Exhibit 99.2
John H. Harland Company
Transcript of Q2 2005 Earnings Conference Call
August 4, 2005
John H. Harland Company - CORPORATE PARTICIPANTS
Henry Bond - Vice President, Investor Relations & Treasurer
Charlie Carden - Senior Vice President and Chief Financial Officer
Tim Tuff - Chairman, President & Chief Executive Officer
PRESENTATION
Operator
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Good day everyone, and welcome to the John H. Harland Company Second Quarter
2005 Earnings Results Conference. Just a reminder, today's call is being
recorded. At this time, for opening remarks and introductions, Id like to turn
the conference over to Mr. Henry Bond, Vice President, Investor Relations and
Treasurer. Please go ahead, sir.
Henry Bond - Vice President, Investor Relations & Treasurer
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Thank you, Audrey. Thanks for joining us on Harland's 2005 second-quarter
earnings conference call. Also with me this morning are Tim Tuff, Chairman and
Chief Executive Officer, and Charlie Carden, Chief Financial Officer. In
accordance with Reg FD, this call is open to all interested parties and is being
broadcast live over Harland's website at www.harland.net.
I would like to make a brief cautionary statement that certain words and phrases
such as, "should result," or "will continue," "estimated or projected," and
similar expressions are intended to identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are necessarily subject to certain risks and uncertainties that
could cause the actual results to differ materially from the company's
historical experience and present expectations or projections.
Caution should be taken not to place undue reliance on such forward-looking
statements that speak only as of this date. The very factors that affect the
company's financial performance could cause the actual results for future
periods to differ materially from any opinions or projections.
These factors are discussed in some detail in our press release, our 10-K, and
our 10-Q and I would refer you to those for further clarification.
With that out of the way, I will turn the call over to Charlie Carden.
Charlie Carden - Senior Vice President and Chief Financial Officer
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Thank you, Henry and good morning.
Summary Highlights
For the second quarter of 2005, Harland sales of $239.4 million were up $46.4
million or 24.1% from $193.0 million for the second quarter of 2004. Net income
for the second quarter was $18.8 million, up $9.9 million, or 111.9% from last
year's second-quarter net income of $8.9 million. Diluted earnings per share for
this year's second quarter were $0.67, up $0.36 per share, or 116.1% from
diluted earnings per share of $0.31 for the second quarter of 2004.
The second quarter of 2004 results included pre-tax expenses totaling $6.0
million, equivalent to $0.14 per share, for exit costs and severance charges
related to the reorganization of the Company's Printed Products segment and $1.3
million of pre-tax severance charges equal to $0.03 per share, related to cost
reduction initiatives in the Company's Software & Services segment.
Improved operating performance for this year's second quarter in Printed
Products and Software & Services was partially offset by a decline in Scantron's
operating performance, increased corporate costs and a higher effective tax
rate.
Operations
Turning to operations, the previously mentioned increase of 24.1% in
consolidated sales for the second quarter of 2005 reflected sales improvements
in Printed Products and Software & Services, partially offset by a decline in
Scantron sales. Sales for Printed Products increased 25.9%, primarily due to the
addition of a major new customer in late 2004, the Liberty acquisition which
closed on June 10, 2005, increased contract termination payments and higher
volumes in all business units, partially offset by lower average prices due to
competitive pressure.
Sales for Software & Services for the second quarter of 2005 increased 32.6%
compared to the 2004 second quarter primarily due to acquisitions, sales of E3,
its mortgage solutions product which we first reported in revenue in the third
quarter of 2004, increased sales for credit union core systems service bureau
and increased sales for other compliance solutions partially offset by lower
sales for CRM solutions, branch automation solutions and in-house core systems
for credit unions and community banks.
Sales for Scantron were down 1.7% compared to the second quarter of 2004
primarily due to decreased sales of survey services and imaging solutions in
Data Collection partially offset by increased forms sales in Testing &
Assessment and Data Collection.
