LANDAUER INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Edgar Online, Inc. |
Overview
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Through its
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21 Table of Contents Results of Operations
In connection with the acquisition of GPS, during the first quarter of fiscal 2010, the Company began to operate in two reportable segments, Radiation Monitoring and Medical Physics. Historically, the Company operated in the Radiation Monitoring segment exclusively. The Company evaluates performance of the individual segments based upon, among other metrics, segment operating earnings or loss. Segment operating income or loss is segment revenue less segment cost of sales and segment selling, general and administrative expenses. Corporate expenses for shared functions, including corporate management, corporate finance and human resources, are recognized in the Radiation Monitoring segment where they have historically been reported. As the operational integration activities of the Medical Physics segment progress, including transaction processing, human resources and benefits administration, and sales and marketing activities, the Company expects to reevaluate the allocation of costs if or when these costs become material. Additional information on the Company's reportable segments is contained under the footnote "Segment Information" in Item 8 of this Annual Report on Form 10-K.
Comparability of results is impacted by the acquisition of GPS during the second month of fiscal 2010 as compared to the results for a full twelve month period in fiscal 2011. Segment performance for fiscal 2010 compared to fiscal 2009 is discussed with the consolidated results of operations due to the lack of comparability for the Medical Physics segment, as the Company operated in the Radiation Monitoring segment exclusively in fiscal 2009.
Comparison of the Twelve Months Ended
Revenues for fiscal 2011 were
Cost of sales for fiscal 2011 was
Selling, general and administrative costs for fiscal 2011 were
In conjunction with the Company's acquisition activity, the Company incurred
Operating income for the twelve months ended
Net other income, including equity in income of joint ventures, for fiscal 2011 was
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The effective tax rate was 31.4% and 33.0% for fiscal 2011 and 2010, respectively. The decrease in effective tax rate was due primarily to the reduction of nondeductible acquisition costs as compared to fiscal 2010 and an increased research and development credit in fiscal 2011.
Net income for the twelve months ended
Earnings before interest, taxes, depreciation and amortization ("EBITDA") were
The following is a discussion of the Company's segment operating results.
Radiation Monitoring
Radiation Monitoring revenue for fiscal 2011 declined 0.5%, or
Radiation Monitoring gross margin for the twelve months ended
Medical Physics
Medical Physics revenue for 2011 increased 46.7%, or
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Comparison of the Twelve Months Ended
Revenues for fiscal 2010 were
The domestic InLight equipment revenue included sales to the Canadian government agency responsible for occupational monitoring and radiation emergency preparedness for the citizens of
Radiation Monitoring revenue included sales of
Total cost of sales for fiscal 2010 was
Selling, general and administrative expenses for fiscal 2010 were
In conjunction with the acquisitions completed during fiscal 2010, the Company incurred
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On
Operating income for fiscal 2010 was
Net other income, including equity in income of joint venture, for fiscal 2010 was
The effective tax rate was 33.0% and 31.9% in fiscal 2010 and 2009, respectively. The fiscal 2010 effective tax rate increased primarily due to the nondeductibility of certain acquisition costs and the elimination of certain tax credits realized in fiscal 2009.
Net income for the 2010 fiscal year was
Earnings before interest, taxes, depreciation and amortization ("EBITDA") for fiscal 2010 were
Comparison of the Three Months Ended
Revenues for the fourth fiscal quarter of 2011 were
Cost of sales for the fourth fiscal quarter of 2011 was
Selling, general and administrative costs for the fourth fiscal quarter of 2011 were
Operating income for the fourth fiscal quarter of 2011 was
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Net other income, including equity in income of joint ventures, for the fourth fiscal quarter of 2011 was
The effective tax rate for the fourth fiscal quarter of fiscal 2011 and 2010 was 25.3% and 39.7%, respectively. The decrease in effective tax rate was due primarily to the reduction in the Company's state taxes and the allowance of certain tax credits that had been previously disallowed.
Net income for the fourth fiscal quarter ended
The following is a discussion of the Company's segment operating results.
