names
5,372

 
(4,899
)
 
5,326

 
(4,821
)
Standard operating procedures
2,750

 
(1,178
)
 
2,751

 
(863
)
Other identifiable intangible assets
10,327

 
(3,790
)
 
10,033

 
(4,718
)
Total other intangible assets
$
342,301

 
$
(255,529
)
 
$
341,529

 
$
(260,045
)
Additionally, as of both June 29, 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
 
June 29, 2013
Research Models and Services
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
63,139

 
$
19,273

 
$
29

 
$
82,441

Preclinical Services
 
 
 
 
 
 
 
 
Gross carrying amount
 
1,150,470

 
—

 
(387
)
 
1,150,083

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

 
$
19,273

 
$
(358
)
 
$
1,232,524

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

 
 
 
 
 
$
227,524






















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:
 
June 29, 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
420,000

 
290,947

Revolving credit facility
215,000

 
32,000

Other long-term debt
228

 
232

Total debt
635,228

 
666,448

Less: current portion of long-term debt
(15,978
)
 
(139,373
)
Long-term debt
$
619,250

 
$
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 and extend the maturity date 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 June 29, 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 June 29, 2013, we were compliant with all financial covenants specified in the credit agreement.
We had $4,855 outstanding under letters of credit as of June 29, 2013.
Our $350,000 of 2.25% Senior Convertible Debentures (the 2013 Notes) 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:
Twelve Months Ending
 
June 2014
$
15,978

June 2015
36,750

June 2016
42,000

June 2017
73,500

June 2018
467,000

Total
$
635,228


15

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

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 $705 and $72 at June 29, 2013 and December 29, 2012, respectively.
8. EQUITY
Earnings Per Share
Basic earnings per share for the three and six months ended June 29, 2013 and June 30, 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 six months ended June 29, 2013 and June 30, 2012 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.
Options to purchase 2,591,555 shares and 4,672,900 shares were outstanding in each of the three months ended June 29, 2013 and June 30, 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 six months ended June 29, 2013 and June 30, 2012 excluded the weighted average impact of 1,121,561 and 942,723 shares, respectively, of non-vested restricted stock awards. Options to purchase 2,868,814 shares and 4,534,065 shares were outstanding in each of the six months ended June 29, 2013 and June 30, 2012, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.
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
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Numerator:
 
 
 
 
 
 
 
Income from continuing operations for purposes of calculating earnings per share
$
28,199

 
$
30,426

 
$
53,932

 
$
56,788

Income (loss) from discontinued businesses
(915
)
 
$
42

 
$
(1,070
)
 
$
119

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding—Basic
48,280,371

 
48,029,744

 
47,969,683

 
48,142,347

Effect of dilutive securities:
 
 
 
 
 
 
 
2.25% senior convertible debentures
—

 
—

 
—

 
—

Stock options and contingently issued restricted stock
555,082

 
383,056

 
678,259

 
439,844

Weighted-average shares outstanding—Diluted
48,835,453

 
48,412,800

 
48,647,942

 
48,582,191

Basic earnings per share from continuing operations attributable to common shareholders
$
0.58

 
$
0.63

 
$
1.12

 
$
1.18

Basic earnings per share from discontinued operations attributable to common shareholders
$
(0.02
)
 
$
—

 
$
(0.02
)
 
$
—

Diluted earnings per share from continuing operations attributable to common shareholders
$
0.58

 
$
0.63

 
$
1.11

 
$
1.17

Diluted earnings per share from discontinued operations attributable to common shareholders
$
(0.02
)
 
$
—

 
$
(0.02
)
 
$
—

Treasury Shares
For the six months ended June 29, 2013 and June 30, 2012, we repurchased 546,675 shares of common stock for $23,038 and 806,454 shares of common stock for $27,800, 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 six months ended June 29, 2013 and June 30, 2012, we acquired 112,748 shares for $4,519 and 83,337 shares for $3,013, respectively, as a result of such withholdings.
Share repurchases for the six months ended June 29, 2013 and June 30, 2012 were as follows:

16

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

 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
Number of shares of common stock repurchased
659,423

 
889,791

Total cost of repurchase
$
27,557

 
$
30,813


On July 30, 2013, our Board of Directors increased the stock repurchase authorization to $850,000 from $750,000


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
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Income from continuing operations before income taxes
$
36,847

 
$
40,000

 
$
72,495

 
$
75,146

Effective tax rate
22.3
%
 
23.6
%
 
24.7
%
 
24.1
%
Provision for income taxes
$
8,219

 
$
9,453

 
$
17,941

 
$
18,129

Our overall effective tax rate was 22.3% in the second quarter of 2013 and 23.6% in the second quarter of 2012. The decrease was primarily attributable to a favorable mix of earnings and an increase in tax benefits due to research and development activities and the U.S. domestic production deduction. These benefits were partially offset by a French tax law change enacted in 2013 that limits the deductibility of interest by our French affiliates. The effective tax rate for the six months ended June 30, 2012 reflects an unbenefitted capital loss on the sale of auction rate securities recorded in the first quarter of 2012. Additionally, the effective rate for the six months ended June 29, 2013 reflects 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.
In accordance with Canadian Federal tax law, we claim scientific research and experimental development (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 UK government enacted a tax law change that replaces the existing research and development enhanced deduction with a research and development credit.  Application of the new law is mandatory beginning in 2016.  However, taxpayers may elect to adopt it as early as April 1, 2013.   We are currently evaluating the impact of the new law on our financial position and results of operations and assessing the appropriate timing of adoption.
During the second quarter of 2013, our unrecognized tax benefits recorded decreased by $127 to $32,107 due primarily to the net impact of an increase from ongoing evaluation of uncertain tax positions in the current period offset by reductions from a settlement of a U.S. state audit and foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate favorably decreased by $111 to $25,896. The decrease was due primarily to the net impact of an increase from ongoing evaluation of uncertain tax positions in the current period offset by reductions from a settlement of a U.S. state audit and foreign exchange movement. The amount of accrued interest on unrecognized tax benefits increased by $113 to $2,425 in the second quarter of 2013.

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 2005.

17

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

Our preclinical services subsidiary in Montreal is currently under audit by the Minister of Revenue Quebec provincial tax authority (MRQ). We do not believe that resolution of this controversy will have a material impact on our financial position or results of operations.
Canadian SR&ED credit claims for 2005 through 2011 are currently being reviewed by the Canadian Revenue Authority (CRA).  We believe it is reasonably possible that we will reach a settlement with the CRA with respect to the SR&ED credits claimed for these years within the next twelve months. We do not believe that settlement of these years will have a material impact on our financial position or results of operations.
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 ultimately settled via the competent authority process. In the fourth quarter of 2012, we established a reserve for this uncertain tax position of $2,408 related to years 2006 through 2012 to reduce the tax benefit recognized for these deductions in Canada to the level that we believe will likely be realized upon the ultimate resolution of this controversy. Additionally, in the fourth quarter of 2012, we recognized a tax asset of $2,981, which is included in Other Assets, that represents the correlative relief that we believe will more likely than not be received in the U.S. via the competent authority process. The actual amounts of the liability for Canadian taxes and the asset for the correlative relief in the U.S. could be different based upon the agreement reached between the IRS and CRA.