Consolidated gross profit for the second quarter of 2005 was $120.1 million or
50.1% of sales compared with $93.0 million, or 48.2% of sales for the second
quarter of 2004. The $27.1 million, or 29.1% increase in gross profit was
primarily the result of increased sales. The increase in gross profit as a
percentage of sales was primarily due to a favorable change in sales mix, cost
management and productivity improvement initiatives. Cost of sales for the
second quarter of 2004 included charges of $2.9 million related to the Printed
Products reorganization.
Consolidated SG&A expenses for the second quarter of 2005 were $85.7 million, or
35.8% of sales compared with $75.2 million, or 38.9% of sales for the second
quarter of 2004. The decrease in SG&A expenses as a percentage of sales was
primarily the result of cost reduction actions taken in 2004 in Printed Products
and Software & Services partially offset by increased expenses in Scantron and
Corporate. SG&A expenses for the second quarter of 2004 included charges of
$850,000 related to the Printed Products reorganization.
2
The balance of my comments will be focused on the operations of our three
businesses segments.
The Printed Products segment consists of Checks, Harland Business Solutions and
Integrated Client Solutions. Checks includes most of the Liberty operations that
were acquired on June 10, 2005.
The Software & Services segment includes Harland Financial Solutions' two
businesses, Core Systems and Retail & Lending Solutions and the Cavion operation
acquired from Liberty. Retail & Lending Solutions is the combination of the
Delivery Systems, Mortgage Solutions and Retail Solutions business units.
Delivery Systems includes GreatDocs, the electronic mortgage document business
acquired from Greatland Corporation on April 30, 2004. Core Systems includes the
check imaging and items processing solutions business acquired from Mitek
Systems on July 7, 2004. Phoenix System, the bank core processing business
acquired from Fair Isaac on November 12, 2004, and Intrieve, which was acquired
on April 4, 2005. Intrieve's core processing data center, full service item
processing facility and electronic banking and payment processing service
support Software & Services' strategy of offering clients integrated end-to-end
solutions.
Scantron is the third segment and includes Data Collection, Testing & Assessment
and the Service Group.
Printed Products
Printed Products' segment income in the second quarter increased 156.2% from
$10.7 million in the second quarter of 2004 to $27.5 million in 2005. As
mentioned earlier, exit costs and severance charges related to the
reorganization completed last September were $6.0 million in the second quarter
of 2004.
Printed Products' sales increased 25.9% from $118.2 million for the second
quarter of 2004 to $148.8 million in 2005. The sales increase for the second
quarter of 2005 resulted from a 30.9% increase in Checks' sales, a 24.5%
increase in Integrated Client Solutions' sales and a 5.8% increase in Harland
Business Solutions' sales.
Excluding the impact of the Liberty acquisition, the Checks' sales increase was
primarily attributable to a 26.7% increase in unit volume in its domestic
imprint operations for the quarter compared with the same period a year ago and
contract termination payments received during the quarter totaling $6.0 million.
About $1.0 million of the termination payments were received late in the second
quarter and had not been factored into our previously issued guidance.
The factors contributing to the Checks' sales increase were partially offset by
a 2.0% decrease in average price per unit in the domestic imprint operations.
This decrease resulted from the competitive environment over the past couple of
years and the implementation of a major new customer with lower average pricing
in the fourth quarter of 2004 substantially offset by the contract termination
payments received during the quarter. The unit volume increase reflects the
major new customer I just mentioned, the favorable impact of a package size
reduction, other new business announced last year and increased volumes in some
large accounts partially offset by a continued general decline in check usage.
3
As mentioned earlier, Integrated Client Solutions' sales were up 24.5% for the
second quarter of 2005 compared with the second quarter of 2004 primarily due to
an increase in volumes for direct marketing customers.
Harland Business Solutions' sales were up 5.8% in the second quarter of 2005
compared with the second quarter of 2004 primarily due to increased volume
through the financial institution and software customer channels partially
offset by lower average pricing.
For the Printed Products segment, lower manufacturing costs and SG&A expenses as
a percentage of sales also contributed to the improvement in segment income. The
reduction of manufacturing costs as a percentage of sales resulted primarily
from a reduction in domestic imprint production operations headcount and
facilities costs attributable to plant consolidations, process improvements and
new technology. The reduction of SG&A expenses as a percentage of sales resulted
primarily from cost reduction actions taken in 2004 associated with the Printed
Products reorganization.
