Landauer's (LDR) CEO Mike Kaminski on Q3 2016 Results - Earnings Call Transcript

| About: Landauer, Inc. (LDR)

Landauer, Inc. (NYSE:LDR)

Q3 2016 Earnings Conference Call

August 8, 2016 5:00 PM ET

Executives

Dan Fujii - Secretary and CFO

Mike Kaminski - President and CEO

Analysts

Richard Eastman - Robert W. Baird

Kurt Timber - Hilliard Lyons

Mitra Ramgopal - Sidoti & Company

Operator

Good day ladies and gentlemen, and welcome to the Landauer Fiscal 2016 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host for today's conference, Mr. Dan Fujii, CFO. Sir, you may begin.

Dan Fujii

Thank you, Bridget. Good afternoon. I'm pleased to welcome you to our fiscal 2016 third quarter earnings conference call. With me on the call today is Mike Kaminski, President and Chief Executive Officer of the company.

By now you've had the opportunity to review the press release and perhaps the 10-Q which we issued today, a copy of which you can find on the company's website at landauer.com. In addition, you will find posted our quarterly results slide deck that highlights key activities and accomplishments related to the quarter. With the filing of the press release today, our objective is to provide additional clarity with some brief opening remarks and then move to the question-and-answer portion of the call to address any specific questions you have.

Before turning the call over to Mike, I need to remind everyone of the Safe Harbor provisions contained in our press release, which also governs this conference call, and that certain statements made today are not historical and may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the complete Safe Harbor statements contained within the press release as well as the information contained in the company's annual 10-K report and other reports filed with the SEC by the company.

Now at this time, I'd like to turn the call over to Mike Kaminski. Mike?

Mike Kaminski

Thank you, Dan, and good afternoon everyone. Our third quarter results reflect strong momentum on many fronts, including revenue growth, strong improvements in our operating income and in our earnings per share. On the financials, I will make a few high level comments and Dan will provide more detail later in the call.

My comments will reflect our third quarter results, excluding the Radon business and the Medical Products business, both of which were sold in the past year. I will also exclude the impact of foreign exchange, thereby providing a more relevant comparison of our business trends year-over-year.

Using this methodology, in the third quarter, our revenue grew to $37.2 million, up 15.2% from the same period in 2015. The key drivers of revenue growth continue to be our imaging physics business, our informatics business, and international. We also delivered our first shipment, as part of our recent military order.

Gross margin dollars for the quarter were $19.1 million, up 13.3% from $16.9 million in the prior year, driven by higher revenue in the continuation of our lean initiatives. Operating expenses for the quarter were $11.5 million, down 4.9% from prior year. The combination of increased revenue, higher gross margins and lower operating expenses resulted in a 58.3% increase in operating profitability over prior year.

For the quarter, operating income was $7.6 million or 20.4% of revenue, up from $4.8 million and 14.9% a year ago. Below the operating income line, there are a lot of entries associated with the sale of our Medical Products business and other period expenses, which I will let Dan go over in more detail.

Now turning to the strategic initiatives; on the Verifii digital dosimeter, our number one initiative, we made significant progress over the past quarter and I am pleased to announce that we have commenced customer field trials. This reflects the advancement of the product development and the completion of a number of key milestones. The radiation center, has passed a series of tests, and we are now confident that it will be a superior solution for customers.

Our communication platform has also completed our internal testing requirements, and is being subjected to a variety of field environments. Our product industrial design has been compressed to the size and shape that we targeted, and our intellectual property has been filed for the components we are exposing to the market at this stage.

Initial product performance and customer feedback has been very positive, but its early in the testing cycle. Our plan is to continue to expand the features and customers throughout the rest of the calendar year.

In mid-July, we participated in the U.S. Annual Health Physics Society Meeting, where we exposed the Verifii platform in detail to participants in a private invitation-only session; and on a more general basis, the customers at our booth. The feedback from the meeting was overwhelmingly positive and we continue to build the list of clients interested in early adoption of the platform. We are still on track for a scheduled release in the back half of 2017.

