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Form 10-K for LANDAUER INC

30-Dec-2003

Annual Report

RESULTS OF OPERATIONS

FISCAL 2003 COMPARED TO FISCAL 2002

Net revenues for fiscal 2003 were $64,818,000, an increase of 10.6% compared with revenues of $58,608,000 reported for fiscal 2002. Revenue growth during fiscal 2003 was attributable to gains in pricing, unit volume and ancillary service fees for the Company's core domestic radiation monitoring business. Additionally, full-year consolidation of the operations of LCIE-Landauer, the Company's 51%-owned operating unit in France and the United Kingdom, and a weak U.S. dollar contributed to reported growth. LCIE-Landauer was included in consolidated operations for only the second half of 2002. Consolidated revenues, excluding LCIE-Landauer in 2003 and 2002, increased by $2.9 million, or 5.2%. The remaining growth for fiscal 2003 was primarily attributable to price as well as other factors including currency, volume, ancillary services, and product mix.

During the second quarter of fiscal 2003, the Company reported a non-cash charge in the amount of $2,750,000, or $0.19 per diluted share (after income tax benefit of $1,092,000) to record the impairment in value of assets related to Landauer's Aurion service. Excluding the impairment charge, costs and expenses for fiscal 2003 grew at a slightly higher rate than revenues reflecting higher expenses for insurance and employee benefits, $1,138,000; full-year LCIE-Landauer operations, $2,185,000; a weaker U.S. dollar and higher research costs, $878,000; partially offset by lower incentive compensation costs, $1,303,000. Gross margins decreased from 65.1% in fiscal 2002 to 63.9% in fiscal 2003.

Net other income was lower in fiscal 2002, a result of lower net investment income offset by improved earnings from Nagase-Landauer, Ltd., the Company's joint venture in Japan. Fiscal 2002 results reflect the recognition of a $786,000 gain, or $0.06 per diluted share (after income tax expense of $275,000) arising from the exchange of a portion of the U.K. business for controlling interest in LCIE-Landauer, the Company's operating unit in France and the United Kingdom. The effective tax rate for 2003 was 36.9% compared with 37.3% for 2002.

As a result, net income for fiscal 2003 was $15,019,000 compared with $16,180,000 reported for fiscal 2002. Diluted earnings per share for fiscal 2003 were $1.69 compared with $1.83 reported a year ago.

FISCAL 2002 COMPARED TO FISCAL 2001

Net revenues for fiscal 2002 were $58,608,000 compared with revenues of $53,028,000 reported for fiscal 2001, a gain of 10.5%. Revenue growth for fiscal 2002 reflected primarily higher pricing for dosimetry services, increased demand for ancillary products and the services this technology offers to customers, and account gains in key market segments. Also contributing to revenue growth, beginning in the second half of the fiscal year was the consolidation of the operations of LCIE-Landauer, the Company's 51%-owned operating unit in France and the United Kingdom. Consolidated revenues excluding LCIE-Landauer in 2002 increased by $3.4 million.

Costs and expenses in fiscal 2002 grew at a slightly lower rate than revenues despite costs associated with the formation of LCIE Landauer, moving the Company's listing to the New York Stock Exchange, and ongoing investment in the development of new products and markets. Gross margins increased moderately from 64.7% in fiscal 2001 to 65.1% in fiscal 2002.

Net other income was more than $1,100,000 greater than in fiscal 2001 reflecting the recognition of a $786,000 gain arising from the exchange of a portion of the Company's United Kingdom business for a controlling interest in LCIE-Landauer. Higher investment and joint venture income also contributed to the increase. The Company's effective tax rate was 37.3% for fiscal 2002, slightly higher than the fiscal 2001 rate of 36.5%.

As a result, net income for fiscal 2002 increased $1,856,000 or 13%, to $16,180,000. Diluted earnings per share increased from $1.64 in fiscal 2001 to $1.83 in fiscal 2002. Excluding the $786,000 gain recognized on the formation of LCIE-Landauer net income for fiscal 2002 was $15,669,000 or $1.77 per diluted share, an increase of 9.4% compared with fiscal 2001.

Certain reclassifications have been made in the financial statements for comparative purposes. These reclassifications have no effect on the results of operation or financial position.

FOURTH QUARTER RESULTS OF OPERATIONS

Revenues in the fourth quarter of fiscal 2003 were 8.7% higher than reported in the same period in fiscal 2002. Revenue growth during the fourth quarter of fiscal 2003 was attributable to gains in pricing, unit volume and ancillary service fees for the Company's core domestic radiation monitoring business. A weak U.S. dollar also contributed to reported growth, particularly in France, the United Kingdom and Canada. Costs and expenses for the fourth quarter of fiscal 2003 were 11% higher than for the same period in fiscal 2002, primarily related to foreign currency, increased research activity, $505,000, and higher employee benefit costs, $364,000, offset by reduced incentive compensation expense, $575,000. The Company reported earnings of $4,352,000 compared with earnings of $4,173,000 in the fourth quarter of fiscal 2002. Earnings per diluted share for the quarter were $0.49 compared with $0.47 in the fourth quarter of fiscal 2002.

