XNAS:LMNX Luminex Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
     
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012.
 
or
     
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________.

Commission File Number: 000-30109
 

 
LUMINEX CORPORATION
(Exact name of registrant as specified in its charter)
     
DELAWARE
 
74-2747608
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
12212 TECHNOLOGY BLVD., AUSTIN, TEXAS
 
78727
(Address of principal executive offices)
 
(Zip Code)
(512) 219-8020
(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 þ  No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No    o

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

Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o (Do not check if smaller reporting company)
 
Smaller reporting company o
     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No þ

There were 41,992,156 shares of the Company’s Common Stock, par value $0.001 per share, outstanding on July 27, 2012.

 
 

 
 
     
   
Page
     
   
     
   
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
   
     
 
     
 
     
 
     
 
     
Exhibit 10.1
 
 
Exhibit 10.2
 
 
 
 
 
 
 
 
 
 
EX-101 INSTANCE DOCUMENT
   
EX-101 SCHEMA DOCUMENT
   
EX-101 CALCULATION LINKBASE DOCUMENT
   
EX-101 DEFINITION LINKBASE DOCUMENT
   
EX-101 LABELS LINKBASE DOCUMENT
   
EX-101 PRESENTATION LINKBASE DOCUMENT
   

 
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
LUMINEX CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(in thousands)
 
             
   
June 30, 2012
   
December 31, 2011
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 75,898     $ 58,282  
Restricted cash
    -       1,006  
Short-term investments
    23,150       42,574  
Accounts receivable, net
    26,176       23,016  
Inventories, net
    26,304       24,579  
Deferred income taxes
    4,416       5,991  
Prepaids and other
    4,924       3,529  
                 
Total current assets
    160,868       158,977  
                 
Property and equipment, net
    26,243       25,192  
Intangible assets, net
    27,256       29,437  
Deferred income taxes
    13,461       12,817  
Long-term investments
    5,997       6,151  
Goodwill
    42,758       42,763  
Other
    6,899       7,310  
                 
Total assets
  $ 283,482     $ 282,647  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 5,937     $ 5,941  
Accrued liabilities
    9,714       11,047  
Deferred revenue
    4,230       4,057  
Current portion of long-term debt
    490       999  
                 
Total current liabilities
    20,371       22,044  
                 
Long-term debt
    2,191       2,573  
Deferred revenue
    3,259       3,344  
Other
    2,584       3,831  
                 
Total liabilities
    28,405       31,792  
                 
Stockholders' equity:
               
Common stock, $.001 par value, 200,000,000 shares authorized; issued and outstanding: 41,110,756 shares at June 30, 2012; 40,968,957 shares at December 31, 2011
    41       41  
Preferred stock, $.001 par value, 5,000,000 shares authorized; no shares issued and outstanding
    -       -  
Additional paid-in capital
    294,936       297,104  
Accumulated other comprehensive income
    895       984  
Accumulated deficit
    (40,795 )     (47,274 )
                 
Total stockholders' equity
    255,077       250,855  
                 
Total liabilities and stockholders' equity
  $ 283,482     $ 282,647  
                 
                 
See the accompanying notes which are an integral part of these
 
Condensed Consolidated Financial Statements.
 
 
 
LUMINEX CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(in thousands, except per share amounts)
 
                         
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
                         
Revenue
  $ 48,273     $ 47,638     $ 97,000     $ 90,913  
Cost of revenue
    13,861       13,812       28,828       26,359  
                                 
Gross profit
    34,412       33,826       68,172       64,554  
                                 
Operating expenses:
                               
Research and development
    9,638       7,945       19,078       15,515  
Selling, general and administrative
    17,204       16,482       34,816       30,763  
Amortization of acquired intangible assets
    1,084       602       2,184       1,185  
                                 
Total operating expenses
    27,926       25,029       56,078       47,463  
                                 
Income from operations
    6,486       8,797       12,094       17,091  
Interest expense from long-term debt
    (63 )     (79 )     (122 )     (162 )
Other income, net
    42       108       99       215  
                                 
Income before income taxes
    6,465       8,826       12,071       17,144  
Income taxes
    (3,513 )     (4,183 )     (5,592 )     (8,040 )
                                 
Net income
  $ 2,952     $ 4,643     $ 6,479     $ 9,104  
                                 
Other comprehensive income:
                               
Foreign currency translation adjustments
    (268 )     284       (70 )     424  
Unrealized losses on available-for-sale securities, net of tax
    -       (1 )     (18 )     (80 )
                                 
Other comprehensive income (loss)
    (268 )     283       (88 )     344  
                                 
Comprehensive income
  $ 2,684     $ 4,926     $ 6,391     $ 9,448  
                                 
Net income per share, basic
  $ 0.07     $ 0.11     $ 0.16     $ 0.22  
                                 
Shares used in computing net income per share, basic
    41,064       41,262       40,992       41,251  
                                 
Net income per share, diluted
  $ 0.07     $ 0.11     $ 0.15     $ 0.21  
                                 
Shares used in computing net income per share, diluted
    42,399       42,446       42,246       42,398  
                                 
                                 
See the accompanying notes which are an integral part of these
 
Condensed Consolidated Financial Statements.
 
 

LUMINEX CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(in thousands)
 
                         
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Cash flows from operating activities:
                       
Net income
  $ 2,952     $ 4,643     $ 6,479     $ 9,104  
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Depreciation and amortization
    3,533       2,622       7,055       5,138  
Stock-based compensation
    2,571       2,993       5,214       5,540  
Deferred income tax benefit
    376       2,054       929       3,379  
Excess income tax benefit from employee stock-based awards
    (2,476 )     (1,501 )     (2,773 )     (3,705 )
Other
    (49 )     234       183       305  
Changes in operating assets and liabilities:
                               
Accounts receivable, net
    830       68       (3,183 )     6,656  
Inventories, net
    (1,860 )     1,793       (1,727 )     1,207  
Other assets
    (1,671 )     (164 )     (1,631 )     (1,186 )
Accounts payable
    555       (1,510 )     69       (4,254 )
Accrued liabilities
    4,811       1,953       (1,215 )     167  
Deferred revenue
    (50 )     (317 )     93       (460 )
                                 
Net cash provided by operating activities
    9,522       12,868       9,493       21,891  
                                 
Cash flows from investing activities:
                               
