10-Q 1 ldr_604.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004 or [ ] TRANSITION REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition from ____________ to ___________ LANDAUER, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Commission File Number 1-9788 Delaware 06-1218089 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2 Science Road, Glenwood, Illinois 60425 ---------------------------------------------------- (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code (708) 755-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b.2 of the Exchange Act. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 12, 2004 ---------------------------- ------------------------------ Common stock, $.10 par value 8,903,592 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LANDAUER, INC. AND SUBSIDIARIES Condensed Consolidated Unaudited Balance Sheets (000's except share amounts) A S S E T S ----------- June 30, September 30, 2004 2003 ---------- ------------- Current assets: Cash and cash equivalents . . . . . . . . . $ 6,843 $ 10,572 Short-term investments. . . . . . . . . . . 505 440 Accounts receivable, less allowances of $630 and $583. . . . . . . . . . . . . 15,886 13,770 Inventories . . . . . . . . . . . . . . . . 3,462 3,513 Prepaid expenses. . . . . . . . . . . . . . 694 967 Prepaid income taxes. . . . . . . . . . . . 3,103 1,687 Deferred income taxes . . . . . . . . . . . -- 289 -------- -------- Current assets. . . . . . . . . . . . 30,493 31,238 Property, plant and equipment, at cost. . . . 42,480 38,937 Less: Accumulated depreciation and amortization. . . . . . . . . . . . . 24,107 21,711 -------- -------- Net property, plant and equipment . . . . . . 18,373 17,226 Goodwill & other intangible assets net of amortization . . . . . . . . . . . . 19,647 8,056 Equity in joint venture . . . . . . . . . . . 3,685 3,402 Dosimetry devices, net of amortization. . . . 4,393 4,121 Other assets. . . . . . . . . . . . . . . . . 106 195 -------- -------- $ 76,697 $ 64,238 ======== ======== The accompanying notes are an integral part of these financial statements. 2 LANDAUER, INC. AND SUBSIDIARIES Condensed Consolidated Unaudited Balance Sheets (Cont'd.) (000's, except share amounts) LIABILITIES AND STOCKHOLDERS' INVESTMENT ---------------------------------------- June 30, September 30, 2004 2003 ---------- ------------- Current liabilities: Accounts payable. . . . . . . . . . . . . . $ 994 $ 1,548 Deferred contract revenue . . . . . . . . . 13,274 12,464 Dividend payable. . . . . . . . . . . . . . 3,561 3,316 Notes Payable . . . . . . . . . . . . . . . 5,946 -- Accrued compensation and related costs. . . 2,055 1,459 Accrued pension costs . . . . . . . . . . . 2,791 2,675 Accrued taxes on income . . . . . . . . . . 1,288 507 Deferred income taxes . . . . . . . . . . . 1,122 -- Accrued expenses. . . . . . . . . . . . . . 3,213 2,860 -------- -------- Current liabilities . . . . . . . . . 34,244 24,829 Minority interest in subsidiary . . . . . . . 60 984 -------- -------- Stockholders' investment: Preferred stock, $.10 par value per share - Authorized - 1,000,000 shares Outstanding - None. . . . . . . . . . . . -- -- Common stock, $.10 par value per share - Authorized - 20,000,000 shares Outstanding - 8,903,592 shares at 6/30/04 and 8,843,723 shares at 9/30/03 . 890 884 Premium paid in on common stock . . . . . . 13,625 12,207 Cumulative translation adjustments. . . . . (120) (100) Retained earnings . . . . . . . . . . . . . 27,998 25,434 -------- -------- Stockholders' investment. . . . . . . 42,393 38,425 -------- -------- $ 76,697 $ 64,238 ======== ======== The accompanying notes are an integral part of these financial statements. 3 LANDAUER, INC. AND SUBSIDIARIES Condensed Consolidated Unaudited Statements of Income (000's, except per share amounts) Three Months Ended Nine Months Ended ------------------- -------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 -------- -------- -------- -------- Net Revenues. . . . . . . . $ 17,203 $ 15,925 $ 52,242 $ 48,162 Cost and expenses: Cost of revenues. . . . . 6,436 6,097 18,938 17,542 Selling, general and administrative. . . . . 4,050 3,690 12,561 10,875 Impairment in value of assets. . . . . . . . . -- -- -- 2,750 -------- -------- -------- -------- 10,486 9,787 31,499 31,167 -------- -------- -------- -------- Operating Income. . . . . . 6,717 6,138 20,743 16,995 Equity in income of joint venture . . . . . . 300 213 818 608 Other income, net . . . . . (3) 42 64 102 -------- -------- -------- -------- Income before income taxes and minority interest . . 7,014 6,393 21,625 17,705 Income taxes. . . . . . . . 2,615 2,367 8,115 6,550 -------- -------- -------- -------- Income before minority interest. . . . . . . . . 4,399 4,026 13,510 11,155 Minority interest expense . . . . . . . . . 5 198 272 488 -------- -------- -------- -------- Net income. . . . . . . . . $ 4,394 $ 3,828 $ 13,238 $ 10,667 ======== ======== ======== ======== Net income per common share: Basic . . . . . . . . . . $ 0.49 $ 0.43 $ 1.49 $ 1.21 ======== ======== ======== ======== Based on average shares outstanding . . . . . . 8,903 8,820 8,884 8,797 ======== ======== ======== ======== Diluted . . . . . . . . . $ 0.49 $ 0.43 $ 1.48 $ 1.20 ======== ======== ======== ======== Based on average shares outstanding . . . . . . 8,976 8,910 8,961 8,881 ======== ======== ======== ======== The accompanying notes are an integral part of these financial statements. 