United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 26, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________
Commission file number 1-6352
JOHN H. HARLAND COMPANY
(Exact name of registrant as specified in its charter)
GEORGIA 58-0278260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2939 Miller Rd.
Decatur, Georgia 30035
(Address of principal executive offices) (Zip code)
(770) 981-9460
(Registrant's telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( ).
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( ).
The number of shares of the registrant's common stock outstanding on April 23,
2004 was 28,159,682.
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS . 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 23
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 24
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 25
EXHIBIT LIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-2-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
------
(In thousands) March 26, December 31,
2004 2003
- ----------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 20,488 $ 8,525
Accounts receivable - net 66,907 60,338
Inventories 15,289 15,517
Deferred income taxes 32,003 32,517
Prepaid expenses 11,377 11,096
Other 3,052 7,353
- ----------------------------------------------------------------------
Total current assets 149,116 135,346
- ----------------------------------------------------------------------
Other Assets:
Goodwill - net 217,638 217,749
Intangible assets - net 15,928 16,835
Refundable contract payments 54,453 52,933
Other 22,489 19,681
- ----------------------------------------------------------------------
Total other assets 310,508 307,198
- ----------------------------------------------------------------------
Property, plant and equipment 351,256 356,172
Less accumulated depreciation
and amortization 233,105 231,739
- ----------------------------------------------------------------------
Property, plant and equipment - net 118,151 124,433
- ----------------------------------------------------------------------
Total $ 577,775 $ 566,977
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-3-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands, except share and March 26, December 31,
per share amounts) 2004 2003
- ----------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 23,448 $ 26,030
Deferred revenues 62,129 57,745
Accrued liabilities:
Salaries, wages and employee benefits 26,733 30,376
Taxes 17,460 17,669
Other 28,041 29,602
- ----------------------------------------------------------------------
Total current liabilities 157,811 161,422
- ----------------------------------------------------------------------
Long-Term Liabilities:
Long-term debt, less current maturities 122,000 122,059
Deferred income taxes 4,671 5,087
Other 23,225 22,966
- ----------------------------------------------------------------------
Total long-term liabilities 149,896 150,112
- ----------------------------------------------------------------------
Total liabilities 307,707 311,534
- ----------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, authorized 500,000
shares of $1.00 par value, none issued - -
Common stock, authorized 144,000,000
shares of $1.00 par value,
37,907,497 shares issued 37,907 37,907
Additional paid-in capital 9,407 7,788
Retained earnings 456,029 448,688
Accumulated other comprehensive (loss) (654) (735)
Unamortized restricted stock awards (5,010) (5,408)
- ----------------------------------------------------------------------
497,679 488,240
Less 10,200,057 and 10,413,501 shares
in treasury - at cost,
respectively 227,611 232,797
- ----------------------------------------------------------------------
Total shareholders' equity 270,068 255,443
- ----------------------------------------------------------------------
Total $ 577,775 $ 566,977
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-4-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Month Period Ended
(In thousands, except March 26, March 28,
per share amounts) 2004 2003
- ----------------------------------------------------------------------
Sales:
Product sales $ 153,707 $ 160,409
Service sales 36,869 33,016
- ----------------------------------------------------------------------
Total sales 190,576 193,425
Cost of sales:
Cost of products sold 88,875 88,611
Cost of services sold 13,251 10,982
- ----------------------------------------------------------------------
Total cost of sales 102,126 99,593
Gross Profit 88,450 93,832
Selling, general and administrative expenses 65,687 70,218
Amortization of intangible assets 907 670
- ----------------------------------------------------------------------
Income From Operations 21,856 22,944
- ----------------------------------------------------------------------
Other Income (Expense):
Interest expense (1,124) (1,558)
Other - net 153 43
- ----------------------------------------------------------------------
Total (971) (1,515)
- ----------------------------------------------------------------------
Income Before Income Taxes 20,885 21,429
Income taxes 7,832 8,250
- ----------------------------------------------------------------------
Net Income 13,053 13,179
Retained earnings at beginning of period 448,688 409,110
Cash dividends (2,780) (2,141)
Issuance of treasury shares under stock
plans (2,932) (1,940)
- ----------------------------------------------------------------------
Retained earnings at end of period $ 456,029 $ 418,208
======================================================================
Weighted Average Shares
Outstanding:
Basic 27,437 27,873
Diluted 28,239 28,403
======================================================================
Earnings Per Common Share:
Basic $ 0.48 $ 0.47
Diluted $ 0.46 $ 0.46
======================================================================
Cash Dividends Per Common Share $ 0.10 $ 0.075
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-5-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Period Ended
March 26, March 28,
(In thousands) 2004 2003
- -----------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 13,053 $ 13,179
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 10,032 9,268
Amortization 7,339 4,999
Stock-based compensation 560 597
Tax benefits from stock-based compensation 1,462 405
Gain on sale of assets (3,608) (28)
Deferred income taxes 117 (626)
Other 1,107 460
Change in assets and liabilities:
Accounts receivable (6,765) (5,530)
Inventories and other current assets 1,661 369
Deferred revenues 4,423 5,830
Accounts payable and accrued liabilities (8,449) (2,954)
Refundable contract payments (6,443) (2,244)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 14,489 23,725
- -----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,550) (6,668)
Proceeds from sale of property, plant and equipment 5,422 143
Long-term investments and other assets (99) 1,159
- -----------------------------------------------------------------------------
Net cash (used in) investing activities (227) (5,366)
- -----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Credit facility borrowings 65,610 55,551
Credit facility payments (65,667) (62,236)
Repayment of long-term debt (31) (36)
Repurchases of stock (3,171) (19,138)
Issuance of treasury stock 5,420 1,819
Dividends paid (2,780) (2,141)
Other - net (1,680) 53
- -----------------------------------------------------------------------------
Net cash (used in) financing activities (2,299) (26,128)
- -----------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 11,963 (7,769)
Cash and cash equivalents at beginning of period 8,525 19,218
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 20,488 $ 11,449
=============================================================================
See Notes to Condensed Consolidated Financial Statements.
-6-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 26, 2004
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments which are, in the opinion of management,
necessary for a normal presentation of the results of operations, financial
position and cash flows of the John H. Harland Company and subsidiaries (the
"Company") for the interim periods reflected. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to applicable rules and regulations of the Securities
and Exchange Commission. The results of operations for the interim periods
reported herein are not necessarily indicative of results to be expected for the
full year. Certain reclassifications have been made in the 2003 financial
statements and notes to financial statements to conform to 2004 classifications.
