Edgar Filing: CHARLES RIVER LABORATORIES INTERNATIONAL INC

CRL 6.30.2012 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q



(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Commission File No. 001-15943

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)



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

____________________________________________________________________________

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

_________________________________________________________

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

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

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



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

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

As of July 24, 2012, there were 48,730,630 shares of the Registrant's common stock outstanding.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2012

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 30, 2012 and June 25, 2011	3
		Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2012 and June 25, 2011	4
		Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2012 and December 31, 2011	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2012 and June 25, 2011	6
		Condensed Consolidated Statement of Changes in Equity (Unaudited) for the six months ended June 30, 2012	7
		Notes to Condensed Consolidated Interim Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	30
	Item 4.	Controls and Procedures	31
Part II.	Other Information
	Item 1A.	Risk Factors	32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 6.	Exhibits	33

Special Note on Factors Affecting Future Results

This Quarterly Report on Form 10-Q contains forward‑looking statements regarding future events and the future results of Charles River Laboratories International, Inc. (Charles River or We) that are based on current expectations, estimates, forecasts, and projections about the industries in which Charles River operates and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could” and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward‑looking statements. These statements are based on our current expectations and beliefs and involve a number of risks, uncertainties, and assumptions that are difficult to predict. For example, we may use forward‑looking statements when addressing topics such as: the pursuit of our initiatives to optimize returns for stockholders, including efforts to improve our operating margins, improve free cash flow, invest in growth businesses and return value to shareholders; future demand for drug discovery and development products and services, including the outsourcing of these services and spending trends by our customers; our expectations regarding stock repurchases; present spending trends and other cost reduction activities by our customers; future actions by our management; the outcome of contingencies; changes in our business strategy; changes in our business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; changes in the composition or level of our revenues; our cost structure; the impact of acquisitions and dispositions; our expectations with respect to sales growth and operating synergies (including the impact of specific actions intended to cause related improvements); the impact of specific actions intended to improve overall operating efficiencies and profitability (and our ability to accommodate future demand with our infrastructure); changes in our expectations regarding future stock option, restricted stock, and other equity grants to employees and directors; expectations with respect to foreign currency exchange; assessing (or changing our assessment of) our tax positions for financial statement purposes; and our cash flow and liquidity. In addition, these statements include the impact of economic and market conditions on our customers; the effects of our cost-saving actions and the steps to optimize returns to shareholders on an effective and timely basis and the ability of Charles River to withstand the current market conditions. You should not rely on forward‑looking statements because they are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward‑looking statements. You are cautioned not to place undue reliance on these forward‑looking statements, which speak only as of the date of this document or in the case of statements incorporated by reference, on the date of the document incorporated by reference. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 under the section entitled “Our Strategy,” the section entitled “Risks Related to Our Business and Industry,” the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” and in our press releases and other financial filings with the Securities and Exchange Commission. We have no obligation to publicly update or revise any forward‑looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause the forward‑looking events we discuss in this report not to occur.

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 30, 2012			June 25, 2011			June 30, 2012			June 25, 2011
Net sales related to products	$	119,125		$	122,741		$	245,339		$	244,137
Net sales related to services	165,598			165,522			325,365			329,969
Net sales	284,723			288,263			570,704			574,106
Costs and expenses
Cost of products sold	62,035			65,271			126,980			131,037
Cost of services provided	119,103			116,672			235,927			234,111
Selling, general and administrative	49,900			47,209			105,877			102,216
Amortization of other intangibles	4,411			5,797			8,906			11,177
Operating income	49,274			53,314			93,014			95,565
Other income (expense)
Interest income	151			558			336			922
Interest expense	(8,079		)	(10,659		)	(16,514		)	(20,675		)
Other, net	(1,346		)	(408		)	(1,690		)	(345		)
Income from continuing operations, before income taxes	40,000			42,805			75,146			75,467
Provision (benefit) for income taxes	9,453			8,649			18,129			5,934
Income from continuing operations, net of income taxes	30,547			34,156			57,017			69,533
Income (loss) from discontinued operations, net of taxes	42			(1,732		)	119			(5,677		)
Net income	30,589			32,424			57,136			63,856
Less: Net income attributable to noncontrolling interests	(121		)	(106		)	(229		)	(203		)
Net income attributable to common shareowners	$	30,468		$	32,318		$	56,907		$	63,653
Earnings (loss) per common share
Basic:
Continuing operations attributable to common shareowners	$	0.63		$	0.67		$	1.18		$	1.32
Discontinued operations	$	—		$	(0.03	)	$	—		$	(0.11	)
Net income attributable to common shareowners	$	0.63		$	0.63		$	1.18		$	1.21
Diluted:
Continuing operations attributable to common shareowners	$	0.63		$	0.66		$	1.17		$	1.30
Discontinued operations	$	—		$	(0.03	)	$	—		$	(0.11	)
Net income attributable to common shareowners	$	0.63		$	0.63		$	1.17		$	1.20

