Exhibit 99.2
John H. Harland Company
Transcript of Q4 2005 Earnings Conference Call
February 9, 2006
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
EXTERNAL CONFERENCE CALL PARTICIPANTS
Nik Fisken
Stephens Inc. - Analyst
John Kraft
D.A. Davidson & Co. - Analyst
PRESENTATION
Operator
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Good day, everyone, and welcome to the John H. Harland Company
fourth-quarter 2005 earnings results conference call. Just as a reminder,
this call is being recorded. At this time for opening remarks and
introductions, I would like to turn the call over to Mr. Henry Bond, Vice
President, Investor Relations and Treasurer. Please go ahead, sir.
Henry Bond - John H. Harland Co. - Vice President, Investor Relations
& Treasurer
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Thank you, Michael.
Thanks for joining us on Harland's 2005 fourth-quarter and full-year
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 Web site 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 10K
and our 10Q, and I would refer you to these for further clarification.
With that out of the way, I'd like to turn the call over to Charlie Carden.
Charlie Carden - John H. Harland Co. - CFO
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Thank you, Henry, and good morning.
For the fourth quarter of 2005, Harland sales of $267.0 million were up
$48.0 million or 21.9% from $219.0 million for the fourth quarter of 2004.
Net income for the fourth quarter was $20.9 million, down $243,000 or 1.2%
from last year's fourth quarter net income of $21.1 million. Diluted
earnings per share for this year's fourth quarter were $0.75, unchanged
from diluted earnings per share for the fourth quarter of 2004.
Improved operating performance for this year's fourth quarter in Software &
Services and a lower effective tax rate were essentially offset by a
decline in Printed Products and Scantron's operating performance and
increased interest expense.
Consolidated sales for the year 2005 were $982.9 million, up $184.4 million
or 23.1% from $798.5 million for 2004. Net income for 2005 was $75.5
million, up $20.4 million or 36.9% from 2004 net income of $55.1 million.
Diluted earnings per share for 2005 were $2.69 compared with diluted
earnings per share of $1.96 for 2004. Results for 2004 included a pre-tax
impairment charge of $7.9 million, equivalent to $0.17 per share, related
to the development of new customer care systems for the Printed Products
segment and pre-tax charges of $5.8 million, equivalent to $0.13 per share,
related to the Printed Products reorganization.
Turning to operations, the previously mentioned increase of 21.9% in
consolidated sales for the fourth 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 22.3%
primarily due to the Liberty acquisition which closed on June 10, 2005 and
higher volumes in Harland Business Solutions, Domestic Checks and Forms,
partially offset by lower average prices due to competitive pressure. Sales
for Software & Services for the fourth quarter of 2005 increased 39.4%
compared with the 2004 fourth quarter due to acquisitions, increased sales
of lending solutions and bank core systems partially offset by lower sales
of retail solutions, mortgage solutions and credit union core systems.
Sales for Scantron were down 4.0% compared to the fourth quarter of 2004
primarily due to decreased sales of survey services in Data Collection,
decreased sales of OMR equipment maintenance and installation services in
Service Group and decreased software sales in Testing & Assessment
partially offset by increased forms sales in Data Collection.
Consolidated gross profit for the fourth quarter of 2005 was $133.7 million
or 50.1% of sales compared with $113.7 million, or 51.9% of sales for the
fourth quarter of 2004. The $20.0 million, or 17.6%, increase in gross
profit was the result of increased sales. The decrease in gross profit as a
percentage of sales was primarily due to lower average pricing in Printed
Products and a change in business mix.
Consolidated SG&A expenses for the fourth quarter of 2005 were $94.0
million, or 35.2% of sales compared with $77.3 million, or 35.3% of sales
for the fourth quarter of 2004. The increase in SG&A expenses was primarily
due to the impact of acquisitions and the requirements to service higher
volumes in our Domestic Checks business.
The balance of my comments will be focused on the operations of our three
business 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.
2
The Software & Services segment includes Harland Financial Solutions and
Harland Services & Payment Solutions. Harland Financial Solutions includes
Core Systems, Retail & Lending Solutions and the Cavion operation acquired
from Liberty. Cavion provides internet web site design and hosting and
internet banking services for credit unions and community banks. Retail &
Lending Solutions is the combination of the Lending Solutions, Mortgage
Solutions and Retail Solutions business units. Core Systems includes
Intrieve, which was acquired on April 4, 2005. Harland Services & Payment
Solutions includes the card services and educational services operations
acquired from Liberty and the start-up fraud prevention solutions business.
