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Beckman Coulter 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-15.1
  3. Ex-15.2
  4. Ex-31
  5. Ex-32
  6. Ex-32
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-10109

BECKMAN COULTER, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   95-104-0600

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

 

4300 N. Harbor Boulevard,

Fullerton, California

  92834-3100
(Address of principal executive offices)   (Zip Code)

(714) 871-4848

(Registrant’s telephone number, including area code)

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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  ¨    No  ¨

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  x      Accelerated filer  ¨
Non-accelerated filer  ¨   (Do not check if a smaller reporting company)    Smaller reporting company  ¨

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

The number of outstanding shares of the registrant’s common stock as of July 27, 2009 was 68,549,141 shares.

 

 

 


Table of Contents

Table of Contents

Beckman Coulter, Inc.

FORM 10-Q for the Quarter Ended June 30, 2009

 

Part I—Financial Information   
    Item 1.    Financial Statements    3
   Condensed Consolidated Balance Sheets    3
   Condensed Consolidated Statements of Earnings    4
   Condensed Consolidated Statements of Cash Flows    5
   Notes to Condensed Consolidated Financial Statements    6
    Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    24
    Item 3.    Quantitative and Qualitative Disclosures About Market Risk    37
    Item 4.    Controls and Procedures    37
Part II—Other Information   
    Item 1    Legal Proceedings    38
    Item 1A.    Risk Factors    38
    Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    41
    Item 6.    Exhibits    41
    Signatures    42

 

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Table of Contents

PART I—Financial Information

 

Item 1. Financial Statements

BECKMAN COULTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except amounts per share)

(unaudited)

 

     June 30,
2009
   December 31,
2008

Assets

     

Current assets

     

Cash and cash equivalents

   $ 665.5      $ 120.0  

Trade and other receivables, net

     688.2        706.7  

Inventories

     535.7        496.2  

Deferred income taxes

     67.5        62.5  

Prepaids and other current assets

     106.0        76.3  
             

Total current assets

     2,062.9        1,461.7  

Property, plant and equipment, net

     497.9        465.5  

Customer leased instruments, net

     462.2        448.7  

Goodwill

     700.9        696.3  

Other intangible assets, net

     391.3        396.8  

Deferred income taxes

     -        1.3  

Other assets

     62.1        71.5  
             

Total assets

   $    4,177.3      $ 3,541.8  
             

Liabilities and Stockholders’ Equity

     

Current liabilities

     

Accounts payable

   $ 200.4      $ 172.2  

Accrued expenses

     446.6        416.9  

Income taxes payable

     -        29.7  

Short-term borrowings

     4.7        21.4  

Current maturities of long-term debt

     4.1        4.4  
             

Total current liabilities

     655.8        644.6  

Long-term debt, less current maturities

     1,311.6        819.0  

Deferred income taxes

     64.4        -  

Other liabilities

     529.5        595.9  
             

Total liabilities

     2,561.3        2,059.5  
             

Commitments and contingencies (see Note 14)

     

Stockholders’ equity

     

Preferred stock, $0.10 par value; authorized 10.0 shares; none issued

     -        -  

Common stock, $0.10 par value; authorized 300.0 shares; shares issued 69.0 and 68.8 at June 30, 2009 and December 31, 2008, respectively; shares outstanding 63.8 and 63.0 at June 30, 2009 and December 31, 2008, respectively

     6.9        6.9  

Additional paid-in capital

     628.5        621.5  

Retained earnings

     1,441.3        1,381.6  

Accumulated other comprehensive loss

     (167.3)       (199.8) 

Treasury stock, at cost: 4.9 and 5.5 common shares at June 30, 2009 and December 31, 2008, respectively

     (293.4)       (327.9) 

Common stock held in grantor trust, at cost: 0.4 common shares at June 30, 2009 and December 31, 2008

     (20.9)       (19.3) 

Grantor trust liability

     20.9       19.3 
             

Total stockholders’ equity

     1,616.0        1,482.3 
             

Total liabilities and stockholders’ equity

   $ 4,177.3      $ 3,541.8 
             

See accompanying notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

BECKMAN COULTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except amounts per share)

(unaudited)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   2009    2008    2009    2008

Recurring revenue – supplies, service and lease payments

    $ 629.0       $ 618.7      $ 1,202.7      $ 1,198.0  

Instrument sales

     127.7        179.6        245.5        330.8  
                           

Total revenue

     756.7        798.3        1,448.2        1,528.8  
                           

Cost of recurring revenue

     285.0        278.1        553.3        548.6  

Cost of instrument sales

     114.8        153.3        218.9        284.5  
                           

Total cost of sales

     399.8        431.4        772.2        833.1  
                           

Gross profit

     356.9        366.9        676.0        695.7  
                           

Operating costs and expenses

           

Selling, general and administrative

     198.7        212.7        391.9        416.3  

Research and development

     60.7        77.7        120.6        140.4  

Restructuring and acquisition related costs

     21.6        4.7        48.0        5.4  
                           

Total operating costs and expenses

     281.0        295.1        560.5        562.1  
                           

Operating income

     75.9        71.8        115.5        133.6  
                           

Non-operating (income) expense

           

Interest income

     (1.3)       (3.6)        (2.6)       (6.2) 

Interest expense

     17.5        15.5        28.4        27.8  

Other, net

     (18.7)       (2.2)        (6.9)       (3.5) 
                           

Total non-operating (income) expense

     (2.5)       9.7        18.9        18.1  
                           

Earnings before income taxes

     78.4        62.1        96.6        115.5  

Income tax provision

     17.6        16.2        15.2        28.7  
                           

Net earnings

    $ 60.8       $ 45.9      $ 81.4      $ 86.8  
                           

Basic earnings per share

    $ 0.95       $ 0.73      $ 1.28      $ 1.38  
                           

Diluted earnings per share

    $ 0.94       $ 0.71      $ 1.26      $ 1.35  
                           

Weighted average number of shares outstanding (in thousands)

           

Basic

     63,841        62,969        63,693        63,005  

Diluted

     64,828        64,397        64,428        64,435  

See accompanying notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

BECKMAN COULTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

     Six Months Ended
June 30,
       2009            2008    

Cash flows from operating activities

     

Net earnings

   $ 81.4      $ 86.8  

Adjustments to reconcile net earnings to net cash provided by operating activities

     

Depreciation and amortization

     138.8        122.4  

Provision for doubtful accounts receivable

     0.2        4.4  

Share-based compensation expense

     18.7        18.1  

Gain on sales of building and land

     -        (5.9) 

Accreted interest on convertible debt

     7.1        6.6  

U.S. pension trust contributions

     (24.0)       (8.2) 

Deferred income taxes

     (10.0)       3.1  

Changes in assets and liabilities, net of acquisitions

     

Trade and other receivables

     24.5        (6.0) 

Prepaids and other current assets

     (12.9)       1.3  

Inventories

     (50.4)       (38.5) 

Accounts payable and accrued expenses

     40.8        (30.5) 

Income taxes payable

     14.4        (32.2) 

Long-term lease receivables

     7.6        7.3  

Other

     (10.7)       3.6  
             

Net cash provided by operating activities

     225.5        132.3  
             

Cash flows from investing activities

     

Additions to property, plant and equipment

     (66.0)       (39.4) 

Additions to customer leased instruments

     (72.7)       (95.8) 

Proceeds from sales of building and land

     -        7.4  

Payments for business acquisitions and technology license assets, net of cash acquired

     (18.8)       (15.3) 
             

Net cash used in investing activities

     (157.5)       (143.1) 
             

Cash flows from financing activities

     

Dividends to stockholders

     (21.7)       (21.2) 

Proceeds from issuance of stock

     28.9        38.4  

Repurchase of common stock as treasury stock

     -        (70.9) 

Repurchase of common stock held in grantor trust

     (1.7)       (1.1) 

Excess tax benefits from share-based payment transactions

     1.3        6.3  

Proceeds from issuance of long-term debt

     497.8        -  

Debt issuance costs

     (9.0)       -  

Debt repayments

     -        (16.7) 

Net (repayments) borrowings on lines of credit

     (18.9)       58.5  
             

Net cash provided by (used in) financing activities

     476.7        (6.7) 
             

Effect of exchange rates on cash and cash equivalents

     0.8        4.0  
             

Change in cash and cash equivalents

     545.5        (13.5) 

Cash and cash equivalents – beginning of period

     120.0        83.0  
             

Cash and cash equivalents – end of period

   $ 665.5      $ 69.5  
             

Supplemental Information:

     

Non-cash investing and financing activities

     

Liabilities incurred in connection with the purchase of property, plant and equipment

   $ 9.5      $ 3.0  

Liabilities incurred in connection with equity offering

   $ 11.2      $ -  

See accompanying notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

BECKMAN COULTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in tables in millions, except amounts per share)

(unaudited)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Beckman Coulter, Inc. (the “Company,” “we,” “our”) is a leading manufacturer of biomedical testing instrument systems, tests and supplies that simplify and automate laboratory processes. Spanning the biomedical testing continuum—from pioneering medical research and clinical trials to laboratory diagnostics and point-of-care testing—our installed base of systems provides essential biomedical information to enhance health care around the world. We are dedicated to improving patient health and reducing the cost of care.

Our revenue is evenly distributed inside and outside of the United States (“U.S.”). Clinical Diagnostics sales represented approximately 84% of our total revenue in 2008, with the balance coming from Life Science. Approximately 78% of our total revenue in 2008 was generated by recurring revenue from consumable supplies (including reagent test kits), services and operating-type lease (“OTL”) payments. Central laboratories of mid-to large-size hospitals represent our most significant customer group.

Basis of Presentation

We prepared the accompanying Condensed Consolidated Financial Statements following the requirements of the United States Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information normally required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted.

Our financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2008.

Revenue, expenses, assets and liabilities can vary between the quarters of the year. As such, our results of operations for the three months ended June 30, 2009 are not necessarily indicative of the operating results to be expected for the full year or any future period.

Use of Estimates

We follow U.S. GAAP, which requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures about contingent assets and liabilities. Such estimates include the valuation of accounts receivable, inventories, long-lived assets, lives of customer leased instruments, lives of plant and equipment, lives of intangible assets, and assumptions used in the calculation of warranty accruals, employee benefit plan obligations, environmental and litigation obligations, legal contingencies, taxes, share-based compensation and others. These estimates and assumptions are based on management’s best estimates and judgment and affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, energy markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

 

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Table of Contents

Income Taxes

At the end of each interim reporting period, an estimate is made of the effective tax rate expected to be applicable for the full year. The estimated full year’s effective tax rate is used to determine the income tax rate for each applicable interim reporting period. The tax effect of any tax law changes, final settlement of examinations with tax authorities and certain other events are reflected as discrete items in the interim reporting period in which they occur.

The effective tax rate for the three and six months ended June 30, 2009 was 22.4% and 15.7% respectively. The effective tax rate was impacted by discrete events which reduced tax expense for the three months ended June 30, 2009 by a net $5.5 million. Discrete events occurring in the three months ended June 30, 2009 that reduced tax expense by $6.5 million consisted primarily of settlement of a foreign tax audit of prior years and a claim for additional tax credits in the U.S. for the 2006 tax year, offset by discrete events that increased tax expense by $1.0 million primarily as a result of changes in judgment related to uncertain tax positions in prior years. Discrete events occurring in the three months ended March 31, 2009 that reduced tax expense by $11.2 million consisted primarily of settlement of tax audits of prior years, changes in judgment related to uncertain tax positions in prior years, and changes to various tax credits, offset by discrete events that increased tax expense by $3.4 million as a result of changes in certain tax accounting methods.

The Company and its domestic subsidiaries file federal, state and local income/franchise tax returns in the U.S. Our international subsidiaries file income tax returns in various non-U.S. jurisdictions. The audit of our U.S. federal income tax returns for 2004 and 2005 was closed in the first quarter 2009, which resulted in a reduction in our liabilities for uncertain tax positions of $7.8 million, which reduced income tax expense. Tax years 2006 and 2007 remain open to U.S. federal income tax examination and an audit by the IRS for these years commenced in April 2009. The audit of our German subsidiary’s tax returns for 2003 through 2005 was closed in the second quarter 2009, which resulted in a net reduction in our liabilities for uncertain tax positions of $3.5 million. We are no longer subject to state income tax examinations by tax authorities in our major state jurisdictions for years prior to 2004. The earliest tax years of our major international subsidiaries that are subject to non-U.S. income tax examinations by tax authorities are: Switzerland, 1998; Hong Kong, 2001; Italy, Japan and the United Kingdom, 2004; Canada, 2005; and France and Germany, 2006.

During the first quarter of 2009, we filed certain tax accounting method changes with the U.S. Internal Revenue Service (“IRS”). As a result of these accounting method changes, certain tax deductions will be accelerated and reflected in the 2008 federal income tax return, resulting in a net operating loss for that year. This loss will be carried back to the 2006 tax year and reduce taxes previously paid. We received tax refunds of $31 million in the second quarter of 2009 as a result of these accounting method changes and expect to receive additional tax refunds of at least $14 million as a result of the carryback of the net operating loss to 2006. The acceleration of these tax deductions reduces certain permanent tax benefits in tax years 2008 and 2006. The impact of the reduction of these permanent tax benefits, totaling $3.4 million, was reflected as a discrete item in the tax provision for the three months ended March 31, 2009.

Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” requires us to accrue interest and penalties where there is underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. Our policy on the classification of interest and penalties is to record both as part of interest expense which is consistent with the prior year treatment. At June 30, 2009, we had $2.1 million in accrued interest and penalties for taxes. During the first six months of 2009, we reversed $3.2 million of interest and penalties primarily as a result of the settlement of tax audits.

The total amount of unrecognized tax benefits as of June 30, 2009 was $28.3 million, which if recognized, would affect our effective tax rate in future periods.

A number of years may elapse before an uncertain tax position is finally resolved. It is difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position. We reevaluate and adjust our reserves for income taxes, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash and result in the reduction of the related reserve. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and effective tax rate in the period of resolution. It is reasonably possible that our liability for uncertain tax positions will be reduced by as much as $3.9 million over the next 12 months as a result of the settlement of tax positions with various tax authorities.

