10-Q 1 ldr_1204.txt 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 December 31, 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 checkmark whether the registrant is an accelerated filer as defined in Rule 12.b.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. Outstanding at Class February 8, 2005 ------------------------------ ---------------- Common stock, $.10 par value 8,952,278 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LANDAUER, INC. AND SUBSIDIARIES Condensed Consolidated Unaudited Balance Sheets (000's, except share amounts) ASSETS ------ December 31, September 30, 2004 2004 ------------ ------------- Current assets: Cash and cash equivalents. . . . . . $ 9,884 $ 7,979 Short-term investments . . . . . . . 462 616 Accounts receivable, less allowances of $465 at 12/31/04 and $460 at 9/30/04. . . . . . . . 16,921 15,060 Inventories. . . . . . . . . . . . . 3,251 3,206 Prepaid expenses . . . . . . . . . . 1,200 1,116 Prepaid income taxes . . . . . . . . 2,153 2,292 Deferred income taxes. . . . . . . . 21 21 -------- -------- Current assets . . . . . . . . 33,892 30,290 Property, plant and equipment, at cost . . . . . . . . . . . . . . 41,916 41,021 Less: Accumulated depreciation and amortization . . . . . . . . (23,521) (22,481) -------- -------- Net property, plant and equipment. . . . . . . . 18,395 18,540 Goodwill & other intangible assets net of amortization . . . . 19,383 19,493 Equity in joint venture. . . . . . . 3,904 3,916 Dosimetry devices, net of amortization . . . . . . . . . . . 5,247 4,791 Other assets . . . . . . . . . . . . 487 488 -------- -------- $ 81,308 $ 77,518 ======== ======== The accompanying notes are an integral part of these financial statements. 2 LANDAUER, INC. AND SUBSIDIARIES Condensed Consolidated Unaudited Balance Sheets (Continued) (000's, except share amounts) LIABILITIES AND STOCKHOLDERS' INVESTMENT ---------------------------------------- December 31, September 30, 2004 2004 ------------ ------------- Current liabilities: Accounts payable . . . . . . . . . . $ 1,410 $ 1,306 Notes payable. . . . . . . . . . . . 5,673 5,262 Deferred contract revenue. . . . . . 12,979 12,554 Dividend payable . . . . . . . . . . 3,804 3,577 Accrued compensation and related costs. . . . . . . . . . . 2,084 2,230 Accrued pension costs. . . . . . . . 584 834 Accrued taxes on income. . . . . . . 2,489 20 Deferred taxes . . . . . . . . . . . 94 94 Accrued expenses . . . . . . . . . . 2,263 2,399 -------- -------- Current liabilities. . . . . . 31,380 28,276 Non-current liabilities: Pension and postretirement obligation . . . . . . . . . . . . 4,338 3,845 Deferred income taxes. . . . . . . . 1,317 1,317 -------- -------- Non-current liabilities. . . . 5,655 5,162 Minority interest in subsidiary. . . . 24 83 -------- -------- 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 - 8,952,278 shares at 12/31/04 and 8,945,665 shares at 9/30/04. . . . . . . . 895 895 Premium paid in on common stock. . . 14,542 14,400 Cumulative translation adjustments. . . . . . . . . . . . (767) (251) Retained earnings. . . . . . . . . . 29,579 28,953 -------- -------- Total stockholders' investment . . . . . . . . . 44,249 43,997 -------- -------- $ 81,308 $ 77,518 ======== ======== 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 ----------------------------- December 31, December 31, 2004 2003 ------------ ------------- Net revenues . . . . . . . . . . . . . $ 18,325 $ 16,778 Costs and expenses: Cost of revenues . . . . . . . . . . 7,094 6,138 Selling, general and administrative . . . . . . . . . . 4,511 4,281 -------- -------- 11,605 10,419 -------- -------- Operating income . . . . . . . . . . . 6,720 6,359 Equity in income of joint venture. . . 357 232 Other (expense) income, net. . . . . . (45) 35 -------- -------- Income before income taxes and minority interest. . . . . . . . . . 7,032 6,626 Income taxes . . . . . . . . . . . . . (2,586) (2,481) -------- -------- Income before minority interest. . . . 4,446 4,145 Minority interest therein. . . . . . . (16) (140) -------- -------- Net income . . . . . . . . . . . . . . $ 4,430 $ 4,005 ======== ======== Net Income per common share: Basic. . . . . . . . . . . . . . . . $ 0.50 $ 0.45 ======== ======== Based on average shares outstanding. . . . . . . . . . . . 8,949 8,852 ======== ======== Diluted. . . . . . . . . . . . . . . $ 0.49 $ 0.45 ======== ======== Based on average shares outstanding. . . . . . . . . . . . 9,019 8,930 ======== ======== 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 except per share amounts) Three Months Ended --------------------------- December 31, December 31, 2004 2003 ------------ ------------- Cash flow from operating activities: Net Income . . . . . . . . . . . . . . . . $ 4,430 $ 4,005 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . 1,524 1,251 Amortization . . . . . . . . . . . . . . . 159 90 Bad debt expense . . . . . . . . . . . . . 