Edgar Filing: CHARLES RIVER LABORATORIES INTERNATIONAL INC

CRL 9.29.2013 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q



(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2013
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Commission File No. 001-15943

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		06-1397316
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
251 Ballardvale Street Wilmington, Massachusetts (Address of Principal Executive Offices)		01887 (Zip Code)

____________________________________________________________________________

(Registrant's telephone number, including area code): (781) 222-6000

_________________________________________________________

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o (Do not check if smaller reporting company)	Smaller reporting company o

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

As of October 21, 2013, there were 48,117,860 shares of the Registrant's common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

FORM 10-Q

For the Quarterly Period Ended September 28, 2013

TABLE OF CONTENTS



			Page
Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 28, 2013 and September 29, 2012	3
		Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 28, 2013 and September 29, 2012	4
		Condensed Consolidated Balance Sheets (Unaudited) as of September 28, 2013 and December 29, 2012	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 28, 2013 and September 29, 2012	6
		Condensed Consolidated Statement of Changes in Equity (Unaudited) for the nine months ended September 28, 2013	7
		Notes to Condensed Consolidated Interim Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34
	Item 4.	Controls and Procedures	34
Part II.	Other Information
	Item 1A.	Risk Factors	35
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 6.	Exhibits	37

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.

Part I. Financial Information

Item 1. Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net sales related to products	$	116,732		$	111,196		$	364,877		$	356,535
Net sales related to services	175,397			167,490			511,423			492,855
Net sales	292,129			278,686			876,300			849,390
Costs and expenses
Cost of products sold	70,294			63,649			202,954			190,629
Cost of services provided	121,909			121,778			366,639			357,705
Selling, general and administrative	54,903			51,047			167,021			156,924
Amortization of other intangibles	4,180			4,530			12,892			13,436
Operating income	40,843			37,682			126,794			130,696
Other income (expense)
Interest income	143			124			476			460
Interest expense	(2,319		)	(8,519		)	(18,143		)	(25,033		)
Other income (expense), net	4,059			(892		)	6,094			(2,582		)
Income from continuing operations, before income taxes	42,726			28,395			115,221			103,541
Provision for income taxes	11,390			6,011			29,331			24,140
Income from continuing operations, net of income taxes	31,336			22,384			85,890			79,401
Income (loss) from discontinued operations, net of taxes	(113		)	(182		)	(1,183		)	(63		)
Net income	31,223			22,202			84,707			79,338
Less: Net income attributable to noncontrolling interests	(356		)	(230		)	(978		)	(459		)
Net income attributable to common shareholders	$	30,867		$	21,972		$	83,729		$	78,879
Earnings (loss) per common share
Basic:
Continuing operations attributable to common shareholders	$	0.65		$	0.47		$	1.77		$	1.64
Discontinued operations	$	—		$	—		$	(0.02	)	$	—
Net income attributable to common shareholders	$	0.64		$	0.46		$	1.75		$	1.64
Diluted:
Continuing operations attributable to common shareholders	$	0.64		$	0.46		$	1.75		$	1.63
Discontinued operations	$	—		$	—		$	(0.02	)	$	—
Net income attributable to common shareholders	$	0.64		$	0.46		$	1.72		$	1.63

See Notes to Condensed Consolidated Interim Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net income	$	31,223		$	22,202		$	84,707		$	79,338
Foreign currency translation adjustment	16,371			12,962			(9,653		)	8,871
Unrealized gains (losses) on marketable securities:
Unrealized gains (losses) for the period	—			—			—			209
Add: reclassification adjustment for losses included in net income	—			—			—			712
Defined benefit plan gains (losses) and prior service costs not yet recognized as components of net periodic pension cost:
Amortization of prior service costs and net gains and losses (Note 10)	752			560			2,249			1,880
Comprehensive income, before tax	48,346			35,724			77,303			91,010
Income tax expense (benefit) related to items of other comprehensive income (Note 9)	(326		)	156			874			701
Comprehensive income, net of tax	48,672			35,568			76,429			90,309
Less: comprehensive income related to noncontrolling interests	(454		)	(225		)	(1,260		)	(459		)
Comprehensive income attributable to common shareholders	$	48,218		$	35,343		$	75,169		$	89,850

See Notes to Condensed Consolidated Interim Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands, except per share amounts)



