Landauer's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Executives

Michael Burke – Senior Vice President and Chief Financial Officer

Bill Saxelby – President and Chief Executive Officer

Analysts

Richard C. Eastman – Robert W. Baird & Co.

Mitra Ramgopal – Sidoti & Co. LLC

Landauer, Inc. (LDR) F1Q 2014 Earnings Conference Call February 4, 2014 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Landauer’s First Quarter Fiscal 2014 Conference Call on the 4^th of February, 2014. Throughout today’s quarterly presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions).

I would now hand the conference over to Michael Burke. Please go ahead sir.

Michael Burke

Thank you, Kevin. Good morning everyone. Along with me today, is Mr. Bill Saxelby, our President and Chief Executive Officer and Bill is very pleased to welcome you all to our fiscal 2014 first quarter earnings conference call.

Right now you have the opportunity to review the press release which we issued last evening, following the markets close. The copy of which you can find on that company’s website at landauer.com. located under the tab heading called investors. In addition, there you will find the slide deck that highlights our certain key accomplishments related to our results for the quarter.

During this call today, Bill and I will reference certain pages of that slide deck. Now the filing of the press release last night and with the posting of the slide deck to our website this morning, our objective today is to provide additional clarity which in brief opening remarks and then we’ll move quickly to the question-and-answer portion of the call to address any specific questions you may have.

Before I turn the call over to Bill, though 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 statement contained within the press release as well as the information contained in the company’s detailed annual report on Form 10-K and other reports filed by the company with the SEC.

So now at this time I will turn the call over to Bill Saxelby. Bill?

Bill Saxelby

Thank you Michael, good morning everyone. Thank you for joining us for our 2014 first quarter earnings call. As reported yesterday, revenues for the quarter were $37.7 million, net income was $3.1 million, adjusted EBITDA $9.6 million and operating cash flow was $10 million. Michael will provide additional detail on the quarter during the financial review portion of the call.

As we’ve done in the past and then I referred to the fiscal 2014’s first quarter results PowerPoint, the presentation is located on our website at www.landauer.com. And I would like to start this morning and review four topics. First, Q1 results were as anticipated. Second, we are reaffirming our full year guidance and I would ask you to turn to Page 23 of the PowerPoint deck where you will see that revenue guidance is in the range of $140 million to $160 million, adjusted EBITDA is in the range of $46 million to $49 million and net income’s range is $16 million to $18 million.

The third topic is that there are five drivers when looking at 2014 versus 2013 that I would like to review separately. And then the fourth topic is that we are going to do a review of the business segment highlights for the quarter.

So I would ask you to turn to Page 22 entitled FY 2014 through FY – excuse me, FY 2012 through FY 2014 key drivers. And as I have stated there are five key drivers to consider when you are looking at 2014 versus 2013, which are listed on the right-hand side of Page 22. On the left-hand side of Page 22 you remember, these were drivers that we articulated when we had our call, our fourth quarter earnings call for 2013 and we wanted to have those therefore here also as a reference.

Returning to FY 2014 versus FY 2013, the first driver is the military Radwatch funding. We generated $8.1 million in military Radwatch revenue in FY 2013 and we currently have funding commitments from the military that will generate $2.7 million in FY 2014. Now this number was $2.3 million when we had our Q4 earnings call. So with the small increase, with additional orders that we’ve received to-date, but the fundamental issue around funding visibility is the same as of today’s call as it was when we did the Q4 2013 earnings call. Under a normalized funding environment we would have planned for a revenue opportunity of $12 million in 2014 and that $12 million in revenue would have translated into approximately $3 million of net income.

So we built $2.3 million into the Radwatch system’s revenue into our guidance, given the funding uncertainty that exists. But as I referenced, that number is now up to $2.7 million. And we estimate that the army needs to spend approximately $50 million more to feel the Radwatch system. And we are actively working several initiatives concerning this issue and we will keep you posted as relative to progress as the year progresses.

The second driver is our Next Generation Dosimetry Platform Investment. We’ve referenced than previous call that we have highlighted in previous investor presentations, that we are working on and we are investing in a next generation dosimetry platform. And this platform will build on our military Radwatch system investment and experience and will allow us to offer dosimetry system that will transmit radiation dose information to an individual via an electronic wireless platform.

