Exhibit 99.1
John H. Harland Company
Transcript of Q4 2006 Earnings Conference Call
February 8, 2007
John H. Harland Company - CORPORATE PARTICIPANTS
Tim Tuff - Chairman, President and Chief Executive Officer
Charlie Carden - Senior Vice President and Chief Financial Officer
Henry Bond - Vice President, Investor Relations & Treasurer
PRESENTATION
Operator
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Good day, everyone, and welcome to the John H. Harland Company fourth quarter
and year-end 2006 earnings results conference call. Just 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.
Henry Bond - John H. Harland Company - VP of IR & Treasurer
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Thank you, Jessica. Thanks for joining us on Harland's 2006 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 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
these for further clarification.
In connection with the previously announced proposed merger with M&F Worldwide
and required shareholder approval, Harland has filed a preliminary proxy
statement with the Securities and Exchange Commission and will file with the
Securities and Exchange Commission a definitive proxy statement. INVESTORS AND
SECURITY HOLDERS ARE ADVISED TO READ THE PROXY STATEMENT, AND ANY OTHER RELEVANT
MATERIALS FILED BY HARLAND, BECAUSE THEY CONTAIN, OR WILL CONTAIN, IMPORTANT
INFORMATION ABOUT HARLAND AND THE MERGER. Investors and security holders may
obtain free copies of these documents and other documents filed with the
Securities and Exchange Commission, at its website at www.sec.gov. In addition,
the documents filed by Harland with the Securities and Exchange Commission may
be obtained free of charge by contacting Harland at: John H. Harland Company,
Attn: Henry Bond, Vice President, Investor Relations, Box 105250, Atlanta,
Georgia 30348. Harland's filings with the Securities and Exchange Commission are
also available on Harland's Web site at www.harland.net.
Harland and its officers and directors may be deemed to be participants in the
solicitation of proxies from Harland's shareholders with respect to the merger.
Information about Harland's executive officers and directors and their ownership
of Harland's shares is set forth in the proxy statement for Harland's 2006
annual meeting of shareholders, which was filed with the Securities and Exchange
Commission on March 27, 2006. Investors and security holders may obtain more
detailed information regarding the direct and indirect interests of Harland and
its respective executive officers and directors in the merger by reading the
preliminary proxy statement, as well as the definitive proxy statements
regarding the merger, that Harland will file with the Securities and Exchange
Commission.
I would now like to turn the call over to Tim for some introductory remarks.
Tim Tuff - John H. Harland Company - Chairman, President and CEO
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Thank you, Henry.
On December 20, 2006 we announced that Harland had entered into a definitive
merger agreement with M&F Worldwide. As part of the agreement, M&F Worldwide
will acquire Harland for $52.75 per share in cash. The merger is expected to
close in the second half of 2007, subject to the satisfaction of customary
closing conditions, including expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and
approval by the shareholders of Harland. We filed our preliminary proxy on
January 19, 2007, and we expect to complete our Hart-Scott-Rodino filing in the
near future. Pending the outcome of the merger, we will not give earnings
guidance for 2007, and we will no longer be conducting a Q&A session as part of
our quarterly conference calls.
I will now turn the call over to Charlie for an overview of results for the
fourth quarter and year end, after which I will provide an overview of the
progress we have made in each of our businesses.
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Charlie Carden - John H. Harland Company - SVP, CFO Thank you, Tim and good
morning.
Summary Highlights
For the fourth quarter of 2006, Harland sales of $263.8 million were down $1.5
million or 0.6% from $265.3 million for the fourth quarter of 2005. Net income
for the fourth quarter of 2006 was $13.6 million, down $7.3 million or 34.7%
from net income of $20.9 million for the fourth quarter of 2005. Diluted
earnings per share for the fourth quarter of 2006 were $0.52, down $0.23 or
30.7% from diluted earnings per share of $0.75 for the fourth quarter of 2005.
The decline in earnings was more than accounted for by expenses related to the
pending sale of the Company that was announced on December 20, 2006.
