News Column

LUMINEX CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 26, 2014

The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes included below in Item 8 and "Risk Factors" included above in Item 1A of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.



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 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 and multiplexed PCR assays, as well as automation and robotics in the field of dry sample handling. 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 has adopted a business model built, in part, around strategic partnerships. 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 December 31, 2013, Luminex had 58 strategic partners, of which 48 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

laboratory instruments.

• Consumable revenue is generated from the sale of our dyed polystyrene

microspheres and 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. 37



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2013 Highlights

• Consolidated revenue was $213.4 million for 2013, representing a 5% increase over revenue for 2012. • System shipments of 1,078 multiplexing analyzers, which included 495 MAGPIX systems, resulting in cumulative life-to-date multiplexing analyzer shipments of 10,737, up 11% from a year ago.



• Partners reported over $443 million of royalty bearing end user sales on

xMAP technology for the year, a 12% increase over 2012, contributing to

the 19% increase in royalty revenue over the prior year.



• Realized a gain of $5.4 million from the liquidation of our minority

interest investment in a private company that was acquired by a third party in July 2013.



• Announced a restructuring plan focused on ARP segment's Newborn Screening

Group and our Brisbane, Australia office to drive operational excellence

and improve focus on the molecular diagnostics market. • Received FDA and European Clearance for an Updated Version of



Comprehensive Genotyping Assay, xTAG® CYP2D6 Kit and a New Personalized

Medicine Genotyping Assay, xTAG® CYP2C19 Kit. • Received FDA clearance for the MAGPIX instrument and the xTAG Gastrointestinal Pathogen Panel. • Signed an agreement with Merck & Co. Inc. to develop a companion diagnostic that will help screen patients into Merck's lead investigational candidate drug study for Alzheimer's disease. • As part of the completion of our transition to a direct assay distribution model, we finalized the termination of our molecular diagnostics distribution agreements resulting in an expense of $7.0 million recorded in selling, general and administrative expenses in the first quarter of 2013.



Reimbursement Landscape

The molecular diagnostic market is experiencing 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 lab 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. Our lab customers are exerting efforts towards resolution, but the deceleration could continue to impact our sales, margins and cash flows until resolution. However, we believe these reimbursement headwinds will subside in 2014.



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 bulk purchasing partners. From the first quarter of 2010 through the fourth quarter of 2013, we had quarterly bulk purchases varying 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 pattern of our largest bulk purchasing partner remains variable; however, our other bulk purchasing customers are less variable in their ordering patterns. 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 during the past several years.



Change in Cash Position

Our cash, cash equivalents and investments increased by approximately $13.0 million for the year ended December 31, 2013 to $72.4 million from $59.4 million at December 31, 2012. The increase in cash, cash equivalents and investments is primarily attributable to strong operating cash flows of $26.9 million, coupled with $8.7 million in proceeds from our employee stock purchase plan (ESPP) and stock option exercises and $9.6 million in proceeds from the sale of the ALL equity investment, which funded the majority of our stock repurchases of $14.6 million and capital expenditures of $18.1 million. 38



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Table of Contents 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 is our original, base business, consists of system sales to partners and end customers, 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 and MultiCode technology for use on Luminex's installed base of systems.



Future Operations

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

• development of the next generation sample-to-answer platform for our MultiCode-RTx technology;



• development of the next generation multiplex platform;

• continued successful execution of our direct sales strategy, including

the infrastructure necessary to support our sales force and



decreasing

reliance on our distributors. • commercialization, regulatory clearance and market adoption of products from our ARP segment;



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



• 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. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (GAAP). 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. The following is a discussion of our most critical accounting policies used in the preparation of our financial statements, and the judgments and estimates involved under each. We also have other significant accounting policies that do not involve critical accounting estimates because they do not generally require us to make estimates and judgments that are difficult or subjective. These are described in Note 1 of our Consolidated Financial Statements provided herein in Item 8. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions. 39



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Revenue Recognition. Revenue is generated primarily from the sale of our products and related services, which are primarily support and maintenance services on our systems. We recognize product revenue at the time the product is shipped provided there is persuasive evidence of an agreement, no right of return exists, the fee is fixed or determinable and collectability is probable. There is no customer right of return in our sales agreements. If the criteria for revenue recognition are not met at the time of shipment, the revenue is deferred until all criteria are met. We regularly enter into arrangements for system sales that are multiple-element arrangements, including services such as installation and training, and multiple products. These products or services are primarily delivered within a short time frame, approximately three to six months, of the agreement execution date and can also be performed by one of our third-party partners. Based on the terms and conditions of the sale, we believe that these services can be accounted for separately from the delivered system as our delivered products have value to our customers on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. Accordingly, the estimated selling price of services or products not yet performed or delivered at the time of system shipment are deferred and recognized as revenue as such services are performed. We have typically been able to determine the selling price of each deliverable in a multiple-element arrangement based on the price for such deliverable when it is sold separately. If vendor specific objective evidence (VSOE) is not determinable and when third-party evidence is not available, we use the estimated selling price of a deliverable which is determined based upon our pricing policies, expected margin of the deliverable, geographical location and information gathered from customer negotiations. Within the diagnostic portion of our ARP segment, we provide systems and certain other hardware to customers through reagent rental agreements under which the customers commit to purchasing minimum quantities of disposable products at a stated price over a defined contract term, which is normally two to three years. Instead of rental payments, we recover the cost of providing the system and other hardware in the amount we charge for our diagnostic assays and other disposables. Revenue is recognized over the defined contract term as assays and other disposable products are shipped. The depreciation costs associated with the system and other hardware are charged to cost of sales on a straight-line basis over the estimated life of the system. The costs to maintain these instruments in the field are charged to cost of sales as incurred. Revenue from extended service agreements is deferred and recognized ratably over the term of the agreement. We may also be entitled to milestone payments that are contingent upon our achieving a predefined objective. We follow the milestone method of recognizing revenue from milestones and milestone payments are recorded as revenue in full upon achievement of the milestone. Revenues from royalties related to agreements with strategic partners are recognized when such amounts are reported to the Company; therefore, the underlying end user sales may be related to prior periods. Additional revenue is derived from cost-type contracts with the U.S. government. Revenue and profit under cost-plus service contracts is recognized as costs are incurred plus negotiated fees. Fixed fees on cost-plus service contracts are recognized ratably over the contract performance period as services are performed. Contract costs include labor and related employee benefits, subcontracting costs and other direct costs, as well as allocations of allowable indirect costs. For contract change orders, claims or similar items, judgment is required for estimating the amounts, assessing the potential for realization, and determining whether realization is probable. From time to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent that a revised estimate affects the current or an earlier period, the cumulative effect of the revision is recognized in the period in which the facts requiring the revision become known. Reimbursements of certain costs, including certain hardware costs or out-of-pocket expenses are included in revenue with corresponding costs included in cost of revenue as costs are incurred. Inventory. Inventories are valued at the lower of cost or market value, with cost determined according to the standard cost method. Inventories have been written down through an allowance for excess and obsolete inventories. The two major components of the allowance for excess and obsolete inventory are (i) a specific write-down for inventory items that we no longer use in the manufacture of our products or that no longer meet our specifications and (ii) a write-down against slow moving items for potential obsolescence. Inventory is reviewed on a regular basis and adjusted based on management's review of inventories on hand compared to estimated future usage and sales. While management believes that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, scientific and technological advances will continue and we could experience additional inventory write-downs in the future. However, we do not believe this estimate is subject to significant variability. Warranties. We provide for the estimated cost of initial product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. While management believes that adequate reserve has been made in the consolidated financial statements for product warranties, should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. However, we do not believe this estimate is subject to significant variability. 40