This platform would eliminate the manual processes and logistics-intensive badge delivery system that we work under today, that we work with today. This initiative is progressed and we’re not making a substantial investment in three areas sensor development, the device system and software development that is seen in our Q1 results.

As we talked about in our Q4 call, this investment will be $3.2 million in FY 2014 is being offset by $3.5 million in expense reductions via actions management such in the last six months of FY 2013. The full effect of the R&D incremental expense was seen in Q1, versus reductions which are layered in throughout FY 2014.

The third driver is the Medical Products FY 2014 performance versus FY 2013, especially in the first six months of the fiscal year. Referring this, you will recall that we began to see the revenue which is associated with the acquired management team in the third quarter of FY 2013. This was the May-June timeframe of calendar 2013. And we made the decision replacing the required President of that business in November of 2013.

FY 2012’s revenue was $13.5 million, and we finished FY 2013 with $9.5 million in revenue. The first quarter of FY 2013 was annualizing at a revenue run rate $11.3 million. So when we look at it prior year comparisons in FY14 versus FY13, the first two quarters or six months will show significant decreases. As we’ve discussed the business stabilized in Q3 and Q4 of FY 2013; and we’re beginning to see an increase in revenue per billing day on a quarter-over-quarter basis.

The fourth driver is organic revenue growth in the Radiation Measurement and Medical Physics segment FY 2014 performance versus FY 2013 in Q3 and Q4. In Radiation Measurement this is going to be driven by international growth and new product additions and in Medical Physics this is going to be driven by hospitals adopting the enterprise-wide radiation safety solution.

The fifth driver that affects gross margin is the full effect of the IT ERP system enhancement a new system that was successfully implemented as you’ll recall in the fourth fiscal quarter of FY 2012. In FY 2013 we see the full P&L effect of the successful launch of our order-to-cash ERP system and it’s now in the run-rate of the business.

But given the significance of this expense on the gross margin and the expense line as a percentage of revenue, I wanted to highlight this one more time so that it’s not mistaken for either a market or a competition issue. If you refer to the second bullet on the left-hand side of Page 22, you will see the detail around the $4.6 million in additional expense in FY 2013 versus FY 2012. We communicated the year-over-year impact of the additional expense in FY 2013 throughout the fiscal year on our quarterly calls in investor materials.

It’s worth highlighting that the effect of the system expense on the gross profit margin of the Radiation Measurement segment was a negative 310 basis points when you compare FY 2013 to FY 2013. It’s also important to highlight, that we’ve not made the investment in upgrading our order-to-cash system the Next Generation Dosimetry Platform and several Informatics opportunities that are being implemented as well as contemplated like the example on Page 16 of the PowerPoint deck, would not have been possible. Our legacy mainframe system was not capable of adding new initiatives like these. Now that I have addressed the five key drivers for FY 2014 I will review highlights for each business segment in the quarter.

First, I would like to discuss the Radiation Measurement business. Under the leadership of Mike Kaminski, our Radiation Measurement President, we are committed to re-energizing our revenue growth in this segment globally with a particular focus on the U.S. domestic market.

Our highlights for Q1 are as follows. Our customer-centric focused under Mike has seen us making substantial investment in our customers via customer facing personal, new products are being introduced and new services are being explored. We felt this investment of time and money was critical now that we are past the implementation of the 40 year old ERP legacy system that consumed tremendous amount of time and effort for a small company like ours.

We had in excess of 50 different individual customers come through our Glenwood, Illinois operation just since November. Now, this may not sound important, but a re-energized focus on our domestic business means getting close to our customers to carefully hear what they need so that our investments are targeted at the right areas.

Our hospital customers are under tremendous cost pressures today and we have to be clear on what they do and do not – what they do not value. We have a goal of having in excess of 100 individual customer site visit by the time we get to Q4 of this year. We have increased our domestic sales force by six individuals to a total of 11 in the field in addition to a new national sales to record was affected this quarter. As part of our $3.5 million expense reduction initiative, we re-deployed dollars into this direct sales investment. This investment was required as we look to address domestic revenue growth opportunities. This team will be directly responsible for promoting our new next-generation dosimetry platform as well as taking advantage of the market’s changing awareness around things why patient dose, which is now beginning to have a regulatory, hospital accreditation and reimbursement ramifications.