4 LANDAUER, INC. AND SUBSIDIARIES Condensed Consolidated Unaudited Statements of Cash Flows (000's) Nine Months Ended --------------------- June 30, June 30, 2004 2003 -------- -------- Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . $ 13,238 $ 10,667 Adjustments to reconcile net income to net cash provided by operating activities: Asset impairment charge . . . . . . . . . . -- 2,750 Depreciation. . . . . . . . . . . . . . . . 3,837 3,537 Amortization. . . . . . . . . . . . . . . . 338 294 Bad debt expense. . . . . . . . . . . . . . 140 196 Equity in net income of foreign affiliate . (818) (608) Tax effect of stock options . . . . . . . . 1,425 1,144 Increase in short-term investments. . . . . (66) (22) Increase in accounts receivable - net . . . (2,255) (1,835) (Increase) decrease in inventory. . . . . . 51 (1,407) Increase in prepaid expenses. . . . . . . . (1,142) (1,860) Net increase in other assets. . . . . . . . (2,055) (1,643) Decrease in accounts payable. . . . . . . . (555) (47) Increase in accrued liabilities . . . . . . 1,847 350 Increase in deferred contract revenue . . . 809 1,441 Increase in minority interest . . . . . . . 255 599 -------- -------- Net cash provided from operating activities. . . . . . . . . 15,049 13,556 Cash flows from investing activities: Acquisition of property, plant and equipment. (3,556) (2,950) Acquisition of minority interest in LCIE-Landauer . . . . . . . . . . . . . . . (10,404) -- -------- -------- (13,960) (2,950) Cash flows from financing activities: Dividend received from foreign affiliate. . . 598 535 Dividend paid to stockholders . . . . . . . . (10,429) (9,663) Dividends paid to minority interest . . . . . (913) (288) Net proceeds from revolving credit facility . 5,946 -- -------- -------- Net cash used by financing activities. . . . . . . . . (4,798) (9,416) Effect of foreign currency translation. . . . . (20) 602 -------- -------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . (3,729) 1,792 Opening balance - cash and cash equivalents . . 10,572 7,627 -------- -------- Ending balance - cash and cash equivalents. . . $ 6,843 $ 9,419 ======== ======== The accompanying notes are an integral part of these financial statements. 5 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements June 30, 2004 (1) BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements reflect the financial position of Landauer, Inc. and Subsidiaries ("Landauer" or "the Company") as of June 30, 2004 and September 30, 2003, and the consolidated results of operations and cash flows for the three-month and nine-month periods ended June 30, 2004 and 2003. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of Landauer as of June 30, 2004 and September 30, 2003, the consolidated statements of income for the three-month and nine month periods ended June 30, 2004 and 2003, and the consolidated statements of cash flows for the three-month and nine- month periods ended June 30, 2004 and 2003. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in the 2003 Landauer Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications have no effect on the results of operations or financial position. The results of operations for the three-month and nine-month periods ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. (2) CASH DIVIDENDS On June 4, 2004, the Company declared a regular quarterly cash dividend in the amount of $0.40 per share payable on July 9, 2004 to stockholders of record on June 18, 2004. On March 5, 2004, the Company declared a regular quarterly cash dividend in the amount of $ 0.40 per share payable on April 9, 2004 to stockholders of record on March 19, 2004. On December 19, 2003, the Company declared a regular quarterly cash dividend in the amount of $0.40 per share payable on January 16, 2004, to stockholders of record on January 6, 2004. Regular quarterly cash dividends of $0.375 per share ($1.50 annually) were declared during fiscal 2003. (3) COMPREHENSIVE INCOME Comprehensive income is the total of net income and all other non- owner changes in equity. The following table sets forth the Company's comprehensive income for the three and nine month periods ended June 30, 2004 and 2003 (000's): Three Months Ended Nine Months Ended ------------------- ------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 -------- -------- -------- -------- Net income. . . . . . . . . $ 4,394 $ 3,828 $ 13,238 $ 10,667 Other comprehensive income-Foreign currency translation adjustment . . (471) 317 20 602 -------- -------- -------- -------- Comprehensive income. . . . $ 3,923 $ 4,145 $ 13,258 $ 11,269 ======== ======== ======== ======== 6 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements (Cont'd) June 30, 2004 (4) Earnings Per Share Earnings per share computations have been made in accordance with the provisions of SFAS No. 128, "Earnings Per Share." Basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share were computed by dividing net income by the weighted average number of shares of common stock that would have been outstanding assuming dilution during each period. The following table presents the weighted average number of shares of common stock for the three and nine month periods ended June 30, 2004 and 2003 (000's): Three Months Ended Nine Months Ended ------------------- -------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 -------- -------- -------- -------- Weighted average number of shares of common stock outstanding . . . . 8,903 8,820 8,884 8,797 Options issued to executives. . . . . . . . 73 90 77 84 -------- -------- -------- -------- Weighted average number of shares of common stock assuming dilution. . . . . . . . . 8,976 8,910 8,961 8,881 ======== ======== ======== ======== (5) STOCK-BASED COMPENSATION PLANS The Company maintains stock option plans for key employees ("Employees' Plan"). It also maintains a stock option plan for its non- employee directors. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Under APB Opinion No. 25 no compensation cost is recognized except for performance based grants, whereas under FASB 123 compensation costs are recognized based on the fair-value method of the stock options granted which is calculated using certain assumptions about future volatility and dividend growth. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS No. 123." SFAS No. 148 requires pro-forma disclosure in both annual and quarterly financial statements of net earnings and earnings per share as if the fair-value method of accounting had been applied as required by SFAS 123. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share in each period would have been as follows (000's except per share data): 7 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements (Cont'd) June 30, 2004 Three Months Ended Nine Months Ended ------------------- -------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 -------- -------- -------- -------- Net income, as reported . . $ 4,394 $ 3,828 $ 13,238 $ 10,667 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects . . . 356 56 896 167 -------- -------- -------- -------- Pro forma net income. . . . $ 4,038 $ 3,772 $ 12,342 $ 10,500 ======== ======== ======== ======== Earnings per share: Basic - As Reported . . . $ 0.49 $ 0.43 $ 1.49 $ 1.21 ======== ======== ======== ======== Basic - Pro Forma . . . . $ 0.45 $ 0.43 $ 1.39 $ 1.19 ======== ======== ======== ======== Diluted - As Reported . . $ 0.49 $ 0.43 $ 1.48 $ 1.20 ======== ======== ======== ======== Diluted - Pro Forma . . . $ 0.45 $ 0.42 $ 1.38 $ 1.18 ======== ======== ======== ======== Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 1, 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years. (6) ASSET IMPAIRMENT Following a period of product introduction, marketing efforts and an analysis of second quarter fiscal 2003 results, it was determined that spending constraints placed on targeted customers by health care cost pressures and state and local government budget deficits had significantly reduced the future net cash flows expected to be realized from Landauer's Aurion product offering. Accordingly, the Company recorded a non-cash pre- tax charge of $2,750,000, or $0.19 per diluted share (after income tax benefit computed at a marginal rate of 39.7%) for the fiscal quarter ended March 31, 2003, to recognize an impairment in the value of assets for the Aurion product line. The operating results for Aurion were not significant for any period presented. Based on the estimated identifiable cash flows from this service offering, the impairment charge represents the Company's entire investment in the Aurion-related assets and includes fixed assets, licenses, software and badge components. (7) PENSION AND POSTRETIREMENT MEDICAL BENEFIT EXPENSES In December 2003 the Financial Accounting Standards Board (FASB) released revised FASB Statement No. 132 (FAS 132R), a revision to FAS 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. The revised standard provides required disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency in financial statements. The revised standard replaces existing pension disclosure requirements. FAS 132R requires additional disclosure about the assets, obligations, cash flow, and net periodic benefit costs of defined benefit pension plans and other post retirement benefit plans. It also requires public entities to disclose (a) the amount of net periodic benefit cost recognized and (b) the total amount of the employer's contribution paid, in all interim financial statements beginning after December 15, 2003. 8 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements (Cont'd) June 30, 2004 The components of net periodic benefit cost for pension and retiree medical plans are as follows: Pension Benefits Other Benefits ------------------- ------------------- For the three months ended June 30, ------------------------------------------- In $000's 2004 2003 2004 2003 -------- -------- -------- -------- Components of net periodic cost: Service Cost. . . . . . . $ 250 $ 215 $ 25 $ 21 Interest Cost . . . . . . 247 226 20 16 Expected return on plan assets. . . . . . . . . (162) (140) -- -- Amortization of transition assets . . . (2) (2) 6 6 Amortization of prior service cost. . . . . . 39 39 4 4 Recognized net actuarial loss. . . . . . . . . . 30 23 3 -- -------- -------- -------- -------- Net periodic benefit cost . $ 402 $ 361 $ 58 $ 47 ======== ======== ======== ======== For the nine months ended June 30, ------------------------------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Components of net periodic cost: Service Cost. . . . . . . $ 750 $ 645 $ 75 $ 63 Interest Cost . . . . . . 741 678 60 48 Expected return on plan assets. . . . . . . . . (486) (420) -- -- Amortization of transition assets . . . (6) (6) 18 18 Amortization of prior service cost. . . . . . 117 117 12 12 Recognized net actuarial loss. . . . . . . . . . 