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Purchase Price Allocation, Intangibles and Goodwill. The purchase price allocation for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. Intangible assets with definite lives are amortized over the assets' estimated useful lives using the straight-line method. We periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a diminished fair value or revised useful life. Goodwill represents the excess of the cost over the fair value of the assets of the acquired business. We evaluate the carrying value of goodwill on a reporting unit level annually or more frequently if there is evidence that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. All of our goodwill relates to one reporting unit, our ARP segment, for goodwill impairment testing. We have historically estimated the fair value of our ARP segment reporting unit using a discounted cash flow (DCF) analysis ("step one" analysis) of our projected future results or using a more qualitative analysis ("step zero" analysis) under the accounting guidance which allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In fiscal 2011 and 2012, we used the "step zero" analysis in our annual impairment analysis for goodwill. In performing the impairment test in the fourth quarter of 2013, we used the "step one" analysis. This analysis requires a comparison of the carrying value of the reporting unit to the estimated fair value of the reporting unit. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions. Our annual test, performed on the first day of the fourth quarter, did not result in an impairment charge for 2013 as the estimated fair value of the ARP segment reporting unit continues to exceed the carrying value by a significant enough amount that any reasonably likely change in the assumptions used in the analysis would not cause the carrying value to exceed the estimated fair value for the reporting unit as determined under our "step one" analysis. We utilize an income approach based on a DCF analysis to determine fair value estimates, and then use market comparisons as a reasonableness check to ensure that neither the income approach nor the market comparisons yielded significantly different results. The income approach calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Our estimates are based on revenue projections by product line, and include judgment based on historical growth and scheduled product approvals by the various governmental authorities. We believe our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The most significant assumptions used in the DCF methodology are the discount rate, based upon the estimated weighted average cost of capital (WACC), and the terminal growth rate, based upon strategic studies we commissioned and our own internal analysis. We used a WACC rate of 15% and a terminal growth rate of 2.9% in our 2013 analysis. To determine our WACC rate, we performed a peer company analysis and considered the weighted average return on debt and equity, the updated risk-free interest rate, beta, equity risk premium, and entity specific size risk premium. Our analysis yielded an estimated fair value in excess of the carrying value by over 25% for 2013. Concurrent with the above analysis, we performed a sensitivity analysis based upon reasonably likely changes to determine if our DCF analysis would result in impairment if the following changes were made to our assumptions: i) assumed the fair value of the reporting unit was lower by 10% or ii) future revenue was 75% of our projections in the DCF model. Neither of these sensitivity analyses resulted in an estimated fair value less than the carrying amount of the reporting unit. Accounting for Income Taxes. We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical income, projected future income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. Undistributed earnings of our foreign subsidiaries are considered permanently reinvested and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon. 41



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The GAAP guidance requires recognition of the impact of a tax position in our financial statements only if that position is more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. Determining the consolidated provision for income taxes involves judgments, estimates and the application of complex tax regulations. We are required to provide for income taxes in each of the jurisdictions where we operate, including estimated liabilities for uncertain tax positions. Although we believe that we have provided adequate liabilities for uncertain tax positions, the actual liability resulting from examinations by taxing authorities could differ from the recorded income tax liabilities and could result in additional income tax expense having a material impact on our consolidated results of operations. Changes of estimates in our income tax liabilities are reflected in our income tax provision in the period in which the factors resulting in the change to our estimate become known to us. We benefit from the tax credit incentives under the U.S. research and experimentation tax credit extended to taxpayers engaged in qualified research and experimental activities while carrying on a trade or business. The tax credit expired on December 31, 2013, and if not renewed under similar terms as in prior years, the result could have a material impact on our financial results. We recognize excess tax benefits associated with share-based compensation to stockholders' equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow the with-and-without approach, excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us. In March 2010, significant reforms to the healthcare system were adopted as law in the U.S. The law includes provisions that, among other things, imposes new and/or increased taxes. Specifically, the law requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of certain medical devices effective January 1, 2013. Our products which have received FDA approval fall under the government classification and will be subject to the excise tax. Stock compensation. All stock-based compensation cost, including grants of stock options, restricted stock units and shares issued under the Company's employee stock purchase plan, is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The fair value of our stock options is estimated using the Black-Scholes option pricing model. The Black-Scholes valuation calculation requires us to estimate key assumptions such as expected volatility, expected term and risk-free rate of return. Calculation of expected volatility is based on historical volatility. The expected term is calculated using the contractual term of the options as well as an analysis of our historical exercises of stock options. The estimate of risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We have never paid cash dividends and do not currently intend to pay cash dividends, thus we have assumed a 0% dividend yield. The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is based on historical forfeiture performance and will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of evaluation and will also impact the amount of stock compensation expense to be recognized in future periods. Ultimately, the actual expense recognized over the vesting period will only be for those awards that vest, except for the limited number of market based awards under long term incentive plans. If we use different assumptions for estimating stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change in our stock-based compensation expense could materially affect our operating income, net income and net income per share. 42



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Consolidated Results of Operations

The following table sets forth the percentage of total revenue of certain items in the Consolidated Results of Operations. The financial information and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Year Ended December 31, 2013 2012 2011 Revenue 100 % 100 % 100 % Cost of revenue 33 % 30 % 32 % Gross profit 67 % 70 % 68 % Operating expenses: Research and development expense 21 % 21 % 19 %



Selling, general and administrative expense 41 % 36 % 34 % Amortization of acquired intangible assets 2 % 2 % 1 % Restructuring

1 % - % - % Total operating expenses 65 % 59 % 55 % Income from operations 2 % 11 % 13 % Interest expense from long-term debt - % - % - % Other income, net 3 % - % - % Income taxes (2 )% (5 )% (5 )% Net income 3 % 6 % 8 % 43



