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 3, 1998
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 Identification
No.)
incorporation or organization)
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 ( ).
The number of shares of the Registrant's Common Stock outstanding on May
1, 1998 was 31,057,973.
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<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
------
April 3, December 31,
(In thousands) 1998 1997
- ----------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,953 $ 9,829
Short-term investments 3,188
Accounts receivable 69,262 73,130
Inventories 26,719 26,442
Deferred income taxes 11,951 10,763
Prepaid income taxes 5,304 13,907
Other 10,272 11,127
---------- ----------
Total current assets 139,461 148,386
---------- ----------
INVESTMENTS AND OTHER ASSETS:
Assets held for disposal 8,138 8,721
Investments 4,989 5,185
Goodwill and intangibles - net 112,686 115,538
Deferred income taxes 6,174 9,494
Other 24,027 20,919
---------- ----------
Total investments and other assets 156,014 159,857
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 248,035 249,350
Less accumulated depreciation
and amortization 129,075 131,407
---------- ----------
Property, plant and equipment - net 118,960 117,943
---------- ----------
Total $ 414,435 $ 426,186
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
April 3, December 31,
(In thousands, except share amounts) 1998 1997
- ----------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 26,888 $ 33,816
Deferred revenues 24,861 25,799
Accrued liabilities:
Salaries, wages and employee benefits 20,200 21,829
Restructuring costs 6,028 6,634
Taxes 5,323 10,986
Other 12,538 10,703
---------- ----------
Total current liabilities 95,838 109,767
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 107,041 109,358
Other 14,320 14,235
---------- ----------
Total long-term liabilities 121,361 123,593
---------- ----------
Total liabilities 217,199 233,360
---------- ----------
SHAREHOLDERS' EQUITY:
Series 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 779 1,458
Foreign exchange translation adjustment (181) (186)
Retained earnings 328,066 324,324
---------- ----------
Total shareholders' equity 366,571 363,503
Less 6,791,609 and 6,983,520 shares
of treasury stock - at cost 169,335 170,677
---------- ----------
Shareholders' equity - net 197,236 192,826
---------- ----------
Total $ 414,435 $ 426,186
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE QUARTERLY PERIODS ENDED APRIL 3, 1998 AND MARCH 31, 1997
(Unaudited)
<CAPTION>
(In thousands, except
per share amounts) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 143,538 $ 139,266
---------- ----------
COST AND EXPENSES:
Cost of sales 81,395 79,489
Selling, general and
administrative expenses 49,297 42,174
Amortization of intangibles 2,525 3,918
Restructuring charge 2,070 2,734
---------- ----------
Total 135,287 128,315
---------- ----------
INCOME FROM OPERATIONS 8,251 10,951
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (1,824) (2,419)
Other - net 4,041 54
---------- ----------
Total 2,217 (2,365)
---------- ----------
INCOME BEFORE INCOME TAXES 10,468 8,586
INCOME TAXES 4,397 3,563
---------- ----------
NET INCOME 6,071 5,023
RETAINED EARNINGS AT BEGINNING
OF PERIOD 324,324 316,315
---------- ----------
330,395 321,338
Cash dividends (2,329) (2,321)
---------- ----------
RETAINED EARNINGS AT END OF PERIOD $ 328,066 $ 319,017
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 31,070 31,263
Diluted 31,406 30,942
========== ==========
EARNINGS PER COMMON SHARE:
BASIC $ .20 $ .16
DILUTED $ .20 $ .16
========== ==========
CASH DIVIDENDS PER COMMON SHARE $ .075 $ .075
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERLY PERIODS ENDED APRIL 3, 1998 AND MARCH 31, 1997
(Unaudited)
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 6,071 $ 5,023
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,554 9,991
(Gain)loss on sale of assets (3,929) 155
Provision for bad debt 1,306 390
Other 890 1,205
Change in assets and liabilities:
Deferred income taxes 2,132 1,252
Accounts receivable 2,562 408
Inventories and other current assets 9,181 3,190
Accounts payable and accrued expenses (13,929) (154)
---------- ---------
Net cash provided by operating activities 14,838 21,070
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,410) (8,144)
Proceeds from sale of property, plant and equipment 5,083 398
Short-term investments - net 3,188
Long-term investments and other assets (5,594) (5,083)
---------- ---------
Net cash used in investing activities (4,733) (12,829)
---------- ---------
FINANCING ACTIVITIES:
Issuance of treasury stock 660 1,725
Dividends paid (2,329) (2,321)
Short-term debt - net (15,548)
Long-term debt - net (2,317) (4,000)
Other - net 5 (131)
---------- ----------
Net cash used in financing activities (3,981) (20,275)
---------- ----------
Increase(decrease)in cash and cash equivalents 6,124 (12,034)
Cash and cash equivalents at beginning of period 9,829 22,667
---------- ----------
Cash and cash equivalents at end of period $ 15,953 $ 10,633
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1998
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements contained in this report
are unaudited but reflect all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary
for a fair 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 generally accepted accounting principles have been
omitted pursuant to applicable rules and regulations of the Securities
and Exchange Commission. The results of operations for the interim
period reported herein are not necessarily indicative of results to be
expected for the full year.