 

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Recently Adopted Accounting Standards

Subsequent Events

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. We adopted SFAS 165 as of June 30, 2009. See Note 16 “Subsequent Events” for additional disclosure included.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

In April 2009, the FASB issued Staff Position (“FSP”) SFAS No. 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP SFAS 157-4”). This FSP provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity, as well as additional guidance on circumstances which may indicate a transaction is not orderly. FSP SFAS 157-4 amends SFAS No. 157, Fair Value Measurements (“SFAS 157”) to require interim disclosures of the inputs and valuation techniques used to measure fair value reflecting changes in the valuation techniques and related inputs. FSP SFAS 157-4 is effective prospectively for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP SFAS 157-4 as of June 30, 2009 did not have a material impact on our consolidated financial position, results of operations and cash flows.

Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion

In May 2008, the FASB issued FSP No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”).” Under this standard, convertible debt securities that may be settled in cash (or other assets), including partial cash settlement, are separated into a debt and equity component. The value assigned to the debt component as of the issuance date is the estimated fair value based on a similar debt instrument without the conversion feature. The difference between the proceeds obtained for the securities and the estimated fair value assigned to the debt component represents the equity component. As a result, the debt is recorded at a discount reflecting its below market coupon interest rate and is subsequently accreted to its par value over its expected life, using the rate of interest that reflects the market rate at issuance. This standard requires retrospective application and the new model for cash-settleable convertible instruments applies to both new and previously issued instruments in current and comparative periods in fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted FSP APB 14-1 as of January 1, 2009.

In December 2006, we issued $600.0 million of convertible notes at a coupon rate of 2.5% (the Convertible Notes). Upon the adoption of FSP APB 14-1, we assigned an initial value of $493.8 million to the debt component of the Convertible Notes based on a similar debt instrument without the conversion feature. The market rate of interest applied to determine that value was 5.59%. The difference between the proceeds obtained and the fair value of the debt component was assigned to the equity component. The initial term over which the debt discount is amortized is 7 years, while the remaining period over which the unamortized discount will be recognized is approximately 5 years. The Convertible Notes have a conversion feature that will allow the holders of the Convertible Notes to convert, in increments of $1,000 principal, their investment into 13.4748 shares of our common stock (equivalent to a conversion price of approximately $74.21 per share of common stock, subject to adjustment). Interest cost for the period included the interest coupon of $3.8 million for the three months ended June 30, 2009 and 2008 and $7.6 million for the six months ended June 30, 2009 and 2008, respectively. Also included within interest cost was amortization of the discount in the amount of $3.6 million and $3.3 million for the three months ended June 30, 2009 and 2008, respectively and $7.1 million and $6.6 million for the six months ended June 30, 2009, respectively. The adoption of this standard as of January 1, 2009, was applied retrospectively and reduced net earnings by $1.9 million and diluted earnings per share by $0.03 for the three months ended June 30, 2008 and $3.9 million and $0.06 for the six months ended June 30, 2008. The cumulative effect of the change reduced the January 1, 2009 retained earnings by $16.0 million.

 

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The following table sets forth the effect of the retrospective application of FSP APB 14-1 on certain previously reported line items:

Consolidated Statements of Earnings:

 

     Three Months Ended June 30, 2008
     As
        Previously        
Reported
           As Adjusted        

Interest expense

       $         12.2              $         15.5      

Income tax provision

       $         17.5              $         16.2      

Net earnings

       $         47.8              $         45.9      

Basic earnings per share

       $         0.76              $         0.73      

Diluted earnings per share

       $         0.74              $         0.71      
     Six Months Ended June 30, 2008
     As
        Previously        
Reported
           As Adjusted        

Interest expense

       $         21.2              $         27.8      

Income tax provision

       $         31.3              $         28.7      

Net earnings

       $         90.7              $         86.8      

Basic earnings per share

       $         1.44              $         1.38      

Diluted earnings per share

       $         1.41              $         1.35      

Consolidated Balance Sheets:

 

     December 31, 2008
     As
        Previously        

Reported
           As Adjusted        

Long-term debt, less current maturities

       $         896.3              $          819.0      

Additional paid-in capital

       $          559.2              $         621.5      

Deferred income tax assets

       $           32.3              $             1.3      

Retained earnings

       $      1,397.6              $      1,381.6      

The following table provides additional information about our convertible debt instrument that is subject to FSP APB 14-1:

 

         June 30,    
2009
       December 31,    
2008

Principal amount of the liability component

     $     600.0            $   600.0        

Unamortized discount of liability component

     $       72.0            $     79.1        

Net carrying amount of liability component

     $     528.0            $   520.9        

Carrying amount of the equity component

     $     103.7            $   103.7        

Accounting for Business Combinations

In December 2007, the FASB issued SFAS 141(R). This standard requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141(R) replaces the cost-allocation process of SFAS No. 141, “Business Combinations,” which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141(R) also nullifies Emerging Issues Task Force (“EITF”) 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination,” which required entities to record adjustments to deferred tax assets and uncertain tax position balances arising in a business combination as an increase or decrease to goodwill (irrespective of the one-year allocation period). SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009, except for the provisions related to income tax adjustments, which apply to all business combinations regardless of consummation date. We applied the provisions of SFAS 141(R) on current year business combinations and on income tax adjustments related to prior business combinations. As a

 

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result of implementing SFAS 141 (R), acquisition costs of $11.9 million and $21.7 million which included legal, accounting and investment banking fees were expensed in the three and six months ended June 30, 2009, respectively, in connection with the acquisitions of Olympus Corporation’s diagnostics systems business and Cogenics. Both acquisitions are further described in Note 2 “Acquisitions”. Also, see Note 3 “Restructuring Activities and Acquisition Related Costs” for further discussion on these acquisition costs.

Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock

In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of EITF 07-5 as of January 1, 2009 did not have a material impact on our consolidated financial position, results of operations and cash flows. As further discussed in Note 11 “Debt and Equity Financing” we entered into forward sale agreements to sell equity to finance a portion of the acquisition of Olympus Corporation’s diagnostics systems business. The forward sale agreements were considered indexed to the Company’s own stock after being evaluated under EITF 07-5 and were further evaluated under EITF 00-19 to be classified as equity.

Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). This statement applies to recognized intangible assets that are accounted for pursuant to FASB Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). FSP FAS 142-3 requires an entity to consider its own historical renewal or extension experience in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset. In the absence of entity specific experience, FSP FAS 142-3 requires an entity to consider assumptions that a marketplace participant would use about renewal or extension that are consistent with the highest and best use of the asset by a marketplace participant. The intent of this standard is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset. In addition, FSP FAS 142-3 increases the disclosure requirements related to renewal or extension assumptions. FSP FAS 142-3 applies prospectively to all intangible assets acquired after the effective date of January 1, 2009. The adoption of FSP FAS 142-3 had no effect on our consolidated financial position, results of operations and cash flows.

Fair Value Measurements

In February 2008, the FASB issued FSP FAS 157-2 (“Effective Date of FASB Statement No. 157”) (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of SFAS 157 “Fair Value Measurements” (“SFAS 157”) for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. On January 1, 2009, we adopted the provisions of SFAS 157 as it relates to nonrecurring fair value measurement requirements for non-financial assets and liabilities. As of January 1, 2009 and June 30, 2009, we did not have any significant non-recurring fair value adjustments for our non-financial assets and non-financial liabilities.

New Accounting Standards Not Yet Adopted

The FASB Accounting Standards Codification and the Hierarchy of U.S. GAAP

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (“Codification”), which officially launched July 1, 2009, to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will be effective for us in the third quarter of 2009. Adoption of this standard will change future authoritative accounting literature references included in our financial statements to be in accordance with the Codification.

 

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Accounting for Transfers of Financial Assets

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”). SFAS 166 removes the concept of a qualifying special-purpose entity (QSPE) from SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS 140”) and removes the exception from applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46R”). This statement also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This statement is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact, if any, of the adoption of SFAS 166 on our consolidated financial position, results of operations and cash flows.

Change in Presentation

We have a hedging program to reduce the risk of foreign currency changes on cash flows generated from intercompany inventory purchases. In the first quarter of 2009, our results of operations were impacted more significantly by currency changes, a portion of which was offset by the results of our hedging program. To reflect this net currency impact on our operating results, we have reclassified our gains and losses related to cash flow hedging activities and foreign currency transactions to cost of sales from non-operating income or expense for all periods presented. The amounts reclassified for the prior periods were not material.

 

Note 2. Acquisitions

We entered into a master purchase agreement with Olympus Corporation, which we also refer to as Olympus, dated February 27, 2009, to acquire the diagnostic systems portion of Olympus Corporation’s life science business, (“the Olympus Diagnostic Systems Business”), for 76 billion Japanese yen (the “Olympus Diagnostics Acquisition”). The purchase price is subject to adjustment based on a comparison of estimated net assets at closing to a target amount of net assets as well as a reduction for net debt remaining at the closing. Olympus is a Tokyo-headquartered precision technology company that creates opto-digital solutions in healthcare, life science and consumer electronic products. The Olympus Diagnostic Systems Business encompasses the development, manufacturing, marketing, sale, distribution and use of clinical chemistry and immunoassay analyzers, blood transfusion testing systems, and the chemical reagents and other consumables used with them, and related laboratory automation equipment, for in vitro diagnostic testing of samples from humans and animals.

On August 3, 2009 (Tokyo time), we completed the Olympus Diagnostics Acquisition through a cash payment of approximately 76 billion Japanese yen (approximately U.S. $800 million based on currency exchange rates as of August 3, 2009). The final purchase price is subject to change based upon the final amount of net assets as of the closing as determined within 90 days of closing.

On February 27, 2009, we entered into forward contracts with Bank of America, N.A., J.P. Morgan Chase, Wells Fargo Bank, N.A., Morgan Stanley Capital Services Inc., The Royal Bank of Scotland and Scotia Capital covering the full amount of the purchase price in order to hedge the risk of changes in the exchange rate of the Japanese yen versus the U.S. dollar between the signing and closing of the Olympus Diagnostics Acquisition. The forward contracts transaction effectively fixed the U.S. dollar cost of the purchase price at $780 million U.S. dollars. See Note 4 “Derivatives” for further discussion.

The foregoing description of the Olympus Diagnostics Acquisition is qualified in its entirety by reference to the full text of the master purchase agreement, which is attached as Exhibit 2.1 to the 8-K filed with the SEC on August 4, 2009 and incorporated by reference.

On April 14, 2009, we entered into a Stock Purchase Agreement with Clinical Data Inc. (“CDI”) to acquire Cogenics, the genomics division of CDI. The services that the business provides include DNA and RNA extraction, genotyping and gene expression, as well as multiple applications of Quantitative Polymerase Chain Reaction (“QPCR”) and services for cell bank characterization and biorepository, in both research and regulated environments. The purchase price was $16.4 million.

 

Note 3. Restructuring Activities and Acquisition Related Costs

Supply Chain Initiatives

During the first quarter of 2009, as part of our supply chain initiatives, we announced the closure and relocation of certain manufacturing and distribution sites. Additionally, during 2008, we announced our intent to vacate our Fullerton, California facility and consolidate those operations to other existing facilities (“Orange County consolidation project”). For the three and six months ended June 30, 2009, we recorded restructuring charges of $9.7 million and $26.3 million, respectively and $4.7 million (net of $0.9 million gain on sale of building and land in Hialeah, Florida) and $5.4 million (net of $3.5 million gain on sale of building and land in Hialeah, Florida), respectively for the three and six months ended June 30, 2008 related to severance, relocation, asset impairment charges and other duplicative exit costs. From January 2007 through the second quarter of 2009, we incurred a total of $65.4 million of net charges associated with our supply chain management initiatives and Orange County consolidation project of which $26.4 million relates to severance costs. In addition, we incurred a charge of $19.0 million in the third quarter of 2008, for the remediation of environmental contamination as further described in Note 14.

 

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The following is a reconciliation of the accrual for employee severance and other related costs included in accrued expenses in the Condensed Consolidated Balance Sheets at June 30, 2009:

 

Balance at December 31, 2008

     $  10.2  

Additional charges

     26.3  

Cash payments in 2009

     (14.6)  
      

Balance at June 30, 2009

     $   21.9  
      

Acquisition Related Costs

In connection with the Olympus Diagnostics Acquisition, we incurred acquisition related and integration costs of $10.9 million and $20.7 million during the three and six months ended June 30, 2009. A significant portion of these expenses were related to legal, consulting and investment banking fees. Additionally, we incurred $1.0 million of acquisition related and integration costs during the three and six months ended June 30, 2009 associated with the acquisition of Cogenics.

 

Note 4. Derivatives

We use derivative financial instruments to hedge foreign currency and interest rate exposures. Our objectives for holding derivatives are to minimize currency and interest rate risks using the most effective methods to eliminate or reduce the impacts of these exposures. We do not speculate in derivative instruments to profit from foreign currency exchange or interest rate fluctuations nor do we enter into trades for which there are no underlying exposures. The following discusses in more detail our foreign currency and interest rate exposures and related derivative instruments.

Foreign Currency

We manufacture our products principally in the U.S., but generated approximately 50% of our revenue during the first six months of 2009 from sales made outside the U.S. by our international subsidiaries. Revenues generated by our international subsidiaries generally are denominated in the subsidiary’s local currency, thereby exposing us to the risk of foreign currency fluctuations. To mitigate the impact of changes in foreign currency exchange rates, we use derivative financial instruments (or “foreign currency contracts”) to hedge the foreign currency exposure resulting from intercompany cash flows associated with intercompany inventory purchases by our international subsidiaries through their anticipated cash settlement date. These foreign currency contracts include forward and option contracts and are designated as cash flow hedges. The major currencies against which we hedge are the Euro, Japanese yen, Australian dollar, British Pound Sterling and Canadian dollar.

We also use foreign currency forward contracts to offset the effect of changes in value of loans between subsidiaries and do not designate these derivative instruments as accounting hedges.

The forward contracts that we entered into in connection with the Olympus Diagnostics Acquisition, as further described in Note 2, do not qualify as a cash flow hedge under applicable accounting pronouncements, therefore we recognized fair value gains of $20.5 and $8.7 million during the three and six months ended June 30, 2009, which is reflected within the non-operating expense line of our consolidated statements of earnings.

Hedge ineffectiveness associated with our cash flow hedges was immaterial and no cash flow hedges were discontinued in the three and six months ended June 30, 2009 and 2008.

Derivative gains and losses on effective hedges included in accumulated other comprehensive loss are reclassified into cost of sales upon the recognition of the hedged transaction. We estimate that substantially all of the $1.4 million of unrealized gain ($1.0 million after tax) included in accumulated other comprehensive loss at June 30, 2009 will be reclassified to cost of sales within the next twelve months. The actual amounts that will be reclassified to earnings over the next twelve months will vary from this amount as a result of changes in market rates. As of June 30, 2009 and December 31, 2008, the notional amounts of all derivative foreign exchange contracts were $461.5 and $257.8 million respectively. We have cash flow hedges at June 30, 2009, which settle as late as December 20, 2010.