Additionally, a decision was made during the quarter to dispose of Printed
Products operations in Mexico. This decision resulted in an impairment charge
during the quarter. The fourth quarter of 2006 also included the impact of the
requirement to expense stock options pursuant to FASB 123R, which was
implemented on January 1, 2006. These items were partially offset by the impact
of a lower effective tax rate resulting largely from research & development tax
credits recognized during the quarter.
2
In terms of expenses related to the pending sale of the Company, the fourth
quarter of 2006 included direct and indirect costs related to the pending sale
totaling $12.6 million, equivalent to $0.34 per diluted share. Some of these
costs are not tax deductible. Transaction costs, which consisted primarily of
legal and advisory expenses and retention bonus accruals, totaled $6.8 million
during the quarter, equivalent to $0.21 per diluted share. There were also
amendments to the Directors' Deferred Stock Compensation Plans related to the
transaction which resulted in a charge of $4.8 million, equivalent to $0.11 per
diluted share. In addition, assumptions for the Company's stock compensation
plans for employees were updated to reflect the impact of the pending sale,
which resulted in a cost increase of $1.0 million, equivalent to $0.02 per
diluted share.
Printed Products operations in Mexico are now classified as held for sale in the
balance sheet and discontinued operations in the income statement as a result of
the decision to dispose of those operations. Loss from discontinued operations,
net of tax, increased $3.5 million, equivalent to $0.14 per diluted share, for
the quarter compared with the fourth quarter of 2005 due to a $3.5 million
impairment charge, which was nondeductible for tax purposes.
Diluted earnings per share for continuing operations for the fourth quarter of
2006 were $0.67 compared with diluted earnings per share from continuing
operations of $0.76 for the fourth quarter of 2005. Again, the decline was more
than accounted for by expenses, equivalent to $0.34 per diluted share, related
to the pending sale of the Company just discussed. Compensation costs for the
Company, excluding the impact of transaction-related assumption changes just
discussed, increased $1.8 million pre-tax, or $0.04 per diluted share, in the
fourth quarter of 2006 compared with the fourth quarter of 2005 as a result of
implementing FASB 123R. The previously mentioned research & development tax
credits reduced income tax expense $2.3 million, equivalent to $0.09 per diluted
share.
Prior to the adoption of FASB 123R, the Company classified stock-based
compensation costs as a Corporate expense except for certain grants made in 2004
to replace an incentive agreement related to an acquisition. Effective with the
first quarter of 2006, stock-based compensation costs have been assigned to the
Company's operating segments along with performance-based 401K contribution
accruals for individuals in the operating segments who are participants in these
compensation programs. In the fourth quarter of 2006 a total of $3.6 million of
such costs were assigned to the three operating segments. Similar costs in prior
periods have been reclassified to the operating segments for comparability. A
total of $3.5 million of such costs were reclassified from Corporate to the
three operating divisions for the fourth quarter of 2005. The assignment of
these costs from Corporate to the three operating segments has the effect of
reducing gross profit, pre-tax income and margins from previous levels for each
of the operating segments, but has no effect on consolidated income.
Weighted average diluted shares outstanding decreased from 28.0 million in the
fourth quarter of 2005 to 26.1 million in 2006 largely as a result of the
Company's share repurchase program. The decrease in weighted diluted shares
outstanding had a favorable impact of $0.03 on diluted earnings per share for
the quarter compared with the fourth quarter of 2005.
Improved operating performance for the quarter in Printed Products and the
impact of the lower effective tax rate were more than offset by increased
Corporate costs, which included most of the transaction-related costs previously
discussed and increased interest expense, and by lower operating performance in
Software & Services and Scantron.
3
Consolidated sales for the full year of 2006 were $1.05 billion, up $73.6
million or 7.5% from $976.6 million for 2005. Net income for 2006 was $68.1
million, down $7.4 million or 9.8% from 2005 net income of $75.5 million.
