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 April 1, 2005
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 29,
2005 was 27,465,128.
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. . . . . . . . . . . . . . . . . 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 27
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 29
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . .. 29
EXHIBIT LIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
------
(In thousands) April 1, December 31,
2005 2004
- ----------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 11,952 $ 9,214
Accounts receivable - net 69,779 70,989
Inventories 17,320 16,984
Deferred income taxes 8,437 8,393
Income taxes receivable 14,087 14,608
Property held for sale 3,438 3,438
Prepaid expenses 12,808 11,134
Other 3,661 4,693
- ----------------------------------------------------------------------
Total current assets 141,482 139,453
- ----------------------------------------------------------------------
Other Assets:
Investments 6,651 5,651
Goodwill - net 233,265 233,987
Intangible assets - net 16,169 17,168
Upfront contract payments - net 62,314 53,650
Other 20,956 21,645
- ----------------------------------------------------------------------
Total investments and other assets 339,355 332,101
- ----------------------------------------------------------------------
Property, plant and equipment 334,590 330,525
Less accumulated depreciation
and amortization 235,702 228,302
- ----------------------------------------------------------------------
Property, plant and equipment - net 98,888 102,223
- ----------------------------------------------------------------------
Total $ 579,725 $ 573,777
======================================================================
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 April 1, December 31,
per share amounts) 2005 2004
- ----------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 27,548 $ 28,290
Deferred revenues 70,382 61,648
Current maturities of long-term debt 5,000 5,000
Accrued liabilities:
Salaries, wages and employee benefits 18,648 33,475
Taxes 18,855 15,028
Customer Incentives 8,908 9,422
Other 14,080 16,706
- ----------------------------------------------------------------------
Total current liabilities 163,421 169,569
- ----------------------------------------------------------------------
Long-Term Liabilities:
Long-term debt 88,750 96,300
Deferred income taxes 4,788 4,692
Other 28,550 28,625
- ----------------------------------------------------------------------
Total long-term liabilities 122,088 129,617
- ----------------------------------------------------------------------
Total liabilities 285,509 299,186
- ----------------------------------------------------------------------
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 12,347 11,191
Retained earnings 498,587 486,009
Accumulated other comprehensive loss (197) (184)
Unamortized restricted stock awards (12,134) (13,380)
- ----------------------------------------------------------------------
536,510 521,543
Less 10,449,684 and 10,629,800 shares
in treasury - at cost,
respectively 242,294 246,952
- ----------------------------------------------------------------------
Total shareholders' equity 294,216 274,591
- ----------------------------------------------------------------------
Total $ 579,725 $ 573,777
======================================================================
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 Periods Ended
(In thousands, except April 1, March 26,
per share amounts) 2005 2004
- ----------------------------------------------------------------------
Sales:
Product sales $ 174,379 $ 153,707
Service sales 41,468 36,869
- ----------------------------------------------------------------------
Total sales 215,847 190,576
Cost of sales:
Cost of products sold 96,063 88,108
Cost of services sold 15,061 13,251
- ----------------------------------------------------------------------
Total cost of sales 111,124 101,359
- ----------------------------------------------------------------------
Gross Profit 104,723 89,217
Selling, general and administrative expenses 74,653 70,062
(Gain) loss on disposal of assets - net 10 (3,608)
Amortization of intangible assets 999 907
- ----------------------------------------------------------------------
Income From Operations 29,061 21,856
- ----------------------------------------------------------------------
Other Income (Expense):
Interest expense (1,176) (1,124)
Other - net (8) 153
- ----------------------------------------------------------------------
Total (1,184) (971)
- ----------------------------------------------------------------------
Income Before Income Taxes 27,877 20,885
Income taxes 10,593 7,832
- ----------------------------------------------------------------------
Net Income 17,284 13,053
Retained earnings at beginning of period 486,009 448,688
Cash dividends (3,426) (2,780)
Issuance of treasury shares under stock
plans (1,280) (2,932)
- ----------------------------------------------------------------------
Retained earnings at end of period $ 498,587 $ 456,029
======================================================================
Weighted Average Shares
Outstanding:
Basic 26,962 27,437
Diluted 27,841 28,239
======================================================================
Earnings Per Common Share:
Basic $ 0.64 $ 0.48
Diluted $ 0.62 $ 0.46
======================================================================
Cash Dividends Per Common Share $ 0.125 $ 0.10
======================================================================
See Notes to Condensed Consolidated Financial Statements.
-5-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Periods Ended
April 1, March 26,
(In thousands) 2005 2004
- -----------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 17,284 $ 13,053
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 8,472 10,032
Amortization of upfront contract payments 8,135 4,923
Other amortization 2,014 2,416
(Gain) loss on disposal of assets - net 10 (3,608)
Stock-based compensation 842 560
Tax benefits from stock-based compensation 1,135 1,462
Gain on sale of investments - net (59) (132)
Deferred income taxes (41) 117
Other (284) 1,239
Change in assets and liabilities:
Accounts receivable 1,062 (6,765)
Inventories and other current assets (462) 1,661
Deferred revenues 9,067 4,423
Accounts payable and accrued liabilities (15,301) (8,449)
Upfront contract payments (16,800) (6,443)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 15,074 14,489
- -----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,206) (5,550)
Proceeds from sale of property, plant and equipment 45 5,422
Long-term investments and other (252) (99)
- -----------------------------------------------------------------------------
Net cash (used in) investing activities (5,413) (227)
- -----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Credit facility borrowings 72,985 65,610
Credit facility payments (80,534) (65,667)
Repayment of long-term debt - (31)
Repurchases of stock - (3,171)
Issuance of treasury stock 4,499 5,420
Dividends paid (3,426) (2,780)
Other - net (447) (1,680)
- -----------------------------------------------------------------------------
Net cash (used in) financing activities (6,923) (2,299)
- -----------------------------------------------------------------------------
Increase in cash and cash equivalents 2,738 11,963
Cash and cash equivalents at beginning of period 9,214 8,525
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,952 $ 20,488
=============================================================================
See Notes to Condensed Consolidated Financial Statements.