 

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The following table presents the fair value of derivative instruments within the consolidated balance sheet:

 

    

Balance

Sheet

Location

   Asset Derivatives    Balance
Sheet
Location
   Liability Derivatives
        June 30,
2009
   December 31,
2008
      June 30,
2009
   December 31,
2008

Derivatives designated as hedging Instruments under Statement 133

                 

Foreign exchange forwards and options

   Other current
assets
       $     8.8            $     27.2        Other current
liabilities
       $     2.0            $     1.5    
                                 

Foreign exchange forwards

   Other long term
assets
     1.3          -             1.0          -    
                                 

Total derivatives designated as hedging instruments under Statement 133

          $     10.1            $     27.2               $     3.0            $     1.5    
                                 

Derivatives not designated as hedging instruments under Statement 133

                 

Foreign exchange forwards

          $     14.5            $     -        Other current
liabilities
       $     5.8            $     -    
                                 

Total derivatives not designated as hedging instruments under Statement 133

        14.5          -             5.8          -    
                                 

Total derivatives

          $     24.6            $     27.2               $     8.8            $     1.5    
                                 

 

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The following tables present the amounts affecting the consolidated statements of earnings:

 

    Amount of Loss
Recognized
in Other
Comprehensive
Income on Derivatives
  Location of
Gain (Loss)
Reclassified
From
Accumulated
OCI into
Net Earnings
  Amount of Gain
Reclassified From
Accumulated Other
Comprehensive
Income into Net Earnings
    Three Months Ended June 30,       Three Months Ended June 30,
    2009   2008       2009   2008

Derivatives in Statement 133 Cash Flow Hedging Relationships

         

Foreign exchange forwards and options

      $     (13.3)           $ (0.9)       Cost of sales       $ 5.9           $ 2.6    
                         

Total

      $     (13.3)           $ (0.9)             $ 5.9           $ 2.6    
                         
    Amount of Loss
Recognized
in Other
Comprehensive
Income on Derivatives
  Location of
Gain (Loss)
Reclassified
From
Accumulated
OCI into
Net Earnings
  Amount of Gain
Reclassified From
Accumulated Other
Comprehensive
Income into Net Earnings
    Six Months Ended June 30,       Six Months Ended June 30,
    2009   2008       2009   2008

Derivatives in Statement 133 Cash Flow Hedging Relationships

         

Foreign exchange forwards and options

      $     (5.8)           $     (1.6)       Cost of sales       $     12.7           $     3.9    
                         

Total

      $     (5.8)           $     (1.6)             $     12.7           $     3.9    
                         

 

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    Location of Gain Recognized in Net
Earnings on Derivatives
  Amount of Gain in Net
Earnings on Derivatives
        Three Months Ended June 30,
         2009   2008

Derivatives not designated as hedging instruments under Statement 133

     

Foreign exchange forwards

  Other non-operating income       $     20.5           $     -    
             

Total

        $     20.5           $     -    
             
    Location of Gain Recognized in Net
Earnings on Derivatives
  Amount of Gain (Loss) in Net
Earnings on Derivatives
        Six Months Ended June 30,
         2009   2008

Derivatives not designated as hedging instruments under Statement 133

     

Foreign exchange forwards

  Other non-operating income       $     8.7           $     -    
             

Total

        $     8.7           $     -    
             

The bank counterparties to the foreign exchange forward contracts expose us to credit-related losses in the event of their nonperformance. To help mitigate that risk, we only contract with counterparties that meet certain minimum requirements under our counterparty risk assessment process. The Company monitors ratings and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties as deemed necessary.

 

Note 5. Fair Value Measurements

Effective January 1, 2008, we implemented SFAS 157 for our financial and non-financial assets and liabilities that are re-measured and reported at fair value at each reporting period.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis at June 30, 2009 and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value:

 

          Fair Value Measurements at Reporting Date Using

Description of assets (liabilities)

   Fair Value
at June 30,
2009
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Derivatives

           

Forward contracts

           $     8.9                   $     8.9       

Option contracts

           $     6.9                   $     6.9       

 

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Our financial liabilities have been classified as Level 2. These derivative contracts have been valued initially at the transaction price and valued subsequently using market data including quotes, benchmark yields, spot rates, and other industry and economic events. See Note 4 “Derivatives” for further discussion on derivative financial instruments.

When necessary, we validate our valuation techniques by understanding the models used and obtaining market values from pricing sources.

 

Note 6. Comprehensive Income

The reconciliation of net earnings to comprehensive income is as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Net earnings

     $ 60.8        $     45.9      $ 81.4        $     86.8  
                           

Other comprehensive income

           

Foreign currency translation adjustments

     64.8        7.5        12.6        46.0  

Net actuarial gains associated with pension and other postretirement benefits, net of income taxes $(14.4) and $(3.5) for six months ended June 30, 2009 and June 30, 2008, respectively

     -        -        23.4        5.4  

Amortization of prior service cost and unrecognized gains and losses included in net periodic benefit cost, net of income taxes of $(2.3) and $(4.6) for the three and six months ended June 30, 2009, respectively, and $(0.9) and $(1.9) for the three and six months ended June 30, 2008, respectively

     3.9        1.7        7.9        3.3  

Derivatives qualifying as hedges:

           

Net derivative losses, net of income taxes of $5.0 and $2.2 for the three and six months ended June 30, 2009, respectively, and $0.3 and $0.6 for the three and six months ended June 30, 2008, respectively

     (8.3)       (0.6)       (3.6)       (1.0) 

Reclassifications to cost of sales, net of income taxes of $2.2 and $4.8 for the three and six months ended June 30, 2009, respectively, and $(1.0) and $(1.5) for the three and six months ended June 30, 2008, respectively

     (3.6)       1.6        (7.8)       2.4  
                           

Other comprehensive income

     56.8        10.2        32.5        56.1  
                           

Total comprehensive income

     $     117.6      $ 56.1        $     113.9      $ 142.9  
                           

The components of accumulated other comprehensive loss, net of income taxes, are as follows:

 

         June 30,    
2009
   December 31,
2008

Cumulative currency translation adjustments

     $ 103.1        $ 90.5  

Pension and other postretirement plan liability adjustments

     (271.3)       (302.6) 

Net unrealized gain on derivative instruments

     0.9        12.3  
             

Total accumulated other comprehensive loss

     $ (167.3)       $ (199.8) 
             

 

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Note 7. Earnings Per Share

The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share (“EPS”):

 

     Three Months Ended June 30,
     2009    2008
    

Net
Earnings

  

Shares

  

Per Share
Amount

  

Net
Earnings

  

Shares

  

Per Share
Amount

Basic EPS:

                 

Net earnings

     $ 60.8      63.841      $ 0.95        $ 45.9      62.969        $ 0.73  

Effect of dilutive stock options, non-vested equity shares and share units outstanding

     -        0.987      (0.01)       -        1.428        (0.02) 
                                     

Diluted EPS:

                 

Net earnings

     $ 60.8      64.828      $ 0.94        $ 45.9      64.397        $ 0.71  
                                     
     Six Months Ended June 30,
     2009    2008
    

Net
Earnings

  

Shares

  

Per Share
Amount

  

Net
Earnings

  

Shares

  

Per Share
Amount

Basic EPS:

                 

Net earnings

     $ 81.4      63.693      $ 1.28        $ 86.8      63.005        $ 1.38  

Effect of dilutive stock options, non-vested equity shares and share units outstanding

     -        0.735      (0.02)       -        1.430        (0.03) 
                                     

Diluted EPS:

                 

Net earnings

     $ 81.4      64.428      $ 1.26        $ 86.8      64.435        $ 1.35  
                                     

For the three and six months ended June 30, 2009, there were 3.9 million shares and 4.6 million shares, respectively, and for the three and six months ended June 30, 2008, there were 0.8 million shares and 0.9 million shares, respectively, relating to the possible exercise of outstanding stock options not included in the computation of diluted EPS as their effect would have been antidilutive.

The principal amount of the convertible senior notes issued in December 2006 and due in 2036 (“Convertible Notes”) is expected to be settled in cash. Any conversion spread over the principal amount would be settled in our common shares. Since the average stock price during the three and six months ended June 30, 2009 and 2008 was less than the conversion price of the Convertible Notes, no shares associated with the convertible notes have been assumed to be outstanding in computing diluted EPS.

As a result of retrospectively applying FSP APB 14-1, net earnings for the three and six months ended June 30, 2008 have been adjusted from the previously disclosed amount of $47.8 million to $45.9 million and $90.7 million to $86.8 million, respectively. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” for further discussion on the 2009 adoption of FSP APB 14-1.

In connection with our May 2009 equity offering, as further discussed under Note 11 “Debt and Equity Financing”, we entered into forward sale agreements with certain forward purchasers (the “Forward Purchasers”). Pursuant to the underwriting agreement, the Forward Purchasers borrowed and sold to the Underwriters an aggregate of 4,722,989 shares of the Company’s common stock at an initial forward price of $53.00, before the underwriting discount of $2.25 per share. Before the issuance of our common stock upon the July 27, 2009 settlement of the forward sale agreements, the forward sale agreements were reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares that would be issued upon physical settlement of the forward sale agreements over the number of shares that could be purchased by us in the market (based on the average market price during the period) using the proceeds receivable upon settlement. Consequently, there will be a dilutive effect on our diluted

 

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earnings per share during periods when the average market price of our common stock is above the per share initial forward sale price of $50.75. Based upon the average market price of our common stock during the quarter, there were approximately 164,000 and 82,000 additional shares considered outstanding for the three and six months ended June 30, 2009, respectively, in our dilutive number of shares.

 

Note 8. Sale of Assets

During the six months ended June 30, 2009 and 2008, we sold certain receivables (“Receivables”). The net book value of the Receivables sold during these periods was $39.1 million and $32.6 million, respectively, for which we received cash proceeds of $39.2 million and $32.6 million, respectively. Substantially all of these sales took place in Japan. These transactions were accounted for as sales. As a result, these Receivables have been excluded from the accompanying Condensed Consolidated Balance Sheets.

 

Note 9. Composition of Certain Financial Statement Items

The following is included in cash and cash equivalents at June 30, 2009:

 

Money Market Portfolio – Bond Funds

   Investment

Northern – Government Select Portfolio

       $     50.0    

J. P. Morgan U.S. Government MM Fund

     60.0    

Morgan Stanley – MM Government Portfolio

     14.6    

Dreyfus Government Cash Management

     30.0    

HSBC Investor Government MM Fund

     10.0    

Goldman Sachs Financial Square Government

     60.0    

Fidelity – MM Government Portfolio

     20.0    

High Mark U.S. Government MM Fund

     60.0    

Wells Fargo Government MM Fund

     60.0    
      

Total

       $     364.6    
      

The above amounts were liquidated in connection with the purchase of the Olympus Diagnostic Systems Business, which we closed on August 3, 2009 (Tokyo time).

Inventories consisted of the following:

 

     June 30, 2009    December 31, 2008

Raw materials, parts and assemblies

     $    174.2             $    156.5       

Work in process

             25.6                    19.2      

Finished products

           335.9                  320.5      
         
     $    535.7            $    496.2      
         

Changes in the product warranty obligation were as follows:

     
     Three months ended
June 30, 2009
   Six months ended
June 30, 2009

Beginning Balance

     $    11.9             $    12.4       

Current period warranty charges

             4.0                     10.0       

Current period utilization

            (3.8)                   (10.3)      
         

Ending Balance

     $    12.1             $    12.1       
         

 

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Note 10. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2009 were as follows:

 

     Clinical
Diagnostics
   Life
Sciences
   Total

Goodwill at December 31, 2008

     $ 587.0        $ 109.3        $     696.3  

Acquisitions and related adjustments

     4.6        -        4.6  
                    

Goodwill at June 30, 2009

     $ 591.6        $ 109.3        $ 700.9  
                    

Other intangible assets consisted of the following:

 

     June 30, 2009    December 31, 2008
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net    Gross
Carrying
Amount
   Accumulated
Amortization
   Net

Amortized intangible assets:

                 

Technology

     $ 128.9            $ (46.6)        $ 82.3        $ 128.9            $ (40.8)        $ 88.1  

Customer relationships

     223.9        (92.4)        131.5        219.2        (86.3)        132.9  

Other

     74.0        (36.6)        37.4        69.4        (33.7)        35.7  
                                         
     426.8        (175.6)        251.2        417.5        (160.8)        256.7  

Non-amortizing intangible assets:

                 

Tradename

     73.5        -         73.5        73.5        -        73.5  

Core technology

     66.6        -         66.6        66.6        -        66.6  
                                         
     $ 566.9            $   (175.6)        $   391.3        $ 557.6            $  (160.8)        $ 396.8  
                                         

Estimated future intangible asset amortization expense consists of the following:

 

2009 (remaining six months)

   $  14.7  

2010

     29.0  

2011

     28.4  

2012

     24.8  

2013

     24.0  

Thereafter

     130.3  
      

Total

   $   251.2  
      

 

Note 11. Debt and Equity Financing

Certain of our borrowing agreements contain covenants that we must comply with, including, a debt to earnings ratio and a minimum interest coverage ratio. At June 30, 2009, we were in compliance with such covenants.

In May 2009, we entered into an Amended and Restated Credit Agreement (the “Credit Facility”) and extended the maturity date of the Credit Facility to May 2012. The Credit Facility provides us with a $350.0 million revolving line of credit, which may be increased in $50.0 million increments up to a maximum line of credit of $450.0 million. In connection with the Amendment of the Credit Facility, we incurred issuance costs of $5.3 million which are being amortized over the term of the Credit Facility. Interest on advances is determined using formulas specified in the agreement, generally, an approximation of LIBOR plus 2.25% to 2.875% margin with the precise margin determinable based on our long-term senior unsecured non-credit-enhanced debt rating, which as of June 30, 2009 was 2.81%. We also must pay a facility fee of 0.50% per annum on the aggregate average daily amount of each lender’s commitment with the precise margin determinable based on our long-term senior unsecured non-credit-enhanced debt rating, which as of June 30, 2009 was a S&P rating of BBB. At June 30, 2009, no amounts were outstanding under the Credit Facility.