Software & Services
As mentioned earlier, Software & Services reported a sales increase of 32.6% in
the second quarter compared with the same quarter in 2004 primarily due to the
GreatDocs, Mitek, Phoenix System, Intrieve and Liberty acquisitions, sales of
E3, the mortgage solutions product, increased sales for other compliance
solutions and increased sales for credit union core systems service bureau.
Although sales for other compliance solutions were up, they were adversely
affected by an increase in usage-based contracts compared with perpetual
agreements. The usage-based contracts defer revenue recognition into future
periods.
Partially offsetting those increases were lower revenues associated with the
annual users' conference that was held in the second quarter of last year and
will be held in the third quarter this year and lower sales of CRM solutions,
branch automation solutions, and in-house core systems for credit unions and
community banks. As a result of those decreases, organic sales showed a decline
of 4.0% for the second quarter of 2005 compared with the same quarter in 2004.
In addition to the sales increase, backlog increased $147.3 million, or 151.1%
from last year's second quarter to $244.7 million. The increase in backlog from
the prior year was primarily due to acquisitions and stronger bookings for
compliance solutions and credit union core systems. Excluding the impact of
acquisitions, backlog increased 5.0% compared to the 2004 second quarter.
Backlog increased $133.9 million, or 120.9%, from the first quarter of 2005
primarily due to the Intrieve acquisition and stronger bookings for compliance
solutions and credit union core systems. Excluding the impact of acquisitions,
backlog increased 3.7% compared with the first quarter of 2005.
Segment income for the second quarter of 2005 was $8.3 million, up 129.2%
compared with the 2004 second quarter segment income of $3.6 million. The
favorable impact of lower ongoing operating expenses resulting from cost
reductions implemented during 2004 and income from acquisitions were the key
drivers for the increase in segment income.
Scantron
Scantron's sales decreased 1.7% to $27.3 million in the second quarter of 2005
compared with $27.8 million for the second quarter of 2004 due primarily to
lower sales of survey services and imaging solutions in Data Collection
partially offset by increased forms sales in Testing & Assessment and Data
Collection. The decline in survey services was due to customer losses and lower
volume with an existing large account. The decline in imaging solutions was due
to lower sales as we transition from a reseller relationship for imaging
software to a private-label solution.
4
Segment income of $5.6 million was down 25.0% for the second quarter of 2005
compared with the 2004 second quarter primarily due to higher SG&A expenses
resulting largely from increased development costs and sales and marketing
expenses related to new products and the sales decrease previously discussed.
Corporate
Now, turning to corporate SG&A expenses which increased in the second quarter of
2005 compared with second quarter of 2004. The increase was primarily due to
increased incentive compensation accruals based on the strong year-to-date
performance, increased tax and audit fees, increased business development
expenses, increased professional fees for HR initiatives and increased deferred
compensation costs partially offset by an accrual in 2004 for environmental
liabilities.
Interest
Interest expense for the second quarter was $2.1 million, an increase of $1.1
million from the second quarter of 2004 primarily due to increased debt
outstanding and higher interest rates. Long-term debt, including the current
portion, was $283.9 million at the end of this year's second quarter, up $168.8
million compared with $115.1 million at the end of last year's second quarter.
The Company continues to have strong cash flow as indicated by the fact that
long-term debt was up only $168.8 million over the last twelve months despite
acquisitions totaling $263.6 million, $28.5 million of upfront contract payments
and $24.6 million of stock repurchases. We now expect net interest expense for
2005 will be approximately $10 million after factoring in the impact of our
recent acquisitions.
As we indicated in our last conference call, first quarter upfront contract
payments are expected to represent most of full year 2005's upfront contract
payments based on commitments currently in place. Although upfront contract
payments for the year-to-date are slightly higher than last year, we anticipate
upfront contract payments for the full year will come in slightly lower than
2004 level.
We also now anticipate that depreciation and amortization will be in a range of
$86 million to $88 million for 2005 based on preliminary estimates of
intangibles and the resulting amortization related to the Liberty acquisition.
We also expect that capital expenditures will still be in the $25 million to $28
million for 2005. We will provide updates as these estimates are refined.