We believe we have appropriately provided for 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 second 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
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Income tax expense (benefit) related to foreign currency translation adjustment
$
(5
)
 
$
51

 
$
656

 
$
(38
)
Income tax expense related to change in unrecognized pension gains, losses and prior service costs
301

 
233

 
544

 
583

Income tax expense (benefit) related to items of other comprehensive income
$
296

 
$
284

 
$
1,200

 
$
545














18

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





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
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Service cost
$
823

 
$
979

 
$
161

 
$
160

Interest cost
2,762

 
2,810

 
177

 
223

Expected return on plan assets
(3,593
)
 
(3,430
)
 
—

 
—

Amortization of prior service cost (credit)
(147
)
 
(159
)
 
165

 
165

Amortization of net loss (gain)
682

 
588

 
63

 
65

Net periodic benefit cost
$
527

 
$
788

 
$
566

 
$
613

The following table provides the components of net periodic benefit cost for our defined benefit plans for the six month period ended:
 
Pension Benefits
 
Supplemental
Retirement Benefits
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Service cost
$
1,670

 
$
1,958

 
$
322

 
$
320

Interest cost
5,572

 
5,621

 
354

 
446

Expected return on plan assets
(7,249
)
 
(6,860
)
 
—

 
—

Amortization of prior service cost (credit)
(297
)
 
(310
)
 
330

 
330

Amortization of net loss (gain)
1,372

 
1,170

 
126

 
130

Net periodic benefit cost
$
1,068

 
$
1,579

 
$
1,132

 
$
1,226

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:

19

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

 
Three Months Ended
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Stock-based compensation expense included in:
 
 
 
 
 
 
 
Cost of sales
$
1,350

 
$
2,345

 
$
2,719

 
$
3,792

Selling and administration
4,931

 
2,976

 
9,466

 
6,794

Stock-based compensation, before income taxes
6,281

 
5,321

 
12,185

 
10,586

Provision for income taxes
(2,276
)
 
(1,884
)
 
(4,319
)
 
(3,768
)
Stock-based compensation, net of tax
$
4,005

 
$
3,437

 
$
7,866

 
$
6,818

The fair value of stock-based awards granted during the first six months of 2013 and 2012 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
June 29, 2013
 
June 30, 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
592,839

 
$
40.54

 
 
 
 

Options exercised
(1,108,982
)
 
$
32.75

 
 
 
 

Options canceled
(35,157
)
 
$
42.15

 
 
 
 

Options outstanding as of June 29, 2013
5,309,103

 
$
40.58

 
3.25 years
 
$
18,054

Options exercisable as of June 29, 2013
3,690,013

 
$
41.62

 
2.27 years
 
$
13,428

As of June 29, 2013, the unrecognized compensation cost related to 1,619,090 unvested stock options expected to vest was $14,871. 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 six months ending June 29, 2013 and June 30, 2012 was $11,543 and $177, 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 six months ending June 29, 2013 and June 30, 2012 was $36,351 and $3,107, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $4,159 for the six months ending June 29, 2013. A charge of $1,527 was recorded in capital in excess of par value in the first six 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.

20

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 six months ending June 29, 2013:
 
Restricted Stock
 
Weighted
Average
Grant Date
Fair Value
Outstanding as of December 29, 2012
934,505

 
$
35.83

Granted
565,149

 
40.52

Vested
(369,219
)
 
40.34

Canceled
(8,874
)
 
41.97

Outstanding as of June 29, 2013
1,121,561

 
$
36.66

As of June 29, 2013, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $36,368. 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 six months ending June 29, 2013 and June 30, 2012 was $14,895 and $813, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $5,283 for the six months ended June 29, 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 $892 was recorded during the six months ended June 29, 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 has identified approximately $1,500 in excess amounts billed on these contracts since January 1, 2007 and has 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. 
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.

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 presents sales and other financial information by business segment.
 