Sales of the new microStar 2 product line and Annuity Dot products are good examples of these new revenue opportunities. The new microStar 2 product is highlighted on Page 15 of the deck for Patients Dose Management and it’s really been a success it’s been generated approximately $1.5 million in revenue in FY 2014. Another new product example is the new Saturn Extremity Ring. We introduced a new Ring dosimeter for clients to dispense radiation by-hand which can also be seen on Page 15. For spending a significant amount of time investigating new Informatics Annuity service opportunities like the ones – the one rather excuse me, shown on Page 16.

Landauer is really the de facto National Dose Registry for the United States when it comes to occupational dose to a worker. We are actively looking for ways to now tie our occupational dose database which is the most comprehensive in the world archiving over 50 years of dose data into our enterprise-wide radiation safety solution for clients. The Informatics example on Page 16 shows the shift and focus that capitalize on the radiation dose data that we manage for customers with a more state-of-the-art format that is appropriate for today’s radiation safety officers’ needs.

As discussed earlier, we believe that this can become a new revenue annuity stream for the core business and the investments in our ERP system has enabled us to pursue this new revenue. We are transitioning from a legacy reporting approach and format that is the regulatory in focus, for looking at information as a tool and a new annuity revenue source that we believe clients will recognize the value of in Phase I.

Relative to our Next Generation Dosimetry system, the Radiation Measurement team has done an excellent customer advisory – has done excellent advisory work with customers, as well as market research to determine the optimum design solution for this new platform. The new platform enables electronic data transmission of radiation doses I mentioned earlier, to a worker or a patient versus our current LifeCell logistic system. The goal is to be in the market in late 2014, early 2015 timeframe.

Our new sales team will be responsible for selling these new products and services in Q1 and we’ve also in addition invested in customer service and our quality organization. Another point is that we’re seeing substantial improvements in the performance of our new IT, ERP system as we move into the second full year of operation. And finally, one additional topic relative to the Radiation Measurement business concerning the Military segment, in March of FY 2013 as we have discussed previously, we responded to a Request for Proposal from the Navy that valued at approximately $100 million. The time to hear a response to that RFP should be sometime in the fiscal Q2, Q3 timeframe of this fiscal year.

Next, I would like to review Medical Physics. The key updates for the Medical Physics business is the traction we’re seeing with our Enterprise-Wide Radiation Safety Solution. Under the direction of Mike Kennedy, our segment President and Amy Cosler, our Corporate Sales Leader, we were awarded the Premier Sole Source Agreement for Medical Physics, the first of its kind in the industry which we’ve discussed last quarter. We now have four hospital systems within Premier with annualized revenue of $10 million that we are in active contract discussions with and hope to close early in this fiscal year, the remaining time in this fiscal year.

Page 17 in the deck summarizes the activity concerning our Enterprise-Wide Radiation Safety Solution. We’ve invested approximately $100,000 in expense in Q1 that was associated with doing facility audit for the four hospital systems as part of the contracting process. And there were approximately $200,000 in corporate expenses that were previously allocated to corporate that we now are allocating directly to that business. We are focusing business development and acquisition activity on Medical Physics Practice Groups that support the Enterprise-Wide Radiation Safety Solution strategy.

Next, I would like to talk on the highlights for the Medical Products business. I continue to be very pleased with the direction and the focus to the Greg Groenke, our segment President of IZI Medical Products. I am confident we now have the right team and strategy in place to drive long-term growth and profitability in this segment. We made a small international acquisition in the quarter that will assist new product development as well as expand our international revenue distribution network. We’re seeing good progress with the new Quick Spherz product offering, as well as our new Radiotherapy products. The business unit has few new products offerings that we will be going through the five 10-K process this fiscal year with the expectation that they will be ready for launch in Q4 of FY 2014.

And the final topic I’d like to communicate is that our dividend policy remains unchanged in FY 2014. If you look at Page 24, of the deck it reviews our dividend policy and simply stated the 2014 dividend payout level will be $2.20 per share against this year.

So in conclusion, I think we’ve made significant progress against our key strategic initiatives in the quarter. We believe it’s a market opportunities we discussed for wide Landauer with attractive prospects to grow and expand our business. And we believe the commitment to our shareholders’ best interest, the strength of our products offering and our position as a market leader in Global Dosimetry services, Medical Physics services and Medical Products will continue to drive to growth and development of Landauer over the long-term.

