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LMNX > SEC Filings for LMNX > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for LUMINEX CORP

Form 10-Q for LUMINEX CORP


29-Apr-2014

Quarterly Report


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 the 2013
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, restructuring, impact of the reimbursement landscape, new products including ARIESฎ , assay sales, projected consumables sales patterns or bulk purchases, budgets, anticipated gross margins, liquidity, cash flows, projected costs and expenses, taxes, 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, plans and objectives of management for future operations, and acquisition integration and the expected benefit of our acquisitions 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;

• the uncertainty relating to increased focus on direct sales to the end user;

• 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 timing of and process for regulatory approvals;

• the impact of the ongoing uncertainty in U.S. and global finance markets and changes in government and government agency 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;

• 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;

• 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;

• our increasing dependency on information technology to enable us to improve the effectiveness of our operations and to monitor financial accuracy and efficiency;


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• 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; and

• 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.

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 2013 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 quarterly 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 (TSP) segment and the assays and related products (ARP) segment. The TSP segment, which has been built around strategic partnerships, 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 xMAPฎ, xTAGฎ and MultiCodeฎ technology for use on Luminex's installed base of systems.

OVERVIEW

We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences industry. This industry depends 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, digital signal processors 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 PCR (Polymerase Chain Reaction) and multiplexed PCR assays, as well as automation and robotics in the field of dry sample handling.


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Our end user customers and partners, which include laboratory professionals performing research, clinical laboratories performing tests on patients as ordered by physicians and other laboratories, have a fundamental need to perform high quality testing as efficiently as possible. Luminex employs a two-pronged business model. For the TSP portion of the business, we have licensed our xMAP technology to partner companies, which in turn then 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 March 31, 2014, Luminex had 59 strategic partners, of which 48 have released commercialized reagent-based products utilizing our technology. For the ARP portion of the business, we market and sell our proprietary assay products and instrumentation directly to the end user through our direct sales force.

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

laboratory instruments.

• Consumable revenue is generated from the sale of our dyed polystyrene microspheres, along with sheath and drive 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 microspheres to an end user or when a partner utilizes a kit 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 xMAP bead technology used to perform diagnostic and research assays on samples as well as real-time PCR and multiplexed PCR assays using our proprietary MultiCode technology.

• 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.

First Quarter 2014 Highlights

• Consolidated revenue was $56.6 million for the quarter ended March 31, 2014, representing a 6% increase over revenue for the first quarter of 2013.

• Shipments of 208 multiplexing analyzers, which included 78 MAGPIX systems, resulting in cumulative life-to-date multiplexing analyzer shipments of 10,945, up 11% from a year ago.

• Consumable sales increased 7% over the first quarter of 2013, to $12.8 million.

• Assay revenue was $21.7 million, an 18% increase over the first quarter of 2013.


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Reimbursement Landscape

Over the past year, the molecular diagnostic market has experienced what we believe to be a temporary deceleration in the utilization of molecular assays, particularly in the human genetics segment, driven by administrative issues related to reimbursement associated with the new molecular diagnostic code system established by the Centers for Medicare and Medicaid Services ("CMS") on January 1, 2013. A number of our laboratory customers have experienced Medicare fee schedule reductions, delays in pricing and implementation of key molecular codes, denials of coverage for existing tests and delays in payment for tests performed by some payers after implementation of recently adopted pathology codes, all of which are resulting in lower than anticipated testing volumes for our customers and as a result decreased assay revenues for our ARP segment in 2013. The 2014 Clinical Laboratory Fee Schedule rates have been set by CMS and, based on feedback from our customers, we believe that these reimbursement challenges have diminished for 2014. We will continue to monitor the reimbursement landscape closely.

Consumables Sales and Royalty Revenue Trends

We have experienced significant fluctuations in consumable revenue over the past three years. Overall, the fluctuations manifested themselves through periodic changes in volume from our largest purchasing customers. On a quarterly basis, these customers account for more than 75% of our total consumable sales volume. We expect these fluctuations to continue as the ordering patterns of our largest bulk purchasing partners remain variable. Additionally, even though we experience variability in consumable revenue, the key indicator of the success of our partners' commercialization efforts is the rising level of royalties and reported royalty bearing sales, which have increased at a compound annual growth rate of 35% and 11%, respectively, over the past five years.