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						Six Months Ended
	June 30, 2012			June 25, 2011			June 30, 2012			June 25, 2011
Net income	$	30,589		$	32,424		$	57,136		$	63,856
Foreign currency translation adjustment	(10,871		)	(2,558		)	(4,091		)	5,700
Unrealized gains (losses) on marketable securities:
Unrealized gains (losses) for the period	—			(52		)	209			(137		)
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	659			236			1,320			499
Comprehensive income, before tax	20,377			30,050			55,286			69,918
Income tax expense related to items of other comprehensive income	284			335			545			539
Comprehensive income, net of tax	20,093			29,715			54,741			69,379
Less: comprehensive income related to noncontrolling interests	(108		)	(124		)	(234		)	(233		)
Comprehensive income attributable to common shareholders	$	19,985		$	29,591		$	54,507		$	69,146

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)



	June 30, 2012			December 31, 2011
Assets
Current assets
Cash and cash equivalents	$	76,076		$	68,905
Trade receivables, net	208,046			184,810
Inventories	92,283			92,969
Other current assets	75,047			79,052
Current assets of discontinued businesses	107			107
Total current assets	451,559			425,843
Property, plant and equipment, net	727,405			738,030
Goodwill, net	196,225			197,561
Other intangibles, net	84,570			93,437
Deferred tax asset	43,983			44,804
Other assets	41,399			57,659
Long-term assets of discontinued businesses	932			986
Total assets	$	1,546,073		$	1,558,320
Liabilities and Equity
Current liabilities
Current portion of long-term debt and capital leases	$	134,830		$	14,758
Accounts payable	34,487			34,332
Accrued compensation	37,363			41,602
Deferred revenue	60,993			56,530
Accrued liabilities	45,033			54,377
Other current liabilities	14,367			14,033
Current liabilities of discontinued businesses	1,053			1,165
Total current liabilities	328,126			216,797
Long-term debt and capital leases	551,397			703,187
Other long-term liabilities	99,319			108,451
Long-term liabilities of discontinued businesses	2,381			2,522
Total liabilities	981,223			1,030,957
Commitments and contingencies
Shareowners' equity
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 79,079,407 issued and 48,591,443 shares outstanding at June 30, 2012 and 78,473,888 issued and 48,875,715 shares outstanding at December 31, 2011	791			785
Capital in excess of par value	2,070,474			2,056,921
Accumulated deficit	(408,689		)	(465,596		)
Treasury stock, at cost, 30,487,964 shares and 29,598,173 shares at June 30, 2012 and December 31, 2011, respectively	(1,101,933		)	(1,071,120		)
Accumulated other comprehensive income	2,193			4,593
Total shareowners' equity	562,836			525,583
Noncontrolling interests	2,014			1,780
Total equity	564,850			527,363
Total liabilities and equity	$	1,546,073		$	1,558,320

See Notes to Condensed Consolidated Interim Financial Statements.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)



	Six Months Ended
	June 30, 2012			June 25, 2011
Cash flows relating to operating activities
Net income	$	57,136		$	63,856
Less: Income (loss) from discontinued operations	119			(5,677		)
Income from continuing operations	57,017			69,533
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	40,067			43,081
Amortization of debt issuance costs and discounts	8,662			8,851
Non-cash compensation	10,586			11,348
Deferred income taxes	4,590			2,735
Other, net	3,315			1,238
Changes in assets and liabilities:
Trade receivables	(25,390		)	(14,218		)
Inventories	(1,206		)	1,562
Other assets	(2,665		)	759
Accounts payable	617			(397		)
Accrued compensation	(3,890		)	3,430
Deferred revenue	4,349			(8,882		)
Accrued liabilities	(9,080		)	(2,750		)
Taxes payable and prepaid taxes	2,737			(24,274		)
Other liabilities	(7,065		)	(5,319		)
Net cash provided by operating activities	82,644			86,697
Cash flows relating to investing activities
Capital expenditures	(23,553		)	(13,450		)
Purchases of investments	(8,178		)	(15,334		)
Proceeds from sale of investments	21,424			19,917
Other, net	1,729			988
Net cash used in investing activities	(8,578		)	(7,879		)
Cash flows relating to financing activities
Proceeds from long-term debt and revolving credit agreement	38,117			150,835
Proceeds from exercises of stock options and warrants	3,107			12,713
Payments on long-term debt, capital lease obligation and revolving credit agreement	(76,355		)	(82,014		)
Purchase of treasury stock and Accelerated Stock Repurchase Program	(30,813		)	(191,109		)
Other, net	474			(62		)
Net cash used in financing activities	(65,470		)	(109,637		)
Discontinued operations
Net cash used in operating activities	(88		)	(1,748		)
Net cash used in discontinued operations	(88		)	(1,748		)
Effect of exchange rate changes on cash and cash equivalents	(1,337		)	(762		)
Net change in cash and cash equivalents	7,171			(33,329		)
Cash and cash equivalents, beginning of period	68,905			179,160
Cash and cash equivalents, end of period	$	76,076		$	145,831
Supplemental cash flow information
Capitalized interest	$	373		$	148

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 Interest
December 31, 2011	$	527,363		$	(465,596	)	$	4,593		$	785	$	2,056,921		$	(1,071,120	)	$	1,780
Components of comprehensive income, net of tax:
Net income	57,136			56,907														229
Other comprehensive income	(2,395		)				(2,400		)									5
Total comprehensive income	54,741																	234
Tax detriment associated with stock issued under employee compensation plans	(148		)									(148		)
Issuance of stock under employee compensation plans	3,121									6		3,115
Acquisition of treasury shares	(30,813		)									—			(30,813		)
Stock-based compensation	10,586											10,586
June 30, 2012	$	564,850		$	(408,689	)	$	2,193		$	791	$	2,070,474		$	(1,101,933	)	$	2,014

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 31, 2011.