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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Year Ended December 31, 2013 2012 Variance Variance (%) (dollars in thousands) Revenue $ 213,423$ 202,582$ 10,841 5 % Gross profit $ 143,626$ 142,574$ 1,052 1 % Gross margin percentage 67 % 70 % (3 )% N/A Operating expenses $ 138,859$ 119,858$ 19,001 16 % Operating income $ 4,767$ 22,716$ (17,949 ) (79 )% Net income $ 7,096$ 12,407$ (5,311 ) (43 )% Revenue. Total revenue increased to $213.4 million for the year ended December 31, 2013 from $202.6 million in 2012. The increase was primarily attributable to an increase of $5.8 million in royalty revenue and $3.9 million in other revenue. The increase in royalty revenue was driven by our partners continued menu expansion and increased utilization of our partners' assays on our technology. The increase in other revenue was driven by our our contracts with the U.S. government and our development agreement with Merck. In addition, system revenue increased from $31.1 million in 2012 to $31.8 million in 2013. We sold 1,078 multiplexing analyzers in 2013, which included 495 of our MAGPIX systems as compared to 981 multiplexing analyzers sold in 2012, which included 420 MAGPIX systems, bringing total multiplexing analyzer sales since inception to 10,737 as of December 31, 2013. Also included in system revenue for 2013 were sales of 45 automated punching systems compared to 68 in 2012. A breakdown of revenue for the years ended December 31, 2013 and 2012 is as follows: Year Ended December 31, 2013 2012 Variance Variance (%) (dollars in thousands) System sales $ 31,786$ 31,083$ 703 2 % Consumable sales 48,540 48,012 528 1 % Royalty revenue 36,950 31,160 5,790 19 % Assay revenue 74,101 75,020 (919 ) (1 )% Service revenue 8,939 8,079 860 11 % Other revenue 13,107 9,228 3,879 42 % $ 213,423$ 202,582$ 10,841 5 % We continue to have revenue concentration in a limited number of customers. In 2013, the top five customers, by revenue, accounted for 54% of total revenue down from 63% of total revenue in 2012. In particular, three customers accounted for 43% of 2013 total revenue (18%, 16% and 9%, respectively) down from 51% of 2012 total revenue (19%, 24% and 8% respectively). No other customer accounted for more than 10% of total revenue in 2013. As expected, and resulting from our focus on selling directly to the end user, customer concentration in the ARP segment has declined. See the segment discussions that follow on pages 48-54 for additional revenue discussion. Gross Profit. Gross profit increased to $143.6 million for the year ended December 31, 2013, as compared to $142.6 million for the year ended December 31, 2012. Gross margin (gross profit as a percentage of total revenue) was 67% for the year ended December 31, 2013, down from 70% for the year ended December 31, 2012. Gross margin was lower in 2013 primarily as a result of the inclusion of $2.6 million of impairment of inventory related to our restructuring plan focused on our Newborn Screening Group and our Brisbane, Australia office. Additionally, concentration of sales in our higher margin items (assays, consumables and royalties) was modestly lower than in the prior year, representing 75% of revenue for the year ended December 31, 2013 compared to 76% for the year ended December 31, 2012. We anticipate continued fluctuation in gross margin and related gross profit primarily as a result of variability in consumable and system purchases and seasonality effects inherent in our assay revenue. 44



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Research and Development Expense. Research and development expense increased to $45.0 million for the year ended December 31, 2013 from $43.0 million for the year ended December 31, 2012, but remained flat as a percentage of revenue, at 21% in both 2013 and 2012. The increase in expense was primarily associated with (i) the development of a new version of our multiplex PCR technology and (ii) our sample-to-answer instrumentation and assays. Our current expectation is for research and development expenses to decrease modestly as a percentage of total revenue in 2014. Selling, General and Administrative Expense. Selling, general and administrative expenses, excluding the amortization of acquired intangible assets, increased to $87.3 million for the year ended December 31, 2013 from $72.6 million for 2012. The increase was primarily attributable to an expense of $7.0 million related to the termination of our molecular diagnostics distribution agreements effective as of the first quarter of 2013, an increase of our allowance for bad debts of $3.9 million related to all of the receivables from Natural Molecular Testing Corporation (NMTC) that filed for Chapter 11 bankruptcy on October 21, 2013 and additional infrastructure and personnel and related expenses focused on our direct sales channels. Selling, general and administrative headcount at December 31, 2013 was 281 as compared to 259 at December 31, 2012. As a percentage of revenue, selling, general and administrative expense, excluding the amortization of acquired intangible assets, increased to 41% in 2013 compared to 36% in 2012. Restructuring costs. We recorded total pre-tax restructuring charges of $5.0 million in 2013. The portion of these charges that pertained to the non-cash impairment of inventory and certain of the employee separation costs, $2.6 million, was recorded to cost of revenue. The portion of these charges that pertained to the non-cash impairment of intangible assets, fixed assets and certain employee separation costs, $2.4 million, was recorded to restructuring costs in our ARP segment operating expenses. As a result of the organizational change, the Company eliminated approximately 5% of its workforce. Other Income, net. Other income, net increased to $6.7 million for the year ended December 31, 2013 from $0.3 million for the year ended December 31, 2012 due to the liquidation of our minority interest in a private company, which resulted in a gain of $5.4 million and a reduction in the contingent consideration liability established in connection with the 2012 acquisition of GenturaDx from $1.4 million to $0 during 2013. Income taxes. Income tax expense decreased to $4.3 million for the year ended December 31, 2013 from $10.4 million for the year ended December 31, 2012 primarily due to decreased profitability in the U.S. during 2013. Our effective tax rate for the year ended December 31, 2013 was 38% compared to 46% for the year ended December 31, 2012. The decrease in our effective tax rate in 2013 is primarily a function of the decrease in the proportion of taxable income attributable to the U.S., an extension of the the U.S. federal research and experimentation tax credit in 2013, and an increase in the taxable losses in our foreign jurisdictions for which no income tax benefit is recognized. Our foreign earnings are generally taxed at lower rates than in the United States. We continue to assess our business model and its impact in various tax jurisdictions.



Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Year Ended December 31, 2012 2011 Variance Variance (%) (dollars in thousands) Revenue $ 202,582$ 184,339$ 18,243 10 % Gross profit $ 142,574$ 125,490$ 17,084 14 % Gross margin percentage 70 % 68 % 2 % N/A Operating expenses $ 119,858$ 101,647$ 18,211 18 % Operating income $ 22,716$ 23,843$ (1,127 ) (5 )% Net income $ 12,407$ 14,474$ (2,067 ) (14 )% 45