And with that I’d like to turn the call over to Michael for a review of our financials.

Michael Burke

Thank you Bill. To begin, consolidated revenues for the quarter were $37.7 million, an increase of $1 million over the prior year period. Revenue in the Radiation Measurement segment increased by $1.3 million primarily due to the strength in our international operations, the 13% increase or $1.1 million largely from performance contributions in Sweden, France and Brazil which does include only – $23,000 of positive foreign exchange benefits.

Medical Physics segment revenue increased 2% to $7.7 million in the first fiscal quarter of 2014, principally due to higher imaging revenue of approximately $200,000. The consolidated revenue was partially offset by a decline in the Medical Products segments of $500,000 due to lower Spherz selling price and shipments as compared to the prior year period. Overall consolidated gross margin as a percentage of revenue was 52%, as compared to the prior year period of about 55%.

The decrease in the gross margin over the prior year period, was due primarily to a lower overall Spherz selling price in Medical Products, increased sales of lower margin products in the Medical Products segment, higher cost in the Medical Physics segments in support of the system-sell initiative and some interim independent contracting cost to facilitate market coverage.

While the Radiation Measurement segment had a higher mix in the equipment sales offsetting a high margin in net revenue. IT overhead expense in the quarter was higher as the prior year period had a larger portions of capitalized expense so what was then the ongoing project work.

Operating income for the first fiscal quarter of 2014 was a little over $5 million, about $1.7 million lower than the first fiscal quarter of 2013. The decrease in operating income was largely due to increased research and development costs of $1 million focused on the developments of our next-gen electronic dosimeter within a Radiation Measurement business. And increased amortization costs of $350,000 of which almost half with the one-time true-up from an accelerated schedule.

Equity income from unconsolidated joint ventures with lower by about $1 million over the prior year period largely due to a delay in plant’s government funding for our military partner with respect to their non-Radwatch product lines that negatively impacted them by approximately $700,000.

With Nagase-Landauer joint venture that was negatively affected by $100,000 plus foreign exchange impact and another $100,000 of one-time benefit in the prior year quarter that is not in their ongoing annual net run-rate. The effective tax rate was 31.5% and 31.1% for the first three months of fiscal 2014 and 2013 respectively. The increase in the effective tax rate was due primarily through a true-up of a prior year pension adjustment. Our outlook for the full year remains 28% of 32% for an effective rate.

Net income for the first fiscal quarter was $3.1 million or $0.32 per diluted share, compared to net income of $4.9 million or $0.52 per diluted share in the same period last year. The decrease in net income was due primarily to the increased research and development costs of $700,000 net of tax, related to the investment in the next-gen dosimeter. Lower growth profit contributions from Medical Physics and Medical Products as compared to the prior year period, of which within Medical Products include $200,000 net of tax as accelerated amortization, of which about a third reflects one-time adjustment and lower equity earnings from two of our partners.

Excluding the cost associated with an acquisition and non-cash stock-based compensation expenses, adjusted net income was $3.3 million, compared to adjusted net income of $5.5 million in a comparable prior year period. The resulting adjusted diluted earnings per share for the fiscal first quarter ended December 31, 2014 was $0.35 per share compared to $0.58 per share in the same period last year.

You will notice in our press release that during the first quarter of fiscal 2014 the company changed the presentation of its reporting segment to separately disclose certain corporate expenses that has previously been reported within the Radiation Measurement segment. As a result of the current segment disclosures will have reflect three reported segments, Radiation Measurement, Medical Physics and Medical Products and one Functional Group, Corporate.

As such our corporate selling, general and administrative expenses reflect costs associated with reporting the entire company including, executive management and administrative function such as accounting, treasury, legal, human resources and sales and information technology management. As well as other costs required to support our company. Corporate expenses for the first fiscal quarter of 2014 were $3.5 million, a decrease of $600,000, as compared to $4.1 million in the first fiscal quarter of 2013. The decrease was due primarily to $500,000 of reduced stock-based compensation expense consistent with the company’s fiscal 2014 guidance.

