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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 Commission File Number 000-22400
 STRATEGIC DIAGNOSTICS INC.
  
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    56-1581761(I.R.S. employer
identification no.)111 Pencader Drive 
Newark, Delaware(Address of principal executive offices)
    
    19702(Zip Code)
 (302) 456-6789
 
  þ o
  o o þ
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STRATEGIC DIAGNOSTICS INC.
 INDEX
 Item
    
    
    
    PagePART I FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets  September 30, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations  Three and nine months ended September 30, 2007 and 2006
    
    
    3Consolidated Statements of Cash Flows  Nine months ended September 30, 2007 and 2006
    
    
    4Notes to Consolidated Interim Financial Statements
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18ITEM 4. Controls and Procedures
    
    
    18PART II OTHER INFORMATION
    
    
    19ITEM 6. Exhibits
    
    
    19SIGNATURES
    
    
    19Certifications of the Chief Executive OfficerCertifications of the Chief Financial OfficerCertifications of the Chief Executive Officer, pursuant to Section 906Certifications of the Chief Financial Officer, pursuant to Section 906
  1




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##### 



PART I.  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
  
 
 September 30,
    
    December 31,2007
    
    2006ASSETSCurrent Assets :Cash and cash equivalents
    
    $
    11,871
    
    
    $
    10,892Receivables, net
    
    
    3,855
    
    
    
    3,678Inventories
    
    
    4,396
    
    
    
    3,178Deferred tax asset
    
    
    1,025
    
    
    
    831Other current assets
    
    
    731
    
    
    
    492Total current assets
    
    
    21,878
    
    
    
    19,071Property and equipment, net
    
    
    5,503
    
    
    
    4,058Other assets
    
    
    7
    
    
    
    3Deferred tax asset
    
    
    7,756
    
    
    
    8,484Intangible assets, net
    
    
    6,119
    
    
    
    6,337Total assets
    
    $
    41,263
    
    
    $
    37,953LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities :Accounts payable
    
    $
    394
    
    
    $
    541Accrued expenses
    
    
    1,395
    
    
    
    1,455Deferred revenue
    
    
    121
    
    
    
    133Current portion of long term debt
    
    
    611
    
    
    
    211Total current liabilities
    
    
    2,521
    
    
    
    2,340Long-term debt
    
    
    1,793
    
    
    
    351Non-current taxes payable
    
    
    117
    
    
    
    Total non-current liabilities
    
    
    1,910
    
    
    
    351Stockholders Equity:Preferred stock, $.01 par value, 20,920,648 shares authorized,
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 35,000,000 shares authorized,
20,364,541 and 20,192,402 issued and outstanding
at September 30, 2007 and December 31, 2006,
respectively
    
    
    204
    
    
    
    202Additional paid-in capital
    
    
    39,441
    
    
    
    38,605Accumulated deficit
    
    
    (2,996)
    
    
    
    (3,690
    )Cumulative translation adjustments
    
    
    183
    
    
    
    145Total stockholders equity
    
    
    36,832
    
    
    
    35,262Total liabilities and stockholders equity
    
    $
    41,263
    
    
    $
    37,953
  2




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Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    6,564
    
    
    $
    6,624
    
    
    $
    19,936
    
    
    $
    18,532OPERATING EXPENSES:Manufacturing
    
    
    2,667
    
    
    
    2,965
    
    
    
    7,891
    
    
    
    8,633Research and development
    
    
    723
    
    
    
    666
    
    
    
    2,184
    
    
    
    1,959Selling, general and administrative
    
    
    2,900
    
    
    
    2,543
    
    
    
    8,661
    
    
    
    7,899Loss on
disposal of assets
    
    
    108
    
    
    
    
    
    
    
    108
    
    
    
    Total operating expenses
    
    
    6,398
    
    
    
    6,174
    
    
    
    18,844
    
    
    
    18,491Operating income
    
    
    166
    
    
    
    450
    
    
    
    1,092
    
    
    
    41Interest income (expense), net
    
    
    109
    
    
    
    101
    
    
    
    335
    
    
    
    275Income before taxes
    
    
    275
    
    
    
    551
    
    
    
    1,427
    
    
    
    316Income tax expense
    
    
    275
    
    
    
    219
    
    
    
    733
    
    
    
    123Net income
    
    
    0
    
    
    
    332
    
    
    
    694
    
    
    
    193Basic net income per share
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.01Shares used in computing basic
net income per share
    
    
    20,360,000
    
    
    
    20,050,000
    
    
    
    20,302,000
    
    
    
    19,994,000Diluted net income per share
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.01Shares used in computing diluted
net income per share
    
    
    20,542,000
    
    
    
    20,115,000
    
    
    
    20,490,000
    
    
    
    20,068,000
  3




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Nine MonthsEnded September 30,2007
    
    2006Cash Flows from Operating Activities :Net income
    
    $
    694
    
    
    $
    193Adjustments to reconcile net income to net
cash provided by (used in) operating activities :Depreciation and amortization
    
    
    905
    
    
    