Scantron is the third segment and includes Data Collection, Testing &
Assessment and the Service Group.
Turning to Printed Products. Printed Products' segment income in the fourth
quarter decreased 8.6% from $27.8 million in the fourth quarter of 2004 to
$25.4 million in 2005. The impact of income related to Liberty and
increased volumes was more than offset by lower average pricing in Domestic
Checks, 5 fewer production days in the fourth quarter of 2005 compared with
the fourth quarter of 2004 and the favorable impact of a $2.9 million
reduction in the segment's accrued vacation liability in the fourth quarter
of 2004 as a result of a policy change.
Printed Products' sales increased 22.3% from $132.2 million for the fourth
quarter of 2004 to $161.6 million in 2005. The sales increase for the
fourth quarter of 2005 resulted from a 29.8% increase in Checks' sales and
a 5.0% increase in Harland Business Solutions' sales partially offset by a
4.1% decrease in Integrated Client Solutions' sales.
Excluding the impact of the Liberty acquisition, the Checks' sales increase
was primarily attributable to a 9.8% increase in unit volume in its
domestic imprint operations for the quarter compared with the same period a
year ago, partially offset by an 8.5% decrease in average price per unit in
the domestic imprint operations. This decrease resulted from the
continuation of 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. This year's fourth quarter included a full
quarter's impact of business with this new customer whereas last year's
fourth quarter did not. The unit volume increase reflects the major new
customer I just mentioned as well as another new customer implemented this
quarter, the favorable impact of a package size reduction, other new
business announced last year and increased volumes in some large accounts
partially offset by the impact of a recent customer loss mentioned earlier,
fewer production days in 2005 and a continued general decline in check
usage.
As mentioned earlier, Harland Business Solutions' sales were up 5.0% in the
fourth quarter of 2005 compared with the fourth quarter of 2004 primarily
due to increased volume through the Financial Institution and retail
channels partially offset by lower sales through the software customer
channel due in part to lower average pricing.
Integrated Client Solutions' sales were down 4.1% for the fourth quarter of
2005 compared with the fourth quarter of 2004 primarily due to a decrease
in volumes for direct marketing customers.
For the Printed Products segment, higher manufacturing costs and SG&A
expenses as a percentage of sales contributed to the decrease in segment
income. The increase in manufacturing costs as a percentage of sales
resulted primarily from the favorable impact of a reduction in the
segment's accrued vacation liability in the fourth quarter of 2004 related
to a policy change for employees' paid time off that was implemented during
that quarter and unfavorable inventory adjustments in 2005. Higher SG&A
expenses as a percentage of sales resulted primarily from higher call
center and marketing expenses related to customer additions and new
programs, the favorable impact of the previously mentioned reduction in the
segment's accrued vacation liability in the fourth quarter of 2004 and
higher incentive compensation related to the segment's performance for
2005.
3
As mentioned earlier, Software & Services' reported a sales increase of
39.4% in the fourth quarter compared with the same quarter in 2004 due to
the Phoenix System, Intrieve and Liberty acquisitions. Organic sales showed
a decline of 2.9% for the quarter compared with the same quarter in the
prior year due to lower sales of retail solutions, mortgage solutions and
credit union core systems partially offset by increased sales for lending
solutions and bank core systems.
Although sales for lending solutions were up, they continue to be affected
by an increase in usage-based contracts compared with perpetual agreements.
The usage-based contracts defer revenue recognition into future periods.
In addition to the sales increase, backlog increased $146.7 million, or
135.1%, from last year's fourth quarter to $255.3 million. The increase in
backlog from the prior year was primarily due to acquisitions and stronger
bookings for lending solutions and bank core systems. Excluding the impact
of acquisitions, backlog increased 10.0% compared with the 2004 fourth
quarter. Backlog increased $9.5 million, or 3.9%, from the third quarter of
2005 primarily due to stronger bookings for bank core systems and lending
solutions.