Purchases of available-for-sale securities
    (1,496 )     (22,201 )     (10,495 )     (29,247 )
Sales and maturities of available-for-sale securities
    21,490       7,256       30,005       14,177  
Purchase of property and equipment
    (3,761 )     (2,644 )     (5,357 )     (3,798 )
Business acquisition consideration, net of cash acquired
    -       (33,914 )     -       (33,914 )
Purchase of cost method investment
    -       -       -       (2,000 )
Acquired technology rights
    (291 )     (87 )     (291 )     (87 )
                                 
Net cash provided by (used in) investing activities
    15,942       (51,590 )     13,862       (54,869 )
                                 
Cash flows from financing activities:
                               
Payments on debt
    (1,025 )     (885 )     (1,025 )     (885 )
Proceeds from issuance of common stock
    1,706       590       2,363       818  
Payments for stock repurchases
    (4,432 )     (1,436 )     (9,880 )     (4,686 )
Excess income tax benefit from employee stock-based awards
    2,476       1,501       2,773       3,705  
                                 
Net cash used in financing activities
    (1,275 )     (230 )     (5,769 )     (1,048 )
                                 
Effect of foreign currency exchange rate on cash
    (121 )     1       30       149  
Change in cash and cash equivalents
    24,068       (38,951 )     17,616       (33,877 )
Cash and cash equivalents, beginning of period
    51,830       94,561       58,282       89,487  
                                 
Cash and cash equivalents, end of period
  $ 75,898     $ 55,610     $ 75,898     $ 55,610  
                                 
                                 
                                 
See the accompanying notes which are an integral part of these
 
Condensed Consolidated Financial Statements.
 


NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Luminex Corporation (the “Company” or “Luminex”) in accordance with United States generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company has two segments for financial reporting purposes: the technology and strategic partnerships (“TSP”) segment and the assays and related products (“ARP”) segment.  See Note 9 — Segment Information.

NOTE 2 — BUSINESS COMBINATIONS

On June 27, 2011, the Company completed its acquisition of 100% of the outstanding shares of EraGen Biosciences, Inc., now known as Luminex Madison, or LMA, a privately-held molecular diagnostic company in Madison, Wisconsin, which was founded in 1999, for the aggregate cash purchase price of $34 million.  The results of operations for LMA have been included in the Company’s consolidated financial statements from the date of acquisition as part of the Company’s ARP segment.  $5.6 million of the cash purchase price was deposited in escrow as security for breaches of representations and warranties and certain other expressly enumerated matters and to satisfy any post-closing adjustments. $150,000 of this escrow was released to the seller in the third quarter of 2011 after the closing balance sheet was finalized, $1 million of this escrow was released to a licensor of LMA to fund an indemnification claim in the first quarter of 2012 related to a fee due pursuant to a sublicense agreement, and $944,000 of this escrow was released to former shareholders of EraGen Biosciences, Inc. and certain other individuals in the third quarter of 2012 at the conclusion of the one year initial general claims escrow period.

NOTE 3 — INVESTMENTS

Marketable Securities

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.  Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.  Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, which approximates the fair value of these investments.   Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Debt and marketable equity securities not classified as held-to-maturity or as trading are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses included in the determination of comprehensive income and reported in stockholders’ equity.  As of June 30, 2012 and December 31, 2011, all of the Company’s marketable securities are classified as available for sale.  Marketable securities are recorded as either short-term or long-term on the balance sheet based on contractual maturity date.  The fair value of all securities is determined by quoted market prices, market interest rates inputs, or other than quoted prices that are observable either directly or indirectly (as of the end of the reporting period).  Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against net earnings.
 
Available-for-sale securities consisted of the following as of June 30, 2012 (in thousands):
 
   
Amortized Cost
   
Gains in Accumulated Other Comprehensive Income
   
Losses in Accumulated Other Comprehensive Income
   
Estimated Fair Value
 
                         
Current:
                       
Money Market funds
  $ 55,698     $ -     $ -     $ 55,698  
Non-government sponsored debt securities
    23,133       20       (3 )     23,150  
Total current securities
    78,831       20       (3 )     78,848  
                                 
Noncurrent:
                               
Non-government sponsored debt securities
    6,000       -       (3 )     5,997  
Total noncurrent securities
    6,000       -       (3 )     5,997  
                                 
Total available-for-sale securities
  $ 84,831     $ 20     $ (6 )   $ 84,845  
 
Available-for-sale securities consisted of the following as of December 31, 2011 (in thousands):
 
   
Amortized Cost
   
Gains in Accumulated Other Comprehensive Income
   
Losses in Accumulated Other Comprehensive Income
   
Estimated Fair Value
 
                         
Current:
                       
Money Market funds
  $ 38,520     $ -     $ -     $ 38,520  
Non-government sponsored debt securities
    42,554       32       (12 )     42,574  
Total current securities
    81,074       32       (12 )     81,094  
                                 
Noncurrent:
                               
Non-government sponsored debt securities
    6,129       22       -       6,151  
Total noncurrent securities
    6,129       22       -       6,151  
                                 
Total available-for-sale securities
  $ 87,203     $ 54     $ (12 )   $ 87,245  

 
There were $6 million and $0 in proceeds from the sales of available-for-sale securities during the three months ended June 30, 2012 and 2011, respectively. Realized gains and losses on sales of investments are determined using the specific identification method.  Realized gains and losses are included in other income (expense) in the Consolidated Statement of Comprehensive Income. Net unrealized holding gains and losses on available-for-sale securities of $14,000, net of $10,000 of tax expense, on available-for-sale securities, have been included in accumulated other comprehensive gain (loss) as of June 30, 2012.  All of the Company’s available-for-sale securities with gross unrealized losses as of June 30, 2012 and December 31, 2011 had been in a loss position for less than 12 months.

The estimated fair value of available-for-sale debt securities at June 30, 2012 and December 31, 2011, by contractual maturity, was as follows (in thousands):
 
   
Estimated Fair Value
 
   
June 30, 2012
   
December 31, 2011
 
Due in one year or less
  $ 23,150     $ 42,574  
Due after one year through two years
    5,997       6,151  
    $ 29,147     $ 48,725  

 
Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

Non-Marketable Securities and Other-Than-Temporary Impairment

In the second quarter of 2010, the Company invested $2.0 million in a private company based in the U.S.  In the first quarter of 2011, the Company invested an additional $2.0 million in the same private company.   This minority investment in the private company is included at cost in other long-term assets on the Company’s Condensed Consolidated Balance Sheets as the Company does not have significant influence over the investee, owns less than 20% of the voting equity and the investee is not publicly traded.  The Company regularly evaluates the carrying value of this cost-method investment for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is judged to be other-than-temporary, the Company will record an other-than-temporary impairment charge in other income, net in the Consolidated Statements of Comprehensive Income.