	September 28, 2013			December 29, 2012
Assets
Current assets
Cash and cash equivalents	$	130,454		$	109,685
Trade receivables, net	224,270			203,001
Inventories	87,146			88,470
Other current assets	105,153			83,601
Current assets of discontinued businesses	758			495
Total current assets	547,781			485,252
Property, plant and equipment, net	690,725			717,020
Goodwill, net	229,271			208,609
Other intangibles, net	87,245			84,922
Deferred tax asset	28,249			38,554
Other assets	57,170			48,659
Long-term assets of discontinued businesses	3,326			3,328
Total assets	$	1,643,767		$	1,586,344
Liabilities and Equity
Current liabilities
Current portion of long-term debt and capital leases	$	16,170		$	139,384
Accounts payable	29,675			31,218
Accrued compensation	57,414			46,951
Deferred revenue	55,357			56,422
Accrued liabilities	53,998			45,208
Other current liabilities	20,613			21,262
Current liabilities of discontinued businesses	1,944			1,802
Total current liabilities	235,171			342,247
Long-term debt and capital leases	624,310			527,136
Other long-term liabilities	101,724			104,966
Long-term liabilities of discontinued businesses	8,531			8,795
Total liabilities	969,736			983,144
Commitments and contingencies
Redeemable noncontrolling interest	14,577			—
Shareholders' equity
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 81,700,104 issued and 48,254,391 shares outstanding at September 28, 2013 and 79,607,981 issued and 48,220,037 shares outstanding at December 29, 2012	817			796
Capital in excess of par value	2,170,901			2,097,316
Accumulated deficit	(284,572		)	(368,301		)
Treasury stock, at cost, 33,445,713 shares and 31,387,944 shares at September 28, 2013 and December 29, 2012, respectively	(1,228,681		)	(1,135,609		)
Accumulated other comprehensive income (loss)	(1,957		)	6,603
Total shareholders' equity	656,508			600,805
Noncontrolling interests	2,946			2,395
Total shareholder's equity, including redeemable noncontrolling interests	674,031			603,200
Total liabilities and equity	$	1,643,767		$	1,586,344

See Notes to Condensed Consolidated Interim Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)



	Nine Months Ended
	September 28, 2013			September 29, 2012
Cash flows relating to operating activities
Net income	$	84,707		$	79,338
Less: Income (loss) from discontinued operations	(1,183		)	(63		)
Income from continuing operations	85,890			79,401
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	67,336			60,617
Amortization of debt issuance costs and discounts	9,124			13,136
Non-cash compensation	18,231			15,828
Deferred income taxes	8,675			(1,338		)
Other, net	(2,496		)	7,493
Changes in assets and liabilities:
Trade receivables	(22,663		)	(27,931		)
Inventories	1,445			(2,183		)
Other assets	(7,917		)	1,201
Accounts payable	(7,688		)	(6,743		)
Accrued compensation	10,500			6,287
Deferred revenue	(2,289		)	283
Accrued liabilities	3,285			(1,518		)
Taxes payable and prepaid taxes	(9,557		)	7,323
Other liabilities	(5,326		)	(8,177		)
Net cash provided by operating activities	146,550			143,679
Cash flows relating to investing activities
Acquisition of businesses, net of cash acquired	(24,218		)	(16,902		)
Capital expenditures	(25,319		)	(33,795		)
Purchases of investments	(15,341		)	(10,814		)
Proceeds from sale of investments	10,437			23,549
Other, net	108			2,746
Net cash used in investing activities	(54,333		)	(35,216		)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit agreement	467,804			53,115
Proceeds from exercises of stock options and warrants	58,986			11,916
Payments on long-term debt, capital lease obligation and revolving credit agreement	(502,241		)	(112,731		)
Purchase of treasury stock	(91,703		)	(45,842		)
Other, net	(1,176		)	535
Net cash used in financing activities	(68,330		)	(93,007		)
Discontinued operations
Net cash used in operating activities	(1,533		)	(292		)
Net cash used in discontinued operations	(1,533		)	(292		)
Effect of exchange rate changes on cash and cash equivalents	(1,585		)	(845		)
Net change in cash and cash equivalents	20,769			14,319
Cash and cash equivalents, beginning of period	109,685			68,905
Cash and cash equivalents, end of period	$	130,454		$	83,224
Supplemental cash flow information
Capitalized interest	$	79		$	472

See Notes to Condensed Consolidated Interim Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(dollars in thousands)



	Total			Accumulated (Deficit) Earnings			Accumulated Other Comprehensive Income			Common Stock		Capital in Excess of Par			Treasury Stock			Non-controlling Interests
December 29, 2012	$	603,200		$	(368,301	)	$	6,603		$	796	$	2,097,316		$	(1,135,609	)	$	2,395
Components of comprehensive income, net of tax:
Net income	84,707			83,729														978
Other comprehensive loss	(8,278		)				(8,560		)									282
Total comprehensive income	76,429																	1,260
Redeemable noncontrolling interest acquired in business combination	8,963																	8,963
Adjustment of redeemable noncontrolling interest to fair value												(4,905		)				4,905
Tax benefit associated with stock issued under employee compensation plans	1,362											1,362
Issuance of stock under employee compensation plans	58,918									21		58,897
Acquisition of treasury shares	(93,072		)									—			(93,072		)
Stock-based compensation	18,231											18,231
September 28, 2013	$	674,031		$	(284,572	)	$	(1,957	)	$	817	$	2,170,901		$	(1,228,681	)	$	17,523

See Notes to Condensed Consolidated Interim Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)


1.	BASIS OF PRESENTATION

The condensed consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) considered necessary to state fairly the financial position and results of operations of Charles River Laboratories International, Inc. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 29, 2012. Certain amounts in prior-year financial statements and related notes have been reclassified to conform with current period presentation.