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

2. Restructuring and Contract Termination 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 three months ended June 30, 2012 and June 25, 2011, we recorded severance and retention charges as shown below. As of June 30, 2012, $1,047 was included in accrued compensation and $2,005 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 30, 2012			June 25, 2011
Balance, beginning of period	$	3,374		$	10,658
Expense	911			1,392
Payments/utilization	(1,233		)	(6,065		)
Balance, end of period	$	3,052		$	5,985

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



	Six Months Ended
	June 30, 2012		June 25, 2011
Severance charges included in cost of sales	$	—	$	431
Severance charges included in selling, general and administrative expense	911		961
Total expense	$	911	$	1,392

The following table presents severance and retention cost by segment:



	Six Months Ended
	June 30, 2012		June 25, 2011
Research models and services	$	—	$	408
Preclinical services	911		984
Corporate	—		—
Total expense	$	911	$	1,392

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

3. Supplemental Balance Sheet Information

The composition of net trade receivables is as follows:



	June 30, 2012			December 31, 2011
Client receivables	$	181,363		$	159,381
Unbilled revenue	30,682			29,446
Total	212,045			188,827
Less allowance for doubtful accounts	(3,999		)	(4,017		)
Net trade receivables	$	208,046		$	184,810

The composition of inventories is as follows:



	June 30, 2012		December 31, 2011
Raw materials and supplies	$	13,076	$	13,987
Work in process	16,548		13,533
Finished products	62,659		65,449
Inventories	$	92,283	$	92,969

The composition of other current assets is as follows:



	June 30, 2012		December 31, 2011
Prepaid assets	$	24,659	$	22,828
Deferred tax asset	26,265		30,894
Marketable securities	6,623		5,359
Prepaid income tax	17,271		19,742
Restricted cash	229		229
Other current assets	$	75,047	$	79,052

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



	June 30, 2012			December 31, 2011
Land	$	40,482		$	40,517
Buildings	699,041			696,275
Machinery and equipment	337,820			332,683
Leasehold improvements	38,689			29,975
Furniture and fixtures	27,932			26,775
Vehicles	3,140			5,226
Computer hardware and software	104,959			105,563
Construction in progress	45,798			57,661
Total	1,297,861			1,294,675
Less accumulated depreciation	(570,456		)	(556,645		)
Net property, plant and equipment	$	727,405		$	738,030

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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 month ended June 30, 2012 and June 25, 2011 was $31,161 and $31,904, respectively.

The composition of other assets is as follows:



	June 30, 2012		December 31, 2011
Deferred financing costs	$	7,677	$	9,239
Cash surrender value of life insurance policies	20,273		25,057
Long term marketable securities	—		11,051
Other assets	13,449		12,312
Other assets	$	41,399	$	57,659

The composition of other current liabilities is as follows:



	June 30, 2012		December 31, 2011
Accrued income taxes	$	10,854	$	10,552
Current deferred tax liability	1,342		1,379
Accrued interest and other	2,171		2,102
Other current liabilities	$	14,367	$	14,033

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



	June 30, 2012		December 31, 2011
Deferred tax liability	$	15,416	$	16,074
Long-term pension liability	40,866		49,223
Accrued Executive Supplemental Life Insurance Retirement Plan and Deferred Compensation Plan	26,112		25,739
Other long-term liabilities	16,925		17,415
Other long-term liabilities	$	99,319	$	108,451

4. Marketable Securities and Equity-Method Affiliates

Investments in marketable securities are reported at fair value and consist of time deposits and auction rate securities. During the six month ended June 30, 2012, we sold our auction rate securities for $11,260 in cash and recorded a realized loss of $712 , which is included in other income (expense).

The amortized cost, gross unrealized gains, gross unrealized losses and fair value for marketable securities by major security type were as follows:



	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Time deposits	$	6,623	$	—	$	—	$	6,623
Auction rate securities	—		—		—		—
	$	6,623	$	—	$	—	$	6,623

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)



	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Time deposits	$	5,359	$	—	$	—		$	5,359
Auction rate securities	11,972		—		(921		)	11,051
	$	17,331	$	—	$	(921	)	$	16,410

Maturities of debt securities were as follows:



	June 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due less than one year	$	6,623	$	6,623	$	5,359	$	5,359
Due after one year through five years	—		—		—		—
Due after ten years	—		—		11,972		11,051
	$	6,623	$	6,623	$	17,331	$	16,410

Equity-Method Affiliates

In 2009, we entered into a limited partnership, which invests in biotechnology and medical device companies. We committed $20,000, or approximately 12%, of the limited partnership's total committed capital. As of June 30, 2012, we have contributed $7,120 of our total committed capital of $20,000. We recognized equity income (loss) of $(262) and $135 for the three and six month ended June 30, 2012, respectively. This income is reported as other income (expense). As of June 30, 2012, equity method affiliates had a carrying value of $7,544, which is reported in other assets on the consolidated balance sheets.

5. Fair Value

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


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


•	Life policies—Valued at cash surrender value.