Taxes
The effective tax rate was 38.0% for the second quarter of 2005 compared with
35.0% for the second quarter of 2004. The increase was primarily due to
favorable adjustments in last year's second quarter related to the partial
settlement of an IRS examination, an increase in the effective state income tax
rate and a decrease in tax credits for Puerto Rico operations partially offset
by the implementation of new manufacturing tax deductions in 2005.
5
Dividends
At its August 3, 2005 meeting, the Board increased the quarterly dividend by
$0.025 per share from $0.125 to $0.15 per share.
Outlook
Looking ahead, we expect third-quarter earnings on a GAAP basis to be in the
$0.62 to $0.67 per share range. For the full year, we are increasing our
guidance and expect earnings on a GAAP basis will be in the $2.65 to $2.70 per
share range. The impact of the Liberty acquisition that closed on June 10, 2005
is reflected in both the third-quarter and full-year ranges.
As we discussed during our first quarter earnings release conference call, the
implementation of FASB 123R regarding the accounting for share-based payments
has been delayed to January 1, 2006. Our current estimate of the impact of
expensing stock options is an incremental expense of approximately $0.12 per
share for 2006.
That concludes the financial discussion. I would now like to turn the call over
to Tim.
Tim Tuff - Chairman, President and Chief Executive Officer
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Thank you, Charlie, and thank you all for joining us this morning as we discuss
our results for the second quarter.
It was a strong quarter driven by growth in our Printed Products business and
acquisitions.
A major development in the quarter was two acquisitions. We completed our
acquisition of Intrieve, which we discussed in our last conference call, early
in the second quarter and closed our acquisition of Liberty, the largest
acquisition in Harland's history, in mid-June. With the acquisitions of Intrieve
and Liberty, we now supply one or more products to about two-thirds of all
financial institutions in the country, providing a major opportunity to
cross-sell additional products and services. We have also achieved a significant
milestone with these two acquisitions: our revenue on an annualized basis now
exceeds $1 billion.
Liberty is a good fit for a variety of reasons. It has a strong brand and
increases our presence in the credit union market, particularly among small to
medium-size credit unions. Liberty has also pursued a similar diversification
strategy to ours and brings us additional businesses we can build on through our
channels of distribution.
Liberty is composed of five businesses, which will be integrated into our
Printed Products and Software & Services segments. The checks business and part
of ALTAFI, which provides marketing services, will be managed as part of Printed
Products, while Cavion, an Internet banking operation; MyDAS, an education and
training company; and Card Services, as well as the rest of ALTAFI, will be
managed as part of Software & Services.
We expect the Liberty businesses to be marginally accretive to earnings in 2005
and this has been factored into our guidance for the year. We also continue to
expect that Liberty will add $0.25 to $0.30 per share to earnings in 2006.
6
I'd like to now give you a more in-depth look at what we have achieved in each
of our segments starting with Printed Products.
Printed Products
Printed Products had a very strong quarter, with all three of its businesses
posting year-over-year sales gains. Segment sales and income were up
year-over-year, 25.9% and 156.2% respectively. In fact, Printed Products sales
in the quarter were at their highest level since the first quarter of 1996 and
segment income was at its highest level since the third quarter of 1996.
We closed the Liberty acquisition on June 10, and Printed Products is in the
process of integrating Liberty into the organization. We are retaining the
strong Liberty brand as a separate business within Printed Products focused on
credit unions, with a dedicated sales and customer service operation. Liberty
has a well-deserved reputation in the credit union industry, and we believe
there is considerable opportunity to expand our credit union business with an
operation focused on this market segment.
Our strategy is to build on the strengths of both Liberty and the existing
Harland organization. Maintaining Liberty's focus on credit unions is one
example of how we will implement this strategy. The strategy also applies to
manufacturing operations where we will utilize the best technology coming from
both Harland and Liberty. Liberty's facility in Simi Valley, California will
remain open and be converted to digital technology, while the remaining six
facilities will be consolidated into Harland's network of regional production
facilities. We expect the plant consolidation to be completed by the end of the
second quarter of 2006. We will also eliminate any duplicate SG&A expenses.