2. RESTRUCTURING COSTS

Facilities

In July 2013, management committed to a plan to consolidate production in its U.S. research model facilities and anticipates that these actions will result in the abandonment of certain long-lived assets, including a building at one of our facilities in California. During the quarter, the Company recorded to cost of sales accelerated depreciation of $6,766 related to the building based on its revised useful life. The Company anticipates that additional accelerated depreciation for the fourth quarter of 2013 will be up to approximately $7,000.

Staffing Reductions

We have implemented staffing reductions over the past few years to improve operating efficiency and profitability at various sites. As a result of these actions, for the nine months ended September 28, 2013 and September 29, 2012, we recorded severance and retention charges as shown below. As of September 28, 2013, $1,197 was included in accrued compensation and $1,413 in other long-term liabilities on our consolidated balance sheet.

The following table rolls forward our severance and retention cost liability:



	Nine Months Ended
	September 28, 2013			September 29, 2012
Balance, beginning of period	$	3,636		$	3,374
Expense	1,058			1,881
Payments/utilization	(2,084		)	(1,415		)
Balance, end of period	$	2,610		$	3,840

The following table presents severance and retention costs by classification on the income statement:



	Nine Months Ended
	September 28, 2013		September 29, 2012
Severance charges included in cost of sales	$	989	$	936
Severance charges included in selling, general and administrative expense	69		945
Total expense	$	1,058	$	1,881

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

The following table presents severance and retention cost by segment:



	Nine Months Ended
	September 28, 2013		September 29, 2012
Research models and services	$	811	$	934
Preclinical services	247		947
Total expense	$	1,058	$	1,881

3. SUPPLEMENTAL BALANCE SHEET INFORMATION

The composition of net trade receivables is as follows:



	September 28, 2013			December 29, 2012
Client receivables	$	191,183		$	174,774
Unbilled revenue	38,398			32,494
Total	229,581			207,268
Less allowance for doubtful accounts	(5,311		)	(4,267		)
Net trade receivables	$	224,270		$	203,001

The composition of inventories is as follows:



	September 28, 2013		December 29, 2012
Raw materials and supplies	$	14,662	$	14,525
Work in process	10,894		11,082
Finished products	61,590		62,863
Inventories	$	87,146	$	88,470

The composition of other current assets is as follows:



	September 28, 2013		December 29, 2012
Prepaid assets	$	28,860	$	20,404
Deferred tax asset	29,832		30,018
Marketable securities	11,084		6,781
Prepaid income tax	35,148		26,169
Restricted cash	229		229
Other current assets	$	105,153	$	83,601

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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



	September 28, 2013			December 29, 2012
Land	$	40,638		$	40,812
Buildings	704,262			697,547
Machinery and equipment	373,431			356,960
Leasehold improvements	36,907			34,916
Furniture and fixtures	24,867			25,681
Vehicles	4,028			3,736
Computer hardware and software	111,025			107,171
Construction in progress	33,396			46,186
Total	1,328,554			1,313,009
Less accumulated depreciation	(637,829		)	(595,989		)
Net property, plant and equipment	$	690,725		$	717,020

Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets. Depreciation expense for the nine months ended September 28, 2013 and September 29, 2012 was $54,444 and $47,181, respectively.

The composition of other assets is as follows:



	September 28, 2013		December 29, 2012
Deferred financing costs	$	7,563	$	6,424
Cash surrender value of life insurance policies	25,625		26,071
Equity-method affiliates	15,999		8,492
Other assets	7,983		7,672
Other assets	$	57,170	$	48,659

The composition of other current liabilities is as follows:



	September 28, 2013		December 29, 2012
Accrued income taxes	$	18,260	$	18,216
Current deferred tax liability	469		410
Accrued interest and other	1,884		2,636
Other current liabilities	$	20,613	$	21,262

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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



	September 28, 2013		December 29, 2012
Deferred tax liability	$	16,530	$	13,147
Long-term pension liability	35,333		44,316
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan	28,518		26,663
Other long-term liabilities	21,343		20,840
Other long-term liabilities	$	101,724	$	104,966

4. MARKETABLE SECURITIES AND EQUITY-METHOD AFFILIATES

Marketable Securities

Investments in marketable securities are reported at fair value and consist of time deposits. The carrying value for these time deposits approximates fair value. The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:



	September 28, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Time deposits	$	11,084	$	—	$	—	$	11,084
	$	11,084	$	—	$	—	$	11,084



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

Maturities of debt securities were as follows:



	September 28, 2013				December 29, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due less than one year	$	11,084	$	11,084	$	6,781	$	6,781
Due after one year through five years	—		—		—		—
Due after ten years	—		—		—		—
	$	11,084	$	11,084	$	6,781	$	6,781

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

Equity-Method Affiliates

We have invested in two limited partnerships that are accounted for under the equity-method. In 2009, we entered into a limited partnership that invests in biotechnology and medical device companies. We committed $20,000, or approximately 12%, of the limited partnership's total committed capital. As of September 28, 2013, we have contributed $9,420 of our total committed capital of $20,000. During the first quarter of 2013, we entered into a second limited partnership that invests in technology and life sciences companies with an emphasis on early stage investments. We committed $10,000, or approximately 4% of the limited partnership's total committed capital. As of September 28, 2013, we have contributed $2,075 to the limited partnership.

