In regards to corporate earnings, most investors focus their attention on sales and either net income or earnings per share (EPS). While sales figures are usually straightforward, EPS results are often reported in both GAAP (Generally Accepted Accounting Principles) and nonGAAP adjustments. GAAP results provide a standardized and consistent method to compare results, but do not account for adjustments of nonrecurring items or otherwise, referred to as one-time items or extraordinary items. NonGAAP results add back charges and subtract gains to the bottom line for extraordinary items, and thus provide a better reflection of future earnings and a more accurate account of operating results. One gray area revolves around adjustments for stock-based compensation. Although it usually occurs on a regular basis, it is considered a one-time charge. Another aspect to making adjustments to the bottom line is that the taxable income is not recalculated after adding back charges and, therefore, results in a double benefit.

To show the difference in GAAP versus nonGAAP EPS, we have listed 10 analytical and life science instrument companies that reported significant one-time charges in 2007 for various reasons, such as restructuring, litigation and amortization. Reviewing extraordinary charges can provide a better understanding of a company’s operations and strategies, especially when related to restructuring plans or acquisitions.

Among the firms (see table), Illumina recorded the biggest difference between GAAP and nonGAAP earnings in 2007. The company reported $303.4 million in acquired in-process R&D from the acquisition of Solexa (see IBO 11/15/06), which accounted for roughly half of the total purchase price. Those projects that were written off, which included sequencing-by-synthesis biochemistry, reagents, analyzers and sequencing services–related technologies, were determined to have no future use. Other adjustments included the amortization of acquired intangible assets from Solexa of $2.4 million, as well as a litigation settlement of $54.5 million. These nonrecurring expenses, along with stock compensation expenses of $33.7 million, totaled $394.1 million. Illumina also benefited from a $10.4 million tax credit related to 2006’s losses. For 2006, there were no reported extraordinary charges or benefits.

Similarly, Invitrogen’s reported a number of extraordinary charges in 2007. The company recorded $98.7 million in costs for amortization of purchased intangibles, compared to $110.7 million of such costs in 2006. However, in accordance with purchase accounting rules, these charges were recorded as cost of revenues and included in GAAP results. As a result, GAAP gross profit margins were 55.9% of sales, while adjusted gross margins were 63.6%. Because this type of write-off also occurs in the two previous years, comparing Invitrogen’s year-over-year figures is more effective then comparing them to other instrument companies’ results. Additionally, the company reported consolidation costs of $5.6 million and $12.5 million in 2007 and 2006, respectively, which were primarily associated with severance and other costs from several acquisitions.

As with Invitrogen, QIAGEN ended the year with nonreoccurring expenses that included a recording of the amortization of acquisition-related intangibles as cost of sales. These charges, which were related to acquired technology and patent and license rights following a consolidation of businesses, amounted to $23.6 million in 2007, compared to $6.1 million in 2006. The company also reported purchase in-process R&D charges of $25.9 million, acquisition-related charges of $22.4 million, and relocation and restructuring costs of $0.5 million, all related to the acquisitions of eGene (see IBO 4/15/07) and Digene (see IBO 2/15/07).

Similarly, Thermo Fisher Scientific, Waters, Caliper Life Science and Applied BioSciences all recorded write-downs associated with acquisitions. Thermo Fisher Scientific reported amortization of acquisition related–intangible assets of $572.6 million, as well as restructuring costs of $42.2 million due to consolidation-related efforts. The company also recorded $49.2 million in cost-of-revenue charges from the sale of inventory following the merger with Fisher Scientific (see IBO 11/15/06).

On a smaller scale, Waters reported charges of $8.7 million in 2007, or $0.08 a share, for the amortization of purchased intangibles related to the acquisition of Environmental Resources (see IBO 11/30/06). Approximately $30 million, or less than half of the purchase price, was deemed intangible assets, such as customer relationships, noncompete agreements and acquired technology and trademarks, and will be amortized over five to 10 years.

In 2007, Caliper Life Sciences also recorded amortization of intangible assets. Due to the integration of acquired businesses, it recorded amortization of intangible assets in the amount of $10.1 million. The company also recorded stock-based compensation expenses.

For fiscal 2007, Applied Biosystems wrote-off $114.3 million for in-process R&D associated with the acquisition of Agencourt Personal Genomics (see IBO 5/31/06). The write-off equaled approximately 95% of the company’s purchase price. At the time of the acquisition, Agencourt’s instrument and reagent projects were still in early development and were roughly 30% completed, and thus were deemed to have no forward value. Even with the additional costs of approximately $28 million to develop the acquired technology into commercially viable products, the acquisition of Agencourt could be viewed as a cost-effective purchase if sales are successful. The company also listed an amortization expense of $11.2 million related to acquired intangibles from past acquisitions, as well as a pretax benefit of $2.2 million from legal settlements. The cumulative recorded items reduced income before taxes by $123.3 million, compared to $19.1 million in the previous year. Finally, Applied Biosystems received a favorable tax adjustment of $23.8 million, which further lowered taxable income, however, this was less than half of fiscal 2006’s tax benefit. Such large write-offs make it more difficult to determine future tax expenditures and bottom line figures.

PerkinElmer and Bruker were also subsidized using tax benefits in 2007. In 2007, PerkinElmer recorded a tax benefit of $18.6 million from an income tax audit. Coupled with an in-process R&D charge of $1.5 million related to the acquisitions of Evotec Technologies (see IBO 11/30/06) and Euroscreen (see IBO 12/31/06), the company’s tax rate fell to 11.5% compared to 21.5% in 2006. Bruker received a tax benefit of $3.7 million in 2007 from a change in German tax law, but also wrote-off $0.04 a share for expenses related to the acquisition of Bruker BioSpin (see IBO 12/15/07). This resulted in an overall tax rate of 34.5% compared to 42.2%, excluding the tax benefit.

In an effort to reduce operational costs, Affymetrix initiated restructuring plans that resulted in employee severance, relocation and contract termination costs of $15.3 and $13.5 million in 2006 and 2007, respectively. In 2007, Affymetrix recorded net income of approximately $12.6 million, or $0.17 per share for 2007, including $0.18 a share in restructuring charges.