•	Contingent consideration—Consists of future acquisition-related payments based on certain agreed upon revenue and technical milestones valued using the income approach.


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


•	Long-term debt—Valued based on current market pricing for similar debt.

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

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 June 30, 2012 using
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Assets and Liabilities at Fair Value
Time deposits	$	—	$	6,623	$	—	$	6,623
Auction rate securities	—		—		—		—
Fair value of life policies	—		14,663		—		14,663
Hedge contract	—		70		—		70
Total assets measured at fair value	$	—	$	21,356	$	—	$	21,356
Contingent consideration	—		—		—		—
Total liabilities measured at fair value	$	—	$	—	$	—	$	—



	Fair Value Measurements at December 31, 2011 using
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Assets and Liabilities at Fair Value
Time deposits	$	—	$	5,359	$	—	$	5,359
Auction rate securities	—		—		11,051		11,051
Fair value of life policies	—		19,520		—		19,520
Hedge contract	—		5		—		5
Total assets measured at fair value	$	—	$	24,884	$	11,051	$	35,935
Contingent consideration	—		—		—		—
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. The fair value of our 2.25% Senior Convertible Debentures (2013 Notes), which are carried at cost less unamortized discount on our consolidated balance sheets, was $350,870 as of June 30, 2012. We determine the fair value of these 2013 Notes based on their most recent quoted market price and by reference to the market value of similar debt instruments. We classify the fair value of our debt as Level 2 (significant other observable inputs) on the valuation hierarchy, where Level 2 inputs include quoted prices for similar assets and liabilities in active markets and/or quoted prices for identical or similar assets and liabilities in markets that are not active.

The following table presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month ended June 30, 2012 and June 25, 2011.

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
Auction rate securities	June 30, 2012			June 25, 2011
Beginning balance	$	11,051		$	11,377
Transfers in and/or out of Level 3	—			—
Total gains or losses (realized/unrealized):
Included in other income (expense)	(712		)	(1		)
Included in other comprehensive income	921			(137		)
Purchases, issuances and settlements	(11,260		)	—
Ending balance	$	—		$	11,239

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 quarter ended June 30, 2012, we recognized $1,431 of hedge losses associated with forward currency contracts open during the quarter. As of June 30, 2012, outstanding forward currency contracts had a fair value of $70.

6. Goodwill and Other Intangible Assets

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



	June 30, 2012					December 31, 2011
	Gross Carrying Amount		Accumulated Amortization & Impairment Loss			Gross Carrying Amount		Accumulated Amortization & Impairment Loss
Goodwill	$	1,212,924	$	(1,016,700	)	$	1,214,285	$	(1,016,724	)
Other intangible assets not subject to amortization:
Research models	$	3,438	$	—		$	3,438	$	—
Other intangible assets subject to amortization:
Backlog	2,833		(2,299		)	2,856		(2,253		)
Client relationships	298,774		(219,456		)	298,813		(210,816		)
Trademarks and trade names	5,017		(4,751		)	5,022		(4,706		)
Other identifiable intangible assets	5,395		(4,380		)	5,415		(4,332		)
Total other intangible assets	$	315,457	$	(230,886	)	$	315,544	$	(222,107	)

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

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



				Adjustments to Goodwill
	December 31, 2011			Acquisitions		Foreign Exchange/ Impairment			June 30, 2012
Research Models and Services
Gross carrying amount	$	56,402		$	—	$	(275	)	$	56,127
Accumulated amortization	(3,721		)	—		24			(3,697		)
Preclinical Services
Gross carrying amount	1,157,883			—		(1,086		)	1,156,797
Accumulated impairment loss	(1,005,000		)	—		—			(1,005,000		)
Accumulated amortization	(8,003		)	—		—			(8,003		)
Total
Gross carrying amount	$	1,214,285		$	—	$	(1,361	)	$	1,212,924
Accumulated impairment loss	(1,005,000		)	—		—			(1,005,000		)
Accumulated amortization	(11,724		)	—		24			(11,700		)

7. Long-Term Debt and Capital Lease Obligations

Long-Term Debt

Long-term debt consists of the following:



	June 30, 2012			December 31, 2011
2.25% Senior convertible debentures:
Principal	$	349,995		$	349,995
Unamortized debt discount	(14,433		)	(21,533		)
Net carrying amount of senior convertible debentures	335,562			328,462
Term loan facilities	315,420			356,322
Revolving credit facility	35,000			33,000
Other long-term debt represents secured and unsecured promissory notes, interest rates ranging from 0% to 0.5% at both June 30, 2012 and December 31, 2011, maturing between 2012 and 2013	222			118
Total debt	686,204			717,902
Less: current portion of long-term debt	(134,812		)	(14,732		)
Long-term debt	$	551,392		$	703,170

Our credit agreement dated September 23, 2011 provides for a $299,750 term loan, a €69,414 Euro term loan and a $350,000 revolving credit facility. Under specified circumstances, we have the ability to increase the term loan and/or revolving line of credit by up to $250,000 in the aggregate. The term loan facility matures in 20 quarterly installments with the last installment due September 23, 2016. The $350,000 revolving facility also matures on September 23, 2016 and requires no scheduled payment before that date. The book value of our term and revolving loans approximates fair value.