On May 26, 2009, we issued $250.0 million principal amount of the Company’s 6% Senior Notes due 2015 and $250.0 million principal amount of the Company’s 7% Senior Notes due 2019 (the “Notes”). In connection with the Notes, we incurred issuance costs of $4.8 million. The Notes were issued at a discount of $2.3 million which is being amortized over the estimated life of the Notes. At June 30, 2009, the majority of the proceeds from the Notes were included in cash and cash equivalents and invested primarily in money market funds. The proceeds from the Notes were used on August 3, 2009 to fund the Olympus Diagnostics Acquisition that is further described in Note 2 “Acquisitions”.

 

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On May 19, 2009 we entered into forward sale agreements for the sale of an aggregate of 4,722,989 shares of our common stock including an amount equal to the underwriters’ over-allotment option in the public offering. The initial forward sale price was $50.75 per share which was equivalent to the public offering price of $53.00 less the underwriting discount of $2.25. On July 27, 2009 we received net proceeds of approximately $240 million from the issuance of shares in connection with this offering, which were used to fund the Olympus Diagnostics Acquisition. Additionally, we incurred issuance costs of $11.4 million in connection with this offering, which is recorded as a deferred asset as of June 30, 2009.

 

Note 12. Share-Based Compensation

Share-based compensation expense was $7.4 million and $8.7 million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, share-based compensation expense was $18.7 million and $18.1 million, respectively.

 

Note 13. Retirement Benefits

In the first quarter of 2009, we received the final valuations of our pension plans and other postretirement benefit plans to reflect actual census data as of January 1, 2009, which also included a revision to our assumption for the percentage of retirees expected to participate in the postretirement plan. This valuation resulted in a decrease to pension obligations of $2.4 million and postretirement obligations of $35.3 million. Additionally, other comprehensive income increased by $23.3 million and long-term deferred tax liabilities increased by $14.4 million.

For the three and six months ended June 30, 2009 and 2008, the pension and postretirement benefit costs were comprised of:

 

     Pensions    U.S.
     U.S. Plans    Non-U.S.
Plans
   Postretirement
Benefit Plans
     Three Months Ended June 30,
     2009    2008    2009    2008    2009    2008

Service cost-benefits earned during the period

   $ 3.9      $ 4.3      $ 1.3      $ 1.4      $ 0.4      $ 0.5  

Interest cost on benefit obligation

     10.7        10.2        2.4        2.8        1.6        1.9  

Expected return on plan assets

     (11.9)       (14.1)       (2.0)       (3.1)       -         -   

Amortization:

                 

Prior service cost (credit)

     0.2        0.2        (0.2)       (0.2)       (0.1)       (1.1) 

Actuarial loss

     5.6        3.0        0.8        0.4        -         0.3  
                                         

Net periodic benefit costs

   $ 8.5      $ 3.6      $ 2.3      $ 1.3      $ 1.9      $ 1.6  
                                         
     Pensions    U.S.
     U.S. Plans    Non-U.S.
Plans
   Postretirement
Benefit Plans
     Six Months Ended June 30,
     2009    2008    2009    2008    2009    2008

Service cost-benefits earned during the period

   $ 7.9      $ 8.6      $ 2.5      $ 2.8      $ 0.8      $ 1.0  

Interest cost on benefit obligation

     21.5        20.4        4.8        5.6        3.3        3.8  

Expected return on plan assets

     (23.5)       (28.2)       (4.1)       (6.2)       -         -   

Amortization:

                 

Prior service cost (credit)

     0.4        0.4        (0.4)       (0.4)       (0.2)       (2.2) 

Actuarial loss (gain)

     11.2        6.0        1.6        0.8        (0.1)       0.6  
                                         

Net periodic benefit costs

   $ 17.5      $ 7.2      $ 4.4      $ 2.6      $ 3.8      $ 3.2  
                                         

 

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We contributed $24.0 million and $8.2 million to our U.S. pension plan during the six months ended June 30, 2009 and June 30, 2008. We expect to contribute approximately $14.7 million to our other U.S. retirement plans and international pension plans and approximately $4.6 million to our postretirement plan during 2009. If the value of pension assets continues to decline we may decide to make additional pension plan contributions. In addition, pension expense in future years may increase.

 

Note 14. Commitments and Contingencies

Environmental Matters

We are subject to federal, state, local and foreign environmental laws and regulations. Although we continue to incur expenditures for environmental protection, we do not anticipate any expenditures to comply with such laws and regulations that would have a material impact on our consolidated operations or financial position beyond amounts accrued to date. We believe that our operations comply in all material respects with applicable federal, state and local environmental laws and regulations.

In connection with our Orange County consolidation project and closure of our Fullerton, California site, we began conducting environmental studies at our Fullerton site. The data generated by these studies indicates that soils under and around several of the buildings contain chemicals previously used in operations at the facility. Some of these chemicals also have been found in groundwater underlying the site. Studies to determine the source and extent of these chemicals are underway and are expected to continue for several months. We have notified the State Department of Toxic Substances Control of the presence of these chemicals at the site and expect that agency to oversee determination of any remediation requirements. During 2008, we recorded a liability of $19 million representing our best estimate of the future expenditures for investigation and remediation at the site; however, it is possible that the ultimate costs incurred could range from $10 million to $30 million. Our estimates are based upon the results of our investigation to date and comparison to our prior experience with environmental remediation at another site. Therefore, it is possible that additional activities not contemplated at this time could be required and that the actual costs could differ materially from the amount we have recorded as a liability or our estimated range.

To address contingent environmental costs, we establish reserves when the costs are probable and can be reasonably estimated. We believe that, based on current information and regulatory requirements, the reserves established by us for environmental expenditures are adequate. Based on current knowledge, to the extent that additional costs may be incurred that exceed the reserves, the amounts are not expected to have a material adverse effect on our operations, consolidated financial condition or liquidity.

Legal Proceedings

We are involved in a number of lawsuits, which we consider ordinary and routine in view of our size and the nature of our business. We do not believe that any ultimate liability resulting from any of these lawsuits will have a material adverse effect on our results of operations, financial position or liquidity. However, we cannot give any assurances regarding the ultimate outcome of these lawsuits and their resolution could be material to our operating results for any particular period, depending upon the level of income for the period.

In 1998, we entered into a sale-leaseback transaction with Cardbeck Miami Trust (“Cardbeck”) in connection with our Miami facility. The State of Florida asserted that payments made by us pursuant to the sale-leaseback transaction are subject to commercial rental tax under applicable state laws. Cardbeck demanded that we pay these taxes and has filed an action in Miami-Dade County, Florida Circuit Court seeking a declaratory ruling that we are in breach of the lease if we fail to pay them. This action is currently stayed. We filed an action in Leon County, Florida Circuit Court seeking a judicial ruling that no taxes are due, paid approximately $2.4 million to settle the State’s claim for taxes for the period from June 2000 to February 2005, and posted a bond for approximately $6 million covering taxes, penalties and interest that are currently unpaid. On July 30, 2009, we entered into a settlement with the State of Florida under which the Company agreed to pay $3.5 million to resolve Beckman’s and Cardbeck’s potential liability for unpaid commercial rent tax (including applicable county surtax, penalty, and interest) arising from the sale-leaseback transaction for the period from June 25, 1998 through May 31, 2000, and from March 1, 2005 through June 30, 2018. Of the $3.5 million settlement amount, we’ve estimated approximately $1.7 million to be associated with past liabilities, which we accrued for during the first quarter of 2009. The settlement agreement also provides that it is not intended to and does not resolve any commercial rent tax issues for any period commencing after June 30, 2018.

 

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Also, in June 2006 Wipro Limited (“Wipro”), our former distributor in India, initiated an arbitration action against Beckman Coulter International S.A., our subsidiary who entered the distributor relationship with Wipro, alleging that certain actions by Beckman Coulter India Private Limited, our India subsidiary, breached their contract. We agreed to a settlement in the first quarter 2009. We recorded this settlement and recognized a total of $2.6 million during the first quarter of 2009.

On August 16, 2007, a former employee filed a lawsuit in Orange County California Superior Court titled Davila vs. Beckman Coulter. The lawsuit alleged claims on the plaintiff’s own behalf and also on behalf of a purported class of our former and current employees. The complaint alleged, among other things, that we violated certain provisions of the California Labor Code and applicable California Industrial Welfare Commission Wage Orders with respect to meal breaks and rest periods, the payment of compensation for meal breaks and rest periods not taken, the information shown on pay stubs and certain overtime payments. It also alleged that we engaged in unfair business practices. The plaintiff asked for back pay, statutory penalties, and attorneys’ fees and sought to certify this action on behalf of our nonexempt California employees. Later, six additional former employees were added as class representatives. The Court has approved the parties settlement of this matter with the Company to pay $1.6 million to the claims administrator to settle all claims of the settling class members known or unknown, which relate to their wage claims with the Company.

 

15. Business Segment Information

We are engaged primarily in the design, manufacture and sale of laboratory instrument systems and related products with two operating segments, Clinical Diagnostics and Life Science. The Clinical Diagnostics segment, which includes products used to evaluate and analyze bodily fluids, cells and other patient samples, represents approximately 86% of our consolidated revenue. The product areas within Clinical Diagnostics are Chemistry and Clinical Automation, Cellular Analysis, and Immunoassay and Molecular Diagnostics. Our Life Science segment includes systems used in disease research performed in academic centers as well as therapeutic research performed by biopharmaceutical companies.

Management evaluates business segment performance on a revenue and operating income basis, exclusive of certain adjustments such as restructuring charges, technology licenses and other charges, which are not allocated to our segments for performance assessment by our chief operating decision maker. We do not discretely allocate assets to our operating segments, nor does our chief operating decision maker evaluate operating segments using discrete asset information.

 

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The following table sets forth revenue and operating income data with respect to our two operating segments and a reconciliation of our segments’ operating income to consolidated earnings before income taxes:

 

     *Three Months Ended
June 30,
   *Six Months Ended
June 30,
       2009            2008            2009            2008    

Segment revenues:

           

Clinical Diagnostics

           

Chemistry and Clinical Automation

   $ 218.7      $ 233.0      $ 425.7      $ 448.6  

Cellular Analysis

     226.4        244.5        439.9        476.0  

Immunossay and Molecular Diagnostics

     202.7        193.3        379.6        366.2  
                           

Total Clinical Diagnostics

     647.8        670.8        1,245.1        1,290.8  

Life Science

     108.8        127.5        203.0        238.0  
                           

Total revenue

   $ 756.7      $ 798.3      $ 1,448.2      $ 1,528.8  
                           

Segment operating income:

           

Clinical Diagnostics

   $ 84.2      $ 70.5      $ 146.2      $ 123.5  

Life Science

     13.3        18.0        17.3        28.5  
                           

Total segment operating income

     97.5        88.5        163.5        152.0  

Restructuring expenses

     (9.7)       (4.7)       (26.3)       (5.4) 

Technology license used in R&D for Clinical Diagnostics

     -         (12.0)       -         (12.0) 

Acquisition related costs for Clinical Diagnostics

     (11.9)       -         (21.7)      -   

Fair market value inventory adjustment

     -         -         -         (1.0) 
                           

Total operating income

     75.9        71.8        115.5        133.6  
                           

Non-operating (income) expense:

           

Interest income

     (1.3)       (3.6)       (2.6)       (6.2) 

Interest expense

     17.5        15.5        28.4        27.8  

Other

     (18.7)       (2.2)       (6.9)       (3.5) 
                           

Total non-operating (income) expense

     (2.5)       9.7        18.9        18.1  
                           

Earnings before income taxes

   $ 78.4      $ 62.1      $ 96.6      $ 115.5  
                           

 

* Amounts may not foot due to rounding.

U. S. information is presented separately since the Company is headquartered in the U.S. Revenues in the U.S. represented 50% and 49% of our total consolidated revenues for the three month periods ended June 30, 2009 and 2008, respectively and 51% and 50% for the six month periods ended June 30, 2009 and 2008, respectively. No other country accounts for greater than 10% of revenues.

The following table sets forth revenue and long-lived asset data by geography:

 

     *Three Months Ended
June 30,
   *Six Months Ended
June 30,
       2009            2008            2009            2008    

Revenues by geography:

           

United States

   $ 376.7      $ 389.7      $ 732.8      $ 756.9  

Europe

     166.1        183.5        310.9        346.5  

Emerging Markets (a)

     62.2        70.0        113.1        136.3  

Asia Pacific

     102.9        100.9        199.6        184.6  

Other (b)

     48.7        54.3        91.7        104.6  
                           

Total revenue

   $ 756.7      $ 798.3      $ 1,448.2      $ 1,528.8  
                           

 

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         June 30,    
2009
       December 31,    
2008

Long-lived assets by geography:

     

United States

   $ 1,736.7      $ 1,690.3  

International

     377.7        389.8  
             

Total long lived assets

   $ 2,114.4      $ 2,080.1  
             

 

* Amounts may not foot due to rounding.
(a) Emerging Markets includes Eastern Europe, Russia, Middle East, Africa and India.
(b) Other includes Canada and Latin America

 

16. Subsequent Events

On July 27, 2009, we completed the forward sale of our common stock, as described in Note 11 “Debt & Equity Financing”, and received total net proceeds of approximately $240 million. On August 3, 2009 (Tokyo time), we completed the Olympus Diagnostics Acquisition for a cash purchase price of approximately 76 billion Japanese yen, or approximately $800 million. The purchase price is subject to adjustment based on a comparison of estimated net assets at closing to a target amount of net assets as well as a reduction for net debt remaining at closing. We recorded an additional gain of approximately $12 million during the third quarter of 2009 in connection with the settlement of our yen forward purchase which we entered into to hedge the purchase price. This increased our cumulative gain associated with the yen forward purchase to approximately $20 million. We evaluated our subsequent events through August 5, 2009, which is the date the financial statements were issued.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Form 10-Q for the quarterly period ended June 30, 2009 (“Form 10-Q”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. Forward-looking statements reflect our current views with respect to future events and can also be identified by words such as “may,” “will,” “might,” “expect,” “believe,” “anticipate,” “could,” “would,” “estimate,” “continue,” “pursue,” “plans,” “should,” “likely,” “might,” or the negative thereof or comparable terminology, and may include, without limitation, information regarding our expectations, goals or intentions regarding the future. Forward-looking statements involve certain risks and uncertainties, and our actual results may differ materially from those discussed in any forward-looking statement. Factors that could cause results to differ include, but are not limited to, those discussed in the section below entitled “Risk Factors” under Part I, Item 1A of this Form 10-Q. Additional factors that could cause actual results to differ are discussed in Part I, Item A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008 and in our other current and periodic reports filed from time to time with the SEC. All forward-looking statements in this Form 10-Q are made as of the date hereof and we assume no obligation to update any forward-looking statement, except as required by law.