Radiation Monitoring
Radiation Monitoring revenue for the fourth fiscal quarter of 2011 was
Radiation Monitoring gross margin for the fourth fiscal quarter of 2011 increased to 66.2% from 63.7% in the fourth fiscal quarter of 2010. Selling, general and administrative costs in the Radiation Monitoring segment for the fourth fiscal quarter of 2011 increased 8.0%, or
Medical Physics
Medical Physics revenue for the fourth fiscal quarter of 2011 increased 32.6%, or
Fiscal 2012 Outlook
•
support the successful completion of the Company's systems initiative and
the related post implementation support.
• Incremental depreciation and amortization over fiscal 2011 of
(
the Company's systems initiative in the third fiscal quarter of fiscal 2012.
• The accretive impact of the
Products producing$1.1 million to $1.5 million of net income for the 10 months included in fiscal 2012. 26 Table of Contents
Based upon the above assumptions, the Company anticipates reported net income for fiscal 2012 in the range of
Liquidity and Capital Resources
The Company's cash increased
Cash provided by operating activities for fiscal 2011 were
Cash used by investing activities for fiscal 2011 included
Included in the acquisitions of property, plant and equipment were costs of
The Company's financing activities were comprised primarily of net borrowings on the Company's
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In connection with its fiscal 2010 first quarter acquisitions, the Company borrowed
Under the terms of the first amendment to the
Cash paid for interest on the borrowings under the credit facility with
In connection with its acquisition of IZI in
The credit facility will mature on
Borrowings under the credit facility will bear interest, at
Loans under the credit facility may be prepaid at any time without penalty with same-day written notice, subject to, in the case of loans bearing interest on the LIBO Rate, payment of customary breakage costs for prepayments made prior to the last day of the applicable interest period.
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The new credit agreement includes customary covenants for facilities of this type, including limitations on indebtedness, liens, investments and acquisitions, loans and advances, mergers and consolidations, sales of assets, and dividends, stock repurchases and other restricted payments.
In addition, the new credit agreement requires that
The new credit agreement also includes customary events of default, including but not limited to failure to pay any principal when due or any interest, fees or other amounts within three business days when due, default under any covenant or any agreement in any loan document, cross-default with other debt agreements, bankruptcy and change of control.
The Company is exposed to market risk, including changes in foreign currency exchange rates. The financial statements of the Company's non-U.S. subsidiaries are remeasured into U.S. dollars using the U.S. dollar as the reporting currency. The market risk associated with foreign currency exchange rates has historically been immaterial in relation to the Company's financial position, results of operations, and cash flows.
In the opinion of management, cash flows from operations and the Company's borrowing capacity under its credit facility are adequate for projected operations and capital spending programs, as well as the 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 current credit facility to fund such investments.
Use of Non-GAAP Financial Measures
In evaluating the Company's financial performance and outlook, management uses EBITDA. Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure. Management believes that such measure supplements evaluations using operating income, net income, and diluted earnings per share and other GAAP measures, and is a useful indicator for investors. This indicator can help readers gain a meaningful understanding of the Company's core operating results and future prospects without the effect of non-cash or other one-time items and the Company's ability to generate cash flows from operations that are available for taxes, capital expenditures, and debt repayment. Investors should recognize that these non-GAAP measures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows or liquidity prepared in accordance with accounting principles generally accepted in
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The following table reconciles net income to EBITDA:
(Dollars in Thousands) 2011 2010 2009 Net income attributed to Landauer, Inc. $ 24,538 $ 23,674 $ 23,366
Add back:
Interest and other expense (income) 339 105 (624) Income taxes 11,527 11,893 11,071 Depreciation and amortization 7,991 6,681 5,845
Earnings before interest, taxes, depreciation and
amortization $ 44,395 $ 42,353 $ 39,658 Contractual Obligations
As of
Schedules payments by fiscal year (Dollars in Thousands) Total 2012 2013-14 2015-16 Thereafter Capital leases $ 210 $ 71 $ 139 $ 0 $ 0 Operating leases 2,648 584 791 479 794 Purchase obligations (1) 16,917 16,678 239 0 0 Dividends (2) 5,301 5,301 0 0 0 Pension and postretirement benefits (3) 3,736 360 764 727 1,885 Revolving credit facility (4) 19,805 0 19,805 0 0 Total obligations $ 48,617 $ 22,994 $ 21,738 $ 1,206 $ 2,679
(1) Includes accounts payable and other agreements to purchase goods or services
including open purchase orders; also includes remaining contractual
obligations associated with the Company's information systems upgrade. (2) Cash dividends in the amount of
2011.