Segment income for the fourth quarter of 2005 was $14.5 million, up 41.5%
compared with the 2004 fourth quarter segment income of $10.3 million
primarily due to income from acquisitions, the sales increases mentioned
earlier and lower operating expenses. Those increases were partially offset
by the impact of lower retail solutions sales for the fourth quarter of
2005 compared with the same period in 2004 and business development
expenses related to fraud prevention solutions.
Scantron's sales decreased 4.0% to $30.0 million in the fourth quarter of
2005 compared with $31.3 million for the fourth quarter of 2004 due
primarily to lower sales of survey services in Data Collection, lower sales
of OMR equipment maintenance and installation services in the Service Group
and lower software sales in Testing & Assessment partially offset by
increased forms sales in Data Collection. The decline in survey services
was due to customer losses and lower volume with an existing account.
Increased sales of newer technology products in the education market were
more than offset by lower sales of legacy products. Revenue for the newer
technology products is recognized ratably over the contract term, which
results in deferrals of revenue into future periods, whereas revenue for
the legacy products is generally recognized when the product is shipped.
Segment income of $8.8 million was down 5.4% for the fourth quarter of 2005
compared with the fourth quarter of 2004 primarily due to the sales
declines just mentioned partially offset by lower SG&A expenses resulting
largely from decreased sales and marketing expenses.
Interest expense for the fourth quarter was $3.4 million, an increase of
$2.4 million from the fourth quarter of 2004 primarily due to increased
debt outstanding and higher interest rates. Long-term debt, including the
current portion, was $255.6 million at year-end, up $154.3 million compared
with $101.3 million at the end of last year. The Company continues to have
strong cash flow as indicated by the fact that credit facility borrowings
were up only $153.3 million over the year despite acquisitions totaling
$239.8 million, $45.1 million of stock repurchases and $15.3 million of
dividend payments. Upfront contract payments for 2005 were $25.2 million,
down slightly from $27.1 million in 2004.
4
The effective tax rate was 36.9% for the fourth quarter of 2005 compared
with 39.0% for the fourth quarter of 2004. The decrease was primarily due
to the impact of a change in Ohio law that reduced deferred income tax
liabilities. The effective tax rate for the fourth quarter of 2004
reflected an increase in the effective state tax rate for the year. The
ongoing effective rate for 2006 operations is projected to be approximately
39.25% largely reflecting the expiration of tax benefits related to Puerto
Rico operations and a higher state tax rate reflecting the impact of recent
acquisitions.
During the fourth quarter, we repurchased approximately 1.1 million shares
of the Company's common stock at an aggregate cost of $40.8 million, or
$37.86 per share. These purchases completed the then existing share
repurchase authorization. The Board of Directors has approved a new program
for the purchase of up to 3.0 million shares.
The Board declared a quarterly dividend of $0.15 per share, payable
February 24, 2006 to shareholders of record as of February 15, 2006.
Turning to the outlook. We had a good fourth quarter with earnings in line
with our expectations. We expect 2006 to be another solid year for the
company. We expect diluted earnings per share to be in the range of $2.73
to $2.78 per share in 2006, compared with $2.69 per share for 2005. This
range includes the current estimate of the impact of expensing previously
issued stock options in 2006 with the implementation of FASB 123R effective
January 1, 2006. The estimated impact is an incremental expense of $0.12
per share for 2006 related to the previously issued stock options.
For the full year, we anticipate an increase in segment income for all
three segments. Those increases will be partially offset by the
implementation of FASB 123R, higher interest expense and a higher effective
tax rate.
For the first quarter of 2006, we are expecting earnings to be in the range
of $0.60 to $0.65 per share, compared with $0.62 in the first quarter of
2005. First quarter results reflect anticipated operating performance
improvement compared with last year's first quarter as well as higher
interest expense, the implementation of FASB 123R and a higher effective
tax rate.
Cash flow is expected to remain strong in all business units in 2006.
Capital expenditures are expected to be in the $26 to $29 million range up
from 2005 capital expenditures of $23.9 million. Upfront contract payments
in Printed Products for 2006 are expected to be slightly lower than 2005.
Based on commitments in place going into the year, most of the upfront
contract payments will occur in the first quarter of 2006. Depreciation and
amortization for 2006 are expected to be about the same as 2005 with
amortization related to fully depreciated and amortized assets being
partially replaced by acquisition-related intangibles and capital
additions. Interest expense is expected to be approximately $13 million in
2006. This guidance reflects average diluted shares outstanding of about
28.0 million. As I mentioned earlier, the effective tax rate is expected to
be about 39.25%.