NOTE 4 — INVENTORIES, NET

Inventory is stated at the lower of cost or market, with cost determined according to the standard cost method.   Inventory consisted of the following (in thousands):
 
   
June 30, 2012
   
December 31, 2011
 
Parts and supplies
  $ 14,397     $ 12,382  
Work-in-progress
    4,867       6,829  
Finished goods
    7,040       5,368  
    $ 26,304     $ 24,579  


NOTE 5 — FAIR VALUE MEASUREMENT

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The ASC describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:
 
Level 1—Quoted prices in active markets for identical assets or liabilities.
 
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.  The Company regularly evaluates the carrying value of the Level 3, cost-method investment for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. There were no transfers between Level 1, Level 2, or Level 3 measurements for the three month period ending June 30, 2012.

 
The Company’s long-term debt is classified as a Level 3 instrument and the Company has used a discounted cash flow (“DCF”) model to determine the estimated fair value for disclosure purposes as of June 30, 2012 and December 31, 2011, which does not equal its carrying value on the Consolidated Balance Sheet.  The assumptions used in preparing the DCF model include estimates for (i) the amount and timing of future interest and principal payments and (ii) the rate of return indicative of the investment risk in the ownership of the TPC debt.  In making these assumptions, the Company considered relevant factors including the likely timing of principal repayments and the probability of full repayment considering the timing of royalty payments based upon total revenue. 

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (in thousands):
 
   
Fair Value Measurements at June 30, 2012 Using
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Money Market funds
  $ 55,698     $ -     $ -     $ 55,698  
Non-government sponsored debt securities
    -       29,147       -       29,147  
Cost-method equity investment
    -       -       4,081       4,081  
                                 
Liabilities:
                               
Long-term debt
  $ -     $ -     $ 2,352     $ 2,352  
 
   
Fair Value Measurements at December 31, 2011 Using
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Money Market funds
  $ 38,520     $ -     $ -     $ 38,520  
Non-government sponsored debt securities
    -       48,725       -       48,725  
Cost-method equity investment
    -       -       4,081       4,081  
                                 
Liabilities:
                               
Long-term debt
  $ -     $ -     $ 3,232     $ 3,232  

 
NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS

On June 27, 2011, the Company completed the acquisition of LMA.  As a result, the Company recorded approximately $0.5 million of goodwill and $20.0 million of other identifiable intangible assets.  For impairment testing purposes, the Company has assigned all of the LMA goodwill to the ARP segment.   This goodwill is not expected to be deductible for tax purposes.


The changes in the carrying amount of the Company’s goodwill during the period are as follows (in thousands):
 
   
June 30, 2012
   
December 31, 2011
 
Balance at beginning of year
  $ 42,763     $ 42,250  
Acquisition of EraGen
    -       532  
Foreign currency translation adjustments
    (5 )     (19 )
Balance at end of period
  $ 42,758     $ 42,763  

  
The current in-process research and development projects are scheduled to be completed in 2012 and 2013.  The estimated costs to complete these projects are not material. The Company’s intangible assets are reflected in the table below (in thousands, except weighted average lives):
 
   
Finite-lived
   
Indefinite-lived
       
   
Technology, trade secrets and know-how
   
Customer lists and contracts
   
Other identifiable intangible assets
   
IP R&D
   
Total
 
2011
                             
Balance at December 31, 2010
  $ 18,407     $ 1,285     $ 283     $ 712     $ 20,687  
Additions due to acquisition of LMA
    11,332       6,697       1,652       286       19,967  
Completion of IP R&D projects
    270       -       -       (270 )     -  
Write-off of IP R&D projects
    -       -       -       (92 )     (92 )
Foreign currency translation adjustments
    (9 )     (1 )     (2 )     (5 )     (17 )
Balance at December 31, 2011
    30,000       7,981       1,933       631       40,545  
Less: accumulated amortization:
                                       
Accumulated amortization balance at December 31, 2010
    (7,362 )     (308 )     (73 )     -       (7,743 )
Amortization expense
    (2,643 )     (461 )     (272 )     -       (3,376 )
Foreign currency translation adjustments
    6       1       4       -       11  
Accumulated amortization balance at December 31, 2011
    (9,999 )     (768 )     (341 )     -       (11,108 )
Net balance at December 31, 2011
  $ 20,001     $ 7,213     $ 1,592     $ 631     $ 29,437  
                                         
Weighted average life (in years)
    10       11       9                  
                                         
2012
                                       
Balance at December 31, 2011
  $ 30,000     $ 7,981     $ 1,933     $ 631     $ 40,545  
Foreign currency translation adjustments
    -       -       (1 )     (3 )     (4 )
Balance at June 30, 2012
    30,000       7,981       1,932       628       40,541  
Less: accumulated amortization:
                                       
Accumulated amortization balance at December 31, 2011
    (9,999 )     (768 )     (341 )     -       (11,108 )
Amortization expense
    (1,593 )     (395 )     (196 )     -       (2,184 )
Foreign currency translation adjustments
    4       1       2       -       7  
Accumulated amortization balance at June 30, 2012
    (11,588 )     (1,162 )     (535 )     -       (13,285 )
Net balance at June 30, 2012
  $ 18,412     $ 6,819     $ 1,397     $ 628     $ 27,256  
                                         
Weighted average life (in years)
    10       11       9                  


The estimated aggregate amortization expense for the next five fiscal years and thereafter is as follows (in thousands):
 
2012 (six months)
  $ 2,058  
2013
    4,109  
2014
    4,082  
2015
    3,318  
2016
    3,107  
Thereafter
    9,954  
      26,628  
IP R&D
    628  
    $ 27,256  

 
NOTE 7 — EARNINGS PER SHARE

A reconciliation of the denominators used in computing per share net income, or EPS, is as follows (in thousands, except per share amounts):
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator:
                       
Net income
  $ 2,952     $ 4,643     $ 6,479     $ 9,104  
                                 
Denominator:
                               
Denominator for basic net income per share - weighted average common stock outstanding
    41,064       41,262       40,992       41,251  
                                 
Effect of dilutive securities: stock options and awards
    1,335       1,184       1,254       1,147  
                                 
Denominator for diluted net income per share - weighted average shares outstanding - diluted
    42,399       42,446       42,246       42,398  
                                 
Basic net income per share
  $ 0.07     $ 0.11     $ 0.16     $ 0.22  
Diluted net income per share
  $ 0.07     $ 0.11     $ 0.15     $ 0.21  
 

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period.  Restricted stock (consisting of restricted stock awards, or RSAs, and restricted stock units, or RSUs) and stock options to acquire approximately zero and 35,000 shares for the three months ended June 30, 2012 and 2011, respectively, and zero and 35,000 shares for the six months ended June 30, 2012 and 2011, respectively, were excluded from the computations of diluted EPS because the effect of including those RSAs, RSUs, and stock options would have been anti-dilutive.