    749Share-based compensation expense
    
    
    352
    
    
    
    235Deferred income tax provision
    
    
    570
    
    
    
    54Loss on disposal of fixed assets
    
    
    93
    
    
    
    (Increase) decrease in :Receivables
    
    
    (177
    )
    
    
    (611
    )Inventories
    
    
    (1,218
    )
    
    
    (49
    )Other current assets
    
    
    (239
    )
    
    
    (303
    )Other assets
    
    
    (4
    )
    
    
    (1
    )Increase (decrease) in :Accounts payable
    
    
    (147
    )
    
    
    70Accrued expenses
    
    
    (63
    )
    
    
    (248
    )Deferred revenue
    
    
    (12
    )
    
    
    41Non-current taxes payable
    
    
    117
    
    
    
    Net cash provided by operating activities
    
    
    871
    
    
    
    130Cash Flows from Investing Activities :Purchase of property and equipment
    
    
    (2,264
    )
    
    
    (690
    )Purchase of intangible assets
    
    
    
    
    
    
    (117
    )Net cash used in investing activities
    
    
    (2,264
    )
    
    
    (807
    )Cash Flows from Financing Activities :Proceeds from exercise of incentive stock options
    
    
    470
    
    
    
    389Proceeds from employee stock purchase plan
    
    
    22
    
    
    
    15Proceeds from long and short term debt
    
    
    2,000
    
    
    
    Repayments on financing obligations
    
    
    (158
    )
    
    
    (158
    )Net cash provided
by financing
activities
    
    
    2,334
    
    
    
    246Effect of exchange rate changes on cash
    
    
    38
    
    
    
    82Net increase (decrease) in Cash and Cash Equivalents
    
    
    979
    
    
    
    (349
    )Cash and Cash Equivalents, Beginning of Period
    
    
    10,892
    
    
    
    10,009Cash and Cash Equivalents, End of Period
    
    $
    11,871
    
    
    $
    9,660Supplemental Cash Flow Disclosure :Cash paid for taxes
    
    
    148
    
    
    
    28Cash paid for interest
    
    
    41
    
    
    
    37
  4




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STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business
  Basis of Presentation and Interim Financial Statements
  Revenue Recognition
    Use of Estimates
  5




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New Accounting Pronouncements
        6




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Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    
    
    
    $
    332
    
    
    $
    694
    
    
    $
    193Currency translation adjustment
    
    
    71
    
    
    
    13
    
    
    
    38
    
    
    
    82Total comprehensive income (loss)
    
    $
    71
    
    
    $
    345
    
    
    $
    732
    
    
    $
    275
 2. BASIC AND DILUTED INCOME PER SHARE
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Weighted avg. common shares
outstanding
    
    
    20,360,125
    
    
    
    20,050,399
    
    
    
    20,301,521
    
    
    
    19,994,481Shares used in computing basic
net income per share
    
    
    20,360,125
    
    
    
    20,050,399
    
    
    
    20,301,521
    
    
    
    19,994,481Stock options
    
    
    182,169
    
    
    
    64,974
    
    
    
    188,255
    
    
    
    73,046Shares used in computing diluted
net income per share
    
    
    20,542,294
    
    
    
    20,115,373
    
    
    
    20,489,776
    
    
    
    20,067,527
 3. SHARE-BASED COMPENSATION
  7




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options
    
    $
    78
    
    
    $
    16
    
    
    $
    208
    
    
    $
    61Employee stock
purchase plan
    
    
    2
    
    
    
    1
    
    
    
    6
    
    
    
    2Restricted stock units
    
    
    54
    
    
    
    44
    
    
    
    138
    
    
    
    172Total share-based compensation expense
    
    $
    134
    
    
    $
    61
    
    
    $
    352
    
    
    $
    235
   8




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Weighted
    
    AggregateNumber
    
    
    
    
    
    Average Remaining
    
    Instrinsicof Shares
    
    Price Range
    
    Contractual term
    
    ValueBalance, December 31, 2006
    
    
    1,469,729
    
    
    $
    1.88               $6.94Granted
    
    
    180,575
    
    
    $
    3.46               $4.65Cancelled / Forfeited
    
    
    (190,534
    )
    
    $
    3.05               $6.94Exercised
    
    
    (158,400
    )
    
    $
    1.88               $3.96Balance, September 30, 2007
    
    
    1,301,370
    
    
    $
    2.50               $6.94
    
    
    6.1 years
    
    $
    1,717Vested and excercisable at
September 30, 2007
    
    
    1,083,694
    
    
    $
    2.50               $6.94
    
    
    5.4 years
    
    $
    1,483Expected to vest as of
September 30, 2007
    
    
    1,288,870
    
    
    $
    2.50               $6.94
    
    
    6.0 years
    
    $
    1,703
   Options Outstanding
    
    
    Options ExercisableWeighted Average
    
    
    
    
    
    
    Wtd. AverageNumber of
    
    
    Remaining
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Contractual Life
    
    
    Price
    
    
    Shares
    
    
    Price$2.50  $2.88
    
    
    155,700
    
    
    3.5 Years
    
    $
    2.74
    
    
    