2. Accounting Policies
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 for the fiscal year ended December
31, 1997 ("1997 10-K").
Reference is made to the accounting policies of the Company described in
the notes to consolidated financial statements included in the 1997 10-
K. The Company has consistently followed those policies in preparing
this report.
Effective January 1, 1998, the Company began reporting its quarterly
results on a 13-week basis. As a result, the first quarter of 1998
ended on April 3, 1998.
3. Restructuring Charge
In April 1996, the Company announced plans to consolidate its check
imprint plants into a network of regional facilities. The Company
recorded restructuring charges of $2.1 million and $2.7 million in the
first quarters of 1998 and 1997, respectively, for severance that was
not previously accrued. In the first quarters of 1998 and 1997, the
Company made payments totaling $0.6 million and $1.1 million,
respectively, related to previously accrued restructuring costs.
Management expects to incur additional charges in 1998 and 1999,
predominantly related to employee severance. As part of this
restructuring, certain assets, predominantly land, buildings and
equipment at the facilities to be closed, with a carrying value of $8.1
million are held for sale at April 3, 1998. The Company expects to sell
these assets within one year of the related facility being closed.
4. Accounting for Income Taxes
The provisions for income taxes for the first quarters of 1998 and 1997
were as follows(in thousands):
April 3, March 31,
1998 1997
- ----------------------------------------------------------------------
Current provision $ 6,529 $ 3,729
Deferred benefit (2,132) (166)
--------- ---------
Total $ 4,397 $ 3,563
========= =========
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5. Inventories
Inventories consisted of the following (in thousands):
April 3, December 31,
1998 1997
- -----------------------------------------------------------------------
Raw materials and semi-finished goods $ 24,254 $ 21,606
Finished goods 2,114 2,116
Hardware component parts 351 2,770
--------- ---------
Total $ 26,719 $ 26,442
========= =========
6.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards
as components of comprehensive earnings be reported in financial
statements. This Statement also requires that an entity classify items
of other comprehensive earnings by their nature in an annual financial
statement. Other comprehensive earnings for the Company includes
foreign currency translation adjustments. Total comprehensive earnings
were as follows for the first quarters of 1998 and 1997 (in thousands):
April 3, March 31,
1998 1997
- -----------------------------------------------------------------------
Net earnings: $ 6,071 $ 5,023
Other comprehensive earnings (losses),
net of tax:
Change in equity due to foreign
currency translation adjustments 5 (87)
--------- ---------
Comprehensive earnings $ 6,076 $ 4,936
========= =========
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<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company operates its business in two segments. The Financial Services
segment ("FS") includes checks, forms and other printed products,database
marketing software, direct marketing campaign management and loan
origination software sold primarily to financial institutions.
The Scantron segment represents products and services sold by the
Company's Scantron subsidiary, including optical mark reading equipment,
scannable forms, mail order software and maintenance services. Scantron
sells these products and services to education and commercial markets.
RESULTS OF OPERATIONS FIRST QUARTER 1998 VERSUS 1997
Consolidated net sales for the quarter ended April 3, 1998 were $143.5
million compared to $139.3 million for the quarter ended March 31, 1997.
FS sales totaled $123.0 million and $120.4 million for 1998 and 1997,
respectively. FS check order volumes, excluding computer checks,
increased 5.2% from 1997, and the price and product mix decreased by
8.4%. The price and product mix decrease is primarily attributable to
lower prices experienced as a result of the level of discounting
occurring in traditional check markets. Revenue from marketing
services, including database marketing software, direct marketing
campaign management and loan origination software sold primarily to
financial institutions was $15.8 million in the first quarter of 1998,
an increase of $2.0 million over 1997. Scantron's sales increased $1.6
million or 8.5% over 1997, primarily due to expansion of field
maintenance operations.