 
NOTE 8 — STOCK-BASED COMPENSATION

The Company’s stock option activity for the six months ended June 30, 2012 was as follows:
 
Stock Options
 
Shares
(in thousands)
   
Weighted Average Exercise Price
 
Outstanding at December 31, 2011
    2,020     $ 10.19  
Granted
    153       22.68  
Exercised
    (319 )     7.40  
Cancelled or expired
    -       -  
Outstanding at June 30, 2012
    1,854     $ 11.70  
 
The Company had $2.6 million of total unrecognized compensation costs related to stock options at June 30, 2012 that are expected to be recognized over a weighted average period of 2.1 years.

The Company’s restricted share activity for the six months ended June 30, 2012 was as follows:
 
Restricted Stock Awards
 
Shares
(in thousands)
   
Weighted Average Grant Price
 
Non-vested at December 31, 2011
    903     $ 17.13  
Granted
    314       22.68  
Vested
    (261 )     17.22  
Cancelled or expired
    (25 )     17.43  
Non-vested at June 30, 2012
    931     $ 18.97  
                 
                 
                 
Restricted Stock Units
 
Shares
(in thousands)
         
Non-vested at December 31, 2011
    827          
Granted
    243          
Vested
    (77 )        
Cancelled or expired
    (103 )        
Non-vested at June 30, 2012
    890          
 
As of June 30, 2012, there was $17.0 million and $8.0 million of unrecognized compensation cost related to RSAs and RSUs, respectively. That cost is expected to be recognized over a weighted average period of 3.2 years for the RSAs and 2.6 years for the RSUs.

The following are the stock-based compensation costs recognized in the Company’s condensed consolidated statements of income (in thousands):
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Cost of revenue
  $ 246     $ 225     $ 475     $ 443  
Research and development
    472       536       988       1,030  
Selling, general and administrative
    1,853       2,232       3,751       4,067  
Stock-based compensation costs reflected in net income
  $ 2,571     $ 2,993     $ 5,214     $ 5,540  


NOTE 9 — SEGMENT INFORMATION

Management has determined that the Company has two segments for financial reporting purposes:  the technology and strategic partnerships segment and the assays and related products segment.  The accounting principles of the segments are the same as those described in the Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Intersegment sales are recorded at fixed prices that approximate the prices charged to third party strategic partners and are not a measure of segment operating earnings. Intersegment sales of approximately $3.3 million and $1.9 million for the quarters ending June 30, 2012 and 2011, and $5.7 million and $4.4 million for the six months ended June 30, 2012 and 2011, respectively, have been eliminated upon consolidation.  Following is selected segment information for and as of the periods indicated (in thousands).
 
   
Three Months Ended
June 30, 2012
   
Three Months Ended
June 30, 2011
 
   
TSP Segment
   
ARP Segment
   
Consolidated
   
TSP Segment
   
ARP Segment
   
Consolidated
 
                                     
Revenues from external customers
  $ 29,565     $ 18,708     $ 48,273     $ 36,211     $ 11,427     $ 47,638  
                                                 
Depreciation and amortization
    1,675       1,858     $ 3,533       1,487       1,135     $ 2,622  
                                                 
Operating profit (loss)
    4,342       2,144     $ 6,486       11,572       (2,775 )   $ 8,797  
                                                 
Segment assets
    167,015       116,467     $ 283,482       152,994       120,432     $ 273,426  
 
   
Six Months Ended
June 30, 2012
   
Six Months Ended
June 30, 2011
 
   
TSP Segment
   
ARP Segment
   
Consolidated
   
TSP Segment
   
ARP Segment
   
Consolidated
 
                                     
Revenues from external customers
  $ 59,774     $ 37,226     $ 97,000     $ 68,146     $ 22,767     $ 90,913  
                                                 
Depreciation and amortization
    3,295       3,760     $ 7,055       2,902       2,236     $ 5,138  
                                                 
Operating profit (loss)
    8,541       3,553     $ 12,094       20,228       (3,137 )   $ 17,091  
                                                 
Segment assets
    167,015       116,467     $ 283,482       152,994       120,432     $ 273,426  


NOTE 10 — ACCRUED WARRANTY COSTS

Sales of certain of the Company's systems are subject to a warranty.  System warranties typically extend for a period of 12 months from the date of installation not to exceed 24 months from the date of shipment.  The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data.  The actual warranty expense could differ from the estimates made by the Company based on product performance.  Warranty expenses are evaluated and adjusted periodically.

The following table summarizes the changes in the warranty accrual (in thousands):
 
       
Accrued warranty costs at December 31, 2011
  $ 681  
Warranty expenses
    (523 )
Accrual for warranty costs
    544  
Accrued warranty costs at June 30, 2012
  $ 702  


NOTE 11 — 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 effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. The effective tax rate for the six months ended June 30, 2012 was 46.32%, including amounts recorded for discrete events.  This differs from the statutory rate of 35% primarily because of the worldwide mix of consolidated earnings before taxes and an assessment regarding the realizability of the Company’s deferred tax assets.  The Company’s tax expense reflects the full Federal, various state, and foreign blended statutory rates.  The Company is utilizing its net operating losses in the U.S. and Canada; therefore cash taxes to be paid are expected to be in the range of 5-10% of pre-tax book income.
 
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, Australia, Canada, China, Japan, the Netherlands, and various states.  Due to net operating losses, the U.S. tax returns dating back to 1996 can still be reviewed by the taxing authorities.   With respect to Canada, tax returns dating back to 2002 can still be reviewed by the authorities.  The Company recorded no liabilities associated with its uncertain tax positions in the first two quarters of 2012.  No other material changes to this liability are expected within the next 12 months.  For the six months ended June 30, 2012, there were no material changes to the total amount of unrecognized tax benefits.  The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes.


NOTE 12 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income.  The amended guidance eliminated one of the presentation options provided by accounting principles generally accepted in the United States of America (“U.S. GAAP”) which was to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  In addition, it gave an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance was effective for reporting periods beginning after December 15, 2011 and has been applied retrospectively.  The impact of adoption on the Company’s financial position and results of operations was not material.
 