Now turning to the expansion of our imaging physics business and informatics. As a reminder, we believe we are well positioned to capture a significant portion of the $400 million U.S. market, due to our growing presence in major markets in the increased regulations, driving our customers to value service providers, such as ourselves, who can standardize their equipment QC processes, and provide insights on patient dose in large geographies. These macro and micro trends, bode well for us to continue to grow in this fragmented market from our dominant but small market share position. In fact, we are now fielding incoming calls from both clients and physicists who have expressed interest in learning more about Landauer's capabilities.

In May, we hosted a patient radiation dose symposium in Chicago, in which regulators, industry thought leaders in over 50 hospital radiation managers from around the country attended. This leadership form confirmed our belief that regulations are continuing to tighten and our informatics and physics skills will continue to be in high demand.

In the quarter, imaging physics and informatics continued strong performance, with revenue growth over 20% and operating income growing 47% over prior year, and we secured approximately $600,000 of new annual contracts, which will begin service in the fourth quarter.

Operating margin for our imaging physics segment continues to strengthen, as we are benefitting from the integration of central services, the implementation of best practices and greater staff efficiency.

One final note before I turn the call over to Dan, I wanted to provide some thoughts on our business trajectory for the remainder of 2016. Our third quarter top line results, benefitted from the initial shipment of military order that we announced in April. The quick timing of this first shipment was possible, because we had inventory available that we could turn into final goods in a short timeframe.

Moving forward with the next shipment will require some restocking of inventory, which is now targeted for the fall or the first quarter of 2017. Additionally, beginning in the fourth quarter and throughout the commercial launch, we will be increasing our spending on the Verifii platform, as we begin the testing and commercialization phase, to ensure we optimize the product performance and customer satisfaction.

With that, now let me turn the call over to Dan to go through the financial results in more detail. Dan?

Dan Fujii

Thank you, Mike. As discussed previously, we completed the divestiture of our Medical Products business in May and the divestiture of our Radon business last September. These divestitures did not qualify for discontinued operations accounting. Therefore, in accordance with GAAP, all the historical financial results of the Medical Products division and Radon business are fully reflected in the income statements included in our 10-Q.

In order to allow for a more direct year-over-year comparison of our core business, we have provided certain metrics, excluding the sale of these businesses, as well as fluctuations in foreign currency translation rates. The press release that we issued this afternoon as well as our slide presentation, include tables that provide a computation of these comparable metrics.

Reported revenues were $37.9 million for the third quarter of 2016, a 6.8% increase over the prior year period, excluding the divested businesses and negative impact of foreign currency, revenues increased 15.2% over the prior year period.

Radiation Measurement revenues for the quarter were $27.5 million, a 14.1% increase over the prior year period, driven largely by the completion of the first shipment of the military order that was announced in April.

Military product sales were $2.5 million during the quarter. As a reminder, following this first shipment, we have approximately $8.8 million remaining on the military order, which we expect to fulfill later this fall and into 2017.

Turning to our Medical Physics segment, revenue increased 7.9% during the third quarter versus the prior year, driven by growth in imaging services. The strong demand for our compliance solutions pushed imaging services revenue higher by $500,000 or 19.2%.

Reported operating income for the quarter was $7.7 million compared with $5.1 million in the third quarter of 2015. Consolidated operating income margin improved to 20.4% from 14.4% in the third fiscal quarter of 2015. Excluding the divested businesses and negative impact of foreign currency, operating income increased 58.3% over the prior year period. Operating income was positively impacted by the margin on the military sales and a decrease in selling, general and administrative expenses.

Selling, general and administrative expenses were down $1.7 million or 12.6% compared to the third quarter of 2015, driven by lower professional fees, the impact of the Radon divestiture and ongoing progress on our lean initiatives.

Net income for the quarter was $7.3 million compared to $4.1 million in the third quarter of 2015. The increase in net income was driven primarily by the $2.7 million gain on sale of the Medical Products business, partially offset by an increase in our effective tax rate to 31.3% from 10.4%. The increase in net tax rate was driven by the gain on sale of the Medical Products business, and the mix of earnings between jurisdictions with differing tax rates.