(3) Includes estimated future benefit payments for supplemental key executive
retirement plans and a terminated retirement plan that provides certain
retirement benefits payable to non-employee directors. The amounts are
actuarially determined, which includes the use of assumptions, and may vary
significantly from expectations. (4) Includes only principal payments at maturity of credit facility onOctober 31, 2013 . Excludes interest payments and fees related to the revolving credit facility due to variability with respect to the timing of advances and repayments. The debt is classified as current as the agreement contains a subjective acceleration clause as well as a Company elected arrangement which provides for automatic draws or pay downs on the credit facility on a daily basis after taking into account operating cash needs.
The Company is not able to reasonably estimate the ultimate timing of the payments or the amount by which its gross unrecognized tax benefits of
Recently Issued Accounting Pronouncements
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Recently Adopted Accounting Pronouncements
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In
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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 and products that the Company offers, however, is highly competitive, and in some cases has limited the ability of the Company to offset inflationary cost increases.
31 Table of Contents Forward-Looking Statements
Certain matters contained in this report, including the information contained under the heading "Fiscal 2012 Outlook" in Item 7 of this Annual Report on Form 10-K, constitute forward-looking statements that are based on certain assumptions and involve certain risks and uncertainties. These include the following, without limitation: assumptions, risks and uncertainties associated with IZI Medical Products' future performance, the Company's development and introduction of new technologies in general; the ability to protect and utilize the Company's intellectual property; continued customer acceptance of the InLight technology; the adaptability of optically stimulated luminescence (OSL) technology to new platforms and formats; military and other government funding for the purchase of certain of the Company's equipment and services; the impact on sales and pricing of certain customer group purchasing arrangements; changes in spending or reimbursement for medical products or services; the costs associated with the Company's research and business development efforts; the usefulness of older technologies and related licenses and intellectual property; the effectiveness of and costs associated with the Company's IT platform enhancements; the anticipated results of operations of the Company and its subsidiaries or ventures; valuation of the Company's long-lived assets or business units relative to future cash flows; changes in pricing of products and services; changes in postal and delivery practices; the Company's business plans; anticipated revenue and cost growth; the ability to integrate the operations of acquired businesses and to realize the expected benefits of acquisitions; the risks associated with conducting business internationally; costs incurred for potential acquisitions or similar transactions; other anticipated financial events; the effects of changing economic and competitive conditions, including instability in capital markets which could impact availability of short and long-term financing; the timing and extent of changes in interest rates; the level of borrowings; foreign exchange rates; government regulations; accreditation requirements; changes in the trading market that affect the cost of obligations under the Company's benefit plans; and pending accounting pronouncements. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from what is anticipated today. These risks and uncertainties also may 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 information set forth in Item 1A "Risk Factors" and Item 7A "Quantitative and Qualitative Disclosures about Market Risk" and information contained in the Company's reports filed, from time to time, with the
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in
Revenue Recognition and Deferred Contract Revenue
The source of Radiation Monitoring segment revenues for the Company is radiation measuring and monitoring services including other services incidental to measuring and monitoring. The measuring and monitoring services provided by the Company to its customers are of a subscription nature and are continuous. The Company views its business in the Radiation Monitoring segment as services provided to customers over a period of time and the wear period is the period over which those services are provided. Badge production, wearing of badges, badge analysis, and report preparation are integral to the benefit that the Company provides to its customers. These services are provided to customers on an agreed-upon recurring basis (monthly, bi-monthly, quarterly, semi-annually or annually) that the customer chooses for the wear period. Revenue is recognized on a straight-line basis, adjusted for changes in pricing and volume, over the wear period as the service is continuous and no other discernible pattern of recognition is evident. Revenues are recognized over the periods in which the customers wear the badges irrespective of whether invoiced in advance or in arrears.