Consolidated gross profit increased by 4.0% in 1998 over 1997. FS gross
profit increased 3.2% in 1998 over 1997 as manufacturing costs per order
decreased 6.3%. Scantron's gross profit increased 13.3% in 1998 over
1997. The majority of the increase resulted from an improvement in
field services. Consolidated gross margin was 42.9% in 1997 as
compared to 43.3% in 1998.
Consolidated selling, general and administrative expenses increased by
$7.1 million, with the largest increases resulting from increased costs
related to upgrading technology and implementation of new customers.
Selling, general and administrative expenses increased as a percentage
of sales from 30.3% in 1997 to 34.3% in 1998.
Amortization of intangibles decreased by $1.4 million from 1997 compared
to 1998 due to certain intangible assets becoming fully amortized in
1997.
Other income (expense) increased $4.6 million in 1998 to $2.2 million
primarily due to the gains from the sale of a facility and the Company
aircraft.
The Company's consolidated effective income tax rate for 1998 was 42%
compared to 41.5% for 1997.
The Company's net income for 1998 was $6.1 million compared to $5.0
million for 1997. Basic and diluted earnings per share were $.20 in
1998 compared to $.16 in 1997. Included in the calculation of earnings
per share of $.20 were restructuring charges, which reduced earnings per
share by approximately $.04 per share, offset by a gain on the sale of
assets, which increased earnings per share by approximately $.07. Net
income in 1997 included restructuring charges which reduced earnings per
share by approximately $.05.
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<PAGE>
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operations in the first quarter of 1998 were
$14.9 million compared to $21.1 million in 1997. The primary uses of
funds in the first quarter of 1998 were for capital expenditures and
dividends paid.
Purchases of property, plant and equipment totaled $7.4 million in the
first quarter of 1998, compared to $8.1 million in 1997. Proceeds from
the sale of property, plant and equipment totaled $5.1 million in the
first quarter of 1998 compared to $0.4 million in 1997. During the
first quarter of 1998, the Company sold a facility and the Company
aircraft.
The Company has unsecured lines of credit which provide for borrowings
up to $111.0 million. As of April 3, 1998, the Company had no
outstanding balances under these lines of credit.
On March 31, 1998, the Company had $16.0 million in cash and cash
equivalents. The Company believes that its current cash position, funds
from operations and the availability of funds under its lines of credit
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.
OUTLOOK
To improve service quality, reduce costs and increase the profitability of its
check printing business, the Company is rebuilding its manufacturing
operations, including consolidating plants and centralizing customer service.
This strategy also includes linking the check printing business with financial
institution customers' marketing programs. To achieve this, the Company is
developing additional marketing services, which will enhance its database
management capabilities.
The rebuilding of Harland's manufacturing operations continues as planned, and
the regional printing network is currently producing 75 percent of all orders.
During the first quarter of 1998, three imprint plants and one web plant were
closed. Although the Company has extended its consolidation schedule to
accommodate significant new business in 1998, two additional imprint plants
are scheduled to be consolidated during 1998. The remaining imprint plants
scheduled for consolidation will be closed in 1999. The network is now focused
on implementing more than $40 million in new check business. Implementation of
this new business has begun and will accelerate during the second quarter.
To support the business strategies, the Company expects to incur additional
charges, predominantly related to employee severance, of approximately $7
million in 1998 and $2.5 million in 1999.
Risk Factors And Cautionary Statements
When used in this Form 10-Q 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 "should result",
"are expected to", "will continue", "is anticipated", "estimate",
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<PAGE>
"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 publicly release the result of any revisions which may be made to 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 and 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.
Regarding the rebuilding of the Company's manufacturing operations, there can be
no assurances that the printing plant consolidation will occur within the
projected time frame and that it, combined with the centralization and
outsourcing of customer service, will result in the anticipated quality
improvements or projected costs savings. Many variables will impact the ability
to improve production efficiencies and reduce redundant expenses. These include,
but are not limited to, the development and implementation of new manufacturing
technology and information systems used in the Company's data entry and
production operations and the successful development of software to enhance call
center operations. Further, there can be no assurance that the Company can
reproduce or improve upon historic trends related to profit margins. Many
factors can affect the Company's ability to improve profitability, including,
among other factors, competitive pricing trends, the ability to secure similar
materials prices and labor rates, and the ability to reduce the cost of
manufacturing. Competition among suppliers, restricted supply of materials,
labor and services, and other such factors outside of the Company's control, may
adversely affect prices and may materially impact the Company's results.