In September 2011, the FASB issued amendments to the goodwill impairment guidance which provides an option for companies to use a qualitative approach to test goodwill for impairment if certain conditions are met. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (early adoption is permitted).  The Company early adopted the amendments in connection with the performance of the Company’s annual goodwill impairment test.  The impact of adoption on the Company’s financial position and results of operations was not material.
 

NOTE 13 — SUBSEQUENT EVENTS

On July 11, 2012, the Company completed its acquisition of GenturaDx, Inc., a British Virgin Islands corporation with operations in Hayward, California (“GenturaDx”), pursuant to the terms of an Agreement and Plan of Merger, dated July 9, 2012, by and among Luminex,  Grouper Merger Sub, Inc., a British Virgin Islands corporation and a wholly-owned subsidiary of Luminex (“Merger Sub”), GenturaDx, and a representative of the stockholders and lenders of GenturaDx (the “Agreement”).  Pursuant to the terms of the Agreement, Merger Sub merged with and into GenturaDx and GenturaDx continued as the surviving corporation as a wholly-owned subsidiary of Luminex (the “Merger”).

Under the terms of the Agreement, the Company acquired all of the outstanding capital stock of GenturaDx in exchange for approximately $50 million cash consideration, subject to working capital adjustments, plus (i) $3 million in consideration contingent upon achieving certain future development and regulatory milestones by December 31, 2013, (ii) up to $7 million in consideration contingent upon achieving certain future development and regulatory milestones by June 30, 2014 and (iii) additional consideration contingent upon acquired products exceeding certain revenue thresholds in each of 2013, 2014 and 2015.  An amount of $8 million of the upfront consideration was deposited in escrow as security for potential indemnity claims and certain other expressly enumerated matters and $100,000 was deposited in escrow to satisfy, in part, any post-closing adjustments relating to GenturaDx’s working capital balance at closing.  Additionally, up to 30% of the milestone payments are subject to certain set-off rights of the Company for indemnification claims under the Agreement.  The remainder of the upfront consideration was used to repay GenturaDx’s indebtedness and other expenses.  The Company’s acquisition of GenturaDx was funded by the use of cash on hand.

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Report, and the “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”).

SAFE HARBOR CAUTIONARY STATEMENT

This quarterly report on Form 10-Q contains statements that are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide our current expectations of forecasts of future events. All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding our future financial position, business strategy, new products, assay sales, projected consumables sales patterns or bulk purchases, strategic partner sales or commercialization efforts, budgets, anticipated gross margins, liquidity, cash flows, projected costs, litigation costs, including the costs or impact of any litigation settlements or orders, regulatory approvals or the impact of any laws or regulations applicable to us, and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “projects,” “will,” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements are based on our current plans and actual future activities, and our financial condition and results of operations may be materially different from those set forth in the forward-looking statements as a result of known or unknown risks and uncertainties, including, among other things:
 
·  
risks and uncertainties relating to market demand and acceptance of our products and technology;
 
·  
dependence on strategic partners for development, commercialization and distribution of products;
 
·  
concentration of our revenue in a limited number of strategic partners, some of which may be experiencing decreased demand for their products utilizing or incorporating our technology, budget or finance constraints in the current economic environment, or periodic variability in their purchasing patterns or practices;
 
·  
the impact of the ongoing uncertainty in U.S. and global finance markets and changes in government funding, including its effects on the capital spending policies of our partners and end users and their ability to finance purchases of our products;
 
·  
fluctuations in quarterly results due to a lengthy and unpredictable sales cycle, fluctuations in bulk purchases of consumables, fluctuations in product mix, and the seasonal nature of some of our assay products;
 
·  
our ability to obtain and enforce intellectual property protections on our products and technologies;
 
·  
reliance on third party distributors for distribution of specific assay products;
 
·  
our ability to scale manufacturing operations and manage operating expenses, gross margins and inventory levels;
 
·  
potential shortages, or increases in costs, of components or other disruptions to our manufacturing operations;
 
·  
competition;
 
·  
our ability to successfully launch new products;
 
·  
the timing of and process for regulatory approvals;
 
·  
our increasing dependency on information technology to enable us to improve the effectiveness of our operations and to monitor financial accuracy and efficiency;
 
·  
the implementation, including any modification, of our strategic operating plans;
 
·  
the uncertainty regarding the outcome or expense of any litigation brought against or initiated by us;
 
·  
risks relating to our foreign operations, including fluctuations in exchange rates, tariffs, customs and other barriers to importing/exporting materials and products in a cost effective and timely manner; difficulties in accounts receivable collections; the burden of monitoring and complying with foreign and international laws and treaties; and the burden of complying with and change in international taxation policies; and
 
 
·  
risks and uncertainties associated with implementing our acquisition strategy, including our ability to obtain financing, our ability to integrate acquired companies or selected assets into our consolidated business operations, and the ability to recognize the benefits of our acquisitions.

 
Many of these risks, uncertainties and other factors are beyond our control and are difficult to predict.  Any or all of our forward-looking statements in this quarterly report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. New factors could also emerge from time to time that could adversely affect our business. The forward-looking statements herein can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions outlined above and described in the 2011 10-K.  In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this quarterly report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this quarterly report, including in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our other annual and periodic reports.
 
Our forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Luminex,” the “Company,” “we,” “us” and “our” refer to Luminex Corporation and its subsidiaries.

Segment Information

Luminex has two reportable segments: the technology and strategic partnerships segment and the assays and related products segment.  The TSP segment, which is our base business, consists of system sales to partners, raw bead sales, royalties, service and support of the technology, and other miscellaneous items. The ARP segment is primarily involved in the development and sale of assays on xMAP® technology for use on Luminex’s installed base of systems, and the MultiCode® technology obtained with our June 2011 acquisition of EraGen Biosciences, Inc., now known as Luminex Madison, or LMA.

OVERVIEW

We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences and diagnostics industries.  These industries depend on a broad range of tests, called bioassays, to perform diagnostic tests and conduct life science research.  