The condensed consolidated financial statements included herein should be read
in conjunction with the consolidated financial statements and notes thereto, and
the Independent Auditors' Report included in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 2003 ("2003 Form 10-K").
2. Accounting Policies
Reference is made to the accounting policies of the Company described in the
notes to consolidated financial statements included in the 2003 Form 10-K.
Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. If the Company
accounted for stock-based compensation using the fair value recognition
provisions of Financial Accounting Standards Board (the "FASB") Statement No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share for the three month periods ended March 26, 2004 and March
28, 2003 would have changed to the pro forma amounts listed below:
Three Month Period Ended
(In thousands, except March 26, March 28,
per share amounts) 2004 2003
- ----------------------------------------------------------------------
Net income:
As reported $ 13,053 $ 13,179
Add: stock-based compensation
expense included in reported
net income, net of tax 342 364
Deduct: stock-based compensation
expense determined under the
fair value based method for
all awards, net of tax (1,390) (1,675)
- ----------------------------------------------------------------------
Pro forma net income $ 12,005 $ 11,868
======================================================================
Earnings per common share:
As reported
Basic $ 0.48 $ 0.47
Diluted $ 0.46 $ 0.46
Pro forma
Basic $ 0.44 $ 0.43
Diluted $ 0.43 $ 0.42
-7-
Pro forma compensation costs associated with options granted under the employee
stock purchase plan were estimated based on the discount from market value. The
following presents the estimated weighted average fair value of options granted
and the weighted average assumptions used under the Black-Scholes option pricing
model for the three month periods ended March 26, 2004 and March 28, 2003:
March 26, March 28,
2004 2003
- ----------------------------------------------------------------------
Fair value per option $ 9.60 $ 7.87
Weighted average assumptions:
Dividend yield 1.4% 1.4%
Expected volatility 36.1% 41.1%
Risk-free interest rate 4.1% 4.1%
Expected life (years) 5.0 5.2
3. Acquisition
On June 3, 2003, Harland Financial Solutions, Inc. ("HFS"), a wholly owned
subsidiary of the Company, extended its core systems offering with the
acquisition of 100% of the equity of Premier Systems, Inc. ("PSI") for
approximately $11.3 million, net of cash acquired. The fair value of assets and
liabilities at the date of acquisition consisted of non-deductible goodwill of
$9.5 million, customer list of $6.0 million (estimated useful life of ten
years), other assets of $4.3 million and assumed liabilities of $8.5 million.
The allocation of purchase price is subject to refinement as the Company
finalizes the valuation of certain assets and liabilities. PSI was a provider of
core processing service bureau deliverables that were based on HFS' widely used
ULTRADATA(R) System. With the addition of PSI, HFS now provides core processing
applications and services to more than 1,000 financial institutions.
The acquisition was paid for with net cash provided by operating activities and
proceeds from the Company's credit facility. The results of operations of the
acquired business have been included in the Company's operations since the date
of acquisition. The pro forma effects of the PSI acquisition were not material
to the Company's results of operations.
4. Goodwill and Intangible Assets
Under FASB Statement No. 142, "Goodwill and Other Intangibles," goodwill and
intangible assets with indefinite lives are no longer amortized but are tested
at least annually for impairment. Separable intangible assets with definitive
lives will continue to be amortized over their useful lives.
The changes in the carrying amounts of goodwill by business segment for the
three months ended March 26, 2004 are as follows (in thousands):
Printed Software &
Products Services Scantron Consolidated
- ------------------------------------------------------------------------
Balances as of
December 31, 2003 $ 24,709 $149,474 $ 43,566 $217,749
Purchase price
allocation adjustments - (111) - (111)
- ------------------------------------------------------------------------
Balances as of
March 26, 2004 $ 24,709 $149,363 $ 43,566 $217,638
========================================================================
-8-
Intangible assets with definitive lives were comprised of the following (in
thousands):
March 26, 2004 December 31, 2003
- ------------------------------------------------------------------------
Gross Net Gross Net
Carrying Accum. Carrying Carrying Accum. Carrying
Amount Amort. Amount Amount Amort. Amount
- ------------------------------------------------------------------------
Developed
technology $25,017 $(13,271) $11,746 $24,787 $(11,851) $12,936
Customer
lists 25,900 (13,178) 12,722 25,900 (12,366) 13,534
Trademarks 3,800 (594) 3,206 3,800 (499) 3,301
Content 2,300 (385) 1,915 2,300 (327) 1,973
- ------------------------------------------------------------------------
Total $57,018 $(27,428) $29,589 $56,787 $(25,043) $31,744
========================================================================
Carrying amounts of developed technology and content are included in the other
assets caption on the balance sheets and the related amortization expense is
included in the cost of sales caption on the statements of income.
Aggregate amortization expense for intangible assets totaled $2.3 million and
$2.1 million for the three month periods ended March 26, 2004 and March 28,
2003, respectively.
The estimated future intangible amortization expense as of March 26, 2004 is as
follows (in thousands):
Year Amount
- --------------------------------------------------------------------
Remaining 2004 $ 6,118
2005 6,025
2006 5,491
2007 4,638
2008 3,144
Thereafter 4,173
- --------------------------------------------------------------------
Total $29,589
====================================================================
5. Reorganization
In September 2003, the Company announced a reorganization of its Printed
Products operations including a plan to consolidate its domestic manufacturing
operations from 14 plants to 9 plants. During the first quarter of 2004, one
plant was closed and two plants ceased production. The last affected plant is
scheduled to be closed in the third quarter of 2004. Two of the facilities being
closed are leased. One of these facilities is under lease through late 2005 and
the other is under lease through mid 2010. In addition to the plant
consolidation, Printed Products implemented other staffing reductions beginning
in the fourth quarter of 2003 and will continue with additional staffing
reductions throughout 2004. These actions are primarily due to excess capacity
in production facilities resulting from efficiencies realized from digital
printing technology and other production and support systems and lower volumes
attributable to the losses of certain large customers, including a direct check
marketer, and general market volume decline.
-9-
The Company estimates net pre-tax expenses associated with the plant
consolidations will total $10.4 million consisting of employee severance ($3.6
million), revision of depreciable lives and salvage values of furniture and
equipment, asset impairment charge and disposal gains and losses ($2.2 million),
relocation and other costs ($2.0 million) and contract termination costs related
to leaseholds ($2.6 million). The other staffing reduction actions will result
in a total estimated expense of $5.5 million related to employee severance
costs.