The credit agreement includes certain customary representations and warranties, events of default, notices of material adverse changes to our business and negative and affirmative covenants. As of June 30, 2012, we were compliant with all financial covenants specified in the credit agreement. We had $4,325 outstanding under letters of credit as of June 30, 2012.

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

As of June 30, 2012, our debt included $349,995 of 2.25% Senior Convertible Debentures (2013 Notes) due June 2013. At June 30, 2012, the fair value of these outstanding 2013 Notes was approximately $350,870 based on their quoted market value and no conversion triggers were met. The current portion of the 2013 Notes is $100,670, which represents the amount we expect to settle upon maturity through available cash and future borrowings. We expect to settle the remaining balance on the 2013 Notes utilizing the capacity on our current revolving credit facility when the 2013 Notes mature. As of June 30, 2012, we had the ability and intent to settle the principal balance of the 2013 Notes at maturity by using a combination of the available capacity on our current credit agreement, available cash, and future borrowings.

As of June 30, 2012, $14,433 of debt discount related to the 2013 Notes remained and will be amortized over 4 quarters. Interest expense related to our convertible debt of $3,587 and $3,403 for quarters ended June 30, 2012 and June 25, 2011, respectively, yielded an effective interest rate of 6.93% on the liability component. In addition, $1,969 and $1,969 of contractual interest expense was recognized on our convertible debt during the quarters ended June 30, 2012 and June 25, 2011, respectively.

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



Twelve Months Ending
June 2013	$	384,137
June 2014	38,766
June 2015	62,884
June 2016	59,950
June 2017	154,900
Total	$	700,637

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 $22 and $43 at June 30, 2012 and December 31, 2011, respectively.

8. Equity

Earnings Per Share

Basic earnings per share for the three and six months ended June 30, 2012 and June 25, 2011 was computed by dividing earnings available to common shareowners for these periods by the weighted average number of common shares outstanding in the respective periods adjusted for contingently issuable shares. The weighted average number of common shares outstanding for the three and six month ended June 30, 2012 and June 25, 2011 has been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share for these periods.

Options to purchase 4,672,900 shares and 4,005,165 shares were outstanding in each of the three months ended June 30, 2012 and June 25, 2011, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Options to purchase 4,534,065 shares and 4,028,815 shares were outstanding in each of the six month ended June 30, 2012 and June 25, 2011, respectively, but were not included in computing diluted earnings per share because their inclusion would have been anti-dilutive. Basic weighted average shares outstanding for the three months ended June 30, 2012 and June 25, 2011 excluded the weighted average impact of 5,447 and 718,089 shares, respectively, of non-vested fixed restricted stock awards. Basic weighted average shares outstanding for the six month ended June 30, 2012 and June 25, 2011 excluded the weighted average impact of 316,596 and 718,089 shares, respectively, of non-vested fixed restricted stock awards.

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

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 30, 2012		June 25, 2011			June 30, 2012		June 25, 2011
Numerator:
Income from continuing operations for purposes of calculating earnings per share	$	30,426	$	34,050		$	56,788	$	69,330
Income (loss) from discontinued businesses	42		$	(1,732	)	$	119	$	(5,677	)
Denominator:
Weighted-average shares outstanding—Basic	48,029,744		50,991,731			48,142,347		52,464,839
Effect of dilutive securities:
2.25% senior convertible debentures	—		—			—		—
Stock options and contingently issued restricted stock	383,056		689,006			439,844		687,166
Weighted-average shares outstanding—Diluted	48,412,800		51,680,737			48,582,191		53,152,005
Basic earnings per share from continuing operations attributable to common shareowners	$	0.63	$	0.67		$	1.18	$	1.32
Basic earnings (loss) per share from discontinued operations attributable to common shareowners	$	—	$	(0.03	)	$	—	$	(0.11	)
Diluted earnings per share from continuing operations attributable to common shareowners	$	0.63	$	0.66		$	1.17	$	1.30
Diluted earnings (loss) per share from discontinued operations attributable to common shareowners	$	—	$	(0.03	)	$	—	$	(0.11	)

Treasury Shares

For the six months ended June 30, 2012 and June 25, 2011, we repurchased 806,454 shares of common stock for $27,800 and 1,102,392 shares of common stock for $42,095, respectively, through open market purchases made in reliance on Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. Additionally, our 2000 Incentive Plan permits the netting of common stock upon vesting of restricted stock awards in order to satisfy individual tax withholding requirements. During the six month ended June 30, 2012 and June 25, 2011, we acquired 83,337 shares for $3,013 and 78,607 shares for $2,903, respectively, as a result of such withholdings. The six month ended June 25, 2011 also includes the acquisition of 4,637,732 shares under accelerated stock repurchase programs (ASR).