90 69 9 -- -------- -------- -------- -------- Net periodic benefit cost . $ 1,206 $ 1,083 $ 174 $ 141 ======== ======== ======== ======== The Company made $792,957 in pension contributions in the first fiscal quarter of 2004 and has not made any additional contributions. In December 2003, the Medicare Prescription Drug, Improvement and Modernization act of 2003 (the "Act") was signed into law. The Company has determined the effect of the Act, if any, on the retirement medical plan will have no material impact on its consolidated statements. Consequently, measures of the accumulated postretirement benefit obligation or net periodic benefit cost do not reflect any effects of the Act on the plan. 9 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements (Cont'd) June 30, 2004 (8) ACQUISITION OF MINORITY INTEREST IN LCIE- LANDAUER In April 2004 Landauer, Inc. consummated an agreement with Bureau Veritas ("BV") to acquire the 49% minority interest in LCIE-Landauer, Ltd. owned by BV's subsidiary, Laboratoire Central Industries des Electriques ("LCIE"), for $10.4 million in cash. The purchase price was allocated based on estimates of fair value as determined by an independent third party valuation consultant. Substantially all the purchase price, plus deferred tax liabilities recorded, was allocated to intangible assets including $3.9 of customer lists (amortized over the estimated useful life of 15 years) and goodwill of $7.9 million. Had the acquisition occurred at the beginning of the periods presented, unaudited net income of the company on a proforma basis would have been as follows: Unaudited, in $000 (except EPS) Quarter Ended June 30 Year to Date June 30 --------------------- -------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Proforma Net Income . . . . $ 4,394 $ 3,937 $ 13,283 $ 10,922 Diluted earnings per share . . . . . . . . $ 0.49 $ 0.44 $ 1.48 $ 1.23 The unaudited proforma net income is for illustrative purposes only and is not necessarily indicative of the financial results had the acquisition actually occurred at the beginning of the periods presented. Landauer funded the purchase price from a combination of working capital funds ($2.7 million), and $7.7 million borrowed under a credit facility obtained in April 2004. This $25 million credit facility is annually renewable upon agreement of the parties and will mature in April 2005. At June 30, 2004, outstanding borrowings under the credit agreement (net of a $1.8 million principal payment made during the third quarter) were $5.9 million. The loan is denominated in Euros and bears interest at the applicable EURIBO rate plus 1.25% per annum. At June 30, 2004, the loan is based upon the 60 day EURIBO rate and is fixed at 3.3% until August 31, 2004, at which time the Company will execute a new EURIBO election notice and specify the interest period and rate for the remaining balance of the advance under the terms of the credit agreement. The proceeds from borrowings under the credit agreement can be used to repay certain indebtedness, finance certain acquisitions, and provide for working capital and general corporate purposes. The Company is subject to certain covenants and restrictions and must meet certain financial tests under the Credit Agreement. The Company was in compliance with such covenants, restrictions and financial tests at June 30, 2004. 10 ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS OVERVIEW Landauer is the leading provider of analytical services to determine occupational and environmental radiation exposure. For 50 years, the Company has provided complete radiation dosimetry services to hospitals, medical and dental offices, universities, national laboratories, and other industries in which radiation poses a potential threat to employees. Landauer's services include the manufacture of various types of radiation detection monitors, the distribution and collection of the monitors to and from clients, and the analysis and reporting of exposure findings. These services are provided to customers in the U.S., Japan, France, the United Kingdom, Brazil, Canada and China. Landauer's InLightTM dosimetry system provides smaller in-house and commercial laboratories with the ability to offer a complete radiation monitoring service using optically stimulated luminescence ("OSL") technology. The system is based on the Company's propriety technology and instruments and dosimetry devices developed by Matsushita Industrial Equipment Company and allows customers the flexibility to tailor their precise dosimetry needs. Landauer's operations include services for detecting, monitoring, and if necessary, remediating radon gas. Landauer operates a mature business, and growth in numbers of customers is modest. In recent years the Company's strategy has been to expand into new international markets, primarily by partnering with existing dosimetry service providers with a prominent local presence. In addition, the Company has been developing new platforms and formats for its OSL technology such as InLight to gain access to markets where the Company previously did not have a significant presence such as smaller in-house and commercial laboratories. Revenue growth in recent years has occurred as a result of increased prices for certain services, entry into new markets through joint ventures and acquisitions, modest unit growth and new ancillary services and products. The services provided by the Company to its customers are ongoing and are of a subscription nature. As such, revenues are recognized in the periods in which such services are rendered irrespective of whether invoiced in advance or in arrears. Given the subscription nature of Landauer's services, quarterly revenues are fairly consistent. During the second quarter of each fiscal year, however, the Company provides additional services reporting annual radiation dose summaries that generate increased revenues. The introduction of the Company's InLight product line may introduce some variability in quarter-to-quarter revenue comparisons given the nature of purchase cycles associated with sales of radiation dose measurement instruments and detectors. LIQUIDITY AND CAPITAL RESOURCES Landauer's cash flow from operating activities for the nine months ended June 30, 2004 and 2003 amounted to $15,049,000 and $13,556,000, respectively. Acquisitions of property, plant and equipment amounted to $3,556,000 and $2,950,000, respectively, for fiscal 2004 and 2003. The Company's financing activities consisted of borrowing $7,725,000 from and making a $1,779,000 principal payment to its revolving credit facility, payments of cash dividends, offset by foreign dividends received from Nagase-Landauer, Ltd., our Japanese joint venture, and SAPRA-Landauer, Ltda., our subsidiary in Brazil. 