Our xMAP (Multi-Analyte Profiling) technology, an open architecture, multiplexing technology, allows simultaneous analysis of up to 500 bioassays from a small sample volume, typically a single drop of fluid, by reading biological tests on the surface of microscopic polystyrene beads called microspheres. xMAP technology combines this miniaturized liquid array bioassay capability with small lasers, light emitting diodes (LEDs), digital signal processors, photo detectors, charge-coupled device (CCD) imaging and proprietary software to create a system offering advantages in speed, precision, flexibility and cost. Our xMAP technology is currently being used within various segments of the life sciences industry which includes the fields of drug discovery and development, and for clinical diagnostics, genetic analysis, bio-defense, food safety and biomedical research.  In addition to our xMAP technology, our other offerings include our proprietary MultiCode® technology, used for real-time polymerase chain reaction (PCR) and multiplexed PCR assays, as well as automation and robotics in the field of dry sample handling.

Our xTAG® and MultiCode® assay chemistries are proprietary technologies primarily used to detect analytes for human genetic testing and infectious disease testing.  Our MultiCode technology makes use of a DNA base pair (isoC:isoG) not found in nature.  This synthetic third base pair is used in the creation of both multiplex PCR assays (MultiCode-PLx) and low-plex, real-time PCR assays (MultiCode-RTx).  Currently, most of our MultiCode assay and reagent revenue is based on products using our MultiCode-RTx technology.  The xTAG and MultiCode chemistries are both compatible with our xMAP technology, and the MultiCode chemistry is also compatible with low-plex real-time PCR platforms available from a variety of vendors.
 
 
Our end user customers and partners, which include laboratory professionals performing research, clinical laboratories performing tests on patients as ordered by a physician and other laboratories, have a fundamental need to perform high quality testing as efficiently as possible.  Luminex has adopted a business model built, in part, around strategic partnerships.  We have licensed our xMAP technology to partner companies, which in turn develop products that incorporate the xMAP technology into products that our partners sell to end users. We develop and manufacture the proprietary xMAP laboratory instrumentation and the proprietary xMAP microspheres and sell these products to our partners. Our partners then sell xMAP instrumentation and xMAP-based reagent consumable products, which run on the instrumentation, to the end user laboratory.  As of June 30, 2012, Luminex had approximately 66 strategic partners and these partners have purchased from Luminex approximately 9,160 xMAP-based multiplexing analyzer systems. Of the 66 strategic partners, 45 have released commercialized reagent-based products utilizing our technology.

Luminex has several forms of revenue that result from our business model:

·  
System revenue is generated from the sale of our xMAP multiplexing analyzers and peripherals and automated punching instruments.

·  
Consumable revenue is generated from the sale of our dyed polystyrene microspheres and sheath fluid.  Our larger commercial and development partners often purchase these consumables in bulk to minimize the number of incoming qualification events and to allow for longer development and production runs.

·  
Royalty revenue is generated when a partner sells our proprietary microspheres to an end user, a partner sells a kit incorporating our proprietary technologies to an end user, or a partner utilizes a kit incorporating our proprietary technologies to provide a testing result to a user.  End users can be facilities such as testing labs, development facilities and research facilities that buy prepared kits and have specific testing needs or testing service companies that provide assay results to pharmaceutical research companies or physicians.

·  
Assay revenue is generated from the sale of our kits, which are a combination of chemical and biological reagents, and our proprietary technologies used to perform diagnostic and research assays on samples.

·  
Service revenue is generated when a partner or other owner of a system purchases a service contract from us after the standard warranty has expired or pays us for our time and materials to service instruments.  Service contract revenue is amortized over the life of the contract and the costs associated with those contracts are recognized as incurred.

·  
Other revenue consists of items such as training, shipping, parts sales, license revenue, grant revenue, contract research and development fees, milestone revenue and other items that individually amount to less than 5% of total revenue.
 
Second Quarter 2012 Highlights

·  
Consolidated revenue was $48.3 million for the quarter ended June 30, 2012, representing a 1% increase over revenue for the second quarter of 2011.

·  
Shipments of 278 multiplexing analyzers that included 167 MAGPIX systems, resulting in cumulative life-to-date multiplexing analyzer shipments of 9,162, up 12% from a year ago.

·  
Assay revenue was $17.5 million, an 89% increase over the second quarter of 2011.

·  
Operating expenses were $27.9 million for the quarter ended June 30, 2012, an increase of $2.9 million over the quarter ended June 30, 2011, including $0.9 million of incremental operating expenses from LMA.

·  
Received CE marking of both the xMAP NeoPlex4® Assay and NeoPlex® System in April, 2012.  This system changes the way newborn screening is performed, providing four assays from one blood spot punch, reducing sample requirements and improving laboratory efficiency.
 
 
Acquisition of GenturaDx on July 11, 2012

Subsequent to quarter end, we acquired privately-held GenturaDx, a molecular diagnostics company focused on making nucleic acid testing both affordable and practical for any laboratory.  Under the terms of the Agreement, we acquired all of the outstanding capital stock of GenturaDx in exchange for approximately $50 million cash consideration, subject to working capital adjustments, plus (i) $3 million in consideration contingent upon achieving certain future development and regulatory milestones by December 31, 2013, (ii) up to $7 million in consideration contingent upon achieving certain future development and regulatory milestones by June 30, 2014 and (iii) additional consideration contingent upon acquired products exceeding certain revenue thresholds in each of 2013, 2014 and 2015.  The acquisition was funded by the use of cash on hand.

GenturaDx is in late stage development of a fully integrated, highly automated, real-time PCR system that employs a single-use cassette for sample-to-answer workflow. This new system will integrate with our MultiCode-RTx chemistry to make rapid, high-quality molecular diagnostics accessible to hospitals and patients worldwide.  GenturaDx's patented cartridge design provides automated sample extraction, amplification and detection thereby improving testing throughput, while reducing hands on time, turnaround times and sample handling. Luminex anticipates commercial availability of a variety of assays for use with this system by early 2014.

Consumables Sales and Royalty Revenue Trends

We have experienced significant fluctuations in consumable revenue over the past two years.  Overall, the fluctuations manifested themselves through periodic changes in volume from our largest bulk purchasing partners.  From the second quarter of 2010 through the second quarter of 2012, we had quarterly bulk purchases ranging from $7.0 million to $16.1 million and representing between 75% and 88% of total consumable revenue.  We expect these fluctuations to continue as the ordering patterns of our largest bulk purchasing partners remains variable.  Even though we experience variability in consumable revenue, the key indicator of the success of our partners’ commercialization efforts is the rising level of reported royalty bearing sales during the past several years which have increased at a compound annual growth rate of 8% since the first quarter of 2010.