Several factors outside the Company's control, could negatively impact check
revenue. 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 could also be adversely affected by
continued consolidation of financial institutions and competitive check pricing,
among other factors. There can be no assurances that the Company will not lose
significant customers or that any such loss could be offset by the addition of
new customers. Also, there can be no assurance that the Company will experience
similar or higher revenue compared to prior years, or that any targets or
projections made relating to check revenues will be achieved.
While the Company believes substantial growth opportunities exist in FS,
specifically Marketing Services such as database marketing software and direct
marketing, there can be no assurances that the Company will achieve its growth
targets. There are many variables relating to the development of the next
generation database marketing software, including the timing and costs of the
development effort, the viability of the product, product acceptance and
competition. Also, no assurance can be made as to market acceptance and to the
-10-<PAGE>
<PAGE>
potential impact of governmental regulations on the Company's ability to expand
its direct marketing business and meet projected growth targets.
There can also be no assurance that all or some of the anticipated cost savings
expected from rebuilding the manufacturing operation will not be offset by
increased expenses from other areas or be shared with the customers in the form
of discounted prices. As a result, the full impact of the cost savings may not
be fully reflected in operating income.
From time to time, authorized representatives of the Company may make
predictions or forecasts regarding the Company's future results, including
estimated earnings. Any such forecast reflects various assumptions, which are
subject to significant uncertainties, many of which may prove to be incorrect.
Further, the achievement of any forecast depends on numerous factors, many of
which are beyond the Company's control. As a result, there can be no assurance
that the Company's performance will be consistent with any management forecasts
or that the variation from such forecasts may not be material and adverse.
Accordingly, investors are cautioned not to base their entire analysis of the
Company's business and prospects upon isolated predictions, but instead are
encouraged to utilize the entire available mix of historical and forward-looking
information when evaluating the Company. Further, there can be no assurance that
a review of both historical trends and predictions will necessarily lead to the
same results that may actually be experienced in the future.
In addition, authorized representatives of the Company may occasionally comment
on published projections by independent analysts regarding the Company's future
performance. Such comments should not be interpreted as an endorsement or
adoption of any given estimate or range of estimates, or the assumptions and
methodologies upon which such estimates are based. The Company expressly
disclaims any continuing responsibility to advise analysts or the public markets
of its view regarding the current accuracy of the published estimates of outside
analysts. Persons relying on such estimates should pursue their own independent
investigation and analysis of their accuracy and the reasonableness of the
assumptions on which they are based, and they should also be aware that actual
results could differ from such estimates.
Generally speaking, the Company does not make public its own internal
projections or budgets. Undue reliance should not be placed on any comments
regarding the differences between such independent estimates and the Company's
own expectations regarding its future operations. The methodologies employed
by the Company in arriving at its own internal projections and the approaches
taken by independent analysts in making their estimates may differ in many
significant respects. Although the Company may presently perceive a given
estimate to be reasonable, changes in the Company's business, market
conditions or the general economic climate may materially impact the results
obtained through the use of differing analyses and assumptions.
-11-<PAGE>
<PAGE>
PART II. OTHER INFORMATION
===========================
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference No. Description of Exhibit
- ----------------------------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarterly period ended
April 3, 1998.
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
(Registrant)
May 10, 1998 William M. Dollar
Date: _________________ By:_____________________________
William M. Dollar
Vice President, Finance and
Treasurer
(Principal Accounting Officer)
May 10, 1998 S. David Passman III
Date: _________________ By:_____________________________
S. David Passman III
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the quarterly period ended April 3, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-03-1998
<CASH> 15,953
<SECURITIES> 0
<RECEIVABLES> 73,516
<ALLOWANCES> (4,254)
<INVENTORY> 26,719
<CURRENT-ASSETS> 139,461
<PP&E> 248,035
<DEPRECIATION> 129,075
<TOTAL-ASSETS> 414,435
<CURRENT-LIABILITIES> 95,838
<BONDS> 107,041
<COMMON> 37,907
0
0
<OTHER-SE> 159,329
<TOTAL-LIABILITY-AND-EQUITY> 414,435
<SALES> 143,538
<TOTAL-REVENUES> 143,538
<CGS> 81,395
<TOTAL-COSTS> 81,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,824
<INCOME-PRETAX> 10,468
<INCOME-TAX> 4,397
<INCOME-CONTINUING> 6,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,071
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
<PAGE>
</TABLE>