Future Operations

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

•          clinical validation and commercial launch of our ARIESTM system, the
           next generation sample-to-answer platform for our MultiCode-RTx
           technology, including IVD assays;

• development of the next generation multiplex chemistry, including the next generation of our Respiratory Viral Panel line of IVD assays;

•          continued successful execution of our direct sales strategy, including
           developing the infrastructure necessary to support our sales force and
           decreasing reliance on our distributors. For the three months ended
           March 31, 2014, direct assay sales comprised 99% of total assay sales
           compared to 92% for the three months ended March 31, 2013;

• commercialization, regulatory clearance and market adoption of products from our ARP segment;

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

• adoption and use of our platforms and consumables by our customers for testing services;

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

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

• continued adoption and development of partner products incorporating Luminex technology through effective partner management.

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 as a result of the timing of development expenses, clinical validation and clinical trials in advance of the commercial launch of our new products.


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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 U.S. GAAP 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 March 31, 2014 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 2013 10-K.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THREE MONTHS ENDED MARCH 31, 2013

Selected consolidated financial data for the three months ended March 31, 2014
and 2013 is as follows (dollars in thousands):
                                          Three Months Ended March 31,
                                             2014               2013           Variance       Variance (%)
Revenue                                $      56,561       $      53,200     $     3,361             6  %
Gross profit                           $      39,954       $      37,957           1,997             5  %
Gross margin percentage                           71 %                71 %             - %         N/A
Operating expenses                     $      31,769       $      39,509          (7,740 )         (20 )%
Income (loss) from operations          $       8,185       $      (1,552 )         9,737          (627 )%

Total revenue increased by 6% to $56.6 million for the three months ended March 31, 2014 from $53.2 million for the comparable period in 2013. The increase was primarily attributable to an increase in assay and consumable revenue offset by a decrease in system sales and other revenue in the first quarter of 2014 as compared to the prior year period. The increase in assay revenue was driven by growth in the sales of both of our primary assay portfolios: infectious disease and genetic testing assay products, which grew 25% and 8% over the first quarter of 2013, respectively. Consumable sales increased to $12.8 million for the three months ended March 31, 2014 compared to $11.9 million for the three months ended March 31, 2013, driven primarily by an increase in bulk purchases of $0.7 million. We expect fluctuations in consumable sales on an ongoing basis. System revenue decreased by 2% for the first quarter of 2014 from the first quarter of 2013, primarily driven by a decrease in the number of automated punching systems sold as a result of the related restructuring and the decreased focus and sales efforts for these products. We sold 208 multiplexing analyzers in the first quarter of 2014, which included 78 of our MAGPIX systems, as compared to 205 multiplexing analyzers sold for the corresponding prior year period, which included 72 MAGPIX systems, bringing total multiplexing analyzer sales since inception to 10,945 as of March 31, 2014. Also included in the first quarter of 2014 system revenue were sales of 5 automated punching systems compared to 17 in the prior year period, a decrease that was primarily the result of a decrease in the number of BSD600 systems sold during the first quarter of 2014. Other revenue decreased from $4.2 million in the three months ended March 31, 2013 to $3.3 million in the three months ended March 31, 2014 primarily as a result of decreased revenue from development agreements with U.S. government agencies and a decrease in license fees attributable to license transfer fees that we received in the first quarter of 2013 due to mergers of our licensees. Total royalty bearing sales reported to us by our partners were $111.4 million for the quarter ended March 31, 2014, compared with $110.5 million for the quarter ended March 31, 2013. However, royalty revenue remained consistent as minimum royalty payments and royalty audit findings decreased by approximately $0.3 million. We expect modest fluctuations in the royalties submitted quarter to quarter based upon the varying contractual terms, differing reporting and payment requirements, and the addition of new partners.