Future Operations

We expect our areas of focus over the next twelve months to be:

·  
maintenance and  improvement of our existing products and the timely development, completion and successful commercial launch of our pipeline products;

·  
commercialization, regulatory clearance and market adoption of output from the ARP segment, including the NeoPlex System, NeoPlex4 Assay, CYP2C19, Gastrointestinal Pathogen Panel (“GPP”), and the related clearance of our MAGPIX and FM3D instruments;

·  
the expansion and enhancement of our installed base and our market position within our identified target market segments;

·  
the effect of the ongoing uncertainty in global finance markets and changes in government funding on planned purchases by end users;

·  
the continued adoption and development of partner products incorporating Luminex technology through effective partner management; and

·  
development of the next generation sample-to-answer platform for our MultiCode RTx technology.
 
We anticipate continued revenue concentration in our higher margin items (assays, consumables and royalties) contributing to favorable, but variable, gross margin percentages.  Additionally, we believe that a sustained investment in research and development is necessary in order to meet the needs of our marketplace and provide a sustainable new product pipeline.  We may experience volatility in research and development expenses as a percentage of revenue on a quarterly basis.
 
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles for interim financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.

Management believes there have been no significant changes during the quarter ended June 30, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2011 10-K.
 
 
RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THREE MONTHS ENDED JUNE 30, 2011

Selected consolidated financial data for the three months ended June 30, 2012 and 2011 is as follows (dollars in thousands):
 
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Variance
   
Variance (%)
 
Revenue
  $ 48,273     $ 47,638     $ 635       1 %
Gross profit
  $ 34,412     $ 33,826       586       2 %
Gross profit margin percentage
    71 %     71 %     0 %     N/A  
Operating expenses
  $ 27,926     $ 25,029       2,897       12 %
Income from operations
  $ 6,486     $ 8,797       (2,311 )     -26 %
 
Total revenue increased by 1% to $48.3 million for the three months ended June 30, 2012 from $47.6 million for the comparable period in 2011. The increase was primarily attributable to an increase in assay revenue, partially offset by a decline in consumable sales.  The increase in assay revenue of $8.2 million was driven primarily by the inclusion of sales of our LMA assay products in the three months ended June 30, 2012 as a result of the acquisition of LMA on June 27, 2011.  The increase in assay revenue was partially offset by a decrease in consumable sales of $7.6 million, which resulted primarily from volume decreases in bulk purchases from one of our partners.  System revenue decreased from $9.1 million in the second quarter of 2011 to $8.4 million in the second quarter of 2012.  We sold 278 multiplexing analyzers in the second quarter of 2012, which included 167 of our MAGPIX systems as compared to 248 multiplexing analyzers sold for the corresponding prior year period, which included 62 MAGPIX systems, bringing total multiplexing analyzer sales since inception to 9,162 as of June 30, 2012.  Also included in second quarter system revenue were sales of 18 automated punching systems compared to 44 in the prior year, a decrease that was primarily the result of the cyclical nature of activities in the world surrounding major forensic events.  Irrespective of the increase in the number of multiplexing analyzers placements relative to the prior year, system revenue declined primarily as a result of two factors: (i) a shift towards our lower priced MAGPIX systems and (ii) a decrease in the number of automated punching systems placed. 

A breakdown of revenue for the three months ended June 30, 2012 and 2011 is as follows (dollars in thousands):
 
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Variance
   
Variance (%)
 
System sales
  $ 8,386     $ 9,135     $ (749 )     -8 %
Consumable sales
    10,802       18,397       (7,595 )     -41 %
Royalty revenue
    7,715       7,412       303       4 %
Assay revenue
    17,510       9,261       8,249       89 %
Service revenue
    1,970       1,844       126       7 %
Other revenue
    1,890       1,589       301       19 %
    $ 48,273     $ 47,638     $ 635       1 %


We continue to experience revenue concentration in a limited number of strategic partners. Four customers accounted for 54% (20%, 15%, 10% and 9%, respectively) of consolidated total revenue in the second quarter of 2012. For comparative purposes, those same four customers accounted for 54% (7%, 28%, 10% and 9%, respectively) of total revenue in the second quarter of 2011.

Gross profit margin percentage remained constant at 71% for the second quarter of 2012 and 2011.  Our gross profit margin percentage is highly dependent upon the mix of revenue components each quarter.  Assay revenue increased to $17.5 million, or 36%, of total revenue for the second quarter of 2012 from $9.3 million, or 19% of total revenue for the quarter ended June 30, 2011.  Consumable sales, a higher margin item, decreased from 39% of revenue in the second quarter of 2011 to 22% of revenue in the second quarter of 2012.  The increase in assay revenue was driven primarily by our acquisition of LMA on June 27, 2011.  We anticipate fluctuation in gross profit margin and related gross profit primarily as a result of variability in the percentage of revenue derived from each of our revenue streams and the seasonality effect inherent in our assay revenue.  The increase in total operating expense dollars from $25.0 million, or 53% of revenue, to $27.9 million, or 58% of revenue is primarily attributable to $0.9 million in incremental operating expenses from LMA, growth in our marketing efforts to support our global initiatives, additional personnel costs and rent, utility and depreciation expenses associated with the addition of employees and expansion of our facilities and technology infrastructure.  See additional discussions by segment below.

 
Technology and Strategic Partnerships Segment

Selected financial data for our TSP segment for the three months ended June 30, 2012 and 2011 is as follows (dollars in thousands):
 
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Variance
   
Variance (%)
 
Revenue
  $ 29,565     $ 36,211     $ (6,646 )     -18 %
Gross profit
  $ 20,090     $ 26,905       (6,815 )     -25 %
Gross profit margin percentage
    68 %     74 %     -6 %     N/A  
Operating expenses
  $ 15,748     $ 15,333       415       3 %
Income from operations
  $ 4,342     $ 11,572       (7,230 )     -62 %
 
Revenue. Total revenue for our TSP segment decreased by 18% to $29.6 million for the three months ended June 30, 2012 from $36.2 million for the comparable period in 2011. The decrease in revenue was primarily attributable to a decrease of $7.5 million in consumable revenue attributable to volume decreases in bulk purchases from one of our partners.
 
Three customers accounted for 56% of total TSP segment revenue in the second quarter of 2012 (25%, 16% and 15%, respectively). For comparative purposes, these same three customers accounted for 62% of total TSP segment revenue (37%, 13% and 12%, respectively) in the second quarter of 2011.  No other customer accounted for more than 10% of total TSP segment revenue during those periods.