11 The Company had no long-term liabilities at June 30, 2004 and its requirement for cash flow to support investing activities is generally limited. Since the credit agreement described below is renewed each year, borrowings thereunder are classified as current liabilities. Capital expenditures for the balance of fiscal 2004 are expected to amount to approximately $2,300,000 principally for the acquisition of equipment to support the Company's introduction of the InLight product line, introduction of new products, the development of supporting software systems, and computer hardware. The Company anticipates that funds for these capital improvements will be provided from operations. In April 2004 the Company negotiated a new line of credit provided with LaSalle Bank, ABN AMRO. This credit facility provides funds to be used for working capital and other general corporate purposes. The credit agreement is annually renewable upon agreement of the parties. The credit agreement provides the Company with the option of electing to borrow funds denominated in US dollars or Euros that bear interest rates based on the Federal Funds rate, Prime rate, EURIBO or LIBOR; it also contains certain covenants including a covenant for minimum tangible net worth. As of April 30, 2004 the Company was in compliance with all of the covenants. As disclosed in Note 8, in April 2004 the Company borrowed $7.7 million dollars under this facility as part of funding the acquisition of the remaining 49% minority interest in LCIE - Landauer, Ltd. During the third fiscal quarter the Company made a principal payment of $1,779,000 as well as an interest payment of $30,000. In the event the credit facility is not renewed at maturity, it is expected that cash on hand, and cash flow from operations will be sufficient to satisfy the obligation. In the opinion of management, cash flow from operations and the Company's borrowing capacity under this line of credit are adequate for projected operations and capital spending programs, as well as continuation of the regular cash dividend program. From time to time, the Company may have the opportunity to make investments for acquisitions or other purposes that are in excess of these sources of liquidity. In that event, the Company may seek additional sources of liquidity to fund such investments. Landauer requires limited working capital for its operations since many of its customers are invoiced for services in advance. Such advance billings amounted to $13,274,000 and $12,464,000, respectively, as of June 30, 2004 and September 30, 2003, and are included in the balance sheet under the caption "Deferred contract revenue". While these amounts included in deferred contract revenue represent almost one-half of current liabilities, such amounts generally do not represent a cash requirement. The services provided by the Company to its customers are ongoing and are of a subscription nature. As such, revenues are recognized in the periods in which such services are rendered irrespective of whether invoiced in advance or in arrears. All customers are invoiced in accordance with the Company's standard terms, with payment due thirty days from date of invoice. Considering the Company's invoicing practices and that a significant portion of the Company's revenues are subject to health care industry reimbursement cycles, the average days sales outstanding range from 43 to 80 days over the course of a fiscal quarter. RESULTS OF OPERATIONS QUARTERLY RESULTS Revenues for the quarter just ended were $17,203,000, an 8.0% increase compared with revenues of $15,925,000 for the same quarter in fiscal 2003. Revenue growth for the current quarter primarily occurred as a result of higher pricing and slightly higher unit demand for the Company's products and services in the U.S. InLightTM system revenues, as well as currency gains and somewhat higher volume from operations in Europe, Asia and Brazil also contributed. Approximately 80% of revenue growth was derived from traditional domestic measurement and reporting services during the quarter. 12 Gross margins were 62.6% of revenues for the third quarter of fiscal 2004, slightly improved from the 61.7% reported for the same period in 2003. Cost of goods sold were $339,000 or 5.6% higher than fiscal 2003, primarily a result of increased domestic overhead costs including indirect labor and employee benefits, $104,000, depreciation, $86,000, as well as currency related foreign overhead costs, $162,000. Selling, general and administrative expenses in the third quarter of fiscal 2004 were $360,000 or 9.8% higher versus a year ago due to incentive compensation expense $137,000, professional fees, $82,000, research costs, $82,000 and $68,000 amortization of intangibles associated with the acquisition of the balance of LCIE-Landauer at the beginning of the quarter. Resulting operating income for the third quarter of fiscal 2004 was $6,717,000, an increase of $579,000 or 9.4% compared with $6,138,000 reported for the same quarter in 2003. Other income for the second quarter amounted to $297,000 compared with $255,000 a year earlier; the increase relates to higher income from