The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Form 10-Q and in our Annual Report on Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.

Overview

Beckman Coulter is the world’s largest company devoted solely to biomedical testing, a market we estimate had about $37 billion in worldwide sales in 2008. We market our products in more than 130 countries, with approximately half of our revenue in 2008 coming from outside the United States. Our strategy is to extend the company’s leadership in simplifying, automating and innovating customer’s processes, by continuing to rollout new products, enhance our current product offerings and enter into new and growing market segments.

We design, manufacture, and sell systems, services, reagents and supplies to clinical and life science laboratories around the world. Our products combine sophisticated analytical instruments, user-friendly software and highly sensitive chemistries, integrated into complete and simple to use systems. Our product lines address nearly all blood tests routinely performed in hospital laboratories and a range of systems for life science and pharmaceutical research.

 

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The majority of our revenue is generated from consumable supplies (including reagent test kits), service and operating-type lease (“OTL”) payment arrangements. Approximately 78% of our total revenue in 2008 was generated by this type of revenue, which we refer to as “recurring revenue.” A customer contract typically runs five years while the average customer relationship lasts more than 15 years. Switching instrument systems creates significant costs for labs: changing suppliers means re-training staff on new systems and performing validation studies to assure consistency of reported results. High retention rates have driven recurring revenue to approximately 80% of total revenue. Our remaining balance of revenue is derived from “instrument sales.” In 2008, we revised our presentation in the consolidated statements of earnings to better reflect our main sources of revenue: recurring revenue and instrument sales.

Our instruments are mainly provided to customers under cash sales or OTL arrangements. Since mid-2005, most of our leases have been OTLs rather than sales-type leases (“STLs”), which we previously utilized. Our OTLs are provided under bundled lease arrangements, in which our customers pay a monthly amount for the equipment, consumable supplies (including reagent test kits), and service. Our lease arrangements primarily take the form of what are known as “reagent rentals” where an instrument is placed at a customer location and the customer commits to purchase a certain minimum volume of reagents annually. We also enter into “metered” contracts with customers where the instrument is placed at a customer location with a stock of reagents and the customer is billed monthly based on actual reagent usage.

Strategic Initiatives

Our strategic initiatives for 2009 focus on key growth drivers, quality and operating excellence:

 

   

We are working to expand our test menu, particularly in our immunoassay and molecular diagnostics products and believe our focus on certain disease states will enable us to deliver enhanced testing capability to our customers, which are expected to improve patient health and reduce the cost of care.

 

   

We are building on our industry-leading ability to help customers simplify, automate and innovate their processes. Our unparalleled knowledge of customers’ laboratory processes supports our expansion of automation and work cells, growing our installed base of instruments.

 

   

From a geographic perspective, we are expanding resources in developing markets, including China and India, which we believe will improve our opportunities for long-term growth.

 

   

We intend to continue to streamline our supply chain operations to improve our overall cost structure. We are expanding our use of “Lean Six Sigma” tools throughout the company as a result of our initial success with these tools.

 

   

We have announced that we plan to design and build an automated, fully integrated molecular diagnostic system to enable moderately complex testing in clinical diagnostic laboratories.

As part of our strategic initiatives, we expect to incur charges as we realign our manufacturing and distribution footprint and implement initiatives to improve productivity and reduce operating costs in the future.

Acquisition of Olympus Diagnostic Systems Business

We entered into a master purchase agreement with Olympus Corporation, which we also refer to as Olympus, dated February 27, 2009, to acquire the diagnostic systems portion of Olympus Corporation’s life science business, (“the Olympus Diagnostic Systems Business”), for 76 billion Japanese yen (the “Olympus Diagnostics Acquisition”). The purchase price was subject to adjustment based on a comparison of estimated net assets at closing to a target amount of net assets as well as a reduction for net debt remaining at the closing. Olympus is a Tokyo-headquartered precision technology company that creates opto-digital solutions in healthcare, life science and consumer electronic products. The Olympus Diagnostic Systems Business encompasses the development, manufacturing, marketing, sale, distribution and use of clinical chemistry and immunoassay analyzers, blood transfusion testing systems, and the chemical reagents and other consumables used with them, and related laboratory automation equipment, for in vitro diagnostic testing of samples from humans and animals

On August 3, 2009 (Tokyo time), we completed the Olympus Diagnostics Acquisition through a cash payment of approximately 76 billion Japanese yen (approximately U.S. $800 million based on currency exchange rates as of August 3, 2009). The final purchase price is subject to change based upon the final amount of net assets as of the closing as determined within 90 days of closing.

On February 27, 2009, we entered into forward contracts with Bank of America, N.A., J.P. Morgan Chase, Wells Fargo Bank, N.A., Morgan Stanley Capital Services Inc., The Royal Bank of Scotland and Scotia Capital covering the full amount of the purchase price in order to hedge the risk of changes in the exchange rate of the Japanese yen versus the U.S. dollar between the signing and closing of the Olympus Diagnostics Acquisition. The forward contracts transaction effectively fixed the U.S. dollar cost of the purchase price at $780 million U.S. dollars. See Note 4 “Derivatives” for further discussion.

 

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The foregoing description of the Olympus Diagnostics Acquisition is qualified in its entirety by reference to the full text of the master purchase agreement, which is attached as Exhibit 2.1 to the 8-K filed with the SEC on August 4, 2009 and incorporated by reference.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, our accounting policies, assumptions, estimates and judgments are reviewed by management to ensure that our financial statements are presented fairly in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.

Both our accounting policies and estimates are essential in understanding MD&A and results of operations. We describe our significant accounting policies in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. In addition, we discuss our critical accounting estimates in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2008. There were no significant changes in our accounting policies or estimates since the end of 2008 except for the adoption of FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, on a retroactive basis, to record the equity component of our convertible debt and non-cash interest expense related to our convertible debt obligation. As a result of the adoption of FSP APB 14-1, at December 31, 2008 our long-term debt decreased by $77.3 million and our stockholders’ equity increased by $46.3 million. Our interest expense increased by $3.6 million and $3.3 million for the three months ended June 30, 2009 and 2008, respectively and by $7.1 million and $6.6 million for the six months ended June 30, 2009 and 2008, respectively. Our diluted earnings per share decreased by $0.03 for both the three months ended June 30, 2009 and 2008, respectively, and by $0.07 and $0.06 for the six months ended June 30, 2009 and 2008, respectively, as a result of the adoption.

Change in Presentation

We have a hedging program to reduce the risk of foreign currency changes on cash flows generated from intercompany inventory purchases. In the first quarter of 2009, our results of operations were impacted more significantly by currency changes, a portion of which was offset by the results of our hedging program. To reflect this net currency impact on our operating results, we have reclassified our gains and losses related to cash flow hedging activities and foreign currency transactions to cost of sales from non-operating income or expense for all periods presented. The amounts reclassified for the prior periods were not material.

Results of Operations

We measure our business on the basis of two reportable segments– Clinical Diagnostics and Life Science. The Clinical Diagnostics segment represents approximately 86% of our consolidated revenue and includes products used to evaluate and analyze bodily fluids, cells and other patient samples. The three product areas within Clinical Diagnostics are Chemistry and Clinical Automation, Cellular Analysis and Immunoassay and Molecular Diagnostics. Our Life Science segment, on the other hand, includes systems used for disease research performed in academic centers and therapeutic research performed by biopharmaceutical companies.

To facilitate an understanding of our financial results, we review revenue on both a reported and constant currency basis (constant currency growth is not a U.S. GAAP defined measure of revenue growth). We define constant currency revenue as current period revenue in local currency translated to U.S. dollars at the prior year’s foreign currency exchange rate for that period, computed monthly. Constant currency growth as presented herein represents:

Current period constant currency revenue less prior year reported revenue / Prior year reported revenue

This measure provides information on revenue growth assuming that foreign currency exchange rates have not changed between the prior year and the current period. We believe the use of this measure aids in the understanding of our operations without the impact of foreign currency fluctuations. Constant currency revenue and constant currency growth as defined or presented by us may not be comparable to similarly titled measures reported by other companies. Additionally, constant currency revenue is not an alternative measure of revenue on a U.S. GAAP basis.

 

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Current Quarter Financial Highlights

Total revenue decreased 5.2% to $756.7 million during the second quarter, when compared to the corresponding prior year period. However, on a constant currency basis, revenue remained relatively flat as constant currency recurring revenue grew by 7.7%, but was partially offset by a 25.8% constant currency decline in hardware cash instrument sales. The recurring revenue gain was generated primarily from our Clinical Diagnostics products, driven in part by Access Immunoassay which grew 13.7% in constant currency. As anticipated, cash instrument sales declined significantly in all product areas when compared to the prior year quarter due primarily to weakness in the U.S. market. Additionally, the 2009 second quarter is being compared to an unusually strong second quarter during 2008. During the 2008 second quarter, we experienced an unprecedented increase in sales generated from Cellular Analysis due to resolving a 2007 backlog related to a supply chain disruption. This helped drive an approximately 21.1% constant currency growth in cash instrument sales during the second quarter of 2008. Extremely strong cash instrument sales during 2008, which were primarily driven by the backlog issue and a weaker dollar, will continue to make for a difficult comparison to 2009.

Gross profit margin increased 120 basis points to 47.2% during the second quarter of 2009 as compared to the prior year quarter due primarily to a favorable product mix, with recurring revenue comprising a larger percentage of our overall revenue.

Selling, general and administrative (“SG&A”) expense decreased $14.0 million or 6.6% during the current quarter as we benefited from our cost containment initiatives combined with the effect of a stronger dollar, which reduced SG&A expenses by approximately $11 million.

Research and development (“R&D”) expense decreased by $17.0 million or 21.9% mainly due to a $12.0 million charge incurred during the prior year quarter associated with the purchase of a non-exclusive sublicense related to the hepatitis C virus for our molecular diagnostics project. We did not have any similar type arrangements in the current quarter. Excluding this charge during 2008, our R&D expenses decreased by approximately $5.0 million as a result of completion of certain Cellular R&D projects and reprioritization of other projects, while continuing to fund significant R&D programs in Immunoassay and Molecular Diagnostics and Flow Cytometry.

Restructuring and acquisition related costs increased by $16.9 million during the second quarter, when compared to the prior year quarter, in large part due to an $11.9 million increase in acquisition related costs, such as outside legal and consulting fees primarily associated with the Olympus Diagnostics Acquisition. Additionally, we incurred approximately $5.0 million of additional restructure related cost in comparison to the prior year in connection with the closure and relocation of certain manufacturing and distribution sites as part of our plan to vacate our Fullerton, California facility and consolidate those operations to other existing facilities.

Total non-operating income increased by $12.2 million mainly due to a $20.5 million hedging gain. This gain is associated with forward contracts to purchase Japanese yen. Given that our purchase price for the Olympus Diagnostics Acquisition was paid in yen, we have entered into forward contracts in an effort to mitigate the risk associated with changes in the value of the yen. As a result of the movement in currency, the U.S. dollar converted purchase price of approximately $780 million (based on the exchange rates as of February 27, 2009) was also increased by an amount approximating our hedging gain. This hedging gain was partially offset by a reduction of interest income of approximately $2 million, combined with additional net interest expense of $3.2 million as a result of our completion of the debt portion of our financing for the Olympus Diagnostics Acquisition in late May, 2009.

Our effective tax rate decreased from 26.1% during the second quarter of 2008 to 22.4% during the current quarter due primarily to higher discrete items during the current year quarter.

 

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Revenue

The following table compares revenue type, segment and geography for the three months ended June 30, 2009 and 2008 (dollar amounts in millions):

 

     *Three Months
Ended June 30,
   Reported
Growth %
   Constant
Currency
Growth % (a)
   2009    2008      

Total revenue:

           

Recurring revenue – supplies, service and lease payments

     $   629.0        $   618.7      1.7%        7.7%    

Instrument sales

     127.7        179.6      (28.9)%        (25.8)%    
                   

Total revenue

     $   756.7        $   798.3      (5.2)%        0.2%    
                   

Segment revenue:

           

Clinical Diagnostics:

           

Chemistry and Clinical Automation

     $   218.7        $   233.0      (6.1)%        (0.6)%    

Cellular

     226.4        244.5      (7.4)%        (2.8)%    

Immunoassay and Molecular Diagnostics

     202.7        193.3      4.9%        11.2%    
                   

Total Clinical Diagnostics

     647.8        670.8      (3.4)%        2.0%    

Life Science

     108.8        127.5      (14.7)%        (9.3)%    
                   

Total revenue

     $   756.7        $   798.3      (5.2)%        0.2%    
                   

Revenue by geography:

           

United States

     $   376.7        $   389.7      (3.3)%        (3.3)%    

Europe

     166.1        183.5      (9.5)%        4.6%    

Emerging Markets (b)

     62.2        70.0      (11.1)%        (1.3)%    

Asia Pacific

     102.9        100.9      2.0%        4.4%    

Other (c)

     48.7        54.3      (10.3)%        4.7%    
                   

Total revenue

     $   756.7        $   798.3      (5.2)%        0.2%    
                   

 

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     *Six Months
Ended June 30,
   Reported
Growth %
   Constant
Currency
Growth % (a)
   2009    2008      

Total revenue:

           

Recurring revenue – supplies, service and lease payments

     $   1,202.7        $   1,198.0      0.4%        6.3%    

Instrument sales

     245.5        330.8      (25.8)%        (22.7)%    
                   

Total revenue

     $   1,448.2        $   1,528.8      (5.3)%        0.0%    
                   

Segment revenue:

           

Clinical Diagnostics:

           

Chemistry and Clinical Automation

     $   425.7        $   448.6      (5.1)%        0.2%    

Cellular

     439.9        476.0      (7.6)%        (2.9)%    

Immunoassay and Molecular Diagnostics

     379.6        366.2      3.7%        9.8%    
                   

Total Clinical Diagnostics

     1,245.1        1,290.8      (3.5)%        1.8%    

Life Science

     203.0        238.0      (14.7)%        (9.6)%    
                   

Total revenue

     $   1,448.2        $   1,528.8      (5.3)%        0.0%    
                   

Revenue by geography:

           

United States

     $   732.8        $   756.9      (3.2)%        (3.2)%    

Europe

     310.9        346.5      (10.3)%        3.2%    

Emerging Markets (b)

     113.1        136.3      (17.0)%        (6.0)%    

Asia Pacific

     199.6        184.6      8.1%        9.4%    

Other (c)

     91.7        104.6      (12.3)%        3.9%    
                   

Total revenue

     $   1,448.2        $   1,528.8      (5.3)%        0.0%    
                   

 

  * Amounts in table above may not foot or recalculate due to rounding.
  (a) Constant currency growth is not a U.S. GAAP defined measure of revenue growth.
  (b) Emerging Markets includes Eastern Europe, Russia, Middle East, Africa and India.
  (c) Other includes Canada and Latin America.