-6-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 1, 2005
(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.
The condensed consolidated financial statements included herein should be read
in conjunction with the consolidated financial statements and notes thereto, and
the Independent Registered Public Accounting Firm's Report included in the
Company's Annual Report on Form 10-K, for the year ended December 31, 2004
("2004 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 2004 Form 10-K.
Accounting Pronouncements
In December 2004, the FASB released its revised standard, FASB Statement No.
123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R supersedes APB 25,
"Accounting for Stock Issued to Employees" and its related implementation
guidance. SFAS 123R requires that a public entity measure the cost of equity
based service awards based on the grant-date fair value of the award. Such cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award. No compensation cost is recognized
for equity instruments for which employees do not render the requisite service.
A public entity will initially measure the cost of liability based service
awards based on its current fair value; the fair value of that award will be
remeasured subsequently at each reporting date through the settlement date.
Changes in fair value during the requisite service period will be recognized as
compensation cost over that period.
Adoption of SFAS 123R is required for the first annual reporting period
beginning after June 15, 2005. The Company is evaluating SFAS 123R to determine
whether to adopt the statement using the modified prospective application or the
modified retrospective application. The Company believes that the adoption of
this standard will have a material effect on its results of operations and
financial condition with effects to future years dependant on the level of
awards granted.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that an
entity must record a liability for a conditional asset retirement obligation if
the fair value of the obligation can be reasonably estimated. The provision is
effective for fiscal years ending after December 15, 2005. The Company does not
expect the adoption of FIN 47 will have a material effect on its financial
position and results of operations.
-7-
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its stock-based compensation plans and applies the disclosure-only
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), as amended by FASB Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148").
The Company recognizes stock-based compensation expense for restricted stock
granted to employees and also for the deferred compensation plan for
non-employee directors. The Company uses the straight-line method to amortize
unearned compensation expense over the maximum vesting period for restricted
stock awards that vest at a single point in time or vest over time.
No stock-based compensation cost is reflected in net income for options or
purchases under the employee stock purchase plan. Had compensation cost for
options granted under the Company's stock-based compensation plans and purchases
under the employee stock purchase plan been determined based on the fair value
at the grant dates consistent with SFAS 123, the Company's net income and
earnings per share would have changed to the pro forma amounts listed below (in
thousands, except per share amounts):
Three Month Periods Ended
(In thousands, except April 1, March 26,
per share amounts) 2005 2004
- ----------------------------------------------------------------------
Net income:
As reported $ 17,284 $ 13,053
Add: stock-based compensation
expense included in reported
net income, net of tax 514 342
Deduct: stock-based compensation
expense determined under the
fair value based method for
all awards, net of tax (1,278) (1,390)
- ----------------------------------------------------------------------
Pro forma net income $ 16,520 $ 12,005
======================================================================
Earnings per common share:
As reported
Basic $ 0.64 $ 0.48
Diluted $ 0.62 $ 0.46
Pro forma
Basic $ 0.61 $ 0.44
Diluted $ 0.59 $ 0.43
Pro forma compensation costs associated with options granted under the employee
stock purchase plan were estimated based on the discount from market value.
There were no stock options awarded during the three month period ended April 1,
2005. 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 period ended March 26,
2004:
March 26,
2004
- ----------------------------------------------------------------------
Fair value per option $ 9.60
Weighted average assumptions:
Dividend yield 1.4%
Expected volatility 36.1%
Risk-free interest rate 4.1%
Expected life (years) 5.0
-8-
Reclassifications
During the first quarter of 2005, the Company elected to reclassify certain
items in its condensed consolidated statements of income. The reclassifications
affected the categories of costs of goods sold and selling, general and
administrative expenses. The change primarily reflects the consistent alignment
of certain functional costs throughout the Printed Products segment. These
reclassifications were not significant and had no impact on net income or
shareholders' equity as previously reported. Financial data for all periods
presented have been reclassified for comparability.
3. Acquisitions
All acquisitions in 2004 were paid for with cash provided from operating
activities and proceeds from the Company's credit facility. The results of
operations of each acquired business have been included in the Company's
operations beginning as of the date of the particular acquisition.
2004 Acquisitions
On November 12, 2004, Harland Financial Solutions, Inc. ("HFS"), a wholly owned
subsidiary of the Company, acquired London Bridge Phoenix Software Inc.
("Phoenix System"). Phoenix System, an integrated core banking solution that
operates in both the Windows(R) NT and Unix environments, features open
relational database choices and leverages Internet and network technology to
optimize delivery channel integration. Phoenix System is delivered in both
in-house and service bureau configurations. Also included in the acquisition
were the Phoenix Internet Banking System, also known as IBANK, and the TradeWind
international trade finance management system. The acquisition provides HFS with
a proven service bureau delivery option for banks and thrifts, which is a
significant expansion to the breadth of current offerings.
On July 7, 2004, HFS acquired certain assets and operations including exclusive
distribution and licensing rights related to the CheckQuest(R) item processing
and CaptureQuest(R) electronic document management solutions from Mitek Systems,
Inc. Mitek Systems is a provider of recognition software-based fraud protection
and document processing solutions to banks and other businesses, and licenses
its recognition engine toolkits to major software and hardware providers in the
imaging and document processing industry. CheckQuest provides financial
institutions with a check imaging and item processing solution that enables them
to take advantage of the efficiencies offered by the Federal Check Clearing for
the 21st Century Act. CaptureQuest is an electronic document management system
that allows financial institutions to file, distribute, archive, retrieve and
automatically process documents and forms of all types and quantities. As part
of the agreement, HFS has also licensed from Mitek Systems the QuickStrokes(R)
family of recognition toolkits and the QuickFX(R) Pro form identification
toolkit for use with CheckQuest and a variety of other applications.
On April 30, 2004, HFS acquired certain assets and operations related to the
electronic mortgage document business of Greatland Corporation. Greatland
Corporation is a provider of forms technology, compliance expertise and software
compatible products used to meet the needs of businesses to convey regulatory
information. The GreatlandTM 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 allow
HFS to build on its leadership position in compliance and mortgage solutions.