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Revenue. Total revenue increased to $202.6 million for the year ended December 31, 2012 from $184.3 million in 2011. The increase was primarily attributable to an increase in assay revenue, partially offset by a decrease in consumable and system sales. The increase in assay revenue of $26.4 million was driven primarily by the inclusion of and growth in sales of our infectious disease assay products. Consumable sales decreased by $7.4 million resulting primarily from a decrease of $8.7 million in bulk purchases from one of our partners. System revenue decreased from $35.9 million in 2011 to $31.1 million in 2012. We sold 981 multiplexing analyzers in 2012, which included 420 of our MAGPIX systems as compared to 978 multiplexing analyzers sold in 2011, which included 275 MAGPIX systems, bringing total multiplexing analyzer sales since inception to 9,659 as of December 31, 2012. Also included in system revenue for 2012 were sales of 68 automated punching systems compared to 144 in 2011, a decrease that was primarily the result of the unpredictable nature of activities in the world surrounding major forensic events; for example, the Japanese tsunami in 2011. Notwithstanding the slight increase in the number of multiplexing analyzer placements relative to 2011, 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 years ended December 31, 2012 and 2011 is as follows: Year Ended December 31, 2012 2011 Variance Variance (%) (dollars in thousands) System sales $ 31,083$ 35,901$ (4,818 ) (13 )% Consumable sales 48,012 55,457 (7,445 ) (13 )% Royalty revenue 31,160 29,205 1,955 7 % Assay revenue 75,020 48,670 26,350 54 % Service revenue 8,079 7,444 635 9 % Other revenue 9,228 7,662 1,566 20 % $ 202,582$ 184,339$ 18,243 10 % We had revenue concentration in a limited number of customers, as the top five customers, by revenue, accounted for 63% of total revenue in 2012 up from 61% of total revenue in 2011. In particular, three customers accounted for 51% of 2012 total revenue (24%, 19% and 8%, respectively) up from 50% of 2011 total revenue (30%, 10% and 10%, respectively). The increase was primarily attributable to the increase in sales of our assay products. No other customer accounted for more than 10% of total revenue in 2012. See the segment discussions that follow on pages 48-54 for additional revenue discussion. Gross Profit. Gross profit increased to $142.6 million for the year ended December 31, 2012, as compared to $125.5 million for the year ended December 31, 2011. Gross margin (gross profit as a percentage of total revenue) was 70% for the year ended December 31, 2012, up from 68% for the year ended December 31, 2011. Our gross margin is highly dependent upon the mix of revenue components, and our 2012 gross margin was impacted by the high concentration of sales in our higher margin items (assays, consumables and royalties), which represented 76% of revenue for the year ended December 31, 2012 compared to 72% for the year ended December 31, 2011. Additionally, gross margin was lower in 2011 as a result of the inclusion of a $3.3 million incremental expense from recording the LMA inventory acquired at fair value on the date of acquisition in 2011. Research and Development Expense. Research and development expense increased to $43.0 million for the year ended December 31, 2012 from $35.4 million for the year ended December 31, 2011. As a percentage of revenue, research and development expense increased to 21% in 2012 compared to 19% in 2011. The increase was primarily attributable to our acquisitions of LMA in June 2011 and GenturaDx in July 2012, including $0.9 million of acquisition related costs, and increases in materials, clinical trial costs and additional personnel costs associated with the addition of employees and contract employees resulting from increased activity in our ARP segment related to the expansion of our product portfolio. 46



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Selling, General and Administrative Expense. Selling, general and administrative expenses, excluding the amortization of acquired intangible assets, increased to $72.6 million for the year ended December 31, 2012 from $62.9 million for 2011. The increase was primarily attributable to $3.4 million of acquisition related costs resulting from the purchase of GenturaDx in July 2012, and additional personnel costs and rent, utility and depreciation expenses associated with the addition of employees, growth in our marketing efforts to support our global initiatives and expansion of our facilities and technology infrastructure. As anticipated when we completed the acquisition of GenturaDx, in the fourth quarter of 2012, we ceased using the Hayward, California facility, whose operating lease commitment was acquired under the GenturaDx acquisition in July 2012, and therefore accrued a liability of approximately $850,000 based upon the estimated fair value of the costs that will continue to be incurred under the lease, including an estimate of sublease rental income. As a percentage of revenue, selling, general and administrative expense, excluding the amortization of acquired intangible assets, increased to 36% in 2012 compared to 34% in 2011. Other Income, net. Other income, net decreased to $0.3 million for the year ended December 31, 2012 from $0.4 million for the year ended December 31, 2011 due to the decrease in our invested balance and the decrease in the average rate earned on our current invested balances from 0.3% for the year ended December 31, 2011 to 0.2% for the year ended December 31, 2012. This decrease is the result of an overall decrease in market rates compared to the prior year period. Income taxes. Income tax expense increased to $10.4 million for the year ended December 31, 2012 from $9.5 million for the year ended December 31, 2011 primarily due to increased profitability in the U.S. during 2012. Our effective tax rate for the year ended December 31, 2012 was 46% compared to 40% for the year ended December 31, 2011. The increase in our effective tax rate in 2012 is primarily a function of the proportion of positive taxable income attributable to the U.S., an increase in the proportion of taxable income attributable to tax loss jurisdictions for which no income tax benefit is recognized and recording a valuation allowance against the deferred tax assets in Australia. Our foreign earnings are generally taxed at lower rates than in the United States. Segment Results of Operations



Technology and Strategic Partnerships Segment

Selected financial data for the year ended December 31, 2013 and 2012 of our TSP segment is as follows:

Year Ended December 31, 2013 2012 Variance Variance (%) (dollars in thousands) Revenue $ 132,023$ 121,032$ 10,991 9 % Gross profit $ 86,461$ 83,288$ 3,173 4 % Gross margin percentage 65 % 69 % (4 )% N/A Operating expenses $ 52,700$ 55,459$ (2,759 ) (5 )% Operating income $ 33,761$ 27,829$ 5,932 21 % Revenue. Total TSP segment revenue increased 9% to $132.0 million for the year ended December 31, 2013 from $121.0 million in 2012. The increase in TSP segment revenue was primarily attributable to an increase in royalty revenue of $6.0 million, increased system revenue of $2.2 million and an increase of $1.3 million in other revenue.



A breakdown of revenue in the TSP segment for the years ended December 31, 2013 and 2012 is as follows:

Year Ended December 31, 2013 2012 Variance Variance (%) (dollars in thousands) System sales $ 30,127$ 27,890$ 2,237 8 % Consumable sales 48,344 47,655 689 1 % Royalty revenue 36,803 30,852 5,951 19 % Service revenue 8,343 7,523 820 11 % Other revenue 8,406 7,112 1,294 18 % $ 132,023$ 121,032$ 10,991 9 % 47