That concludes the financial discussion. I would now like to turn the call
over to Tim.
5
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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Thank you, Charlie, and thank all of you for joining us this morning as we
discuss our results for the fourth quarter and full year of 2005.
Fourth quarter results were in line with our expectations and capped a
record year for Harland. Earnings per share for the full year were $2.69
compared with our initial guidance at the beginning of the year of $2.38 to
$2.43.
Earnings per share are an indication of the significant progress we made
during the year. We also completed two of the three largest acquisitions in
Harland's history, and our revenue now exceeds $1 billion on an annualized
basis. Our cash flow from operating activities increased significantly
during the year, which strengthens our flexibility to pursue various
options for increasing shareholder value. We also completed our existing
share repurchase authorization, and our Board of Directors has authorized
the repurchase of an additional three million shares.
We out-performed the S&P 500 in 2005 - albeit marginally, but more
significantly, it was the fourth time in the last five years that we have
out-performed this index, which is our primary benchmark. In addition, we
continued to invest in new products and services in each part of our
business, investments we believe will stimulate organic growth.
I'd like to now give you an overview of the progress we are making in each
of our three segments starting with Printed Products.
Printed Products had a solid quarter in an exceptional year. A year ago, we
indicated that we anticipated growth in Printed Products in 2005 even
though the overall check market would continue to decline at a rate of 4%
to 5% per annum. We did grow our Printed Products business for the year,
with segment sales increasing 24.9% on a year-over-year basis.
Segment sales also increased in the quarter - 22.3% year-over-year. Segment
income decreased 8.6% in the quarter. Improvements from Liberty and higher
check volume were more than offset by a lower average price and fewer
production days.
The integration of Liberty continues to go well. As we mentioned last
quarter, we achieved our anticipated SG&A savings earlier than we had
expected. We have established Liberty as our channel of distribution for
credit unions and have already introduced a broader selection of products
for this channel. We are now focused on the integration of Liberty's
production facilities, which we anticipate will be completed in the second
quarter of this year. The integration will involve consolidating all but
one of Liberty's production facilities into our existing network, enabling
Liberty's customers to benefit from Harland's digital capabilities. The
remaining facility has already started to run on Harland's digital
technology platform.
Excluding Liberty, check volumes increased 9.8% in the quarter
year-over-year. Production is at record levels, and we continue to hit
record levels of productivity in our plants. We also brought on a
previously announced large customer in the fourth quarter, and that
implementation has gone smoothly. Pricing is competitive, especially with
larger accounts, but continues to be consistent with what we have seen in
recent years. Excluding Liberty, overall unit pricing was down 8.5% in the
quarter on a year-over-year basis. This was driven in large part by higher
volume from some of our lower-priced large accounts, including a full
quarter from the large account we added in the fourth quarter of 2004.
6
Our focus remains on differentiating ourselves through our value
proposition. We have developed a number of products and services that
support our ability to help financial institutions attract, retain and grow
profitable consumer relationships. These offerings include Harland
Passport, which focuses on the first 90 days of a consumer's relationship
with their financial institution. Another offering is HarlandImpact, which
marries our analytics and marketing expertise with our digital printing
technology to help financial institutions cross-sell their other products
and services.
Harland Business Solutions' sales increased 5.0% in the quarter
year-over-year, with increases from our financial institution and retail
channels partially offset by a decrease from our software customer channel.
Integrated Client Solutions sales decreased 4.1% in the quarter
year-over-year. While sales were down in the quarter, we are seeing
interest pick up, especially through some of our new offerings such as
HarlandPassport and HarlandImpact, and we believe that the long-term
prospects for this business are stronger than they have been for a while.
Turning now to Software and Services, which includes Harland Financial
Solutions and Harland Services and Payment Solutions, they had a solid
quarter, with segment sales increasing 39.4% on a year-over-year basis.
Segment income for the quarter increased 41.5% year-over-year.
Organic growth was a negative 2.9% in the quarter, year-over-year. Positive
organic growth in Core Systems and Lending were offset by negative organic
growth for Retail and Mortgage. However, backlog increased 135%, and
organic backlog increased 10%. The increase is due primarily to higher
bookings in Lending and bank Core Systems.