Turning to cash flow metrics, reconciliation of net income to EBITDA is included in the financial statements that accompanying the press release today. Adjusted EBITDA in the first fiscal quarter of 2014 does not include acquisition nor the non-cash stock based compensation expenses. In the first fiscal quarter of 2014, adjusted EBITDA was $9.6 million, compared with about $12.4 million on the same basis in the comparable quarter last year. The decrease was due primarily to reduce operating income and lower equity income from unconsolidated joint ventures as we discussed earlier.

Cash flow provided by operations during the first fiscal quarter of 2014 was $10 million, as compared to an operating cash flow of $2.3 million in the prior year period. This large increase over the prior year period was due primarily to lower accounts receivable and inventory balances, smaller decrease in accounts payable that we continued to move successfully through the stabilization of the ERP system that are now returning to a more historical levels as they are free ERP systems going along.

Adjusted free cash flow provided by operating activities for the first fiscal quarter of 2014 was $8.9 million net of $1.1 million in capital expenditure during the quarter. Our overall liquidity reflects the cash balances of $30.3 million in cash and cash equivalents through the first fiscal quarter ended December 31, 2013 and unused borrowing capacity of over $30 million under our current $175 million credit facility. Our liquidity remains adequate to advance the business with additional capital investment as needed. We are on to our debt service and continue to return cash to our shareholders.

Well, I will conclude my remarks by reaffirming our fiscal 2014 full year guidance. As noted in the press release, our plans for fiscal 2014 currently anticipates aggregate revenues for the year again in the range of $140 million to $150 million, it continues to reflect the uncertainty of government funding during fiscal 2014, or opportunities associated with other military equipment sales.

Our business plan also anticipates to blend the effective tax rate for the full fiscal year within a range of 28% to 32%. Based upon the above assumptions, the company anticipates reported net income for fiscal 2014 in a range of the $16 million to $18 million and adjusted EBITDA fiscal 2014 anticipated in the range of $46 million to $49 million.

And with that, operator this concludes my opening remarks. And at this point, I will turn the call back over to you to open up the lines for the question-and-answer period. Kevin?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Your questions will be polled in order they are received. The first question comes from Richard Eastman. Please go ahead.

Richard C. Eastman – Robert W. Baird & Co.

Yes, good morning.

Michael Burke

Good morning Rick.

Bill Saxelby

Good morning Rick.

Richard C. Eastman – Robert W. Baird & Co.

Bill and Mike, maybe just a couple of questions first on Radiation Measurement, were there any military Radwatch sales in the quarter, we bumped up maybe the expectation for the full year from $2.3 to $2.7. How about in the quarter, was there any Radwatch sales?

Michael Burke

Yes, about $2.4 million.

Richard C. Eastman – Robert W. Baird & Co.

In the quarter you recognized $2.4 million?

Michael Burke

That’s correct.

Richard C. Eastman – Robert W. Baird & Co.

Okay, okay. And then, so the domestic business exclusive of the military sales maybe running flat to down a little bit. Any prospects there as the year unfolds for some growth?

Bill Saxelby

Yes Rick, I think that a couple of things, I referenced the six sales people that we added.

Richard C. Eastman – Robert W. Baird & Co.

Okay.

Bill Saxelby

That was a, those people were actually only fully brought and trained in Q1 actually kind of on the Street kind of call it the first to second week of January. At short term in 2014, the opportunities will be with the microStar product line which is a re-developed microStar which I referenced in the presentation that’s a fairly substantial opportunity it’s got a sell price of about $25,000 with an attractive margin, there is also an UED [ph] opportunities tied to that with the nanoDot and that’s the dosimeter that’s actually the QA dosimeter that’s used as part of their process.

So we’re starting to see an increased level of interest around that from the patient dose perspective – and that is managed let’s not be confused with the Medical Physics business because these are, this is working in the area of fluoroscopy in the therapy areas this is tied directly to the, to kind of our Rad Measurement historical clients so that would be one.

Two, I referenced the one product that Saturn Ring that you see there and I think let me backup for a minute, I think the message sent here is our sales organization which by with the corporate leader we are now at six with a Director of National Sales [indiscernible] segment it get to a total of a 11 sales people in total compared with our 5 from previous year. So, we redefined territories, we have made these territories smaller instead of giving people an opportunity to focus more on penetration with existing clients. But in kind of force flooring [ph] to order think if it is the microStar product, the Ring product that we just introduced which is getting some very positive feedback. And then also, we see some very interesting opportunities to be determined in terms of how we want to start to articulate revenue but the Informatics in particular.