On a GAAP basis, earnings per diluted share were $0.76 for the quarter. Adjusted net income was $5.6 million for the quarter, equating to adjusted earnings per diluted share of $0.58. Adjusted net income, excludes the onetime gain from the sale of the Medical Products business and adds back non-cash stock based compensation and other non-recurring expenses, net of taxes.

Turning to cash flow metrics, year-to-date cash provided by operations was $22.2 million, an increase of $500,000 over the same period in 2015. The increase was due primarily to lower selling, general and administrative expenses.

Our year-to-date financing cash flows included a $21 million reduction in debt. The cash proceeds from the sale of our two non-core businesses were used to pay down debt. In addition, the Medical Products divestiture will enable us to accelerate approximately $20 million in cash tax benefits. We expect to pay down debt over the next four to five years, as we realize these cash tax benefits.

Finally, an update on our guidance for the year; in order to reflect the divestiture of the Medical Products business in May, we are providing updated guidance for fiscal 2016. Previously, we anticipated aggregate revenues for fiscal 2016 to be in the range of $150 million to $157 million, and adjusted net income in the range of $15 million to $18 million. Included within that previous guidance was approximately $4.5 million of projected revenue and $500,000 of projected net income for the Medical Products business from May 2016 to September 2016.

The company has updated its fiscal 2016 guidance to reflect this divestiture and now anticipates full year fiscal 2016 revenues to be in the range of $145.5 million to $152.5 million and adjusted net income to be near the top end of the range of $14.5 million to $17.5 million.

As Mike discussed earlier, we have commenced customer field trials for the Verifii digital dosimeter and our guidance reflects the expectation, that we will incur additional spending in the fourth quarter to support these field trials.

Overall, we are pleased with our results in the third quarter and look forward to continue to build on our momentum.

Bridget, this concludes our opening remarks. So at this point, please open the lines for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Richard Eastman with Robert W. Baird. Your line is open.

Richard Eastman

Hi. Good afternoon. Could I get the international Radiation Measurement revenue from you? Can I just get a number on that?

Dan Fujii

It was for the quarter, $6.9 million.

Richard Eastman

Okay. And then, also -- is that exclusive of the divested revenue?

Mike Kaminski

That is actual, right?

Dan Fujii

Yes the actual. Correct.

Richard Eastman

And that Radon's been out of the business, the radon divestment has been out of the business?

Mike Kaminski

It went out Rick in October 1st, right? So it was in last year's comparable numbers, but it's not -- [indiscernible].

Richard Eastman

I get you. And then also, I had a question around the SG&A number; we had anticipated it perhaps to move higher sequentially. Now again, some of the med products expenses were out of that number with the divest there. But is the operating expense now going forward -- the SG&A number going forward, how does that look in the fourth quarter vis-à-vis the third quarter actual here? So we pick up some expenses on Verifii support, do we grow off of the current number?

Mike Kaminski

Yeah. So we should see some growth in the fourth quarter, primarily driven by the Verifii pilot driving some period expenses that will continue to roll out through the commercial launch.

Richard Eastman

Could you just give us some flavor for what that would be on a quarterly basis, to support the roll-out of the field trials?

Mike Kaminski

I will give you -- like the first period will be -- the early pilot products will end up just expensing? So all the products going through. And then later in the testing cycles, that those will get expensed as well, and then we will have commercial launch, training and marketing materials, as we get closer to launch. So all those things will roll through over the next several quarters.

Richard Eastman

So it will step off in terms of what's expensed in the fourth quarter, and then will it step-up again in the first quarter kind of going forward, or is that more capitalized expense?

Mike Kaminski

I would plan on a sequential gradual increase, as time goes on through commercial launch.

Richard Eastman

Okay. And then just one question, on the med physics business, can you just give us a sense of how the commissioning in the therapeutics pieces did? And then also, I am a little curious, that quarter-to-quarter the business came in a little bit, is that seasonality, or is that less episodic or what perhaps kind of drove the slight degradation quarter-to-quarter?

Mike Kaminski

There's a little bit of seasonality in that. But there is also -- we had some timing of some new hires. So we have been getting, obviously, some early healthy new contracts. And some of the new hires that or the manpower behind the contracts were hired later in the quarter. So we got the -- some of the expense without the revenue in the quarter for imaging physics, and then therapy and commissioning --?