We recognized equity-method gains of $4,832 for the nine months ended September 28, 2013 related to these limited partnerships. These gains are reported within other income (expense). As of September 28, 2013, Equity Method Affiliates had a carrying value of $15,999, which is reported in Other Assets, Non-current, on the consolidated balance sheets.

5. FAIR VALUE

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


•	Time deposits—Valued at their ending balances as reported by the financial institutions that hold our securities, which approximates fair value.


•	Life policies—Valued at cash surrender value based on fair value of underlying investments.


•	Hedge contract—Valued at fair value by management based on our foreign exchange rates and forward points provided by banks.

•

Redeemable noncontrolling interest—Valued using a weighted combination of a market-based approach, utilizing information about our company as well as publicly available industry information to determine revenue and earnings multiples, and an income approach based on estimated future cash flows based on projected financial data discounted by a weighted average cost of capital. Significant assumptions include a discount rate of 18% and a long-term pretax operating margin of 28% .

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



	Fair Value Measurements at September 28, 2013
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Assets and Liabilities at Fair Value
Time deposits	$	—	$	11,084	$	—	$	11,084
Life policies	—		18,893		—		18,893
Total assets measured at fair value	$	—	$	29,977	$	—	$	29,977
Redeemable noncontrolling interest	—		—		14,577		14,577
Total liabilities measured at fair value	$	—	$	—	$	14,577	$	14,577

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)



	Fair Value Measurements at December 29, 2012
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Assets and Liabilities at Fair Value
Time deposits	$	—	$	6,781	$	—	$	6,781
Life policies	—		19,555		—		19,555
Hedge contract	—		16		—		16
Total assets measured at fair value	$	—	$	26,352	$	—	$	26,352
Redeemable noncontrolling interest	—		—		—		—
Total liabilities measured at fair value	$	—	$	—	$	—	$	—

The book value of our term and revolving loans, which are variable rate loans carried at amortized cost, approximates fair value based current market pricing of similar debt.



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Nine Months Ended
Redeemable Noncontrolling Interest (Liability)	September 28, 2013		September 29, 2012
Beginning balance	$	—	$	—
Transfers in and/or out of Level 3	—		—
Total gains or losses (realized/unrealized):
Included in other income (expense)	476		—
Included in other comprehensive income (CTA)	233		—
Included in additional paid-in capital	4,905
Purchases, issuances and settlements	8,963		—
Ending balance	$	14,577	$	—



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Nine Months Ended
Auction rate securities (Asset)	September 28, 2013		September 29, 2012
Beginning balance	$	—	$	11,051
Transfers in and/or out of Level 3	—		—
Total gains or losses (realized/unrealized):
Included in other income (expense)	—		(712		)
Included in other comprehensive income	—		921
Purchases, issuances and settlements	—		(11,260		)
Ending balance	$	—	$	—

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table displays the gross carrying amount and accumulated amortization of definite-lived intangible assets by major class:



	September 28, 2013					December 29, 2012
	Gross Carrying Amount		Accumulated Amortization & Impairment Loss			Gross Carrying Amount		Accumulated Amortization & Impairment Loss
Backlog	$	2,899	$	(2,469	)	$	2,875	$	(2,375	)
Client relationships	313,595		(238,245		)	305,178		(231,902		)
Client contracts	15,339		(15,339		)	15,366		(15,366		)
Trademarks and trade names	5,380		(4,949		)	5,326		(4,821		)
Standard operating procedures	2,753		(1,339		)	2,751		(863		)
Other identifiable intangible assets	10,384		(4,202		)	10,033		(4,718		)
Total other intangible assets	$	350,350	$	(266,543	)	$	341,529	$	(260,045	)

Additionally, as of both September 28, 2013 and December 29, 2012 , other intangible assets, net, included $3,438 of indefinite-lived intangible assets.

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



				Adjustments to Goodwill
	December 29, 2012			Acquisitions		Foreign Exchange		September 28, 2013
Research Models and Services
Gross carrying amount	$	63,139		$	19,273	$	361	$	82,773
Preclinical Services
Gross carrying amount	1,150,470			—		1,028		1,151,498
Accumulated impairment loss	(1,005,000		)					(1,005,000		)
Total
Gross carrying amount	$	1,213,609		$	19,273	$	1,389	$	1,234,271
Accumulated impairment loss	(1,005,000		)					(1,005,000		)
Goodwill, net	$	208,609						$	229,271

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-Term Debt

Long-term debt consists of the following:



	September 28, 2013			December 29, 2012
2.25% Senior convertible debentures:
Principal	$	—		$	349,995
Unamortized debt discount	—			(6,726		)
Net carrying amount of senior convertible debentures	—			343,269
Term loan facilities	414,750			290,947
Revolving credit facility	224,752			32,000
Other long-term debt	237			232
Total debt	639,739			666,448
Less: current portion of long-term debt	(15,987		)	(139,373		)
Long-term debt	$	623,752		$	527,075

On May 29, 2013, we amended and restated our credit agreement dated September 23, 2011 to repay loans outstanding under the previous agreement, to retire our 2.25% Senior Convertible Debentures (2013 Notes), and to extend the maturity date of our credit agreement under a new $970,000 agreement (the $970M Credit Facility). The $970M Credit Facility provides for a $420,000 U.S. term loan facility and a $550,000 multi-currency revolving credit facility. The revolving credit facility may be drawn in U.S. Dollars, Euros, Pound Sterling, or Japanese Yen, subject to sub-limits by currency. Under specified circumstances, we have the ability to expand the term loan and/or revolving credit facility by up to $350,000 in the aggregate. Certain financing costs associated with the $970M Credit Facility were capitalized as deferred financing costs and will be amortized over the life of the agreement using the effective interest method. As a result of the refinancing and the associated modification and extinguishment of the previous debt agreement, we recognized an extinguishment loss of $389 of deferred financing costs associated with the previous credit agreement.

The $420,000 U.S. term loan matures in quarterly installments through maturity on May 29, 2018. The revolving credit facility also matures on May 29, 2018 and requires no scheduled payment before this date. The interest rates applicable to the $970M Credit Facility are variable and are based on an applicable rate plus a spread determined by our leverage ratio. As of September 28, 2013, the interest rate spread for the adjusted LIBOR was 1.25%.

The $970M Credit Facility includes certain customary representations and warranties, events of default, notices of material adverse changes to our business and negative and affirmative covenants. As of September 28, 2013, we were compliant with all financial covenants specified in the credit agreement.

We had $4,855 outstanding under letters of credit as of September 28, 2013.

Our $350,000 2013 Notes issued in June 2006 became due in June 2013 and were retired with funds provided by the $970M Credit Facility and available cash.

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)



Twelve Months Ending
September 2014	$	15,987
September 2015	42,000
September 2016	42,000
September 2017	63,000
September 2018	476,752
Total	$	639,739

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

8. EQUITY

Earnings Per Share

Basic earnings per share for the three and nine months ended September 28, 2013 and September 29, 2012 was computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for the three and nine months ended September 28, 2013 and September 29, 2012 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.

Options to purchase 2,652,660 shares and 4,667,739 shares were outstanding in each of the three months ended September 28, 2013 and September 29, 2012, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted average shares outstanding for the three and nine months ended September 28, 2013 and September 29, 2012 excluded the weighted average impact of 1,107,313 and 941,873 shares, respectively, of non-vested restricted stock awards. Options to purchase 2,363,878 shares and 4,590,418 shares were outstanding in each of the nine months ended September 28, 2013 and September 29, 2012, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Numerator:
Income from continuing operations for purposes of calculating earnings per share	$	30,980		$	22,154		$	84,912		$	78,942
Income (loss) from discontinued businesses	(113		)	$	(182	)	$	(1,183	)	$	(63	)
Denominator:
Weighted-average shares outstanding—Basic	47,910,649			47,625,806			47,950,018			48,028,602
Effect of dilutive securities:
2.25% senior convertible debentures	—			—			—			—
Stock options and contingently issued restricted stock	530,516			482,808			704,118			447,544
Weighted-average shares outstanding—Diluted	48,441,165			48,108,614			48,654,136			48,476,146
Basic earnings per share from continuing operations attributable to common shareholders	$	0.65		$	0.47		$	1.77		$	1.64
Basic earnings (loss) per share from discontinued operations attributable to common shareholders	$	—		$	—		$	(0.02	)	$	—
Diluted earnings per share from continuing operations attributable to common shareholders	$	0.64		$	0.46		$	1.75		$	1.63
Diluted earnings (loss) per share from discontinued operations attributable to common shareholders	$	—		$	—		$	(0.02	)	$	—

Treasury Shares

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

Share repurchases for the nine months ended September 28, 2013 and September 29, 2012 were as follows:



	Nine Months Ended
	September 28, 2013		September 29, 2012
Number of shares of common stock repurchased	2,057,769		1,306,518
Total cost of repurchase	$	93,072	$	45,842

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

Warrants

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

9. INCOME TAXES

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



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Income from continuing operations before income taxes	$	42,726		$	28,395		$	115,221		$	103,541
Effective tax rate	26.7		%	21.2		%	25.5		%	23.3		%
Provision for income taxes	$	11,390		$	6,011		$	29,331		$	24,140

Our overall effective tax rate was 26.7% in the third quarter of 2013 and 21.2% in the third quarter of 2012. The increase was primarily attributable to a $2,006 reduction of a tax asset related to the ongoing transfer pricing controversy with the Canadian Revenue Authority (CRA), a reduction in benefits from the U.K. research and development enhanced deduction regime due to the early adoption of the new refundable research and development credit that was enacted in the third quarter of 2013, and a French tax law change enacted in the first quarter of 2013 that limits the deductibility of interest by our French affiliates. These tax costs were partially offset in the third quarter of 2013 by a favorable mix of earnings, increased benefits from Canadian Scientific Research and Experimental Development credits (SR&ED), and an increased tax benefit from the U.S. domestic production deduction. The effective tax rate for the third quarter of 2012 reflects a tax benefit of $1,226 related to the settlement of a Canadian tax controversy for the SR&ED credits claimed in 2003 and 2004.