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The top five customers, by revenue, accounted for 63% of total TSP segment revenue in 2013 compared to 64% in 2012. In particular, three customers accounted for 52% of total TSP segment revenue in the year ended December 31, 2013 (27%, 14% and 11%, respectively). For comparative purposes, these same three customers accounted for 55% of total TSP segment revenue (28%, 14% and 13%, respectively) in the year ended December 31, 2012. No other customer accounted for more than 10% of total TSP segment revenue during 2013. Revenue from the sale of systems and peripheral components increased 8% to $30.1 million for the year ended December 31, 2013 from $27.9 million for the year ended December 31, 2012, due to the increase in the total multiplexing analyzer placements as the TSP segment sold 1,072 of the 1,078 total multiplexing analyzers sold in 2013 as compared to 960 in 2012. For the year ended December 31, 2013, five of our partners accounted for 894, or 83%, of total TSP segment multiplexing analyzers sold. Five of our partners accounted for 801, or 83%, of total TSP segment multiplexing analyzers sold for the year ended December 31, 2012. Consumable sales, comprised of microspheres and sheath fluid, increased 1% to $48.3 million during 2013 from $47.7 million in 2012. During the year ended December 31, 2013, we had 74 bulk purchases of consumables totaling approximately $38.8 million (80% of total TSP segment consumable revenue), ranging from $0.1 million to $4.3 million, as compared with 70 bulk purchases totaling approximately $38.1 million (80% of total TSP segment consumable revenue), in the year ended December 31, 2012. The increase in bulk purchases is the primary driver to the increase in consumable revenue from the prior year. Partners who reported royalty bearing sales accounted for $38.4 million, or 79%, of TSP segment consumable sales for the year ended December 31, 2013 compared to $35.0 million, or 73%, of the total consumable sales for the year ended December 31, 2012. Royalty revenue, which results when our partners sell products or services incorporating our technology, increased 19% to $36.8 million for the year ended December 31, 2013 from $30.9 million for the year ended December 31, 2012. We believe this is primarily the result of menu expansion and increased utilization of our partners' assays on our technology. 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 year ended December 31, 2013, we had 51 commercial partners submit royalties as compared with 41 for the year ended December 31, 2012. Total royalty bearing sales reported to us by our partners were $443.5 million for the year ended December 31, 2013 as compared to $397.8 million for the year ended December 31, 2012. Service revenue, comprised of extended warranty contracts earned ratably over the term of a contract, increased 11% to $8.3 million during 2013 from $7.5 million in 2012. This increase is attributable to increased penetration of the expanded installed base. At December 31, 2013, we had 1,516 Luminex systems covered under extended service agreements and $3.8 million in deferred revenue related to those contracts. At December 31, 2012, we had 1,379 Luminex systems covered under extended service agreements and $3.3 million in deferred revenue related to those contracts. Other revenue, which includes training revenue, shipping revenue, miscellaneous part sales, amortized license fees and grant revenue, increased 18% to $8.4 million for the year ended December 31, 2013 compared to $7.1 million for the year ended December 31, 2012. This increase is primarily the result of payments related to minimum purchase obligations. Gross Profit. The gross margin (gross profit as a percentage of total revenue) for the TSP segment decreased to 65% for the year ended December 31, 2013 from 69% for the year ended December 31, 2012. The decrease in gross margin was primarily the result of mix in systems sales and modest increases in the fixed cost components of our consumables and our manufacturing and service activities. Gross profit for the TSP segment increased to $86.5 million for the year ended December 31, 2013, as compared to $83.3 million for the year ended December 31, 2012. Research and development expense. Research and development expense decreased to $12.2 million, or 9% of TSP segment revenue, for the year ended December 31, 2013 from $15.1 million, or 12% of TSP segment revenue, for the year ended December 31, 2012. The focus of our TSP segment research and development activities on continued refinement of our systems, software and reagents to meet the evolving needs of the marketplace including the addition of more automated solutions for assay performance, remains consistent with the prior year period. The decrease in TSP segment research and development expense is primarily the result of some resources previously focused on TSP segment pipeline activities being prioritized towards development activities within our ARP segment. 48



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Reclassifications. The Company reclassified certain 2012 amounts in the accompanying consolidated financial statements to conform to the 2013 presentation. These reclasses include $12.7 million of TSP segment selling, general and administrative expenses and the related headcount reclassed to ARP segment selling, general and administrative expenses for the year ended December 31, 2012. Selling, general and administrative expense. Selling, general and administrative expense increased to $40.5 million for the year ended December 31, 2013 from $40.4 million in 2012. Notwithstanding the absolute dollar increase, as a percentage of TSP segment revenue, selling, general and administrative expense declined to 31% in 2013 from 33% in 2012. The modest increase in expense was primarily related to the addition of employees and the associated additional personnel costs, increased marketing services and rent, utility and depreciation expenses associated with expansion of our facilities, offset slightly by a decrease in incentive compensation based on current year financial performance. Selected financial data for the year ended December 31, 2012 and 2011 of our TSP segment is as follows: Year Ended December 31, 2012 2011 Variance Variance (%) (dollars in thousands) Revenue $ 121,032$ 127,779$ (6,747 ) (5 )% Gross profit $ 83,288$ 90,987$ (7,699 ) (8 )% Gross margin percentage 69 % 71 % (2 )% N/A Operating expenses $ 55,459$ 48,522$ 6,937 14 % Operating income $ 27,829$ 42,465$ (14,636 ) (34 )% Revenue. Total revenue decreased 5% to $121.0 million for the year ended December 31, 2012 from $127.8 million 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 and a decrease in system sales of $2.2 million due to the differing mix of systems sold and a slight decrease in the total multiplexing analyzer placements, offset by an increase in royalty revenue of $1.9 million.



A breakdown of revenue in the TSP segment for the years ended December 31, 2012 and 2011 is as follows:

Year Ended December 31, 2012 2011 Variance Variance (%) (dollars in thousands) System sales $ 27,890$ 30,071$ (2,181 ) (7 )% Consumable sales 47,655 55,159 (7,504 ) (14 )% Royalty revenue 30,852 28,926 1,926 7 % Service revenue 7,523 6,880 643 9 % Other revenue 7,112 6,743 369 5 % $ 121,032$ 127,779$ (6,747 ) (5 )% The top five customers, by revenue, accounted for 64% of total TSP segment revenue in 2012 compared to 68% in 2011. In particular, three customers accounted for 55% of total TSP segment revenue in the year ended December 31, 2012 (28%, 14% and 13%, respectively). For comparative purposes, these same three customers accounted for 58% of total TSP segment revenue (33%, 14% and 11%, respectively) in the year ended December 31, 2011. The decrease in percentage of total revenue represented by our three largest customers was primarily the result of the lower dollar amount of bulk purchases by one of our largest customers. No other customer accounted for more than 10% of total TSP segment revenue during 2012. Revenue from the sale of systems and peripheral components decreased 7% to $27.9 million for the year ended December 31, 2012 from $30.1 million for the year ended December 31, 2011, due to the differing mix of systems sold and a slight decrease in the total multiplexing analyzer placements. The TSP segment sold 960 of the 981 total multiplexing analyzers sold in 2012 as compared to 967 in 2011. For the year ended December 31, 2012, five of our partners accounted for 801, or 83%, of total TSP segment multiplexing analyzers sold. Five of our partners accounted for 799, or 83%, of total TSP segment multiplexing analyzers sold for the year ended December 31, 2011. 49