Diluted earnings per share for 2006 were $2.55 compared with diluted earnings
per share of $2.69 for 2005. Results for 2006 included transaction related
expenses of $12.6 million, equivalent to $0.33 per diluted share, the impairment
charge for Printed Products operations in Mexico of $ 3.5 million, equivalent to
$0.13 per diluted share and an increase in compensation costs related to the
implementation of FASB 123R of $6.4 million, equivalent to $0.15 per diluted
share. Research & development tax credits reduced income tax expense $2.3
million in 2006, equivalent to $0.08 per diluted share. The full year per
diluted share equivalents for transaction related expenses, the impairment
charge and tax credits were slightly lower than the fourth quarter per diluted
share equivalents due to lower weighted average diluted shares for the fourth
quarter than for the full year.
Operations
Turning to operations, the previously mentioned decrease of 0.6% in consolidated
sales for the fourth quarter of 2006 reflected a sales decrease in Printed
Products partially offset by increases in Software & Services and Scantron.
Sales for Printed Products decreased 3.9% primarily due to lower volumes in
Checks partially offset by higher volumes in Integrated Client Solutions and
Harland Business Solutions and a price increase implemented earlier in 2006.
Sales for Software & Services for the fourth quarter of 2006 increased 4.4%
compared with the 2005 fourth quarter due to increased sales for Lending
Solutions and Retail Solutions, and the impact of the Financialware acquisition
partially offset by lower sales for Mortgage Solutions, Bank Core Systems and
Technology Services. Organic growth for Software & Services was 0.9% for the
fourth quarter of 2006. Sales for Scantron increased 8.5% compared to the fourth
quarter of 2005 due to increased sales in Testing & Assessment and Data
Collection.
Consolidated gross profit for the fourth quarter of 2006 was $137.5 million or
52.1% of sales compared with $134.1 million, or 50.5% of sales for the fourth
quarter of 2005. The improvement in gross profit as a percentage of sales
occurred largely in Printed Products and was primarily due to efficiencies
resulting from the integration of Liberty Checks into Harland Checks and lower
depreciation for digital printing as that equipment is becoming fully
depreciated.
Consolidated SG&A expenses for the fourth quarter of 2006 were $105.8 million,
or 40.1% of sales compared with $92.8 million, or 35.0% of sales for the fourth
quarter of 2005. The year-over-year increase of $13.0 million for the fourth
quarter was largely accounted for by the $12.6 million of transaction-related
expenses previously discussed.
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. Effective with the third quarter of 2006, Checks
includes the card products, education services and fraud payment prevention
solutions businesses previously included in Software & Services. For
comparability, historical periods have been reclassified to reflect this
organizational change. Sales for these businesses were $10.7 million with a
pre-tax loss of $1.8 million during the full year of 2006.
The Software & Services segment includes Harland Financial Solutions which is
comprised of Core Systems and Retail & Lending Solutions, and effective with the
fourth quarter of 2006 the Scantron Service Group, which has been renamed
4
Harland Technology Services. Historical periods have been reclassified to
reflect this organizational change. Core Systems includes Financialware, which
was acquired on January 31, 2006. Financialware provides enterprise content
management solutions.
Scantron is the third segment and now includes Data Collection and Testing &
Assessment.
Printed Products
Printed Products' sales decreased 3.9% from $164.7 million for the fourth
quarter of 2005 to $158.3 million in 2006. Checks reported a sales decrease of
8.9% while Integrated Client Solutions reported a 26.7% increase and Harland
Business Solutions reported a 6.8% increase.
Checks' sales, which now include both legacy Harland Checks and Liberty Checks,
decreased $11.4 million, or 8.9%, primarily due to an 11.2% decrease in unit
volume in imprint operations for the quarter compared with the same period in
2005. The unit volume decrease reflected a previously announced major customer
loss in the first quarter of 2006, the continuing market decline in check usage
and the net effect of other customer wins and losses. The average price per unit
in imprint operations increased 2.3% in the quarter compared with the fourth
quarter of 2005 due primarily to a price increase implemented during the first
quarter of 2006 and an increase of $736,000 in contract buyout payments received
from customers.