Margins were up slightly, in spite of development costs for some of our new
products, especially our new anti-fraud product.
Core Systems sales grew 86.3% in the quarter year-over-year, most of which
is attributable to acquisitions. In 2005 we rounded out our suite of core
processing offerings and now offer core processing systems for community
banks, credit unions and thrifts of all sizes on both an in-house and
service bureau basis. We also continue to integrate other Harland products
and services with our core systems.
The major disappointment in the quarter was in Retail and Lending, which
includes our Retail, Lending and Mortgage businesses. Sales in this part of
our business decreased 5.1% in the quarter on a year-over-year basis.
Positive organic growth in lending was more than offset by lower sales in
both retail and mortgage. The new management of our Retail business, which
we announced last quarter, has made significant progress in turning this
business around. We expect substantial improvements in this business in
2006. Mortgage product sales continued to be slow in the quarter.
The last part of Harland Financial Solutions is Cavion, the Internet
banking operation acquired from Liberty. This business currently is being
integrated into the organization and will benefit from the relationships
that Harland already has with a large number of financial institutions in
the country.
7
Last week we announced the acquisition of Financialware, Inc. This is a
small acquisition, but it gives us an entree into the enterprise content
management arena. We will immediately begin integrating Financialware's
.Net(TM) based solution into our existing core, lending, mortgage, item and
payment processing systems.
Harland Services and Payment Solutions is a new business. It is composed of
some businesses acquired from the Liberty acquisition and internal
development activities. It is not yet profitable and is dilutive to
Software and Services' overall margins.
Turning now to Scantron. Scantron had a disappointing quarter with both
sales and segment income decreasing on a year-over-year basis - 4.0% and
5.4% respectively.
Testing and Assessment sales decreased 1.8% in the quarter year-over-year.
Our traditional business continued to do well as did Achievement Series,
our new assessment product. However, this was offset by decreased sales of
some of our other traditional software products. We recently introduced a
new version of Achievement Series, which features additional options, such
as including short answer responses. That increases the flexibility of the
system. We have also integrated it with Performance Series, our
computer-adaptive assessment program. With the integration of Achievement
Series and Performance Series, we believe that we have the testing and
assessment platform best positioned to address ongoing implementation of
standards at both the state and federal level.
Data Collection sales decreased 8.5% in the quarter year-over-year. As I
mentioned last quarter, we are transitioning from being a value-added
reseller to a provider of proprietary hardware and software, which we
expect will increase margins in this part of the business. However, our
proprietary scanner was slow to market and sales of the software that runs
with this scanner were accordingly low.
Scantron Service Group's sales were down slightly in the quarter
year-over-year. Fewer installations reduced sales but improved overall
margins because of the lower-margin nature of the installation business.
Customer satisfaction levels remain high, and we continue to add a number
of household name companies as customers based on our superior service
performance.
To recap, fourth quarter results came in where we expected and capped a
record year for Harland in sales and earnings.
In 2005, we completed two of the three largest acquisitions in our history
and recently announced the acquisition of Financialware, our 15th
acquisition since the beginning of 2000. Our revenue now exceeds $1 billion
on an annualized basis.
Strong cash flow gives us the flexibility to pursue different options for
improving shareholder value, and our cash flow from operating activities
strengthened significantly in 2005. Although we spent approximately $300
million on acquisitions, share repurchases and dividends, our credit
facility borrowings only increased by slightly more than $150 million.
We completed the existing buyback authorization, and the board recently
authorized the repurchase of an additional three million shares.
8
We have done a good job with acquisitions but know that we need to increase
our focus on organic growth as well. During the year we invested in new
products and services in each part of our business that we believe will
help generate organic growth.
In 2006, we expect income will increase in each of our three segments.
These operating improvements will be partially offset by stock option
expensing, higher interest and a higher effective tax rate. Consequently,
we anticipate 2006 earnings will be in the range of $2.73 to $2.78 per
diluted share, with first quarter earnings in the range of $0.60 to $0.65
per diluted share.
With that, I'll open it up to any questions.
[OPERATOR INSTRUCTIONS]. John Kraft, D.A. Davidson.
John Kraft - D.A. Davidson - Analyst
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Good morning. On Financialware, can you tell us what you paid for that?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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We paid approximately $7 million.