Check volumes for the rest of Harland began increasing on a year-over-year basis
in December when a large national account came on board, and volumes from some
other major accounts are also running higher than expected, which contributed to
an overall volume increase of 27% year-over-year. The increase in check volumes
was partially offset by the general decline in check usage, and pricing
continues to be competitive.
Printed Products value proposition continues to gain traction in the market. We
recently reached a milestone with HarlandImpact, our marketing solution that
combines our analytics and digital printing capabilities. More than 100
financial institutions now use HarlandImpact to cross-sell and up-sell
additional products and services through marketing messages targeted at
individual consumers and delivered directly in the check book.
Harland Business Solutions had a good quarter. This business grew 5.8% in the
quarter, year-over-year. Last week we renewed our largest customer in this
business, and one of Harland's top five customers, for the next five years.
Integrated Client Solutions also had a good quarter, growing 24.5%
year-over-year. The year-over-year growth is attributable to two factors: a
relatively weak second quarter comparison from a year ago and some of our new
check product offerings that also pull through analytics and direct marketing
revenue.
Software & Services
Turning to Software & Services. Software & Services segment sales increased
32.6% and segment income increased 129.2% year-over-year, but these increases
were driven largely by acquisitions.
7
Although organic growth was negative in the quarter, organic backlog did
increase 5.0%. Our bookings were much more favorable in the quarter, and we
expect organic growth to turn positive in the second half of the year. The
difference between bookings and sales in the quarter was due to a pronounced
trend away from perpetual license deals and towards usage-based license deals.
This gives us less immediate recognition of revenue.
Margins improved in the quarter, but continue to be below industry levels
because we remain focused on the integration of our existing products with our
recent acquisitions with the accompanying costs. We believe that our ability to
integrate a large number of our products and services will further differentiate
our core processing offerings, but it does negatively impact our margins in the
short term.
Our Core Systems business grew 85.6% in the quarter year-over-year, attributable
to both the Phoenix and Intrieve acquisitions.
Phoenix provides core processing systems for mid to large community banks. Sales
interest in this product is exceeding our expectations. Phoenix is one of only
two core processing solutions in the market featuring an open client/server
architecture, which is gaining increasing acceptance.
Phoenix had gone through two quick changes in ownership prior to becoming part
of Harland. Now that the ownership issue has stabilized, and its technology
better appreciated, Phoenix is being invited to participate in more bids and we
are encouraged by the feedback in the marketplace and the outlook for this
business.
Intrieve's core systems business for thrifts is still new to Harland, but we
believe we are in a good position in this market. We have now started to
cross-sell some of Intrieve's other products, such as item processing, which is
new for Harland, across all our other Core Processing customers.
Our in-house credit union core processing business was down in the quarter on a
year-over-year basis. We are improving execution, but it is not yet showing up
in revenue. We expect our progress to be more evident in the second half of the
year. The service bureau part of this business continues to show good progress.
Retail & Lending includes Retail Solutions and our two compliance businesses:
Delivery Systems and Mortgage Solutions. Sales for the combined business grew
2.7% in the quarter year-over-year, with gains in Delivery Systems and Mortgage
Solutions partially offset by a decrease in Retail Solutions.
Delivery Systems had a good quarter. Sales increased 6.3% year-over-year, which
is particularly noteworthy given that this business has been impacted by the
move to usage-based deals mentioned earlier.
Mortgage Solutions sales grew 10.1% in the quarter year-over-year, attributable
to both E3 and our traditional products; however, this market is still slow in
adopting new technology.
Retail Solutions had a weak quarter, with sales down 9.4% year-over-year. The
sales decline extends across the entire business, including branch automation
and CRM products. Execution in Software & Services overall has been pretty good,
but it has been weaker in Retail Solutions, and this remains an area of focus
for us.
8
Scantron
Scantron had a disappointing quarter, with sales declining 1.7% and segment
income declining 25.0% in the quarter year-over-year.
Testing & Assessment sales were virtually flat in the quarter year-over-year.
Sales of some of our newer software products have increased but they are sold on
an ASP model, and we are not yet seeing all the benefit of the revenue.
Increased sales of these products are also being offset by lower sales of older
shrink-wrapped products. We do continue to see a strong showing from our
traditional forms business.