-9-
The combined purchase price of net assets acquired through acquisitions in 2004
totaled approximately $29.9 million, net of cash acquired. The fair value of
assets and liabilities at the acquisition dates consisted of goodwill of $20.7
million, of which $5.4 million is expected to be deductible for tax purposes,
other intangible assets of $10.2 million (estimated weighted average useful life
of eight years), which included $6.3 million in developed technology (estimated
weighted average useful life of nine years) and $3.9 million in customer lists
(estimated weighted average useful life of 13 years), other assets of $8.8
million and assumed liabilities of $9.9 million. The allocations of purchase
price are subject to refinement as the Company finalizes the valuation of
certain assets and liabilities. The pro forma effects of the 2004 acquisitions
were not material to the Company's results of operations. One of the acquisition
agreements entered into by the Company in 2004 included additional consideration
of $1.0 million to be paid contingent upon the resolution by the seller of
certain contractual issues with a third party. Such issues were resolved and on
April 19, 2005 the Company made the additional payment. A portion of the payment
will be allocated to developed technology and amortized over an estimated life
of 6.25 years and a portion will be allocated to goodwill.
4. Goodwill and Intangible Assets
The changes in the carrying amounts of goodwill by business segment for the
three month period ended April 1, 2005 are as follows (in thousands):
Printed Software &
Products Services Scantron Consolidated
- ------------------------------------------------------------------------
Balances as of
December 31, 2004 $ 24,709 $165,724 $ 43,554 $233,987
Purchase price
allocation adjustments - (722) - (722)
- ------------------------------------------------------------------------
Balances as of
April 1, 2005 $ 24,709 $165,002 $ 43,554 $233,265
========================================================================
Intangible assets with definitive lives were comprised of the following (in
thousands):
April 1, 2005 December 31, 2004
- ------------------------------------------------------------------------
Gross Net Gross Net
Carrying Accum. Carrying Carrying Accum. Carrying
Amount Amort. Amount Amount Amort. Amount
- ------------------------------------------------------------------------
Developed
technology $31,635 $(17,659) $13,976 $31,547 $(16,828) $14,719
Customer
lists 30,005 (16,662) 13,343 30,005 (15,758) 14,247
Trademarks 3,800 (974) 2,826 3,800 (879) 2,921
Content 2,300 (615) 1,685 2,300 (557) 1,743
- ------------------------------------------------------------------------
Total $67,740 $(35,910) $31,830 $67,652 $(34,022) $33,630
========================================================================
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 $1.9 million and
$2.3 million for the three month periods ended April 1, 2005 and March 26, 2004,
respectively.
-10-
The estimated future intangible amortization expense as of April 1, 2005 is as
follows (in thousands):
Year Amount
- --------------------------------------------------------------------
Remaining 2005 $ 5,574
2006 6,891
2007 5,943
2008 4,294
2009 2,511
Thereafter 6,617
- --------------------------------------------------------------------
Total $31,830
====================================================================
5. Reorganization
In September 2003, the Company announced a reorganization of its Printed
Products operations including the consolidation of its domestic manufacturing
operations from 14 plants to 9 plants, which was completed during the third
quarter of 2004. Two of the facilities that were closed were leased. One of
these facilities is under lease through late 2005 and the other is under lease
through mid-2010. During the third quarter of 2004, the Company sublet the
latter facility to a third party for the remaining term of the lease.
In addition to the plant consolidation, Printed Products implemented other
staffing reductions beginning in the fourth quarter of 2003 which were completed
during the third quarter of 2004. These actions were 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 undertook these actions to bring its production and
support structures in line with its business levels.
The following table presents the cumulative net costs of these actions incurred
through April 1, 2005 (in thousands):
Staffing
Plant Reduction
Consolidation Actions
- ------------------------------------------------------------------------
Employee severance $ 2,843 $ 4,545
Revision of depreciable lives and
salvage values 3,459 -
Asset impairment charge and
disposal (gains) and losses (1,168) -
Relocation and other costs 2,186 -
Contract termination costs related
to leaseholds 917 -
- ------------------------------------------------------------------------
Total $ 8,237 $ 4,545
========================================================================
-11-
The following table presents net expenses by income statement caption for plant
consolidation and other staffing reduction actions for the three months ended
April 1, 2005 and March 26, 2004 (in thousands):
Three Month Periods Ended
April 1, March 26,
2005 2004
- ----------------------------------------------------------------------
Plant consolidation expenses:
Cost of products sold $ 108 $ 2,682
Gain on disposal of assets - net - (3,664)
- ----------------------------------------------------------------------
Total $ 108 $ (982)
======================================================================
Other staffing reduction actions:
Selling, general and administrative expenses $ - $ 474
======================================================================
The following table reconciles the beginning and ending liability balances for
three month period ended April 1, 2005 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 $ 211 $ (2) $ (206) $ - $ 3
Contract termination
costs related to
leaseholds 681 41 (133) - 589
Other - 69 (69) - -
Staffing reduction
actions:
Employee severance 61 - (61) - -
- ----------------------------------------------------------------------------------
Total $ 953 $ 108 $ (469) $ - $ 592
==================================================================================
6. Property Held for Sale
At April 1, 2005 and December 31, 2004, property held for sale was $3.4 million,
which consisted of the Company's Printed Products facility in Denver, Colorado
which was closed during the second quarter of 2004 pursuant to the plant
consolidation plan. The Company has entered into a contract to sell the facility
for $3.6 million and expects to complete the sale during the second quarter of
2005.
During the first quarter of 2004, the Company sold its Printed Products facility
in San Diego, California, which became available pursuant to the plant
consolidation plan, and realized a pre-tax gain of $3.7 million on the sale of
the facility.
7. Income Taxes
The Company's consolidated effective income tax rates were 38.0% and 37.5% for
the first quarter of 2005 and the first quarter of 2004, respectively. The
effective tax rate for the first quarter of 2005 was unfavorably impacted by an
increase in the effective state income tax rate for the consolidated group and a
decrease in the Internal Revenue Code of 1986, as amended ("IRC") Section 936
U.S. tax credit for the Company's operations in Puerto Rico partially offset by
the implementation of IRC Section 199, Qualified Production Activities
Deduction.