John Kraft - D.A. Davidson - Analyst
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$7 million. And how about ballpark revenue expectations for that?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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It's probably $4 to $5 million.
John Kraft - D.A. Davidson - Analyst
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Okay. And, Tim, you're talking about investing in some new businesses and
products I guess to stimulate organic growth in 2006. Could you give us a
little bit more, maybe some specific examples of what you're doing?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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There are some I would point to specifically. Let's start with Scantron.
Scantron has a number of new products coming to market. They have a new
scanner, new software for data collection that we were hoping to get out
earlier in 2005, we really only came to market at the end of 2005. They
also have new product offerings in Testing and Assessment. I talked a bit
about the new Achievement Series -- or integrated Achievement Series and
Performance Series platform, and they also have new products even on the
forms side, really addressing new markets for Scantron, so that would all
be incremental.
On the financial side of the house, we launched in November at the BAI
conference, our new anti-fraud check product, Validify, that is designed to
tackle check forgery and we had that in pilot in 2005 and we'll have it
fully launched in 2006. We also have new products and services in our
Printed Products business designed to assist customers, reduce attrition of
existing customers, and to maximize the profitability of relationships with
existing customers. On the software side, we have a number of new products
coming to market. Obviously, in the Core Systems side, because we have
integrated and are in the process of integrating a number of our products,
we have significantly enhanced capability on almost all of our core
processing products. On the lending side, we have an important new product
which we're just launching called CreditQuest, which opens up the whole
area of business lending. And on the retail side, you will see with the new
strategy and focus on some new service offerings and for the first time, as
a result of the Liberty acquisition, we are now able to offer CRM in a
service bureau mode, which we think is going to prove to be an interesting
market. Those are just some of -- and there are a number more -- some which
I won't comment on at this stage for competitive reasons.
9
John Kraft - D.A. Davidson - Analyst
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Sounds like you guys have your hands full. Just going back to one of the
products you mentioned, Validify. Those revenues will be accounted for in
the Software and Services segment?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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That's correct.
John Kraft - D.A. Davidson - Analyst
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And that is in pilot still?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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It's in pilot. It will be moving to launch in 2006, but given rates of
adoption in the financial market, I don't see it making a significant
impact on our revenues in 2006.
John Kraft - D.A. Davidson - Analyst
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Okay and, Charlie, you mentioned the new customer coming online in Q4. Was
that all of Q4? Or did that happen in the middle of Q4? I can't remember.
Charlie Carden - John H. Harland Co. - CFO
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It was all of it.
John Kraft - D.A. Davidson - Analyst
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All of Q4. Okay. And then last question the lending strength you saw -- I'm
assuming that's LaserPro, on the weakness in Mortgage, is that Interlinq
stuff - or, I guess how's the E3 launch?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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E3 is -- you are correct, John, in that the real strength was in the
LaserPro and associated product lines. E3 has been slow taking off in part
is because it's a complex product and so our customers are slow to fully
transition, particularly when the mortgage market has been strong. We are
actually seeing a greater rate of implementation now as the market begins
to slack off. And as we move into 2006, you're going to move into a period
of easier year-on-year comparisons.
10
John Kraft - D.A. Davidson - Analyst
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Any new competitive threats or changes on the competitive landscape with
that particular product? Is it just a slow to adopt issue?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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Yes. We actually believe it is the leading product in its field. I'm sure
there will be other competitors that will come out with similar products.
But right now it's probably leading from a technology standpoint.
John Kraft - D.A. Davidson - Analyst
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Okay. Thanks a bunch.
Operator
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[OPERATOR INSTRUCTIONS]. Nik Fisken, Stephens, Inc.
Nik Fisken - Stephens Inc. - Analyst
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Good morning, everybody.
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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Hi, Nick.
Nik Fisken - Stephens Inc. - Analyst
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Tim, if you exclude acquisitions, in what scenario would you guys add $100
plus-million of debt?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
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We would be adding debt for either acquisition or more significant buyback.
Nik Fisken - Stephens Inc. - Analyst
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Okay. And then what were the contract termination fees in the quarter?
Charlie Carden - John H. Harland Co. - CFO
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They were very small. Less than -- it was roughly -- about $300,000.
11
Nik Fisken - Stephens Inc. - Analyst
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And then you said that segment income will be up in each of the divisions.