Revenues in the fourth quarter of fiscal 2002 were 13.3% higher than reported in the same period in fiscal 2001. Revenue growth for the quarter reflected improved pricing as well as incremental volume, and includes the impact of the consolidation of the operations of LCIE-Landauer, the Company's 51%-owned operating unit in France and the United Kingdom. Net income for the quarter of $4,173,000 represented a 9.8% increase compared with the same period in 2001. Diluted income per share for the fourth quarters of 2002 and 2001 was $.47 and $.43, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Landauer's cash flows, as shown in the statement of cash flows, can differ from year to year as a result of the Company's operating, investing, and financing activities. Investments in short-term instruments with maturity of greater than three months are classified separately from cash and equivalents.

Investing activities included acquisitions of property, plant and equipment (including amortizable dosimetry device components) and amounted to $4,715,000 and $4,656,000, respectively, in fiscal 2003 and 2002. Cash paid for income taxes was $8,501,000 in 2003 and $10,096,000 in fiscal 2002.

At September 30, 2003, the Company had no significant long-term liabilities or future cash commitments, and its requirement for cash flow to support investing activities is generally limited. Capital expenditures for fiscal 2004 are expected to amount to $7,000,000, principally for equipment and information technology infrastructure. The Company anticipates that funds for these capital improvements will be provided from operations.

On April 2, 2002, the Company completed an agreement to merge its European operations with the radiation monitoring business operated by Laboratoire Central des Industries Electriques ("LCIE"). Under the terms of the acquisition agreements, LCIE may, in the fifth and sixth year of the venture, require Landauer to purchase its interest in LCIE-Landauer at estimated fair value based on a multiple of EBITDA for the trailing four quarters. Additionally, Landauer has the option to purchase LCIE's interest in the seventh year of the venture on the same terms as LCIE's "Put" option. A change in control provision, as defined, may accelerate the respective Put and Call options and provides for premiums and discounts in the event such options are exercised as the result of a change in control. The Company anticipates that the commitment to purchase the 49% minority interest position in LCIE- Landauer will be funded from operations and/or available credit facilities.

The Company presently maintains bank lines of credit totaling $5,000,000. In the opinion of management, resources are adequate for projected operations and capital spending programs, as well as continuation of the regular cash dividend program.

Landauer requires limited working capital for its operations since many of its customers pay for annual services in advance. Such advance payments amounted to $12,464,000 and $11,885,000, respectively, as of September 30, 2003 and 2002, and are included in deferred contract revenue. While these amounts represent approximately one-half of current liabilities, such amounts generally do not represent a cash requirement.

Landauer offers radiation monitoring services in the United Kingdom, Canada, Japan, Brazil, China, and France. The Company's operations in these markets do not depend on significant capital resources.

The Company is exposed to market risk, including changes in foreign currency exchange rates and interest rates. As discussed in Note 1, "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. The market risk associated with foreign currency exchange rates is not material in relation to the Company's financial position, results of operations, or cash flows. 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 units' functional currencies. As such, the Company does not use derivative financial instruments to manage the exposure in its non-U.S. operations.

NEW ACCOUNTING PRONOUNCEMENTS

On October 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 which requires that goodwill and certain intangible assets no longer be amortized to earnings, but be reviewed periodically for impairment. For acquisitions completed prior to June 30, 2001, the amortization of goodwill and certain intangible assets has ceased beginning in fiscal year 2002. The Company did not recognize goodwill amortization expense in fiscal 2003 or 2002. Goodwill amortization expense aggregated $190,000 in fiscal 2001. Diluted EPS increased by approximately $0.02 in both fiscal 2003 and 2002 due to the reduction in amortization expense. As a result of applying the impairment provisions of SFAS No. 142, no impairment loss was indicated. Goodwill and other intangible assets at September 30, 2003 consisted of the following:

                                                Accmu-  
                                                lated   
                                     Gross      Amorti-      Net    
(Dollars in Thousands)               Amount     zation      Amount  
----------------------               -------    -------     ------- 

Customer lists. . . . . . . . . . .  $ 2,682    $   564     $ 2,118 
  (useful life of 10 years)
Licenses & patents. . . . . . . . .      508        254         254 
  (useful life of 10-15 years)
Other intangibles . . . . . . . . .      706        279         427 
                                     -------    -------     ------- 
    Total . . . . . . . . . . . . .  $ 3,896    $ 1,097     $ 2,799 
                                     =======    =======     ======= 

                                                            ======= 

In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of periods ending after December 15, 2002. The adoption of FIN 45 did not have a material affect on the financial position or the results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123. The transition provisions are effective for fiscal years ending after December 15, 2002. The disclosure provisions are effective for interim periods beginning after December 15, 2002. The Company implemented the required disclosure provisions in the quarter ended March 31, 2003. The adoption of this statement did not have a material impact on the Company's consolidated financial position, results of operations or cash flows as the Company did not make the voluntary change to the fair value method of accounting for stock-based compensation.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, and 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. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to existing variable interest entities in the interim period beginning after June 15, 2003. The Company believes it has no material interests in variable interest entities that will require disclosure or consolidation under FIN 46.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement 133. The implementation of SFAS No. 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30. The Company has reviewed SFAS No. 149 and believes that the adoption of SFAS No. 149 did not have a material impact on our financial position or results of operations.