21 47 Equity in net income of foreign affiliate. . . . . . . . . . . . . . . . (357) (232) Dividends received from foreign affiliate. . . . . . . . . . . . . . . . -- 598 Tax effect of stock options. . . . . . . . 121 65 (Increase) decrease in short-term investments. . . . . . . . . . . . . . . 154 (1,023) Increase in accounts receivable - net. . . (1,883) (1,830) (Increase) decrease in inventory . . . . . (45) 291 Decrease in prepaid expenses . . . . . . . 54 22 Net increase in other assets . . . . . . . (616) (807) (Decrease) increase in accounts payable. . 104 (24) Increase in notes payable. . . . . . . . . 482 -- Increase in accrued liabilities. . . . . . 1,936 1,508 Increase in deferred contract revenue. . . 425 146 Increase in non-current liabilities. . . . 493 449 Increase in minority interest. . . . . . . 26 199 -------- -------- Net cash provided from operating activities . . . . . . . . . . 7,028 4,755 Cash flows from investing activities: Acquisition of property, plant and equipment. . . . . . . . . . . . . . . . (895) (1,582) Disposition of property, plant and equipment. . . . . . . . . . . . . . . . -- 95 -------- -------- Net cash used by investing activities. . . (895) (1,487) Cash flows from financing activities: Dividends paid to stockholders . . . . . . (3,577) (3,316) Dividends paid to minority interest. . . . (85) (69) Proceeds from the exercise of stock options. . . . . . . . . . . . . . . . . 21 -- Repayments of revolving credit facility . . . . . . . . . . . . . . . . (71) -- -------- -------- Net cash used by financing activities. . . (3,712) (3,385) Effects of foreign currency translation. . . (516) 208 Net increase in cash and cash equivalents. . 1,905 91 Opening balance - cash and cash equivalents . . . . . . . . . . . . . 7,979 10,572 -------- -------- Ending balance - cash and cash equivalents . . . . . . . . . . . . . $ 9,884 $ 10,663 ======== ======== The accompanying notes are an integral part of these financial statements. 5 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements December 31, 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 December 31, 2004 and September 30, 2004, and the condensed consolidated results of operations and cash flows for the three-month periods ended December 31, 2004 and 2003. In the opinion of management, the accompanying consolidated unaudited condensed financial statements contain all adjustments necessary to present fairly the consolidated financial position of Landauer as of December 31, 2004 and September 30, 2004, and the consolidated results of operations and cash flows for the three-month periods ended December 31, 2004 and 2003. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in the 2004 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 operation or financial position. The results of operations for the three-month periods ended December 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year. (2) CASH DIVIDENDS On November 12, 2004, the Company declared a regular quarterly cash dividend in the amount of $.425 per share payable on January 17, 2005, to stockholders of record on December 17, 2004. Regular quarterly cash dividends of $.40 per share ($1.60 annually) were declared during fiscal 2004. (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-month periods ended December 31, 2004 and 2003 (000's): Three Months Ended December 31, -------------------- 2004 2003 -------- -------- Net Income . . . . . . . . . . . . . . . . $ 4,430 $ 4,005 Other comprehensive loss - foreign currency translation adjustment. . . . . 516 208 -------- -------- Comprehensive income . . . . . . . . . . . $ 3,914 $ 3,797 ======== ======== (4) EARNINGS PER SHARE Earnings per share computations have been made in accordance with the provisions of Statement of Financial Accounting Standards ("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. 6 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements December 31, 2004 (Continued) The following table presents the weighted average number of shares of common stock for the three-month periods ended December 31, 2004 and 2003 (000's): Three Months Ended December 31, -------------------- 2004 2003 -------- -------- Weighted average number of shares of common stock outstanding. . . . . . . 8,949 8,852 Options issued to executives . . . . . . . 70 78 -------- -------- Weighted average number of shares of common stock assuming dilution. . . . 