-12-
8. Inventories
As of April 1, 2005 and December 31, 2004, inventories consisted of the
following (in thousands):
April 1, December 31,
2005 2004
- ----------------------------------------------------------------------
Raw materials $ 14,215 $ 14,055
Work in progress 1,167 956
Finished goods 1,938 1,973
- ----------------------------------------------------------------------
Total $ 17,320 $ 16,984
======================================================================
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 and will decrease by $5.0
million per annum. As a result, the Credit Facility will decrease to $400.0
million at the 2009 maturity date. As of April 1, 2005 the Credit Facility
totaled $418.8 million. 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 as defined): the Federal
Funds Rate, the SunTrust Bank Base Rate or LIBOR (as defined therein). The
Credit Facility has certain financial covenants including, among other items,
leverage, fixed charge coverage 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 April 1, 2005, the Company had $93.8 million in outstanding cash borrowings
under the Credit Facility, $5.5 million in outstanding letters of credit and
$319.5 million available for borrowing under the Credit Facility. The average
interest rate in effect on outstanding cash borrowings at April 1, 2005 was
3.84%.
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 April 1, 2005 and March 26, 2004 was as follows (in thousands):
Three Month Periods Ended
April 1, March 26,
2005 2004
- ----------------------------------------------------------------------
Net income: $ 17,284 $ 13,053
Other comprehensive
income (loss):
Foreign exchange
translation adjustments (154) (62)
Unrealized gain (loss) on
investments, net of ($93) and $11
in tax (provisions)
benefits 141 (17)
Changes in fair value of cash
flow hedging instruments,
net of ($0) and ($102) in tax
(provisions) - 160
- ----------------------------------------------------------------------
Comprehensive income $ 17,271 $ 13,134
======================================================================
-13-
11. Earnings per Common Share
The computation of basic and diluted earnings per share for the three month
periods ended April 1, 2005 and March 26, 2004 is as follows (in thousands,
except per share amounts):
Three Month Periods Ended
April 1, March 26,
2005 2004
- ----------------------------------------------------------------------
Computation of basic earnings per common share:
Numerator
Net income $ 17,284 $ 13,053
- ----------------------------------------------------------------------
Denominator
Weighted average shares
outstanding 26,804 27,309
Weighted average deferred
shares outstanding under
non-employee directors
compensation plan 158 128
- ----------------------------------------------------------------------
Weighted average shares
outstanding - basic 26,962 27,437
- ----------------------------------------------------------------------
Earnings per share - basic $ 0.64 $ 0.48
======================================================================
Computation of diluted earnings per common share:
Numerator
Net income $ 17,284 $ 13,053
- ----------------------------------------------------------------------
Denominator
Weighted average shares
outstanding - basic 26,962 27,437
Dilutive effect of stock
options and restricted stock 879 802
- ----------------------------------------------------------------------
Weighted average shares
outstanding - diluted 27,841 28,239
- ----------------------------------------------------------------------
Earnings per share - diluted $ 0.62 $ 0.46
======================================================================
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 month period ended April 1, 2005, the Company
contributed $0.3 million to the plans. The Company's accumulated postretirement
benefit obligations and net periodic postretirement benefit cost do not reflect
the effects of the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 on the health care benefit plan because the Company has not
completed its determination whether plan benefits are at least actuarially
equivalent to portions of the Act. Management does not believe that the effects
of the Act will materially affect the Company's postretirement obligations or
its future postretirement benefit expense.
-14-
Net periodic postretirement costs for the three month periods ended April 1,
2005 and March 26, 2004 are summarized as follows (in thousands):
Three Month Periods Ended
April 1, 2005 March 26,2004
- --------------------------------------------------------------------
Interest on APBO $ 302 $ 354
Net amortization 55 86
- --------------------------------------------------------------------
Total $ 357 $ 440
====================================================================
13. Business Segments
The Company operates its business in three segments. The Company has organized
its business segments based on products, services and markets served. Each
business segment has a division president who reports to the Company's Chief
Executive Officer, the chief operating decision maker. 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 planning software, 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.
During the three month periods ended April 1, 2005 and March 26, 2004, 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 and revenues, 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. The Company also considers stock-based compensation costs to be
a Corporate item except for a grant made in 2004 to replace an incentive
agreement. 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 2004 10-K.
-15-
Selected summarized financial information for the three month periods ended
April 1, 2005 and March 26, 2004 was as follows (in thousands):
Business Segment
-------------------------------
Printed Software & Corporate & Consoli-
Products Services Scantron Eliminations dated
- ------------------------------------------------------------------------------
Three month periods ended:
April 1, 2005
Sales $ 140,448 $ 47,620 $ 28,214 $ (435) $ 215,847
Income (loss)
before income
taxes 24,827 4,944 6,595 (8,489) 27,877
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
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 Events
On February 1, 2005, the Company announced plans to expand its outsourcing
services with the signing of a definitive agreement to acquire Cincinnati-based
Intrieve, Incorporated ("Intrieve"). The Company consummated the acquisition on
April 4, 2005 for approximately $78 million which was paid for with cash
provided from operations and proceeds from the Company's Credit Facility.
Intrieve is a provider of technology for financial institutions including
service bureau operations that deliver core processing for thrifts and community
banks, comprehensive item processing, and electronic banking and payments
processing. In-house solutions include software for financial accounting and
software that allows financial institutions to print their own laser checks and
other MICR documents. Also included in the transaction is a datacenter operation
providing co-location, hosting, managed data services and hot-site backup. The
acquisition of Intrieve represents an expansion of the Company's existing
outsourced product and service offerings. Intrieve's core processing datacenter,
full service item processing facility and electronic banking and payment
processing service support Software & Services' strategy of offering clients
integrated end-to-end solutions.