A breakdown of revenue in the TSP segment for the three months ended June 30, 2012 and 2011 is as follows (dollars in thousands):
 
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Variance
   
Variance (%)
 
System sales
  $ 7,734     $ 7,437     $ 297       4 %
Consumable sales
    10,736       18,264       (7,528 )     -41 %
Royalty revenue
    7,588       7,408       180       2 %
Service revenue
    1,827       1,722       105       6 %
Other revenue
    1,680       1,380       300       22 %
    $ 29,565     $ 36,211     $ (6,646 )     -18 %
 
System and peripheral component sales increased by 4% to $7.7 million for the three months ended June 30, 2012 from $7.4 million for the comparable period of 2011.  The TSP segment sold 277 of the 278 total multiplexing analyzer sales, which includes 167 MAGPIX systems, in the three months ended June 30, 2012 as compared to 245 multiplexing analyzers, which included 62 MAGPIX systems, in the same prior year period. The increase in system revenue is the result of an increase in the number of multiplexing analyzer placements relative to the prior year, offset by a shift towards our lower priced MAGPIX systems.   For the three months ended June 30, 2012, two of our partners accounted for 207 analyzers, or 75% of total TSP segment multiplexing analyzers sold for the period.  The top five partners accounted for 245 analyzers, or 88%, of total TSP segment systems sold in the three months ended June 30, 2012.

Consumable sales, comprised of microspheres and sheath fluid, decreased 41% to $10.7 million for the three months ended June 30, 2012 from $18.3 million for the three months ended June 30, 2011.  During the three months ended June 30, 2012, we had 15 bulk purchases of consumables totaling approximately $8.1 million (76% of total TSP segment consumable revenue), ranging from $0.1 million to $3.5 million, as compared with 14 bulk purchases totaling approximately $16.1 million (88% of total TSP segment consumable revenue),  in the three months ended June 30, 2011. A bulk purchase is defined as the purchase of $100,000 or more of consumables in a quarter.  The decrease in consumable revenue was primarily attributable to volume decreases in bulk purchases from one of our partners as a result of a change in the timing of their consumable needs due to a modification to their inventory management practices in the prior year.  We expect these fluctuations to continue as the ordering pattern of our largest bulk purchasing partner varies due to their efforts to minimize the number of incoming qualification events, control inventory, and allow for longer development and production runs.  Partners who reported royalty bearing sales accounted for $7.5 million, or 70%, of total consumable sales for the three months ended June 30, 2012.

 
Royalty revenue, which results when our partners sell products or services incorporating our technology, increased by 2% to $7.6 million for the three months ended June 30, 2012 compared with $7.4 million for the three months ended June 30, 2011.  Our partners’ end user sales may reflect volatility from quarter to quarter and therefore, that same volatility is reflected in our reported royalty revenues on a quarterly basis.  Additionally, we expect modest fluctuations in the number of commercial partners submitting royalties quarter to quarter based upon the varying contractual terms, consolidations among partners, differing reporting and payment requirements, and the addition of new partners. For the three months ended June 30, 2012, we had 39 commercial partners submitting royalties as compared to 41 for the three months ended June 30, 2011. One of our partners reported royalties totaling approximately $3.4 million, or 45%, of total royalties for the quarter ended June 30, 2012 compared to $3.0 million, or 40%, for the quarter ended June 30, 2011. Two other customers reported royalties totaling approximately $1.8 million, or 24%, of total TSP royalty revenue (13% and 11%, respectively) for the quarter ended June 30, 2012.  No other customer accounted for more than 10% of total royalty revenue for the quarter ended June 30, 2012.  For comparative purposes, these same two customers accounted for approximately $1.7 million, or 23% (12% and 11%, respectively), of total TSP royalty revenue in the second quarter of 2011.  Royalty revenues were comprised of 73% from diagnostic partners and 27% from life science research partners.  Total TSP royalty bearing sales reported to us by our partners were over $102 million for the quarter ended June 30, 2012, compared with over $97 million for the quarter ended June 30, 2011.

Service revenue, comprised of extended warranty contracts earned ratably over the term of a contract and fees for services performed on instruments, increased by 6% to $1.8 million for the second quarter of 2012 from $1.7 million for the second quarter of 2011. This increase is attributable to increased penetration of the expanded installed base.  At June 30, 2012 and 2011, we had 1,374 and 1,205 Luminex systems, respectively, covered under extended service agreements.
 
Other revenues, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees, reagent sales, and grant revenue, increased by 22% to $1.7 million for the three months ended June 30, 2012 from $1.4 million for the three months ended June 30, 2011. This increase is primarily the result of an increase in grant revenue and license fees.

Gross profit margin. The gross profit margin percentage for the TSP segment decreased to 68% for the three months ended June 30, 2012 compared to 74% for the three months ended June 30, 2011.  The decrease in gross profit margin was primarily the result of the decrease in consumable sales, a higher margin item, from 50% of revenue in the second quarter of 2011 to 36% of revenue in the second quarter of 2012.  

Research and development expense. Research and development expenses for the TSP segment increased to $3.5 million, or 12% of TSP segment revenue, for the three months ended June 30, 2012 compared to $3.2 million, or 9% of TSP segment revenue, for the comparable period in 2011.  The focus of our TSP segment research and development activities, on continued refinement of our systems and software to meet the evolving needs of the marketplace including the addition of more automated solutions for assay performance, remains consistent with the prior year.

Selling, general and administrative expense. Selling, general and administrative expense for the TSP segment increased to $12.2 million, or 41% of TSP segment revenue for the three months ended June 30, 2012 from $12.1 million, or 34% of TSP segment revenue, for the comparable period in 2011.

Assays and Related Products Segment

Selected financial data for our ARP segment for the three months ended June 30, 2012 and 2011 is as follows (dollars in thousands):
 
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Variance
   
Variance (%)
 
Revenue
  $ 18,708     $ 11,427     $ 7,281       64 %
Gross profit
  $ 14,322     $ 6,921       7,401       107 %
Gross profit margin percentage
    77 %     61 %     16 %     N/A  
Operating expenses
  $ 12,178     $ 9,696       2,482       26 %
Income (loss) from operations
  $ 2,144     $ (2,775 )     4,919       177 %


A breakdown of revenue in the ARP segment for the three months ended June 30, 2012 and 2011 is as follows (in thousands):
 
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Variance
   
Variance (%)
 
System sales
  $ 652     $ 1,698     $ (1,046 )     -62 %
Consumable sales
    66       133       (67 )     -50 %
Royalty revenue
    127       4       123       3075 %
Assay revenue
    17,510       9,261       8,249       89 %
Service revenue
    143       122       21       17 %
Other revenue
    210       209