The following is the cumulative net costs of these actions incurred through
March 26, 2004 (in thousands):
Staffing
Plant Reduction
Consolidation Actions
- ----------------------------------------------------------------------------------
Employee severance $ 2,708 $ 3,375
Revision of depreciable lives and
salvage values, asset impairment and
disposal gains on assets (423)
Relocation and other costs 683
- ----------------------------------------------------------------------------------
Total $ 2,968 $ 3,375
==================================================================================
Plant consolidation costs are included in cost of goods sold except for a $3.7
million gain on the sale of a closed facility, which is included in selling,
general and administrative costs along with other staffing reduction costs.
The following reconciles the beginning and ending liability balances for the
three months ended March 26, 2004 related to these actions and are included in
the other accrued liabilities caption on the balance sheet (in thousands):
Charged to Utilized
Beginning Costs and -------------------- Ending
Balance Expenses Cash Non-Cash Balance
- ----------------------------------------------------------------------------------
Plant consolidation:
Employee severance $ 1,659 $ 978 $ (1,062) $ - $ 1,575
Revision of
depreciable lives
and salvage values - 1,102 - (1,102) -
Gain on sale of assets - (3,663) 5,301 (1,638) -
Relocation and other
costs - 601 (601) - -
Staffing reduction
actions:
Employee severance 1,125 474 (1,054) - 545
- ----------------------------------------------------------------------------------
Total $ 2,784 $ (508) $ 2,584 $ (2,740) $ 2,060
==================================================================================
6. Property Held for Sale
At March 26, 2004, property held for sale consisted of the Company's Printed
Products facility in St. Louis, Missouri. Management is actively marketing the
sale of the St. Louis facility.
During the first quarter of 2004, the Company sold its Printed Products facility
in San Diego, California, which became available due to the plant consolidation
plan and realized a pre-tax gain of $3.7 million on the sale of the property.
The gain was included as a reduction of selling, general and administrative
expenses on the statement of income.
-10-
7. Income Taxes
The Company's consolidated effective income tax rates were 37.5% and 38.5% for
the first three months of 2004 and 2003, respectively. The lower effective
income tax rate for the first three months of 2004 resulted primarily from the
reduction in the effective state rate and a favorable renewal of an industrial
revenue grant related to the Company's operations in Puerto Rico.
8. Inventories
As of March 26, 2004 and December 31, 2003, inventories consisted of the
following (in thousands):
March 26, December 31,
2004 2003
- ----------------------------------------------------------------------
Raw materials $ 12,669 $ 13,028
Work in progress 815 920
Finished goods 1,805 1,569
- ----------------------------------------------------------------------
Total $ 15,289 $ 15,517
======================================================================
9. Long Term Debt
In February 2004, the Company amended its credit facility (the "Credit
Facility") with a syndicate of banks increasing the amount from $325.0 million
to $425.0 million. The Credit Facility is comprised of a $100.0 million term
loan and a $325.0 million revolving loan, both of which mature in 2009. The term
loan requires annual repayments of $5.0 million. As a result, the Credit
Facility will decrease by $5.0 million per annum to $400.0 million at the 2009
maturity date. The Credit Facility may be used for general corporate purposes,
including acquisitions, and includes both direct borrowings and letters of
credit. The Credit Facility is unsecured and the Company presently pays a
commitment fee of 0.175% on the unused amount of the Credit Facility. Borrowings
under the Credit Facility bear interest, at the Company's option, based upon one
of the following indices (plus a margin specified in the agreement): the Federal
Funds Rate, the SunTrust Bank Base Rate or LIBOR. The Credit Facility has
certain financial covenants including, among other items, leverage, fixed charge
and minimum net worth requirements. The Credit Facility also has restrictions
that limit the Company's ability to incur additional indebtedness, grant
security interests or sell its assets beyond certain amounts.
At March 26, 2004, the Company had $127.0 million in outstanding cash borrowings
under the Credit Facility, $5.1 million in outstanding letters of credit and
$292.9 million available for borrowing under the Credit Facility. The average
interest rate in effect on outstanding cash borrowings at March 26, 2004,
including the effect of the Company's interest rate hedging program was 2.57%.
-11-
10. Comprehensive Income
Other comprehensive income for the Company includes foreign currency translation
adjustments, unrealized gains (losses) on investments and changes in fair value
of cash flow hedging instruments. Total comprehensive income for the three month
periods ended March 26, 2004 and March 28, 2003 was as follows (in thousands):
Three Month Period Ended
March 26, March 28,
2004 2003
- ----------------------------------------------------------------------
Net income: $ 13,053 $ 13,179
Other comprehensive
income (loss):
Foreign exchange
translation adjustments (62) 52
Unrealized losses on
investments, net of $11 and ($516)
in tax benefits (provisions) (17) (849)
Changes in fair value of cash
flow hedging instruments,
net of ($102) and $(157) in tax
(provisions) 160 245
- ----------------------------------------------------------------------
Comprehensive income $ 13,134 $ 12,627
======================================================================
11. Earnings per Common Share
The computation of basic and diluted earnings per share for the three month
periods ended March 26, 2004 and March 28, 2003 is as follows (in thousands,
except per share amounts):
Three Month Period Ended
March 26, March 28,
2004 2003
- ----------------------------------------------------------------------
Computation of basic earnings per common share:
Numerator
Net income $ 13,053 $ 13,179
- ----------------------------------------------------------------------
Denominator
Weighted average shares
outstanding 27,309 27,766
Weighted average deferred
shares outstanding under
non-employee directors
compensation plan 128 107
- ----------------------------------------------------------------------
Weighted average shares
outstanding - basic 27,437 27,873
- ----------------------------------------------------------------------
Earnings per share - basic $ 0.48 $ 0.47
======================================================================
Computation of diluted earnings per common share:
Numerator
Net income $ 13,053 $ 13,179
- ----------------------------------------------------------------------
Denominator
Weighted average shares
outstanding - basic 27,437 27,873
Dilutive effect of stock
options and restricted stock 802 530
- ----------------------------------------------------------------------
Weighted average shares
outstanding - diluted 28,239 28,403
- ----------------------------------------------------------------------
Earnings per share - diluted $ 0.46 $ 0.46
======================================================================
-12-
12. Postretirement Benefits
The Company sponsors two unfunded defined postretirement benefit plans that
cover certain salaried and nonsalaried employees. One plan provides health care
benefits, and the other provides life insurance benefits. The medical plan is
contributory, and contributions are adjusted annually based on actual claims
experience. During the three months ended March 26, 2004, the Company
contributed $0.2 million to the plans.