Share repurchases for the six month ended June 30, 2012 and June 25, 2011 were as follows:



	Six Months Ended
	June 30, 2012		June 25, 2011
Number of shares of common stock repurchased	889,791		5,818,731
Total cost of repurchase	$	30,813	$	213,624

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				Six Months Ended
	June 30, 2012		June 25, 2011		June 30, 2012		June 25, 2011
Income from continuing operations before income taxes	40,000		42,805		75,146		75,467
Effective tax rate	23.6	%	20.2	%	24.1	%	7.9	%
Provision (benefit) for income taxes	9,453		8,649		18,129		5,934

Our overall effective tax rate was 23.6% in the second quarter of 2012 and 20.2% in the second quarter of 2011. The change was primarily attributable to the tax benefit recorded in the second quarter of 2011 resulting from the receipt of a $7,710 tax exempt gain on the settlement of a life insurance policy. The effective tax rate for the second quarter of 2012 also increased due to a decline in research and development tax benefits compared to the second quarter of 2011. 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 tax rate for the six months ended June 25, 2011 reflects an $11,111 tax benefit recorded in the first quarter of 2011 associated with a tax loss incurred with the disposition of our Phase I clinical business.

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 Edinburgh, Scotland, in the performance of certain client contracts.

During the fourth quarter of 2010, we took actions to divest our Phase 1 clinical business. We recorded in discontinued operations a deferred tax asset associated with the excess of the tax outside basis over the basis for financial reporting purposes of the Phase 1 clinical business. As of the fourth quarter of 2010, we determined that we did not meet the more-likely-than-not realization threshold for this deferred tax asset and we recorded a valuation allowance against it as part of discontinued operations. During the first quarter of 2011, we determined that the tax loss would more-likely-than-not be benefitted as a worthless stock deduction. As such, we released the valuation allowance recorded against the tax loss on the Phase 1 clinical business and recognized the benefit in continuing operations.

During the second quarter of 2012, our unrecognized tax benefits recorded increased by $160 to $28,880 primarily due to ongoing evaluation of uncertain tax positions in the current and prior periods and foreign exchange movement. The amount of unrecognized income tax benefits that would impact the effective tax rate favorably increased by $100 to $23,036, and the amount of accrued interest on unrecognized tax benefits increased by $46 to $1,545 in the second quarter of 2012.

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.

We and certain of our subsidiaries are currently under audit by the Canadian Revenue Authority (CRA) and various state tax authorities. We do not believe that resolution of these controversies will have a material impact on our financial position or results of operations. During the second quarter of 2012, we concluded an audit by the Minister of Revenue Quebec provincial tax authority (MRQ) for an immaterial amount.

We are challenging the reassessments received by the CRA with respect to the SR&ED credits claimed in 2003 and 2004 by our Canadian preclinical services subsidiary in the Tax Court of Canada (TCC). Additionally, we filed Notices of

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

Objection in response to Notices of Reassessment received from the MRQ with respect to our 2003 and 2004 claims for the Quebec Research and Development tax credits. We disagree with the positions taken by the CRA and MRQ with regard to the credits claimed. We believe that it is reasonably possible that we will conclude the controversies with respect to our 2003 and 2004 claims with the TCC and MRQ within the next twelve months. We do not believe that resolution of these controversies 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 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 2012 as they are required to fund needs outside the U.S. and cannot be repatriated in a manner that is substantially tax free.

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



	Three Months Ended				Six Months Ended
	June 30, 2012		June 25, 2011		June 30, 2012			June 25, 2011
Tax expense (benefit) related to foreign currency translation adjustment	51		313		(38		)	379
Tax expense related to change in unrecognized pension gains, losses and prior service costs	233		22		583			160
Income tax expense related to items of other comprehensive income	$	284	$	335	$	545		$	539

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 30, 2012			June 25, 2011			June 30, 2012		June 25, 2011
Service cost	$	979		$	755		$	160	$	159
Interest cost	2,810			3,018			223		300
Expected return on plan assets	(3,430		)	(3,418		)	—		—
Amortization of prior service cost (credit)	(159		)	(157		)	165		125
Amortization of net loss (gain)	588			215			65		53
Net periodic benefit cost	788			413			613		637
Company contributions	$	2,323		$	2,428		$	—	$	—

The following table provides the components of net periodic benefit cost for our defined benefit plans for the six 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
	June 30, 2012			June 25, 2011			June 30, 2012		June 25, 2011
Service cost	1,958			1,521			320		318
Interest cost	5,621			6,040			446		600
Expected return on plan assets	(6,860		)	(6,806		)	—		—
Amortization of prior service cost (credit)	(310		)	(311		)	330		250
Amortization of net loss (gain)	1,170			454			130		106
Net periodic benefit cost	1,579			898			1,226		1,274
Company contributions	$	8,008		$	6,019		$	—	$	—

During 2012, we expect to contribute $13,868 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						Six Months Ended
	June 30, 2012			June 25, 2011			June 30, 2012			June 25, 2011
Stock-based compensation expense included in:
Cost of sales	$	2,345		$	1,700		$	3,792		$	3,378
Selling and administration	2,976			3,730			6,794			7,970
Stock-based compensation, before income taxes	5,321			5,430			10,586			11,348
Provision for income taxes	(1,884		)	(1,940		)	(3,768		)	(4,058		)
Stock-based compensation, net of tax	$	3,437		$	3,490		$	6,818		$	7,290

The fair value of stock-based awards granted during the first six months of 2012 and 2011 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	June 30, 2012			June 25, 2011
Expected life (in years)	4.5			4.2
Expected volatility	34.9		%	33.4		%
Risk-free interest rate	0.84		%	2.22		%
Expected dividend yield	0		%	0		%
Weighted-average grant date fair value	$	10.94		$	11.35

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

Stock Options

The following table summarizes stock option activities under our plans:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Options outstanding as of December 31, 2011	6,081,263		$	38.25
Options granted	588,125		$	36.08
Options exercised	(125,104	)	$	24.96
Options canceled	(119,712	)	$	40.26
Options outstanding as of June 30, 2012	6,424,572		$	38.27	3.50 years	$	8,671
Options exercisable as of June 30, 2012	4,421,703		$	39.80	2.65 years	$	6,049

As of June 30, 2012, the unrecognized compensation cost related to 2,002,869 unvested stock options expected to vest was $16,906. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 30 months.