Revenue

Recurring revenue increased 1.7% (7.7% in constant currency) during the three months ended June 30, 2009 and 0.4% (6.3% in constant currency) in the six months ended June 30, 2009 in comparison to the same periods in the prior year. The increase in constant currency recurring revenue was mainly driven by strong growth in Immunoassay and Flow Cytometry. Additionally, our recent acquisition of Cogenics added approximately 94 and 50 basis points to this growth during the three and six months ended June 30, 2009, respectively. Recurring revenue, which we believe is the best indicator of the overall strength of our business, represented 83.1% of our total revenue during the year.

Instrument sales decreased by 28.9% (25.8% in constant currency) during the three months ended June 30, 2009 and by 25.8% (22.7% in constant currency) during the six months ended June 30, 2009. Cash instrument sales pertaining to Cellular Analysis and Chemistry and Clinical Automation were most significantly impacted, declining by more than 25% in both the three and six months ended June 30, 2009. We believe the overall decline in 2009 cash instrument sales is due to a number of factors, including the continued difficult economic environment, the tightening of the credit markets, constrained hospital operating environments and the strengthening dollar. As a result, sales were negatively impacted as customers remain cautious in their capital spending and in some cases have delayed purchases. In addition, in 2008 we experienced an unusually strong increase of 25% in instrument sales in part due to a weak U.S. dollar, but also due to a production backlog issue that we resolved in 2008.

Clinical Diagnostics

Clinical Diagnostics revenue decreased by 3.4% and 3.5% in the three and six months ended June 30, 2009, respectively, when compared to the same period in 2008. In constant currency, however Clinical Diagnostics realized an increase in revenue of 2.0% and 1.8% for the quarter and first half of 2009, respectively, primarily driven by a 6.9% improvement in recurring revenue during the first half of the year. Recurring revenue was impacted by growth in Access Immunoassay. Recurring revenue growth largely reflects an expanding installed base and increased test kit utilization. The gains in recurring revenue, however, were partially offset by declines

 

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in instrument sales of 33.3% and 27.8% in constant currency for the three and six months ended June 30, 2009, respectively, in comparison to the related prior year periods. The lower levels of instrument sales were mainly due to Cellular Analysis and Chemistry and Clinical Automation as discussed earlier.

Revenue by Product Area – Clinical Diagnostics

Chemistry and Clinical Automation

Revenue from Chemistry and Clinical Automation decreased by 6.1% (0.6% in constant currency) and 5.1% (or an increase of 0.2% in constant currency) for the three and six months ended June 30, 2009, respectively versus the same periods in 2008. Although constant currency revenue was essentially flat for both the three and six months ended June 30, 2009, cash instruments sales were down due in large part to significantly lower placement of instruments in Clinical Automation. We believe Clinical Automation sales were down in part due to constrained capital spending. While Clinical Automation can be sold as part of an operating type lease, automation sales are often associated with other capital projects within a hospital, such as facility build-outs. Therefore, Automation tends to be a product area within Clinical Diagnostics that is more sensitive to restricted capital spending. Based on our second quarter results, we remain on pace to achieve a fifth consecutive record year of AutoChemistry placements, growing our installed base in mid to large sized hospitals.

Cellular Analysis

Revenue from Cellular Analysis decreased 7.4% (2.8% in constant currency) or 7.6% (2.9% in constant currency) for the three and six months ended June 30, 2009, respectively as compared to the same period in 2008. This was due primarily to a 27.9% and 29.7% constant currency decline in cash instrument sales for the three and six months ended June 30, 2009, respectively. Cash instrument sales were unusually high during 2008 as we resolved a 2007 backlog related to a supply chain disruption. In addition, the current constrained capital expenditure environment, including a stronger dollar, has had a negative impact on our cash instrument sales. The decline in instrument sales, however, was partially offset by an increase in recurring revenue from our Flow Cytometry products.

Immunoassay and Molecular Diagnostics

Revenue in Immunossay and Molecular Diagnostics increased by 4.9% (11.2% in constant currency) and 3.7% (9.8% in constant currency) for the three and six months ended June 30, 2009, respectively, when compared to the same periods in the prior year. This increase is directly due to an increase in constant currency recurring revenue which grew by 13.0% and 10.9% in constant currency for the three and six months ended June 30, 2009, respectively and was led by an increase from our Access Immunoassay products. Double digit growth in placements of mid to ultra high volume Immunoassay systems, were driven by rapid adoption of work cells introduced last year. These placements increase our penetration at the account level and position us for future recurring revenue growth. The acquisition of Cogenics in April 2009 also contributed $5.4 million in revenue during the second quarter 2009.

Life Science

Revenue from our Life Science products decreased by 14.7% (9.3% in constant currency) and 14.7% (9.6% in constant currency) for the three and six months ended as compared to the prior year periods. Cash instrument sales were a significant driver of the decrease in sales, declining by approximately 16.1% and 15.9% in constant currency for the three and six month periods ended June 30, 2009, respectively. We anticipate continued weakness in research markets, with a possible upside late in the year, as NIH stimulus funding begins to flow and grants are funded.

Revenue by Major Geography

Overall, revenue in the U.S. was down 3.3% and 3.2% for the three and six months ended June 30, 2009, respectively, versus the three and six months ended June 30, 2008. Lower revenue was primarily a result of significant declines of more than 30% in cash instrument sales from both Clinical Diagnostics and Life Science due to the economic factors mentioned earlier. Recurring revenue, however, grew by 5.7% and 3.3% during the three and six months ended, respectively, mainly due to strong results from our Access immunoassay products.

Revenue in Europe decreased by 9.5% and 10.3% (or increased by 4.6% and 3.2% in constant currency) for the three and six months ended June 30, 2009, respectively. The constant currency growth was due to an increase in recurring revenue of 7.1% and 7.3%, primarily resulting from solid growth in Immunoassay and Molecular Diagnostics. The region also experienced a decline in instrument sales posting a decrease in sales of 4.7% and 12.8% in constant currency for the three and six months ended. We believe that the decline is partly due to a stronger U.S. dollar and adverse credit market conditions which has led some customers to defer capital expenditures.

 

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Revenue from Emerging Markets decreased by 11.1% and 17.0% (1.3% and 6.0% in constant currency) for the three and six months ended June 30, 2009, respectively, as we experienced a decrease in instrument sales from both Clinical Diagnostics and Life Science. Overall, cash instrument sales dropped by approximately 46% on a constant currency basis for both the three and six months ended June 30, 2009, respectively. Sales in 2008 had been particularly strong due to the weaker dollar which enabled us to increase our market penetration. However, in 2009, the stronger dollar and difficult economic environment reduced cash instrument sales.

Sales in Asia Pacific increased by 2.0% and 8.1% (4.4% and 9.4% in constant currency) for the three and six months ended June 30, 2009, respectively, mainly due to 7.5% and 10.6% constant currency growth in recurring revenue, led by growth in products from Immunoassay and Molecular Diagnostics. China continued to be the leading country, with total revenue growth of about 14% and 25% in constant currency for the three and six months ended June 30, 2009, respectively.

Gross Profit

 

     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Gross profit on recurring revenue

     $   344.0         $   340.6       1.0%      $   649.4         $   649.4       0.0%

As a percentage of recurring revenue

     54.7%      55.1%    (0.4)%      54.0%      54.2%       (0.2)%
     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Gross profit on instrument sales

     $   12.9         $   26.3       (51.0)%      $   26.6         $   46.3       (42.5)%

As a percentage of instrument sales

     10.1%      14.6%    (4.5)%      10.8%      14.0%    (3.2)%
     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Gross profit

     $   356.9         $   366.9       (2.7)%      $   676.0         $   695.7       (2.8)%

As a percentage of total revenue

     47.2%      46.0%    1.2%      46.7%      45.5%    1.2%

The overall increase in gross margin for the first half of 2009 is due primarily to a mix favoring recurring revenue, which represented approximately 83% of our total revenue for the current period and approximately 78% for the comparative period. Gross margin from recurring revenue represents more than 90% of our overall gross margin. We expect recurring revenue to outpace cash instrument sales for the full year, improving mix and gross margin as compared to the prior year. Instrument sales, particularly outside the U.S, are unfavorable in the short term from a margin perspective, however, it supports our long term objective to increase our penetration in emerging markets and positions us to provide reliable and sustainable recurring revenue growth in future periods.

 

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Operating Expenses

 

     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Selling, general and administrative

     $   198.7         $   212.7       (6.6)%      $   391.9         $   416.3       (5.9)%

As a percentage of total revenue

     26.3%      26.6%    (0.3)%      27.1%      27.2%    (0.1)%

The decrease in selling, general and administrative expense for the three and six months ended June 30, 2009, is due primarily to our continued focus on cost containment initiatives combined with the effect of a stronger dollar which reduced SG&A expense by approximately $10.6 million and $17.8 million for the three and six months ended June 30, 2009. The noted decrease in SG&A was achieved despite an increase in pension expense of $4.2 million and $8.8 million during the three and six months ended June 30, 2009, respectively, while we incurred a $4.3 million charge related to legal matters during the six months ended June 30, 2009.

 

     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Research and development

     $   60.7         $   77.7       (21.9)%      $   120.6         $   140.4       (14.1)%

As a percentage of total revenue

     8.0%      9.7%    (1.7)%      8.3%      9.2%    (0.9)%

The decrease in research and development of $17.0 million and $19.8 million for the three and six months ended June 30, 2009, respectively, compared to the same periods last year is mainly due to a $12.0 million charge incurred during the second quarter of 2008 associated with the purchase of a non-exclusive sublicense related to the hepatitis C virus for our molecular diagnostics project. We did not have any similar type arrangements in the current year. Excluding this charge during 2008, our R&D expense decreased by approximately $5.0 million and $7.8 million as a result of completion or certain R&D projects and our efforts to reprioritize other R&D projects. However, we continue to fund significant R&D programs within high potential areas such as Flow Cytometry and Molecular Diagnostics.

 

     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Restructuring and acquisition related costs

     $   21.6        $   4.7      >100%      $   48.0        $   5.4      >100%

Restructuring and acquisition related costs increased by $16.9 million and $42.6 million during the three and six months ended June 30, 2009, when compared to the prior year periods. This increase is partly due to the closure and relocation of certain manufacturing and distribution sites along with activities related to our plan to vacate our Fullerton, California facility and consolidate those operations to other existing facilities. The restructuring cost related to the closure and relocation of these sites includes severance, relocation, and other duplicative exit costs. Additionally, we incurred approximately $12 million and $22 million during the three and six months ended June 30, 2009, respectively, in outside legal, consulting and investment banking expenses associated primarily with the Olympus Diagnostics Acquisition.

Operating Income

Management evaluates business segment performance based on revenue and operating income exclusive of certain adjustments, which are not allocated to our segments for performance assessment by our chief operating decision maker.

 

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The following table presents operating income for each reportable segment for the three and six months ended June 30, 2009 and 2008 and a reconciliation of our segment operating income to consolidated earnings before income taxes (dollar amounts in millions):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Operating income:

           

Clinical Diagnostics

   $ 84.2       $ 70.5       $ 146.2       $ 123.5   

Life Science

     13.3         18.0         17.3         28.5   
                           

Total segment operating income

     97.5         88.5         163.5         152.0   
                           

Restructuring expenses

     (9.7)        (4.7)        (26.3)        (5.4)  

Technology license used in R&D for Clinical Diagnostics

     -          (12.0)        -          (12.0)  

Acquisition related costs for Clinical Diagnostics

     (11.9)        —        (21.7)        —  

Fair market value inventory adjustment

     -          —        -          (1.0)  
                           

Total operating income

     75.9         71.8         115.5         133.6   
                           

Non-operating (income) expense:

           

Interest income

     (1.3)        (3.6)        (2.6)        (6.2)  

Interest expense

     17.5         15.5         28.4         27.8   

Other

     (18.7)        (2.2)        (6.9)        (3.5)  
                           

Total non-operating (income) expense

     (2.5)        9.7         18.9         18.1   
                           

Earnings before income taxes

   $ 78.4       $ 62.1       $ 96.6       $ 115.5   
                           

Despite an approximately 4% decrease in revenue during the three and six months ended June 30, 2009, operating income from our Clinical Diagnostics segment improved by $13.7 million and $22.7 million, respectively. The increase in operating income is due primarily to lower SG&A expense resulting from our cost containment initiatives coupled with lower R&D expense as compared to the prior year.

The decrease in operating income from our Life Science segment in the three and six months ended June 30, 2009, respectively, was due primarily to an approximately 15% decline in overall revenue, partially offset by lower operating expense.

Non-Operating (Income) Expense

 

     Three Months Ended    Six Months Ended
   June 30,
2009
   June 30,
2008
   Percent
Change
   June 30,
2009
   June 30,
2008
   Percent
Change

(in millions)

                 

Interest income

     $   (1.3)        $   (3.6)      (63.9)%      $   (2.6)        $   (6.2)      (58.1)%

Interest expense

     $   17.5         $   15.5       12.9%      $   28.4         $   27.8       2.2%

Other non-operating income

     $   (18.7)        $   (2.2)      >100%      $   (6.9)        $   (3.5)      97.1%

Interest income decreased during the first half of 2009 due, in part, to our decreasing investment in STL receivables coupled with overall lower rates of interest on our cash and investment balances as well as lower average investment balances.

Interest expense increased during the three and six months ended June 30, 2009, due primarily to additional interest expense during the quarter of $3.2 million resulting from our $500 million issuance of debt to finance the Olympus Diagnostics Acquisition, which was partially offset by decreased interest expense on tax reserves. Interest expense for all periods reflects our adoption of FSP APB 14-1 which effectively increases the amount of interest expense recorded on our convertible debt instruments. See Note 1 “Recently Adopted Accounting Standards” for a detailed discussion of the accounting change. The adoption of this standard was applied retrospectively to the prior year financial results. Interest expense increased by $3.6 million and $3.3 million for the three months ended June 30, 2009 and 2008, respectively and $7.1 million and $6.6 million for the six months ended June 30, 2009 and 2008, respectively, as a result of implementing this accounting change.