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The Company, through its Medical Physics segment, offers full scope medical physics services to hospitals and radiation therapy centers. Services offered include, but are not limited to, clinical physics support in radiation oncology, commissioning services, special projects support and imaging physics services. Delivery of the medical physics services can be of a contracted, recurring nature or as a discrete project with a defined service outcome. Recurring services often are provided on the customer's premises by a full-time employee or fraction of a full-time employee. These services are recognized as revenue on a straight-line basis over the life of the contract. Fee for service projects' revenue is recognized when the service is delivered.
Contracted services are billed on an agreed-upon recurring basis, either in advance or arrears of the service being delivered. Customers may be billed monthly, quarterly, or at some other regular interval over the contracted period. The amounts recorded as deferred revenue represent invoiced amounts in advance of delivery of the service. Management believes that the amount of deferred contract revenue fairly represents remaining business activity with customers invoiced in advance. Fee for service revenue is typically associated with much shorter contract periods, or with discrete individual projects. Invoicing is usually done after completion of the project and customer acceptance thereof.
The amounts recorded as deferred contract revenue in the consolidated balance sheets represent invoiced amounts in advance of delivery of the service, and are net of services rendered through the respective consolidated balance sheet date. Such advance billings amounted to
Property, Plant & Equipment and Other Assets
Maintenance and repairs are charged to expense, and renewals and betterments are capitalized. Plant and equipment and other assets, primarily dosimetry badges, are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives, which are primarily 30 years for buildings, three to eight years for equipment, five to eight years for internal software and thirty months to eight years for other assets. The Company assesses the carrying value and the remaining useful lives of its property, plant, equipment, and other assets when events or circumstances indicate the carrying value may not be recoverable or the estimated useful life may no longer be appropriate. Factors that could trigger this review include competitive conditions, government regulations and technological changes.
The Company capitalizes costs of software which is acquired, internally developed, or modified solely to meet the Company's internal needs. In accordance with FASB authoritative guidance, internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized. Costs incurred during the preliminary project stage as well as training costs and maintenance costs during the postimplementation-operation stage are expensed. Capitalized costs of software amounted to
Goodwill and Other Intangible Assets
The Company's intangible assets include purchased customer lists, licenses, patents, trademarks, tradenames and goodwill. Purchased customer lists are recorded at cost and are amortized on a straight-line basis over estimated useful lives, which range from 10 to 15 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 20 years. The Company acquired goodwill primarily from its acquisitions of Landauer-Europe, SAPRA-Landauer and GPS as well as other smaller investments. Goodwill as well as trademarks and tradenames have indefinite lives.
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FASB authoritative guidance requires that goodwill and certain intangible assets with indefinite lives be reviewed periodically for impairment. Reporting units are business components one level below the operating segment level for which discrete financial information is available and reviewed by segment management. Per guidance, two or more components of an operating segment should be aggregated and deemed a single reporting unit if the components have similar economic characteristics and are economically interdependent, among other factors. As a result of this aggregation, the Company has two reporting units, Radiation Monitoring and Medical Physics. The Company performs an impairment test for each of its reporting units with goodwill annually and, for goodwill and other intangible assets that are not being amortized, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Triggering events include, but are not limited to, a current-period operating or cash flow loss; a product, technology, or service introduced by a competitor; or a loss of key personnel. When such events or changes in circumstances occur, the Company performs a financial analysis of future undiscounted cash flows projections by asset or asset group.