9,019 8,930 ======== ======== (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): Three Months Ended December 31, -------------------- 2004 2003 -------- -------- Net income, as reported. . . . . . . . . . . . $ 4,430 $ 4,005 Deduct: Total stock-based employee compensa- tion expense determined under fair value based method for all awards, net of related tax effects. . . . . . . . . . . . . $ 1,292 $ 183 -------- -------- Pro forma net income . . . . . . . . . . . . . $ 3,138 $ 3,822 ======== ======== Earnings per share: Basic - As Reported. . . . . . . . . . . . . $ 0.50 $ 0.45 ======== ======== Basic - Pro Forma. . . . . . . . . . . . . . $ 0.35 $ 0.43 ======== ======== Diluted - As Reported. . . . . . . . . . . . $ 0.49 $ 0.45 ======== ======== Diluted - Pro Forma. . . . . . . . . . . . . $ 0.35 $ 0.43 ======== ======== 7 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements December 31, 2004 (Continued) On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share- Based Payment" ("SFAS 123R"). SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). SFAS 123R will be effective for the Company's fiscal quarter beginning July 1, 2005, and allows for the use of the Modified Prospective Application Method. Under this method SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS 123. The Company used the Modified Prospective Application Method to calculate the compensation expenses noted above. The Company has quantified the effects of the adoption of SFAS 123R on a preliminary basis, and it is expected that the new standard will result in approximately $262,000 of stock-based compensation expense (before income taxes) to be recognized in fiscal 2006 and $33,000 in fiscal 2007. The pro forma effects on net income and earnings per share if the Company had applied the fair value recognition provisions of original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed above. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period. (6) NOTES PAYABLE In April 2004 the Company negotiated a $25 million line of credit provided by LaSalle Bank, ABN AMRO. The credit facility, with a maturity date of April 12, 2005, provides funds that are to be used for working capital and other general corporate purposes. The credit agreement is annually renewable upon agreement of the parties and provides the Company with the option of electing to borrow funds denominated in U.S. dollars or euros that bear interest rates based on the federal funds denominated in US dollars or euros that bear interest rates based on the federal funds rate, prime rate, EURIBOR or LIBOR. It also contains certain covenants, including a covenant for minimum tangible net worth. As of December 31, 2004 the Company was in compliance with all of the covenants contained in the credit agreement. The Company currently expects that the credit facility will be renewed for an additional year. In April 2004 the Company borrowed $7,724,000 under this facility as part of funding the acquisition of the remaining 49% minority interest in LCIE-Landauer, Ltd. During the first quarter of fiscal 2005 the Company made principal payments of $71,000 as well as an interest payment of $33,000. 8 LANDAUER, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Unaudited Financial Statements December 31, 2004 (Continued) Current outstanding balances under the line are denominated in euros and bear interest at the applicable rate plus 1.25% per annum. At December 31, 2004, the loan is based upon the 181 day EURIBOR rate and is fixed at 3.38% until February 28, 2005, at which time the Company will execute a new EURIBOR election notice and specify the interest period and rate for the remaining balance of the advance under the terms of the credit agreement. In the event the credit facility is not renewed at maturity, it is expected that cash on hand, and cash flow from operations, and the Company's borrowing capacity will be sufficient to satisfy the obligation. The expectation is the Company will fund euro-based debt service payments from the euro-denominated cash flows. (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. The components of net periodic benefit cost for pension and retiree medical plans are as follows: Pension Other Benefits Benefits ------------- ------------- For the three months ended December 31, ------------------------------- 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 costs. . . . . . . . . . . . . . 39 39 4 4 Recognized net actuarial loss. . . 30 23 3 -- ---- ---- ---- ---- Net periodic benefit cost. . . . . $402 $361 $ 58 $ 47 ==== ==== ==== ==== Landauer expects to contribute $789,000 to its pension plan in fiscal 2005, the maximum amount permitted under U.S. tax law. The Company made $250,000 in pension contributions in the first fiscal quarter of 2005 and expects to fund the remaining $539,000 in the second fiscal quarter. 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 December 31, 2004 (Continued) (8) ACQUISITION OF MINORITY INTEREST IN LCIE- LANDAUER, LTD. 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 to identifiable intangible assets 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 (amounts in thousands, except per share): For the Three Months Ended December 31, -------------------- 2004 2003 -------- -------- Proforma Net Income . . . . . . . . . . . $ 4,430 $ 4,069 Diluted earnings per share . . . . . . . $ 0.49 $ 0.46 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. See Note 6 for additional information on the credit facility. 