 

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The increase in other non-operating income for the three and six months ended June 30, 2009 was primarily related to a $20.5 million and $8.7 million hedging gain, respectively. This gain is associated with forward contracts to purchase Japanese yen. Given that our purchase price for the Olympus Diagnostics Acquisition was paid in yen, we entered into forward contracts in an effort mitigate the risk associated with changes in the value of the yen. As a result of the movement in currency, the U.S. dollar converted purchase price of approximately $780 million (based on the exchange rates as of February 27, 2009) was also increased by an amount approximating our cumulative hedging gain of $8.7 million as of June 30, 2009.

Income Taxes

At the end of each interim reporting period, an estimate is made of the effective income tax rate expected to be applicable for the full year. The effective income tax rate determined is used to provide for income taxes on a year-to-date basis. The tax effect of any tax law changes and certain other discrete events are reflected in the period in which they occur.

The effective tax rate for the three months ended June 30, 2009 and June 30, 2008 was 22.4% and 26.1%, respectively. For the six months ended June 30, 2009 and June 30, 2008, the effective tax rate was 15.7% and 24.8%, respectively. The effective tax rate was impacted by discrete items which reduced tax expense for the current quarter and consisted primarily of settlement of tax audits of prior years, changes in judgment related to uncertain tax positions in prior years, and changes to various tax credits.

Our effective tax rate for the full year 2009 could be impacted by a number of factors such as new tax laws, interpretations of existing tax laws, rulings by and settlements with taxing authorities, expiration of the statute of limitations for open years, our use of tax credits and our geographic profit mix. We expect our effective tax rate for the year to be approximately 25% compared to 23% for 2008. The increase in tax rate is primarily attributable to a shift in geographic mix of income, with more income in 2009 in higher-tax rate countries such as the U.S. The 2008 tax rate was also favorably impacted by additional tax credits.

During the first quarter 2009 we filed certain tax accounting method changes with the U.S. Internal Revenue Service. As a result of these accounting method changes, certain tax deductions will be accelerated and reflected in the 2008 federal income tax return, resulting in a net operating loss for that year. This loss will be carried back to the 2006 tax year and reduce taxes previously paid. We received tax refunds of $31 million in the second quarter 2009 as a result of these accounting method changes and expect to receive additional tax refunds of at least $14 million as a result of the carryback of the net operating loss to 2006. The acceleration of these tax deductions reduces certain permanent tax benefits in tax years 2008 and 2006. The impact of the reduction of these permanent tax benefits, totaling $3.4 million, was reflected as a discrete item in the tax provision for the six months ended June 30, 2009.

Liquidity and Capital Resources

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing and to convert those assets that are no longer required in meeting existing strategic and financing objectives into cash. Therefore, for purposes of achieving long-range business objectives and meeting our commitments, liquidity cannot be considered separately from capital resources that consist of current and potentially available funds.

Our business model, in particular recurring revenue comprised of consumable supplies (including reagent test kits), service, and OTL payments, allows us to generate substantial operating cash flows. We are currently investing a substantial portion of this cash flow in instruments leased to customers. We expect operating cash flows to increase as our OTL lease portfolio continues to build. We anticipate our operating cash flows together with the funds available through our credit facilities will continue to satisfy our working capital requirements. During the next twelve months, we anticipate using our operating cash flows and other sources of liquidity, including proceeds raised from our recent debt and equity offerings to:

 

   

complete and integrate the Olympus Diagnostics Acquisition,

 

   

facilitate growth in the business by developing, marketing and launching new products. We expect new product offerings to come from new technologies gained through licensing arrangements, existing R&D projects, and business acquisitions,

 

   

maintain our quarterly dividend. Our dividend paid in the second quarter was $0.17 per share. In July 2009, our Board of Directors declared a quarterly cash dividend of $0.17 per share, payable on August 24, 2009 to stockholders of record on August 10, 2009. Although dividend payments are at the discretion of our Board of Directors, we expect to pay quarterly dividends in 2009 of $0.17 per share,

 

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pay costs associated with our supply chain initiatives,

 

   

continue our Orange County consolidation project (as further described below), and

 

   

make pension and postretirement plan contributions of approximately $19 million.

We anticipate that our Orange County consolidation project will result in additional cash outflows of approximately $25 to $35 million during 2009, the vast majority of which is associated with renovations and other capital expenditures. Although we may begin to incur some payments associated with the environmental clean up of our Fullerton facility, we expect more significant payments to occur in 2010 and beyond. Proceeds from the potential sale of the Fullerton facility are not anticipated until 2010 or later.

Following is a summary of our cash flow from operating, investing and financing activities, as reflected in our Condensed Consolidated Statements of Cash Flows (in millions):

 

     Six Months
Ended June 30,
     2009    2008

Cash provided by (used in):

     

Operating activities

   $   225.5       $   132.3   

Investing activities

     (157.5)        (143.1)  

Financing activities

     476.7         (6.7)  

Effect of exchange rates on cash and cash equivalents

     0.8         4.0   
             

Change in cash and cash equivalents

   $   545.5       $   (13.5)  
             

Cash provided by operating activities for the first six months of 2009 increased by $93.2 million due primarily to improved collection effort of customer receivables, timing of vendor payments and a $31 million tax refund related to net operating loss carryback associated with a tax accounting method change. The above increases in cash were partially offset by higher pension contributions and inventory purchases.

Investing activities used cash of $157.5 million in the first six months of 2009, compared to $143.1 million in the same period in 2008, an increase of $14.4 million. This increase is primarily related to an increase in payments for property, plant and equipment offset by a decrease in spending for new customer leased instruments. Additionally, in the prior year, we received proceeds from the sale of buildings and land.

Cash flows provided by financing activities increased by $483.4 million compared to the same period in the prior year due primarily to the debt offering completed in May 2009 to finance a portion of the Olympus Diagnostics Acquisition, which closed on August 3, 2009.

Financing Arrangements

At June 30, 2009 approximately $201.5 million of unused, uncommitted, short-term lines of credit were available to our subsidiaries outside the U.S. at various interest rates. In the U.S., $40.0 million in unused, uncommitted, short-term lines of credit at prevailing market rates were available, excluding the accounts receivable securitization program described below.

Our wholly owned subsidiary, Beckman Coulter Finance Company, LLC (“BCFC”), a Delaware limited liability company, entered into an accounts receivable securitization program with several financial institutions. The securitization facility is on a 364-day revolving basis. As part of the securitization program, we transferred our interest in a defined pool of accounts receivable to BCFC. In turn, BCFC sold an ownership interest in the underlying receivables to the multi-seller conduits administered by a third party bank. Sale of receivables under the program is accounted for as a secured borrowing. The cost of funds under this program varies based on changes in interest rates. The term of the agreement extends to October 28, 2009 and the maximum borrowing amount is $125.0 million. We did not have any amounts drawn on the facility as of June 30, 2009.

In May 2009, we entered into an Amended and Restated Credit Agreement (the “Credit Facility”) and extended the maturity date of the Credit Facility to May 2012. The Credit Facility provides us with a $350.0 million revolving line of credit, which may be increased in $50.0 million increments up to a maximum line of credit of $450.0 million. Interest on advances is determined using formulas specified in the agreement, generally, an approximation of LIBOR plus 2.25% to 2.875% margin with the precise margin

 

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determinable based on our long-term senior unsecured non-credit-enhanced debt rating, which as of June 30, 2009 was 2.81%. We also must pay a facility fee of 0.50% per annum on the aggregate average daily amount of each lender’s commitment with the precise margin determinable based on our long-term senior unsecured non-credit-enhanced debt rating, which as of June 30, 2009 was a S&P rating of BBB. At June 30, 2009, no amounts were outstanding under the Credit Facility.

On May 18, 2009, we issued $250 million principal amount of the Company’s 6% Senior Notes due 2015 and $250 million principal amount of the Company’s 7% Senior Notes due 2019. In connection with the Notes, we incurred issuance costs of $4.8 million and the Notes were issued at a discount of $2.3 million which is being amortized over the estimated life of the Notes. The proceeds from the Notes was used to fund the Olympus Diagnostics Acquisition.

On May 19, 2009 we entered into forward sale agreements for the sale of an aggregate of 4,722,989 shares of our common stock including an amount equal to the underwriters’ over-allotment option in the public offering. The initial forward sale price was $50.75 per share which was equivalent to the public offering price of $53.00 less the underwriting discount of $2.25. On July 27, 2009, we completed the forward sale of our common stock, as described in Note 11, and received total net proceeds of approximately $240 million which was used to fund the Olympus Diagnostics Acquisition. We incurred issuance costs and underwriting fees of $11.4 million in connection with this offering, which is recorded as a deferred asset as of June 30, 2009.

Global Market and Economic Conditions

Global market and economic conditions have been, and continue to be, disrupted and volatile. Concerns about the systemic impact of geopolitical issues, the availability and cost of credit, currency volatility, slowing and declining global economies, the United States mortgage market and a declining real estate market in the U.S. and elsewhere have contributed to the increased market volatility as well as diminished expectations for the United States and other world economies. These conditions combined with declining business and consumer confidence and increased unemployment have contributed to the market volatility.

As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, or in some cases cease, to provide funding to borrowers. The economic conditions also might impact counterparties ability to perform under existing hedging agreements. Continued turbulence in the United States and international markets and economies may adversely affect our liquidity and financial condition and the liquidity and financial condition of our customers and suppliers. If these market conditions continue, they may limit our ability, and the ability of our customers and suppliers, to replace maturing liabilities and access the capital markets to meet liquidity needs, which could result in an adverse effect on our financial condition and results of operations. It also may affect our ability to issue and the terms of equity and debt capital.

The disruptions in the equity and credit markets, as mentioned above, have resulted in depressed security values in most types of investment and non-investment grade bonds and debt obligations and mortgage and asset-backed securities, as well as the failure of the auction mechanism for certain of those asset-backed securities. Our pension plans invest in a variety of equity and debt securities, including securities that have been impacted by this disruption. Although, the value of our U. S. pension plan assets has increased by approximately $8.3 million as of June 30, 2009 as compared to December 31, 2008, our U.S. pension plan is underfunded at June 30, 2009 as a result of the decline in the credit and equity markets. Our worldwide pension expense is expected to increase by about $24 million in 2009. We expect to make additional contributions of about $15 million to our U.S. and international pension plans during the remainder of 2009. We may decide to make additional pension plan contributions beyond the required minimum in the future.

Notwithstanding the above, we believe our cash flows from operations together with existing cash balances, available borrowings under our credit facility and other sources of liquidity will be adequate to meet our anticipated requirements for interest payments, other debt service obligations, working capital, capital expenditures, lease payments, pension contributions and other operating needs for the next year. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels. Future operating performance and our ability to service or refinance existing indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control as described above.

Recent Accounting Developments

See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of the Notes to the Condensed Consolidated Financial Statements in this filing for a description of recently adopted accounting pronouncements as well as new accounting standards not yet adopted.

 

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Other Events

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Except as noted below, there have been no significant changes in our market risk exposures from the amounts and descriptions disclosed therein.

On February 27, 2009, we announced that we had signed a definitive agreement to buy the lab-based diagnostics business of Olympus Corporation for 77.45 billion Japanese yen (approximately U.S. $780 million based on currency exchange rates as of February 27, 2009), which we closed August 3, 2009. To mitigate unfavorable fluctuation in the movement of the yen in relation to the U.S. dollar, we entered into forward contracts to purchase Japanese yen at the spot rate to effectively fix the U.S. dollar cost of the total payment to approximately $780 million. The forward contracts do not qualify as a cash flow hedge under accounting rules, therefore, we recognized a hedging gain of $20.5 million and $8.7 million during the three and six months June 30, 2009, which is reflected within the non-operating (income) expense line of our consolidated statement of earnings.

In addition to our foreign currency risk associated with the Olympus Diagnostics Acquisition described above, we have significant foreign currency exposures related to the Euro, Japanese yen, Australian dollar, British Pound Sterling and Canadian dollar. As of June 30, 2009 and December 31, 2008, the notional amounts of all derivative foreign exchange contracts were $461.5 million (which includes the forward contract related to the Olympus Diagnostics Acquisition as noted above) and $257.8 million, respectively. Notional amounts are stated in U.S. dollar equivalents at the spot exchange rate at the respective dates. The net fair values of all derivative foreign exchange contracts as of June 30, 2009 and December 31, 2008 were a net asset of $15.8 million and $25.7 million, respectively. We estimated the sensitivity of the fair value of all derivative foreign exchange contracts to a hypothetical 10% strengthening and 10% weakening of the spot exchange rates for the U.S. dollar against the foreign currencies at June 30, 2009. The analysis showed that a 10% strengthening of the U.S. dollar would result in loss from a fair value change of $62.2 million and a 10% weakening of the U.S. dollar would result in gain from a fair value change of $70.7 million in these instruments. Losses and gains on the underlying hedged transactions would largely offset any gains and losses on the fair value of the derivative contracts. These offsetting gains and losses are not reflected in the above analysis. Significant foreign currency exposures at June 30, 2009 were not materially different than those at December 31, 2008, except for the forward contracts entered into to hedge the purchase price of the Olympus Diagnostics Acquisition.

Similarly, we performed a sensitivity analysis on our variable rate debt instruments. A one percentage point increase or decrease in interest rates was estimated to decrease or increase this year’s pre-tax earnings by $0.1 million based on the amount of variable rate debt outstanding at June 30, 2009.

Additional information with respect to our foreign currency and interest rate exposures is discussed in Note 4, “Derivatives“ and Note 5, “Fair Value Measurements” of the Notes to Condensed Consolidated Financial Statements included in Part I “Financial Information,” Item 1 “Financial Statements” of this filing.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, at the reasonable level of assurance.

Changes in Internal Control Over Financial Reporting.

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

Certain of our legal proceedings in which we are involved are discussed in Note 14 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q and are incorporated herein by reference.

 

Item 1A. Risk Factors

We face significant competition, and our failure to compete effectively could adversely affect our sales and results of operations.

We face significant competition from many domestic and international manufacturers, with many of these companies participating in one or more parts of each of our markets. Some of these competitors are divisions or subsidiaries of corporations with substantial resources. We also compete with several companies that offer reagents, supplies and service for laboratory instruments that are manufactured by us or others. Our sales and results of operations may be adversely affected by loss of market share through aggressive competition, the rate at which new products are introduced by us and our competitors and the extent to which new products displace existing technologies and competitive pricing especially in areas where currency has an effect.

We are subject to various federal, state, local and foreign regulations and compliance with these laws could cause us to incur substantial costs and adversely affect our results of operations.