On April 4, 2005, the Company signed a definitive agreement to acquire Liberty
Enterprises, Inc. ("Liberty"). Liberty, headquartered in Mounds View, Minnesota,
is a provider of checks, marketing services, education and e-commerce solutions
primarily to credit unions. The acquisition is subject to regulatory approval
and other closing conditions, and is expected to close in late May or early June
2005. The purchase price is approximately $160 million in a cash-for-stock
purchase under a 338(h)(10) tax election. The Company plans to fund the purchase
price with cash provided by operations and proceeds from the Company's Credit
Facility.
-16-
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 planning software, 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, 2004 (the "2004 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 month period
ended April 1, 2005 to warrant further disclosure. See the 2004 Form 10-K for
additional disclosure with respect to the Company's critical accounting
policies.
Reclassifications
During the first quarter of 2005, the Company elected to reclassify certain
items in its condensed consolidated statements of income. The reclassifications
affected the categories of costs of goods sold and selling, general and
administrative expense. The change primarily reflects the alignment of certain
functional costs throughout the Printed Products segment. These
reclassifications were not significant and had no impact on net income or
shareholders' equity as previously reported. Financial data for all periods
presented have been reclassified for comparability.
Significant Events
On March 11, 2005, the Company was notified that a major customer in its Printed
Products segment will not renew its current contract that expires in March 2006.
The current annual sales under this contract are approximately $32 million with
current annual pre-tax operating income of approximately $10 million. The
Company believes it will be able to eliminate all variable costs associated with
this customer and will adjust its infrastructure wherever possible to minimize
the impact of fixed costs. The impact of this customer loss is not anticipated
to begin until April 1, 2006.
In September 2003, the Company announced a reorganization of its Printed
Products operations including the consolidation of its domestic manufacturing
operations from 14 plants to 9 plants, which was completed during the third
quarter of 2004. Two of the facilities that were closed were leased. One of
these facilities is under lease through late 2005 and the other is under lease
through mid-2010. During the third quarter of 2004, the Company sublet the
latter facility to a third party for the remaining term of the lease.
-17-
In addition to the plant consolidation, Printed Products implemented other
staffing reductions beginning in the fourth quarter of 2003 which were completed
during the third quarter of 2004. These actions were 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 bring its production and
support structures in line with its business levels.
For the three months ended March 26, 2004, plant consolidation actions resulted
in a net gain of $1.0 million before income taxes 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. The net pre-tax expenses associated with other staffing
reduction actions totaled $0.5 million for the three months ended March 26, 2004
and were included in selling, general and administrative expenses. Ongoing costs
related to closed facilities were incurred for the three months ended April 1,
2005 but were not significant.
RESULTS OF OPERATIONS - FIRST QUARTER OF 2005 VERSUS FIRST QUARTER OF 2004
Sales
Consolidated sales and sales by segment for the three month periods ended April
1, 2005 and March 26, 2004 were as follows (in thousands):
Three Month Periods Ended
April 1, 2005 March 26, 2004
- ----------------------------------------------------------------------
% of % of
Amount Total Amount Total
- ----------------------------------------------------------------------
Printed Products $140,448 65.1% $120,419 63.2%
Software & Services 47,620 22.1% 44,763 23.5%
Scantron 28,214 13.1% 25,913 13.6%
Eliminations (435) (0.1%) (519) (0.3%)
- ----------------------------------------------------------------------
Total $215,847 100.0% $190,576 100.0%
======================================================================
Consolidated sales increased $25.2 million, or 13.2%, to $215.8 million in the
first quarter of 2005 from $190.6 million in the first quarter of 2004. Sales
increases occurred in all three segments. Sales of products, which consist of
all Printed Products sales (except analytical services), software licensing
sales, scanning equipment and scannable forms and other products, increased
$20.7 million, or 13.4%, to $174.4 million in the first quarter of 2005 from
$153.7 million in the first quarter of 2004. Sales of services, which consist of
software maintenance services, field maintenance services, core processing
services, analytical and consulting services and other services, increased $4.6
million, or 12.5%, to $41.5 million in the first quarter of 2005 from $36.9
million in the first quarter of 2004.
-18-
Printed Products sales increased $20.0 million, or 16.6%, to $140.4 million in
the first quarter of 2005 from $120.4 million in the first quarter of 2004.
Domestic imprint check printing operations were favorably impacted by a volume
increase of 36.0% partially offset by an average price per unit decrease of
11.5%. The volume increase was primarily attributable to the addition of new
customers in late 2004 and the impact of four more production days for Printed
Products in the first quarter of 2005 compared to the first quarter of 2004. The
volume increase was partially offset by general market volume decline related to
alternative payments systems. The decrease in average price per unit was
primarily due to incentives and price reductions resulting from contract
renewals and lower pricing for certain new customers added in late 2004. Sales
of computer checks and related products increased 11.1% in the first quarter of
2005 compared to the first quarter of 2004 due primarily to the addition of a
new retail customer during 2004 and higher sales from financial institution
channels partially offset by lower pricing on increased volume with a large
software customer. Sales of direct marketing activities increased 11.2% in the
first quarter of 2005 compared to the first quarter of 2004 primarily due to
higher direct marketing sales partially offset by decreased analytical services
sales.
Software & Services sales increased $2.8 million, or 6.4%, to $47.6 million in
the first quarter of 2005 from $44.8 million in the first quarter of 2004. The
increase in sales was due primarily to the acquisitions of certain assets and
operations of Greatland Corporation in April 2004 and Mitek Systems in July 2004
and Phoenix System in November 2004 (see Note 3 to the Condensed Consolidated
Financial Statements included in this report). Excluding the impact of the
acquisitions, Software & Services sales decreased approximately $1.4 million, or
3.0%, due primarily to decreases in core systems and retail and lending
solutions sales. Core systems organic sales decreased 5.2% primarily due to
lower sales in banking systems and credit union systems partially offset by
increases in credit union service bureau services. Retail and lending solutions
organic sales decreased 1.8% in the first quarter of 2005 compared to the first
quarter of 2004 primarily due to lower sales of branch automation products
partially offset by an increase in sales from a mortgage loan product released
in 2004.