Is that -- can you give us a -- on a Printed Products line, specifically,
should revenue be down year-over-year because of the loss of U.S. Bank?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
- -------------------------------------------------------------------------------
Well, you're going to see growth in some other areas and you'll see the
impact of a full year of Liberty. And I've said very consistently that this
is a business that we manage for cash and we expect segment income to
increase and I wouldn't be surprised, given some of the things that we're
doing in that business, that you wouldn't see revenue also increase.
Nik Fisken - Stephens Inc. - Analyst
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So, we should use flat or up a little bit for '06, for Printed Products?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
- -------------------------------------------------------------------------------
I would increase it a bit.
Nik Fisken - Stephens Inc. - Analyst
- -------------------------------------------------------------------------------
Okay. And then the corporate and other elimination was $16 million in the
fourth quarter. Why is that up so much relative to the -- call it $11
million average for the first three quarters of '05?
Charlie Carden - John H. Harland Co. - CFO
- -------------------------------------------------------------------------------
Well, if you look at it on a year-over-year basis it was up about $2.9
million, Nick. The biggest single piece of that was interest expense, which
was about $2.4 million. The other two big contributors to the increase
related to performance. Our incentive compensation expense was up
year-over-year and also we make a contribution to all employees' 401(k)
accounts based on the Company's performance, which is discretionary. That
increased year-over-year. Those three things accounted for the increase in
the quarter; and for the full year, they were basically the bulk of the
increase, as well.
Nik Fisken - Stephens Inc. - Analyst
- -------------------------------------------------------------------------------
And then what are we going to be spending our money on for CapEx for the
increase?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
- -------------------------------------------------------------------------------
In CapEx, always the bulk of the expenditure is in Printed Products or the
printing operations. And we have the plant consolidation of Liberty and
clearly we're also integrating that system. But, it's really primarily
maintenance capital.
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Nik Fisken - Stephens Inc. - Analyst
- -------------------------------------------------------------------------------
And so the weakness on the retail mortgage stuff in HFS is predominantly
E3, is that right?
Tim Tuff - John H. Harland Co. - Chairman, President & CEO
- -------------------------------------------------------------------------------
No, no. Let's address the two separately. Retail is teller platforms and
CRM. And that was the area that was primarily weak in Q4. As I say, we are
repositioning that business and I actually think that this is going to not
only turn the business around but actually position us in an interesting
way from a competitive advantage standpoint in the market. I think you will
really see the full impact of that in the second half of 2006. In relation
to Mortgage, you're getting the adoption of E3 it's just slower than we had
forecasted at the beginning of 2005. As you look at 2006, I think it will
pick up and also you're going to be looking at easier year-on-year
comparisons because we actually had the launch and initial recognition of
all of that revenue in 2004, which made 2005 numbers look particularly
weak.
Nik Fisken - Stephens Inc. - Analyst
- -------------------------------------------------------------------------------
And Charlie, what was the $1 million of positive impact from other income?
Charlie Carden - John H. Harland Co. - CFO
- -------------------------------------------------------------------------------
Essentially it reflects minority interests in our Mexican operations, where
we record a gross and we reflect the minority interest in other income.
Nik Fisken - Stephens Inc. - Analyst
- -------------------------------------------------------------------------------
And the reason why it was up in Q4 versus historically it'd been a negative
issue or negative item?
Charlie Carden - John H. Harland Co. - CFO
- -------------------------------------------------------------------------------
They recorded a loss in the quarter.
Nik Fisken - Stephens Inc. - Analyst
- -------------------------------------------------------------------------------
Okay. Thanks so much.
- -------------------------------------------------------------------------------
Operator
A rebroadcast of this conference is available starting today at 1:00 p.m.
Eastern Time. It will run until February 15th, 2006 at midnight Eastern
Time. You may access the rebroadcast by calling (719) 457-0820 and please
reference the passcode 1482906. Again, that phone number is (719)457-0820.
And the passcode is 1482906. Now I'd like to turn the call back over to Mr.
Bond for any additional or closing remarks.
Henry Bond - John H. Harland Co. - Vice President, Investor Relations
& Treasurer
- -------------------------------------------------------------------------------
Thanks, Michael. We appreciate your joining us this morning as we
discussed our fourth-quarter and full-year results, and our outlook for
2006. A replay of the call is also available on our website.
Thanks again for joining us.
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