Three Months Ended
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Research Models and Services
 
 
 
 
 
 
 
Net sales
$
178,973

 
$
173,611

 
$
361,462

 
$
356,763

Gross margin
75,771

 
76,266

 
156,206

 
158,462

Operating income
49,630

 
55,542

 
104,933

 
115,009

Depreciation and amortization
10,629

 
9,085

 
20,502

 
18,027

Capital expenditures
6,344

 
7,569

 
10,354

 
20,469

Preclinical Services
 
 
 
 
 
 
 
Net sales
$
113,960

 
$
111,112

 
$
222,709

 
$
213,941

Gross margin
26,799

 
27,319

 
50,575

 
49,335

Operating income
10,935

 
10,809

 
18,995

 
14,983

Depreciation and amortization
9,781

 
10,980

 
19,918

 
22,040

Capital expenditures
3,451

 
1,872

 
5,869

 
3,084

A reconciliation of segment operating income to consolidated operating income is as follows:
 
Three Months Ended
 
Six Months
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Total segment operating income
$
60,565

 
$
66,351

 
$
123,928

 
$
129,992

Unallocated corporate overhead
(17,377
)
 
(17,077
)
 
(37,977
)
 
(36,978
)
Consolidated operating income
$
43,188

 
$
49,274

 
$
85,951

 
$
93,014

Net sales for each significant service area are as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Research models
$
98,901

 
$
97,766

 
$
202,024

 
$
202,698

Research model services
52,402

 
53,776

 
104,556

 
109,847

EMD
27,670

 
22,069

 
54,882

 
44,218

Total research models and services
178,973

 
173,611

 
361,462

 
356,763

Total preclinical services
113,960

 
111,112

 
222,709

 
213,941

Total sales
$
292,933

 
$
284,723

 
$
584,171

 
$
570,704






A summary of unallocated corporate overhead consists of the following:

22

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

 
Three Months Ended
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Stock-based compensation expense
$
3,470

 
$
2,900

 
$
6,667

 
$
5,685

U.S. retirement plans
1,042

 
1,014

 
2,342

 
2,386

Audit, tax and related expense
1,089

 
637

 
2,324

 
1,291

Salary and bonus
5,471

 
4,866

 
10,226

 
9,789

Global IT
2,860

 
3,366

 
5,446

 
6,216

Employee health, long-term disability and fringe benefit expense
(1,656
)
 
(1,140
)
 
572

 
853

Consulting and professional services
1,315

 
778

 
2,003

 
2,520

Depreciation expense
1,572

 
1,570

 
3,142

 
3,139

Other general unallocated corporate expenses
2,214

 
3,086

 
5,255

 
5,099

Total unallocated corporate overhead costs
$
17,377

 
$
17,077

 
$
37,977

 
$
36,978

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 $12,153 as of June 29, 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 less sublease income. Under the terms of the lease, if we are required to honor the guarantee due to default by the lessee, we may obtain control of the leased property.
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 The total carrying amount of the liability for our obligation under the lease as of June 29, 2013 is $11,145 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:
 
Three Months Ended
 
Six Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Net sales
$
—

 
$
—

 
$
—

 
$
—

Income (loss) from operations of discontinued businesses, before income taxes
(1,502
)
 
69

 
(1,722
)
 
172

Provision (benefit) for income taxes
(587
)
 
27

 
(652
)
 
53

Income (loss) from operations of discontinued businesses, net of taxes
$
(915
)
 
$
42

 
$
(1,070
)
 
$
119



23

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

Assets and liabilities of discontinued operations at June 29, 2013 and December 29, 2012 consisted of the following:
 
June 29,
2013
 
December 29,
2012
Current assets
$
886

 
$
495

Long-term assets
3,510

 
3,328

Total assets
$
4,396

 
$
3,823

Current liabilities
$
2,280

 
$
1,802

Long-term liabilities
8,979

 
8,795

Total liabilities
$
11,259

 
$
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

In October 2012, we entered into an agreement to acquire a 75%- ownership interest of Vital River, a commercial provider of research models and related services in China, for approximately $26,890 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
10,404

Other long-term assets
2,242

Definite-lived intangible assets
16,281

Goodwill
19,096

Current liabilities
(11,792
)
Long term liabilities
(6,141
)
Redeemable noncontrolling interest
(8,963
)
Total purchase price allocation
$
24,219


The breakout of definite-lived intangible assets acquired is as follows:
 
 
Weighted average amortization life (in years)
Client relationships
$
14,292