Integrated Client Solutions' sales were up 26.7% for the fourth quarter of 2006
compared with the fourth quarter of 2005 primarily due to higher volumes for the
legacy direct marketing business, the price increase implemented during the
first quarter of 2006 and the addition, effective January 1, 2006, of a portion
of the direct marketing business acquired from Liberty which was included in the
Checks' business unit in 2005.
Harland Business Solutions' sales were up 6.8% in the fourth quarter of 2006
compared with the fourth quarter of 2005 primarily due to increased volume
through the Financial Institution channel.
Printed Products' segment income in the fourth quarter increased 23.7% from
$24.3 million in the fourth quarter of 2005 to $30.0 million in 2006 due to
improved operating performance in all business units. Operating performance in
Checks was particularly strong with improved pricing and lower SG&A and
production expenses more than offsetting the decrease in unit volume.
The decrease in SG&A expenses resulted primarily from lower selling, call center
and information technology expenses and lower incentive compensation accruals
partially offset by the implementation of stock option expensing in 2006. The
decrease in production expenses resulted largely from increased productivity
primarily as a result of the Liberty integration, and lower depreciation expense
for digital printing as that equipment is becoming fully depreciated.
Software & Services
As mentioned earlier, Software & Services' reported a sales increase of 4.4% in
the fourth quarter compared with the same quarter in 2005 primarily due to the
transfer of certain operations to Retail Solutions that were included in Liberty
checks in 2005, the Financialware acquisition and organic sales growth of 0.9%.
Sales were strong in Lending Solutions with a combination of growth from
existing customers and new customer additions. Branch automation sales were
stronger in Retail Solutions for the quarter while sales were slow in Bank Core
Systems, Mortgage Solutions and Technology Services.
5
In addition to the sales increase, backlog increased $36.6 million, or 13.8%,
from the fourth quarter of 2005 to $301.9 million. The increase in backlog from
2005 was primarily due to stronger bookings for Lending Solutions, Bank Core
Systems and Retail Solutions. Excluding the impact of the Financialware
acquisition, backlog increased $36.0 million, or 13.6% compared from the fourth
quarter 2005. Backlog increased $35.6 million, or 13.4%, from the third quarter
of 2006.
Segment income for the fourth quarter of 2006 was $15.3 million, down 6.6%
compared with the 2005 fourth quarter segment income of $16.3 million primarily
due to increased SG&A expenses, a portion of which resulted from the
implementation of stock option expensing in 2006. The decrease in segment income
as a percentage of sales from 20.0% in the fourth quarter of 2005 to 17.9% in
the fourth quarter of 2006 was primarily due to lower sales in Mortgage
Solutions and Bank Core Systems and the increase in SG&A expenses.
Scantron
Scantron's sales increased 8.5% to $20.4 million in the fourth quarter of 2006
compared with $18.8 million for the fourth quarter of 2005 due primarily to
increased sales of newer software products and forms in the education market in
Testing & Assessment and increased sales of OMR equipment and survey services in
Data Collection partially offset by decreased sales of forms in Data Collection.
Segment income of $5.1 million for the fourth quarter of 2006 was down 8.0% from
$5.6 million for the fourth quarter of 2005 primarily due to higher SG&A
expenses resulting largely from increases in legal and severance expenses.
Corporate
Now turning to Corporate, SG&A expenses which increased $13.7 million in the
fourth quarter of 2006 compared with the fourth quarter of 2005.
Transaction-related expenses accounted for $11.9 million of this increase. The
balance of the increase was primarily due to increased stock compensation costs
largely resulting from the adoption of FASB 123R, increased business development
and information security expenses and increased professional fees.
Interest
Interest expense for the fourth quarter was $3.8 million, an increase of
$388,000 from the fourth quarter of 2005 primarily due to higher interest rates
partially offset by a decrease in the amount of long-term debt outstanding.