Data Collection sales were down 5.9% in the quarter year-over-year. We have seen
a significant reduction in traditional imaging software sales as we transition
from a reseller relationship to a private label solution. Our new product is now
in the market and should offer an opportunity for greater margins. At the same
time, we are incurring development costs for another new product that is running
behind schedule. While we plan on launching it this year, we do not expect it to
have a significant impact on this year's results. Survey Services sales were
also down in the quarter due to the loss of two large contracts that were not
fully offset by new wins.
Scantron Service Group sales were also virtually flat in the quarter
year-over-year. Installations were weak, but we expect them to pick up in the
second half of the year. Customer satisfaction in this business remains
especially high.
Corporate
So to recap, during the second quarter we increased the share of financial
institutions with which we do business to about two-thirds of all financial
institutions in the United States, which increases our ability to cross-sell
multiple products and services. We also achieved a significant revenue
milestone, with revenue now on an annualized basis exceeding $1 billion.
We completed two major acquisitions in the quarter and are in the process of
integrating them into the organization. We have a good track record with
acquisitions, but we know that we have to increase our organic growth as well.
Our cash flow remains strong, with $49 million cash provided by operating
activities in the second quarter used primarily to retire post-acquisition debt.
Yesterday, we announced an increase in the quarterly dividend to $0.15 per
share. We are also increasing our outlook for the year to $2.65 to $2.70 per
diluted share.
With that, I'll open it up to any questions.
QUESTION AND ANSWER
Operator
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Thank you. [OPERATOR INSTRUCTIONS]. And our first question will come from John
Kraft with D.A. Davidson.
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John Kraft - Analyst, D. A. Davidson
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Good morning, Tim and Charlie.
Tim Tuff - Chairman, President and Chief Executive Officer
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Good morning, John.
Charlie Carden - Senior Vice President and Chief Financial Officer
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Good morning, John.
John Kraft - Analyst, D. A. Davidson
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Tim, you just said that plant consolidation is expected to be completed in the
second quarter of `06. Is that going to be the end of any of the integration
costs related to the Liberty acquisition? Is that about the time frame?
Tim Tuff - Chairman, President and Chief Executive Officer
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Yes.
John Kraft - Analyst, D. A. Davidson
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Okay.
Charlie Carden - Senior Vice President and Chief Financial Officer
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The bulk of the Liberty costs or the integration costs, John, will be balance
sheet costs, and won't be going to the P&L. The small amount that will be P&L
has already been factored into the guidance.
John Kraft - Analyst, D. A. Davidson
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Okay, and speaking of guidance, the increase of 10%, you had said when the
acquisition of Liberty was announced, that you thought that $0.10 to $0.15 was a
fair estimation of contribution for the first year, but it would be backend
loaded and since this was sort of an end of second quarter closure, I just was
curious, and then Tim says something about marginally accretive. How much of
that increase--how much of that $0.10 was due to Liberty?
Tim Tuff - Chairman, President and Chief Executive Officer
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We don't split it out, John, what I will say about Liberty is, we are only three
weeks into it, so far it's going well and it's meeting or exceeding our
expectations and any forecasts of earnings coming from the Liberty side has been
built into our guidance.
John Kraft - Analyst, D. A. Davidson
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Okay, and as for the Software & Services, a couple of questions there. Did
Cavion contribute at all in the quarter?
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Tim Tuff - Chairman, President and Chief Executive Officer
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Very small.
John Kraft - Analyst, D. A. Davidson
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Very small. And organic growth, just to clarify, did you guys expect that to
turn positive for the whole year or turn positive by the end of the year?
Tim Tuff - Chairman, President and Chief Executive Officer
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No, I am expecting it to turn positive in Q3 and continue positive in Q4.
John Kraft - Analyst, D. A. Davidson
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Do you think we can end the year with a year-over-year positive number?
Tim Tuff - Chairman, President and Chief Executive Officer
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Time will tell, but I would hope so.
John Kraft - Analyst, D. A. Davidson
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Okay. Thanks guys.
Operator
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Next, we will hear from John Rodin with Glenview Capital.
John Rodin - Analyst, Glenview Capital
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Hey guys, thanks for taking the questions.