So, that product that I had referenced earlier in the deck that shows kind of a new layout in the new way we’re approaching the business is one of about three or four different approaches that we’re taking to delivering information that different way for clients that we think will be an advantage to them. The other thing we want to do in Rad – and – I think of Rad Measurement now is we’re through the ERP process, My comments is been in the business for an excess of about a year or plus, he’s restructured the organization, new sales people beginning to bring in some newer products like the microStar and the Ring and then we see Informatics as a very substantial opportunity.

We also had some cost opportunities we believe i.e., losing clients the pay-per-list scenarios which obviously the sales group is going to have to help ourselves I don’t want to put out too many numbers but as an example, going to a pay-per-list process for us what clients would probably say it was somewhere between $500,000 to $800,000 this a yea. So that’s not a revenue increase that you need sales depot to be able to do that type of thing.

Richard C. Eastman – Robert W. Baird & Co.

Okay.

Bill Saxelby

I kind of stop there and just say, our renewed focus on the domestic business with sales focus and now the beginning of hopefully products and then services that are more annuity focused than they are our equipment.

Richard C. Eastman – Robert W. Baird & Co.

And Bill, when we start the transition I guess this is more of a fiscal 2015 events, when we start the transition towards this new electronic dosimeter platform, is the sales process going to be focused initially on migrating legacy to new electronic platform or is the sales focus going to be on targeting share gain with new customer share gains?

Bill Saxelby

I would call that a combination of both direct.

Richard C. Eastman – Robert W. Baird & Co.

Okay.

Bill Saxelby

It’s a combination of both.

Richard C. Eastman – Robert W. Baird & Co.

Okay. And then, just one question and I can jump back in the queue. But in Med Physics, can I ask you Bill, you had mentioned when we were talking about Med Physics and the progress at Premier. I think you would step up to $10 million in four Premier systems that should start to ramp in fiscal Q2 is, was that my interpretation because the slide the legacy sides here are still kind of $8 million, so was there some progress in pulling in some additional groups here?

Bill Saxelby

Yes, there’s one additional system. What we are trying to do is, yes the answer is yes.

Richard C. Eastman – Robert W. Baird & Co.

Okay.

Bill Saxelby

One additional system and the four that we now have in play Rick, all look like they have an opportunity for either Q2 or like Q3.

Richard C. Eastman – Robert W. Baird & Co.

Okay, okay.

Bill Saxelby

I’m a little hesitant only because as we watch the sales cycle, this is we work just a comment I think for everyone else as well, as we watch the sales cycle, we earned a tremendous amount of how to manage this process and this story built around the value of the Enterprise-Wide System based around in particular the value of the assessments we’ve did this past quarter which were in expense for us this year.

We will be proving to the fact that there are very substantial radiation risk gap that exists when you look at hospital-wide system and without naming the system there’s a 12 hospital system that we have just completed where we have gone through both their therapy and their imaging organization as well as practices, protocol, standards, et cetera. And I would just comment that they are, there are very significant gaps that we are now in the process of being able to get to a higher level within the hospital system quicker and with a more sustained executive level package to basically say why should you care about this.

Richard C. Eastman – Robert W. Baird & Co.

Okay.

Bill Saxelby

And one other thing is, that we have got a strongest fist, that Premier has its own version of the sales organization that goes out and promote their products. And then the four that we are talking about here there are many more targets I think that slides referenced is about $25 million to $27 million so I think an opportunity.

Richard C. Eastman – Robert W. Baird & Co.

Yes.

Bill Saxelby

But, we actually have identified $50 million worth of opportunity within Premier that are that are tied to specific systems and we are working with those organization jointly to now helps us get more quickly to what I would call either the CEOs, COOs, CMOs for the Chief Medical Officer and/or the risk management individual that really can drive decisions through a system that takes you out of the process of avenue to do the what I would call the department-by-department selling process which can be flocked with issues around politics and personalities and protectionism, and any time you go out and try to promote a more unique a more streamlined way to approach your operation and you say we’ve looked into your system, you don’t need tons of dosimetries, you need this.

You don’t need a medical physicist of this caliber, you need to fix with this training and two in different categories you can imagine all the defensive issues that come up when you try to advance that at a middle-management level. But we couldn’t have got into that point had we not kind of crawled through five or six of these systems at a level of detail that we have.