    155,700
    
    
    $
    2.74$3.05  $4.36
    
    
    1,074,670
    
    
    6.3 Years
    
    $
    3.86
    
    
    
    883,659
    
    
    $
    3.85$4.55  $6.94
    
    
    71,000
    
    
    7.6 Years
    
    $
    4.80
    
    
    
    44,335
    
    
    $
    4.90$2.50  $6.94
    
    
    1,301,370
    
    
    6.1 Years
    
    $
    3.78
    
    
    
    1,083,694
    
    
    $
    3.73
 9




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Weighted AverageGrant Date
    
    
    AggregateShares
    
    
    Fair Value
    
    
    Intrinsic ValueNon-vested shares of restricted stock at December 31, 2006
    
    
    85,222
    
    
    $
    3.71Granted
    
    
    27,000
    
    
    $
    3.46Vested
    
    
    (15,819
    )
    
    $
    3.43Non-vested shares of restricted stock at September 30, 2007
    
    
    96,403
    
    
    $
    3.69
    
    
    $
    355Shares of restricted stock expected to vest at September 30, 2007
    
    
    93,703
    
    
    $
    3.69
    
    
    $
    346
  4. INVENTORIES
  September 30, 2007
    
    
    December 31, 2006Raw materials
    
    $
    1,401
    
    
    $
    1,221Work in progress
    
    
    910
    
    
    
    653Finished goods
    
    
    2,085
    
    
    
    1,304Net inventories
    
    $
    4,396
    
    
    $
    3,178
 10




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5. INTANGIBLE ASSETS
  September 30, 2007
    
    
    December 31, 2006
    
    
    LivesGoodwill
    
    $
    4,785
    
    
    $
    4,822
    
    
    
    N/AOther
    
    
    3,134
    
    
    
    3,134
    
    
    
    2-20Less  accumulated
amortization
    
    
    (1,800
    )
    
    
    (1,619
    )Net intangible assets
    
    $
    6,119
    
    
    $
    6,337
 6. DEBT
      11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Background
       12




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Results of Operations
 Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2006
    ®
       13




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Nine Months Ended September 30, 2007 versus Nine Months Ended September 30, 2006
           14




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Product Groups
 Antibody Products
  Food Safety Products
   TM
 Water and Environmental Products
  Liquidity and Capital Resources
     15




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Contractual Obligations
  Payments Due by Year2012 and2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Beyond
    
    Total(in thousands)Long-term debt
    
    $
    311
    
    
    
    611
    
    
    
    540
    
    
    
    400
    
    
    
    400
    
    
    
    300
    
    
    
    2,562Operating leases
    
    $
    654
    
    
    
    482
    
    
    
    478
    
    
    
    38
    
    
    
    19
    
    
    
    0
    
    
    
    1,671Total contractual
cash obligations
    
    $
    965
    
    
    
    1,093
    
    
    
    1,018
    
    
    
    438
    
    
    
    419
    
    
    
    300
    
    
    
    4,233
  16




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Non-GAAP Financial Measures
   Nine Months Ended September 30,2007
    
    
    2006Net cash (used in) provided by
operating activities
    
    $
    871
    
    
    $
    130Changes in assets and liabilities:Receivables
    
    
    177
    
    
    
    611Inventories
    
    
    1,218
    
    
    
    49Other current assets
    
    
    239
    
    
    
    303Other assets
    
    
    4
    
    
    
    1Accounts payable
    
    
    147
    
    
    
    (70
    )Accrued expenses
    
    
    63
    
    
    
    248Deferred revenue
    
    
    12
    
    
    
    (41
    )Non-current taxes payable
    
    
    (117
    )
    
    
    Loss on disposal of fixed assets
    
    
    (93
    )
    
    
    Net change in deferred income tax
    
    
    163
    
    
    
    69Share-based compensation expense
    
    
    (352
    )
    
    
    (235
    )Interest income, net
    
    
    (335
    )
    
    
    (275
    )EBITDA
    
    $
    1,997
    
    
    $
    790
 17




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
        18




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PART II  OTHER INFORMATION
 
 Item 6. Exhibits
 31.1
    
    Certifications of the Chief Executive Officer of Strategic
Diagnostics Inc. required by Rule 13a-14(a) under the Securities
Exchange Act of 193431.2
    
    Certifications of the Chief Financial Officer of Strategic
Diagnostics Inc. required by Rule 13a-14(a) under the Securities
Exchange Act of 193432.1
    
    Certification of the Chief Executive Officer of Strategic Diagnostics
Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer of Strategic Diagnostics
Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
 
 SIGNATURES
  STRATEGIC DIAGNOSTICS INC.Date: November 14, 2007
    /s/ Matthew H. KnightMatthew H. KnightPresident, Chief Executive Officer
(Principal Executive Officer)Date: November 14, 2007
    /s/ Stanley A. FronczkowskiStanley A. FronczkowskiVice President  Finance and Chief Financial Officer
(Principal Financial and Accounting Officer) 19