Our products and operations are subject to a number of federal, state, local and foreign laws and regulations. A determination that our products or operations are not in compliance with these laws and regulations could subject us to civil and criminal penalties, prevent us from manufacturing or selling certain of our products and cause us to incur substantial costs in order to be in compliance. In addition, changes to existing laws or regulations, changes in interpretation of these laws and regulations or the adoption of new laws or regulations, including the effect of potential health care reforms, also could prevent us from manufacturing or selling our products, reduce funding for government and academic research and cause us to incur substantial compliance costs. The passage of potential health care reforms, changes in tax laws and their interpretation in the United States and other countries, the effect of taxes and changes in tax policy also may adversely affect our results of operations.

We must continue to market and improve existing products and develop new products that meet customer needs and expectations or our business and results of operations will be adversely impacted.

Our ability to continue to grow depends on our success in continuing to market and improve our existing products and develop new products that meet customer needs and expectations. Improving existing products and developing new products requires us to successfully integrate hardware, software and chemistry components. Consequently, the expected introductions of new products may be impacted by factors such as complexity and uncertainty in the development of new high-technology products and availability of qualified engineers, programmers and other key personnel. The viability of supply partners also may impact new product introductions for products we distribute. In addition, our ability to introduce new products and to continue marketing existing products may be affected by patents and other intellectual property rights of others, our ability to protect our intellectual property from others, the acquisition and integration of other companies and intellectual property and our ability to obtain regulatory approvals, including delays in obtaining any government marketing authorizations necessary to market the products, particularly with respect to clinical diagnostics products. Factors affecting the introduction of molecular diagnostic products include the inability to develop clinical diagnostic tests based on new technologies, a determination that the tests do not provide sufficient precision and accuracy, identification of additional necessary intellectual property rights, failure to establish the clinical utility of these tests during clinical studies and delays resulting from the timing and scope of regulatory agency reviews.

Our business could be adversely affected if we do not prevail in present or future third party intellectual property litigation adverse to our products or if our patents or other intellectual property rights are challenged, invalidated, circumvented or expire.

We cannot assure you that our products will be free of intellectual property rights of others or that a court will not find such products to infringe third party rights. Patent disputes are frequent, costly and may preclude or delay product commercialization. We may have to pay significant licensing fees to obtain access to third party intellectual property rights to make and sell current products or to introduce new products and cannot guarantee that such licenses will be available on terms actable to us, or at all. We also cannot assure you that our issued patents will include claims sufficiently broad to prevent competitors from developing competing products or that pending patent applications will result in issued patents. Obtaining and maintaining patents is an iterative process with patent offices worldwide. Our patents may not protect us against competitors with similar products or technologies, because competing products or technologies may not infringe our patents. The enforcement of our issued patents requires the filing and prosecution of legal actions in countries around the world, and we cannot assure you that we will prevail in such actions.

 

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We rely on certain suppliers and manufacturers for raw materials and other products, and fluctuations in the availability and price of such products and services may interfere with our ability to meet our customers’ needs.

Difficulty in obtaining raw materials and components for our products, especially in the rapidly evolving electronic components market, could affect our ability to achieve anticipated production levels. For some of our products we are dependent on a small number of suppliers of finished products and of critical raw materials and components and our ability to obtain, enter into and maintain contracts with these suppliers. We cannot assure you that we will be able to obtain, enter into or maintain all such contracts in the future. On occasion, we have been forced to redesign portions of products when a supplier of critical raw materials or components terminated its contract or no longer made the materials or components available. If we are unable to achieve anticipated production levels and meet our customers needs, our operating results could be adversely affected. In addition, our results of operations may be significantly impacted by unanticipated increases in the costs of labor, raw materials, freight, utilities and other items needed to develop, manufacture and maintain our products and operate our business. Suppliers also may deliver components or materials that do not meet specifications preventing us from manufacturing products that meet our design specifications or customer requirements.

Consolidation of our customer base and the formation of group purchasing organizations could adversely affect our sales and results of operations.

Consolidation among health care providers and the formation of buying groups has put pressure on pricing and sales of our products, and in some instances, required payment of fees to group purchasing organizations. Our success in these areas depends partly on our ability to enter into contracts with integrated health networks and group purchasing organizations. If we are unable to enter into contracts with these group purchasing organizations and integrated health networks on terms acceptable to us, our sales and results of operations may be adversely affected. Even if we are able to enter into these contracts, they may be on terms that negatively affect our current or future profitability.

Reductions in government funding to our customers could negatively impact our sales and results of operations.

Many of our customers rely on government funding and on prompt and full reimbursement by Medicare and equivalent programs outside of the United States. In addition, our sales are affected by factors such as:

 

   

the level of government funding for clinical testing, biomedical research, bioterrorism, forensics, and food safety,

 

   

pharmaceutical company spending policies, and

 

   

access to capital by biotechnology start ups.

A reduction in the amount or types of government funding or reimbursement that affect our customers, as well as the unavailability of capital to our clinical diagnostics and biomedical research customers, could have a negative impact on our sales. Global economic uncertainty can result in lower levels of government funding or reimbursement.

Our international operations expose us to foreign currency exchange fluctuations.

We operate a substantial portion of our business outside of the United States and are therefore exposed to fluctuations in the exchange rate between the U.S. dollar and the currencies in which our foreign subsidiaries and dealers receive revenue and pay expenses. With a strengthening U.S. dollar, this exposure includes a negative impact on margins on sales of our products in foreign countries that are manufactured in the United States. We may enter into currency hedging arrangements in an effort to stabilize certain of these fluctuations. There are certain costs associated with these currency hedging arrangements, and we cannot be certain that such arrangements will have the full intended effect. Our currency exposures may not be hedged exposing us to losses on our assets and cash flows denominated in these currencies. Our dealers may experience slower payment terms from their customers or have trouble paying for the purchases due to a stronger U.S. dollar. Further, we are exposed to counter party risks in the event that our counterparties do not perform in accordance with the contract terms.

Global market, economic and political conditions and natural disasters may adversely affect our operations and performance.

Our operations and performance depend significantly on worldwide market economic and political conditions and their impact on levels of certain customer spending, which may deteriorate significantly in many countries and regions, including without limitation the United States, particularly in light of the current worldwide market disruptions and economic downturn, and may remain depressed for the foreseeable future. For example, global political conditions and general economic conditions in foreign countries in which we do significant business, such as France, Germany, India, Japan and China, could have a negative impact on our sales. These disruptions could adversely affect our customer’s ability to pay for products or purchase additional products. These conditions also may adversely affect our suppliers, which could cause disruptions in our ability to produce our products. In addition, economic and market volatility and disruption, such as the current worldwide market disruptions and economic downturn, may adversely affect the cost and availability of credit. Concern about market stability and counterparty strength may lead lenders and institutional investors to reduce or cease to provide funding to borrowers. Natural disasters, such as hurricanes and earthquakes,

 

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could adversely affect our customers and our ability to manufacture and deliver products. Any of these market, economic, political or natural disaster factors could have a material adverse effect on demand for our products, our ability to manufacture, support and distribute products, our financial condition and operating results, and the terms of equity and debt capital and our ability to issue them.

Costs associated with our supply chain initiatives will affect earnings and results of operations.

We have announced several relocation plans, including our plan to vacate our Fullerton, California facility and consolidate those operations to other facilities. In connection with this consolidation and the related closure of our Fullerton, California site, we have initiated environmental studies of the Fullerton facility and could incur substantial costs in addition to those already estimated and recorded depending upon determination of the remediation requirements. We may experience difficulties, delays or unexpected costs and not achieve anticipated cost savings from our relocation and consolidation plans. The scope and timing of the relocations and related charges and savings could impact our earnings and results of operations.

We are subject to various income tax risks and regulations throughout the world.

By conducting business in the United States and many other countries, we must continually interpret, and then comply with, the income tax rules and regulations in these countries. Different interpretations of income tax rules and regulations as applied to our facts by us and applicable tax authorities throughout the world could result, either historically or prospectively, in adverse impacts to our worldwide effective income tax rates and income tax liabilities. Other factors that could impact our worldwide effective tax rates and income tax liabilities are:

 

   

the amount of taxable income in the various countries in which we conduct business,

 

   

the tax rates in those countries,

 

   

income tax treaties between countries

 

   

the extent to which income is repatriated between countries,

 

   

future changes in income tax rules and regulations, and

 

   

adoption of new types of taxes such as consumption, sales and value added taxes.

Our investment in marketable securities is significant and is subject to market, interest rate and credit risk that may reduce its value.

Within the pension plan assets, we maintain a significant portfolio of marketable securities as well as other assets subject to market fluctuations. Our earnings and stockholder’s equity could be adversely affected by changes in the value of this portfolio. In particular, the value of our investments may be adversely affected by general economic conditions, changes in interest rates, downgrades in the corporate bonds included in the portfolio and other factors. Each of these events may cause us to reduce the carrying value of our investment portfolio and may result in higher pension expense or our pension plans being further under funded.

Acquisitions and divestitures pose financial and other risks and challenges.

We routinely explore acquiring other businesses and assets that would fit strategically. From time to time, we also may consider disposing of certain assets, subsidiaries or lines of business that are less of a strategic fit within our portfolio. Potential acquisitions or divestitures present financial, managerial and operational challenges, including diversion of management attention, difficulty with integrating or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities, indemnities and potential disputes with the buyers or sellers. There can be no assurance that we will engage in any acquisitions or divestitures or that we will be able to do so on terms that will result in any expected benefits. Acquisitions financed with borrowings could put financial stress on our earnings resulting in materially higher interest rates.

If we do not achieve the contemplated benefits of our acquisition of the Olympus Diagnostic Systems Business, our business and financial condition may be materially impaired.

The Olympus Diagnostics Acquisition will increase the size of our company and expand the geographic areas in which we operate. We cannot assure that we will achieve the desired benefits from the Olympus Diagnostics Acquisition. Our acquisition of the Olympus Diagnostic Systems Business involves the integration of the Olympus Diagnostic Systems Business with our Clinical Diagnostics business. If we cannot successfully integrate the Olympus Diagnostic Systems Business operations with our Clinical Diagnostics business, we may experience material negative consequences to our business, financial condition or results of operations. The integration of the two businesses that have previously operated separately will be a costly and time-consuming process that will involve a number of risks, including, but not limited to:

 

   

diversion of senior management’s attention from the management of daily operations to the integration of operations;

 

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demands on the management of our Clinical Diagnostics business related to the increase in the size and scope of the distribution business for which they are responsible;

 

   

difficulties in the assimilation of different corporate cultures, practices and sales and distribution methodologies, as well as in the assimilation and retention of geographically dispersed operations and personnel;

 

   

difficulties in implementing information technology to support the entire combined business;

 

   

the potential loss of key personnel who choose not to join the combined business;

 

   

difficulties in implementing information technology to support the entire combined business;

 

   

the potential loss of key customers who choose not to do business with the combined business;

 

   

larger foreign operations and increased exposure to risks relating to business operations outside the United States;

 

   

difficulties and unanticipated expenses related to the integration of facilities, departments, systems, including accounting systems, computer and other technologies, books and records and procedures, as well as in maintaining uniform standards, including internal accounting controls, procedures and policies;

 

   

difficulties in obtaining the leverage across the companies’ installed base that is anticipated, which could offset any such savings and other synergies resulting from the Olympus Diagnostics Acquisition;

 

   

difficulties in implementing anticipated changes to infrastructure, which could offset any such savings and other synergies resulting from the Olympus Diagnostics Acquisition;

 

   

fluctuations in foreign currency rates, which could cause the operating results of the Olympus Diagnostic Systems Business and any such savings or other synergies we expect from the Olympus Diagnostics Acquisition to fail to meet our current expectations;

 

   

costs and expenses associated with any undisclosed or potential liabilities; and

 

   

the use of cash resources and increased capital expenditures on integration and implementation activities in excess of our current expectations, which could offset any such savings and other synergies resulting from the Olympus Diagnostic Systems Business acquisition.

Even if we are able to successfully integrate the operations of the Olympus Diagnostic Systems Business, we may not be able to realize the cost savings, synergies and growth that we anticipate from the integration in the time frame that we currently expect, and the costs of achieving these benefits may be higher than what we currently expect.

The Olympus Diagnostic Systems Business operations are subject to their own risks, which we may not be able to manage successfully. There may be additional risks resulting from the Olympus Diagnostic Systems Business acquisition that are not presently known to us which could adversely affect us.

The results of operations of the Olympus Diagnostic Systems Business are subject to many of the same risks that affect our financial condition and results of operations and, more specifically, those of our Clinical Diagnostics business. There may be additional risks resulting from the Olympus Diagnostic Systems Business acquisition that are not presently known to us. Any discovery of adverse information concerning the Olympus Diagnostic Systems Business after the closing of the acquisition could be material and, in many cases, we would have limited rights of recovery. The indemnification provided in the master purchase agreement may not be sufficient to protect us from, or compensate us for, all losses resulting from the acquisition or the Olympus Diagnostic Systems Business’s prior operations. For example, under the terms of the master purchase agreement, indemnification is limited to certain subject matters and the maximum aggregate amount of such losses for which Olympus will indemnify us is, subject to certain exceptions, limited to 12.5% of the purchase price of the Olympus Diagnostic Systems Business. A material loss associated with the Olympus Diagnostic Systems Business acquisition for which there is not adequate indemnification could negatively affect our results of operations, our financial condition and our reputation in the industry and reduce the anticipated benefits of the acquisition.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

No repurchases were made pursuant to our share repurchase program during the three months ended June 30, 2009.

 

Item 6. Exhibits

A list of exhibits filed with this Form 10-Q is set forth in the Exhibit Index and is incorporated by reference.

 

41


Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BECKMAN COULTER, INC.
  (Registrant)
Date: August 5, 2009   By  

/s/ Scott Garrett

    Scott Garrett
   

Chairman of the Board, President

and Chief Executive Officer

Date: August 5, 2009   By  

/s/ Charles P. Slacik

    Charles P. Slacik
   

Senior Vice President &

Chief Financial Officer

Date: August 5, 2009   By  

/s/ Carolyn D. Beaver

    Carolyn D. Beaver
   

Corporate Vice President, Controller and

Chief Accounting Officer

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit No.

  

Exhibit Description

15.1

   Report of Independent Registered Public Accounting Firm

15.2

   Letter of Acknowledgement of Use of Report on Unaudited Interim Financial Information dated August 4, 2009

31

   Rule 13a-14(a)/15d-14(a) Certification

32

   Section 1350 Certification

 

43

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