Net periodic postretirement costs for the three month periods ended March 26,
2004 and March 28, 2003 are summarized as follows (in thousands):
Three Month Period Ended
March 26, 2004 March 28,2003
- --------------------------------------------------------------------
Interest on APBO $ 354 $ 366
Net amortization 86 74
- --------------------------------------------------------------------
Total $ 440 $ 440
====================================================================
13. Business Segments
The Company operates its business in three segments. The Printed Products
segment ("Printed Products") includes checks, direct marketing activities and
analytical services marketed primarily to financial institutions. The Software
and Services segment ("Software & Services") is focused on the financial
institution market and includes core processing applications and services for
credit unions and community banks, lending and mortgage origination
applications, mortgage servicing applications, branch automation applications
and customer relationship management applications. The Scantron segment
represents products and services sold by the Company's Scantron subsidiary
including scanning equipment and software, scannable forms, survey solutions,
curriculum development, testing and assessment tools, training and field
maintenance services. Scantron sells these products and services to the
education, commercial and financial institution markets.
The Company's operations are primarily in the United States and Puerto Rico.
There were no significant intersegment sales. The Company does not have sales to
any individual customer greater than 10% of total Company sales. Equity
investments, as well as foreign assets, are not significant to the consolidated
results of the Company. The Company's accounting policies for segments are the
same as those described in Note 2.
Management evaluates segment performance based on segment income or loss before
income taxes. Segment income or loss excludes interest income, interest expense
and certain other non-operating gains and losses, all of which are considered
corporate items. Corporate assets consist primarily of cash and cash
equivalents, deferred income taxes, investments and other assets not employed in
production. Total assets of each business segment did not change materially from
the amount disclosed in the 2003 Form 10-K.
-13-
Selected summarized financial information for the three month periods ended
March 26, 2004 and March 28, 2003 was as follows (in thousands):
Business Segment
-------------------------------
Printed Software & Corporate & Consoli-
Products Services Scantron Eliminations dated
- ------------------------------------------------------------------------------
Quarter ended:
March 26, 2004
Sales $ 120,419 $ 44,763 $ 25,913 $ (519) $ 190,576
Income (loss)
before income
taxes 17,792 4,011 6,300 (7,218) 20,885
March 28, 2003
Sales $ 127,894 $ 39,940 $ 26,014 $ (423) $ 193,425
Income (loss)
before income
taxes 20,781 4,299 3,847 (7,498) 21,429
14. Contingencies
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. The Company believes that the ultimate outcome of these
matters will not have a material effect on its financial statements.
15. Subsequent Event
On April 30, 2004, HFS acquired certain assets related to the electronic
mortgage document product line of Greatland Corporation for approximately $5.6
million in cash. Greatland is a leading provider of forms technology, compliance
expertise and software compatible products used to meet the needs of businesses
to convey regulatory information. It has been a leader for 20 years in the
evolution of electronic mortgage document technology helping financial
institutions complete and distribute information more easily. The Greatland
mortgage document set is employed by many of the industry's leading mortgage
lenders and mortgage loan origination system technology providers. Greatland's
electronic mortgage document products will allow Software and Services to build
on its leadership position in compliance and mortgage solutions.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company operates its business in three segments. The Printed Products
segment ("Printed Products") includes checks, direct marketing activities and
analytical services marketed primarily to financial institutions.
The Software and Services segment ("Software & Services") is focused on the
financial institution market and includes core processing applications and
services for credit unions and community banks, lending and mortgage origination
applications, mortgage servicing applications, branch automation applications
and customer relationship management applications.
The Scantron segment ("Scantron") includes scanning equipment and software,
scannable forms, survey solutions, curriculum development, testing and
assessment tools, training and field maintenance services. Scantron sells these
products and services to the education, commercial and financial institution
markets.
CRITICAL ACCOUNTING POLICIES
In the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2003 (the "2003 Form 10-K"), the Company's most critical accounting policies
and estimates upon which its financial status depends were identified as those
relating to revenue recognition, impairment of long-lived assets, goodwill and
other intangible assets, software and other developmental costs, income taxes
and stock-based compensation. The Company believes there were no significant
changes in the status of its accounting policies during the three months ended
March 26, 2004 to warrant further disclosure. See the 2003 Form 10-K for
additional disclosure with respect to the Company's critical accounting
policies.
REORGANIZATION
In September 2003, the Company announced a reorganization of its Printed
Products operations including a plan to consolidate its domestic manufacturing
operations from 14 plants to 9 plants. During the first quarter of 2004, one
plant was closed and two plants ceased production. The last affected plant is
scheduled to be closed in the third quarter of 2004. Two of the facilities being
closed are leased. One of these facilities is under lease through late 2005 and
the other is under lease through mid 2010. In addition to the plant
consolidation, Printed Products implemented other staffing reductions beginning
in the fourth quarter of 2003 and will continue with additional staffing
reductions throughout 2004. These actions are primarily due to excess capacity
in production facilities resulting from efficiencies realized from digital
printing technology and lower volumes attributable to the losses of certain
large customers, including a direct check marketer, and general market volume
decline. The Company believes these actions will bring its production and
support structures in line with its business levels. Management expects to
achieve savings increasing to approximately $20 million on an annual run rate
basis by the end of 2005 as a result of the reorganization.
The Company estimates net pre-tax expenses associated with the plant
consolidations will total $10.4 million consisting of employee severance ($3.6
million), revision of depreciable lives and salvage values of furniture and
equipment, asset impairment charge and disposal gains and losses ($2.2 million),
relocation and other costs ($2.0 million) and contract termination costs related
to leaseholds ($2.6 million). The other staffing reduction actions will result
in a total estimated expense of $5.5 million related to employee severance
costs.
-15-
During the first quarter of 2004, plant consolidation actions resulted in a net
gain of $1.0 million consisting of $2.7 million of expenses in cost of goods
sold and a gain of $3.7 million on the sale of a closed facility in selling,
general and administrative expenses. Other staffing reduction actions resulted
in $0.5 million of expenses during the first quarter of 2004, which were
included in selling, general and administrative expenses.