The effective tax rate for the nine months ended September 28, 2013 reflects the items noted above as well as a discrete tax cost of $703 due to the retroactive impact of the French tax law change to 2012, a $525 discrete tax cost related to nondeductible transaction costs incurred in 2012 for the acquisition of Vital River, which closed in the first quarter of 2013, and a discrete tax benefit of $330 for the retroactive impact to 2012 of a change in U.S. Federal tax law enacted during the first quarter of 2013 related to the U.S. anti deferral regime. Additionally the effective tax rate for the nine months ended September 29, 2012 reflects an unbenefitted capital loss of $712 on the sale of auction rate securities recorded in the first quarter of 2012.

In accordance with Canadian Federal tax law, we claim SR&ED credits on qualified research and development costs incurred by our preclinical services facility in Canada in the performance of projects for non-Canadian clients. Additionally, in accordance with the tax law of the United Kingdom, we claim enhanced deductions related to qualified research and development costs incurred by our preclinical services facility in Scotland, in the performance of certain client contracts. On July 17, 2013, the U.K. government enacted a tax law change that replaces the existing research and development enhanced deduction with a research and development credit. In the third quarter of 2013 we elected to adopt the tax law change with retroactive application to April 1, 2013. The benefit of the new refundable credit for the period April 1, 2013 through September 28, 2013 of $1,714 is reported in Cost of Services Provided in our Condensed Consolidated Statements of Income.

During the third quarter of 2013, our unrecognized tax benefits recorded decreased by $13,325 to $18,782 due primarily to a settlement reached during the quarter with the CRA related to SR&ED credits claimed in 2005 through 2011. This reduction was partially offset with an increase from ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate favorably decreased by $8,628 to $17,268. The decrease was due primarily to the Canadian SR&ED settlement. The amount of accrued interest on unrecognized tax benefits decreased by $1,788 to $637 in the third quarter of 2013 primarily due to the Canadian SR&ED settlement. It is reasonably possible as of September 28, 2013 that the liability for unrecognized tax benefits for the uncertain tax position associated with an acquisition agreement termination fee could decrease within the next twelve months by approximately $11,000 due to the potential expiration of a statute of limitations.

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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

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

We believe we have appropriately provided for all uncertain tax positions.

In the third quarter of 2013 the French government proposed a change to French tax law that, if enacted, could further reduce the deductibility of interest by our French affiliates in 2013 and beyond. We are currently analyzing the potential impact of the proposed law change.

In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested as of the end of the third quarter of 2013 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.

The income tax expense (benefit) related to items of other comprehensive income are as follows:



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013		September 29, 2012
Income tax expense (benefit) related to foreign currency translation adjustment	$	(615	)	$	(60	)	$	42	$	(98	)
Income tax expense related to change in unrecognized pension gains, losses and prior service costs	289			216			832		799
Income tax expense (benefit) related to items of other comprehensive income	$	(326	)	$	156		$	874	$	701

10. EMPLOYEE BENEFITS

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

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)



	Pension Benefits						Supplemental Retirement Benefits
	September 28, 2013			September 29, 2012			September 28, 2013		September 29, 2012
Service cost	$	822		$	922		$	160	$	160
Interest cost	2,762			2,824			177		223
Expected return on plan assets	(3,593		)	(3,459		)	—		—
Amortization of prior service cost (credit)	(147		)	(256		)	165		165
Amortization of net loss (gain)	671			586			63		65
Net periodic benefit cost	$	515		$	617		$	565	$	613

The following table provides the components of net periodic benefit cost for our defined benefit plans for the nine month period ended:



	Pension Benefits						Supplemental Retirement Benefits
	September 28, 2013			September 29, 2012			September 28, 2013		September 29, 2012
Service cost	$	2,492		$	2,880		$	482	$	480
Interest cost	8,334			8,445			531		669
Expected return on plan assets	(10,842		)	(10,319		)	—		—
Amortization of prior service cost (credit)	(444		)	(566		)	495		495
Amortization of net loss (gain)	2,043			1,756			189		195
Net periodic benefit cost	$	1,583		$	2,196		$	1,697	$	1,839

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

11. STOCK PLANS AND STOCK-BASED COMPENSATION

The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards' vesting period on a straight-line basis. The following table presents stock-based compensation included in our consolidated statement of income:



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Stock-based compensation expense included in:
Cost of sales	$	1,332		$	1,271		$	4,051		$	3,995
Selling, general and administration	4,715			3,970			14,181			11,833
Stock-based compensation, before income taxes	6,047			5,241			18,232			15,828
Provision for income taxes	(2,103		)	(1,847		)	(6,422		)	(5,615		)
Stock-based compensation, net of tax	$	3,944		$	3,394		$	11,810		$	10,213

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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



	September 28, 2013			September 29, 2012
Expected life (in years)	4.2 years			4.5 years
Expected volatility	32.7		%	34.9		%
Risk-free interest rate	0.80		%	0.84		%
Expected dividend yield	0		%	0		%
Weighted-average grant date fair value	$	11.17		$	10.94

Stock Options

The following table summarizes stock option activities under our plans:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Options outstanding as of December 29, 2012	5,860,403		$	39.11
Options granted	593,499		$	40.54
Options exercised	(1,729,768	)	$	34.06
Options canceled	(105,040	)	$	45.68
Options outstanding as of September 28, 2013	4,619,094		$	41.04	3.25 years	$	30,997
Options exercisable as of September 28, 2013	3,022,605		$	42.52	2.00 years	$	18,186

As of September 28, 2013, the unrecognized compensation cost related to 1,596,489 unvested stock options expected to vest was $12,634. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.5 years.

The total intrinsic value of options exercised during the nine months ended September 28, 2013 and September 29, 2012 was $17,629 and $2,769, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of options during the nine months ended September 28, 2013 and September 29, 2012 was $58,986 and $12,304, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $6,436 for the nine months ended September 28, 2013. A charge of $1,362 was recorded in capital in excess of par value in the first nine months of 2013 for the excess of deferred tax assets over the actual tax benefits at option exercise. We settle stock option exercises with newly issued common shares.

Restricted Stock

Stock compensation expense associated with restricted common stock is charged for the market value on the date of grant, less estimated forfeitures, and is amortized over the awards' vesting period on a straight-line basis.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

The following table summarizes the restricted stock activity for the nine months ended September 28, 2013:



	Restricted Stock		Weighted Average Grant Date Fair Value
Outstanding as of December 29, 2012	934,505		$	35.83
Granted	565,699		40.52
Vested	(371,458	)	40.37
Canceled	(21,433	)	43.75
Outstanding as of September 28, 2013	1,107,313		$	36.55

As of September 28, 2013, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $32,752. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 31.5 months. The total fair value of restricted stock grants that vested during the nine months ended September 28, 2013 and September 29, 2012 was $14,996 and $10,297, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested totaled $5,375 for the nine months ended September 28, 2013.

Performance Based Stock Award Program

On February 22, 2013, we granted 163,847 Performance Share Units (PSUs) to certain executive officers. The PSUs will be paid out in our common stock based upon the results of two metrics: (1) performance based on our earnings per share with certain defined adjustments and (2) our relative stock price market performance based on a 3-year relative Total Shareholder Return calculation. Accordingly, the actual total number of our shares into which the granted PSUs will convert can range from no shares to 327,694 shares. The PSUs will be fully vested in December 2015 and will be paid out in the form of our common stock in the first quarter of 2016. Compensation expense associated with the PSUs of $1,455 was recorded during the nine months ended September 28, 2013.

12. COMMITMENTS AND CONTINGENCIES

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

In early May 2013, the Company commenced an investigation into inaccurate billing with respect to certain government contracts. The Company promptly reported these matters to the relevant government contracting officers, the Department of Health and Human Services' Office of the Inspector General, and the Department of Justice, and we are cooperating with these agencies to ensure the proper repayment and resolution of this matter. The Company identified approximately $1,500 in excess amounts billed on these contracts since January 1, 2007 and reserved such amount. Because of the preliminary stage of discussions with the government and complex nature of this matter, the Company believes that it is reasonably possible that additional losses may be incurred. However, the Company cannot at this time estimate the potential range of loss beyond the current reserve of $1,500.

On July 27, 2012, a Mauritius supplier of large animal models submitted an Application for Arbitration with The Permanent Secretariat, The Permanent Court of Arbitration, The Mauritius Chamber of Commerce and Industry in Port Louis, Mauritius. The supplier asserted that the Company failed to pay certain invoices and the supplier was therefore permitted to terminate the supply agreement. The Company filed a counterclaim asserting that the supplier had failed to meet its contractual obligations under the supply agreement. The arbitration hearing relating to this contract dispute took place in Mauritius from August 13-15, 2013. While no prediction may be made as to the outcome of arbitration, the Company intends to defend against this proceeding vigorously and therefore an estimate of the possible loss or range of loss cannot be made.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

13. BUSINESS SEGMENT INFORMATION

We report two business segments, Research Models and Services (RMS) and Preclinical Services (PCS). Our RMS segment includes sales of Research Models, Genetically Engineered Models and Services (GEMS), Insourcing Solutions (IS), Research Animal Diagnostic Services (RADS), Discovery Research Services (DRS), Endotoxin and Microbial Detection (EMD) products and services, and Avian Vaccine products and services. Our PCS segment includes services required to take a drug through the development process, which includes discovery services, safety assessment and biopharmaceutical services.