Nagase-Landauer, Ltd., the Company's joint venture in Japan. The effective tax rate for the Company was 37.3% compared with 37.0% for the third quarter of fiscal 2003. Third quarter earnings were impacted by the elimination of $193,000 of minority interest associated with ownership of 100% of LCIE-Landauer for the full quarter. Resulting net income for the third quarter amounted to $4,394,000 or $0.49 per diluted share, compared with $3,828,000, or $0.43 per diluted share, in the same quarter in fiscal 2003. NINE MONTHS RESULTS Revenues for the nine months ended June 30, 2004, were $52,242,000 or 8.5% greater than $48,162,000 reported for the same period in fiscal 2003. Domestic revenue growth, representing almost two-thirds of the increase, resulted from improved pricing and modestly higher volume for measurement and reporting services. Higher international revenues resulted from a weak U.S. dollar and some pricing and unit gains in most foreign markets. Gross margins for the first nine months of fiscal 2004 were 63.7% of revenues, comparable with the 63.6% reported a year ago. Cost of revenues increased $1,396,000 or 8.0% from the same period in the prior year. Direct and indirect labor and the associated employee benefits (related primarily to medical claims and pension) costs were $548,000 higher than a year ago, as were direct materials, $334,000. Costs rose both domestically and abroad with the international portion ($191,000) primarily attributable to currency translation. Selling, general, and administrative expenses in the first nine months of fiscal 2004 were $1,686,000 or 15.5% higher than a year ago. The year-to-date increase in selling, general and administrative expenses relates to incentive compensation, $483,000; increased labor and benefits, $303,000; professional fees, $245,000; as well as higher foreign expenses, $627,000, some of which is currency translation related. Selling, general, and administrative expenses were 24.0% of revenues for the first nine months of fiscal 2004 compared to 22.6% for the first nine months of fiscal 2003. Fiscal 2003 results included a non-cash charge in the amount of $2,750,000, or $0.19 per diluted share (after income tax benefit computed at a marginal rate of 39.7%), for costs associated with the impairment in value of assets related to Landauer's Aurion service. Resulting operating income thus far in fiscal 2004 was $20,743,000, an increase of $3,748,000 compared with the same period in 2003. Other income for the first nine months of fiscal 2004 amounted to $882,000 compared with $710,000 a year earlier. Most of the increase relates to higher income from Nagase-Landauer, Ltd., the Company's joint venture in Japan. 13 The effective tax rate was 37.5% compared with 37.0% for the same period of fiscal 2003. The reduction in minority interest compared with a year ago reflects the acquisition of the balance of LCIE-Landauer at the beginning of the third quarter. Resulting net income of $13,238,000 or $1.48 per diluted share, compared with $10,667,000, or $1.20 per diluted share for the same period in fiscal 2003. OUTLOOK FOR BALANCE OF FISCAL 2004 Landauer's business plan and outlook anticipates that revenue growth for the year is expected to be in the range of 7 to 8%, evenly distributed among the Company's traditional revenue sources. Domestic revenue growth is expected to occur as a result of pricing, moderate unit growth and increased sales of ancillary services and products. International revenue growth is expected to benefit moderately from a weak U.S. dollar, although the impact of such comparisons has diminished. Additionally, international revenue growth is expected to result from higher pricing and increased units. Aggregate costs and operating expenses for fiscal 2004 are expected to be moderately higher than fiscal 2003 levels, largely reflecting the absence of a $2.8 million non-cash impairment charge that occurred in 2003, offset by higher costs in 2004. Net other income is anticipated to be slightly higher than a year ago and the effective income tax rate for fiscal 2004 is expected to be 37.5%. The recent acquisition of the balance of LCIE-Landauer will eliminate minority interest for that entity. Resulting net income for 2004 is anticipated to be higher by 18 - 20% compared with fiscal 2003. FORWARD-LOOKING STATEMENTS Certain of the statements made herein constitute forward looking statements that are based on certain assumptions and involve certain risks and uncertainties, including, introduction of the InLight technology, the adaptability of optically stimulated luminescence ("OSL") technology to new platforms and formats, the cost associated with the Company's research and business development efforts, the usefulness of older technologies, the anticipated results of operations of the Company and its subsidiaries or ventures, the valuation of the Company's long lived assets or business units relative to future cash flows, the Company's market position, changes in postal and delivery practices, the Company's business plans, anticipated revenue and cost growth, the risks associated with conducting business internationally, other anticipated financial events, the effects of changing economic and competitive conditions, foreign exchange rates and currency translations, government regulations, accreditation requirements, and pending accounting pronouncements. Such assumptions may not materialize to the extent assumed and such risks and uncertainties may cause actual results to differ from anticipated results. Such risks and uncertainties may also result in changes to the Company's business plans and prospects and could create the need from time to time to write down the value of assets or otherwise cause the Company to incur unanticipated expenses. Additional information may be obtained by reviewing the Company's Annual Report on Form 10-K for the year ended September 30, 2003 and other reports filed by the Company from time to time with the Securities and Exchange Commission. 