RESULTS OF OPERATIONS - FIRST QUARTER OF 2004 VERSUS FIRST QUARTER OF 2003
SALES
Consolidated sales and sales by segment for the three month periods ended March
26, 2004 and March 28, 2003 were as follows (in thousands):
Three Month Period Ended
March 26, 2004 March 28,2003
- ----------------------------------------------------------------------
% of % of
Amount Total Amount Total
- ----------------------------------------------------------------------
Printed Products $120,419 63.2% $127,894 66.1%
Software & Services 44,763 23.5% 39,940 20.6%
Scantron 25,913 13.6% 26,014 13.5%
Eliminations (519) (0.3%) (423) (0.2%)
- ----------------------------------------------------------------------
Total $190,576 100.0% $193,425 100.0%
======================================================================
Consolidated sales decreased $2.8 million, or 1.5%, from $193.4 million in the
first quarter of 2003 to $190.6 million in the first quarter of 2004. Sales
increases in Software & Services partially offset decreases in Printed Products
and Scantron sales. Sales of products, which consist of all Printed Products
sales (except analytical services), software licensing sales, scanning equipment
and scannable forms and other products decreased 4.2% to $153.7 million in the
first quarter of 2004 from $160.4 million in the first quarter of 2003. Sales of
services, which consist of software maintenance services, field maintenance
services, core processing services, analytical and consulting services and other
services increased 11.7% to $36.9 million in the first quarter of 2004 from
$33.0 million in the first quarter of 2003.
Printed Products sales decreased $7.5 million, or 5.8%, to $120.4 million in the
first quarter of 2004 from $127.9 million in the first quarter of 2003. Domestic
imprint check printing operations, which accounted for a majority of the sales
decrease, were unfavorably impacted by a volume decrease of 7.3% and a decrease
in the average price per unit of 2.1%. The volume decrease was primarily due to
the loss of certain large customers during 2003, including a direct check
marketer, and to general market volume decline. The decrease in the average
price per unit was due primarily to incentives and price reductions resulting
from contract renewals, partially offset by the loss of lower priced business.
Sales of computer checks and related products increased in the first quarter of
2004 compared to the first quarter of 2003 due primarily to a product expansion
with an existing customer in 2004, the addition of a new retail customer that
began in 2004 and increased sales from financial institution referral programs.
Sales of direct marketing activities decreased in the first quarter of 2004
compared to the first quarter of 2003 due primarily to lower direct marketing
sales in several large accounts, lower investment services sales and lower
analytical services sales attributable to contracts not being renewed with
certain major banks.
-16-
Software & Services sales increased $4.9 million, or 12.3%, to $44.8 million in
the first quarter of 2004 from $39.9 million in the first quarter of 2003. The
increase in sales was due primarily to the acquisition of Premier Systems, Inc.
("PSI") in June 2003 (see Note 3 to the Condensed Consolidated Financial
Statements included in this report), which accounted for sales of approximately
$4.8 million. Excluding the impact of the acquisition, sales increases in core
systems were largely offset by decreases in sales in retail and lending
solutions. The unfavorable sales results in retail and lending solutions were
primarily due to decreased sales in mortgage solutions attributable to lower
refinancing activity and decreased sales to large customers for loan and deposit
origination and compliance solutions. Software & Services backlog at the end of
the first quarter of 2004 was $100.0 million, an increase of 130.9% compared to
$43.3 million for the first quarter of 2003, and decreased $1.6 million, or
1.6%, from $101.6 million at the end of the fourth quarter of 2003. The increase
from the first quarter of 2003 was due to the PSI acquisition and stronger
bookings of banking and credit union systems over that twelve-month period.
Excluding the impact of the acquisition, backlog increased 13.5% from the first
quarter of 2003.
Scantron sales decreased $0.1 million, or 0.4%, to $25.9 million in the first
quarter of 2004 from $26.0 million in the first quarter of 2003. Increases in
sales of standard forms, survey services and software and services were more
than offset by decreases in sales of imaging solutions, custom forms and
installation services.
GROSS PROFIT
Consolidated gross profit and gross profit by segment for the three month
periods ended March 26, 2004 and March 28, 2003 were as follows (in thousands):
Three Month Period Ended
March 26, 2004 March 28,2003
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
Printed Products $ 44,391 36.9% $ 51,892 40.6%
Software & Services 29,647 66.2% 28,088 70.3%
Scantron 14,412 55.6% 13,852 53.2%
- ----------------------------------------------------------------------
Total $ 88,450 46.4% $ 93,832 48.5%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Consolidated gross profit decreased $5.4 million, or 5.7%, from $93.8 million in
the first quarter of 2003 to $88.5 million in the first quarter of 2004, and
decreased as a percentage of sales from 48.5% in the first quarter of 2003 to
46.4% in the first quarter of 2004.
Printed Products gross profit in the first quarter of 2004 decreased $7.5
million, or 14.5%, from the first quarter of 2003 and as a percentage of sales
was 36.9% in the first quarter of 2004 compared to 40.6% in the first quarter of
2003. Printed Products gross profit was unfavorably impacted by the sales
decreases in domestic imprint check printing, direct marketing and analytical
services operations and plant consolidation costs of $2.7 million incurred
during the first quarter of 2004.
Software & Services gross profit in the first quarter of 2004 increased $1.6
million, or 5.6%, from the first quarter of 2003 due primarily to the PSI
acquisition and higher sales in credit union and community bank markets,
partially offset by decreases in sales in retail and lending solutions. As a
percentage of sales, Software & Services gross profit decreased to 66.2% in the
first quarter of 2004 from 70.3% in the first quarter of 2003, due primarily to
the lower margin nature of the acquired operation.
-17-
Scantron gross profit in the first quarter of 2004 increased $0.6 million, or
4.0%, over the first quarter of 2003, due primarily to a change in sales mix and
to unfavorable costs and production inefficiencies experienced during a facility
relocation that occurred in the first quarter of 2003. As a percentage of sales,
Scantron gross profit increased to 55.6% in the first quarter of 2004 from 53.2%
in the first quarter of 2003.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SG&A)
Consolidated SG&A and SG&A by segment for the three month periods ended March
26, 2004 and March 28, 2003 were as follows (in thousands):
Three Month Period Ended
March 26, 2004 March 28,2003
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
Printed Products $ 26,610 22.1% $ 31,128 24.3%
Software & Services 24,791 55.4% 23,196 58.1%
Scantron 8,038 31.0% 9,918 38.1%
Corporate 6,248 5,976
- ----------------------------------------------------------------------
Total $ 65,687 34.5% $ 70,218 36.3%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Consolidated SG&A decreased $4.5 million, or 6.5%, in the first quarter of 2004
from the first quarter of 2003. These expenses as a percentage of sales were
34.5% in the first quarter of 2004, down from 36.3% in the first quarter of
2003.