10 LANDAUER, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND 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. The majority of 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 customer 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 provided from operating activities for the three months ended December 31, 2004 and 2003 amounted to $7,028,000 and $4,755,000 respectively. The increase in cash provided from operating activities is primarily a result of decreased short-term investments. Acquisitions of property, plant and equipment were $895,000 and $1,582,000, respectively for the quarters ended December 31, 2004 and 2003. The Company's financing activities are primarily comprised of borrowing activities and payments of cash dividends to shareholder and minority partners. 11 LANDAUER, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Conditions and Results of Operations (Continued) The Company has long-term liabilities in the amount of $5,655,000 and $5,162,000 at December 31, 2004 and September 30, 2004, respectively, and its requirement for cash flow to support investing activities is generally limited. Since the credit facility described in No. 6 to the financial statements expires in April 2005, borrowings thereunder are classified as current liabilities. The Company expects to execute a new credit agreement in April 2005 with terms and conditions similar to the existing credit facility. Capital expenditures for the balance of fiscal 2005 are expected to amount to approximately $6,600,000 principally for the acquisition of equipment to support the Company's introduction of the InLight product line, introduction of new products, and the development of supporting software systems, and computer hardware. The Company anticipates that funds for these capital improvements will be provided from operations. In the opinion of management, cash flow from operations and the Company's borrowing capacity under its 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 and borrowings can be made under the credit facility to fund such investments. See Note 6 to the financial statement for additional information regarding the credit facility. The borrowings under the credit facility are denominated in euros, which is the functional currency of LCIE-Landauer, Ltd. Landauer requires limited working capital for its operations since many of its customers pay for services in advance. Such advance payments amounted to $12,979,000 and $12,554,000, respectively, as of December 31, 2004 and September 30, 2004, and are included in the balance sheet under the caption "Deferred Contract Revenue." While these amounts represent approximately one-half of current liabilities, such amounts generally do not represent a cash requirement. 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 of sales outstanding range from 43 to 80 days over the course of a fiscal quarter. RESULTS OF OPERATIONS --------------------- Revenues for the quarter just ended were $18,325,000, a 9.2% increase compared with revenues of $16,778,000 for the same quarter in fiscal 2004. Revenues for the quarter just ended were more than $1,500,000 higher compared with the first quarter of fiscal 2004. Growth in domestic radiation measurement revenues and ancillary fees resulted from higher pricing and increased unit volume and represented approximately 40% of revenue growth. Growth in international revenues, representing almost 30% of revenue growth, resulted from modest pricing and unit gains, as well as the effects of currency translation. The balance of revenue growth represents sales of InLight products and services in the U.S. and Europe. Gross margins were 61.3% of revenues for the first quarter of fiscal 2005, lower than the 63.4% reported for the same period in 2004. Cost of goods sold were $950,000 or 15.6% higher than fiscal 2004. Direct labor costs exceeded the prior year by $50,000; direct materials were $183,000 higher attributable to the incremental InLight revenues as well as currency 12 LANDAUER, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Conditions and Results of Operations (Continued) related cost increases. Factors contributing to higher overhead costs include outside services $173,000, related to information technology projects and Sarbanes-Oxley support, depreciation expense $154,000, and higher international costs, $235,000, impacted by the weakened U.S. dollar particularly in relation to the euro. Selling, general and administrative expenses in the first quarter of fiscal 2005 were $230,000 or 5.4% higher versus a year ago due to higher international costs $79,000; professional fees, $94,000; commissions and incentive compensation expense $75,000 and amortization of intangibles associated with the acquisition of the balance of LCIE-Landauer, $69,000. Resulting operating income for the quarter ended December 31, 2004 was $6,720,000, an increase of 6% compared with $6,359,000 reported in the same quarter a year ago. Minority interest in net income of the Company's subsidiaries declined by almost $125,000 compared with a year ago as a result of the acquisition of the remaining interest in LCIE- Landauer. The effective