Charlie Carden - Senior Vice President and Chief Financial Officer
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Sure.
John Rodin - Analyst, Glenview Capital
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Two questions just about organic growth in checks and then Scantron. Do you guys
have any figures for what the organic unit growth of Checks was, so once you
back out the acquisitions, you back out the new customer that wasn't around last
year?
Charlie Carden - Senior Vice President and Chief Financial Officer
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We had mentioned that in the remarks, the unit growth excluding the Liberty
acquisition, was 26.7%.
John Rodin - Analyst, Glenview Capital
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Right, but then you went on to say that a lot of the unit growth was driven by
new customers?
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Charlie Carden - Senior Vice President and Chief Financial Officer
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Well that's, that's organic growth.
John Rodin - Analyst, Glenview Capital
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Okay, then maybe--sorry, I'll ask it differently. Is there any way to measure,
of the customers that were existing in Q2 of 2004, what their growth was `05
versus `04, or is that not how you look at it on a volume basis?
Tim Tuff - Chairman, President and Chief Executive Officer
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We don't break it out by customer like that, but I would say that our, the
growth that we experienced was more than just from the large customer we brought
in, in Q4. That is the primary reason, but we did actually see growth in other
customers as well.
John Rodin - Analyst, Glenview Capital
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Got you, and just to follow-up, I think in the past on the calls you've given an
organic growth for Scantron, I'm pretty sure there were no material acquisitions
within Scantron, so I'm assuming that the sales number for Scantron is an
organic number?
Tim Tuff - Chairman, President and Chief Executive Officer
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That's correct.
Charlie Carden - Senior Vice President and Chief Financial Officer
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That's right.
John Rodin - Analyst, Glenview Capital
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Okay, and final question, the termination fees of $6 million. Just, my first
question is an accounting question. The termination fee, that comes on the
revenue line, correct?
Charlie Carden - Senior Vice President and Chief Financial Officer
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That's correct.
John Rodin - Analyst, Glenview Capital
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And historically, I think it's been a $2 million per quarter, or roughly a $2
million per quarter?
Charlie Carden - Senior Vice President and Chief Financial Officer
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No, it's more like about $1 million a quarter.
John Rodin - Analyst, Glenview Capital
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Okay, $1 million a quarter. Okay, so going forward, should we go back to the
million or should we assume that it's going to be a little higher?
12
Charlie Carden - Senior Vice President and Chief Financial Officer
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It's very lumpy...the million dollars is an average, so I don't think you are
going to see anything that is really all that far off the average. It could be
marginally up or down, but that's a good number to go with.
John Rodin - Analyst, Glenview Capital
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Okay. Great. Thanks, guys.
Operator
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We have one question remaining. [OPERATOR INSTRUCTIONS]. We'll now hear from Nik
Fisken with Stephens.
Nik Fisken - Analyst, Stephens, Inc.
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How are you doing, everybody?
Charlie Carden - Senior Vice President and Chief Financial Officer
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Good morning, Nik.
Tim Tuff - Chairman, President and Chief Executive Officer
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Good morning, Nik.
Nik Fisken - Analyst, Stephens, Inc.
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So, with these contract term fees, should we expect gross margins to go down
sequentially?
Charlie Carden - Senior Vice President and Chief Financial Officer
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Yes.
Nik Fisken - Analyst, Stephens, Inc.
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And then, how about Q4?
Charlie Carden - Senior Vice President and Chief Financial Officer
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Well, because the fees were higher in Q2 and it affects both the revenue and the
profit line, and you lower that going forward, you will have your margins go
down, but that would be a Q2 to Q3 change.
Nik Fisken - Analyst, Stephens, Inc.
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Okay, so you're guidance implies what for Q4?
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Charlie Carden - Senior Vice President and Chief Financial Officer
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We haven't given margin guidance, but the other thing that will be impacting
margin going forward will be the Liberty amortization...the amortization of the
intangibles.
Nik Fisken - Analyst, Stephens, Inc.
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Okay. Okay. Is it safe to say that if I back out the $6 million of term fees
that the unit growth, or what do we call it, the price per unit, would have gone
from -2 to -7. Is that a rough number, Charlie?