14 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") No. 51," ("FIN 46"). FIN 46 clarifies the application of ARB No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN 46(R), "Consolidation of Variable Interest Entities," which represents a revision to FIN 46. The provisions of FIN 46(R) are effective for interests in variable interest entities as of the first interim, or annual, period ending after December 15, 2003. In addition, FIN 46(R) requires that both the primary beneficiary and all other enterprises with a significant variable interest make additional disclosure in filing issued after January 31, 2003. The Company is evaluating under FIN 46(R) pre-existing joint venture entities. The Company does not expect that the adoption of FIN 46(R) will have any impact on its financial statements and results of operations. On November 17, 2003, the FASB issued the final FASB Staff Position (FSP) FAS 150-3, "Effective Date for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150 (FAS 150), 'Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.'" The final FSP affects how public and nonpublic entities classify, measure, and disclose certain mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries and mandatorily redeemable financial instruments and (b) requires entities that have already adopted FAS 150 to rescind the adoption of certain provisions of FAS 150 and to permit them to present the adoption of the FSP either by restating previously issued financial statements or as a cumulative effect in the period of adoption. The Company has analyzed its financial instruments in light of FAS 150 and has determined that this statement is not applicable to its financial position and that the adoption of this statement has no material impact on its consolidated statements. In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which revises or rescinds portions of the interpretive guidance included in SAB No. 101, "Revenue Recognition in Financial Statements," in order to make the guidance consistent with authoritative accounting and auditing guidance and with SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in the United States generally accepted accounting principles. The adoption of SAB No. 104 did not have any impact on the Company's financial position or results of operations. On December 23, 2003 the FASB released revised FASB Statement No. 132R (FAS 132R), "Employers' Disclosures about Pensions and Other Postretirement Benefits". The revised standard provides required disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency in financial statements. The requirements of the standard are effective for public entities for fiscal years ending after December 15, 2003 and for quarters beginning after December 15, 2003. The Company implemented the required disclosure provisions in the quarter ending March 31, 2004. 15 On January 12, 2004, the FASB released FASB Staff Position No. FAS 106-1 (FSP 106-1). FASB Statement No. 106 (FAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires a company to consider current changes in applicable laws when measuring its postretirement benefit costs and accumulated postretirement benefit obligation. However, because (1) uncertainties may exist for plan sponsors surrounding the effect of the provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") and (2) certain accounting issues raised by the Act are not addressed by FAS 106, FSP 106-1 allows plan sponsors to elect a one-time deferral of the accounting for the Act. If deferral is elected, the deferral must remain in effect until the earlier of (a) the issuance of guidance by the FASB or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. Further, even if an entity elects deferral, certain disclosure requirements are still required. The FSP is effective for interim and annual financial statements of fiscal years ending after December 7, 2003. The Company's post retirement benefits are not based on the retirees' Medicare benefits received. As such, the Company has analyzed its postretirement benefit costs in light of FSP 106-1 and has determined that the adoption of this statement has no material impact on its consolidated statements. ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK SIGNIFICANT RISK FACTORS The Company's business and operations are subject to certain risks and uncertainties, including: FOREIGN CURRENCY TRANSLATION/EXCHANGE AND INTEREST RATE RISKS The Company is exposed to market risk, including changes in foreign currency exchange rates and interest rates. As discussed in Note 1 to the financial statements in the Company's Annual Report on Form 10-K, "Summary of Significant Accounting Policies" to the consolidated financial statements, the financial statements of the Company's non-U.S. subsidiaries are remeasured into U.S. dollars using the U.S. dollar as the functional currency. To date, the market risk associated with foreign currency exchange rates or resulting translations has not been material in relation to the Company's financial position, results of operations, or cash flows. These risks could increase, however, as the Company expands in international markets. The Company does not have any significant trade accounts receivable, trade accounts payable, commitments or borrowings in a currency other