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Consumable sales, comprised of microspheres and sheath fluid, decreased 14% to $47.7 million during 2012 from $55.2 million in 2011. During the year ended December 31, 2012, we had 70 bulk purchases of consumables totaling approximately $38.1 million (80% of total TSP segment consumable revenue), ranging from $0.1 million to $5.7 million, as compared with 68 bulk purchases totaling approximately $47.4 million (86% of total TSP segment consumable revenue), in the year ended December 31, 2011. The decrease in consumable revenue was primarily attributable to a volume decrease of $8.7 million 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, partially offset by an approximate 5% growth in total consumable sales from all other consumable purchasing customers. Partners who reported royalty bearing sales accounted for $35.0 million, or 73%, of total consumable sales for the year ended December 31, 2012. Royalty revenue, which results when our partners sell products or services incorporating our technology, increased 7% to $30.9 million for the year ended December 31, 2012 from $28.9 million for the year ended December 31, 2011. We believe this was primarily the result of menu expansion and increased utilization of our partners' assays on our technology. For the year ended December 31, 2012, we had 41 commercial partners submit royalties as compared with 43 for the year ended December 31, 2011. Additionally, the 41 partners from whom we recognized $30.9 million in royalties in 2012 represented approximately $28.7 million of the total royalties in 2011, an increase of approximately 7% over their prior year payments. Total royalty bearing sales reported to us by our partners were $397.8 million for the year ended December 31, 2012 as compared to $384.0 million for the year ended December 31, 2011. Service revenue, comprised of extended warranty contracts earned ratably over the term of a contract, increased 9% to $7.5 million during 2012 from $6.9 million in 2011. This increase was attributable to increased penetration of the expanded installed base. At December 31, 2012, we had 1,379 Luminex systems covered under extended service agreements and $3.3 million in deferred revenue related to those contracts. At December 31, 2011, we had 1,299 Luminex systems covered under extended service agreements and $3.0 million in deferred revenue related to those contracts. Other revenue, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees and grant revenue, increased 5% to $7.1 million for the year ended December 31, 2012 compared to $6.7 million for the year ended December 31, 2011. This increase was primarily the result of increased grant revenue, offset by decreased parts sales. Gross Profit. The gross margin (gross profit as a percentage of total revenue) for the TSP segment decreased to 69% for the year ended December 31, 2012 from 71% for the year ended December 31, 2011. The decrease was the result of a slightly lower concentration of consumable and royalty sales (our highest margin items) and the addition of resources, technology and infrastructure to improve our worldwide logistics. Consumables and royalties comprised $78.5 million, or 65%, of TSP segment revenue for the year ended December 31, 2012 and $84.1 million, or 66%, for the year ended December 31, 2011. Gross profit for the TSP segment decreased to $83.3 million for the year ended December 31, 2012, as compared to $91.0 million for the year ended December 31, 2011. Research and development expense. Research and development expense increased to $15.1 million for the year ended December 31, 2012 from $12.8 million for the year ended December 31, 2011. The increase in TSP segment research and development expense was primarily attributable to increases in materials and additional personnel costs associated with increased activity related to product development. 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, was consistent with the prior year. Reclassifications. The Company reclassified certain 2012 and 2011 amounts in the accompanying consolidated financial statements to conform to the 2013 presentation. These reclasses include $12.7 million and $12.4 million of TSP segment selling, general and administrative expenses and the related headcount reclassed to ARP segment selling, general and administrative expenses for the years ended December 31, 2012 and 2011, respectively. Selling, general and administrative expense. Selling, general and administrative expense increased to $40.4 million for the year ended December 31, 2012 from $35.7 million for 2011. The increase was primarily related to the addition of employees and increased technology infrastructure costs to help ensure that our technology enables us to maintain financial accuracy and operational effectiveness and additional personnel costs and rent, utility and depreciation expenses associated with expansion of our facilities. TSP segment employees and contract employees increased to 161 at December 31, 2012 from 125 at December 31, 2011. 50



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Assays and Related Products Segment

Selected financial data for the year ended December 31, 2013 and 2012 of our ARP segment is as follows:

Year Ended December 31, 2013 2012 Variance Variance (%) (dollars in thousands) Revenue $ 81,400$ 81,550$ (150 ) - % Gross profit $ 57,165$ 59,286$ (2,121 ) (4 )% Gross margin percentage 70 % 73 % (3 )% N/A Operating expenses $ 86,159$ 64,399$ 21,760 34 % Operating income $ (28,994 )$ (5,113 )$ (23,881 ) 467 %



A breakdown of revenue in the ARP segment for the years ended December 31, 2013 and 2012 is as follows:

Year Ended December 31, 2013 2012 Variance Variance (%) (dollars in thousands) System sales $ 1,659$ 3,193$ (1,534 ) (48 )% Consumable sales 196 357 (161 ) (45 )% Royalty revenue 147 308 (161 ) (52 )% Assay revenue 74,101 75,020 (919 ) (1 )% Service revenue 596 556 40 7 % Other revenue 4,701 2,116 2,585 122 % $ 81,400$ 81,550$ (150 ) - % Revenue. Total ARP segment revenue decreased to $81.4 million for the year ended December 31, 2013 from $81.6 million in 2012. The decrease in revenue was primarily attributable to an increase of $2.6 million in other revenue, offset by a decrease of $1.5 million in system revenue and a $0.9 million decrease in assay revenue. The growth in other revenue was driven by our development agreements with Merck and U.S. government agencies. Our ARP segment sold six multiplexing analyzers and 45 automated punching systems during the year ended 2013 compared to 21 multiplexing analyzers and 68 automated punching systems in 2012. We anticipate that our increased focus on direct sales will drive the placement of reagent rental multiplexing analyzer systems in lieu of multiplexing analyzer system sales to distributors. The modest decline in assay revenue is driven primarily by decreased infectious disease assay sales. Infectious disease testing and genetic testing assays represented 67% and 33%, respectively, of total assay revenue in both 2013 and 2012. For the year ended December 31, 2013, direct assay sales comprised 97% of total assay sales compared to 72% for the year ended December 31, 2012. In 2013 we focused more resources on our direct sales channels which resulted in less reliance on our distributors. The top customer in 2013 accounted for 44% of total ARP segment revenue compared to 45% of total ARP segment revenue in 2012. No other customer accounted for more than 10% of total ARP segment revenue in 2013. In 2012, before our focus on selling directly to the end user, the second and third largest customers represented 18% and 9%, respectively of total ARP segment revenue. Gross profit. The gross margin for the ARP segment decreased to 70% in 2013 from 73% in 2012. Gross profit for the ARP segment decreased to $57.2 million in 2013, from $59.3 million in 2012. The decrease in gross margin was primarily the result of the $2.6 million impairment of inventory and other assets related to our restructuring plan focused on our Newborn Screening Group, partially offset by a $1.0 million milestone payment attributable to our development agreement with Merck. Research and development expense. Research and development expense increased to $32.9 million for 2013 from $27.9 million for 2012. The increase in ARP segment research and development expenses was primarily the result of the development of our next generation sample-to-answer platform for our MultiCode-RTx technology. The focus of our ARP segment research and development activities on continued development of our pipeline products and technologies remains consistent with the prior year. Research and development employees and contract employees of the ARP segment increased to 151 at December 31, 2013 from 120 at December 31, 2012, primarily as a result of some resources previously focused on TSP segment pipeline activities being prioritized towards development activities within our ARP segment. 51



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Reclassifications. The Company reclassified certain 2012 amounts in the accompanying consolidated financial statements to conform to the 2013 presentation. These reclassifications include $2.1 million of ARP segment selling, general and administrative expenses and the related headcount reclassified to ARP segment research and development expenses for the year ended December 31, 2012 and $12.7 million of TSP segment selling, general and administrative expenses and the related headcount reclassified to ARP segment selling, general and administrative expenses for the year ended December 31, 2012. Selling, general and administrative expense. Selling, general and administrative expense, including the amortization of acquired intangibles, increased to $50.9 million in 2013 from $36.5 million in 2012. The increase in selling, general, and administrative expenses is primarily the result of the termination of our molecular diagnostics distribution agreements and the related expense of $7.0 million, an increase of our allowance for bad debts of $3.9 million related to all of the aging receivables from Natural Molecular Testing Corporation (NMTC) that filed for Chapter 11 bankruptcy on October 21, 2013; and additional infrastructure and personnel focused on our direct sales channels, offset slightly by a decrease in incentive compensation based on current year financial performance. Restructuring costs. We recorded total pre-tax restructuring charges of $5.0 million in the year ended December 31, 2013. The portion of these charges that pertained to the non-cash impairment of inventory and certain of the employee separation costs, $2.6 million, was recorded to cost of revenue. The portion of these charges that pertained to the non-cash impairment of intangible assets, fixed assets and certain employee separation costs, $2.4 million, was recorded to restructuring costs in our ARP segment operating expenses. As a result of the organizational change, the Company eliminated approximately 5% of its workforce.