The total intrinsic value of options exercised during the three months ended June 30, 2012 and June 25, 2011 was $177 and $4,583, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total intrinsic value of options exercised during the six month ended June 30, 2012 and June 25, 2011 was $1,308 and $6,711, respectively. The total amount of cash received from the exercise of options during the six month ended June 30, 2012 and June 25, 2011 was $3,107 and $12,713, respectively. The actual tax benefit realized for the tax deductions from option exercises during the six month ended June 30, 2012 was $420. A charge of $148 was recorded in capital in excess of par value in the first six months of 2012 for the excess of deferred tax assets over the actual tax benefits at option exercise. We settle stock option exercises with newly issued common shares.

Restricted Stock

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

The following table summarizes the restricted stock activity for the six months ended June 30, 2012 :



	Restricted Stock		Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2011	703,011		$	35.70
Granted	539,470		36.09
Vested	(283,812	)	35.96
Canceled	(15,946	)	35.45
Outstanding as of June 30, 2012	942,723		$	35.85

As of June 30, 2012, the unrecognized compensation cost related to shares of unvested restricted stock expected to vest was $27,101. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 35 months. The total fair value of restricted stock grants that vested during the three and six month ended June 30, 2012 was $813 and $10,206, respectively. The total fair value of restricted stock grants that vested during the three and six month ended June 25, 2011 was $861 and $10,997, respectively. The actual tax benefit realized for the tax deductions from restricted stock grants that vested during the six months ending June 30, 2012 was $3,662.

Performance Based Stock Award Program

Compensation expense associated with performance-based stock awards of $0 and $54 has been recorded during the

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

three months ended June 30, 2012 and June 25, 2011, respectively.

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.

On January 31, 2012, a putative class action, entitled Irma Garcia v. Charles River Laboratories, Inc., was filed against us in the San Diego Superior Court, alleging various causes of action related to failure to make proper and timely payments to employees in California, failure to timely furnish accurate itemized wage statements, unfair business practices, associated penalties pursuant to California law, and declaratory relief. While no prediction may be made as to the outcome of litigation, we intend to defend against this proceeding vigorously and therefore an estimate of the possible loss or range of loss cannot be made.

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), in vitro products, and avian vaccine products and services. Our PCS segment includes services required to take a drug through the development process, which include discovery research services (DRS), safety assessment and biopharmaceutical services.

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



	Three Months Ended				Six Months Ended
	June 30, 2012		June 25, 2011		June 30, 2012		June 25, 2011
Research Models and Services
Net sales	$	173,611	$	178,163	$	356,763	$	351,534
Gross margin	76,266		78,307		158,462		152,146
Operating income	55,542		55,691		115,009		107,433
Depreciation and amortization	9,085		9,318		18,027		18,587
Capital expenditures	7,569		4,010		20,469		8,413
Preclinical Services
Net sales	$	111,112	$	110,100	$	213,941	$	222,572
Gross margin	27,319		28,013		49,335		56,812
Operating income	10,809		7,875		14,983		17,181
Depreciation and amortization	10,980		12,498		22,040		24,494
Capital expenditures	1,872		2,650		3,084		5,037

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



	Three Months Ended						Six Months Ended
	June 30, 2012			June 25, 2011			June 30, 2012			June 25, 2011
Total segment operating income	$	66,351		$	63,566		$	129,992		$	124,614
Unallocated corporate overhead	(17,077		)	(10,252		)	(36,978		)	(29,049		)
Consolidated operating income	$	49,274		$	53,314		$	93,014		$	95,565

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share amounts)

Net sales for each significant service area are as follows:



	Three Months Ended				Six Months Ended
	June 30, 2012		June 25, 2011		June 30, 2012		June 25, 2011
Research models	$	87,119	$	90,190	$	181,140	$	183,590
Research model services	53,975		55,422		110,306		107,397
Other products	32,517		32,551		65,317		60,547
Research Models and Services	173,611		178,163		356,763		351,534
Preclinical Services	111,112		110,100		213,941		222,572
Total sales	$	284,723	$	288,263	$	570,704	$	574,106

A summary of unallocated corporate overhead consists of the following:



	Three Months Ended						Six Months Ended
	June 30, 2012			June 25, 2011			June 30, 2012		June 25, 2011
Stock-based compensation expense	$	2,900		$	2,528		$	5,685	$	5,514
U.S. retirement plans	1,014			1,055			2,386		2,112
Audit, tax and related expense	637			505			1,291		1,260
Salary and bonus	4,866			4,642			9,789		9,335
Global IT	3,366			2,794			6,216		5,787
Employee health, long-term disability and fringe benefit expense	(1,140		)	675			853		2,314
Consulting and professional services	778			2,201			2,520		3,532
Depreciation expense	1,570			1,593			3,139		3,174
Life insurance death benefit gain	—			(7,710		)	—		(7,710		)
Other general unallocated corporate expenses	3,086			1,969			5,099		3,731
Total unallocated corporate overhead costs	$	17,077		$	10,252		$	36,978	$	29,049