Long-term debt, including the current portion, was $211.2 million at the end of
the fourth quarter, down $44.4 million from $255.6 million at the end of 2005.
The Company continues to have strong cash flow as indicated by the fact that
long-term debt was down $44.4 million from 2005 despite $75.4 million of stock
repurchases, upfront contract payments of $22.2 million, $17.1 million of
dividend payments and acquisitions totaling $10.3 million.
Taxes
The effective tax rate for continuing operations was 28.0% for the fourth
quarter of 2006 compared with 37.1% for the fourth quarter of 2005. The decrease
was primarily due to the estimated research & development tax credits for the
years 2002 through 2006 and favorable adjustments related to prior years
partially offset by nondeductible transaction costs related to the pending
merger, the expiration of tax benefits related to Puerto Rico operations, a
higher effective state rate reflecting recent acquisitions and the favorable
impact of a change in Ohio law that reduced deferred tax liabilities in 2005.
6
Stock Repurchases and Dividends
There were no repurchases of the Company's common stock during the fourth
quarter of 2006.
The Board has declared a quarterly dividend of $0.175 per share, payable
February 23, 2007 to shareholders of record as of February 14, 2007.
That concludes the financial discussion. I would now like to turn the call over
to Tim.
Tim Tuff - John H. Harland Company - Chairman, President and CEO
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Thank you, Charlie.
Thank you, Charlie, and thank all of you for joining us as we discuss our
results for the fourth quarter and the full year of 2006.
As I mentioned at the beginning of this call, Harland signed a definitive merger
agreement with M&F Worldwide in late December. Under the terms of the agreement,
M&F Worldwide will acquire Harland for $52.75 per share in cash. We expect the
transaction to close in the second half of the year subject to the necessary
regulatory and shareholder approvals.
The merger of Harland with M&F Worldwide will combine both companies'
complementary products and services to create a more effective and efficient
strategic partner for financial institutions. Financial institutions will also
have access to an increased suite of direct marketing services, delivery and
anti-fraud products, contact service centers and software solutions.
The combined organization will have a strategy focused on quality of service,
best in class processes and security measures, as well as cross-selling
additional products and services to existing clients of both companies and
deepening all client relationships.
The pending transaction certainly is the most significant event that occurred in
the fourth quarter. However, even without that announcement, the fourth quarter
was a notable one. Operationally, it was a strong quarter. We had a substantial
increase in segment income for Printed Products and sales increases in both
Software and Services and Scantron.
I'd like to now give you an update on each of our businesses, starting with
Printed Products.
Printed Products
Sales in Printed Products decreased 3.9% in the quarter year-over-year, with the
previously announced loss of the large customer being the primary factor.
Segment income was up substantially in the quarter...23.7% on a year-over-year
basis, driven by improved operating performance in all businesses.
Overall unit volumes declined 11.2% in the quarter year-over-year, largely due
to the loss of a large customer I just mentioned. While volumes were down in
Printed Products, we see no fundamental change in the rate of market decline.
Last quarter I mentioned that we were highly confident that we would expand our
relationship with one of our largest clients due to an acquisition they had
made. That has happened since our last conference call. We have also done a good
job of extending contracts with our community bank and credit union clients.
7
We chose not to renew the lease on our production facility in Simi Valley,
California, which was part of the Liberty acquisition. Consequently, that
facility is closing this quarter, and we are consolidating the work into our
Dallas and Seattle facilities.
Harland Business Solutions sales increased 6.8 % in the quarter on a
year-over-year basis, with much of this growth continuing to come from sales of
our business products through our financial institution customers.
Sales in Integrated Client Solutions also increased in the quarter, 26.7%
year-over-year, with the increase coming from higher volumes in direct
marketing, a delivery price increase and the previously announced transfer of
business from Liberty. The increased volume came from all parts of Integrated
Client Solutions and was not dependent on one particular client or project.