In May 2003, SFAS issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which changes the accounting for mandatorily redeemable shares, put options, forward purchase contracts and obligations that have a specific expiration or settlement date and that can be settled with shares. SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As the Company does not have any interest in such instruments, the adoption of this statement did not have a material impact upon its consolidated financial statements.

INFLATION

The Company strives to reflect the inflationary impact of materials, labor and other operating costs and expenses in its prices. The market for the services that the Company offers, however, is highly competitive, and in some cases has limited the ability of the Company to offset inflationary cost increases.

FORWARD LOOKING STATEMENTS

Certain matters contained in this report are forward-looking statements, including, without limitation, statements concerning the development and introduction of new technologies, the adaptability of OSL to new platforms and new formats (such as InLight[trademark]), the usefulness of older technologies, the cost associated with the Company's business development and research efforts, the anticipated results of the Company, the Company's business plans, foreign exchange risks, government regulations, changes in postal and delivery practices, the Company's market position, the risks of conducting business internationally, other anticipated financial events, the effects of changing economic and competitive conditions, and pending accounting announcements. 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 plan and prospects and could create the need from time to time to write down the value of the assets or otherwise cause the Company to incur unanticipated expenses. Additional information may be obtained by reviewing the information set forth below under "Significant Risk Factors" and information contained in the Company's reports filed from time to time with the Securities and Exchange Commission ("SEC").

CRITICAL ACCOUNTING POLICIES

The SEC issued statements regarding disclosure by companies within their management's discussion and analysis of financial condition and results of operations. In those statements, the SEC encouraged companies to identify critical accounting policies. Critical accounting policies are those that are most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. In response to the SEC statements, management has identified the following critical accounting policies used in the preparation of our financial statements and accompanying notes.

REVENUE RECOGNITION AND DEFERRED CONTRACT REVENUE

The Company recognizes revenues and the related costs for its services in the periods for which such services are provided. Many customers pay for these services in advance. The amounts recorded as deferred contract revenue in the consolidated balance sheet represent customer deposits invoiced in advance during the preceding twelve months for services rendered over the succeeding twelve months, and are net of services rendered through the respective consolidated balance sheet date. Such advance billings amounted to $12,464,000 and $11,885,000, respectively, as of September 30, 2003 and September 30, 2002, are included in deferred contract revenue, and are stated net of services rendered through the respective consolidated balance sheet dates. Management believes that the amount of deferred revenue shown at the respective consolidated balance sheet dates fairly represents the level of business activity it expects to conduct with customers invoiced under this arrangement.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Management judgments and estimates are utilized in connection with establishing an allowance for the possibility that portions of the Company's accounts receivable balances may become uncollectible. Specifically, management analyzes accounts in relation to receivable aging trends, economic factors, and changes in customer payment history in establishing this allowance. Accounts receivable reduced by this allowance of $583,000 as of September 30, 2003 and $482,000 as of September 30, 2002, amounted to $13,770,000 and $13,620,000, respectively, as of September 30, 2003 and September 30, 2002.

PROPERTY, PLANT & EQUIPMENT

Plant and equipment (including dosimetry badges and software) are recorded at cost and are depreciated/amortized on a straight-line basis over the estimated useful lives, which are primarily thirty years for buildings and three to eight years for equipment. Landauer assesses the carrying value of its property, plant and equipment and the remaining useful lives whenever events or circumstances indicate the carrying value may not be recoverable or the estimated useful life may no longer be appropriate. Factors considered important which could trigger this review included competitive conditions, government regulations and technological changes. Maintenance and repairs are charged to expense, and renewals and betterments are capitalized. Landauer capitalizes internal software costs in accordance with SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company's intangible assets are comprised of goodwill, purchased customer lists, licenses and patents. On October 1, 2001, the Company adopted SFAS No. 142 which requires that goodwill and certain intangible assets no longer be amortized to earnings, but be reviewed periodically for impairment. For acquisitions completed prior to June 30, 2001, the amortization of goodwill and certain intangible assets has ceased beginning in fiscal year 2002. Under SFAS No. 142, the impairment review of goodwill and other intangible assets that are not being amortized must be based generally on fair values. As a result of applying the impairment provisions of SFAS No. 142, no impairment loss was required. Purchased customer lists are recorded at cost and are amortized on a straight-line basis over the estimated useful lives, which are primarily ten years. Patents and licenses are also recorded at cost and are amortized on a straight-line basis over their useful lives, which range from 10 to 15 years. Other assets are reviewed for impairment whenever circumstances indicate that an impairment may exist. Such review is based on estimates of future undiscounted cash flows and an assessment of fair value based on discounted cash flows or other indicators of fair market value.

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