So, not longwinded, it just says that the sales cycles I believe had been longer in these whatever you want to call, like missionary opportunities or pioneering opportunities and I think in the next deck what I would like to be able to do is get a couple of these in the board candidly then I could say okay, without the name here as specifically the process what the sales process well then what we would kind of in vision going forward. But the last part of this is, it’s getting significant traction I just said to people stay focused on getting 3 to 5 is in the board so we have the right testimonials which then kind of that answers those previous discussion more easily.

Richard C. Eastman – Robert W. Baird & Co.

Okay. Okay, very good. Thank you.

Bill Saxelby

Yes.

Operator

Thank you. The next question comes from Mitra Ramgopal. Please go ahead.

Mitra Ramgopal – Sidoti & Co. LLC

Yes, hi good morning. Just following up on that first one, in terms of given the traction you’re getting now with Premier and the $50 million opportunity you mentioned I mean, do you see that 3 to 5 year capture opportunity?

Bill Saxelby

Mitra, you know I have to qualify that, but I would say that by virtue of the fact that we have four accounts that have annualized opportunity of $10 million right now. And then if you step back and you looked at the target I think this is one we have to just say that as we advance the discussions and we kind of can be more specific with you sales cycles because firstly I haven’t closed anything yet. Right, so I mean, until I can send a signal.

Of course if you go back and kind of six months ago we didn’t have a contract no one has ever had a Medical Physics contract before. So, it’s kind of a steps at a time but I think you could step back and within the next six months I think we would then have proof points that we’d say, here was the charges, here is what we’ve closed, here is what the value was and that will also give us an opportunity to talk about how we can manage the profitability within each one of those between therapy and imaging.

One of the thing I would mention is that, we are also in discussions in two of this systems where they’re looking at also outsourcing the Radiation Safety Officer position to, in addition to Medical Physics. So, this is going to kind of continue to I think a volatile over the course of the next so it’s called 3 to 6, 9 months. But if I stop there and just say, let’s step back and I’m not trying so that people can run math and just extrapolate these things, but Premier is a third of the market and it’s a $1 billion market.

So, in a ballpark Premier is somewhere between $200 million to $300 million just by itself is a potential opportunity for us. Last thing is though, I’m sure you can prove out the process really define what the sales processes are to get closure on you have to I think continue to just kind of articulate the way we have.

Mitra Ramgopal – Sidoti & Co. LLC

Okay, thanks. That’s very helpful. And Bill, I just wondering if you give me your sense as you look at again the military funding surely a lot of uncertainty there as relates to the timing, what’s your sense as you look again to made up this year into next year as it relates to both army and even maybe the navy?

Bill Saxelby

Yes well, I think first of all let me answer Mitra, I would say that the navy is simply an interesting placeholder keep it up as aside and we will let you know that’s a competitive with this process there will be other companies involved. I won’t say just though the military is making a shift in terms of how they’re looking at dosimetry in that they are speaking more and more of our joint requirement and making decisions on dosimetry and radiation-related products that would be common across all of the services.

Now the reality of what behavior demonstrates versus what the theory or the concept is are kind of two different things. So number one, we have to determine whether or not the progress we’ve made in the army would be taken into account yes or no in terms of how the Navy makes their decisions. We certainly hope that’s the case but we don’t know.

So, and therefore the services have acted independently regardless of what the concept has been around the joint requirements but we’ll see. I would say what’s changed since the last quarter as everyone knows is bill didn’t pass [ph] and money has actually starting to find its way in the operating budget, it’s just starting. So the feedback that we’re getting is best part of the discussion and this is not just for the military by the way, it’s across the Board for the government. They are coming out of the CR this Continuing Resolution process.

Having said that, now people are trying to figure out what do I do with the 12 months budget I have seven months to go and I would still call it constructively, I would call it confused at that. But if you go with the ideas that money is actually find its way to budgets we are hoping that multiple strong work we’re doing here with several initiatives whether that be discussions with the congressional representatives, whether that be discussions with the program management, there is a whole matrix of people that we’re trying to integrate into the discussion.