Selected financial data for the year ended December 31, 2012 and 2011 of our ARP segment is as follows:

Year Ended December 31, 2012 2011 Variance Variance (%) (dollars in thousands) Revenue $ 81,550$ 56,560$ 24,990 44 % Gross profit $ 59,286$ 34,503$ 24,783 72 % Gross margin percentage 73 % 61 % 12 % N/A Operating expenses $ 64,399$ 53,125$ 11,274 21 % Operating income $ (5,113 )$ (18,622 )$ 13,509 (73 )%



A breakdown of revenue in the ARP segment for the years ended December 31, 2012 and 2011 is as follows:

Year Ended December 31, 2012 2011 Variance Variance (%) (dollars in thousands) System sales $ 3,193$ 5,830$ (2,637 ) (45 )% Consumable sales 357 298 59 20 % Royalty revenue 308 279 29 10 % Assay revenue 75,020 48,670 26,350 54 % Service revenue 556 564 (8 ) (1 )% Other revenue 2,116 919 1,197 130 % $ 81,550$ 56,560$ 24,990 44 % 52



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Revenue. Total ARP segment revenue increased 44% to $81.6 million for the year ended December 31, 2012 from $56.6 million in 2011. The increase in revenue was primarily attributable to a $26.4 million increase in assay revenue, driven primarily by the growth in our infectious disease assay products. Our assay products are currently divided into two distinct categories: infectious disease testing and genetic testing, which represented 67% and 33%, respectively, of total assay revenue in 2012 as compared to 45% and 55% in 2011, respectively. The shift towards infectious disease testing was primarily due to the increase in MultiCode based assay sales, which were predominantly infectious disease testing, and the growth in sales of GPP. For the year ended December 31, 2012, direct assay sales comprised 72% of total assay sales compared to 61% for the year ended December 31, 2011. The top five customers, by revenue, accounted for 76% of total revenue in 2012 compared to 74% in 2011. In particular, the top three customers in 2012 accounted for 72% of total revenue (45%, 18% and 9%, respectively) compared to the top three customers of 2011 which accounted for 65% of total revenue (31%, 24% and 10%, respectively). No other customers accounted for more than 10% of total ARP segment revenue during 2012. Our ARP segment sold 21 multiplexing analyzers and 68 automated punching systems during the year ended 2012 compared to 11 multiplexing analyzers and 144 automated punching systems in 2011. The decline in sales of automated punching systems was primarily the result of the unpredictable nature of activities in the world surrounding major forensic events; for example, the Japanese tsunami in 2011. Other revenue includes shipping revenue, training revenue, contract research and development fees and commercial milestone revenue. Gross profit. The gross margin for the ARP segment increased to 73% in 2012 from 61% in 2011. Gross profit for the ARP segment increased to $59.3 million in 2012, as compared to $34.5 million in 2011. The increase in gross profit margin in 2012 was primarily attributable to increased sales of high margin assays, the decreased contribution from system sales, and the inclusion of a $3.3 million expense from recording the LMA inventory acquired at fair value on the date of acquisition in the prior year. Research and development expense. Research and development expense increased to $27.9 million in 2012 from $22.6 million in 2011. The increase in ARP segment research and development expenses was primarily the result of increases in materials and additional personnel costs associated with the addition of employees resulting from increased activity related to product development, including clinical trials costs, together with the inclusion of $4.0 million of GenturaDx's research and development expenses in the 2012 results. Research and development employees and contract employees of the ARP segment increased to 120 at December 31, 2012 from 104 at December 31, 2011, primarily due to employees added by the biodefense group and through the acquisition of GenturaDx. Reclassifications. The Company reclassified certain 2012 and 2011 amounts in the accompanying consolidated financial statements to conform to the 2013 presentation. These reclassifications include $2.1 million and $2.0 million of ARP segment selling, general and administrative expenses and the related headcount reclassified to ARP segment research and development expenses for the years ended December 31, 2012 and 2011, respectively. Additionally, $12.7 million and $12.4 million of TSP segment selling, general and administrative expenses and the related headcount were reclassified to ARP segment selling, general and administrative expenses for the years ended December 31, 2012 and 2011, respectively. Selling, general and administrative expense. Selling, general and administrative expense, including the amortization of acquired intangibles, increased to $36.5 million for 2012 from $30.5 million for 2011 but decreased as a percentage of revenue to 45% of ARP segment revenue in 2012 from 54% of ARP segment revenue in 2011. The increase in selling, general, and administrative expenses is primarily due to the inclusion of the GenturaDx acquisition related costs of $3.4 million and ongoing selling, general and administrative expenses, the inclusion of LMA for the entire year ended December 31, 2012, strategic study consulting costs and the expansion of the biodefense group. Additionally, in the fourth quarter of 2012, we ceased using the Hayward, California facility, whose operating lease commitment was acquired under the GenturaDx acquisition in July 2012, and accrued a liability of approximately $850,000 based upon the estimated fair value of the costs that will continue to be incurred under the lease, including an estimate of sublease rental income. 53



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Liquidity and Capital Resources