Dan Fujii

Therapy was up approximately about 3%. So that's our historical growth rate for that business. So about 3% of therapy. Commissioning was very flat, on a small basis, it was down less than $100,000, but that is an episodic business, so relatively flat.

Richard Eastman

Does the headcount that you are adding to support the growth on the imaging side, can any of that be utilized either in the episodic piece or -- probably not, but maybe in the therapeutics piece? I mean, can you --

Dan Fujii

No. They're different skill-sets.

Mike Kaminski

Some of the imaging is -- until you get the contract, you don't want to put them on, and once you get the contract, they want to start before you get the headcount. So we have been trying to match that timing pretty closely. So some of it came in a little later in the third quarter, but they are fully staffed in the fourth quarter. So we will see that.

Richard Eastman

Just one clarification; I think during the commentary, Mike, you mentioned securing some new annual contracts on the imaging side. What was that number? What did you say?

Mike Kaminski

$600,000 in the quarter.

Richard Eastman

600,000 new contracts?

Mike Kaminski

No. $600,000 worth of new contracts.

Richard Eastman

Oh, okay. Thank you.

Mike Kaminski

Sorry. I should have been a little clear on that. $600,000.

Richard Eastman

That went quickly. Okay, perfect. I get it. All right. Thank you very much.

Operator

Thank you. And our next question is from Kurt Timber with Hilliard Lyons. Your line is open.

Kurt Timber

Thanks for taking my questions guys. With the anniversary of the regulations coming for imaging physics, is it fair to expect some slowdown in the pretty impressive growth rate that you have seen over the past year?

Mike Kaminski

We had that symposium in May, and the CT -- really it was implemented around CT, and then the next wave is fluoro, which is x-ray, and that's going to come in early next year. So I anticipate -- and that's even a bigger challenge. So I anticipate that, you will continue to see it for a few years at least at a similar growth.

Kurt Timber

Okay. And then, can you give any additional commentary around some of the feedback you have heard about, regarding Verifii, and if anyone has had any direct comparisons in dose plus?

Mike Kaminski

Yeah. We are pretty early in the testing cycle. Obviously, the feedback is very preliminary. But very positive on the size, shape, weight, how well and we have shown some of the new information screens and the information, they get very positive on that. Obviously, we are excited about the fact that we will have an accelerometer on it, so you can match compliance. The fact that they are wearing it, because you will see motion and dose together. So the compliance as well as dose will be a combination of our product, which will be unique.

So all those have been received very well. And we are early in the cycle, but we anticipate we will continue to add features and more customers as the year unfolds.

Kurt Timber

Okay. And then, just a housekeeping item, was that $8.8 million remaining on the military contract?

Dan Fujii

That's correct. $8.8 million.

Kurt Timber

Okay. All right. Thank you guys.

Mike Kaminski

Thanks Kurt.

Operator

[Operator Instructions]. Our next question is from Mitra Ramgopal with Sidoti. Your line is open.

Mitra Ramgopal

Yes hi. First, just following up on the military side; in light of the recent order, are you getting any interest elsewhere, and I don't know if you have any update regarding maybe the navy?

Mike Kaminski

We are continuing to work other fronts, the navy and the balance of the act of army, which is another big segment that we'd like to see standardized. And all moving in a positive direction, but it's premature to give any forecast on those.

Mitra Ramgopal

Okay, thanks. And back on the imaging side, the new business you are getting, is that pretty much from the hospitals or is that also from the small professional offices?

Mike Kaminski

Primarily hospitals. But there is growth in professional offices, around remote physic services, like shielding plans and other remote physic services that we offer. So we see that as a nice growth avenue as well. And disproportionately profitable, right, because you are providing a physic service remotely, you don't have the travel expense in.

Mitra Ramgopal

Right. And I think you had identified it as a pretty significant opportunity for you long term. I take it, you are still very early on that front?

Mike Kaminski

Yes, we are. But as optimistic as we have been, in the past.