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A breakdown of revenue for the three months ended March 31, 2014 and 2013 is as follows (dollars in thousands):

Three Months Ended March 31,
                             2014                  2013       Variance     Variance (%)
System sales     $         6,400                 $  6,557    $   (157 )         (2 )%
Consumable sales          12,768                   11,897         871            7  %
Royalty revenue           10,049                   10,109         (60 )         (1 )%
Assay revenue             21,660                   18,324       3,336           18  %
Service revenue            2,344                    2,128         216           10  %
Other revenue              3,340                    4,185        (845 )        (20 )%
                 $        56,561                 $ 53,200    $  3,361            6  %

We continue to experience revenue concentration in a limited number of strategic partners. Four customers accounted for 50% (20%, 17%, 7% and 6%, respectively) of consolidated total revenue in the first quarter of 2014. For comparative purposes, the top four customers accounted for 49% (18%, 16%, 8% and 7%, respectively) of total revenue in the first quarter of 2013.

Gross margin remained constant at 71% for the first quarter of 2014 and 2013. The gross margin percentage was impacted by the increase in the percentage of high margin items (consumables, royalties and assays) from 76% of revenue for the three months ended March 31, 2013 to 79% for the three months ended March 31, 2014, offset by $0.6 million of impairment of inventory and certain employee separation costs related to our restructuring plan focused on our Newborn Screening Group. We anticipate continued fluctuation in gross 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 inherent in our assay revenue. The decrease in total operating expense dollars from $39.5 million, or 74% of revenue, to $31.8 million, or 56% of revenue, is primarily attributable to $7.0 million of expense related to the termination of our molecular diagnostics distribution agreements in the first quarter of 2013. See additional discussions by segment below.

Technology and Strategic Partnerships Segment

Selected financial data for our TSP segment for the three months ended March 31,
2014 and 2013 is as follows (dollars in thousands):
                           Three Months Ended March 31,
                              2014               2013          Variance     Variance (%)
Revenue                 $      32,061       $      31,869     $    192            1  %
Gross profit            $      23,059       $      21,628        1,431            7  %
Gross margin percentage            72 %                68 %          4 %        N/A
Operating expenses      $      13,125       $      13,947         (822 )         (6 )%
Income from operations  $       9,934       $       7,681        2,253           29  %

Revenue. Total revenue for our TSP segment increased by 1% to $32.1 million for the three months ended March 31, 2014 from $31.9 million for the comparable period in 2013. The flatness in TSP revenue was a result of increases in consumable and service revenue offset by decreases in system and other revenue.

Three customers accounted for 53% of total TSP segment revenue in the first quarter of 2014 (30%, 12% and 11%, respectively). For comparative purposes, the top three customers accounted for 50% of total TSP segment revenue (26%, 11% and 13%, respectively) in the first quarter of 2013. No other customer accounted for more than 10% of total TSP segment revenue during those periods.


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A breakdown of revenue in the TSP segment for the three months ended March 31, 2014 and 2013 is as follows (dollars in thousands):

Three Months Ended March 31,
                             2014                  2013       Variance      Variance (%)
System sales     $         5,857                 $  6,042    $    (185 )         (3 )%
Consumable sales          12,617                   11,848          769            6  %
Royalty revenue           10,009                   10,071          (62 )         (1 )%
Service revenue            2,207                    1,958          249           13  %
Other revenue              1,371                    1,950         (579 )        (30 )%
                 $        32,061                 $ 31,869    $     192            1  %

System and peripheral component sales decreased by 3% to $5.9 million for the three months ended March 31, 2014 from $6.0 million for the comparable period of 2013. The TSP segment sold 195 of the 208 total multiplexing analyzer sales, which included 66 MAGPIX systems, in the three months ended March 31, 2014 as compared to 204 of the 205 total multiplexing analyzers sales, which included 72 MAGPIX systems, in the same prior year period. The decrease in system revenue directly corresponds to the decrease in the number of systems sold relative to the prior period. For the three months ended March 31, 2014, three of our partners accounted for 137 analyzers, or 70% of total TSP segment multiplexing analyzers sold for the period, compared to three of our partners accounting for 162 analyzers, or 79% of total TSP segment multiplexing analyzers sold for the three months ended March 31, 2013.

Consumable sales, comprised of microspheres and sheath fluid, increased to $12.6 . . .

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