Software and Services
Turning now to Software and Services. Sales increased 4.4% in the quarter
year-over-year, driven by growth in Retail and Lending, as well as the
acquisition of Financialware last year. Segment income decreased 6.6% in the
quarter year-over-year. Organic sales growth in the quarter was 0.9%
year-over-year. Strong sales growth in the quarter in Lending and Retail was
partially offset by weak sales in Mortgage, Bank Core Systems and Technical
Services. Organic backlog was up 13.6% in the quarter year-over-year, and our
pipeline was also up significantly.
Sales in Retail and Lending Solutions grew 12.3% in the quarter year-over-year,
driven by strong sales in both Lending and Retail, partially offset by lower
sales in Mortgage.
Lending sales grew 11.9% in the quarter due to sales of both our traditional
products and CreditQuest, which we introduced in the third quarter. We are
pleased with the market's acceptance of this product, which works with our
existing lending products to address the area of credit risk management.
We continued to see good progress in our Retail operation with sales up 43.7% in
the quarter, year-over-year. Slightly more than half of the increase was related
to the addition, effective January 1, 2006, of a portion of the direct marketing
business acquired from Liberty, which was included in the Checks business unit.
However, the balance of the increase was organic and was driven by sales of our
branch automation products. Last quarter, I mentioned a new offering we had
introduced designed to help financial institutions attract, grow and retain
deposits. While still in its early stages, we are encouraged by the initial
response to this offering.
Mortgage sales were quite slow in the quarter. As you know, we changed
management in this business last year, and although the business performed below
our expectations in the fourth quarter, we are encouraged by the strengthening
pipeline.
Core Systems sales were up 0.7% in the quarter. The impact of the Financialware
acquisition and the increased sales of our credit union core systems were
largely offset by weaker sales in our bank core business.
8
At the beginning of the fourth quarter, we moved Scantron Service Group under
Harland Financial Solutions. The financial institution segment is already a
significant market for this group. Additionally, there is greater opportunity
for growth in the financial market in conjunction with sales of our software
products. Moving Scantron Service Group under Harland Financial Solutions will
help us capitalize on this potential. As part of this transition, we have
renamed this business Harland Technology Services.
Sales in Technology Services were down 5.6% in the quarter year-over-year
attributable to lower sales of installation services. We expect that situation
to turn around in 2007.
Scantron
Turning now to Scantron. Scantron sales increased 8.5% in the quarter
year-over-year, but segment income decreased 8.0%, more than accounted for by
higher legal and severance expenses. The increase in legal expenses relates to a
lawsuit, which we believe has no merit.
Testing and Assessment sales increased 11.7 % in the quarter year-over-year.
Bookings for software were strong, the revenue from which will be recognized
over the next year. Sales of standard forms were also good in the quarter.
Data Collection sales increased 5.2% in the quarter year-over-year, largely
driven by higher volumes in Survey Services and increased sales of legacy and
third-party OMR equipment. Sales of the new Clarity scanners and custom forms
operation continued to be weak.
Corporate
So, to recap, we had a strong quarter operationally. We are pleased with the
increase in segment income for Printed Products, the sales increase in Scantron
and the continued strong showing of the Retail and Lending Solutions group of
Software and Services.
As I mentioned at the beginning of the call, due to the pending transaction with
M&F Worldwide, we are not providing earnings guidance for 2007, nor are we
conducting a question and answer session this morning. We anticipate mailing the
proxy for the acquisition and filing under Hart-Scott-Rodino in the near future,
and we will provide further updates on the transaction as the situation
warrants. With that, I'd like to turn it back over to the operator for closing
instructions and thank you for joining us this morning.
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Operator
Thank you, sir. A rebroadcast of this conference is available starting today at
1:00 PM Eastern Standard Time and will run until February 16, 2007 at midnight
Eastern Standard Time. You may access the rebroadcast by calling 719-457-0820.
Please reference pass-code #8582014. And that does conclude today's
teleconference, we thank you all for your participation and have a wonderful
day.