Charlie Carden - Senior Vice President and Chief Financial Officer
- ------------------------------------------------------------------------------
I haven't calculated it that way, but it would impact it.
Nik Fisken - Analyst, Stephens, Inc.
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Okay, and then you mentioned a release of an accrual for some environmental
deal?
Charlie Carden - Senior Vice President and Chief Financial Officer
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No, we didn't release it. Last year we had an accrual, this year we did not, so
there was a positive variance.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
Okay. Okay. Tim, what do you think is driving the weaker in-house core sales
because we're seeing that from basically everybody in the group?
Tim Tuff - Chairman, President and Chief Executive Officer
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Well, first of all, what you're seeing is weaker in terms of sales in Q2, but I
think a lot of this is timing and, as I look at the pipeline, we actually see an
increasing pipeline. We have seen some deals, which switch from in-house to
service bureau, but I'm not sure that's a pronounced change. I think that--I
actually think things are picking up. I think you had a period when there was a
lot of consolidation going on in the industry and people were looking to see
what new owners of their core processing system we're going to do. And I think
that we're through that period. I think that most of the consolidation has taken
place and so now a number of people are going out to see what's out there in the
market.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
And can you give us an update on the competitive trends within the check
division?
Tim Tuff - Chairman, President and Chief Executive Officer
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I don't see a lot of change there, Nik, it tends to be more of the same.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
In terms of large contract activity, would you characterize that?
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Tim Tuff - Chairman, President and Chief Executive Officer
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On average, as I've said many times, 20% of contracts are coming up for bid. I
think we've been through a particularly active period in `05 and really most of
it is behind us, and I actually think that, certainly for Harland, the amount of
business out for bid in 2006 is actually going to be significantly less than
2005.
Nik Fisken - Analyst, Stephens, Inc.
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Okay, and then lastly, I didn't really get my arms around what happened at
Scantron from a margins standpoint. If we could walk through that again?
Tim Tuff - Chairman, President and Chief Executive Officer
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Yes, in terms of margin, the margin went down because the revenue was down and
we were incurring increased development expenses on new products and the, that
is in the data collection area, where we have two things going on. We are
transitioning from being, in effect, a VAR to a private-label, and we also have
development costs of another new product, which we have not yet announced. So
you have the development costs and the sales and marketing expenses for the new
products without the revenues yet showing. That's resulted in a decrease in
overall margin.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
And what's our outlook on the margin for that division?
Tim Tuff - Chairman, President and Chief Executive Officer
- ------------------------------------------------------------------------------
Well, it obviously should improve, because you're either going to get the sales
or you're going to reduce your costs, so.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
Back to the historical levels?
Tim Tuff - Chairman, President and Chief Executive Officer
- ------------------------------------------------------------------------------
Yes.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
Okay.
Tim Tuff - Chairman, President and Chief Executive Officer
- ------------------------------------------------------------------------------
I see no reason why they shouldn't return to historical levels.
Nik Fisken - Analyst, Stephens, Inc.
- ------------------------------------------------------------------------------
Great, and congrats on the quarter.
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Tim Tuff - Chairman, President and Chief Executive Officer
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Thank you.
Charlie Carden - Senior Vice President and Chief Financial Officer
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Thank you.
Operator
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[OPERATOR INSTRUCTIONS]. And there appear to be no further questions at this
time. That will conclude the question-and-answer session. A rebroadcast of this
conference is available starting today at 1 p.m. Eastern time and will run
until August 11, 2005, midnight Eastern time. You may access the rebroadcast by
calling area code (719) 457- 0820. Please reference pass code number 8342903.
Again, the phone number is (719) 457-0820. The pass code number 8342903. Now Mr.
Bond, I'll turn the conference back to you.
Henry Bond - Vice President, Investor Relations & Treasurer
- ------------------------------------------------------------------------------
Thanks, Audrey. Thank you for joining us this morning as we discussed our
second-quarter results and our outlook for the remainder of 2005. A replay of
the call is also available on our Web site. Thanks again for joining us.
Operator
- ------------------------------------------------------------------------------
That does conclude today's teleconference. Thank you everyone for your
participation.
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