Software & Services backlog, which consists of contracted products and services
prior to delivery, was $110.8 million at the end of the first quarter of 2005,
an increase of 10.8% compared to $100.0 million at the end of the first quarter
of 2004, and increased $2.2 million, or 2.0%, from $108.6 million at the end of
the fourth quarter of 2004. The increase from the first quarter of 2004 was due
primarily to businesses acquired in 2004. The increase from the fourth quarter
of 2004 was due primarily to increases in the credit union service bureau.
Excluding the impact of the acquisitions, backlog did not change significantly
for the first quarters of 2005 and 2004, comparatively. Approximately $53.5
million, or 48.3%, of the backlog at April 1, 2005 is expected to be delivered
over the next twelve months and $57.3 million, or 51.7%, is expected to be
delivered beyond the next twelve months due to the long-term nature of certain
service contracts.
Scantron sales increased $2.3 million, or 8.9%, to $28.2 million in the first
quarter of 2005 from $25.9 million in the first quarter of 2004 due primarily to
increases in sales of testing and custom data collection forms, survey services,
field services and optical mark reading equipment partially offset by decreases
in sales of imaging products. The increases in sales of testing and custom data
collection forms was primarily due to three more production days for Scantron in
the first quarter of 2005 compared to the first quarter of 2004. Scantron
backlog at the end of the first quarter of 2005 was $20.0 million, of which
$19.1 million is expected to be delivered within twelve months or less.
-19-
Gross Profit
Consolidated gross profit and gross profit by segment for the three month
periods ended April 1, 2005 and March 26, 2004 were as follows (in thousands):
Three Month Periods Ended
April 1, 2005 March 26, 2004
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
Printed Products $ 57,465 40.9% $ 45,158 37.5%
Software & Services 31,546 66.2% 29,647 66.2%
Scantron 15,712 55.7% 14,412 55.6%
- ----------------------------------------------------------------------
Total $104,723 48.5% $ 89,217 46.8%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Printed Products gross profit in the first quarter of 2005 increased $12.3
million, or 27.3%, from $45.2 million in the first quarter of 2004 to $57.5
million in the first quarter of 2005 and increased as a percentage of sales from
37.5% in the first quarter of 2004 to 40.9% in the first quarter of 2005. Gross
profit increased in domestic imprint check printing operations, direct marketing
activities and in computer checks and related products operations due to
increases in sales, efficiencies realized from plant consolidations and plant
consolidation costs of $2.7 million incurred during the first quarter of 2004.
Lower average pricing in domestic imprint check printing operations partially
offset these favorable factors. Gross profit in computer checks and related
products operations also was favorably impacted by efficiencies realized from
the implementation of digital printing technology during 2004.
Software & Services gross profit in the first quarter of 2005 increased $1.9
million, or 6.4%, from $29.6 million in the first quarter of 2004 to $31.5
million in the first quarter of 2005. The gross profit increase was due to
businesses acquired in 2004 and lower costs in its other businesses and was
partially offset by lower gross profit in credit union systems and branch
automation systems resulting primarily from lower sales. As a percentage of
sales, Software & Services gross profit remained constant at 66.2% in the first
quarters of 2004 and 2005.
Scantron gross profit in the first quarter of 2005 increased $1.3 million, or
9.0%, from $14.4 million in the first quarter of 2004 to $15.7 million in the
first quarter of 2005. The gross profit increase was due primarily to the
increase in overall sales volume. As a percentage of sales, Scantron gross
profit increased slightly to 55.7% in the first quarter of 2005 from 55.6% in
the first quarter of 2004.
-20-
Selling, General & Administrative Expenses (SG&A)
Consolidated SG&A and SG&A by segment for the three month periods ended April 1,
2005 and March 26, 2004 were as follows (in thousands):
Three Month Periods Ended
April 1, 2005 March 26, 2004
- ----------------------------------------------------------------------
% of % of
Amount Sales(a) Amount Sales(a)
- ----------------------------------------------------------------------
Printed Products $ 32,652 23.2% $ 30,985 25.7%
Software & Services 25,678 53.9% 24,791 55.4%
Scantron 9,048 32.1% 8,038 31.0%
Corporate 7,275 6,248
- ----------------------------------------------------------------------
Total $ 74,653 34.6% $ 70,062 36.8%
======================================================================
(a) Percentage of sales for each segment is calculated using sales for that
segment.
Printed Products SG&A increased $1.7 million, or 5.4%, to $32.7 million in the
first quarter of 2005 from $31.0 million in the first quarter of 2004. The
increase was primarily due to higher marketing and call center support expenses
related to the addition of new customers in late 2004 partially offset by lower
selling, information technology and client support expenses primarily due to
staffing reduction actions in 2004. The first quarter of 2004 included $0.5
million of costs related to staffing reduction actions associated with the
Printed Products reorganization.
Software and Services SG&A increased $0.9 million, or 3.6%, to $25.7 million in
the first quarter of 2005 from $24.8 million in the first quarter of 2004. The
increase was due primarily to increased expenses related to operations acquired
in 2004 partially offset by lower headcount due to cost reduction initiatives in
2004, decreased product development expenses primarily attributable to a new
mortgage loan product that was released in 2004 and lower sales commissions in
2005.
Scantron SG&A increased $1.0 million, or 12.6%, to $9.0 million in the first
quarter of 2005 from $8.0 million in the first quarter of 2004. The increase was
primarily due to product development activities for a new imaging scanner and
selling and product launch expenses related to a new imaging software
application released during the first quarter of 2005.
Corporate SG&A increased $1.1 million, or 16.4%, to $7.3 million in the first
quarter of 2005 from $6.2 million in the first quarter of 2004. The increase was
primarily due to increased legal, audit and consultant fees and increased
amortization expense for restricted stock grants, partially offset by a
favorable adjustment in 2005 for deferred compensation costs related to certain
former officers of the Company.
(Gain) Loss on Disposal of Assets - net
During the first quarter of 2004, the Company realized a net gain of $3.6
million on disposal of assets primarily due to the sale of a facility that was
closed pursuant to the plant consolidation plan.