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

14. Discontinued Operations

On March 28, 2011, we disposed of our Phase I clinical business for a nominal amount. As part of the disposition we remained the guarantor of the Phase I facility lease. During the second quarter of 2011, we recognized the value of the guarantee net of the buyer's related indemnity as a liability of $2,994, which we are accreting ratably over the remaining term of the lease. The facility lease runs through January 2021 with remaining lease payments totaling $13,992 as of June 30, 2012.

The consolidated financial statements have been reclassified to segregate, as discontinued operations, the assets and liabilities, operating results and cash flows, of the businesses being discontinued for all periods presented. 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					Six Months Ended
	June 30, 2012		June 25, 2011			June 30, 2012		June 25, 2011
Net sales	$	—	$	10		$	—	$	2,122
Income (loss) from operations of discontinued businesses, before income taxes	69		(2,951		)	172		(8,153		)
Provision (benefit) for income taxes	27		(1,219		)	53		(2,476		)
Income (loss) from operations of discontinued businesses, net of taxes	$	42	$	(1,732	)	$	119	$	(5,677	)

Assets and liabilities of discontinued operations at June 30, 2012 and December 31, 2011 consisted of the following:



	June 30, 2012		December 31, 2011
Current assets	$	107	$	107
Long-term assets	932		986
Total assets	$	1,039	$	1,093
Current liabilities	$	1,053	$	1,165
Long-term liabilities	2,381		2,522
Total liabilities	$	3,434	$	3,687

Current assets and non-current assets include a short-term and long-term deferred tax asset related to lease guarantee. Current and long-term liabilities consist of the carrying value of the lease guarantee and accrued expenses.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis will help you understand our financial condition and results of operations. The Management's Discussion and Analysis is a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.

Overview

We are a leading global provider of solutions that advance the drug discovery and development process, including research models and associated services and outsourced preclinical services. We provide our products and services to global pharmaceutical companies and biotechnology companies, as well as government agencies, leading hospitals and academic institutions throughout the world in order to bring drugs to market faster and more efficiently. We have built upon our core competency of in vivo biology, including laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of preclinical services - both GLP (Good Laboratory Practice) and non-GLP - which address drug discovery and development. Utilizing our broad portfolio of products and services enables our clients to create a more flexible drug development model which reduces their costs, enhances their productivity and effectiveness, and increase speed to market. We have been in business for 65 years and currently operate approximately 64 facilities in 15 countries worldwide.

For the last few years, large pharmaceutical and biotechnology companies have been undergoing significant change as they endeavor to improve the productivity of their drug development pipelines, and at the same time, streamline their infrastructures in order to improve efficiency and reduce operating costs. Our clients' efforts have had an unfavorable impact on our operations as a result of: measured research and development spending by major pharmaceutical and biotechnology companies; delays in customer decisions and commitments; tight cost constraints and the resultant pricing pressure, particularly in view of excess capacity in the contract research industry; a focus on late-stage clinical testing as customers accelerate their efforts to bring drugs to market in the face of expiration of patents on branded drugs; decreased funding for biopharmaceutical companies; and the impact of healthcare reform initiatives. In addition, consolidation in the pharmaceutical and biotechnology industry has affected demand for our products and services. All of these ongoing factors continue to contribute to demand uncertainty and are expected to impact future sales.

Our market for goods and services appears to continue to stabilize. As part of our clients' efforts to improve pipeline productivity, pharmaceutical and biotechnology companies are emphasizing efficacy testing in order to eliminate therapies from the pipeline earlier in the drug development process. This trend is visible in increasing demand for our non-GLP in vivo pharmacology and drug metabolism and pharmacokinetics services. We continue to anticipate that our clients will reduce their internal capacity through closure of underutilized facilities and increase their use of these outsourced services in the future, because utilizing outsourced services enables them to create a flexible drug development model which improves operating efficiency and reduces costs. We believe that increased focus on strategic outsourcing by our clients should result in the expansion of strategic relationships with a reduced and limited number of partners, which will drive demand for our services. We believe that the long-term drivers for our business as a whole will primarily emerge from our clients' continued demand for research models and services and both GLP and non-GLP in vivo biology services, which are essential to the drug development process. However, presently it is challenging to predict the timing associated with these drivers.

We continue to focus on our four key initiatives designed to allow us to drive profitable growth and to maximize value for shareholders, and thus better position ourselves to operate successfully in the current and future business environment. These four initiatives are:

•

Improving the consolidated operating margin. We continue to aggressively manage our cost structure and drive operating efficiencies, which are expected to generate improvement in our operating margins. We have already implemented significant actions to reduce costs during the last two years to manage challenging industry-wide preclinical market conditions. During the first half of 2012, we continued to selectively adjust our cost structure by headcount reductions and other cost initiatives.


•	Improving free cash flow generation. We believe we have adequate capacity to support revenue growth in both business segments without significant additional investment for expansion. Capital expenditures were