We do know that we’ve got as I mentioned earlier, incremental to what we did in the quarter, we went from $2.3 to $2.7, that was a function of actually seeing additional funding that we haven’t expected. It’s a small number, we hope that continues and we’re just going to continue to work this aggressively. It is a $3 million net income issued for us in terms of what we had originally hoped for through this year and what we’re actually going to see.

So, in fact the good news is at least we have a budget now and now and we’re in with people are at least willing to begin to have dialogue with you because they got money they actually worked with.

Mitra Ramgopal – Sidoti & Co. LLC

Right and I mean, there’s nothing in the guidance there as it relates to as exciting anything this year. Okay. And then quickly, I know you mentioned you did a small tuck-in acquisition, is it fair to assume you feel pretty comfortable now with re-organization and investments going forward, you are now willing to take a look again at maybe doing a couple of acquisitions?

Bill Saxelby

Yes I think what we need to do first of all is, with the candid comment Mitra and for everyone I mean, we talked about this. The Medical Products acquisition which well in attention, which has well sort out and very honestly we got the model run and we, as I have discussed on different calls we’ve learned some things through that process that we are obviously concerns as it related to the competitive environment that had we known would we have thought differently about et cetera.

Having said that, we’ve maintained and I’m going to just comment on Medical Physics products for a second. We’ve maintained very good relationships with Medtronic and Brainlab through this entire process, even though in particular with Medtronic we find ourselves in competition. We think very highly of that organization, they are very professional, we’ve been the same in reverse.

And I think that they have gotten more comfortable with us as a management team. And the reason I say that is, that two of these products that we have that are, we’re hoping for the FDA approval on for this year our image guided surgery devices. And I will just leave with at that. Both of which we think would either have opportunities for us connected and partnered with an OEM, a company like Brainlab or a Medtronic or we would have to determine what we want to do on a direct basis.

So, my comfort level with the business under Greg’s leadership has improved significantly. We are not through the worst as the prior year comparisons as I mentioned before, that’s why I tried to frame that the way I did. But we knew in the first six months of this year as compared to last were going to be a challenge, because the worst part of the situation was back in April of last year and May and we’ve since kind of turned things stabilize and began to turn things around. Pricing looks like it began to stabilize somewhat now to I hope was going to be a normalized level.

And then last thing is, Greg’s experience was back to J&J, back to Baxter and Cardinal Health Care, he as a Device General Manager who has very strong product development routes. And so I think he’s, I think he is now got a team that has been focused effectively. We’re not going to be able to probably make up what we thought we were going to have immediately, but we’ve got a couple of interesting things in the pipeline that I think will bode well for us as we move past kind of through this year. The good news is that on a sales per billing day our actual units in virtually every category are up. On an improvement level our challenge has been ASPs that looks like it’s beginning to stabilize.

As it relates to other acquisitions, I would tell you that we’ve actually been very active in the Medical Physics area and our big challenge there is because of the margin profiles of those businesses we just have to be careful about what we are willing to pay from an internal rate of return standpoint and without going through the detail we have probably passed on three or four acquisitions that just did not need our financial hurdles and also we’re not such that they would have negatively affected our enterprise-wide strategy.

That’s a little bit of also why you have seen the investment that you see in this quarter as it relates to the assessments. We also had some contracting expenses that we went through this year, or this quarter it aid in the process of starting some new business opportunities up that we could have gone out and made an acquisition on and choose not to because of profitability. So, we are trying to be very plant full about how we do that.

So, I would say that we have done this small acquisition that would complement to the Medical Products business we’d worked with several things with medical, the Medical Physics business and we will continue to. And then the last thing is, as Mike Kaminski has really got his feet firmly on the ground now in Rad Measurement there were a couple of very interesting things that were contemplating there. But there we needed to get the general management team in place, get the new sales structure position properly, do some of the fundamental things that we need to do to really start to look to and address growth post the ERP implementation and we’re, feel good we are doing that.

Mitra Ramgopal – Sidoti & Co. LLC

Okay, thanks again for taking the questions.

Bill Saxelby

Okay.

Operator

Thank you. (Operator Instructions) There has been no further questions. Please continue.

Bill Saxelby

Great. Kevin thank you very much and I would like to thank everyone for joining us. We look forward to talking to you in the next quarter.

Operator

Thank you. This concludes the Landauer first quarter fiscal 2014 conference call. Thank you for participating. You may now disconnect.

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