income tax rate for the first quarter of fiscal 2005 was slightly lower at 36.8%. Resulting net income for the first quarter amounted to $4,430,000 or $0.49 per diluted share compared with $4,005,000, or $0.45 per diluted share, for the same quarter in fiscal 2004. OUTLOOK ------- Management's 2005 business plan anticipates aggregate revenue growth for the year in the range of 7 - 8%. The Company's traditional domestic and international revenue sources are expected to grow at a rate of 5.5 - 6.5% with sales for the InLight product line contributing to the balance of revenue growth. Sources of domestic revenue growth are expected to include pricing, moderate unit growth and increased sales of ancillary services. Pricing and increased unit volume are expected to contribute to international revenue growth in 2005, although currency exchange rates may impact results reported in U.S. dollars. Costs and operating expenses for fiscal 2005 are expected to grow at a rate slightly higher than revenues. Net other income in fiscal 2005 is anticipated to be comparable to the year just ended and minority interest should further decline, as a result of the elimination of minority interest in LCIE-Landauer. The effective income tax rate for fiscal 2005 is expected to be comparable to 2004 at 37.4%. Based on the preceding estimates, resulting net income for 2005 is currently anticipated to be higher by 6 - 8% compared with fiscal 2004. FORWARD-LOOKING STATEMENTS -------------------------- Certain of the statements made herein (including, in particular, the statements made under the caption "Outlook" above) constitute forward looking statements that are based on certain assumptions and involve certain risks and uncertainties, including, introduction and customer acceptance 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, changes in pricing for the Company's services, changes in postal and delivery costs and 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 13 LANDAUER, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Conditions and Results of Operations (Continued) 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, 2004 and other reports filed by the Company from time to time with the Securities and Exchange Commission. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ----------------------------------------- In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Cost." This Statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (scrap). SFAS No. 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of fiscal year 2006. The Company is currently evaluating the impact of SFAS No. 151 on its consolidated financial statements. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123R, "Share- Based Payment." This revised standard addresses the accounting for share- based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for all interim or annual periods beginning after June 15, 2005. The Company is in the process of assessing the impact of this standard that will be adopted in July 2005. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29". This standard requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. The Statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 153 on its consolidated financial statements. 14 LANDAUER, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Conditions and Results of Operations (Continued) On December 21, 2004, the FASB released FASB Staff Position No. FAS 109-1 (FSP 109-1). FASB Staff Position No. 109-1, "Application of FASB Statement No. 109, 'Accounting for Income Taxes,' for the Tax Deduction Provided to U.S.-Based Manufacturers by the American Jobs Creation Act of 2004", clarifies that the tax deduction for domestic manufacturers under the American Jobs Creation Act of 2004 should be accounted for as a special deduction in accordance with FASB Statement No. 109, "Accounting for Income Taxes" (FAS 109). The FSP went into effect upon being issued. The Company is currently evaluating the impact, if any, of FSP-109-1 on its consolidated financial statements. On December 21, 2004, the FASB released FASB Staff Position No. FAS 109-2 (FSP 109-2). FASB Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004", provides enterprises more time (beyond the financial-reporting period during which the Act took effect) to evaluate the Act's impact on the enterprise's plan for reinvestment or repatriation of certain foreign earnings for purposes of applying FASB Statement No. 109, "Accounting for Income Taxes" (FAS 109). The FSP went into effect upon being issued. The Company is currently evaluating the impact, if any, of FSP-109-2 on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS SIGNIFICANT RISK FACTORS ------------------------ The Company's business and operations are subject to certain risks and uncertainties, including: FOREIGN CURRENCY 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 re-measured into U.S. dollars using the U.S. dollar as the functional currency. To date, the market risk associated with foreign currency exchange rates 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, or commitments 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. 