Printed Products SG&A decreased $4.5 million, or 14.5%, to $26.6 million in the
first quarter of 2004 compared to $31.1 million in the first quarter of 2003.
The decrease was largely due to a $3.7 million gain realized on a facility that
was closed and sold during the first quarter of 2004. The decrease was also due
in part to lower selling and marketing costs resulting from staffing reduction
actions that were initiated in September 2003. These decreases were partially
offset by an increase in amortization expense related to customer care systems
implemented during 2003 and 2004 and also by staffing reduction action costs
related to the Printed Products reorganization of $0.5 million incurred during
the first quarter of 2004.
Software and Services SG&A increased $1.6 million, or 6.9%, to $24.8 million in
the first quarter of 2004 compared to $23.2 million in the first quarter of
2003. The increase was due primarily to the acquisition of PSI in June 2003 and
increases in other core systems SG&A resulting from increased headcount and
commission expense related to increased sales.
Scantron SG&A decreased $1.9 million, or 19.0%, to $8.0 million in the first
quarter of 2004 compared to $9.9 million in the first quarter of 2003. The
decrease was due primarily to lower development costs and selling and marketing
expenses resulting from cost reduction initiatives implemented in late 2003.
Corporate SG&A increased $0.3 million, or 4.6%, to $6.2 million in the first
quarter of 2004 compared to $6.0 million in the first quarter of 2003. The
increase was due primarily to increases in audit fees, insurance costs and fees
related to Sarbanes-Oxley compliance efforts partially offset by a reduction in
amortization expense in the first quarter of 2004 related to an enterprise
information system that became fully amortized during 2003.
-18-
Consolidated Income from Operations
Consolidated income from operations decreased $1.1 million, or 4.7%, to $21.9
million in the first quarter of 2004 from $22.9 million in the first quarter of
2003, due primarily to a decrease in gross profit which was partially offset by
a decrease in SG&A.
Other Income (Expense)
Other Income (Expense) decreased $0.5 million to an expense of $1.0 million in
the first quarter of 2004 from an expense of $1.5 million in the first quarter
of 2003. The decrease was due primarily to lower average interest rates in
effect during the first quarter of 2004 compared to the first quarter of 2003
because of lower amounts borrowed at fixed rates and also due to lower average
amounts outstanding during the first quarter of 2004 compared with the first
quarter of 2003.
Consolidated Income Before Income Taxes
Consolidated income before income taxes decreased $0.5 million, or 2.5%, to
$20.9 million in the first quarter of 2004 from $21.4 million in the first
quarter of 2003 due to decreased income from operations.
Income Taxes
Consolidated effective income tax rates were 37.5% and 38.5% for the first
quarter of 2004 and the first quarter of 2003, respectively. The lower effective
income tax rate for the first three months of 2004 resulted primarily from a
reduction in the effective state rate and a favorable renewal during the third
quarter of 2003 of an industrial revenue grant related to the Company's
operations in Puerto Rico.
Net Income and Earnings Per Share
Net income in the first quarter of 2004 was $13.1 million compared to $13.2
million in the first quarter of 2003. Basic and diluted earnings per share were
$0.48 and $0.46, respectively, for the first quarter of 2004 compared to basic
and diluted earnings per share of $0.47 and $0.46, respectively, for the same
period in 2003.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Sources and Uses of Cash
Cash flows provided by operating activities decreased $9.2 million to $14.5
million in the first quarter of 2004 from $23.7 million in the first quarter of
2003 due primarily to changes in working capital other than cash which accounted
for $6.8 million of the decrease and to refundable contract payments which
accounted for $4.2 million of the decrease. Refundable contract payments totaled
$6.4 million in the first quarter of 2004 compared to $2.2 million in the first
quarter of 2003. The changes in net income, depreciation and amortization and
other adjustments to net income (excluding working capital and refundable
contracts) were $1.8 million favorable in the first quarter of 2004 compared to
the first quarter of 2003. The primary uses of cash in the first quarter of 2004
were for refundable customer contract payments, capital expenditures, purchases
of treasury stock and dividend payments to shareholders.
-19-
Purchases of property, plant and equipment totaled $5.6 million in the first
quarter of 2004, a decrease of $1.1 million, compared to $6.7 million in the
first quarter of 2003 and were primarily for customer care infrastructure
initiatives. The Company's customer care infrastructure initiatives focus on
improving systems that support sales, marketing and customer service to ensure
exceptional service and added functionality for the Company's call centers. The
Company currently estimates it will have spent a total of approximately $60 to
$65 million on customer care infrastructure initiatives over a four year period
ending in 2004. As of March 26, 2004, $49.0 million has been expended on these
initiatives, of which $35.6 million was capitalized. The Company currently
estimates it will spend an additional $11 to $16 million on customer care
infrastructure initiatives in 2004. Although development of customer care
infrastructure will continue throughout 2004, the Company expects to delay
implementation of certain functionality in the second half of 2004 in order to
evaluate controls and processes as required by Section 404 of the Sarbanes-Oxley
Act, thereby deferring certain expenditures into 2005.
During the three month period ended March 26, 2004, the Company repurchased
108,800 shares of its common stock at an average cost per share of $29.15. See
Part II, Item 2. "Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities" in this report on Form 10-Q, related to the Company's
repurchases of its common stock during the three month period ended March 26,
2004. These purchases were made pursuant to an authorization approved by the
Company's Board of Directors in January 2003.