Consolidated Income from Operations
Consolidated income from operations increased $7.2 million, or 33.0%, to $29.1
million in the first quarter of 2005 from $21.9 million in the first quarter of
2004, primarily due to higher gross profit which was partially offset by
increases in SG&A in the first quarter of 2005 and a net gain on disposal of
assets in the first quarter of 2004.
-21-
Other Income (Expense)
Other Income (Expense) increased $0.2 million to an expense of $1.2 million in
the first quarter of 2005 from an expense of $1.0 million in the first quarter
of 2004. The increase was due primarily to declines in market value during the
first quarter of 2005 of investments held in a rabbi trust for the Company's
deferred compensation plan for eligible employees and to the impact of higher
average interest rates in effect during the first quarter of 2005 compared to
the first quarter of 2004 partially offset by lower amounts of debt outstanding
during the first quarter of 2005 compared with the first quarter of 2004.
Consolidated Income Before Income Taxes
Consolidated income before income taxes increased $7.0 million, or 33.5%, to
$27.9 million in the first quarter of 2005 from $20.9 million in the first
quarter of 2004 due to increased income from operations.
Income Taxes
Consolidated effective income tax rates were 38.0% and 37.5% for the first
quarter of 2005 and the first quarter of 2004, respectively. The effective tax
rate for the first quarter of 2005 was unfavorably impacted by an increase in
the effective state income tax rate for the consolidated group and a decrease in
the IRC Section 936 U.S. tax credit for the Company's operations in Puerto Rico
partially offset by the implementation of IRC Section 199, Qualified Production
Activities Deduction.
Net Income and Earnings Per Share
Net income in the first quarter of 2005 was $17.3 million compared to $13.1
million in the first quarter of 2004. Basic and diluted earnings per share were
$0.64 and $0.62, respectively, for the first quarter of 2005 compared to basic
and diluted earnings per share of $0.48 and $0.46, respectively, for the same
period in 2004.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Sources and Uses of Cash
- -----------------------------------------------------------------------------
Three Month Periods Ended
(In thousands) April 1, 2005 March 26, 2004
- -----------------------------------------------------------------------------
Net cash provided by
operating activities $ 15,074 $ 14,489
Net cash used for
investing activities (5,413) (227)
Net cash used for
financing activities (6,923) (2,299)
=============================================================================
-22-
Cash flow provided from operations in the first quarter of 2005 increased $0.6
million, or 4.0%, to $15.1 million from $14.5 million for the first quarter of
2004. Cash used for upfront payment contracts, which increased $10.4 million in
the first quarter of 2005 compared to the first quarter of 2004, was more than
offset by cash provided by net income adjusted for depreciation and
amortization, which increased $5.5 million in the first quarter of 2005 compared
to the first quarter of 2004, and cash provided by other changes in assets and
liabilities and other non-cash adjustments to net income. The principal uses of
cash in the first quarter of 2005 were for upfront contract payments ($16.8
million), a net reduction in amounts borrowed ($7.5 million), capital
expenditures ($5.2 million) and dividend payments to shareholders ($3.4
million). During the first quarter of 2005, cash flow provided by the issuance
of treasury stock totaled $4.5 million as a result of the exercise of stock
options ($3.5 million) and the employee stock purchase plan ($1.0 million).
Purchases of property, plant and equipment totaled $5.2 million in the first
quarter of 2005, a decrease of $0.4 million, compared to $5.6 million in the
first quarter of 2004 and were primarily for customer care infrastructure
initiatives. The Company's customer care infrastructure initiatives for the
Printed Products segment focused on improving systems that support sales,
marketing and customer service to ensure exceptional service and added
functionality for the Company's call centers.
During the first quarter of 2005, the Company did not purchase any shares of its
common stock. At April 1, 2005, 1,178,722 shares were remaining under an
authorization approved by the Company's Board of Directors in January 2003 to
repurchase 3,000,000 shares.
On February 22, 2005, the Company entered into an agreement with Mitek Systems,
Inc. to purchase up to 2,142,856 shares of Mitek common stock for up to an
aggregate of $1,500,000 or $0.70 per share. In addition, under the agreement the
Company will receive up to 321,428 warrants to purchase common stock at an
exercise price of $0.70. Such warrants will expire in February 2012. As of April
1, 2005, the Company had purchased 1,071,428 shares for $750,000 and received
160,714 of the warrants previously mentioned. The purchase of all of the
remaining shares and warrants was consummated on May 5, 2005 with the payment of
the remaining balance of $750,000 due under the terms of the agreement.
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 and will decrease by $5.0
million per annum. As a result, the Credit Facility will decrease to $400.0
million at the 2009 maturity date. As of April 1, 2005, the total size of the
Credit Facility was $418.8 million. 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.
-23-
At April 1, 2005, the Company had $93.8 million in outstanding cash borrowings
under the Credit Facility, $5.5 million in outstanding letters of credit and
$319.5 million available for borrowing under the Credit Facility. The average
interest rate in effect on outstanding cash borrowings at April 1, 2005 was
3.84%.
At April 1, 2005, the Company had $12.0 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 acquisitions, 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company enters into agreements with certain customers, under which the
Company is obligated to make future payments. As of April 1, 2005, the remaining
payment obligations under the existing customer contracts are scheduled to be
paid as follows: $2.7 million for the nine months ending December 31, 2005;
$35.5 million for the two year period ending December 31, 2007 and $16.8 million
for the two year period ending December 31, 2009. These payments are amortized
as a reduction of sales over the life of the related contract and are generally
refundable from the customer on a pro-rata basis if the contract is terminated.
See SUBSEQUENT EVENTS on page 24 for a discussion of the Company's commitments
to acquire certain businesses.
Other contractual obligations and commitments have not changed significantly
since December 31, 2004. See the 2004 Form 10-K with respect to the Company's
other contractual obligations and commitments.
ACQUISITIONS
All acquisitions in 2004 were paid for with cash provided from operating
activities and proceeds from the Credit Facility. The acquisitions were
accounted for using the purchase method of accounting and accordingly, the
results of operations of the acquired businesses have been included in the
Company's operations since the respective closing dates (see Note 3 to the
Condensed Consolidated Financial Statements).