15 LANDAUER, INC. AND SUBSIDIARIES Qualitative and Quantitative Disclosure About Market Risks (Continued) 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 operations from the Glenwood facility. If the Company were to lose availability of its primary facility due to fire, natural disaster or other disruptions, the Company's 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. 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 OSL crystal radiation measurement 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. Although multiple sources for raw crystal material exists, there can be no assurance that the Company could secure another source to produce finished crystal materials to Landauer's specification 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 the competition 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 charges 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. 16 LANDAUER, INC. AND SUBSIDIARIES Qualitative and Quantitative Disclosure About Market Risks (Continued) 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 and regulations, or stricter interpretations of existing laws or regulations may materially affect Landauer's business or operations in the future and/or could increase the cost of compliance. Many of the Company's technology based services must comply with various national and international standards that are used by regulatory and accreditation bodies for approving such services and products. Changes in these standards and accreditation requirements can result in the Company having to incur costs to adapt its offerings and procedures. Such adaptations may introduce quality assurance issues during transition that need to be addressed to ensure timely and accurate analyses and data reporting. Additionally, changes affecting radiation protection practices, including new understandings of the hazards of radiation exposure and amended regulations, may impact how the Company's services are used by its customers and may in some circumstances cause the Company to alter its products and delivery of its services. 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. COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT ----------------------------------------------------- The Company is in the process of documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, that requires annual management assessments of the effectiveness of internal controls over financial reporting and an attestation report by our independent registered public accounting firm. We are in the process of documenting and testing our system of internal controls to provide the basis for our report. However, at this time, due to the ongoing evaluation and testing, no assurance can be given that there may not be internal control deficiencies that would be required to be reported. Compliance with the requirements of Section 404 of the Sarbanes- Oxley Act will also increase the Company's overhead costs in 2005 and future years. 17 LANDAUER, INC. AND SUBSIDIARIES 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 December 31, 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 December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 18 LANDAUER, INC. AND SUBSIDIARIES 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 At its Annual Meeting held on February 3, 2005, the shareholders voted to elect Robert J. Cronin, Brent A. Latta and Richard R. Risk as directors for three-year terms. The voting for each of the nominees was as follows: For Withheld ---------- ---------- Mr. Cronin 7,776,483 270,818 Mr. Latta 7,757,200 290,101 Mr. Risk 7,804,375 242,926 The shareholders voted to reappoint PricewaterhouseCoopers LLP as the Company's auditors for the following year, with 7,898,147 shares (88.2% of total shares outstanding) voting for, 117,234 shares voting against and 31,918 shares abstaining. The shareholders voted on a proposal related to the Company's 2005 Long-Term Incentive Plan ("the Plan"). The Plan was initially approved by the Board of Directors on November 12, 2004 subject to shareholder approval. The Plan was approved by shareholders with 5,669,843 shares (63.3% of total shares outstanding) voting for, 935,849 shares voted against, 68,677 shares voted to abstain, and 1,372,932 were not voted. The additional directors for the current year are Michael D. Winfield, Thomas M. White, E. Gail de Planque and Gary D. Eppen. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K On January 26, 2005, Landauer filed a report on Form 8-K related to its earnings press release for the same day. 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 19 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: February 8, 2005 /s/ James M. O'Connell ------------------------------ James M. O'Connell Vice President and Treasurer (Principal Financial and Accounting Officer) 20