In February 2004, the Company amended its credit facility (the "Credit
Facility") with a syndicate of banks increasing the amount from $325.0 million
to $425.0 million. The Credit Facility is comprised of a $100.0 million term
loan and a $325.0 million revolving loan, both of which mature in 2009. The term
loan requires annual repayments of $5.0 million, therefore the Credit Facility
will decrease by $5.0 million per annum to $400.0 million at the 2009 maturity
date. The Credit Facility may be used for general corporate purposes, including
acquisitions, and includes both direct borrowings and letters of credit. The
Credit Facility is unsecured and the Company presently pays a commitment fee of
0.175% on the unused amount of the Credit Facility. Borrowings under the Credit
Facility bear interest, at the Company's option, based upon one of the following
indices (plus a margin specified in the agreement): the Federal Funds Rate, the
SunTrust Bank Base Rate or LIBOR. The Credit Facility has certain financial
covenants including, among other items, leverage, fixed charge and minimum net
worth requirements. The Credit Facility also has restrictions that limit the
Company's ability to incur additional indebtedness, grant security interests or
sell its assets beyond certain amounts. At March 26, 2004, the Company had
$127.0 million in outstanding cash borrowings under the Credit Facility, $5.1
million in outstanding letters of credit and $292.9 million available for
borrowing under the Credit Facility. The average interest rate in effect on
outstanding cash borrowings at March 26, 2004, including the effect of the
Company's interest rate hedging program was 2.57%.
At March 26, 2004, the Company had $20.5 million in cash and cash equivalents.
The Company believes that its current cash position, funds from operations and
the availability of funds under its Credit Facility will be sufficient to meet
anticipated requirements for working capital, dividends, capital expenditures
and other corporate needs. Management is not aware of any condition that would
materially alter this trend.
The Company also believes that it possesses sufficient unused debt capacity and
access to equity capital markets to pursue additional acquisition opportunities
if funding beyond that available under the Credit Facility were required.
-20-
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
During the three months ended March 26, 2004, the Company entered into
agreements with certain customers, which obligates the Company to pay a total of
$64.6 million during the years 2004 through 2009. Of this amount, $5.6 million
was paid as of March 26, 2004. As of March 26, 2004, the remaining payments
under these contracts, as well as remaining payment obligations under previously
existing customer contracts totaled $66.8 million and are scheduled to be paid
as follows: $12.1 million for the nine months ending December 31, 2004; $25.6
million for the two year period ending December 31, 2006; $21.1 million for the
two year period ending December 31, 2008 and $8.0 million for the periods beyond
December 31, 2008. These payments are amortized as a reduction of sales over the
life of the related contract and are refundable from the customer on a pro-rata
basis if the contract is terminated.
Other contractual obligations and commitments have not changed significantly
since December 31, 2003. See the 2003 Form 10-K with respect to the Company's
other contractual obligations and commitments.
ACQUISITIONS
The PSI acquisition in June 2003 was paid for with cash provided from operating
activities and proceeds from the Credit Facility. The acquisition was accounted
for using the purchase method of accounting and accordingly, the results of
operation of the acquired business have been included in the Company's
operations since the closing date (see Note 3 to the Condensed Consolidated
Financial Statements).
OUTLOOK
The Company believes that its financial position continues to be strong and
expects positive cash flows from operations in all business segments in 2004.
Net income during the first half of 2004 is expected to be less than net income
during the comparable period of 2003 due to anticipated lower earnings in
Printed Products. Reorganization expenses and anticipated inefficiencies related
to plant consolidation activities during the first half of 2004 are expected to
more than offset improved profitability in Software & Services and Scantron
operations. The Company expects more favorable results in the second half of
2004 compared with the same period in 2003. However, net income for the full
year of 2004 is expected to be lower than 2003 net income, largely the result of
lower net income in the first half of the year.
The Printed Products segment income is expected to improve during the second
half of the year as cost reductions are implemented and after the majority of
the reorganization expenses and expenses required to support the increased use
of an outsourcing model by many financial institutions have been incurred. Some
duplicate costs will be incurred earlier in the year as the remaining plants are
staffed up in anticipation of the actual closure of the plants already
announced.
The Software & Services segment income is expected to improve throughout 2004 as
the result of a full-year impact of a 2003 acquisition as well as the impact of
new products and services.
The Scantron segment is expected to benefit from continuing strong sales of
traditional products as well as growth in the sales of existing and new
technology products. Scantron should also continue to benefit from cost
reduction initiatives implemented throughout 2003.
-21-
The Company believes cash flow will remain strong in all business units in 2004.
The Company currently estimates that capital expenditures will be in the range
of $27 million to $32 million. The Company believes refundable contract payments
in 2004 will be made at a higher level than existed before 2003, but expects
such payments to be less than in 2003 depending upon the timing and extent of
new contracts in 2004. The Company currently expects depreciation and
amortization will total approximately $80 million in 2004, a $17 million
increase over 2003, primarily due to the amortization of refundable contract
payments. The Company expects its effective tax rate will be approximately 37.5%
in 2004.
RISK FACTORS AND CAUTIONARY STATEMENTS
When used in this report and in subsequent filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in
written or oral statements made by authorized representatives of the Company,
the words or phrases "believe," "should result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or 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, including, but not
limited to, those discussed below that could cause actual results to differ
materially from the Company's historical experience and its present expectations
or projections. Caution should be taken not to place undue reliance on any such
forward-looking statements, which speak only as of the date such statements are
made and which may or may not be based on historical experiences and/or trends
which may or may not continue in the future. The Company does not undertake and
specifically declines any obligation to update any forward-looking statements to
reflect events or circumstances occurring after the date of such statements or
to reflect the occurrence of unanticipated events.
Various factors may affect the Company's financial performance, including, but
not limited to, those factors discussed below which could cause the Company's
actual results for future periods to differ from any opinions, statements or
projections expressed with respect thereto. Such differences could be material
and adverse. Many variables will impact the ability to achieve sales levels,
improve service quality, achieve production efficiencies and reduce expenses in
Printed Products. These include, but are not limited to, the continuing upgrade
of the Company's customer care infrastructure and systems used in the Company's
manufacturing, sales, marketing, customer service and call center operations,
and the ongoing plant consolidation and relocation program.
Several factors outside the Company's control could negatively impact check
revenues. These include the continuing expansion of alternative payment systems
such as credit cards, debit cards and other forms of electronic commerce or
on-line payment systems. Check revenues may continue to be adversely affected by
continued consolidation of financial institutions, competitive check pricing
including significant up-front contract incentive payments, and the impact of
governmental laws and regulations. There can be no assurances that the Company
will not lose significant customers or that any such losses could be offset by
the addition of new customers.