The following table presents sales and other financial information by business segment.



	Three Months Ended				Nine Months Ended
	September 28, 2013		September 29, 2012		September 28, 2013		September 29, 2012
Research Models and Services
Net sales	$	173,405	$	166,484	$	534,867	$	523,247
Gross margin	65,710		65,902		221,916		224,364
Operating income	40,260		43,389		145,193		158,398
Depreciation and amortization	16,876		9,670		37,378		27,697
Capital expenditures	6,110		7,423		16,464		27,892
Preclinical Services
Net sales	$	118,724	$	112,202	$	341,433	$	326,143
Gross margin	34,216		27,358		84,791		76,693
Operating income	18,636		10,975		37,631		25,958
Depreciation and amortization	10,039		10,880		29,957		32,920
Capital expenditures	2,986		2,819		8,855		5,903

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



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Total segment operating income	$	58,896		$	54,364		$	182,824		$	184,356
Unallocated corporate overhead	(18,053		)	(16,682		)	(56,030		)	(53,660		)
Consolidated operating income	$	40,843		$	37,682		$	126,794		$	130,696

Net sales for each significant service area are as follows:



	Three Months Ended				Nine Months Ended
	September 28, 2013		September 29, 2012		September 28, 2013		September 29, 2012
Research models	$	92,969	$	90,877	$	294,993	$	293,575
Research model services	52,105		53,400		156,661		163,247
EMD	28,331		22,207		83,213		66,425
Total research models and services	173,405		166,484		534,867		523,247
Total preclinical services	118,724		112,202		341,433		326,143
Total sales	$	292,129	$	278,686	$	876,300	$	849,390

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

A summary of unallocated corporate overhead consists of the following:



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Stock-based compensation expense	$	3,260		$	2,827		$	9,927		$	8,512
U.S. retirement plans	1,275			1,276			3,617			3,662
Audit, tax and related expense	811			842			3,135			2,133
Salary and bonus	5,831			4,813			16,057			14,602
Global IT	3,002			3,285			8,448			9,501
Employee health, long-term disability and fringe benefit expense	(1,470		)	(2,248		)	(898		)	(1,395		)
Consulting and professional services	1,439			1,061			3,443			3,581
Depreciation expense	1,570			1,554			4,712			4,693
Other general unallocated corporate expenses	2,335			3,272			7,589			8,371
Total unallocated corporate overhead costs	$	18,053		$	16,682		$	56,030		$	53,660

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

14. DISCONTINUED OPERATIONS

On March 28, 2011, we disposed of our Phase I clinical business for a nominal amount. As part of the disposition we remained the guarantor of the Phase I facility lease. During the second quarter of 2011, we recognized the value of the guarantee net of the buyer's related indemnity as a liability of $2,994, which we are accreting ratably over the remaining term of the lease. The facility lease runs through January 2021 with remaining lease payments totaling $11,677 as of September 28, 2013.

During the period ended December 29, 2012, we concluded that the decreasing financial viability of the lessee (the buyer of the Phase I clinical business) increased the probability that we will be required to make future lease payments as guarantor. As a result, we recorded an additional contingent loss for the guarantee, reflecting our estimate of the total future lease payments, which include real estate taxes passed on by the lessor, less estimated sublease income. Under the terms of the lease, if we were required to honor the guarantee due to default by the lessee, we had the right to obtain control of the leased property.

On April 4, 2013, the buyer of our Phase I clinical business filed for Chapter 11 bankruptcy. As a result, we revised our estimate of the total future lease payments, less estimated sublease income, resulting in an additional charge of $1,316. In July 2013, the bankruptcy court approved the rejection of the lease, and effective July 1, 2013, we assumed control of the leased property and assumed obligations under the lease consistent with the guarantee. The total carrying amount of the liability for our obligation under the lease as of September 28, 2013 is $10,375 and is reflected on the consolidated balance sheet as a liability of discontinued operations.

The consolidated financial statements classify, as discontinued operations, the assets and liabilities, operating results and cash flows, of businesses that are discontinued for all periods presented. Operating results from discontinued operations are as follows:

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net sales	$	—		$	—		$	—		$	—
Income (loss) from operations of discontinued businesses, before income taxes	(172		)	49			(1,894		)	221
Provision (benefit) for income taxes	(59		)	231			(711		)	284
Income (loss) from operations of discontinued businesses, net of taxes	$	(113	)	$	(182	)	$	(1,183	)	$	(63	)

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



	September 28, 2013		December 29, 2012
Current assets	$	758	$	495
Long-term assets	3,326		3,328
Total assets	$	4,084	$	3,823
Current liabilities	$	1,944	$	1,802
Long-term liabilities	8,531		8,795
Total liabilities	$	10,475	$	10,597

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

15. BUSINESS ACQUISITIONS

Vital River

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

The purchase price allocation, net of $2,671 of cash acquired, is as follows:



Current assets (excluding cash)	$	3,092
Property, plant and equipment	10,468
Other long-term assets	2,242