In
The Company early adopted the amended guidance at
As a result of its qualitative analysis, the Company determined that it is not likely that the fair value of either the Radiation Monitoring reporting unit or the Medical Physics reporting unit is less than its carrying amount, indicating that goodwill is not impaired. Based on amended guidance, the Company was not required to calculate the fair value of the reporting units, and no further testing was performed.
To the extent subsequent events arise, market conditions change or the Company's strategies change, it is possible that the conclusion regarding whether the Company's goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on the Company's consolidated financial position or results of operations. Information regarding the value of goodwill and other intangible assets is presented under the footnote "Goodwill and Other Intangible Assets" in Item 8 of this Annual Report on Form 10-K.
Income Taxes
The Company estimates the income tax provision for income taxes that are currently payable, and records deferred tax assets and liabilities for the temporary differences in tax consequences between the financial statements and tax returns. Temporary differences result from, among other events, revenues, expenses, gains, or losses that are included in taxable income of an earlier or later year than the year in which they are recognized in financial income. These deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent that deferred tax assets will not likely be recovered from future taxable income, a valuation allowance is established against such deferred tax assets.
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Management exercises significant judgment in the valuation of its current and deferred tax assets and liabilities. The Company recognizes the financial statement effects of its tax positions in its current and deferred tax assets and liabilities when it is more likely than not that the position will be sustained upon examination by a taxing authority. Management considers, among other factors, the Company's current and past performance, the market environment in which the Company operates, and tax planning strategies. Further, the Company provides for income tax issues not yet resolved with federal, state and local tax authorities. The Company assesses and updates its tax positions when significant changes in circumstances, which would cause a change in judgment about the likelihood of realizing the deferred items, occur. Variations in the actual outcome of these future tax consequences could materially impact the Company's financial position, results of operations or cash flows. Further information regarding the Company's income taxes is contained under the footnote "Income Taxes" in Item 8 of this Annual Report on Form 10-K.
Defined Benefit Pension and Other Postretirement Benefit Plans
The pension expenses and benefit obligations recorded for the Company's defined benefit plans are dependent on actuarial assumptions. These assumptions include discount rates, expected return on plan assets, interest costs, expected compensation increases, benefits earned, mortality rates, and other factors. Management reviews the plan assumptions on an annual basis to ensure that the most current, relevant information is considered. If actual results vary considerably from those that are expected or if future changes are made to these assumptions, the amounts recognized for these plans could change significantly.
The weighted-average assumed discount rates used to determine plan expenses were 5.08% for both pension and other benefits in fiscal 2011 and 5.59% for both pension and other benefits in fiscal 2010. For fiscal 2011 expense, the long-term rate of return of plan assets was 6.50%, unchanged from fiscal 2010. In establishing the rate, management considered the historical rates of return and the current and planned asset classes of the plan investment portfolio. The weighted-average discount rate used to determine benefit obligations at
The Company recognizes on its balance sheet the amount by which the projected benefit obligations of its defined benefit plans exceed the fair value of plan assets. Subsequent changes in the funded status of the plans as a result of future transactions and events, amortization of previously unrecognized costs, and changes to actuarial assumptions are recognized as an asset or a liability and amortized as components of net periodic pension cost or accumulated other comprehensive income. An increase or decrease in the assumptions or economic events outside of management's control could have a material effect on the Company's results of operations or financial condition. Information regarding these plans is contained under the footnote "Employee Benefit Plans" in Item 8 of this Annual Report on Form 10-K.
35 Table of Contents Stock-Based Compensation
The Company measures and recognizes compensation cost at fair value for all stock-based awards, net of the estimated impact of forfeited awards. The Company granted stock options in years prior to fiscal 2006. The fair values of options were estimated using a Black-Scholes option pricing model. In addition to stock options, key employees and/or non-employee directors are eligible to receive performance shares and restricted stock. The fair value of performance shares and restricted stock granted under the Company's 2005 Long-Term Incentive Plan was based on the average of the Company's high and low stock prices on the date of grant. Upon the adoption of the Company's Incentive Compensation Plan in
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