December 31, 2013 December 31, 2012 (in thousands) Cash and cash equivalents $ 67,924 $ 42,789 Short-term investments 4,517 13,607 Long-term investments - 3,000 $ 72,441 $ 59,396 At December 31, 2013, we held cash, cash equivalents and short-term investments of $72.4 million and had working capital of $117.9 million. At December 31, 2012, we held cash, cash equivalents and short-term and long-term investments of $59.4 million and had working capital of $101.0 million. Cash, cash equivalents and investments increased by $13.0 million during the year ended December 31, 2013. The increase in cash, cash equivalents and investments from the prior year is primarily attributable to strong operating cash flows, coupled with $8.7 million in proceeds from the Company's employee stock purchase plan and stock option exercises and $9.6 million in proceeds from the sale of of our minority interest investment in a private company, which funded the majority of our stock repurchases of $14.6 million and capital expenditures of $18.1 million. We have funded our operations to date primarily through the issuance of equity securities (in conjunction with an initial public offering in 2000, subsequent option exercises, and our follow-on public offering in 2008) and cash generated from operations. Our cash reserves are held directly or indirectly in a variety of short-term, interest-bearing instruments, including non-government sponsored debt securities. We do not have any investments in asset-backed commercial paper, auction rate securities, or mortgage backed or sub-prime style investments. Cash provided by operations was $26.9 million for the year ended December 31, 2013 as compared with cash provided by operations of $24.3 million for the year ended December 31, 2012. Cash provided by investing activities was $2.7 million for the year ended December 31, 2013 as compared with cash used in investing activities of $28.4 million for 2012. The change in cash flows of investing activities was primarily attributable to the $48.2 million expended on our GenturaDx acquisition in 2012 and $9.5 million in proceeds received from the sale of our minority interest investment in a private company in the current year, offset by a decrease in the net sales of our available-for-sale securities of $20.0 million and an increase of $8.3 million in purchases of property and equipment in 2013 as compared to 2012. Currently, exclusive of changes in available-for-sale securities, we expect cash used in investing activities to be primarily for purchases of property and equipment, additional cost-method investments and continued strategic investments or acquisitions. Cash used by financing activities decreased to $4.4 million for the year ended December 31, 2013, from $11.5 million for the year ended December 31, 2012, primarily attributable a decrease in stock repurchases of $6.4 million together with an increase of $4.7 million in proceeds from the Company's employee stock purchase plan and stock option exercises offset by a decrease in excess income tax benefit from employee stock-based awards of $3.9 million in 2013 as compared to 2012. Our future capital requirements will depend on a number of factors, including our success in developing and expanding markets for our products, payments under possible future strategic arrangements, continued progress of our research and development of potential products, the timing and outcome of regulatory approvals, the need to acquire licenses to new technology, costs associated with strategic acquisitions including integration costs and assumed liabilities, the status of competitive products and potential costs associated with both protecting and defending our intellectual property. Additionally, actions taken as a result of our ongoing internal evaluation of our business could result in expenditures not currently contemplated in our estimates for 2014. We believe, however, that our existing cash and cash equivalents are sufficient to fund our operating expenses, capital equipment requirements and other expected ordinary course liquidity requirements for the coming twelve months. Factors that could affect our capital requirements, in addition to those listed above include: (i) continued collections of accounts receivable consistent with our historical experience, (ii) our ability to manage our inventory levels consistent with past practices, (iii) signing partnership agreements which include significant up front license fees, (iv) our stock repurchase program from time to time and (v) entering into strategic investment or acquisition agreements requiring significant cash consideration. See also the "Safe Harbor Cautionary Statement" and Item 1A "Risk Factors" above. 54



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To the extent our capital resources are insufficient to meet future capital requirements we will have to raise additional funds to continue the development and deployment of our technologies, or to supplement our position through strategic acquisitions. There can be no assurance that debt or equity funds will be available on favorable terms, if at all, particularly given the current state of the capital markets. Any downgrade in our credit rating could adversely affect our ability to raise debt capital on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of those securities could result in dilution to our stockholders. Moreover, incurring debt financing could result in a substantial portion of our operating cash flow being dedicated to the payment of principal and interest on such indebtedness, could render us more vulnerable to competitive pressures and economic downturns and could impose restrictions on our operations. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds through entering into agreements on unattractive terms.



Debt

On December 12, 2003, Tm Bioscience entered into an agreement with the Ministry of Industry of the government of Canada under which the government agreed to invest up to Canadian (Cdn) $7.3 million relating to the development of several genetic tests. This agreement was amended in March 2009. Funds were advanced from Technology Partnerships Canada (TPC), a special operating program. The actual payments we received were predicated on eligible expenditures made during the project period, which ended July 31, 2008. We have received Cdn $4.9 million from TPC, which is expected to be repaid along with approximately Cdn $1.6 million of imputed interest for a total of approximately Cdn $6.5 million. We have agreed to repay the TPC funding through a royalty on revenues. Royalty payments commenced in 2007 at a rate of 1% of total LMD revenue and at a rate of 2.5% for 2008 and thereafter. Aggregate royalty repayment will continue until total advances plus imputed interest has been repaid or until December 31, 2016, whichever is earlier. The repayment obligation expires on December 31, 2016 and any unpaid balance will be cancelled and forgiven on that date. Should the term of repayment be shorter than expected due to higher than expected assay revenue, the effective interest rate would increase as repayment is accelerated. Actual future sales generating a repayment obligation will vary from our projections, are subject to adjustment based upon the U.S. and Canadian exchange rate and are subject to the risks and uncertainties described elsewhere in this report, including under Item 1A "Risk Factors" and "Safe Harbor Cautionary Statement."



Contractual Obligations

As of December 31, 2013, we had approximately $18.8 million in non-cancellable obligations for the next 12 months. These obligations are included in our estimated cash usage during 2014. The following table reflects our total current non-cancellable obligations by period as of December 31, 2013 (in thousands): Payment Due By Period Less Than 1 More Than 5 Contractual Obligations Total Year 1-3 Years 3-5 Years Years Non-cancellable rental obligations $ 18,917$ 4,773$ 5,609$ 3,019$ 5,516 Non-cancellable purchase obligations (1) 12,071 10,477 495 499 600 Long-term debt obligations (2) 1,663 1,194 469 - - Capital lease obligations 346 170 176 - - Severance and retention bonus obligations 267 267 - - - Minimum royalty commitments (3) 266 39 52 53 122 Software license obligations 1,290 1,290 - - - Insurance premiums 615 615 - - - Total (4) $ 35,435$ 18,825$ 6,801

$ 3,571$ 6,238 (1) Purchase obligations include contractual arrangements in the form of purchase orders primarily as a result of normal inventory purchases or



minimum payment obligations resulting when minimum purchase commitments

are not met. (2) We have agreed to repay the long term TPC debt obligations through a



royalty on revenues. Repayments denominated in U.S. dollars are currently

projected to be as shown in the table above. The amount due within one year, as shown in the table above, is our estimated repayment amount based on the sales for the full year 2013. 55



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(3) Amounts represent minimum royalties due on net sales of products

incorporating licensed technology and subject to a minimum annual royalty

payment.



(4) Due to the uncertainty with respect to the timing of future cash flows

associated with Luminex's unrecognized tax benefits at December 31, 2013,

Luminex is unable to make reasonably reliable estimates of the timing of

cash settlement with the respective taxing authority. Therefore, $2.3

million of unrecognized tax benefits have been excluded from the

contractual obligations table above. See Note 13 to the Consolidated

Financial Statements for a discussion on income taxes.

Inflation

We do not believe that inflation has had a direct adverse effect on our operations to date. However, a substantial increase in product and manufacturing costs and personnel related expenses could have an adverse impact on our results of operations in the event these expenses increase at a faster pace than we can increase our system, consumable and royalty revenue rates.



Recently Adopted Accounting Pronouncements

In February 2013, the FASB issued guidance on disclosures of additional information with respect to changes in accumulated other comprehensive income ("AOCI") balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income as well as presenting separately for each such component the portion of the change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location would be required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts will be required only for components of AOCI reclassified into income in their entirety. The disclosures required with respect to income statement line item impacts would be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. For the Company, this Accounting Standards Update is effective beginning January 1, 2013. Because this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on the Company's consolidated results of operations or financial condition. Recent Accounting Pronouncements In July 2013, the FASB issued guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an entity to present unrecognized tax benefits as a reduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. For the Company, this Accounting Standards Update is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. This pronouncement will have no effect on the financial statements as the Company has historically presented uncertain tax positions in accordance with this Accounting Standards Update.


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Source: Edgar Glimpses


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