than that of the reporting unit's functional currency. As such, the Company does not currently use derivative financial instruments to manage the exposure in its non-U.S. operations. RELIANCE UPON SINGLE MANUFACTURING FACILITY Landauer, Inc. conducts its primary manufacturing and laboratory processing operations from a single facility in Glenwood, Illinois. In addition, the Company performs significant functions for some of its international joint ventures from the Glenwood facility. If the Company were to lose availability of its primary facility due to fire, natural disaster or other disruptions, its operations could be significantly impaired. Although the Company maintains business interruption insurance, there can be no assurance that the proceeds of such insurance would be sufficient to offset any loss the Company might incur or that the Company would be able to retain its customer base if operations were so disrupted. 16 SINGLE SOURCE FOR CRYSTAL MATERIALS Crystal material is a key component in Landauer's OSL technology. The Company operates a single crystal manufacturing facility in Stillwater, Oklahoma that currently supplies all crystal material used by the Company. If the Company were to lose availability of its Stillwater facility due to a fire, natural disaster or other disruptions, such loss could have a material adverse effect on the Company and its operations. Prior to acquiring the Stillwater facility, the Company purchased the majority of its raw crystal material from one external source. There can be no assurance that the Company could secure additional crystal raw materials from external sources in the event of a disruption at the Stillwater facility. TECHNOLOGY Landauer's technological expertise has been an important factor in its growth. The Company regularly pursues product improvements to maintain its technical position. The development and introduction of new technologies, the adaptability of OSL to new platforms and new formats, the usefulness of older technologies as well as the introduction of new technologies by competitors present various risks to the Company's business. The failure or lack of market acceptance of a new technology or the inability to respond to market requirements for new technology could adversely affect the Company's operations or reputation with customers. The cancellation of technology projects or the cessation of use of an existing technology can result in write downs and changes to the Company's earnings. In the normal course of its business, Landauer must record and process significant amounts of data quickly and accurately and relies on various computer and telecommunications equipment and software systems. Any failure of such equipment or systems could adversely affect the Company's operations. INTERNATIONAL OPERATIONS POSE RISKS Landauer conducts business in numerous international markets such as Japan, France, the United Kingdom, Brazil, Canada and China. Foreign operations are subject to a number of special risks, including among others, currency exchange rate fluctuations; disruption in relations; political and economic unrest; trade barriers exchange controls; expropriation; and changes in laws and policies, including those governing foreign owned operations. GOVERNMENT REGULATIONS Regulation, present and future, is a constant factor affecting the Company's business. The radiation monitoring industry is subject to federal and state governmental regulation. Unknown matters, new laws, regulations and accreditation standards, or stricter interpretations of existing law, regulations, or accreditation standards may materially affect Landauer's business or operations in the future and/or could increase the cost of compliance. COMPETITION The Company competes on the basis of advanced technologies, competent execution of these technologies, the quality, reliability and price of its services and its prompt and responsive performance. In much of the world, radiation monitoring activities are conducted by a combination of private entities and governmental agencies. The Company's primary competitor in the United States is large and has substantial resources. The Company also faces competitive pressures from a number of smaller competitors in the U.S. and abroad. 17 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a- 15(e) under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures as of June 30, 2004 were effective in ensuring information required to be disclosed on this Form 10-Q was recorded, processed, summarized and reported on a timely basis. There have been no changes in the Company's internal control over financial reporting that occurred during the period ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Landauer is involved in various legal proceedings but believes that these matters will be resolved without a material effect on its financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K On July 22, 2004, Landauer filed a report on form 8-K related to its earnings press release for the same day. Exhibit 10.1 Credit Agreement between Landauer, Inc. and LaSalle Bank N.A. dated April 13, 2004. Exhibit 31.1 Rule 13a-14(a)/15d-14(a), Certification of Chief Executive Officer Exhibit 31.2 Rule 13a-14(a)/15d-14(a), Certification of Chief Financial Officer Exhibit 32.1 Section 1350 Certification of Chief Executive Officer Exhibit 32.2 Section 1350 Certification of Chief Financial Officer 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LANDAUER, INC. Date: August 12, 2004 /s/ James M. O'Connell ------------------------------ James M. O'Connell Vice President and Treasurer (Principal Financial and Accounting Officer) 19