Mitra Ramgopal

Okay. And on Verifii, I believe you have mentioned, you still have to incur some expenses, as you roll that out; when should we sort of see the leverage from that investment? I think you mentioned by second half of fiscal 2017, you will have like the soft customer roll-out. Will that be a more fiscal 2018 and beyond?

Mike Kaminski

Yeah. So we anticipate launching it in the second half of 2017, and then 2018 you will see some ramp. So you will see the product. We expect it to begin to ramp in 2018, and obviously 2018 and 2019 will be nice ramp years for it.

Mitra Ramgopal

Okay, thanks. And again, just from a competitive standpoint, everything you are hearing, you feel very comfortable that this is the leading product out there and customers are clearly giving us a good reception?

Mike Kaminski

Yeah. We feel comfortable. I think we have worked hard to make sure we got the voice of the customer and the product.

Mitra Ramgopal

Okay. Thanks again.

Mike Kaminski

Thank you.

Operator

And our next question is from Richard Eastman with Robert W. Baird.

Richard Eastman

Sorry, I am back again. Just two things, the international, the Japan JV sales, and I guess, while I was kind of back in the queue here, I didn't notice; that was about $800,000 to the quarter? Is that -- I picked that right out of the Q? And is that a onetime sale that kind of fills their inventory, or how do we look at that over the next six months in terms of sale, is that fulfilling a large order, or what accounts for that?

Dan Fujii

Yeah. So they are updating their fleet of dosimeters in Japan. So that's a trend that has been recent, and we would expect that to go into probably about the first half of next year. So they should be fully restocked, about March to April for next year.

Richard Eastman

And to refresh our memory, they purchased the dosimeters from you and then that's their service to their customers, then they basically -- effectively rent those out or sell them or provide the service on them? So that's a onetime sale?

Dan Fujii

That's right.

Richard Eastman

One time sale? Okay.

Dan Fujii

One time from a [indiscernible] size. Yes.

Richard Eastman

Okay. And then just, the last question, would Verifii, as we are going into field trials and you are doing some of your preliminary -- getting some preliminary feedback, are you bouncing off any potential kind of business models off of the customers to say hey -- are you going to be interested here with an upfront purchase or service contract, or -- what's the feedback on the initial revenue model here or is that premature?

Mike Kaminski

It’s a little premature, but we are definitely in the middle of that discussion with all of them. So probably a conversation more for December or mid next year as we get closer to launch.

Richard Eastman

I got you. Okay. Thank you.

Mike Kaminski

But Rick, I would say, in 2017 we don't anticipate the Verifii impacting revenue or profitability in a big way in the last half of the year. It would really be a 2018, 2019 question, for modeling purposes.

Richard Eastman

Yeah, I understand. And is that -- when you talk about Verifii, what are maybe the three top characteristics that are patentable or proprietary there?

Mike Kaminski

One is, having an ability to tie motion in with dose, so that you have compliance. You will know, that somebody is actually wearing the badge, and our viewpoint is, if you get a reading without that, you really don't know if it's an accurate reading or not, right? They could have left it on your desk, they could have worn it half the time. Seems like the regulators are very interested in that component, is that, we can now assure there is compliance with dose.

I think the software, the way we present it, is going to be very unique and that we can begin to tie-in exposure by the day, actually, and then tie it back to a behavior [indiscernible]. So you won't have a monthly -- you won't have an incremental timeframe that's much tighter than that, and the sensors -- we will have a number of sensors that we can look at the energy over a wide array. So we will have quite a few sensors on there, so we can be able to just depict what energy field the person was exposed in.

So we think both science and then the combination of both compliance and dose will be pretty strong in the market.

Richard Eastman

And this does not utilize OSO, correct?

Mike Kaminski

That's correct. It utilizes a silicon chip that has a property similar to OSO. But we actually measure something different -- its obviously measuring real time, something different than what an OSO crystal does.

Richard Eastman

Okay, great. All right. Thank you again.

Mike Kaminski

Okay. Thanks.

Operator

I am not showing any further questions. So I will now turn the call back over to Mr. Fujii, CFO, for closing remarks.

Dan Fujii

Thank you for your time today. We appreciate your support of Landauer. This concludes today's conference call.

Operator

Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone, have a great day.

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