While the Company believes substantial growth opportunities exist in the
Software & Services segment, there can be no assurances that the Company will
achieve its revenue or earnings growth targets. The Company believes there are
many risk factors inherent in its Software & Services business, including but
not limited to the retention of employee talent and customers. Also, variables
exist in the development of new Software & Services products, including the
timing and costs of the development effort, product performance, functionality,
product acceptance, competition, the Company's ability to integrate acquired
companies, and general changes in economic conditions or U.S. financial markets.
-22-
Several factors outside of the Company's control could affect results in the
Scantron segment. These include the rate of adoption of new electronic data
collection solutions and testing and assessment methods, which could negatively
impact forms, scanner sales and related service revenue. The Company continues
to develop products and services that it believes offer state-of-the-art
electronic data collection and testing and assessment solutions. However,
variables exist in the development of new testing methods and technologies,
including the timing and costs of the development effort, product performance,
functionality, market acceptance, adoption rates, competition, the Company's
ability to integrate acquired companies and the funding of education at the
federal, state and local levels, all of which could have an impact on the
Company's business.
As a matter of due course, the Company and its subsidiaries are subject to
various federal and state tax examinations. The Company believes that it is in
compliance with the various federal and state tax regulations imposed and such
returns and reports filed with respect to such tax regulations are materially
correct. The results of these various federal and state tax examinations could
produce both favorable and unfavorable adjustments to the Company's total tax
expense either currently or on a deferred basis. At such time when a favorable
or unfavorable adjustment is known, the effect on the Company's consolidated
financial statements is recorded.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All financial instruments held by the Company are held for purposes other than
trading. The Company is exposed primarily to market risks related to interest
rates.
Interest Rate Risk
The Company is exposed to interest rate risk on its variable rate debt. At March
26, 2004, the Company had outstanding variable rate debt of $127.0 million. In
order to manage its exposure to fluctuations in interest rates, the Company has
entered into interest rate swap agreements, which allow it to raise funds at
floating rates and effectively swap them into fixed rates. The notional
principal amount of interest rate swaps outstanding was $39.0 million at March
26, 2004. These derivative financial instruments are viewed as risk management
tools and are entered into for hedging purposes only. The Company does not use
derivative financial instruments for trading or speculative purposes. The
Company believes that its interest rate risk at March 26, 2004 was minimal. The
impact on quarterly results of operations of a hypothetical one-point interest
rate change on the outstanding debt as of March 26, 2004 would be approximately
$220,000.
The fair value of the swaps, which represent what the Company would have to pay
to terminate the swaps, reflected a loss of $0.2 million ($0.1 million net of
income taxes) at March 26, 2004. The fair value of the swaps was recognized on
the balance sheet in other liabilities with a corresponding charge to
accumulated other comprehensive income, a component of shareholders' equity.
Charges and credits to other comprehensive income will net to zero over the term
of interest rate swap agreements.
ITEM 4. CONTROLS AND PROCEDURES
The Company's disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that such information is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
-23-
As of the end of the period covered by this report, the Company evaluated, under
the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the Company's disclosure controls and procedures, pursuant to
Exchange Act Rule 13a-14 and Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. The Company believes that the ultimate outcome of these
matters will not have a material effect on its financial statements.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
During the three months ended March 26, 2004, the Company made the following
purchases of treasury stock:
Number of Maximum
Shares Number of
Average Purchased Shares
Number Price as Part of Remaining
of Paid Publicly Under
Shares Per Announced Authorized
Period Purchased Share Program(1) Program
- ------------------------------------------------------------------------
Jan. 1 - 31 - $ - - 2,578,022
Feb. 1 - 29 88,800 28.95 88,800 2,489,222
Mar. 1 - 26 20,000 30.02 20,000 2,469,222
- ------------------------------------------------------------------------
Total 108,800 $29.15 108,800 2,469,222
========================================================================
(1) On January 28, 2003, the Company's Board of Directors authorized the
purchase of up to 3,000,000 million shares of the Company's outstanding common
stock. Shares purchased under this program may be held in treasury, used for
acquisitions, used to fund the Company's stock benefit and compensation plans or
for other corporate purposes. Unless terminated earlier by resolution of the
Company's Board of Directors, the 2003 stock repurchase program will expire when
the Company has repurchased all shares authorized for repurchase under the
program. As of March 26, 2004, a total of 530,778 shares had been purchased
under the 2003 stock repurchase program at an average cost of $27.73 per share.
-24-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
3.1 Amended and Restated Articles of Incorporation.
3.2 * Amended and Restated Bylaws, as amended through December 19, 2002
(Exhibit 3.2 to registrant's Annual Report on Form 10-K for the year
ended December 31, 2002).
4.1 * Rights Agreement, dated as of December 17, 1998, between registrant
and First Chicago Trust Company of New York (Exhibit 4.1 to
registrant's Registration Statement on Form 8-K dated July 1, 1999).
4.2 See Articles IV, V and VII of registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V and
VIII of registrant's Bylaws, filed as Exhibit 3.2.
11.1 Computation of Per Share Earnings (1)
31.1 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated in parentheses and incorporated herein by reference.
(b) Reports on Form 8-K
On February 4, 2004, the Registrant furnished to the Securities and Exchange
Commission a Report on Form 8-K dated January 28, 2004 including its Press
Release for the year ended December 31, 2003, as well as the transcript of its
conference call on January 29, 2004 discussing its fourth quarter and annual
results.
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(1)Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 11
to the Condensed Consolidated Financial Statements included in this report.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHN H. HARLAND COMPANY
Date: May 4, 2004 By: /s/ J. Michael Riley
-----------------------------
J. Michael Riley
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
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EXHIBIT LIST
Exhibit Description
3.1 Amended and Restated Articles of Incorporation.
3.2 * Amended and Restated Bylaws, as amended through December 19, 2002
(Exhibit 3.2 to registrant's Annual Report on Form 10-K for the year
ended December 31, 2002).
4.1 * Rights Agreement, dated as of December 17, 1998, between registrant
and First Chicago Trust Company of New York (Exhibit 4.1 to
registrant's Registration Statement on Form 8-K dated July 1, 1999).
4.2 See Articles IV, V and VII of registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V and
VIII of registrant's Bylaws, filed as Exhibit 3.2.
11.1 Computation of Per Share Earnings. (1)
31.1 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated in parentheses and incorporated herein by reference.
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(1)Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 11
to the Condensed Consolidated Financial Statements included in this report.
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