SUBSEQUENT EVENTS
On February 1, 2005, the Company announced plans to expand its outsourcing
services with the signing of a definitive agreement to acquire Cincinnati-based
Intrieve, Incorporated ("Intrieve"). The Company consummated the acquisition on
April 4, 2005 for approximately $78 million which was paid for with cash
provided by operations and proceeds from the Company's Credit Facility. Intrieve
is a provider of technology for financial institutions including service bureau
operations that deliver core processing for thrifts and community banks,
comprehensive item processing, and electronic banking and payments processing.
In-house solutions include software for financial accounting and software that
allows financial institutions to print their own laser checks and other MICR
documents. Also included in the transaction is a datacenter operation providing
co-location, hosting, managed data services and hot-site backup. The acquisition
of Intrieve represents an expansion of the Company's existing outsourced product
and service offerings. Intrieve's core processing datacenter, full service item
processing facility and electronic banking and payment processing service
support Software & Services' strategy of offering clients integrated end-to-end
solutions.
-24-
On April 4, 2005, the Company signed a definitive agreement to acquire Liberty
Enterprises, Inc. ("Liberty"). Liberty is a provider of checks, marketing
services, education and e-commerce solutions primarily to credit unions. The
acquisition is subject to regulatory approval and other closing conditions, and
is expected to close in late May or early June 2005. The purchase price is
approximately $160 million in cash. The Company plans to fund the purchase price
with cash provided by operations and proceeds from the Company's Credit
Facility.
OUTLOOK
Net income for 2005 is expected to be higher than net income for 2004 with all
three segments expected to show growth in sales and income before income taxes
in 2005.
Segment income for Printed Products is expected to improve for the year as a
result of a full year of benefits from cost reductions related to its
reorganization that was completed in the third quarter of 2004. In addition,
unit volume is expected to be higher in 2005 as a result of the implementation
of new business in late 2004.
Software & Services segment income is expected to improve as a result of the
full-year impact of three acquisitions in 2004 and the Intrieve acquisition in
2005 as well as the impact of integrating them with existing products and
services. Cost reduction initiatives implemented during 2004 are also expected
to impact segment income favorably.
The Scantron segment is expected to continue its growth of sales in traditional
products and services. Increased sales of existing technology products and the
introduction of new products are also expected to provide growth in 2005.
Product development costs and marketing costs related to the new products are
expected to moderate the impact of expected sales growth in 2005.
The Company believes cash flow provided by operations will remain strong in all
business units in 2005. The Company currently estimates that capital
expenditures will be in the range of $25 million to $28 million. The Company
believes upfront contract payments in 2005 will be made at a lower level than
2004 based on commitments currently in place with most of the payments having
been made in the first quarter. The Company currently expects depreciation and
amortization will total approximately $80 million in 2005, an increase of
approximately $8 million from 2004, primarily due to the amortization of upfront
contract payments. The Company expects its effective tax rate will be
approximately 38% in 2005.
ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Condensed Consolidated Financial Statements regarding the
impact of recent accounting pronouncements on the Company's financial condition
and results of operations.
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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 successful
implementation of major new accounts and 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.
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 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. Revenues may continue to be
adversely affected by continued consolidation of financial institutions. 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.
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, software 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 and the funding of education at the federal, state and local levels,
all of which could have an impact on the Company's business.
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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 with the exception of $5.7 million of assets related to a nonqualified
deferred compensation plan held in a trust. The Company is exposed primarily to
market risks related to interest rates and equity prices.
Interest Rate Risk
The Company is exposed to interest rate risk on its variable rate debt. In order
to manage its exposure to fluctuations in interest rates, the Company from time
to time has entered into interest rate swap agreements, which allow it to raise
funds at floating rates and effectively swap them into fixed rates. As of April
1, 2005, there were no interest rate swap agreements in effect. These derivative
financial instruments are viewed as risk management tools and, when used, are
entered into for hedging purposes only. The Company does not use derivative
financial instruments for trading or speculative purposes. At April 1, 2005, the
Company had outstanding variable rate debt of $93.8 million. The impact on
quarterly results of operations of a hypothetical one-point interest rate change
on the outstanding debt as of April 1, 2005 would be approximately $145,000.
Equity Price Risk
The fair value of the Company's trading securities investments, which is related
to a nonqualified deferred compensation plan for eligible employees, is included
in investments with an offsetting obligation included in other noncurrent
liabilities. Realized and unrealized holding gains and losses related to those
investments are recorded in other income with an offsetting adjustment to
compensation expense which is included in selling, general and administrative
expenses.
The fair value of the Company's available-for-sale investments is primarily
affected by fluctuations in the market price for the common stock of Mitek
Systems, Inc. The change in market value has been accounted for as a component
of other comprehensive income. The following presents the Company's investment
in Mitek reflecting the high and low closing market prices during the period
subsequent to the date of the investment (February 22, 2005) to April 1, 2005:
Carrying
(In thousands) Value (a) High (b) Low (b)
- -----------------------------------------------------------------------------
Investment in Mitek $ 911 $1,082 $ 589
(a) Based on market value as of April 1, 2005
(b) Based on quoted market prices
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ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the
principal executive officer and principal financial officer, the Company
conducted an evaluation of its disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on
this evaluation, such officers concluded that the Company's disclosure controls
and procedures were effective as of April 1, 2005.
Changes in Internal Control over Financial Reporting
There have been no 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.
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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 6. EXHIBITS
Exhibit Description
3.1 * Amended and Restated Articles of Incorporation (Exhibit 3.1 to
registrant's Quarterly Report on Form 10-Q for the three months ended
March 26, 2004).
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-A 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.
Asterisk (*) indicates exhibit previously filed with the Securities and Exchange
Commission as indicated in parentheses and incorporated herein by reference.
(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 11, 2005 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 (Exhibit 3.1 to
registrant's Quarterly Report on Form 10-Q for the three months ended
March 26, 2004).
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-A 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.
Asterisk (*) indicates exhibit previously filed with the Securities and Exchange
Commission as indicated in parentheses and incorporated herein by reference.
(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.